"Is America The New Russia?"

By Ethan Brown, Section Economy
Posted on Wed Apr 15, 2009 at 05:47:00 PM EST
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That's what Martin Wolf asks in a strong column over at the Financial Times.

I'd made the US/Russia comparison here recently, prompted by the Paulson/Geithner approach to the financial crisis which I believe is hobbled by a total lack of transparency and a fundamental misunderstanding of the crisis itself (Geithner and co. don't seem to believe that the banks are insolvent). Put simply, the bailout is worthy a banana republic or perhaps Russia but not a supposedly first world democracy like the U.S. [More...]

Wolf takes a more nuanced approach to the US/Russia question. He acknowledges that "we have witnessed a massive rise in the significance of the financial sector" and that the Geithner approach is "unlikely to fill the capital hole that the markets are, at present, ignoring."

Wolf concludes that:

"Do these weaknesses make the US into Russia? No. In many emerging economies corruption is egregious and overt. In the US, influence comes as much from a system of beliefs as from lobbying (although the latter was not absent). What was good for Wall Street was deemed good for the world. The result was a bipartisan programme of ill-designed deregulation for the US and, given its influence, the world."

Fair enough but then Wolf writes that "decisive restructuring is indeed necessary."

And that to me is the problem. I don't think we're going to get a "decisive restructuring" of the financial system with Geithner at the helm. And Geithner's misguided bailout may yield catastrophic results given the depth of the crisis. So, to me the lack of will to reform a financial system that is fundamentally broken makes us indeed Russia-like.

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"Is America The New Russia?" | 41 comments (41 topical)

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If the question is one of corruption, (5.00 / 1) (#4)
by inclusiveheart on Wed Apr 15, 2009 at 06:31:16 PM EST

I do not think that we will have a good answer to that for ten or twenty years. Maybe earlier, but the typical cycle in DC is that solid evidence of corruption takes many years to surface.

If the question is whether we are going to continue the boom and bust cycle, the answer is yes if we don't make changes to the system. Those changes would have to come out of a totally different market philosophy that is focused on consumers rather than businesses which I am not seeing beyond the ranks of a few Hill folks like Bernie Sanders and Byron Dorgan.

You need a credit union (none / 0) (#19)
by Catch 22 on Wed Apr 15, 2009 at 07:50:35 PM EST

You and other consumers can start your own and aim it strictly at consumers needs. You can lend mortgage money at rates people can afford even if it isn't profitable. You can lend money to people who don't qualify seeing how it is focused on consumers rather than business. And you could do so without penalizing the poor credit risks with higher rates because it is focused on consumers rather than business. You could also double the interest they earn on their savings accounts. And the employees and managers could all work for 50K a year because they are nice people who are more interested in the consumer than their own families future. You could issue credit cards with low interest, 60 day terms, and no late fees or penalties.

Whatever the consumer wants you could give it them and put all business interests aside. Then the world would all be happy. Go for it.

[ Parent ]

So basically what you're saying is (none / 0) (#22)
by inclusiveheart on Wed Apr 15, 2009 at 08:19:52 PM EST

that we consumers can "take a hike" right? Watch out what you wish for because you just might get it.

[ Parent ]

Nope didn't say that (none / 0) (#26)
by Catch 22 on Wed Apr 15, 2009 at 09:15:27 PM EST

I was saying what you could do. But then if you did it like I said you probably could not meet the NCUA requirements to be chartered as a CU. Even CU's have to be run as a business in the interest of the business which is in the business of servicing members.

So much for your silly notion that banks should be run for consumers and not the banks. And people say Obama is out of touch? It would warm his heart th read these pages on most days.

You notion that banks should be run for consumers and not the banks strongly implies tht the problems we have today is because banks took advantage of consumers when they did business with them. That is absurd. Other than the credit card divisions which needed and got some new consumer friendly legislation the banks were not mistreating consumers in mass, particularly in the services provided at the branch level.

There does have to be some new legislation regarding investments and derivatives but that has nothing to do with you notion of "a totally different market philosophy that is focused on consumers rather than businesses". That's not only absurd but unwarranted. You didn't have any legitimate or logical basis for even suggesting that. Why you did is anyones guess. My guess is you post too much and thus don't think through what it is you are saying.

