Monday, November 17, 2008

The Looming Recession

Last weekend, exiting President George W Bush, hosted the leaders of the G20 nations at a summit here to discuss a coordinated response to the global economic crisis.

While the world leaders, including our own, rushed into the Capitol, we drove out of it in search of America’s equivalent of the Rosetta Stone to help illustrate the meaning of this sprawling economic mess.

Washington DC is not the place to find it. It is virtually recession-proof, given the high numbers around here who work for Government or are involved in lobbying it. I witnessed this a few weekends ago when we had dinner at the uber-expensive Palm steakhouse (where the rudeness of the waiters is matched only by the number of Washingtonians who clamour for a table here). The bill for a meal for four, without dessert, amounted to around R4000. Fortunately my visiting, and wealthier brother picked up the tab.

But Greenwich, Connecticut seemed to be a better place to take the weakening pulse of the wealth creators (and laterally destroyers) of the American and world financial markets. One of the wealthiest enclaves in the United States, it headquarters the major hedge fund companies and financial service corporations, and is home to some of America’s richest people.

Last Saturday, we approached this gleaming citadel of American capitalism via the neighbouring town of Stamford. My friend, Laurence Kaplan, pointed out two of the imposing and shiny structures which house UBS’s American trading operations – which boasts the largest trading floor in the world - and the Royal Bank of Scotland. Both stand today as monuments to the subprime crisis which has caused them to write down, and write off, tens of billions of dollars of dodgy mortgages and credit default swaps. RBS has landed up as a state-owned asset of Gordon Brown, and UBS’s fate is even worse: last week a US Federal Grand Jury indicted its head of global wealth management on a slew of charges relating to tax evasion and other breaches of American regulatory law.

Our walk along the main street of Greenwich was even more instructive of what Paul Krugman, winner of this year’s Nobel Prize for Economics, recently termed “the long feared capitulation of American consumers”. Indeed, on this crisp autumnal morning, there were hardly any shoppers around. In the chic boutiques and splendid luxury store fronts of this immaculately maintained town (where appropriately, perhaps, the “Stepford Wives” was filmed here four years ago). We were the only visitors at a tony luggage store. The shop assistant advised us, that the dearth of customers was “soul-destroying”. Greenwich might be the high-end of the American retail. But the desertion of its shops and stores is now reflected across the board. Real consumer spending is plummeting and fell at an annual rate of 3.1% in the third quarter while spending on durable goods (cars and TVs, etc.) fell at an annual rate of 14%. As Krugman points out this is a real change in consumer behaviour which could not have come at a worse time. Because while excess household debt got a lot of Americans into their current problems, and trimming debt and boosting savings is always a virtue, a freeze on spending by consumers right now will slide America, and much of the world, into a recession. (The so-called “paradox of thrift”).

Laurence Summers, the once and possibly future US Treasury Secretary, tartly summed up the central cause of the financial markets’ crisis as a case of “too much greed, not enough fear”. But the fear which now keeps shoppers out of the stores presents its own set of headaches. It is further driven by the new fear of banks and lending institutions proving as unwilling as ever – despite the $700 billion rescue package – to lend to consumers and to each other. General Motors, now titters on bankruptcy just two months after celebrating its 100 birthday, it says it may not survive to see another year unless it is rescued by a Federal bailout. Starbucks, the corner-store icon of globalisation, posted a net income drop of 97%.

The current desertion of main street Greenwich is also explained by looming job losses in the financial industry as banks attempt to slash costs, to cushion the blow of further market turbulence anticipated for 2009. The Financial Times reported last week that up to 70 000 jobs could be lost in US banks and financial institutions over the next few months. Across all sectors of the American labour market some 1.2 million jobs have already been lost in 2008 and 3.8 million homes are under foreclosure. Clearly, a fiscal stimulus of some sort is required. But will it work in unfreezing the credit markets? In any event, the new administration is hedged in by the thicket of the national debt, which currently stands at around $10 trillion, and rising.

All this bad news has led to a schadenefreude by the pundits all-round. The most prescient of the lot is Michael Lewis who lifted the veil on the excesses of Wall Street in “Liars’ Poker” way back in 1985. He retuned to splendid form in a recent article posted on Tina Brown’s marvellous new blog “The Daily Beast”. In it he profiles Steve Eisman, a hedge fund manager who was among the first to detect the weakness of the subprime mortgage market, and who made a fortune from shorting it and everyone with a hand in it: first, the lenders; then the rating agencies; finally, the big banks. As he explains, the subprime market was actually too small to feed investors greed and so they created a market of side bets. This is where derivatives and other esoteric, and ultimately toxic, assets created a market which at its height was worth trillions of dollars worldwide.

