Piracy or Livelihoods?

The destruction of sources of livelihood on the Somalian coast is driving people to desperation.

Ever since the collapse of the Mohamed Siad Barre government in 1991, Somalia has been subjected to lawlessness that has ripped the nation and its society apart. Sea piracy in the Gulf of Aden is related to this breakdown as also to the destruction by international fisheries of the Somalian coastal community’s main source of livelihoods.

Pirates have seized upon traffic in the very busy Gulf of Aden to earn money by hijacking and extracting a ransom, and by looting ships that carry food. The surge in the incidence of piracy resulted in a unanimous United Nations Security Council (UNSC) resolution in December 2008 that authorised nations to cooperate in their fight against piracy and to deploy naval vessels and military aircraft to interdict vessels engaged in such acts. The UNSC authorised the entry of foreign vessels into Somalian territorial waters when required to combat piracy. This led to a relative decline in hijackings of vessels in the region, but the recent hijacking of a United States vessel and of a French ship has brought the issue back into focus.

The basic rationale for the acts of piracy has been cited as the lucrative returns from hijacking of high value sea traffic in the area – one estimate suggests income from this activity is higher than the entire gross domestic product (GDP) of the autonomous region of Puntland in north-eastern Somalia, where piracy is most rampant. The unending civil war since 1991 has seen multiple authorities; warlords have controlled the capital at various times; there has been an invasion by Ethiopian armed forces and the internationally recognised transitional federal government in Somalia has been unable to establish any semblance of rule. This has brought about a complete collapse of the economy and the destruction of livelihoods in an already impoverished nation.

At the same time, the breakdown in civil society is not the only reason for the emergence of piracy. The Somalian coast has been used as a dumping ground for toxic waste and the waters off the coast as a source of uncontrolled fishing by international operators. Reports and even the United Nations Environment Programme have pointed out that tonnes of toxic waste have accumulated on the Somalian coast, a process that was exacerbated by the tsunami in the Indian Ocean in 2004. Trawlers operated by European firms have systematically emptied the fishing zones, naturally causing resentment among local fishing communities. The pirates are believed to have started their acts on the seas as a means of dissuading international ships – particularly off the coast of Puntland – from being in the vicinity. It is therefore no wonder that the pirates’ actions have been supported by the local public concerned about the effects of toxic dumping and bulk fishing in their zones. Many of the locals view piracy as an act of self-defence against commercial ships entering sovereign Somalian territory.

In essence then, the “piracy problem” on the Somalian coast and in the Gulf of Aden is more than just a criminal enterprise. The continuing use of the Somalian territorial waters for illegal dumping and fishing by international firms is a crime against the local people that has to be monitored and stopped immediately by the international community.

It is untenable that 18 years have passed since a functional government was in place in Somalia. Efforts by the UN to bring in civil rule and law in Somalia by engaging the warlords and various groups in talks have been thwarted by the perspective of major powers like the United States, which have been driven by their own interest in exploiting energy resources in the country or in pursuing the so-called “war on terror”. In sum, the spiral into further anarchy and the piracy problem have to be addressed not just with a security response by the international community, but through a different form of intervention that keeps in mind the plight of the Somalian population.

Economic & Political Weekly

A tank for every child

By Tamar Rotem

Haaretz

"Mom, I don't want to be a soldier. I don't want to die." That is what my son said to me one day in the car. Out of the blue, without any preparation. He was 5 years old.

At that time, we repeatedly heard songs by Aviv Geffen as we drove between Jerusalem and Tel Aviv. One of the regular passengers, in her early teens, had just discovered the singer whose songs (at least when he started out) were full of explicit anti-war messages. Weeks later, the pacifist declaration reverberated in bedtime chats, at mealtimes and on the way to preschool.

My son was concerned, and justifiably so. He had become aware of the connection between being a soldier and dying. Today, three years later, when he is questioned cautiously about the army, it seems he no longer supports that outspoken view so completely. This time he surprises by so naturally using words and phrases like "combat soldier" and "to enlist," even though they remain abstract concepts for him.

Even more surprising, the question of what they were gong to do in the army has come up among his friends, 8-year-olds. Apparently the pro-army steam-roller in the educational establishment here has influenced them. It has one aim - to get 18-year-olds to enlist in the army en masse and to ensure they see this step not only as a necessary but also as fulfilling their heart's desire, the fulfillment of an ideal.

In his gripping book, "Isha Borahat Mibesora" (A Woman Flees Tidings) David Grossman describes in great detail the process of turning a sensitive young boy into a soldier who is dying to give his utmost. The story is typical of many youngsters. In the book the mother, Ora, flees from the message her son Ofer has died. Ora mourns the son "who was lost to her forever from the moment he was nationalized" and she searches in the man he has become, who blows his nose so noisily, "a weak echo of his childhood." She recalls how, as a fragile and frightened boy, he went wild when he found out that people kill cows to eat meat, and he was only 4-years-old. Time and again she asks herself how he became a soldier who begs the army to take him on an operation after he is discharged, how he was transformed from a child into a fighter, from fragility to toughness.

A gift for a soldier

Though Israeli society has apparently grown more individualistic, with regard to the army it seems there has been a supreme effort to maintain the old ideals. Dr. Hagit Gur, a lecturer at the Seminar Hakibbutzim College's Center of Critical Pedagogy, and author of the book "Militarism Behinuch" ("Militarism in Education", published in Hebrew by Bavel, 2005) believes Israeli society has always directed its citizens from an early age to identify with serving in the army. "In early childhood, children think about themselves in a matter of fact way," Gur says. "If they are told people stand on Memorial Day in honor of fallen soldiers, the logical conclusion is that it is possible to die when serving in the army." However, she says, with time and as social pressures increase, children learn it is legitimate to be afraid and to be deterred by death. "The accepted messages that are transmitted in school are that we are under siege, in danger and fighting for our lives, and that the army watches out for and defends us," she says.

Israeli society either consciously or unconsciously encourages feelings of admiration for the army, Gur adds. Parallel to strengthening the consensus around the army, there is a process of shutting up and suppressing other points of view and desires that go against the grain of the mainstream, the correct and designated course for boys, she believes. In particular, Israeli society does not grant legitimacy to expressions of fear or doubt, she says. In general, it is problematic for a boy to be wimpish and to show weakness. The weak are harassed by Israeli society. The urge to become tough and to grow "a thick skin" is stronger in Israeli society than elsewhere, she believes.

The military discourse has gained such massive control of everyday life, Gur says, that an attempt to escape from it and to develop non-aggressive or non macho personal opinions is almost hopeless. She quotes Prof. Cynthia Enloe of Clark University, an expert on the social influences of militarism, who says militarization is a process that spreads in and pervades society without seeming problematic. Toys for boys imitate weapons. Computer games, films and the media are all filled with aggressiveness and violence and contribute to making boys tough so they can be soldiers, she says. The militaristic discourse pervades schools, too, she says, whether in the way the myths of the Jewish holidays, such as Hanukkah and Purim, are portrayed - the victory of a few over many, of light over darkness - or in Memorial Day ceremonies in which courage and those who died for their country are glorified. Not surprisingly the army opens its bases to the public on Independence Day, and children jump on the tanks.

"The children admire strength," Gur says. She writes in her book that on Independence Day, messages of open militarism are conveyed. Lessons are taught about the War of Liberation. The implicit, and sometimes explicit, message is the "bad Arabs" wanted to throw us into the sea, the armies of seven Arab countries invaded but we won and the state was established.

Independence Day is celebrated in preschools as the festival of the army. It is common practice to hang the flags of the various IDF corps as decorations and to tell stories of valor from the War of Independence. Gur proposes an alternative, that Independence Day be a time to discuss human rights and the Declaration of Independence's pledge of equality regardless of religion, race or gender. This alternative is already accepted practice in some educational institutions.

The gift sent to soldiers on Independence Day or during wars - the parcel that children wrap up at their teacher's request - is also part of the same socialization, says Gur. Do soldiers really need the socks or the candy? she asks. But the children get the message: "Today you are sending a parcel to the soldiers, and tomorrow you will be the one to get one."

Passport to citizenship

Contrary to Gur's description, at one Jerusalem school there was no interest in sending parcels to soldiers during Operation Cast Lead in Gaza, and the subject of socks made a few parents giggle. Can this be the first sign of subversion in relation to the army?

Dr. Gilad Padva of Tel Aviv University's School of Cultural Studies, says a dual relationship to the army has developed in Israel, and the military has lost some of its status. Nevertheless there is still a large public for whom "the IDF is a sacrosanct matter, and its name is mentioned with reverence."

A child, says Padva, gets most of his opinions and models of male identification from the home rather than from the school. The area where he lives is definitive, he says. The army is much less admired in central or north Tel Aviv than in communities in the periphery. The picture is thus complex. "On the one hand, there are more people who want to reexamine the place of the IDF in Israeli culture, society and politics," he says. "There is criticism today of the cult of the army and militarism, of parachuting senior officers into central positions in politics in local authorities and in education; on the other hand, there are people who consider it a cultural asset of permanent value, and not merely a security necessity, and who believe the IDF must be strengthened."