[ Parent ]

: I am talking about government's (none / 0) (#40)
by inclusiveheart on Thu Apr 16, 2009 at 07:24:24 AM EST

view of banks. Not banks' view of banks. The American people's interest in banks is in having a financial system to serve the people, not in enriching banks. During the Great Depression there was an entire framework of banking laws enacted that was centered around the theory that protecting even the smallest customer's interests the entire system was stronger and banks were more stable. This is not some crazy radical concept. It worked really well for decades and the bankers weren't hurting - they weren't making the insane money they were in the last few years but they didn't LOSE the insane money they lost in the past 18 months and destroy the economy either.

[ Parent ]

Private health insurance corps are still raking in (none / 0) (#31)
by Salo on Wed Apr 15, 2009 at 10:14:53 PM EST

the cash. Funny old system aint it?

If the answer was a snake it'd have bitten you already.

[ Parent ]

solvency vs. liquidity (5.00 / 1) (#15)
by Ethan Brown on Wed Apr 15, 2009 at 07:26:11 PM EST

I should have been more specific: Geithner/Treasury view the financial crisis as a liquidity crisis while economists like Krugman view it as a solvency crisis. Whether banks are actually insolvent or not isn't clear--though the vague and ill-defined 'stress tests' probably won't do much in helping us figure that out.

The larger point still stands: is real financial reform going to happen under Geithner?

: Ethan, thanks. (none / 0) (#30)
by Green26 on Wed Apr 15, 2009 at 10:14:30 PM EST

I'm fine with your later post, even if I don't necessarily agree with all of it. I just dislike the mantra of "insolvency", as there is no hard evidence to support it. My initial comment was mostly directed at the others who chant this mantra, not at you.

[ Parent ]

Not quite the new Russia (5.00 / 2) (#23)
by ruffian on Wed Apr 15, 2009 at 08:58:25 PM EST

We still need a long term military commitment to impose our will on Afghanistan.

Oh, wait....this just in....uh-oh

: I was (5.00 / 1) (#25)
by Ga6thDem on Wed Apr 15, 2009 at 09:14:56 PM EST

thinking the same thing.

[ Parent ]

How can some of you continue (2.00 / 1) (#3)
by Green26 on Wed Apr 15, 2009 at 06:26:11 PM EST

to say the banks are insolvent, when the head of the FDIC, and others in the know, have said that all of the big banks are currently "well-capitalized"?

Can you not read or understand financial statements, which clearly support that the companies are solvent?

Of course, things could change in the future. The recession, housing market and unemployment can deepen behind expectations.

I'm sorry, but those who continue to say the banks are insolvent have zero credibility.

So we can have all our money back? (5.00 / 3) (#5)
by nycstray on Wed Apr 15, 2009 at 06:31:50 PM EST

They didn't need it after all? COOL!

[ Parent ]

Have they 'unwound' all their bad mortgage debt (5.00 / 1) (#24)
by ruffian on Wed Apr 15, 2009 at 09:01:24 PM EST

yet? Not that I have seen. When they can tell me they have done that and are still solvent, I might believe them.

[ Parent ]

Well the banks are only (2.00 / 1) (#16)
by Catch 22 on Wed Apr 15, 2009 at 07:37:16 PM EST

insolvent because posters say so. Do they have any numbers to back it up? No.

Do they have a solution? Yes. Nationalization. Do they know that nationalization will cost more than the Obama plan? No.

Do they know that the government & taxpayer will likely end up owning all the the assets the posters say are worth nothing? No.

Do they know that when the worthless assets are owned by them that all such assets in the world will likely not be worth anything either thereby making the current worldwide crisis worse? No.

Do they now how long it would take to get these banks back to privatization - in all likelihood more than a decade? No.

Do any of the no answers above matter to them? No.

It is better to go with a plan that has no projected costs or time frame and is a bigger gamble than the Obama plan - just because it is.