Lewis also quotes the analyst who apparently first saw the basic lack of real value underlying these assets. Meredith Whitney of Oppenheimers, back in last October, was the first to blow the whistle on this financial house of cards. As she put it “if you want to know what those Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale.” Lewis’s own interpretation is priceless: “this woman wasn’t saying Wall Street bankers were corrupt (if mere scandal could have destroyed big Wall Street investment banks, they would have vanished long time ago), this woman was saying, they were stupid.” And this was much more seditious and calamitous.

The marvel of the American economy is that 60% of its citizens own shares today, literally from Warren Buffet to the legendary Joe Six-Pack. But it is now demonstrating the defects of this quality: like its wealth the misery is now spread about, but by no means equally.

*Written for the Weekender, to be published 21 Nov.

Tuesday, November 11, 2008

Obama: The hope, the contradiction

There are days that define a country’s history and which signal a sea-change in its national course. 27 April 1994 was such a date for South Africa, when against expectation and history; we turned our back on three-and-a-half centuries of racial division and political exclusion. 1 May 1997, less dramatically, marked a profound shift in British political history, as nearly two decades of unbroken Conservative rule were swept away in a tidal wave of change in favour of Tony Blair’s Labour Party.

Tuesday, November 4 2008, proved to be, at so many levels and in many different ways, a hinge day of change for America. Ironically, it was the rallying cry which the vanquished Republican standard bearer, Senator John McCain used in his frenetic and futile dash across seven states on the last day of the campaign, which accurately summed up the epoch-changing result of the US presidential election: “We never hide from history! We make history!”

As the results rolled in on Tuesday night, and were relayed with a degree of technological wizardry and television mastery which made me gape, America made history, but, from the Republican perspective, for all the wrong reasons.

On the back of a surging turnout, buoyed by the worst financial crisis this country (and the world) has seen since the Great Depression, Barack Hussein Obama was elected President with a huge Electoral College sweep of 338 votes to 163 and a slightly narrower, but equally decisive, popular vote haul of 51% of the ballots cast.

The most obvious and commented upon aspect of the remarkable achievement of the 47 year-old first-term Senator is his racial identity. As the New York Times exulted “he swept away the last racial barrier in American politics with ease”. For the candidate, now president-elect, it was a moment to savour. As he told over 200,000 of his supporters gathered on the balmy Fall evening in Grand Park in Chicago, “I was never the likeliest candidate for this office”.

Perhaps it was appropriate that it was the state of Virginia, which swung behind Obama and voted for a Democratic presidential candidate for the first time in 44 years, which assured Obama of his win. In many ways, the state of Virginia, known as the “Old Dominion“ symbolised the struggle for slavery and on its battlefields, the bloodiest conflicts of the Civil War were fought. This was a true moment of American exceptionalism, which seemed, as the ballots piled up and the results were declared, to sweep away the ugly stain of a racially disfigured past and which in the words of one commentator witnessed, “tens of millions of white Christians, voting freely, select as their leader a man of modest origin, the son of a Muslim”. Obama’s improbable, but emphatic, election is certainly at odds with some comfortable and conspiratorial assumptions made about the United States. Steven Kull of the BBC recently reported on an international conference he attended in Malaysia where some of the delegates assumed that the US was controlled by “a cabal of white bankers and Jews who use police and fire hoses to repress blacks”. Obama’s rise will trigger “severe cognitive dissonance” amongst America’s detractors abroad for whom the excesses of the Bush presidency provided easy ammunition.

Cynics argue that it was only a-once-in-a-century economic crisis which got enough white people in America to vote for a black man. But this actually misses the wider point: Obama was a transformational candidate in many, perhaps less obvious, ways. When his quest for the presidency seemed somewhat vain and Senator Hillary Clinton was a prohibitive favourite to win the Democratic nomination, I happened to attend a rally he addressed just over a year ago in the urban parkland of the Boston Common. I thought the crowd was impressive, but the 10000 people he drew that night, was in the course of the long campaign which followed to be eclipsed typically by hundreds of thousands who flocked to hear a candidate whose campaign propelled him into the iconic status, and gave him the pulling power, usually reserved for rock stars. Although his crowds increased, his message never wavered: that night in Boston he never spoke about race, or his suffering, or his people’s struggle for equality. He addressed the future and offered hope for the resolution of the myriad conflicts in America’s national life and international projection. By turning his back on the sort of race-holding politics which has characterised the debate about transformation in South Africa, and which Jesse Jackson has preached unwaveringly in America, Obama got Americans to see beyond skin colour.