For years, the army and militarism were a central and concrete part of the creation of Israeli manhood, and children were educated in a pro-army spirit, he says. "After the military victory in 1967, children would dress up as a soldier, just so and not even on Purim, and go like that to preschool. The father would tell his children about what he had done in the army. Parents would take their children on trips in the footsteps of military operations. Today, however, most of the population educates their children to see the army as the least of evils - the army is a necessary part of the defense of the country; it is not an object of admiration. Hardly any children dress up now as soldiers and simultaneously the masculine ideal has changed. There are more men who can be more easily described as metrosexual. All the same, the boundary is well-defined. There is almost complete consensus over conscription. Most of the parents in Israel, even among the left, are shocked if a child decides not to enlist. That's also because they believe that military service is an inseparable part of growing up and a kind of passport to citizenship, and the children generally accept this when they are small."

A., a Tel Aviv boy, is an exception. One day his mother proudly told him on the way to preschool that his big brother had received a callup to the air force. He stopped and stared at her. "Will you send me to die also?" he asked. For almost a decade now he has been engaged in a debate with his parents about going to the army. It puts him off. "He is exceptionally sensitive to violence of any type, even in the school playground," says his mother. "This is killing his father, but I have been persuaded." 

Wall Street rallies despite sharp contraction in US economy

By Barry Grey 

The Commerce Department reported Wednesday that US gross domestic product (GDP) plunged 6.1 percent on an annual basis in the first quarter of 2009, a far deeper decline than had been predicted by economists. Following a 6.3 percent decline in the last three months of 2008, the Commerce Department report registered the biggest six-month economic contraction in more than 50 years.

The first quarter decline also marked the third straight quarterly contraction, the first time this has occurred in 34 years.

The bleak figures herald a continuing surge in unemployment, already officially at 8.5 percent. More than 5 million jobs have been wiped out in the US since the recession began in December of 2007, and more than 600,000 jobs are disappearing every month. Next month the current slump will become the longest since the Great Depression of the 1930s.

The report spells a deepening social disaster for tens of millions of Americans, but it did not deter the big investors who drive the stock market from continuing the rally that has brought share prices 22 percent higher than their low point early last month. All three major exchanges closed sharply higher, with the Dow Jones Industrial Average gaining 168 points, the Standard & Poor’s 500 Index rising 18 points, and the Nasdaq Composite Index gaining 38 points. In percentage terms, all three picked up more than 2 percent on the day. Financial stocks led the rally.

This response to the dire GDP report, issued in the midst of a historic downsizing of the US auto industry and assault on the jobs, wages and benefits of auto workers, reflects the class divide that dominates American society. It is also an expression of the growing confidence of the financial elite that it has in the Obama administration a pliant defender of its wealth and power.

This confidence was bolstered by the report issued later in the day by the Federal Open Market Committee, the policy arm of the Federal Reserve Board. Concluding a two-day meeting, the Fed said it would keep its key federal funds interest rate—the rate for overnight loans between banks—at 0 to 0.25 percent for “an extended period.” It also said it would continue and consider expanding the program it announced in March to buy up to $300 billion in long-term Treasury notes and up to $1.25 billion in mortgage-backed securities issued by the government-sponsored mortgage finance companies Fannie Mae and Freddie Mac.

These decisions signify that there will be no let-up in the administration’s policy of bolstering the balance sheets and profits of the banks by offering virtually interest-free loans, supplemented by cash infusions, subsidies and guarantees on the banks’ bond issuances and toxic assets. They further suggest that the administration will continue to place the US Treasury and trillions of dollars of taxpayer funds at the disposal of the banks and finance houses without imposing any significant requirements on how the money is used, or even obliging the bankers to account for the bailout funds they receive.

On the basis of the vast transfer of public funds, supplemented by deceptive accounting tactics, most of the big banks have reported substantial profits for the first quarter of 2009—even as they refuse to sell or write down hundreds of billions of dollars in bad debts they continue to hold—and denounce the minimal restrictions on executive pay imposed in return for the government handouts.

In recent days, the banks, the media and the Obama administration have hailed the improved fortunes of Wall Street as a harbinger of a broader economic recovery. In the statement released Wednesday, the Fed echoed this line, saying the economy had “improved modestly” since its March meeting and touting a “somewhat slower” pace of the contraction.

At the same time, it acknowledged that “economic activity is likely to remain weak for a time,” and that while household spending “has shown signs of stabilizing,” it remains “constricted by ongoing job losses, lower housing wealth and tight credit.”

By putting the best possible gloss on the economic situation, the Fed is suggesting that the policy of, in Obama’s words, doing “whatever is necessary” to bail out the banks is working.

Wall Street analysts cited two new indicators to justify this claim. On Tuesday, the Conference Board reported that consumer confidence had risen to 39.2 in April from 26.9 in March. This indicator, which mainly reflects lingering hopes and illusions in the Obama administration, is up from almost unprecedented lows and remains far below normal levels.

On Wednesday, the government reported that consumer spending rose 2.2 percent in the first quarter of 2009 compared to the last quarter of 2008. The modest increase broke a string of six straight monthly declines. However, the figure was up from a disastrous fourth quarter decline of 4.3 percent.

Any hopeful signs provided by the consumer confidence and consumer spending reports were more than overshadowed by the grim details of the GDP report. The first quarter drop means that GDP—a measure of the country’s total output of goods and services—has shrunk by 3.3 percent since peaking in the second quarter of 2008.

The Commerce Department reported, moreover, that US companies cut their total spending by a record 38 percent. It also said residential construction fell by 38 percent, the biggest quarterly decline since 1980. Reflecting the global character of the crisis, the report noted that US exports dropped 30 percent to the lowest level in four decades.

Also on Tuesday a report on home prices, the Standard & Poor’s/Case Shiller index, showed no let-up in the housing crisis. Home prices fell sharply in February across 20 major cities, declining 18.6 percent from a year earlier. Half of the cities posted deeper declines than in prior months, and overall prices fell 2.2 percent from January.

A separate report revealed that home loan applications fell 18.1 percent last week.

Politics and economics dominate response to swine flu epidemic

By David Walsh and Sean South 

The outbreak of a swine flu epidemic that threatens to assume global proportions is exposing the disastrous consequences of the subordination of all aspects of social life to the capitalist market and the competing interests of nationally-based corporate elites. The potential toll in illness, death and economic disruption is compounded by the scourges of poverty, social inequality and the lack of basic health care infrastructure in much of the world.

A rational and coordinated application of modern medical science and technological resources to deal with a world threat is frustrated at every turn by national boundaries and nationally based responses.

In the industrialized countries, above all the United States, the potential human cost from the flu epidemic is magnified by the decades-long neglect of public health by governments, beholden to financial interests, that have starved the health care infrastructure of resources.

In response to the spread of the swine flu, the World Health Organization on Wednesday raised its alert to Phase 5, a level characterized by widespread human infection and the danger of a pandemic. WHO Director-General Margaret Chan called on all countries to activate their “pandemic preparedness plans” and urged governments and manufacturers of vaccines and viral medications to mobilize resources to confront the crisis.

The organization announced that nine countries have officially reported cases of swine influenza A/H1N1, while numerous others have suspected cases. Laboratory confirmed cases have been reported in Mexico, the US, Canada, Germany, Israel, New Zealand, Spain, Austria and the UK.

The presence of the disease has also been detected, although not officially confirmed, in Brazil, Australia, Russia, South Korea and the Middle East. The list is likely to grow over the next several days.

While common seasonal flu kills from 250,000 to 500,000 people worldwide annually, the reason for special concern in the present situation, according to Dr. Carlos del Rio of the Emory University School of Medicine in Atlanta, Georgia, is that “we had a vaccine for regular flu.” He told CNN: “This [swine flu] is a totally new virus... You have a virus to which there’s no pre-vaccination, there’s no prior immunity. And, therefore, the mortality rate may be higher than other influenza viruses.”

In Mexico, where the flu first broke out, health officials raised the number of “probable” deaths on Wednesday to 159 from 152. A total of 1,311 people remain in Mexican hospitals after showing symptoms of swine flu.

The confirmed cases are likely to be only a small portion of the population that has actually been infected with the virus. The media reports that at least 2,400 Mexicans have been stricken. Unemployment, poverty and undernourishment are huge factors in the spread and severity of the illness. (See: “Mexico: Epidemic deepens the social crisis”)

The US Centers for Disease Control and Prevention said Wednesday morning that 91 confirmed cases had been reported in the US. These had occurred in 10 states (Arizona, California, Indiana, Kansas, Massachusetts, Michigan, Nevada, New York, Ohio and Texas). However, as Dr. Richard Besser, acting director of the CDC, told the media Wednesday, “these numbers are almost out of date by the time I say them.”

A 23-month-old boy became the first American fatality Monday night. The child had traveled with his parents from Matamoras, Mexico, to Brownsville, Texas to visit relatives in early April. He became ill while in Texas and was eventually brought to a hospital in Houston, where he died.

The most serious outbreak has occurred so far in New York City, with 45 of those cases concentrated in one school in Queens. City officials on Tuesday were investigating six additional cases at a school in Manhattan. The city is also attempting to determine whether five other people, including a child in the Bronx and a woman in Brooklyn, are suffering from swine flu. Scores of additional possible cases statewide are being investigated.

In response to these developments, the CDC warned that “more hospitalizations and more deaths are expected in the coming days and weeks.”

The threat of a swine flu epidemic exposes the incompatibility of the profit system with elementary human health and welfare. The risk or potential boon to business, as well as whatever reactionary political capital can be gained from the situation, is paramount in the minds of US officials and corporate executives.