[ Parent ]

: 22, you have captured much of (none / 0) (#33)
by Green26 on Wed Apr 15, 2009 at 10:28:12 PM EST

the argument, but do you understand it? I don't.
I truly don't understand how so many people, who seem to be very intelligent, subscribe to these views. to me, the views are unsupportable and make little sense, Yes, I understand that Krugman, a Nobel winner, has said some of this. However, I have never seen anyone, including Krugman, furnish any evidence for such views.
On the other side, the head of the FDIC, the banks' CFO's and in some cases CEO's, the SEC filings, presumably the regulatory filings, the Big 5 accountants, Treasury (with the support of the President), and most of the bank analysts; don't agree with the current insolvency stuff. It would be a clear violation of civil and criminal laws if these people were being dishonest, or even intentionally misleading, on this stuff. I just don't believe that any of these companies or people are lying.
And the recent Goldman/AIG stuff? The CFO of Goldman Sachs specifically says that the AIG transaction had no impact on first quarter or December earnings, and also says that the AIG thinks were not P&L matters, and yet some people won't believe Goldman? I don't get it. Sure, a few analyst/financial types, at some point, tried to say something to the contrary, but the vast majority of those in-the-know know that the CFO of Goldman isn't going to be dishonest, nor is he going to be wrong on this.
To my knowledge, no one with any credibility is currently challenging Goldman on its explanation of this.

[ Parent ]

From the article: (none / 0) (#6)
by inclusiveheart on Wed Apr 15, 2009 at 06:37:08 PM EST

Now, argues Prof Johnson, the weight of the financial sector is preventing resolution of the crisis. Banks "do not want to recognise the full extent of their losses, because that would likely expose them as insolvent ... This behaviour is corrosive: unhealthy banks either do not lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won't pay off at all. In either case, the economy suffers further, and, as it does, bank assets themselves continue to deteriorate - creating a highly destructive cycle."

I think the argument is not that they "are" insolvent, but rather that they might be and/or their coninued adherence to this system "as is" could ultimately lead them to insovency in this "highly destructive cycle".

But nevermind.

[ Parent ]

The Difference Between Being Insolvent and ... (none / 0) (#34)
by santarita on Wed Apr 15, 2009 at 10:50:39 PM EST

Being Maybe Insolvent or may be in the future insolvent is huge. I may be insolvent if I don't rein in my spending on non-necessary items. But I am currently paying all bills as they come due and have something set aside for emergencies. I may not be spending as frivolously as before. Does this scenario justify the government (or some other creditor) forcing me into bankruptcy?

If the banks are only potentially insolvent and not actually insolvent , then receivership would be improper. Assuming that the only thing keeping them solvent is their improper valuation of toxic assets, the government could simply say what the proper valuation is and let the chips fall where they may. Of course, before the government takes that course of action, it had better have a good argument that those assets are not properly valued. And if it doesn't have the facts right now, it had better get them.

[ Parent ]

I agree, Santarita. (none / 0) (#36)
by Green26 on Wed Apr 15, 2009 at 11:00:41 PM EST

I think the banks have a pretty good cushion at this time too.

If the regulators thought the banks had lots of overvalued assets on their books, and really couldn't weather the storm for much longer, the regulators would be taking more or different action with those banks.

[ Parent ]

It May Be... (none / 0) (#37)
by santarita on Wed Apr 15, 2009 at 11:35:22 PM EST

that the regulators and some banks are, at present, arguing over when to take write downs, how much to write down and how much the banks should increase reserves. What I think a lot of people want to see the regulators do, is to tell the banks what the toxic assets are worth and force a write down. What I don't think a lot of people realize is that while it may come to that, the regulators have to have a solid factual basis for imposing that valuation on the banks. To do so without a solid factual basis would create a huge mess.

Now it may be that the regulators (and Congress) are doing what was done in the early 1980's in the S & L crisis, postponing the day of reckoning through accounting changes (remember RAP vs GAAP?) and other techniques in the hopes that the economy will change. But for right now I think the regulators are proceeding in about the fashion and timeframe that I would expect. So I'm still in the wait and see mode.

[ Parent ]

: My impression is that the regulators (none / 0) (#41)
by Green26 on Thu Apr 16, 2009 at 09:52:45 AM EST

have been all over the banks and the banks' books for well over a year and maybe two. Loan loss reserves have been increased significantly during that time period--in part because of the involvement of regulators, as well as accountants.
As for the truly toxic assets, especially the securities, my guess is that the regulators are close enough to the situation to understand that it is very difficult to value these assets, or at least the ones which have had little or know trading market for the past 8 or so months.
Most of these securities will ultimately be worth a considerable amount. Let't take securities composed of pools of home mortgages, even ones with mainly or only subprime mortgages. First, note that these securities assume a certain amount of defaults. Second, even if the default rate gets to 15% or 20%, there is still significant underlying collateral value for the defaulted mortgages (just not enough to cover the loan). I assume that collateral value must average at least 50% of the unpaid amount of the loans, and it's probably more than that. Thus, under these assumptions, common sense tells me that these securities will ultimately pay off at 90% or so of face value, and when a market develops, they will be worth much closer to 90% of face value. Feel free to pick apart my simplistic analysis.