American voters in Tuesday did not simply turn a new page for a country whose racial history and current antagonisms are perhaps as severe as, or even exceed, those of South Africa. They also took a huge leap of faith. Half of the voters who cast their ballots told exit pollsters that they did not believe Obama had the experience to be an effective president, as opposed to 6 out of 10 that said that Senator McCain did. But an overwhelming 90% said that the economy was in bad shape and seven out of 10 voters disapproved of the job which President Bush has done. Thus the election of Obama, whose opponent was 72 years-old and a veteran law-maker and prisoner-of-war hero into the bargain, marked the end of a generational era as well. The public clamour for change, spurred by young voters who cast ballots in record numbers and older voters who are fearful as they watch 40% of their retirement savings being obliterated by the Wall Street blow out, proved decisive.

Taking a timeline of the polls, you can trace Obama’s victory and McCain’s defeat back to the third week of September, the day Lehman Brothers collapsed, a harbinger of the financial crisis to come. On that pivotal day, it is now clear, that the election would become, in large measure, a referendum on the economy. Campaigning in Jacksonville, Florida McCain made the fateful, and politically fatal, remark, “the fundamentals of our economy are strong”. Up until then the polls were even and his controversial pick of culture warrior Governor Sarah Palin had enthused the Republican base. But the financial fires of Wall Street which fanned across America and which saw, for example, General Motors announce (just the day before the election) its worst month of sales since the Second World War , sealed the deal. It says much for the discipline, the brilliance and the awesome financial power of the Obama campaign that it could exploit and magnify every misstep of its opponent and minimise the contradictions contained within its own ranks and hidden behind its message of “hope”: a candidate offering change and a new direction, anchored to liberal policies which looked decidedly antique given the enormity of the unchartered territory the American and world economy has now entered.

But America’s embrace of its most liberal president in two generations and the end it heralds to laissez-faire Reaganomics does not change another fundamental. This most adaptive of all nations remains 40% “moderate”, 40% “conservative” and only 20% “liberal” according to the polls. Obama is a shrewd enough politician to know that he will have to govern, as he campaigned, from the centre of the political spectrum.

Obama’s in-tray is overcrowded. He has promised to end an unpopular war in Iraq, and win a necessary one in Afghanistan; he has promised universal health care and to find alternatives to America’s crippling dependence on Middle East oil. He has to do all this against the background of record budget deficits and a looming crisis in America’s Social Security programmes which will soon be bankrupt. He has to divine a manner of satisfying the resurgent big government spenders in his own Party, whose ranks have now increased in both Houses of Congress who wish to spend a trillion-plus dollars to avoid a deep recession. But he has also promised tax cuts to 95% of the population. Former Democratic Party grandee, Mario Cuomo once archly observed, “You campaign in poetry, and you govern in prose”.

However, Obama’s historic victory suggests that he has exceptional and disciplined talents to meet the challenges of extraordinary times and to balance, if not resolve, the contradictions he both epitomises and has already overcome.

