Preface: The war between liberals and
conservatives is a false divide-and-conquer dog-and-pony show created
by the powers that be to keep the American people divided and
distracted. See this, this, this, this, this, this, this, this, this and this. So before assuming that privatization is a good thing, read on.
If these resources had
always been in the private sector, that would be fine ... that would be
free market capitalism.
But if they were purchased with our taxpayer funds and then sold to the big boys for cheap, that is looting.
What's going on?
Well, as I predicted in December 2008, bailing out the giant, insolvent banks would cause a global debt crisis:
Bank for International Settlements (BIS) is often called the "central
banks' central bank", as it coordinates transactions between central
BIS points out in a new report
that the bank rescue packages have transferred significant risks onto
government balance sheets, which is reflected in the corresponding
widening of sovereign credit default swaps:
scope and magnitude of the bank rescue packages also meant that
significant risks had been transferred onto government balance sheets.
This was particularly apparent in the market for CDS referencing
sovereigns involved either in large individual bank rescues or in
broad-based support packages for the financial sector, including the
United States. While such CDS were thinly traded prior to the announced
rescue packages, spreads widened suddenly on increased demand for
credit protection, while corresponding financial sector spreads
In other words, by assuming huge portions of
the risk from banks trading in toxic derivatives, and by spending
trillions that they don't have, central banks have put their countries
at risk from default.
And a study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
analysis to date also shows that accommodative policy measures (such
as substantial liquidity support, explicit government guarantee on
financial institutions’ liabilities and forbearance from prudential
regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway.
Also, closure of a nonviable bank is often delayed for too long,
even when there are clear signs of insolvency (Lindgren, 2003). Since
bank closures face many obstacles, there is a tendency to rely
instead on blanket government guarantees which, if the government’s
fiscal and political position makes them credible, can work albeit at
the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
By failing to break up the giant banks, governments are forced to take counter-productive emergency measures (see this and this) to try to cover up their insolvency. Those measures drain the life blood out of the real economy ... destroying national economies.
Selling the Farm to Pay for Debt Incurred to Make the Rich Richer
Matt Stoller notes:
takes inherently governmental functions — everything from national
defense to mass transit and roads — and turns them over to the control
of private actors, whose goal is to extract maximum revenue while
costing as little as possible.
It isn’t true, as a
general rule, that privatization shrinks the public sector. When
investor demand for high returns is combined with the natural
monopolies of public assets, what often results instead is citizens
finding themselves saddled with high fees and poor service.
more perniciously, selling infrastructure such as toll roads puts the
coercive power of the state in the hands of private actors. We have
great public assets built by prior generations. We should and could be
building a better country for our children, rather than liquidating what
Rep. Peter DeFazio (D-Ore.) pointed out
the truth of the Obama administration’s stimulus program: “Larry
Summers hates infrastructure. And some of these other economists — they
don’t like infrastructure. … They want to have a consumer-driven
Both domestic manufacturing and taxation are opposed
by the current corporate and political elites. Take the liberal
establishment economist Alan Blinder, who horrified former Intel chief
Andy Grove when he celebrated
as “success” the fact that America today cannot make televisions. Or
Michael Boskin, an economic adviser to President Reagan, saying potato
chips, microchips, what’s the difference?
The real infrastructure
trend in America today is privatizing what is left. House
Transportation and Infrastructure Committee Chairman John Mica has been
hearings on privatizating Amtrak’s Northeast corridor — ostensibly
because private capital can more easily bring in high-speed rail.
Kansas Gov. Sam Brownback just turned over
arts funding to the private sector, making Kansas the only state
without a publicly funded arts agency. Cities across California,
meanwhile, are trying to outsource
nearly all municipal functions. Chicago famously sold its parking
meter revenue to a consortium headed by Morgan Stanley. The Arizona
Legislature sold and then leased back its state capitol.
these good deals? History would say no. The granddaddies of
privatization were Fannie Mae and Freddie Mac, the housing giants whose
public role was supporting the secondary mortgage markets. These
companies were “private” in the sense that they operated without public
accountability. But eventually, their losses ended up on the public’s
Most privatization deals of core public assets
have the same essential structure as Fannie and Freddie. Listen to a
Goldman Sachs managing director, John Ma, who expressed his
reservations about the privatization of Amtrak’s Northeast corridor.
these public-private transactions are always a delicate balancing
act,” Ma explained, “of what risks the public sector will retain and
what risks you’ll try to transfer to the private sector.” Privatization doesn’t actually make something private; it simply divides risks between public and private entities.
fact, the real allure of privatization is that it offers what looks
like a free lunch. The public receives revenue, but privatization keeps
the costs hidden by deferring them to the future. Political actors get
to close deficits without raising taxes on wealthy interests. And the
political muscle is provided by the people who ultimately benefit from
the deal — the same way that Countrywide, Fannie Mae and allied private
bankers brutalized their political critics in the name of
For Democrats, the benefits are more
subtle. Privatization allows them to paper over the party schism
between liberals and neoliberals by spending money for social aims
through what is, essentially, an off-balance-sheet channel.