Obama administration officials, including Agriculture Secretary Tom Vilsack, have been at pains to argue that the disease should not be called “swine flu” because the name “suggests a problem with pork products.” President Barack Obama had gotten the message by Tuesday, referring to the crisis as “the H1N1 flu outbreak,” whereas he had referred to it as “swine flu” one day earlier. According to ABC News, “Representatives of certain agricultural industries [had] made their displeasure known to the Obama administration.”

Asked about the issue, WHO’s Fukuda replied, “We have not initiated any plans to try to change the name ‘swine influenza’... [T]he virus that is identified is a swine influenza virus.”

Various demagogues in the US are turning the flu crisis into an opportunity for whipping up anti-Mexican sentiment. At a hearing of the Senate Homeland Security Committee Wednesday, senators Joseph Lieberman, John McCain and Susan Collins demanded to know of Homeland Security Secretary Janet Napolitano and the CDC’s Rear Adm. Anne Schuchat why the government had not shut the US-Mexico border.

Napolitano and Schuchat both noted the futility of such a measure, given the incidence of the disease within the US, but the senators continued to press the issue. Schuchat, the CDC’s interim deputy director for science and public health, bluntly called the issue a “diversion” and commented, “Going forward, there is no circumstance in which closing the border would have value.”

Earlier in the week, WHO spokesman Gregory Hartl told the press that the WHO is advising countries to provide sick people with treatments such as Tamiflu and make sure that national plans are in place to ease the impact of a larger outbreak.

“Governments will need to start thinking about larger-scale care for a specific disease in accident and emergency wards,” he said. “Do they have the infrastructure? Do they have the equipment? Do they have the medicines? This is the time, now, to prepare.”

The US is unprepared for such crises by the very fact that every decision has to conform to the interests of large corporations. MSNBC reports, for example, that the “US flu vaccine manufacturing system is a partnership between the federal government and various drug-makers, such as GlaxoSmithKline, Novartis, Sanofi Pasteur and MedImmune.” Whether sufficient supplies of vaccine exist depends, in the final analysis, on the profitability of its production, as the flu vaccine shortage of 2004-05 revealed.

A genuinely coordinated policy is impossible under those conditions. All the more so in a country that includes 47 million people who have no health insurance. Public officials advise those with any suspicious symptoms to “see your doctor.” For many, a visit to a physician is a financial hardship, and a serious illness an economic catastrophe.

The already disastrously inadequate health care infrastructure in the US has been further eroded as a result of the economic crisis. Governments at every level are cutting back, endangering the lives of the people in the process.

The New York Times reported Wednesday that the recession “has drained hundreds of millions of dollars and thousands of workers from the state and local health departments that are now the front line in the country’s defense against a possible swine flu pandemic.”

The newspaper cited numerous worried comments from public health officials. Robert M. Pestronk, executive director of the National Association of County and City Health Officials, told the Times, “Local health departments are barely staffed to do the work they do on a day-to-day basis. A large increase in workload will mean that much of the other work that is being done now won’t be done. And depending on the scale of an epidemic, capacity may be exceeded.”

Pestronk’s organization estimates that local health departments lost about $300 million in financing and 7,000 workers in 2008 due to budget cuts. He expects 7,000 more jobs to be cut this year. State public health agencies cut 1,500 additional jobs and another 2,600 job cuts are anticipated in 2009.

In New York City, health department spending on emergency preparedness was cut by $5 million a year ago. California’s Department of Public Health recently underwent a 10 percent budget cut. Congress eliminated nearly $900 million in proposed funding for pandemic flu preparation from the recently passed stimulus bill.

Dr. Paul E. Jarris of the Association of State and Territorial Health Officials told the Times, “The entire system is lining up to decrease resources at the time we need them most.”

At a press conference Monday, CDC acting director Besser made a fairly forthright statement, commenting that “economic realities” had been “very hard on state and local public health.” He noted that the nation relied “on public health personnel at the state and local levels to identify these outbreaks and identify them quickly.”

He added, “That infrastructure is one of the backbones that we count on to be able to identify and control outbreaks.”

Zuma: An African Chavez?

by Walter Smolarek 

Africa is an infected continent. Its affliction is spread not by bacteria or parasites, but through loans. Delivered by the IMF and World Bank as part of the neo-liberal wave that enveloped the world after the fall of the Soviet Union, it plunged the continent, especially Southern Africa, into the pits of privatized hell. Neo-liberalism struck here at a magnitude only barely surpassed by Latin America¹ , and at long last there are at least some signs that the masses may be standing up against capitalist exploitation to affirm their dignity as human beings. Now that he has won last week’s election, could Jacob Zuma, the leftist leader of the African National Congress, turn South Africa into an example of Socialism for the 21st Century?

The Tripartite Alliance

Currently ruling South Africa is what’s called the “Tripartite Alliance”, which consists of the African National Congress, the South African Communist Party, and the Congress of South African Trade Unions. The friendship between these organizations goes back to the struggle against apartheid. During this period of “National Democratic Revolution”, the movement was relatively homogeneous in its orientation towards the abolition of tyrannical white-rule. However, after majority rule was institutionalized following the 1994 all-races election, a rift in the Alliance began to form between those that represented the interests of the impoverished majority and those that represented the interests of the national bourgeoisie: the black elites.

The African National Congress is both a member of the Tripartite and the parliamentary vehicle for all three constituents. The ANC itself is a social democratic organization, which supports some social programs while ignoring the systemic root of the widespread poverty that grips South Africa (although this may soon change). Its true loyalties are made evident in the ANC’s highly touted Black Economic Empowerment program, which gives substantial state support to black capitalists. In doing so, the ANC continues the marginalization and exploitation of workers, especially black workers, that the very apartheid system it fought to overthrow was conceived for.

On the other hand, there exists a wing of the Tripartite that upholds the interests of the working class (both urban and rural). It’s composed of the South African Communist Party and the Congress of South African Trade Unions, two organizations closely allied in the common struggle for a socialist South Africa (the former somewhat more vocally than the latter). COSATU is the largest trade union in the country, while the SACP has a rich history of struggle that has earned it the loyalty of many South Africans.

In the aftermath of the 1994 election, the right wing of the Alliance slowly rose to dominance. During the presidency of Nelson Mandela, it became clear that the socialist society many envisioned after the end of apartheid was not going to materialize without further struggle. However, it was not until 1999 and the ascension of Thabo Mbeki that neo-liberalism fully descended on South Africa. Corruption, privatization, and all the other hallmarks of neo-colonialism deepened as a result, leading to a great amount of tension within the Tripartite Alliance and finally a major split.

The roots of the schism go back to 2005, when the Deputy President of South Africa, Jacob Zuma, was dismissed by Mbeki. Zuma, a fiery populist, was then faced with several politicized charges of corruption. However, during the course of these high-profile legal battles, Zuma became a symbol of the mass base of the ANC that opposed the neo-liberal betrayal of its founding principles. The Mbeki and Zuma camps fought a definitive battle at the 52nd National Conference of the ANC, held in Polokwane in 2007.

What transpired was an overwhelming victory for the left. Strengthened by the hardships the people have endured under neo-liberalism, the SACP and COSATU flexed their muscles in favor of the leftist Zuma, who won the ANC presidency with over 60% of the vote, defeating Thabo Mbeki. Furthering the defeat of the neo-liberal right was the victory, with nearly 62% of the vote, of Kgalema Motlanthe, a close ally of Zuma, who became deputy president of the ANC and later President of South Africa while Chairman of the South African Communist Party Gwede Mantashe became the General Secretary of the ANC with 62.4% of delegates supporting him.

In response, the most right-wing of the ANC national bourgeoisie left the party in 2008. Led by Mosiuoa “Terror” Lakota, these die-hard opponents of Zuma founded the Congress of the People (COPE), which espouses a mix of neo-liberal and center-left views, much like New Labour in the UK.

But for Zuma to even have a chance to change the nation, he would have to secure a crushing mandate from the people, and that’s exactly what he did. Last week’s election results revealed a landslide victory for the Tripartite Alliance, although it did lose its two-thirds supermajority. Specifically, 65.9% of the vote went to the ANC, 16.66% to the centrist, white-led Democratic Alliance, and an embarrassing 7.42% to COPE. Furthermore, a superb 77.3% of voters participated, which should prompt the social movements that called for a boycott to reevaluate their tactics.

Zuma — Glass Half Empty

So now that Zuma has won, let’s take a closer look at his political orientation. The new president of South Africa is a complex man with complex views, indicative of the ideological schizophrenia of the Tripartite. It’s important to analyze both his progressive and reactionary sides. First: a pessimistic look.

Zuma’s personal conduct leaves a lot to be desired. Although he was quick to apologize, the president made a high-profile homophobic remark, calling homosexuality “a disgrace”. This chauvinistic attitude can also be seen in his repeated participation (Zuma has had four wives) in the lobolo custom. Lobolo involves the payment of a woman’s family for the right to marry her, reducing the bride to a piece of property. Also, the President was a close friend of Schabir Shaik, a capitalist that was convicted of corruption in a high-profile trial.

In word, Jacob Zuma is by no means a model revolutionary. For example, here’s an excerpt from a speech he made to the American Chamber of Commerce at its Thanksgiving dinner in 2008:

Ladies and gentlemen, I said earlier during some of my business meetings in the United States I encountered a common question, based on media reports back home.

There appeared to be a concern about the role played by the SA Communist Party in particular, and our Alliance partners in general in policy making.

