Those were the days... Scams define end of an era

The sub-prime fiasco was a pyramid scheme of its own, argues Thomas Friedman
Ronald Reagan is dead and Margaret Thatcher is a remote and, through advanced illness, a figure far removed from the world stage.
The revolution they jointly led in the ’80s of ever-advancing markets based on light regulation, easy credit, distrust of the state and unleashing of the “animal spirits” of capitalist accumulation have been discredited as the world faces the worst economic crisis since the Great Depression.
Perhaps it is no coincidence that the cardiac arrest suffered by world markets, including our own, since the collapse of Lehman Brothers on Wall Street last September has brought to light a series of mega-sized Ponzi schemes in the US and, more recently, in South Africa. The lure of easy, outsize pickings and staggeringly high rates of return explains the existence of pyramid schemes, such as those operated by Bernard Madoff, Allen Stanford and our own alleged Ponzi king, Barry Tannenbaum, now conveniently resident in Australia.
Ponzi schemes — named after the eponymous Italian immigrant to the US in the early 20th century who arbitraged the value of postage stamps — essentially pay back early investors with either the proceeds acquired from later investors or even with their own money. The scheme collapses and the fraud is finally revealed when people stop investing and there is no more loot to pay out the creditors. As author Michael Lewis explains, “something for nothing — it never loses its charm”.
Madoff, who apparently embezzled a staggering 50-billion from the rich and even banks and top charitable institutions, kept his operation going for over 30 years by offering consistently above-market rates of return, but not by such a wide margin as to attract either undue suspicion or to be unsustainable — until the unprecedented credit crunch last year caused a mass of withdrawals, which Madoff could not meet, since he had never invested most of the deposits originally received.
Tannenbaum, in contrast, is alleged to have lured hundreds of South African and overseas investors with the promise of a rate of return of between 90% and 200% per annum. Instead of postage stamps, his investors were invited to help buy active pharmaceutical ingredients (APIs), allegedly on behalf of South African drug-makers, and then shared in the proceeds of the profits when the APIs were sold to the drug companies.
The neatness of the scheme is that it fell outside the watch of the Financial Services Board. But when one creditor sought to recoup his investment, plus interest, well, the bird had flown the coop — and the personal cheques which Tannenbaum had issued were dishonoured.
These schemes usually involve high-level fraud, including cooking the books, and financial techniques to make actual losses look like bumper profits, or simply invent non-existent investments or sales. But the detail is less significant than the result. Not only are investors — the greedy, the gullible and innocent third parties — ruined, but the system itself gets discredited.
Last December, when the Madoff scandal broke, I was living temporarily in Washington DC. Two of the city’s most thoughtful commentators saw a much wider implication for the future of free enterprise.
Anne Applebaum described how difficult it was for her to acquire an apartment in Warsaw in the early ’90s — endless form-filling, visits to notaries and the seller requiring to be paid in hard currency and in cash. She described a culture of “low trust”, in which the market and its mechanisms are treated with suspicion.
In contrast, when she bought a car in Washington, she could drive it out of the showroom simply by providing a personal cheque, without any identification. It was this “high trust” culture, which both fuelled American capitalism and allowed its dark underside, in the form of Madoff and the like, to operate. As she put it, “Madoff’s pyramid scheme may have been made possible by our tradition of trust and lawfulness. And now he will bring that tradition down.”
Thomas Friedman was more damning. He saw in Madoff a scheme only slightly more outrageous than the “legal” one Wall Street was running, fuelled by easy credit, low standards and high greed. For him, the sub-prime fiasco was a pyramid scheme of its own: “What do you call giving a worker who makes 14000 a year, a nothing-down and nothing-to-pay-for-two-years mortgage to buy a 750000 home and then bundling that mortgage with hundreds of others into bonds that Moody’s or Standard & Poor’s rate AAA — and then selling them to banks and pension funds the world over. This is what the financial industry was doing. If that isn’t a pyramid scheme, what is?”
Friedman’s fury found an answer last week, when President Barack Obama produced plans for regulatory reform, including an expanded role for government. Clearly, the era of Reagan-Thatcher has ended. The age of exuberance has yielded to an era of control. Let’s just hope that the new medicine doesn’t amount to a treatment that kills the patient.


