Page 1 of 2 Paulson's Lilliputian moment
By Julian Delasantellis
In Jonathan's Swift's 1726 novel Gulliver's Travels, explorer Lemuel
Gulliver is shipwrecked off an unknown island; he swims ashore, falls asleep,
then awakens, most surprisingly, to find himself tied up by the residents of
the Kingdom of Lilliput.
"When I awakened, it was just Day-light. I attempted to rise, but was not able
to stir: For as I happen'd to lye on my Back, I found my Arms and Legs were
strongly fastened on each Side to the Ground; and my Hair, which was long and
thick, tied down in the same Manner. I likewise felt several slender Ligatures
across my Body, from my Armpits to my Thighs."
Who were his captors, the Lilliputians? Not much individually, but
acting in unison they had managed to temporarily detain poor Gulliver.
"In a little time I felt something alive moving on my left Leg, which advancing
gently forward over my Breast, came almost up to my Chin; when bending my Eyes
downwards as much as I could, I perceived it to be a human Creature not six
Inches [15 cm] high, with a Bow and Arrow in his hands, and a Quiver at his
Back. In the meantime, I felt at least Forty more of the same Kind (as I
conjectured) following the first. I was in the utmost Astonishment, and roared
so loud, that they all ran back in a Fright; and some of them, as I was
afterwards told, were hurt with the Falls they got by leaping from my Sides
upon the Ground."
Beware, Barack Obama. Upon your arrival in Washington on January 20, beings of
essentially similar stature (little people in intellectual if not physical
stature) will most likely attempt to bind the new president to the inanities of
the past. The success, or lack of success, of Obama's presidency will depend on
his ability to cast off the ropes and make his own way in a very strange land.
As Obama promises his daughters a new puppy, and, as a result, luxuriates in
the absolute adoration of the American masses, the search on the rightward side
of the political spectrum for scapegoats for last week's electoral catastrophe
gathers pace. As usual, the beginning of the search is marked by the formation
of a circular firing squad.
Many in the quickly forming "Palin in 2012" avalanche contend that the US
Republican Party's recent dire fortunes were the result of the party, both
under George W Bush and John McCain, being insufficiently conservative; an
argument similar to that put forward by those who believe Britain lost the
Revolutionary War with America because taxes on tea were too low.
Of course, the counter-argument states that the electoral defeats were
inevitable once the United States stumbled and fell into the yawning chasm that
was the world financial train wreck which followed upon the failure of the
Lehman Brothers' investment banking house on September 15 (see
Silences say it all, Asia Times Online, September 16, 2008)
Only now do we recognize what we did not see in the immediate hours following
Lehman's downfall - that the unknown quantity and ownership of the credit
default swaps (CDSs) that were activated upon Lehman's bankruptcy filing cast
such a dark pall of default risk over the entirety of private world finance
that everybody with a financial stake in the system greater than just a few
coins in their pockets started looking for the exits, and the exits just
weren't big enough to handle the stampeding horde.
In the 19 trading days between Lehman's fall and the lows on October 10, the US
Dow Jones Industrial Average lost more than 3,000 points, almost 32% of its
value. Foreign stock markets, for those Americans who fell victim to the
brokerage houses' siren song that overseas diversification equaled safety,
fared even worse, with Japan's Nikkei 225 average down 42% from Lehman's filing
to its lows on October 28. Not Joe the Plumber, had he been in possession of an
actual plumber's license, could have snaked out the pipes that the McCain
campaign then fell into and remained in right through to election day.
In a long article in the Washington Post the day after the election, reporter
Anne Kornbluth provided an inside look on how those two weeks irrevocably
transformed both the campaign, and John McCain's prospects.
Sen Barack
Obama, so steady in public, did not hide his vexation when he summoned his top
advisers to meet with him in Chicago on September 14.
His general-election campaign had gone stale. For weeks, he had watched Sen
John McCain suction up the oxygen in the race, driving the news coverage after
the boisterous Republican convention in St Paul, Minnesota, and suddenly
drawing huge crowds with his new running mate, Alaska Governor Sarah Palin. ...
And then, the next morning, a global earthquake hit: Lehman Brothers, the giant
investment firm, filed for bankruptcy, triggering the biggest corporate
collapse in US history and an international financial meltdown, and
transforming the presidential race. It was a moment neither the senator from
Illinois nor his advisers had anticipated, but one for which they were uniquely
prepared.