Does this sound like Greece? Creating off-balance-sheet shenanigans to hide debt
and try to kick the can down the road, and then having to sell off
public assets and impose austerity to try to climb out of the sinkhole
There's a reason for that .
As I explained in 2008:
Well-known Austrian economist Friedrich von Hayek wrote:
"Emergencies” have always been the pretext on which the safeguards of individual liberty have eroded.
[Obama's former chief of staff] Rahm Emanuel famously said:
Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before.
Naomi Klein documented in the Shock Doctrine
that the Neoliberals and Chicago school followers advocated a kind of
"disaster capitalism". Specifically, whenever a natural, economic,
war-related, or other disaster strikes, these folks pounce and use the
opportunity to quickly impose a brand of economic policy which benefits
the elite at the cost of everyone else (by increasing unemployment,
pushing the cost of essential goods through the roof, and otherwise
increasing poverty), while people are still in shock and before they can
Publishers Weekly's review of the Shock Doctrine puts it this way:
neo-liberal economic policies—privatization, free trade, slashed
social spending—that the Chicago School and the economist Milton
Friedman have foisted on the world are catastrophic in two senses,
argues this vigorous polemic. Because their results are
disastrous—depressions, mass poverty, private corporations looting
public wealth, by the author's accounting—their means must be
cataclysmic, dependent on political upheavals and natural disasters as
coercive pretexts for free-market reforms the public would normally
Amazon's review of Klein's book states:
the most chaotic juncture in Iraq'' civil war, a new law is unveiled
that will allow Shell and BP to claim the country's vast oil reserves…
Immediately following September 11, the Bush Administration quietly
outsources the running of the 'War on Terror' to Halliburton and
Blackwater… After a tsunami wipes out the coasts of Southeast Asia, the
pristine beaches are auctioned off to tourist resorts… New Orleans
residents, scattered from Hurricane Katrina, discover that their public
housing, hospitals and schools will never be re-opened." Klein not only
kicks butt, she names names, notably economist Milton Friedman and his
radical Chicago School of the 1950s and 60s which she notes "produced
many of the leading neo-conservative and neo-liberal thinkers whose
influence is still profound in Washington today."
And Pulitzer prize winning journalist David Cay Johnston provided an interesting example of disaster capitalism, noting that 2 days after 9/11, Congress was thinking about how to help the ultra-wealthy:
Both parties are doing this. They’re doing it because they’re
listening to a narrow group of very well to do people who do not want to
pay taxes, who do not want to share in the expenses of the country
that has made them rich. And they want you to pay their taxes. Those
are the people who get access. Every politician will say you to, you
can’t buy my vote. Generally, that’s true. The problem is that you and I
don’t have the real access, and the
proof that Congress is thinking about the super rich came two days
after 9/11. The House Republican leadership introduced ten bills to
address 9/11. One of them was a tax bill. What did it do? It gave
estate tax relief, which did nothing for the firefighters and police
officers and army sergeants at their desk and nurses and the busboy at
the World Trade Center. All of those people that were killed. A tiny
handful of people, but that’s what Congress thought these people
needed, was estate tax relief even though 99% wouldn’t pay estate taxes.
[Interviewer:] It’s slipping it in as a very opportune time.
That was just for this group of people. That was just for this group
of people, but it’s indicative of what Congress is thinking about,
what’s on the minds of Congress are not the concerns of ordinary
Americans who want to educate their children, you know, who want to
engage in enjoying life. Their concerns are about the super rich and
within the super rich, those who are very anti-tax.
As I noted last year, this is a game which both liberals and conservatives play:
that agenda is labelled "conservative" or "liberal", it is almost
certain to benefit the powers-that-be, rather than the average
Some inside the halls of power have tried to warn of this risk:
Senator Leahy and the New York Times are questioning Paulson's use of shock and awe:
- Senator Leahy said "If we learned anything from 9/11, the biggest mistake is to pass anything they ask for just because it's an emergency"
- The New York Times wrote:
rescue is being sold as a must-have emergency measure by an
administration with a controversial record when it comes to asking
Congress for special authority in time of duress."