ANC policies are formulated by the ANC. Our alliance partners participate in the process, and bring to the fore the interests of the constituencies they represent. This brings much-needed balance to the broad church.

However, they cannot and do not dictate to the ANC what its policy should be. We also cannot dictate their policies as well. We have a relationship based on mutual respect.

Here Zuma spinelessly goes out of his way to ease the minds of the western bourgeoisie and reveals quite clearly that he is at least partially loyal to the capitalist system that is the bane of the South African people.

Zuma — Glass Half Full

It should also be recognized that the President-elect of South Africa has many qualities that set him apart from the run of the mill career politician. His oratory is inspiring and down to earth; free of the condescending double talk that characterizes the rhetoric of bourgeois statesmen. Zuma is also found of singing the militant anti-apartheid song “Umshini Wami” (“Bring Me My Machine Gun”).

There are plenty of statements Zuma has made that could be cited as support for an optimistic outlook. For example, he stated on December 16th, 2008 at the 47th Anniversary of the formation of Umkhonto We Sizwe (the armed wing of the ANC during the fight against apartheid):

Comrades, the ANC is a learning organisation. We have learnt from the mistakes of the past 15 years, especially the manner in which we may have, to some degree, neglected the people’s movement in our focus on governance.

From 1994, we had to focus primarily on transforming the State and the country, and to deliver on the basic needs of our people. We have to a large extent done well. Thousands of people have water, electricity, roads, public health care, access to education, houses and other basic services.

However, we may not have balanced our governance and party work well. In this context, all who led the ANC in the past 15 years should take collective responsibility for any possible weaknesses, as well take credit for the successes.

The various problems that developed could have been averted and some of our key structures and sectors would not have been neglected as they have been.

This statement reflects exactly the kind of honest, self-critical reflection necessary to prepare the path for radical anti-capitalist inroads.

Conclusions

Faced with a leader of unpredictable loyalties, what is the left-wing of the Tripartite to do? Abandoning the ANC and starting fresh would consume a tremendous amount of resources and those involved would have to face a long and treacherous path to get their foot in the door of state power. However, should the leftists choose to keep the alliance intact, which they very clearly are doing, the socialist forces will have a good deal of leverage to push Zuma in a revolutionary direction. It’s important to keep in mind that the future of South Africa rests not with one man, but with the constructive struggle of millions. The organizations potentially capable of leading this struggle are COSATU and the SACP, but for them to reach this potential they must first take a serious look at their actions over the last fifteen years and commit themselves to standing up when rightist elements of the ANC try to exert influence counter to the interests of the people.

Should the progressive forces of South Africa succeed in establishing 21st Century Socialism outside of Latin America , the ramifications will be earth-shattering. No longer will the ideology be confined to a single region, a single national liberation movement, but will spread to all oppressed nations and peoples, becoming the banner around which revolutionary elements the world over will rally. This internationalization is of paramount importance to the struggle against the rule of capital and to establish a just, democratic, and egalitarian world.

That said, we should not become too emotionally and politically invested in the radical trajectory of Zuma, which is dubious. However, working-class victory is, now more than at any other time since the defeat of apartheid, within reach. As legendary freedom fighter and SACP leader Joe Slovo said: “It’s not difficult in South Africa for the ordinary person to see the link between capitalism and racist exploitation, and when one sees the link one immediately thinks in terms of a socialist alternative.”

1. Development and Globalization: Facts and Figures. United Nations Conference on Trade and Development 2004: 25. [↩]

Why South Africa's nascent black opposition fell flat on Election Day.

Can't COPE 

by Eusebius McKaiser and Sasha Polakow-Suransky

A theory of racial politics that shed light on last year's U.S. presidential election could perhaps have been used to better effect by a new opposition party in South Africa. The theory--promulgated by Shelby Steele, a fellow at Stanford University's Hoover Institution--is that blacks who succeed in mainstream America are either race-stoking "challengers" or race-conciliatory "bargainers." While Steele's assessment was dead wrong stateside--it failed to adequately account for Obama's success--his framework was largely valid. Had it been leveraged by South Africans who opposed the presidential candidacy of Jacob Zuma, head of the ruling black-led African National Congress (ANC), things today might look very different for the G-20 nation.

Since 1994--when apartheid ended, Nelson Mandela came to power, and South Africa became a democracy--the country has been stymied by something of a Thomas Frankian paradox. Most middle- and upper-class whites there have refused to vote for the apartheid-ending ANC, even though its neoliberal economic policies--including partial deregulation and inflation targeting--distinctly favor them. Likewise, poor black voters, still seduced by the ANC's liberation narrative, consistently vote against their own economic interests, leaving many of these have-nots worse off still.

Enter COPE, the Congress of the People, a black-led opposition party that emerged late last year and promised to challenge South Africa's racially defined voting patterns. Comprising former President Thabo Mbeki's old ANC allies, it was the first genuine multiracial opposition that threatened to upset the ANC's dominance since the end of apartheid.

The ANC received 63 percent of the parliamentary vote in 1994, and nearly 70 percent in 2004. The largest (and largely white) opposition party, the Democratic Alliance (DA), managed to win the support of many disgruntled whites and Afrikaners who had previously voted for the National Party, led by the country's last white president, F.W. de Klerk. But without significant black support, the DA has never been able to compete with the ANC on a national level. The party, led today by Helen Zille, the 58-year-old white mayor of Cape Town, has made incremental gains, notably winning 16 percent in last week's election, its best-ever total--as well as an impressive majority win in the Western Cape province (Cape Town is its capital), which is largely white and mixed race. In the weeks prior to the election, Zille courted these voters by criticizing the ANC and sensationally attacking Zuma, warning that he was a "one-man constitution wrecking machine."

COPE, meantime, adopted a "bargaining" strategy--in this case, appealing to middle-class white South Africans while promising upward mobility to the poor black majority and hoping its slick professionalism would appeal to the emerging black middle class. "Bargainers," according to Steele, reassure whites that they will not be blamed for their country's racist past so long as they abandon racism in the voting booth. "Challengers," by contrast, aggressively leverage the history of racism and pressure whites to make concessions, such as agreeing to affirmative action-like policies. As a result, the theory holds, challengers enjoy immediate material gain, while their white counterparts gain some amount of racial redemption.

In February, COPE co-founder Mosiuoa Lekota, the country's former defense minister, criticized the ANC's affirmative-action policies, likening them to "job reservation" under apartheid--a racial quota system that ensured government jobs for Afrikaners. Young white taxpayers, he asserted, should not bear the cost of affirmative-action policies (even though, according to the Commission for Employment Equity--which advises the minister of labor on relevant matters--white women benefit more from the policy than black men do).

Lekota's rhetoric undercut whites' anxieties, provided them a sense of racial redemption, and sent a message of post-racialism. Just as Barack Obama gave voice to white bitterness in his March 2008 speech on race in Philadelphia--"When they hear that an African American is getting an advantage in landing a good job," he said, "or a spot in a good college because of an injustice that they themselves never committed; when they're told that their fears about crime in urban neighborhoods are somehow prejudiced, resentment builds over time,"--COPE, it seemed, was beginning to acknowledge the racial grievances aired in private by many white South Africans.

In the end, though, bargaining proved too risky a strategy. After all, unlike in the U.S., whites in South Africa do not make up a majority of the electorate, and so the tactic of overtly wooing them was and is a losing proposition. Add to that more pedestrian errors, like near-invisibility in the media, and the outcome was all but inevitable. But it was the party's ideological incoherence and posturing that left it with a disappointingly narrow slice of the electorate. For instance, while the ANC rented 3,300 buses to bring voters to a 200,000-person rally in central Johannesburg, COPE held its final pre-election event in the swanky Hilton ballroom in Sandton, a wealthy suburb to which many of the nouveaux riches have fled. In a bizarre blend of religion and alarmism, COPE's leaders invited the audience, primarily black men and women in business suits, to pray for 30 percent of the vote and then listen to a series of speeches--peppered with an odd array of quotations from the likes of Thomas Jefferson and Frantz Fanon-- denouncing the ANC for its totalitarian decision-making and populist economic policies. At one point, COPE's Gauteng provincial leader, Lawrence Khosa, likened Zuma's rise to the reign of terror in post-revolutionary France.

What's more, COPE failed to make explicit its position on affirmative action. Though Lekota's position was clear, the rest of the party equivocated. Even its official manifesto was vague: nominally committed to retaining affirmative action but open to reviewing its implementation. This left the party awkwardly straddling bargainer and challenger positions, placing the party in a no-man's land that confused and alienated potential supporters. In the end, COPE's leaders did not have the political resolve to bluntly support race-based redress, and they were too timid to openly embrace non-racialism with a principled renunciation of affirmative action. As a result, many would-be white voters were left unable to affirm COPE's commitment to post-racialism, while many "buppies"--South Africa's black middle class constitutes about six percent of the total population and is rapidly expanding, thus making it a much-targeted constituency--feared losing the very affirmative action benefits that have helped them join the middle class. The end result: COPE was trounced, and received less than eight percent of the vote.

COPE must now regroup and reconsider how it will become a post-racial party capable of attracting anxious whites, maintaining the trust of self-interested buppies, and building support in the impoverished townships. South Africa's democracy is maturing fast, but the psychological scars of apartheid and the racial allegiances it produced will color voting patterns for years to come. COPE's best shot at success may come from demonstrating to political competitors and voters alike that color-blind policies and ideologies are not essential for building a substantively equal post-democratic society. Some of the logic of challenger politics, such as the need to address South Africa's deep racial legacies in explicit racial terms, can be successfully articulated in the gentle, inclusive, and non-alienating voice of a skilled bargainer.  