*Published Sunday Times 28 June 2009

The Power of Addiction and The Addiction to Power

The scandals are flying so thick and fast around here that it is all a little reminiscent of the final act of Macbeth. The corpses have piled up so high and the murders so widespread, that you eventually loose count of the number and the motives behind each assassination. All you are left with is the primal force of the destruction: addiction to power.

On the political front, the arrest of Illinois Governor, Rod Blagojevich for allegedly trying to sell President-elect Barack Obama’s former Senate seat to the highest bidder is currently centre-stage. The FBI affidavit underlying the criminal complaint against Blagojevich, whose state motto is “The Land of Lincoln” (an American avatar of political honesty and ethical probity), revealed wiretaps of conversations where Blagojevich and his associates schemed up various illegal ways in which he could profit from his authority to appoint Obama’s successor. In Chicago, which long-time resident Saul Bellow once indicted as a city representing “the overlap between politics and crime” this is known as “pay to play”. I actually thought that the seat-buying which characterised South Africa’s recently-euthanised floor-crossing was an extreme feature of our corroded culture. It appears, however, to have international application. The Illinois Governor is currently suspended in a sort of political-zombie zone – he remains in office but everyone from the President-elect to his own Lieutenant- Governor have called for his removal and he is now subject to impeachment petitions in the state legislature. But what differentiates the mop-haired Governor of easy virtue is that he hasn’t yet claimed that his “innocence until proven guilty” is a sufficient political defence to stave off the clamour for his departure. He is also likely to be hounded from office and certainly will not become the president of his country. In South Africa, of course, this basic right of the criminal defendant has become the political weapon-of-choice for the politically mighty, including our wannabe President, whose criminal charges are far more serious than those facing the sleazy US Governor.

The loss of faith in a local political personality here is nothing compared to the incredulity which has greeted the self-confessed mega-fraud of Wall Street titan Bernard L. Madoff. If it is possible to tarnish capitalism’s high street brand even further, then the 70 year-old with the once-Midas touch has done it. In what might be the largest financial swindle in history, he stands accused of orchestrating a $50-billion “Ponzi” con, on the good old pyramid scheme concept in which early investors are paid off with money from later investors, until no more money can be raised, and the scheme collapses.

In South Africa we would associate such a charming device (indeed, as Michael Lewis recently wrote, “something for nothing - it never loses its charm”) with a Nigerian criminal scam or with the founders of the ill-gotten 1980s Kubus get-rich-quick plot. However, Madoff’s alleged pyramid scheme was far broader than anything dreamed up by a Nigerian or South Africa crook. He drew in prominent billionaires, European banks and major American philanthropies, and he did so largely on the basis of the trust which his swanky Manhattan address, his Palm Beach Country Club membership and huge charitable giving engendered. His reliability was so great, that he was referred to, with affection, as the Jewish Treasury Bill. Madoff’s exposure is symptomatic of a much wider malaise, and one which goes far beyond personal embezzlement and corporate culpability. It is only slightly worse than the “legal scheme” which caused the wider collapse of America’s financial architecture, and many of Wall Street’s most famous houses.

Writing in the New York Times this week, Thomas L. Friedman pinpointed the parallel between Madoff’s Ponzi scheme and Wall Street’s “cheap credit, low standards and high greed.” On the one hand, you have Madoff cooking the books and providing consistently high returns regardless of market conditions. On the other hand, subprime lenders gave a worker who made just over $1000 a month a “nothing down and nothing-to-pay for two years” mortgage to buy a $750 000 home. They then bundled that mortgage with hundreds of others into bonds – which Moody’s or Standard and Poor rated AAA and sold them to banks and pension funds all over the world. A veritable pyramid scheme -writ hideously large.

But, of course, the link between the greedy Illinois Governor, the scheming Wall Street traders and the universal band of corrupt political brothers, appears to be addiction of one form or another – either to power, or greed or some combination. Just like Shakespeare gave forth Macbeth, Southern Africa’s local neighbourhood tyrant, Robert Mugabe, continues with his policies of national destruction. And South Africa, like a powerful yet indulgent relative, continues to coddle him from international sanction.

