Fannie and Freddie sneeze, the world catches a cold

When United States Federal Reserve Chairman Ben Bernanke gave the US Congress a bleak assessment about the state of the country’s economy on Tuesday, he blamed the housing markets, high energy prices and tight credit conditions for a slowing of growth.

Bernanke’s statement came just two days after the Federal Reserve – which is the central bank in the United States - and the US Treasury Department came to the rescue of mortgage giants Fannie Mae and Freddie Mac.

That move marks the latest development in a global financial crisis that was triggered by falls in the US housing market earlier this year.

The US had initially looked to the Fannie Mae and Freddie Mac, two ‘government sponsored’ companies, to sure up the country’s mortgage market when the initial crisis hit.

Now the rescuers – which, between them, hold or guarantee more than $5 trillion dollars in mortgages - have had to be rescued with emergency loans from the Federal Reserve.
In response shares on Wall Street, the US stock market, slumped.

But why does it matter what happens in the US mortgage market? And what was the subprime mortgage crisis, of which this Fanny Mae and Freddy Mac bailout is a part?

As Jim Stanford pointed out in the last Red Pepper sub-prime mortgages were, in essence, cheap loans issued to home purchasers in the United States –offered at low rates to lure buyers into the market. When the rates started rising, the loans were increasingly defaulted – and lenders, realising their investments were liable, started to lose confidence in the market. That loss of trust then had knock on effects in other parts of the financial system, triggering a financial crisis that has seen the US tumble towards recession.

But the bursting of the housing bubble was only one symptom of a much wider financial crisis that is besetting the US economy. With the liberalisation of global economies in recent years, the old economic adage that ‘when the US sneezes the world catches a cold’ still has a ring of truth.

Like most crises, this one was avoidable – but the signs were not recognised by leading bankers and economists.

Bernanke himself attributed rising US housing prices to ‘strong economic fundamentals’ in 2005 – blind to the role of speculative activity in this sector.

The US housing boom was also fuelled by a lack of regulation, with the debt burden for US mortgages parcelled up and resold so that investors didn’t know what they were buying.

This pattern of speculation was itself underpinned by a disconnection between the real and financial economies. In essence, with the ‘real economy’ faultering, investors shifted their money to financial assets from which they could generate greater profits. But with stock markets spiralling out of control – failing to take account of the real value of their assets – it was inevitable that this ‘bubble’ would eventually burst.

The results have so far fallen hardest on homeowners in US, rather than on the corporations which speculated in continued growth. And these same investors have shifted assets back to the real economy – one of the key reasons why food and oil prices have been on the rise this year.

Nor is it a surprise that Chinese capital is the main foreign investment behind Fanny Mae and Freddy Mac.

As Walden Bello points out in an excellent article on chain-gang economics, China’s economic growth has largely depended on the ability of US consumers to continue their debt-financed spending spree to absorb much of the output of China’s production - a process backed up by massive Chinese lending to the US Treasury and US firms.

The result has been an unsustainable cycle of Chinese production and US consumption. And while it could help the Chinese, and the whole globe, to de-couple their economy from the US – there are not yet signs that this is happening.

Sarko's Club Med

A new Union for the Mediterranean was officially launched in Paris last Sunday, with French President Nicholas Sarkozy claiming it would help bring about peace and stability.

Actually, he was rather more romantic: 'The purpose of the Mediterranean summit, of this union for the Mediterranean, is that people learn to love each other in the Mediterranean region instead of keeping on hating each other, and fighting each other.'

Sarko's love-in was attended by Palestinian President Mahmoud Abbas and Israeli Prime Minister Ehud Olmert, who added to their holiday snaps by posing together, as well as Syrian leader, Bashar al-Assad. This was the first meeting he'd had with Olmert, although he quietly slipped out of the room before having to listen to his Israeli counterpart.

Despite the hype, though the new club of nations is far from a new proposal. In fact, the Union for the Mediterranean is the latest of several attempts to formalize relations between the European Union and its neighbours to the South and East.

It was devised by Sarkozy as a key pillar of the French EU presidency, which runs until the end of the year.

The new Union overlaps with an earlier EU proposal for cooperation in the Mediterranean region, officially called the 'Barcelona Process'.

But suspicions are widespread to French motives for proposing the new club of nations.

Turkey has long expressed its reservations about the plan – seeing moves towards a Union of the Mediterranean as a manouvre by Sarkozy to block its entry into the European Union (and with good reason).

The Libyan leader Muammar Qaddafi boycotted the summit, claiming that the new Union was a ‘neo-colonialist’ attempt to reassert French influence in North Africa.

Beyond this posturing, however, the move towards a new Mediterranean Union is driven more by economic concerns than by grand intentions to build peace in the region.

Its formation has sparked up internal rivalry within the European Union, with German Chancellor Angela Merkel seeing it as an attempt by France designed mainly to advance its own economic and political interests in North Africa.