Five new problems for Obama's second 100 days.

Fresh Hell Awaits

by Michelle Cottle, Michael Crowley, Bradford Plumer, Noam Scheiber, and Jason Zengerle

The presidency isn't supposed to be easy--but the sheer tonnage of catastrophe that has been heaped on Barack Obama in his first 100 days is astounding. As Michael Crowley put it, "Two wars, economic collapse, and now a possible global pandemic. When do the locusts arrive?" Never, hopefully. But that doesn't mean that Obama's second 100 days will be any easier. Below, five TNR staffers--some cheekily, some not--speculate on what fresh hell awaits Obama as spring stretches into summer. 

Michael Crowley--In an interview with "60 Minutes" last month, Obama called Iraq "the least of my problems." And, indeed, his first 100 days have been blessed by a relative calm there. But that may be changing. Yesterday's gruesome double car bombing, killing at least 41 people, was just the latest in a recent series of deadly attacks. Visiting Baghdad this week, Secretary of State Hillary Clinton dismissed the latest violence as "a signal that the rejectionists fear that Iraq is going in the right direction"--a phrase alarmingly reminiscent of Donald Rumsfeld's misguided talk of "dead-enders." In fact, the recent wave of suicide attacks suggest that the Iraqi security forces may not yet be prepared to protect the country without substantial American help. And they are a reminder that peace in Iraq, such as it is, is tenuous indeed. Mammoth disputes have yet to be resolved, such as the distribution of oil revenue and control of oil-rich Kirkuk--questions over which many Iraqis are more than willing to shed blood.

Obama has pledged to have all combat troops out of Iraq by the end of August 2010, and the Iraqi government has asked America to leave the country by then. But if the country should again slide towards anarchy, that plan might well change. Iraq could plead with Obama to stay, confronting him with a grueling choice. Although Obama pledged repeatedly as a candidate to "end the war," he did so at a time when Iraq seemed like a lost cause. Now that the past year or so has demonstrated that Iraq can be stable and secure, accepting a plunge back into chaos is a different proposition. (Recent experience has also undermined Obama's past argument that U.S. troops were a root cause of instability in the country.) However, if Obama is determined to prevent Afghanistan from collapsing, he'll need tens of thousands of troops relocated from Iraq. Given the size of the military, troop levels in Iraq and Afghanistan are close to a zero-sum game.

Faced with this quandary--one of his own making, to be sure--George W. Bush concluded that stabilizing Iraq, with its natural resources and its strategic location, was a higher priority than stabilizing Afghanistan. Until recently it looked as though Obama could enjoy the inheritance of stability in Iraq and create it in Afghanistan. But in the months to come he may have to make the terrible choice anew.

Noam Scheiber--On the economic front, the most obvious second-hundred days minefield is those stress tests. The administration is planning to release the results in some form next week. Under the best-case scenario, the tests will tell us what we thought we already knew: Citigroup and Bank of America are in serious trouble and will need more capital; the other big commercial banks will be able to muddle through. But it's frighteningly easy to imagine this ending badly. On the one hand, the results could look a little too rosy, in which case investors may lose confidence in the entire exercise. On the other hand, the results could come in more pessimistic than we expect. In both cases, the upshot could be a run on bank stocks, which is why the whole thing is such a tightrope act.

And, if we make it through that intact, there's one more subplot that has the potential to blow a hole in our banking system: commercial real estate. Banks (and, for that matter, insurance companies, some of which have similar investment portfolios) are sitting on hundreds of billions of dollars in commercial real estate loans and securities, whose downward trajectory looks similar to residential real estate, except a year or two behind. It's not hard to imagine a full-on commercial real estate collapse leaving craters in banks we think of as semi-healthy. Nor is it hard to imagine this dealing a death-blow to the two big zombies. The bailouts may just be getting started.

 

Michelle Cottle--If you thought Obama's plague-ridden first 100 days had a biblical feel, brace yourself: We're headed straight into what could reasonably be called The Acts of God Season.

And I don't mean that in a good way.

Pick your natural disaster--tropical storm, hurricane, tornado, wildfire. Like clockwork, they all come bearing down on this great nation as the weather warms. Few regions are safe. In the southern plains' Tornado Alley, the peak season runs from May through early June, while June and July are prime twister time for the Midwest and northern plains. Along the Gulf and Atlantic coasts, hurricane season starts in June and gets progressively uglier through September. Out west, wildfires rage in July and August. Then, of course, there are the derivative dangers: Because thunder storms are more common in summer, so are lightning strikes. And although, historically, this particular phenomenon has not occurred in sufficient numbers to require mobilization of FEMA or the National Guard, at the rate things are going ...

Certainly, Obama cannot be rationally held responsible for such elemental disasters. But make no mistake: Every time a trailer park in Florida experiences a strong wind, a primed-for-catastrophe chattering class is going to parse the POTUS's every word and deed for signs that this will be (all together now!) "his Katrina moment." Making matters worse, the media are flat-out obsessed with bad weather. As far as most networks are concerned, having one's star correspondents stand knee deep in tidal surge buffeted by driving rain and category-three winds ranks up there on the interest meter with tales of missing kids, shark attacks, and politicians banging hookers.

So while it may be the hoariest of truisms that you can't control the weather, Obama sure as hell better start gearing up to manage it.

 

Brad Plumer--Another possible catastrophe for the second 100 days? Darkness. Sustained, terror-inducing darkness. In recent years, cyberspies from China and Russia have reportedly penetrated the U.S. power grid, leaving behind software that could be used to create targeted blackouts or possibly tamper with U.S. nuclear power plants, should the hackers find themselves in the mood for chaos. (Intelligence officials have stressed that it's unclear what the hackers' motives are, exactly, or whether they're even government-backed.) Stirred by the news, members of Congress have been falling over themselves in recent weeks to introduce bills to beef up grid security and fend off potential cyberattackers.

Granted, it's unlikely that China would feel any desire to disrupt the U.S. economy in the midst of a recession, but accidents can happen: In 2008, security experts told National Journal that an outage in Florida affecting three million people may have been caused by a hacker with China's People's Liberation Army who was supposed to be mapping the power grid and inadvertently hit the wrong switch. Whoops.

 

Jason Zengerle--Republicans are putting on a smiley face and claiming they're actually happy to see Arlen Specter leave their party, but, while this is mostly spin, there is a germ of truth to the claim. After all, Specter is a notorious pain in the ass. ("There are two kinds of senators," a former Republican aide once told National Review. "Republicans who don't like Specter and Democrats who don't like Specter.") And, now that Specter's a Democrat, he becomes Obama's pain in the ass.

Specter can make Obama's life difficult over the next 100 days (and beyond) merely by being himself. Over his 28 years in the Senate, he's developed a reputation as a politician who'll vote your way--for a price. He once told Trent Lott he'd support an appropriations bill only if Lott would attend two fundraisers for him. Earlier this year, he voted for Obama's stimulus plan, but only after he'd gotten a 39 percent increase in funding for the National Institutes of Health. In other words, Obama will have to spend the next 100 days working as hard for Specter's vote as he would have if Specter were still a Republican.

Except, now that Specter's a Democrat and Obama has pledged to support him in the 2010 Pennsylvania Democratic primary, Obama won't just be working to win over Specter. He's going to have to spend some of his political capital to win over liberals, who'll have a big say in that Democratic primary and might not want to vote for a guy who opposes the Employee Free Choice Act and the public plan component of any health care legislation.

Of course, there's always the possibility that Specter could make Obama's life easier and start voting more like a Democrat--now that he actually is one. But he hasn't given any indication that he will. During his party-switch negotiations with Senate Majority Leader Harry Reid (who last year wrote that Specter only crosses party lines "when we don't need him"), Specter claims that the subject of policy stances never came up. If it had, Specter explained, it would have led to a "long, perhaps unpleasant, conversation." It's one thing for Obama to have those conversations with recalcitrant Republicans. But now he'll be having them with a member of his own party.

Japan factory data raises hopes

Japan's economy relies heavily on the export of cars and electronic items [EPA]

Japan's factory output has risen for the first time in six months, raising hopes that the country's worst recession since World War Two may have bottomed out.

Government figures released on Thursday showed industrial output rose 1.6 per cent in March compared with a month earlier, with forecasts that production will increase further in April and May.

The rise following several months of sharp declines has been seen as a hopeful sign that the country's struggling manufacturers could be beginning to recover.

The monthly gain is a marked turnaround from February's 9.4 per cent plunge and January's record 10.2 per cent tumble.

Forecasts showed Japan's manufacturing sector, pivotal for the country's export-oriented economy, is projected to rise 4.3 per cent in April and another 6.1 per cent in May.

The announcement was warmly welcomed by Japanese investors with the benchmark Nikkei share index closing Thursday up by almost four per cent, buoyed also by a strong day on Wall Street.

Outlook revised

"Unless we can see a recovery in the US economy, it is too early to say Japan's economy is back on track" Hiroshi Watanabe, Daiwa Institute of Research

But the optimistic news was tempered by an announcement from the Bank of Japan that it now expects the Japanese economy to shrink by 3.1 per cent in the fiscal year to March, more than was previously expected.

The central bank had forecast in January that the economy would contract by around two per cent.