Last week I discussed Mugabe’s behaviour with my Durban boyhood friend, Jeremy Schmahmann. He now lives in Boston and has risen to great heights as Professor of Neurology at Harvard University Medical School. He has an interesting hypothesis, not yet proven, but one which has big implications for dealing with both national tyrants, and even the more common and garden financial fraudsters. It boils down to transposing “the tyranny of addiction” to the addiction to tyranny. As Jeremy put it the other night, society acknowledges “the tyranny of addiction” – the craving for drugs, alcohol or gambling that grabs hold of a person’s body and soul. Neurobiologists now have a fairly detailed understanding of the hard-wiring and chemistry of the brain that leads to this personal disintegration. With Mugabe, who cannot relinquish power even in the midst of a mass cholera epidemic symptomatic of the country he has now so comprehensively broken, “his brain reward system is in over-drive, addicted to power.” And like any addict, he cannot just be persuaded to stop. He needs to be removed from the addicting substance, and from the environment which supports it. Since our local politicians’ lack of political imagination and courage has led to consistently misdiagnosing Mugabe and his cravings, perhaps they should take a page from this eminent neurologist.

We are surprised and saddened when the oppression of Ian Smith metastasises into the brutality of Robert Mugabe. We are equally amazed that the frauds of Enron and WorldCom are repeated again in the form of Madoff. But, of course, they stem from the same impulses, and the same lack of internal or external correctives. The first step to healing, both the economic and political systems, is to recognise the addictions and to apply the corrective measures early on.

This being the last Washington column in the last Weekender edition of the year, allow me, with a touch of American ecumenicalism, to wish all readers “Happy Holidays”.

*Written for "The Weekender" in South Africa; publshing date: Saturday, 20 December 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.

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

A view from Washington DC - Financial meltdown

Tuesday’s lunch with an old friend (of South Africa’s and mine), Walter Kannsteiner, former US Assistant Secretary of State for African Affairs, yielded a useful insider insight. Walter observed that Washington DC is “the only city in America where entrée to power is more important than access to money”.

Ironically, a stone’s throw away from our downtown restaurant a drama was underway that very afternoon, which saw the fusion of power and money in a scene unwitnessed here since the Great Depression. The CEO’s of the nine largest banks were in conclave in the marbled conference room of the Treasury Department. They were presented with a one-page document by Treasury Secretary Hank Paulson that said they agreed to sell shares in their banks to the Federal Government. According to the New York Times, Paulson told them they had to sign it before they left. They duly obliged. This part nationalization of the American banking system was seen by a clearly reluctant Paulson as the only key to unlocking what had become a global financial crisis headquartered in, but by no means confined to, America. His $250 billion bank recapitalisation scheme clearly stuck in his Republican craw. As he justified it afterward: “Government owning a stake at any private US company is objectionable to most Americans, me included. Yet, the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”

What Paulson failed to disclose was how strenuously he had initially opposed the very step the markets forced him to take. Because by Friday of the preceding week ,the Dow industrial average had recorded its worst decline in a week, percentage wise, in its 112 year history. On that day alone, it lurched on a rollercoaster ride of more than a thousand points. Since J M Keynes has now elbowed out Milton Friedman as the reigning intellectual prophet here, Paulson no doubt decided that Keynesian adage: “when the facts change I change my mind” was the best philosophical straw to grasp.

Whatever the explanation for the turnaround, anticipation of the step had, by Monday, seen the Dow rebound by an extraordinary 936 points (11%), the largest single day-gain since, you guessed it, the Great Depression.

The one person, however, who was having no positive effect on market sentiment (and even less bounce, except of the dead-cat sort, on the fortunes of his fast-fading presidential standard bearer John McCain) was President Bush. Somewhat gleefully, Dana Milbank wrote in the Washington Post that “for the twentieth time in recent days Bush tried to calm the markets. The previous nineteen times the markets ignored him and continued their downward plunge, and this time would be no different.” The columnist was referring to Bush’s Rose Garden speech last Friday when the President said “the American people can be confident on our economic future”. A few minutes later, 300 points were shaved off the Dow.