Paulson has argued that the powers he seeks are necessary to chase away
the wolf howling at the door: a potentially swift shredding of the
American financial system. That would be catastrophic for everyone, he
argues, not only banks, but also ordinary Americans who depend on their
finances to buy homes and cars, and to pay for college.
suspicious of Mr. Paulson’s characterizations, finding in his warnings
and demands for extraordinary powers a parallel with the way the Bush
administration gained authority for the war in Iraq. Then, the White
House suggested that mushroom clouds could accompany Congress’s failure
to act. This time, it is financial Armageddon supposedly on the
“This is scare tactics to try to do something that’s in
the private but not the public interest,” said Allan Meltzer, a former
economic adviser to President Reagan, and an expert on monetary policy
at the Carnegie Mellon Tepper School of Business. “It’s terrible.”
the International Monetary Fund or World Bank offer to lend money to a
struggling third-world country (or "emerging market"), they demand "austerity measures".
As Wikipedia describes it:
In economics, austerity is when a national government reduces its spending in
order to pay back creditors. Austerity is usually required when a
government's fiscal deficit spending is felt to be unsustainable.
projects, welfare programs and other social spending are common areas
of spending for cuts. In many countries, austerity measures have been
associated with short-term standard of living declines until economic
conditions improved once fiscal balance was achieved (such as in the
United Kingdom under Margaret Thatcher, Canada under Jean Chrétien, and
Spain under González).
Private banks, or institutions like the
International Monetary Fund (IMF), may require that a country pursues an
'austerity policy' if it wants to re-finance loans that are about to
come due. The government may be asked to stop issuing subsidies or to
otherwise reduce public spending. When the IMF requires such a policy,
the terms are known as 'IMF conditionalities'.
Wikipedia goes on to point out:
programs are frequently controversial, as they impact the poorest
segments of the population and often lead to a wider separation between
the rich and poor. In many situations, austerity programs are imposed
on countries that were previously under dictatorial regimes, leading to
criticism that populations are forced to repay the debts of their
What Does This Have to Do With the First World?
the IMF and World Bank lend to third world countries, you may
reasonably assume that this has nothing to do with "first world"
countries like the US and UK.
But England's economy is in dire straight, and rumors have abounded that the UK might have to rely on a loan from the IMF.
And as former U.S. Comptroller General David Walker said :
People seem to think the [American] government has money. The government doesn't have any money.
Indeed, the IMF has already performed a complete audit of the whole US financial system, something which they have only previously done to broke third world nations.
Martin - former contributor to the Presidential Council of Economic
Advisors and retired naval intelligence officer - observed in an April
2005 newsletter that the ratio of total U.S. debt to gross domestic
product (GDP) rose from 78 percent in 2000 to 308 percent in April 2005.
The International Monetary Fund considers a nation-state with a total
debt-to-GDP ratio of 200 percent or more to be a "de-constructed Third
"de-constructed" actually means is that a political regime in that
country, or series of political regimes, have, through a long period of
fraud, abuse, graft, corruption and mismanagement, effectively
collapsed the economy of that country.
What Does It Mean?
Some have asked
questions like, "Is the goal to force the US into the same kinds of
IMF austerity programs that have caused riots in so many other
nations?" Some predicted years ago that the "international bankers"
would bring down the American economy.
I used to think, frankly, that such kinds of talk were crazy-talk. I'm not so sure anymore.
Austin Fitts - former managing director of a Wall Street investment
bank and Assistant Secretary of the Department of Housing and Urban
Development (HUD) under President George Bush Sr. - calls what is
happening to the economy "a criminal leveraged buyout of America,"
something she defines as "buying a country for cheap with its own money
and then jacking up the rents and fees to steal the rest." She also
calls it the "American Tapeworm" model, explaining:
American Tapeworm model is to simply finance the federal deficit
through warfare, currency exports, Treasury and federal credit borrowing
and cutbacks in domestic "discretionary" spending .... This will then
place local municipalities and local leadership in a highly vulnerable
position - one that will allow them to be persuaded with bogus but
high-minded sounding arguments to further cut resources. Then, to
"preserve bond ratings and the rights of creditors," our leaders can he
persuaded to sell our water, natural resources and infrastructure
assets at significant discounts of their true value to global investors
.... This will be described as a plan to "save America" by
recapitalizing it on a sound financial footing. In fact, this process
will simply shift more capital continuously from America to other
continents and from the lower and middle classes to elites.
Writer Mike Whitney wrote in CounterPunch in April 2005:
towering [U.S.] national debt coupled with the staggering trade
deficits have put the nation on a precipice and a seismic shift in the
fortunes of middle-class Americans is looking more likely all the
time... The country has been intentionally plundered and will eventually
wind up in the hands of its creditors This same Ponzi scheme has been
carried out repeatedly by the IMF and World Bank throughout the world
Bankruptcy is a fairly straightforward way of delivering valuable public
assets and resources to collaborative industries, and of annihilating
national sovereignty. After a nation is successfully driven to
destitution, public policy decisions are made by creditors and not by
representatives of the people .... The catastrophe that middle class
Americans face is what these elites breezily refer to as "shock
therapy"; a sudden jolt, followed by fundamental changes to the system.