In the days that followed, the newly chastised Obama team became more
aggressive, with a message they had refined over the summer. The candidate
himself, criticized as too cool, too cerebral and too detached, suddenly had
the opportunity to show those qualities to be reassuring and presidential. For
McCain, already struggling with the economic issue, the Wall Street meltdown
became part of a much different narrative. By the time the senator from Arizona
made the surprise announcement on September 24 that he would suspend his
campaign, a powerful image had been framed: of an 'erratic', older Republican
who could not be trusted to handle a crisis, economic or otherwise. In a race
that had been thought to be even, the polls showed Obama to be pulling ahead, a
lead that he would not relinquish through three debates and the election's
closing weeks.
The question then becomes, if it was then Lehman
chief executive Richard Fuld's destiny to essentially don a suicide bomber's
vest and go blow up Republican chances in the election, why wasn't Lehman
saved? After all, US Treasury Secretary Henry Paulson had already engineered
the rescue of Bear Stearns in March (see
A risk-free revolution, Asia Times Online, April 2, 2008) and set the
Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac down the
road towards an inevitable de facto full government ownership in mid-summer.
Why wasn't the rescue of Lehman the third-time charm?
Paulson couldn't rescue Lehman. He had been tied up by the Lilliputians.
What a sad destiny it must be to be a teacher of history in America, a place
that despises the very concept of history, a land where it is well believed
that the history of the past can and should be regularly altered in order to
serve the necessities of the present.
To a certain extent, being a teacher, or even someone who respects and
cherishes history in this circumstance is like being the proprietor of an
ice-cream fountain in a city wholly populated by the lactose intolerant, for it
seems that Americans have the same reaction to accepting the lessons of
history, even recent history, as the bodies of the people who can't metabolize
the key ingredient of a milkshake.
Those who say that Lehman should have been saved have already forgotten the
history of the late summer. Beginning with the rescue of Bear Stearns in March,
but especially gaining force with the pre-rescue (when the government's
commitment to their solvency was made just a bit more explicit than previously,
leading up to the receiving an pledge of full government backing in early
September) of the GSEs in mid-July, a bellowing bedlam, caterwauling cacophony
was heard from America's well-cosseted chattering classes that there was
something wrong with all these interventions.
It was all supposedly so un-American, they bleated on their blogs, and on cable
news shows. Where was the great tradition of rugged American individualism, of
the nation where the failures of some cleared away the underbrush for the
glorious successes promised by God for the entrepreneurial class of the chosen
people on John Winthrop's Shining City on a Hill-blah-blah-blah?
In what was still the bitterly polarized America of the pre-Obama age (that
obviously no longer exists - this is now apparently a country of 300 million
souls all in mad, squealing, passionate love with each other), the government
rescues inevitably got sucked into the mire.
A movement developed around Tennessee Republican Senator Jim Bunning, then
spread to the editorial pages of the Wall Street Journal and beyond, trumpeting
the supposedly pure, unfettered capitalism of a fantasy bygone age. This
movement saw the ideological combat that would attend the autumn's election
contest, searched desperately for a weapon to hold on to in the trenches, even
if it was just imaginary. For the Democrats and liberals, this was all just schadenfreude,
the joy they got from the right's misfortune.
If Paulson had had any sense, or if Bush had still been able to summon up but
one last measure of the steely-eyed/brook-no-dissent determination that led
America into its catastrophic Iraq quagmire, all this palaver would have meant
little. Neither was the case. Whoever was in charge of the US executive branch
in late summer, they attended to the dopey din and rather explicitly let the
message slip that the cupboard was bare for all future rescues.
I noted this determination to let the free markets do their damnest without the
prospect of government assistance in late August (see
Tough love's fatal attraction, Asia Times Online, August 27, 2008); by
the time the GSE's were brought fully under the Federal Reserve's wing on the
weekend of September 6-7, the resolve was even stronger.
Thus, when the great captains of American finance capital were summoned to the
fortress-like redoubt of the New York Federal Reserve Bank the following
weekend, the private-sector bankers were stunned to learn that it was the
government's plan, very unlike the case of Bear Stearns in March, to have them,
not the public sector, rescue Lehman. This they were not willing to do;
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