*Published in The Star Newspaper, Johannesburg, 10 Nov. 2008

Profiting from election theft in Africa

Written with Marian Tupy of the Cato Institute

South Africa and its partners in the Sothern African Development Community have again temporized with the tyranny of Zimbabwe’s Robert Mugabe. The announcement, after last weekend’s summit, that the opposition Movement for Democratic Change should relinquish claims for sole control of the Home Affairs Ministry, which supervises the country’s police force and electoral machinery, is a further blow to the faltering power sharing agreement brokered by South Africa’s now vanquished President, Thabo Mbeki. This latest “compromise,” which the MDC’s leader Morgan Tsvangirai has rightly rejected as “unworkable” is a further dilution of the March poll, which despite a widely flawed electoral process, saw the opposition gain a majority of the parliamentary seats. It also suggests that Africa’s democratic awakening, which has seen the demise of many one-party dictatorships and military rule since 1990, is, in many ways, only skin deep. An unfortunate pattern has emerged in some key countries, whereby elections are either rigged in favor of the incumbents or ignored if their outcomes are unfavorable to the ruling regimes. Shockingly, both African and Western countries have often been complicit in legitimizing and rewarding such election theft.
Take Kenya’s presidential elections in December 2007. Prior to the vote, the opposition candidate Raila Odinga led the incumbent, Mwai Kibaki, in all the opinion polls. Some had him 15 to 19 percentage points ahead. With half of the 210 constituencies reporting, Odinga had a commanding lead. Suddenly, the Electoral Commission of Kenya stopped the count. When the counting resumed, Kibaki surged past Odinga. An hour later he was sworn in to his second term at a hastily arranged State House ceremony.
According to the chief European Union monitor Alexander Lambsdorff, the tallying process “lacked credibility.” Enraged Kenyans took to the streets. In the violence that ensued, 1,000 people died and 600,000 people were displaced. Through a combined diplomatic effort of Kofi Annan, Condoleezza Rice and others, a compromise was eventually reached. It created a new position of the Prime Minister for Odinga, while leaving Kibaki as President. Kibaki and his henchmen subverted democracy and Western countries, grateful for an end to violence, quickly resumed their aid payments to Kenya. A similar arrangement is currently profiting Zimbabwe’s Robert Mugabe. Having lost the first round of presidential elections in March 2008 to Tsvangirai, Mugabe unleashed a wave of violence against the MDC. Amnesty International estimates 180 people were killed and 9,000 injured, forcing Tsvangirai out of the subsequent run-off and ensuring that Mugabe was installed for his sixth term as President of Zimbabwe.
Given their own problematic accession to power, it is perhaps understandable that peer pressure from Mugabe’s fellow African leaders is both mute and moot. For example, Umaru Yar’Adua, the chosen successor of Olusegun Obasanjo, won the Nigerian presidency in an election marred by fraud. Obasanjo himself came to power in a poll where, according to the EU observes, the “minimum standards for democratic elections have not been met.” After losing the 2005 election, Meles Zenawi, the Prime Minister of Ethiopia, ordered his troops to shoot anti-government protesters in Addis Ababa. Some 200 have perished. Yet, the West rewarded the former with debt forgiveness and the latter with large amounts of foreign aid. Allegations persist that the October election result in Zambia was doctored in favor of the incumbent. It would be sheer hypocrisy for many African leaders to call on Mugabe to go. And so, they did not. Even South Africa, which has the democratic credentials to speak out and to act, has over the past eight years cosseted Mugabe behind the veil of so-called “quiet diplomacy.” Undertakings by Mbeki’s successor, Kgalema Motlanthe, and other ANC leaders, to peruse a tougher line on Zimbabwe, were not on display over the past weekend. Botswana’s exceptionally critical attitude to Mugabe remains just that - an exception.
The original power-sharing compromise in Zimbabwe involved Mugabe’s ZANU-PF and the MDC sharing cabinet seats on an equitable basis, with Mugabe staying on as President and Tsvangirai becoming the new Prime Minister. But, even those generousterms were not enough for the Zimbabwean ruler. The latest incarnation of the “compromise,” will further strengthen Mugabe and undermine the outcome of the March 2008. Mugabe will thus literally get away with murder.
What we seem to be witnessing in Africa, therefore, is not the triumph of democracy but the triumph of incumbentocracy. Elections are held, but real transfers of power are still rare. Most worryingly, people who preside over electoral theft and sometimes murder are legitimized by their peers and rewarded with dollops of foreign aid. The will of the African electorate, in the meantime, goes ignored.

Thursday, November 6, 2008

Thoughts about the US presidential election

Two grand historical arcs define America – its exceptionalism and its contradictions. And they converged on Tuesday, election night.

Less than a year ago I had lunch in Cambridge, Massachusetts with Harvard academic, former presidential advisor and, more famously, CNN’s election pundit, David Gergen. I had recently had some stardust sprinkled in my eyes by Barack Obama after I attended his rally in Boston when my jaded cynicism was swept away by his soaring and inspirational rhetoric. After I relayed, somewhat breathlessly, my positive impression of the then long-shot Democratic candidate, Gergen said to me “so you think a good orator will make a good President?”

On Tuesday, as Americans embraced the politics of change and hope, they also swopped from one of the most inarticulate Presidents – whose famous battle with the English language connected him to many ordinary Americans – for one of the most articulate – and also arguably the most liberal since John F. Kennedy. That he also happens to be the first black, half African (in the continental sense) occupant of the White House drives this barrier-smashing exceptionalism into realms that would have been, until recently, unimaginable. After all, when Obama’s white Kansan mother and black Kenyan father were married, dozens of American states outlawed interracial unions. However, the successful anti gay marriage ballot initiative in California, whose result was made known just hours after America celebrated the election of its first black President, suggests that the struggle of equality is far from over.