[ Parent ]

Very Greenesque (none / 0) (#29)
by Salo on Wed Apr 15, 2009 at 10:13:29 PM EST

lol

[ Parent ]

if it was the new Russia (none / 0) (#1)
by Capt Howdy on Wed Apr 15, 2009 at 05:52:35 PM EST

you would probably be in trouble for writing this.

: Ah (none / 0) (#2)
by jbindc on Wed Apr 15, 2009 at 06:17:24 PM EST

Who says he won't be?

[ Parent ]

Interesting (none / 0) (#7)
by Cream City on Wed Apr 15, 2009 at 06:39:04 PM EST

in light of the recent study by a Russian who predicted that we will dissolve soon as the USSR did, owing to his measures of increasing regionality here.

Regionality was a significant part of the Dems' political strategy -- and we certainly saw the winning candidate use it in the campaign.

Regionality has always been apart of American (none / 0) (#9)
by Socraticsilence on Wed Apr 15, 2009 at 06:56:37 PM EST

Presidential campaigns though- especially after 1964- If anything Obama broke some of the supposedly locked in patterns- he won Virgina and NC- Virgina for the first time in nearly half a century (maybe more I think Carter won it) heck- he was the first non-Southern Dem to win since JFK (and I'm including Al Gore's victory in 2000). Unfortunately were a regional country- No Dem's won Texas since LBJ, No Repubs won Minnesota since Nixon in 1972 (unfortunately Reagan in 1984 makes going beyond a single state really hard to do).

Frankly I think the Democratic Party is well positioned to consolidate much of America outside the Heartland- with the rising Hispanic population, I can see CO, AZ, NM, and even TX becoming Blue States- not battle grounds and Deep Reds- within the next two decades or so- with Gregg retiring the Maine Duo remain the only Republicans in New England and if Specter goes down in a primary the entire North East Corridor could be Blue, and that to the blueing of the MT West- excepting WY and ID-- and the Democratic party may start to need a viable check on its excesses. Basically, the GOP had a really good chance of locking and/forestalling the future- heck, give the man credit Rove knew one of the key things to do-- but then the anti-immigrant nuts torpedoed Immigration Reform and with it many of the in-roads Bush fought so hard to make- the Republicans better pray that Hispanic-Americans are more forgiving than African-Americans, because the Civil Rights Act in 1964 flipped what had long been one of the cornerstones of Republican support, and if the Immigration Debacle does the same for Latinos I don't really see what Mike Steele and Company can do to change things.

[ Parent ]

: A part of it, yes. But the study (none / 0) (#11)
by Cream City on Wed Apr 15, 2009 at 07:04:48 PM EST

stated -- again -- that it detected increasing regionality. Okay?

[ Parent ]

And the losers didn't? (none / 0) (#10)
by MileHi Hawkeye on Wed Apr 15, 2009 at 06:57:38 PM EST

I seem to recall a lot of talk about "real America" coming from the McCain/Palin camp. Among other themes. Also.

[ Parent ]

Yes, but they blurred that (none / 0) (#12)
by Cream City on Wed Apr 15, 2009 at 07:05:54 PM EST

message badly, while the Obama campaign was better about it, often on point about it (if sometimes making a point of it on tape when not knowing it:-).

[ Parent ]

I think message was pretty clear... (none / 0) (#13)
by MileHi Hawkeye on Wed Apr 15, 2009 at 07:11:05 PM EST

...and resonated well with their intended audience. That audience just wasn't enough to win them the election.

[ Parent ]

: Demographics (none / 0) (#18)
by Socraticsilence on Wed Apr 15, 2009 at 07:43:31 PM EST

Forget race, a non-Southern Dem would have been destroyed by that message just two decades ago- McCain ran an uglier version of Bush I's campaign, but it didn't work because America as a nation has changed- we're collectively more diverse, better educated and more tolerant all things that increase Democratic votes.