Given the distrust, and ineffectiveness of the political classes around here, it seemed a better bet to soak some wisdom from the intellectual sponge of the globalization guru, Thomas L. Friedman (author of the award-winning “The World is Flat”). I went to hear him speak at the Washington launch of his new work, “Hot, Flat and Crowded”, a critical look at the unsustainability of a rising world population coupled with global energy demands and the destruction of our biodiversity.

But Freidman wasn’t simply interesting on the convergence of global warming, global flattening and global crowding. He was also apt on the current financial crisis. As he put it, “in some ways we‘ve become a subprime nation that thinks it can just borrow its way to prosperity – putting nothing down and making no payments for two years. Subprime lenders told us we could have the American dream – a home of our own – without the discipline or sacrifice that home-ownership requires”. A welter of evidence supports his thesis: Since the 1980s, Americans have consumed more than they produced but made up the difference by borrowing. (South Africans, incidentally, do precisely the same – only in America, like the food, it’s all super-sized).

Two decades of easy money and innovative financial products (including the dark and unfathomable ones like the derivatives that caused all the trouble) has seen household debt balloon in this country from $680 billion in 1974 to $14 trillion today. And the government has mirrored (or led) the consumer trend by ringing up a budget deficit of $454 billion in the current financial year. Freidman noted that the worst message Bush sent out after 9/11 was to tell Americans, immediately after that disaster, to “go shopping”. A nation addicted to consumption, not saving, hardly needed any presidential encouragement.

Instead of retail therapy, a much better strategy, he suggests, would have been to promote investment in energy efficiency, cut America’s dependence on energy-guzzling fossil fuels and the “petro- dictatorships” on which American oil imports depend.

Understandably, various American doomsayers have triumphalised about “a shattering moment of America’s fall from power”, to quote the Guardian of London. But its ideological opposite, the Wall Street Journal, suggests that despite current travails, America will remain a superpower. Two figures were striking in their analysis: its staggeringly large bailout of nearly a trillion dollars constitutes only 5% of U.S. Gross Domestic Product (whereas Britain’s slightly more expensive version amounts to a whopping 30% of its GDP). And last week’s historic plunge in the Dow still meant that the U.S. bourse outperformed nearly every single major stock exchange throughout the world, from Germany to China.

As the old Nedbank advert used to say, “It makes you think, doesn’t it?”