In response, Merkel won some concessions. The European Commission, which has so far spent 16 billion euros since 1995 on the ‘Barcelona process’ will limit its funding for the new Mediterranean union to 7.5 billion euros until 2013.

This package was agreed alongside a pledge to dedicate more funding to the EU’s eastern relationships – in which Germany has a stronger interest. Germany is the largest contributor to the EU budget.

Both policies, in fact, overlap with a more broad-ranging European Union Neighbourhood Policy to promote free trade and control migration into the 27-member bloc.

As part of this strategy the European Union is building detention centres to lock up migrants in Libya – as part of a cooperation agreement that critics have called a ‘Fortress Europe’ strategy.

The EU is also pursuing a series of bilateral trade agreements with Africa, aimed at opening up markets for European-based corporations. Trade between the EU and its Mediterranean neighbours amounted to 120 billion euros in 2006, with EU-based multinational companies the main beneficiaries.

In fact, the most immediate objective effect of the new Mediterranean union is the promotion of a series of investment projects – in water management, sea purification and nuclear energy – which are most likely to help French companies acquire lucrative new contracts in the region. And that's an idea that Sarkozy truly loves.

The world in 23 minutes

Here's a TV programme that I did, which rounds up the world news from the last seven days (well actually 10 now because it went out a few days ago):

http://www.presstv.ir/Programs/player/?id=59208#

The main items are on the World Food Summit and Obama's primary victory

Obama’s Middle East policy: more of the same?

What is it about American politics? No sooner has Barack Obama won the Democratic nomination, than he’s in front of the America Israel Public Affairs Committee promising to strengthen US-Israeli military ties; promising not to negotiate with Hamas or Hezbollah; and promising to keep the threat of military action against Iran ‘on the table’.

So is there any chance that Obama – who’s election campaign message is ‘a change you can believe in’ - can bring about any genuine shift in US foreign policy towards the Middle East?

Well, his position on Iraq is unquestionably favourable to that of his rival. McCain has promised to ‘stay a hundred years in Iraq’, whereas Obama has pledged to withdraw US troops from the country within 16 months of his election.

But look behind the headlines and Obama’s call is for a withdrawal only of ‘combat troops.’ This would still leave anywhere between 35 and 75,000 so-called counter-terrorism troops and trainers in Iraq, as well as all or most of the 180,000 mercenaries that the US pays to support its military. He has also said little about closing the 15 permanent military bases that the US has built in Iraq, including the one less than 2 miles from the Iranian border.

Obama’s policy towards Iran is also ambiguous, at best. Initially, he sought to distinguish himself from other candidates in the US Presidential race by urging the need for immediate negotiations with Iran ‘without preconditions.’ He talked of the potential for Iran to enter the World Trade Organisation, as well as of the need to offer some guarantees to Iran.

As he gets closer to the White House he appears to be distancing himself from this stand and taking a harder line. His latest remarks on the supposed threat of Iranian nuclear weapons are a case in point.

Don’t get me wrong – an Obama White House would be a different beast to a McCain one. And the fact that Obama grew up in Hawaii and Indonesia suggests that he might at least bring with him a more intuitive sense of the disastrous role of US militarism across the world.

The course of an Obama presidency is far from fixed, moreover. His support base amongst the many Americans who oppose current US foreign policy is a cause for hope, if they manage to use that position to pressure him to resist a ‘business as usual’ approach to the Middle East.

But while I’d like to believe in the change that an Obama presidency would bring, I’m not holding my breath. For those of us who don’t believe in the Great Men theory of history, the political conditions in which a leader operates are all important.

The salient question is not what Obama wants to achieve, so much as what it is possible for him to achieve. What openings can he find or engineer in a Washington that is wedded to an aggressive sense of its own national interest, and beset by powerful lobbies, from the arms industry and pro-Israel groups, as well as an oil industry looking to achieve ‘energy security’ at any cost?

The signs so far are that Obama is likely to prove unwilling and unable to redefine the US national interest in ways that would fundamentally break with the ideology of empire.

Oil boom... and bust?

In Indonesia, thousands of people protested as the government cut fuel subsidies in response to sharply rising prices.

In France, fishermen are blockading oil refineries .

And in the United States, Ford is to cut production of its oil-hungry sports utility vehicles; while American Airlines has retired old planes and added a $15 surcharge to flight tickets.

This week, oil prices hit record highs of $135 per barrel – which, even taking inflation into account, is higher than at the peak of the 1970s oil crisis.

Is the world running out of oil? Or are oil traders cashing in on temporary price hikes – creating a temporary bubble that will soon burst?

With oil prices reaching record highs, there is no shortage of explanations for the current boom.

The latest surge came after the US government reported that its supplies of crude oil and petrol fell unexpectedly in the last week.