However the BoJ said it expected to see 1.2 per cent growth in the next fiscal year, saying that overseas economies will start recovering from the second half of this year, aided by government efforts to tackle the recession.

Japan's economy, driven by foreign sales of its cars and electronic gadgets, has been mired in its deepest recession since the end of World War II, hit by plunging levels of global consumer and corporate spending.

Major exporters such as Toyota Motor Corp and Sony Corp have responded by reducing shifts, suspending factory lines and slashing thousands of jobs over the past few months.

Recovery uncertain

Japan's economy has been hit by its worst recession since World War Two [EPA]

But the overall outlook for Japan remains grim and analysts cautioned that a sustainable recovery was still uncertain.

"A full recovery in Japan requires strong exports, particularly to the United States," Hiroshi Watanabe, an economist at Tokyo's Daiwa Institute of Research told reporters.

"Unless we can see a recovery in the US economy, it is too early to say Japan's economy is back on track.

Japan's economy suffered a brutal annual contraction of 12.1 per cent in the last three months of 2008 and economists say this year's first quarter could be even worse.

In an effort to prop-up the economy the government has presented to parliament a record supplementary budget calling for 15.4 trillion yen ($159bn) in extra spending.

The cabinet said the newest stimulus package will help protect Japan from a downward spiral while laying the foundation for future growth, including a subsidy for drivers buying "eco-friendly" cars.

A Strong Safety Net Encourages Healthy Risk-Taking

By Jacob S. Hacker

The basic underlying principle of the New Deal was that security is not opposed to opportunity but essential to it.

From Five Ways of Looking at Risk.

Remember the "ownership society"? Just an election cycle ago, conservatives were urging Americans to give up their antiquated social-insurance programs--Social Security, Medicare, unemployment insurance--in favor of tax-subsidized individual accounts that would vest responsibility for dealing with economic risk in workers and their families. Thankfully, the most extreme elements of that agenda failed, and the vision behind it (of responsive financial markets capable of managing risk with limited government oversight, and the private sector providing inclusive, progressive protections with minimal public prodding) is now discredited.

Yet while the ownership society was a practical and intellectual failure, it was more of a political success than commentators generally acknowledge. Even before the financial crisis, the broad set of economic protections that arose in the Great Depression and expanded in the decades after--sometimes called the "safety net," though in truth the net was never understood to be the bare minimum that the term implies--lay in tatters. Over the last generation, our economy and society have dramatically changed, creating new risks and intensifying old ones. But our public-private framework of economic security has decayed, leaving advocates of the existing policies increasingly defending a Potemkin village of hobbled and out-of-date protections.

If ever there were a time for an alternative to the reigning orthodoxies of risk management, this is it. Now is the time to adopt a vision not of individuals managing economic uncertainties on their own with limited government help but of all of us providing the common foundation for economic prosperity and advancement through smarter and broader sharing of risk. Yes, progressives must unlock financial markets and put them on a stronger basis. But our longer-term goal should be more fundamental: a new public-private partnership that builds upon and extends the basic underlying principle of the New Deal. That principle--even more true today than it was in the 1930s--is that security is not opposed to opportunity but essential to it. In a dynamic and flexible economy, well-designed policies of economic security are critical if workers are going to have the confidence they need to invest in and achieve the American dream.

Consider our failing health-care system, with its spiraling costs and cratering coverage. One in three people younger than 65 in the United States goes without health insurance at some point every two years, and even Americans who have health insurance are at risk of catastrophic costs that can drive them into bankruptcy. Our exorbitantly expensive system weighs down family finances, harms labor-market flexibility, and siphons off money that could be invested in enhanced productivity and skills. In the face of this crisis, calls for health savings accounts or greater personal responsibility fly in the face of the overwhelming evidence--from our own history and cross-national experience--that broader sharing of risk through publicly sponsored public and private insurance would not only head off countless preventable hardships but also slow the skyrocketing growth of health costs and improve our economy and long-term fiscal standing.

Health care is only the tip of a larger iceberg. In every facet of Americans' economic life--their health care, their pension plans, their job security, their family finances--risk and responsibility have shifted from the broad shoulders of government and corporations onto the fragile backs of workers and their families. In an era of partisan polarization and gridlock, we have failed to update our nation's safety net to reflect the changing economic and social realities of our nation. We still have strong benefits for the elderly, but we do very little to help the millions of young Americans struggling to gain a foothold in the job market or buy a home or start a business--the future of our economy and society. Our safety net emphasizes short-term exits from the work force, even though long-term job losses and the displacement and obsolescence of skills have become more common. And some of our social polices still embody the antiquated notions that family strains can be dealt with by a parent, usually a mother, who can easily leave the work force when there is a need for someone at home.

Above all, our safety net is based on the dying belief that job-based health and retirement benefits can easily fill the gaps left by public programs, when it is ever more clear that they cannot. We spend hundreds of billions of dollars subsidizing workplace benefits through the tax code so that employers can serve as mini-welfare states. But, of course, employers are less and less willing to take on these obligations, and less and less willing to provide broad protections on equal terms to their workers when they do. At one time we had guaranteed private pensions that looked much like Social Security; now we have 401(k) plans that place nearly all of the risk of retirement planning on workers. In effect, we have shifted from the traditional "three-legged stool" of Social Security, guaranteed private pensions, and private savings to a wobbly two-legged stool of Social Security and private savings (inside and outside of 401(k)s). Once again, economic common sense and social justice both argue for moving away from our present mess toward the broader and more direct pooling of risk.

George W. Bush's ownership society was based on the belief that "financial innovation" would spread the rewards of economic growth to all Americans through better and broader access to financial assets. Yet the exact opposite has been true. As government and corporations have pulled back, the personal safety net has been fraying, too. There is no need to restate the familiar statistics: bankruptcy and home-mortgage foreclosures are up, savings are down, debt is up, and middle-class incomes have grown slowly in an era in which most of the rewards of economic growth have gone to the richest of Americans.

"Risk" may be the word on people's lips today, but most understand it far too narrowly. Risk does not simply concern the breakdown of our nation's financial institutions; it concerns the breakdown of our nation's social contract. If we are to fix that contract--and our economy--we will have to do more than socialize risk for those at the top of the economic ladder. We will need to reclaim the twin ideals of security and opportunity for all Americans.  

Housing is Local, and Lending Should Be, Too

Alyssa Katz

We're just now learning how dangerous it is that the sources of finance for homeowners and their neighborhoods have no real connection to those people and places.

 

From Five Ways of Looking at Risk.

History will recall 2005 as the year the credit bubble grew fattest--when in much of Florida and California, real-estate prices doubled in a matter of months. But in Cuyahoga County, Ohio, it was the year that nearly 12,000 homes were abandoned to foreclosure, leaving streets littered with boarded-up houses. Many of the home sales turned out to have been between speculators selling property to one another at rigged prices, using phony paperwork. Other borrowers fell prey to sub-prime refinancing that put cash in their hands but lost them their home.

At the time, Cleveland's calamity was a nonevent outside of Ohio, because the projected losses fit within the margins of investment bankers' risk models. Securities analysts wrote off the Ohio foreclosure wave as the byproduct of a declining Rust Belt economy, notwithstanding that the unemployment rate in Cleveland had been twice as high in the early 1980s. Nationwide, the foreclosure rate still stood at less than 1 percent, about as low as it had ever been.

Of course, Ohio was a harbinger of the dismal fate of the rest of the nation. So why were Wall Street analysts so blind? Perhaps it's that they literally could not see the destruction their funds had wrought--they were, after all, hundreds of miles away and dependent on a few points of outdated, deeply unreliable data. And even if those who packaged, repackaged, sold, or rated mortgage-backed securities had witnessed the men carting off aluminum siding or the teenagers using windows of abandoned homes for target practice, they could still avoid the consequences of the risk. <>In a world in which capital can instantaneously leap just about anywhere, we're now learning the hard way just how dangerous it is that the sources of finance that sustain home-owners and their neighborhoods have no meaningful connection to those people and places. This is a hazard that now looms much larger than the mortgage market. The supplanting of local economies with global ones, no matter the product, amplifies whatever risks already exist.

This challenge has already been painfully clear in the business of growing and processing food, in which a rogue peanut-processing plant in Georgia infects supermarket shelves nationwide and effluvia from factory farms poisons communities far from where the pork or poultry will be consumed. The sustainable-food movement has a word for its response: "locavore," a person who consumes food that is grown or processed nearby. Locavores do much more than limit the fuel consumption and climate impacts that ensue when tons of food get hauled all over the planet. They also seek to create a sustainable and safe system that ties producers and consumers together in a mutually beneficial ecological and economic pact.

The current machinery of mortgage making not only fails to encourage local connections between creditor and debtor, financial institution and community; by design it prevents such links. Investment banks are shielded from legal liability for harmful acts committed by the lenders whose mortgages they bought. They're further armored by the terms of the securities pools they helped assemble, which command lenders to buy back any loans whose underwriting turned out not to be up to the pools' declared standards.

Yet more than a legal and financial construct, evasion of responsibility looms as a social, political, and moral reality. Those who created and traded in the securities trusts were not players with any stake in the communities in which these loans were made. They could not be subject to boycotts, or concerned about status as a good corporate citizen, or care about what the local paper or blogger might write, or even harbor fond memories of a neighborhood's high school football team. Indeed, the mortgage-backed-securities pools themselves existed only as creatures of the law, without a single identifiable face or place of business. In business jargon, they lacked "reputational risk."