Home Thoughts From Abroad: The US Election and Africa

The American financial meltdown is upmost in the minds of both US Presidential candidates and voters. It seemed unlikely, therefore, that the continent of Africa would be more than a minor footnote, and certainly provide no sound bite, as the campaign enters its final month.
Yet, in last Tuesday’s second presidential debate, both Senators Barack Obama and John McCain used several bloody and conflictual examples from the oft-forgotten continent to illustrate the reach and purpose of their foreign policy doctrines.
In suitably vague terms, Obama proclaimed that standing “idly by” in Ruanda “diminishes us”. He announced that the genocide in Darfur can only be curtailed by an American-led effort to bolster the UN- African Union Peace Keeping Force there. McCain offered similar boilerplate assurances on preventing genocide, but pointed to the “limits of our capability”. He cited the infamous, “humiliating” Somalian intervention as a cautionary case of reach exceeding grasp. McCain went much further in Foreign Affairs (December 2007) by naming Africa as the most compelling case for humanitarian intervention and promised to use “all elements” of US power to halt the outrages in Darfur.
But Africa’s two minutes of presidential primetime raises prospects about the continent’s relationship with the next occupant of the White House.
President George W Bush’s policies and programs in Africa have provided him with rare approval from his domestic opponents. His $15 billion AIDS-fighting PREPFAR initiative has provided 1.7 million Africans with anti-retrovirals and has converted the disease, for them at least, from a death into a life sentence. Senator Joe Biden proclaimed it as one of Bush’s “finest hours”. The substantial enhancement by the Republicans of the Clinton administration’s Africa Growth and Opportunity Act (AGOA) and the generosity, and crucially the conditionality, of the Millennium Challenge Account (MCA) has been described as one of his most important foreign policy innovations. Both Obama and McCain are enthusiastic supporters of the MCA. Obama initially announced he would fund it more generously but has now pulled back that pledge in view of the deteriorating fiscal picture in the US. McCain would enhance it in a different, and arguably more durable, direction: by abolishing wasteful agricultural subsidies for US farmers which so tamp down African agricultural exports.
While the Bush administration acted decisively and swiftly against Kenyan President Mwai Kibaki’s electoral theft last December, its attempts to restore democracy in Zimbabwe have been uneven and feeble. By appointing then regnant, now vanquished, but at all times pro-Mugabe, Thabo Mbeki as his “point man” in Harare, Bush effectively handed the issue over to South Africa to resolve (or not, as the current stalemate suggests).
Too often the Bush focus on “the war against terror”, allowed rights’ delinquent regimes such as Ethiopia’s to escape the democratic-deepening requirements of the MCA. Meanwhile the multiple conflicts and violent anarchy in the strategically significant Horn of Africa remain unaddressed.
Bush’s engagement with Africa has not always been reciprocated. The recent establishment of the stand-alone Africom (US Military Command for Africa) has generally been coolly, even suspiciously, received on the continent. The pre-emptive unilateralism of the Bush doctrine has given forward cover to the anti-American chorus which has escalated in volume over the past five years.
Africa will remain in the frame of the next President because of the other major driver of US policy, aside from the war against terror, namely America’s energy needs: by 2015 it is estimated that no less than 25% of US oil imports will come from Africa, up from 15% in 2007.
Obama’s campaign advisor on Africa, Witney W Schneidman recently suggested that his perspective is informed by the fact that “he is the product of the African Diaspora, the son of a Kenyan father, whose grandmother still lives in Kenya”. This unusual provenance has suggested to some, in my country at least, that Obama will be a “soft touch” when it comes to Africa. In fact, a close analysis of his record indicates otherwise: during his 2006 visit to Africa, he forthrightly attacked the disastrous AIDS-denialism of South Africa’s then Health Minister. In Kenya he railed against “the lack of basic rule of law and accountability” in many predatory African states. While Obama has scaled back his promise of doubling US foreign aid he has not adjusted his requirement of conditionality: it is helpful that Obama has coupled US aid with “an insistent call for reform, to combat the corruption that rots societies and governments from within”. Citizens of the world’s poorest continent, governed by some of the world’s richest leaders, can only say “amen” to that.
Obama’s initiatives in the Senate such as his 2005 amendment which helped bring Liberian tyrant Charles Taylor to international justice, suggests that Obama might become impatient with the “big man solidarity” which the African Union invokes repeatedly to shield dictators from justice and accountability, most recently, in the case of Omar Al-Bashir of Sudan.
Obama proposes to renew and restore America’s somewhat tattered international partnerships. However, in dealing with Africa and the world, he will soon enough confront the limits imposed on United Nation’s action imposed by Russia and China who had vetoed decisive action from Burma to Zimbabwe.
McCain has elaborated little in the campaign on his grandiose project of creating “the league of democracies”, to act “where the United Nations fails”. He clearly envisages such a body to overcome the shield for tyranny which the Russia-China vetoes provide. However, there is no appetite in Pretoria and in other African emerging democracies for such a league.
Whoever wins in November, Africa’s worst problems, from AIDS to Zimbabwe and its best prospects, from deepening democracy to spreading economic opportunity, require a continued engagement and partnership with the United States.

Letter from Washington - First Week Here as a Visiting Fellow, Cato Institute

Five days is a lifetime in Washington DC, a city that is as much a metaphor as it is the capital of the world’s only, but fast declining, hyper-power.

I had barely shaken the jetlag out of my eyes last Thursday night, when I forced myself to stay awake for the much-hyped debate between the nation’s two Vice Presidential candidates. The expectations were both huge and diminished: would Republican Governor Sarah Palin manage to stutter out a few comprehensible sentences? Would she fall off the stage? In the event, the nation’s now most famous “hockey mom” managed a performance, which exceeded the expectations of this Samuel Johnson sort (“She does it exceedingly badly, but the wonder is that she does it at all”).