Financial speculation was rife, with a $5 dollar price hike in a single day’s trading on Wednesday bearing all the hallmarks of a speculative bubble.

The weak US currency was also a factor, as it makes it cheaper for holders of other currencies to buy oil - which is traditionally priced in dollars.

In addition, many investors see commodities such as oil as a hedge against inflation and the falling dollar.

But while some analysts consider that, in the short term, this bubble could burst, the fundamentals of oil supply and global politics make it more likely that the price of a barrel of crude will continue its upward trend.

The International Energy Agency (IEA) last year reported that oil demand is likely to outpace rises in oil supply until at least 2012, generating significant shortfalls.

The economic and consumer boom in the world's largest developing countries, particularly China and India, are one key factor.

But this is accompanied by a pronounced slowdown in the expansion of global supply, due mainly to a dearth of new discoveries, which many analysts take a sign that the world is approaching peak oil - the moment in our history where supplies start to dwindle.

This trend has been exacerbated by the unwillingness – and, to some extent, inability - of the oil cartel Opec to pump significantly more crude.

Recurrent political disorder in key oil fields already in production – including Iraq and Nigeria – is a further factor.

US aggression towards key oil producers, including Iraq, Venezuela and Iran – has made the markets nervous too, with the resulting spike in oil prices having a significant ‘blowback’ effect on the US economy itself.

So what is the effect of all this?

The environmental impact is ambiguous. A cut in flights, and a decline in sales of gas guzzling 4x4 vehicles in the United States is good news for the planet. But price alone will not change the oil addition of Western consumers. And while oil-dependent companies are reporting losses, oil companies themselves are doing well – with the high price making it viable to invest in new “unconventional” oil sources, such as tar sands and deep-offshore fields.

The impact on the US economy is more telling, however. With oil prices now over twice what they were a year ago, they are fuelling US inflation by making it more expensive to transport goods such as food.

This, in turn, is helping to weaken the value of the dollar on international currency markets – which then inflates the price of oil itself in international trading.

More fundamentally, though, the high oil price is weakening the US economy in the longer term by generating a huge balance-of-payments deficit.

As the United States continues to feed its oil addiction, wealth is being transferred at a rapid rate to the economies of oil-producing nations.

When the CAP doesn't fit

The European Commission presented plans to shake up its Common Agricultural Policy, its multi-billion dollar system of farm subsidies, last Tuesday.

But the new proposals do little to fundamentally reform the system, despite pressure from rising global food prices, and growing environmental concerns about large-scale industrial agriculture.
More than 40 per cent of the European Union’s 155 billion dollar annual budget is spent on farm subsidies.

Currently, 15 per cent of farmers receive 85 per cent of the direct farm subsidies in the EU’s 27 member states.

Under the Commission’s new proposals, the EU would cut the link between its subsidies and the amount of food that is actually produced on the land. It claims that this will help to protect the environment and promote traditional family farms.

But the Confederation Paysanne Europeanne, a Europe-wide network representing small farmers, also claimed that the new measures do not go far enough. It argues that market de-regulation pushed by the EU has undermined food sovereignty globally.

The EU’s new proposals would also abolish set-aside, the practice of leaving 10 per cent of arable land fallow.

This measure is supported by farmers’ representatives, but was strongly criticised by environmentalists – who claim that the fallow land is a lifeline for the continent’s birdlife.

Reforms to the Common Agricultural Policy have long been demanded by Southern governments and development organisations, which have criticized the European Union for forcing developing countries to open their markets to heavily subsidized European agricultural produce. This is said to undermine the development of sustainable agriculture in poor countries.

Yet with the rise in food prices globally, the gap between the market price and the EU prices has narrowed; and with that, attention has turned to the role of other EU measures, such as its biofuel subsidies for the production of fuel from crops, in undermining sustainable agriculture.

A victory against BAE

"No-one, whether within this country or outside, is entitled to interfere with the course of our justice. It is the failure of Government and the defendant [the Director of the Serious Fraud Office] to bear that essential principle in
mind that justifies the intervention of this court."

"It is obvious . . . that the decision to halt the investigation suited the objectives of the executive. Stopping the investigation avoided uncomfortable consequences, both commercial and diplomatic."

A pretty emphatic verdict from the High Court in the battle over the Saudi-BAE corruption case, then. Stopping a Serious Fraud Office inquiry on the grounds of 'national security' was one of the most reprehensible acts of the Blair premiership.

Well done to CAAT and The Corner House who brought the case (and see the Control BAE website for more details).

The stock market reacted with its usual ethical indifference - BAE shares were down 1.3 %, only marginally below the FTSE average for the day's trading. Business-as-usual, in other words. How about, just for once, instead of the government interfering in the legal process to prevent investigations into fraud, it regulates the arms trade instead?