Real estate is unlike any other commodity, because its value is tied to its relationship to the community in which it sits. Until the last three decades, the financial institutions that funded the majority of home mortgages had deep connections to the places where they operated. They were savings and loan institutions, which before they turned into capital-pillaging machines in the Reagan revolution were descendants of a 19th-century financial self-help movement. S&Ls funded mortgages out of their cash deposits, and when they had more demand for loans than their deposits could sustain, they turned to Fannie Mae (starting in the 1970s, Freddie Mac) and sold them the loans.

S&Ls' reign at the heart of the home-finance business had enormous and ultimately fatal downsides. S&Ls were egregious practitioners of "redlining," the denial of credit even to low-risk borrowers if they were perceived to live in a blighted area. (Here, the S&Ls' intimate local knowledge was unhelpful, since underwriters were susceptible to negative views of "bad" neighborhoods, driven by race and class biases.) Then, by the late 1970s, the Fed's moves to rein in inflation provoked a mini credit crisis, as high interest rates depleted S&Ls' capital.

The mortgage-backed-securities market was engineered to supplant this constrained local economy with a free global one. It was born in a collaboration between investment bankers, economic advisers to President Ronald Reagan, and Congress. They set out to channel as much investment capital as possible into the financing of real estate. In doing so, they divorced the money behind housing from the places where the real estate sits--for better in the short term but ultimately, for worse.

This isn't the first time that this basic model--generate capital in the markets, then funnel it to borrowers via street-corner mortgage brokers--has led to disastrous results. Beginning in 1970, the government-owned corporation Ginnie Mae began creating securities out of Federal Housing Administration-insured mortgages and selling them to investors. Just like sub-prime mortgages, these loans were frequently sold by predatory brokers who descended on poor urban neighborhoods, set up cash-extraction schemes, and left in their wake tens of thousands of abandoned houses. Some cities, like Detroit, were permanently scarred.

The Community Reinvestment Act of 1977 grew out of neighborhood activists' efforts to fight the twin devils of redlining and destructive FHA lending and to obligate financial institutions to "meet the credit needs of the local communities in which they are chartered." But the Wall Street mortgage-securities market emerged outside of CRA's domain. That market's colossal failure opens up a precious opportunity to combine the best of both worlds--the global reach of the capital markets with local stewardship and scrutiny.

Some advocates are now looking to extend CRA to cover a much wider range of financial activity, making it possible for community leaders to push back against patterns of discrimination in lending practices. The resurgent role of Fannie Mae, Freddie Mac, and Ginnie Mae at the heart of the mortgage-securities market opens an opportunity for those agencies to build local responsibility right into the transactions, through qualification standards for lenders seeking to have their mortgages purchased by the pools, and penalties for irresponsible behavior by lenders' sales agents. Philanthropist George Soros and others have proposed adopting a Danish-style system in which bondholders and homeowners share identical risks. That holds promise, but one way to enforce it is to require that the bond be held by a local issuing institution, which, as a civic body, has a special stake in making sure that a loan performs and brings value to borrower and community alike.

Such civic banks already exist--they're community-development financial institutions, or CDFIs, chartered by the Department of the Treasury to serve neighborhoods and borrowers whose financing needs aren't adequately met by conventional banks. It is these lower-income borrowers who ended up turning in droves to sub-prime loans and their neighborhoods that have been the most devastated. CDFIs were powerless to compete with the flood of Wall Street-sponsored sub-prime products and the mortgage brokers hustling to sell them, but now that the mortgage-finance system is largely run by Washington, not Wall Street, CDFIs-which include credit unions and community banks--can play an essential role as a partner to Fannie Mae and other government-administered mortgage-finance agencies charged with keeping mortgage funds flowing to borrowers.

Lenders that wish to sell relatively high-risk mortgages to Fannie Mae or Freddie Mac could be required to first sell the loan or a stake in it to a CDFI. That idea has already been put to the test in a successful and carefully studied experiment. Beginning a decade ago, the Center for Community Self-Help, a CDFI in Durham, North Carolina, collaborated with Fannie Mae and the Ford Foundation to buy from other financial institutions $2 billion in mortgages for high-risk, predominantly low-income homebuyers, about one-third of them from North Carolina, and then made sure those loans performed through careful underwriting standards and follow-up counseling in the event borrowers ran into trouble (only a relatively small number failed, usually because they elected to refinance with cash-back mortgages from other lenders).

Self-Help's national model can work just as well on a local or regional level. It's time for "locavore" to be a principle that applies not just to the production and consumption of apples and milk but also to the financial system by which communities live or die. 

The Rich and Powerful Can Avoid Risk

By Robert A. Johnson

We have to think of risk not as a problem of faulty math but a problem of power

From Five Ways of Looking at Risk.

Recent discussions of the malfunction of Wall Street have centered on the role of statistical models that failed to accurately account for all possible outcomes. These less likely results, known as "tail risks," were underestimated by the models. Now the "quants" on Wall Street and academia have a new research agenda, which is to figure out how to fix those models.

Telling the story in this way has a risk of its own. Focusing on inanimate abstractions and numbers diverts attention from the human conflicts and follies embodied in our current catastrophe. The challenges related to the distribution and management of risk are much more formidable than a technical fix because they are not technical problems. Managing and balancing risk in the future is an organic human problem, a political problem, and a problem of power. The question is how to remedy the fact that some players have the power to shift risks and to use the political process for insurance, while others do not.

Risk is inherent in the world. Natural disasters, wars, famines, floods, as well as the business cycle and disruptive innovations all introduce risk into life. A properly functioning capital market, working together with government, serves to diversify and distribute that risk to those who can bear it. Social institutions are set up for collective support for the aged and weak and those who fall prey to natural disaster. We've forgotten that in recent years, when society was caught up in the urge to be "entrepreneurial" and to show a hearty appetite for risk. Declaring oneself a "risk taker" was a badge of honor.

We undermined the public institutions constructed to bear risk and insulate citizens from the worst consequences. Health-care policy treated patients as empowered consumers, ignoring their fundamental vulnerability. (Most people heading to the emergency room are not focused on comparison shopping among providers.) Congress cut back on bankruptcy protections for individuals. At the same time, unemployment insurance, welfare, and other aspects of the social contract were charged with creating a disincentive to work. When it came to institutions that protect individuals, concerns about moral hazard were rampant in the economics departments throughout the land. To be sheltered from risk was to be weak or corrupt.

Unfortunately, all this concern about perverse incentives of the weak and unfortunate was not applied in the world of finance. Free-market fundamentalism dominated academic and political debates. Regulations and restraints on the behavior of financial institutions and investors were seen as inefficiencies and unnecessary constraints, getting in the way of greater and greater financial efficiency.

In these elaborate intellectual portrayals of the financial marketplace, little attention was paid to the well-known fact that if a financial crisis were to emerge, officials would step in to truncate the risk of the downside in the name of containing "systemic" consequences. Systemic consequences mean spillovers from the financial sector to the real economy. In this case, just as drivers in an era of cheap gasoline don't worry about the costs of climate change, private participants in the financial system were not pricing the societal consequences of the risks they were taking.

It is important to note that the problems of financial excess introduced risks into society that need not be present. Factors such as excessive leverage, balance sheet complexity, and executive incentives that encouraged risky behavior fostered a system that did great and unnecessary harm. The financial sector did not merely transfer risk onto the taxpayers. It greatly amplified the risk, and took out large bonuses, before handing the bill to the victims across the national and world economic landscape. It is tragic that at the same time we subjected many to the sharp edge of unavoidable risks by weakening social protections, we fanned the flames of risk amplification by the powerful, using the promise of public money to give them a sense of invulnerability.

Previous events enabled market participants to know that the downside of their risks would be limited. The Mexican bailout of 1994?1995, the Asian Crisis of 1997, the Greenspan rate cuts in 1987 and 2000?2001, were all examples. In each case, putting out the immediate fire was imperative. But as time passed each "success" pumped more confidence into the financial balloon.

The underwriting of downside protection, which has been called the "Greenspan Put," owing to former Federal Reserve Chair Alan Greenspan's willingness to cut interest rates and provide assistance to the financial sector, was accompanied by the fierce campaign to unshackle market participants via deregulation. Economists selling expertise were rewarded by patrons who were making money, and together they convinced our money-hungry political representatives that they were doing good for society by accepting campaign contributions to remove constraints on finance. A fawning media offered little resistance.

Then suddenly, it all came to a crashing halt. Now we are in the middle of a process of de-leveraging, a system-wide reduction of risk on the balance sheets of financial institutions. The government, in order to mitigate the excesses of the highly leveraged, poorly managed, exceedingly complex financial sector, has itself become highly leveraged. It has created its own intricate structures, all devoted to keeping intact the very large "too big to resolve" institutions that are responsible for the crisis.

What we have seen so far is not a new approach to risk but risk transfer. Risk is being transferred from the balance sheets of financial firms to the public, by elected representatives from both parties. Think of lobbying and campaign finance as an insurance policy for finance. For a small premium, the financial firms bought the right to offload their losses after they occurred.

Even after the crash, the human dimensions of risk and the incentives to take it on are unchanged. Each of the big financial firms has the incentive to shift risks by selling assets to raise capital before the other goliaths do. Each has the incentive to scurry to the back of the bus and make sure that other firms get "resolved" before they do. If Citigroup were resolved, then everyone else's balance sheet would be stronger. The American International Group bailout turned out to be a conduit for strengthening the firms with which AIG was intertwined.