[ Parent ]

I guess (none / 0) (#17)
by Socraticsilence on Wed Apr 15, 2009 at 07:40:27 PM EST

I have trouble seeing increasing regionality in a win that took both coasts, almost the entire midwest, the former seat of the confederacy and a couple other Southern States, the Southwest (would likely have been a sweep if a non-AZ was the GOP nominee) and made serious in roads in the Mountain West (winning Colorado, and coming very close in Montana and the Dakotas) heck Obama almost won an EV in Nebraska- that seems to be the most diverse map we've had in a two way race (Clinton would have won both times by large margins- but Perot gave MT and I believe another small state to him) since 1964- I don't think that shows regionalization- i think it shows quite the opposite- then add in the Democratic Party retaking house and Senate seats in former Red Strongholds, and it looks like the only way a case can be made for increased regionalization is to make it on the grounds that the GOP is increasingly a regional party.

[ Parent ]

This election was a fluke, I fear (none / 0) (#20)
by Cream City on Wed Apr 15, 2009 at 08:18:38 PM EST

at the presidential level. Looking at the lower levels, there has not been as much change in a lot of regions -- certainly not in mine, one of those that you name. The red-blue map is not gone for good.

[ Parent ]

You are kidding yourself. (none / 0) (#28)
by Salo on Wed Apr 15, 2009 at 10:11:49 PM EST

THE GOP are probably going to wipe out the dems in 2010 if this is any indication. It's been such a waste of time to observe the Dems pee away their hegemony again.

[ Parent ]

: I'm wondering if we are going to have (none / 0) (#35)
by nycstray on Wed Apr 15, 2009 at 10:56:14 PM EST

a Dem v Repug p!ssing match for the next couple years . . . . aka, which can p!ss away most of their support the fastest. Even if the Right is following a drum beat, they still don't have much to support (we're talking the more sane end of the party there). Lordy, I so wish we had more viable parties in the system. You can bet both parties would bleed some . . . and perhaps get a clue?, lol!~

[ Parent ]

Regionality (none / 0) (#14)
by cal1942 on Wed Apr 15, 2009 at 07:20:14 PM EST

has been the bedrock basis of the Republican Party for three decades.

[ Parent ]

: And the urban Northeast (none / 0) (#21)
by Cream City on Wed Apr 15, 2009 at 08:19:11 PM EST

has not been the bedrock of another party?

[ Parent ]
: Regionality (none / 0) (#38)
by Coral on Thu Apr 16, 2009 at 06:14:05 AM EST

goes back to the formation of the nation. It's embedded in our history. Civil War, and all that.
To me, with this last election, it seems to be on the wane, not on the rise.

[ Parent ]

The comparison (none / 0) (#8)
by Socraticsilence on Wed Apr 15, 2009 at 06:41:12 PM EST

is almost offensive- while our financial situation is dire to compare to Russia's is absurd- the rank corruption and graft that permeates every aspect of Russian society makes the US look like a utopia (and we're definitely not a utopia) that's not even getting into the problems of extending the argument beyond the financial sector.

: I'm not sure. (none / 0) (#32)
by Salo on Wed Apr 15, 2009 at 10:17:08 PM EST

Emmanuel Todd made the comparison years ago. America has the ability to correct an election with another election. There are serious underlying problems though. The war in Iraq ended teh Imperial US system IMHO.

[ Parent ]

BTD (none / 0) (#27)
by Salo on Wed Apr 15, 2009 at 10:09:49 PM EST

To reiterate--nationalize the private health insurance industry. No other measure will fix what is broken.

Crony capitalism (none / 0) (#39)
by Coral on Thu Apr 16, 2009 at 06:27:06 AM EST

Yesterday's "public-private partnerships" are relabeled "crony capitalism."

That's a key quote in the Johnson article. Despite Obama's decisive win and the public outrage at the big banks and investment firms that have swallowed so much taxpayer money, the administration seems to be unable to take control of the situation. There is a big push against re-regulation of the financial sector, which has tremendous influence on capitol hill (and in the Obama administration).

The defense sector is another area infected with crony capitalism (and outsized profits, as well as corruption). Halliburton, for example.