Palin’s shtick was a bazooka assault on the city which is to be my home for the next three months. She vowed throughout the debate insistently to “change”, “clean up”, “fix”, “reform” and “shake everything up” in Washington.

The following evening I attended a swanky party in the toniest DC neighbourhood. Our hostess, Katharine Weymouth, is both the granddaughter of Washington grandee, the late Katharine Graham, and currently publisher of the Washington Post – which happens to be the family newspaper and one of the very elite symbols that Palin so disparages.

My interest in the event is both political and anthropological: the party is the launch event of a searing book on the dark but hugely consequential vice presidency of Dick Cheney (“The Angler: The Cheney Vice Presidency” by Barton Gellman). Having had a dozen or more book launches of my own recently in South Africa, I can only commend Mrs. Graham-Weymouth’s event: the Chardonnay was superior and the canapés spectacular – no doubt confirming every prejudice of Governor Palin and her constituency. Although I couldn’t sight a single Republican at the party, most of the marquee democrats were strangely subdued despite the extraordinary news just in that Senator John McCain had pulled out of campaigning in the State of Michigan which he had previously described as a “must-win”. The cause of the sombre tones was Congress’s decision to eventually nod through the $700 billion rescue plan. Few thought that despite its size it would soothe the global financial system and provide the “stick of dynamite” which Treasury Secretary Hank Paulson claimed would unfreeze the stuck credit markets. As it happened, the sceptics were proved right by Monday morning: the credit contagion continued to rage like wild fire and on Wall Street the Dow dropped a frightening 800 points, while stock prices collapsed around the world.

Sometime Democratic Presidential candidate (back in 1992) and Bill Clinton’s Interior Secretary, Bruce Babbit advised me that the only thing which could save McCain at this late stage was “a Hail Mary pass”. I could not confess to this suave Washington fixture that I was utterly ignorant of American football argot, but on subsequent inquiry I discovered that the term relates to a forward pass made in utter desperation, with only a small chance of success, at the end of a game.

The very next day Sarah Palin threw such a long shot at Barack Obama by reminding a fired-up audience in Florida of his links to William “Bill” Ayers, a founder of the 1960’s radical terrorist group “The Weatherman Underground”. In Palin’s folksy vitriol this amounted to the Democratic frontrunner “palling around with terrorists”.

But this is one “Hail Mary” that doesn’t seem to connect. Because while the Republicans are desperate to change the subject from the economy (which the voting public holds them, and especially the toxic presidency of George W. Bush responsible for) most American voters cite the collapse of Wall Street, and the collateral damage to main street America as the seminal issue. Indeed, this is arguably the biggest economic event in world history for the past eighty years. Just put this crisis in perspective: Americans (who largely acquire stocks and shares for the purpose of retirement) have lost a combined $1 trillion dollars in net worth in just the last four weeks. More than one million people have lost their homes in the last two years and one million more are expected to lose their homes in the next year or so. All this makes it a hard, if not impossible, sale for the Republican belief in deregulation, unfettered free markets and its associations with some of the “villains” of Wall Street.

So is the race for the American presidency over? Based on the polls it would appear as though McCain’s candidacy is “as much a casualty of Wall Street as Lehman or Merrill” to quote democrat strategist Howard Wolfson. And while McCain’s campaign has come back from the dead more than once before in this electoral season, his appearance in Tuesday night Presidential debate with Barack Obama was certainly no game changer. Sadly, he almost looked half-dead: waxen and wooden, desperately trying to churn out some lines stuffed into his head by his campaign operatives including the, extraordinary suggestion (from a Republican, at least) that his administration would buy up all the bad home loans in America and renegotiate mortgage repayments.
Ronald Reagan must have spun in his grave.

In fact, some of McCain’s solutions were more substantive than Obama’s light fare. But the Democrat projected a fluency and ease which cast him, ironically, as the more seasoned and reliable hand on the tiller. Given the perfect economic storm now raging, such reassuring poise is probably the game winner.