Although the crisis is systemic, an equally comprehensive resolution may prove impossible. The firms that were strongest politically, notably Goldman Sachs and JP Morgan, were betting that the others would be brought in and restructured first. As this tug of war played itself out, the size of the crisis and the damage to the economy deepened. This dysfunction did not merely transfer the hot potato of risk from one firm to another; the delay in comprehensive resolution actually increased the amount of risk society was forced to bear--the potato got bigger and hotter.

Only the most powerful and wealthy can afford to play this game of risk transfer. The Consumer Education Foundation, in a recent report titled "Sold Out: How Wall Street and Washington Betrayed America" estimates that U.S. financial, insurance, and real-estate firms paid about $5 billion in combined lobbying and campaign contributions over the last decade. They will likely offload nearly $2 trillion in losses onto the taxpayers, so their political investments have paid off at nearly 400 to 1. Goldman Sachs alone recovered its estimated $47 million dollars of influence-buying in one fell swoop with the over $12 billion dollars of transfers reported in the AIG bailout. Even if half of that were justified recovery, the return on their political investments was more than 13,000 percent!

In the future, how can we reduce the incentives and the ability to shift risk, first onto other firms and then to the public? The public good of trust has been badly shattered by the brazen demonstration of power in this episode, and while government has grown, our capacity to believe that government can address and solve social problems, once inspired by the actions of Franklin D. Roosevelt and then denigrated from Ronald Reagan to the present, may be diminished.

It is possible that the current financial and economic crisis will be viewed, in the hindsight of history, as an outlier, a tail risk in itself. But to prevent similar crises in the future, we have to think of risk not as a problem of faulty math but a problem of power. The solutions will not be found in academic finance but in reforms to campaign finance, lobbying, and tax law that create a government that can stand up to the natural human inclination to take on risks and then pass them on to others. 

Risk Is Best Managed From the Bottom Up

By Nomi Prins

We need regulations to address risk in every layer of the system, from the loan or bond, to the bank, to the very structure of the global financial industry.

From Five Ways of Looking at Risk.

Federal Reserve Chair Ben Bernanke stated the obvious during his March 10 speech at the Council on Foreign Relations in Washington: The global financial system contains too much risk and too little regulation. As the central figure in a multitrillion-dollar bailout exercise that has done little to contain, let alone reverse, the current economic crisis, Bernanke then strained to make some risk-fighting suggestions for future stabilization.

First, he recommended regulating "the financial system as a whole … not just its individual components." Second, he warned that classifying any firm as "too big to fail" only "encourages excessive risk-taking by the firm." Third, he stressed the need to help credit flow by adopting "new policies to limit the incidence and impact of systemic risk." All of these are efforts to contain risk from the top and to spot big bubbles before they get out of control. The problem is that they overlook all the layers of risk created from the bottom, before they are visible in the financial system as a whole. We don't just need to prevent big problems at the top. We need regulations to address risk in every layer of the system, from the loan or bond, to the bank, to the very structure of the global financial industry.

At the bottom of the risk pyramid lie the mortgage loans. Financial models select and package them into new securities according to criteria such as diversity of geography, size of loans, and length of mortgages in years. Standard securitization models make numerous assumptions before repackaging a bunch of loans into an asset-backed security. These include the likelihood that a certain number of loans will default or be delinquent with payments. The results the models spit out are only as good as the information put into them. In the case of the mortgage crisis, the input relied too heavily on recent history, of which there was little for sub-prime loans. This introduced a risk that wasn't taken into account.

Meanwhile, under pressure from investment banks and their investors, lenders pushed loans onto borrowers. Even when loans deteriorated and delinquencies rose, demand persisted, which caused lenders to make even riskier loans. From pension funds to university endowments to Icelandic municipalities, institutions everywhere relied on high-grade securities manufactured from the base of low-quality U.S. mortgages.

Even if the models had detected possible losses better, things still would have gotten ugly because the market obsessively reused, or leveraged, these loans in multiple ways. One was the layering within the securitization market. You could have one asset or mortgage-backed security dependent on a certain bunch of sub-prime loans. But parts of that security could be repackaged into a whole new security. Then two securities were related to the same underlying loans.

These asset-backed securities, or collateralized debt obligations (packages of asset-backed securities known as CDOs), could be used as collateral to purchase and package new bunches of sub-prime loans or to simply borrow money for other endeavors. There is no market limit on the number of times loans or asset-backed securities or CDOs can be repackaged. And each time a repackaging occurs, it introduces more risk and leverage (since a widening swath of securities or subsequent borrowing is dependent on the same loans) into the system. This borrowing, or leverage, acts like a magnifying glass for risk.

To make matters systemically worse, different institutions are allowed to take on different amounts of leverage. The Securities and Exchange Commission had set a net capital rule in 1975 that required broker-dealers (or investment banks which ran broker-dealers) to limit their debt-to-net capital ratio to 12 to 1. In other words, they couldn't borrow more than $12 worth of debt for every dollar of real capital, or equity, they held. In 2000, former Treasury Secretary Henry Paulson, in his capacity as chief executive officer of Goldman Sachs, began the fight to change that rule. Four years later, he testified against it before the Senate Banking Committee. Finally, on April 28, 2004, investment banks like Lehman Brothers, Bear Stearns, and Goldman Sachs got the SEC to increase their 12-to-1 leverage to a whopping 30 to 1. Final approval to lift the rule was unanimous and took 55 minutes. At one time, Merrill Lynch's assets were leveraged 40 to 1. Hedge and private-equity funds didn't even have official leverage rules. To this day, there is no official compilation of their global or domestic leverage.

Leverage increases the likelihood of a bank entering the "too big to fail" category, since it expands a bank's borrowing capacity and hence, the amount of debt it holds. Plus, as banks become bigger, it's more difficult to detect all the pockets in which risk can gather. Case in point: Bank of America was allowed to acquire Merrill Lynch. The acquisition rendered the institution bigger, more leveraged, less transparent, and riskier. The size—and the convoluted balance sheet that comes with it—makes the possibility of seeing risk, let alone containing it, that much harder. Smaller, simpler banks, are easier to monitor and cheaper to save.

In his March 10 speech, Bernanke suggested establishing better regulatory oversight for institutions deemed too big to fail. What he should have demanded is that they not be allowed to get too big to fail, which, along with restrictions on risky practices for commercial banks, was the intent of the Glass-Steagall Act of 1933, which was slaughtered in 1999. Instead, mergers were encouraged at every step—with dire consequences for the nation's biggest banks. Citigroup is in critical condition. The Bank of America and Merrill Lynch merger was a train wreck. The merger of Wachovia and Wells Fargo bled losses. The bargain merger of JP Morgan Chase, Washington Mutual, and Bear Stearns only did a bit better because of government backing.

Multilayered risk has reverberated throughout the financial system with catastrophic results. Whether he explicitly said it or not, Bernanke knew things had gone massively wrong and that the banking system took on more debt than it is able repay. And so the risk-holders of last resort became the federal government, the taxpayers, and international governments.

There are remedies to the problem. But for those remedies to be fully effective, risk must be mitigated at every point from the loan level to the leverage amount to the size and complexity of each institution.

Loans must be better regulated. Lenders should be subject to greater restrictions and transparency on hidden costs and loan complexity and not push loans that borrowers are ill-equipped to understand or repay. Multiple loans should be capped. Lenders should not be allowed to keep preying on the same borrower to take out multiple loans on their only collateral, their home.

The leverage within each security should be restricted by increasing the real assets and limiting the number of repackagings—no more CDOs of CDOs. By spreading the loans so thin, any small failure has a greater impact on a higher pyramid. Plus, multiple repackaging renders each new security less transparent, which makes it harder for regulators to keep tabs on it. The net capital rule should be 8 to 1 for every financial firm that operates in the global market—with no exceptions and no loopholes. The system shouldn't be allowed to leverage itself beyond its capacity to absorb the risk, requiring the government to step in and be the safety net. Financial firms should be required to build their own better safety nets. And all transactions should be on the books. More leverage should not be created in such a way as to obscure capital rules and hide the true nature of institutions' debt.

Last, the riskier components of banking should be separated from the consumer oriented, deposit-loan components. The government has a responsibility to back consumer deposits, because those consumers didn't think their deposits were going to be used to create the other, massively risky transactions that banks took on. These riskier elements should be allowed to fail; otherwise, "super regulators" will continue to have a tough time keeping up with Wall Street and its risk-creating prowess.

Alas, Treasury Secretary Timothy Geithner seems to be maintaining Bernanke's top-down approach to fixing the financial system. When Geithner unveiled his plan for economic stability in late March, he echoed the need for a stronger regulator rather than a banking system that is easier to regulate. This was supposedly a remedy to the idea that "the bigger they are, the harder they fall." But in fact, more careful logic holds that if financial institutions don't get so big, they won't fall so hard. In other words, Geithner failed to grasp that we can contain risk by reducing the possibility of its growth, not by watching it more carefully afterward.

In 1933, Franklin D. Roosevelt understood that the creation of the regulatory agencies, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation, worked because the Glass-Steagall Act rendered the banking arena into smaller, clearer components that were easier to regulate. The current banking crisis screams for a similar approach, one that is focused not on strengthening big regulators at the top but on addressing every level of the system to make banks easier to regulate.