In the near future we can expect tax reform, fiscal discipline,
deregulation, free capital flows, lowered tariffs, reduced public
services, and privatization.
And given that experts on third world banana republics from the IMF and the Federal Reserve have said the U.S. has become a third world banana republic (and see this and this), maybe the process of turning first world into the third world is already complete.
The Raping of America
Dylan Ratigan writes:
Chicago, it's the sale of parking meters to the sovereign wealth fund
of Abu Dhabi. In Indiana, it's the sale of the northern toll road to a
Spanish and Australian joint venture. In Wisconsin it's public health
and food programs, in California it's libraries. It's water treatment
plants, schools, toll roads, airports, and power plants. It's Amtrak.
There are revolving doors of corrupt politicians, big banks, and rating
agencies. There are conflicts of interest. It's bipartisan.
it's coming to a city near you -- it may already be there. We're
talking about the sale of public assets to private investors... In an
era of increasingly stretched local and state budgets, privatization of
public assets may be so tempting to local politicians that the trend
seems unstoppable. Yet, public outrage has stopped and slowed a number
On Wall Street, setting up and
running "Infrastructure Funds" is big business, with over $140 billion
run by such banks as Goldman Sachs, Morgan Stanley, and Australian
infrastructure specialist Macquarie. Goldman's 2010 SEC filing should give you some sense of the scope of the campaign. Goldman says it will be involved with "ownership
and operation of public services, such as airports, toll roads and
shipping ports, as well as power generation facilities,
physical commodities and other commodities infrastructure components,
both within and outside the United States." While the bank sees
increased opportunity in "distressed assets" (ie. Cities and states gone
broke because of the financial crisis), the bank also recognizes "reputational concerns with the manner in which these assets are being operated or held."
funds themselves are clear when communicating with investors about why
they are good investments -- a public asset is usually a monopoly.
Says Quadrant Real Estate Advisors:
"Most assets are monopolistic in nature and have limited competitors,
creating the opportunity for stable, long-term investment returns.
Investment choices include economic assets and social assets." Quadrant
notes that the market size is between $12-20 trillion, roughly the size
of the American mortgage market. "Given the market and potential
return opportunities, institutional investors should consider
infrastructure a strategic investment allocation."
mortgage securitizations, the conflicts of interest are intense.
Pennsylvania nearly privatized its turnpike, with Morgan Stanley on
multiple sides of the deal as both an advisor to the state and a
potential bidder. As you'll see, these deals are often profitable because they constrain the public's ability to govern, not because they are creating value. For instance, private infrastructure company Transurban, now attempting to privatize a section of the Beltway around DC, is ready to walk away
if local governments insist on an environmental review of the project.
Many of them have clauses enshrining their monopolistic positions,
preventing states and localities from changing zoning, parking, or
While the trend is worldwide,
privatization of public infrastructure only came to America en masse in
the 2000s. It is worth discussing, because where it has happened it
has sparked deep and intense anger.
American Legislative Exchange Council (ALEC), the influential think
tank that targets conservative state and local officials, has launched
an initiative called "Publicopoly",
a play on the board game Monopoly. "Select your game square", says the
webpage, and ALEC will help you privatize one of seven sectors:
government operations, education, transportation and infrastructure,
public safety, environment, health, or telecommunications.
The Obama administration has been encouraging Chinese
sovereign wealth funds to invest in American infrastructure as a way
to bring in foreign capital. It was Chicago Mayor and Democratic icon
Richard Daley who privatized Chicago's Midway Airport, Chicago's Skyway
road, and Chicago's Parking Meters. Out of office after 22 years, he
is now a paid advisor to the law firm that negotiated the parking meter
Ratings agencies are also in the game, rating up municipalities willing to privatize assets,
or even developing potential new profit centers around the trend (see
the chapter titled "Significant Debt issuance Expected with the
Privatization of Military Housing" from this September 2007 Moody's report).
The strikes and riots in Greece, Spain, England and elsewhere are one reaction to the raping of their countries by creditors and politicians.
Others talk about taking the power to create debt away from the giant banks. But the banks (and the politicians which they own) - are obviously against that idea.
people stand up and demand that the bondholders and other creditors
take haircuts? Or will we all be scalped of our national assets, our
pension funds, our money ... and our freedom? Remember, more and more
national security and police services are being outsourced to the
private sector, and such military, intelligence and police powers are being used to protect big business. And see this.