But back to the oratory. On election night, gathered in my current Washington residence were a dozen visiting or detribalised South Africans plus one or two genuine American voters. Only in America could such an emphatic and predetermined victory for Obama be turned into an evening of television drama as the map increasingly changed from 2004 red (Republican) to 2008 blue (Democratic). Shortly after midnight, addressing over 200,000 of his supporters, near the Chicago lakeside, Obama spoke with grace and passion about the greater meaning of his political and personal triumph.

His preternatural coolness, his ease, his fluency, and the trumping of hope over experience, embodied by his election were impressive enough and on display as usual. But there was something more. It was that almost, in a stroke and with millions of ballots to back it up, Americans have turned the page on a racially disgraceful past and on the excesses of the Bush years. Obama’s invocation of the Civil Right’s struggle, of America’s battle with the concept and reality of equality, seemed almost superfluous: after all, in one generation and in one extraordinary individual it appeared as if indeed America had overcome. I looked around our TV room as Obama said, “If there is anyone out there who still doubts that America is a place where all things are possible, who still wonders if the dream of our founders is alive in our time, who still question the power of our democracy, tonight is your answer.” Up until those words, there had been something of a raucous noise, a teasing of the lone McCain supporter in our midst, visiting journalist Jan-Jan Joubert, and the ususal party background noise. But at the moment Obama spoke, there was complete quiet and very few dry eyes.

But, of course, the Obama campaign had hardly emphasised race at all during his ascent. In fact, the genius of his ultra-disciplined quest for the presidency was that he offered to the majority of white American voters a sort of political equivalent of the Bill Cosby reassurance - which made the TV star the white nation’s darling a generation before.

The contradiction in the excpetionalism was driven home to me last Sunday, as my wife and I tramped around the beautiful Monticello Estate of founding father Thomas Jefferson in rural Virginia. This was the home of the philosopher of the American Revolution, the author of its Declaration of Independence with its invocation that “all men are created equal”. Yet, the official brochure reminds visitors that the same person was also the largest slave owner in Albemarle County. But at least Americans are unblushing about the contradictions in their own history. We were informed that among the 200 Jefferson slaves, was one Sally Hemings – and that the “existing evidence indicates that Jefferson was the likely father of all her known children.”

Virginia, was, of course, the crucible of the American Civil War, which its side, the slave-holding confederacy decisively lost. And on Tuesday, for the first time since I was a seven year-old boy, a democratic presidential candidate prevailed here- and a black one into the bargain.

If Obama’s election binds up, and arguably heals, the most gaping wound of America’s racial past: it does not resolve other fundamental and, far more modern, political contradictions. 9 out of 10 American who voted described their country, and particularly its economy, as “moving in the wrong direction”. By a healthy margin, and ignoring dire Republican warnings that Obama was a “socialist”, or the “redistributionist in-chief” as McCain described Obama, Americans elected as president somebody who is going to tax them more heavily and spend far more government resources on public welfare than was previously thought to be electorally possible. It was only the tanking economy, and the widespread fear and misery it has spawned, which made such an unlikely prospectus a winning political formula. But as Obama surveys a bloated Democratic Congress, a Federal Reserve which has now reduced interest rates to 1% (and has little further room to stimulate the economy), and a slate of programmes and tax-credits which will cost perhaps 500 billion dollars, he might pause to consider the wise words of Gideon Rachman. On Election Day, he wrote in the Financial Times, “the economy has been Mr. Obama’s friend during this campaign. It could become his enemy the moment he steps into the Oval Office.”

Obama’s contradictions, at least, can be resolved from a position of presidential power, to which the Democrats return after nearly a decade. For the Republicans there are no such consolations: a reduced presence in both Houses of Congress; and a once-vaunted party-machine was revealed, in the final days of the campaign to be low on discipline, money and message rendered finally useless by a President of historic unpopularity and a reckless stewardship of both the economy and the national interests.

But that’s all for the future. At a magic moment around midnight on Tuesday, it appeared as though all Americans, black and white, and red and blue, were celebrating the extraordinary self-correcting powers of this enduring, and surprising, democracy.

*Written for the Weekender in South Africa, for 8 Nov. 2008 publication.