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"As an Economic System, Capitalism is Going Crazy"

Factors in Our Colossal Mess

by GABRIEL KOLKO

These are dismal days for those who attempt to run the affairs of the world. But how should we understand it?

It would be a basic error to look at our present situation as if it were rationally comprehensible. The limits of rational explanations are that they assume rational men and women make decisions and that they will respect the limits of their power and behave realistically. This has rarely been true anywhere historically over the past century, and politics and illusions based on ideology or wishful thinking have often been decisive. This is especially the case with the present bunch in Washington.

We are right to fear anything, particularly a war with Iran that would immediately reel out of control and have catastrophic consequences not only to the region but globally. We are also correct to see limits to the power of irrational people, for the United States is strategically weak. It loses the big wars, as in Korea, Vietnam, and now Afghanistan and Iraq-even though its tactical victories often prove to be very successful-but also ultimately destabilizing and ephemeral. Had the U.S. not overthrown the Mossadegh regime in Iran in 1954 it is very likely the mullahs would never have come to power and we would not now be considering a dangerous war there.

Although the whole is far more important than the parts, the details of each part deserve attention. Many of these aspects are known, even predictable, there are — to paraphrase Donald Rumsfeld — the "known unknowns and the unknown unknowns" — the "x-factor" that intercedes to surprise everyone. All of these problems are interrelated, interacting and potentially aggravate or inhibit each other, perhaps decisively, making our world both very difficult to understand — or to run. Putting them together is a formidable challenge to thinking people outside systems of power. It has always been this way; fascism was in large part the result of economic crisis, and World War Two was the outcome. How factors combine is a great mystery and cannot be predicted — not by U S or by those ambitious souls who have the great task of making sure there is no chaos. We wish to comprehend it but it is not decisive if we don’t; for those who have responsibility to manage it, this myopia will produce the end of their world-and their privileges.

What is important to watch?

We can rule out the Left, that artifact of past history. Socialism ceased being a real option long ago, perhaps as early as 1914. Since I have just published an entire book, After Socialism, and detailed its innumerable myopias and faults, I need not say more than that it is no longer is a threat to anybody. The fakirs who lead the parties who still use "socialism" as a justification for their existence have only abolished defeats at the hands of the people from the price capitalism pays for its growing follies. That confidence- freedom from challenge by the unruly masses– is very important but it is less and less sufficient to solve the countless remaining dilemmas. The system has become increasingly vulnerable, social stability notwithstanding, since about 1990 and the formal demise of "communism".


Assume Anarchy

The failure of socialist theory is much more than matched by the failure of capitalism because the latter has the entire responsibility for keeping the status quo functioning-and it has no intellectual basis for doing so. The crisis that exists is that capitalism has reached a most dangerous stage in destructiveness — and no opposition to it exists. This malaise involves foreign affairs and domestic affairs — vast greed at home and adventure overseas. If the foreign policy aspects are largely American-originated, the rest of the world tolerates or sometimes collaborates with it. Its downfall is inevitable, perhaps imminent. The chaos that exists will exist in a void. No powerful force exists to challenge, much less replace it, and therefore it will continue to exist — but at immense and growing human cost. Alternative visions are, for the moment at least, mostly cranky.

Ingenious and precarious schemes in the world economy today have great legitimacy and flourish in the sense that the postulates of classical economics postulated are fast becoming irrelevant. It is the era of the fast talker and buccaneer-snake-oil salesmen in suits. Nothing old-fashioned has credibility. Joseph Schumpeter and other economists worried about pirates, but they are more important today than ever before-including than during the late 19th century when they were immortalized in Charles Francis Adams Jr’s Chapters of Erie. The leitmotif is "innovation," and many respectables are extremely worried. I argued here in Counterpunch recently (June 15 and July 26) that gloom prevails among experts responsible for overseeing national and global financial affairs, especially the Bank for International Settlements, but I grossly underestimated the extent of anxieties among those who know the most about these matters. More importantly, over the past months officials at much higher levels have also become much more articulate and concerned about the dominant trends in global finance and the fact that risks are quickly growing and are now enormous. Generally, people who think of themselves as leftists know precious little of those questions, questions that are vital to the very health of the status quo. But those most au courant with global financial trends have been sounding the alarm louder and louder.

The problem is that capitalism has become more aberrant, improvisatory, and self-destructive than ever. We are in the age of the predator and gamblers, people who want to get very rich very quickly and are wholly oblivious to the larger consequences. Power exists but the theory to describe the economy which was inherited from the 19th century bears no relationship whatsoever to the way it operates in practice, a fact more and more recognized by those who favor a system of privilege and inequality. Even some senior IMF executives now acknowledge that the theory that powerful organization cherish is based on outmoded 19th century illusions. "Reconstructing economic theory virtually from scratch" and purging economics of "neoclassical idiocies," or that its "demonstrably false conceptual core is sustained by inertia alone," is now the subject of very acute articles in none other than the Financial Times, the most influential and widely-read daily in the capitalist world.

As an economic system capitalism is going crazy. In late November there were $75 billion in global mergers and acquisitions in a 24-hour period-a record. Global capitalism is awash with liquidity — virtually free money — and anyone who borrows can become very rich, assuming they win. The beauty of the hedge fund is that individual risks become far smaller and one can join with others to bet big — and much more precariously. Henced, spectacular chances are now being taken: on the value of the U.S. dollar, the price of oil, real estate — and countless others gambles. In the case of Amaranth Advisors, this outfit lost about $6.5 billion at the end of September on an erroneous weather prediction and went under. At least 2,600 hedge funds were founded from the beginning of 2005 to October 2006, but 1,100 went out of business. The new financial instruments — derivatives, hedge funds, incomprehensible financial inventions of every sort-are growing at a phenomenal rate, but their common characteristic, as one Financial Times writer, John Plender, summed it up on November 20. , is that "everyone [has] become less risk adverse." Therein lies the danger.

Hedge funds will bet on anything, natural disasters and, soon, longevity of pension fund members being only the latest examples of their addiction to taking chances. London is fast replacing New York as the center of this activity, and the capital market in general, because the regulatory regime of the government the British Labour Party established is much more favorable to this sort of activity than that Bush’s Republican minions allow — though this may change because Wall Street does not like losing business.

On September 12, 2006, the International Monetary Fund released its report on "Global Financial Stability," and it was unprecedented in its concern that "new and complex financial instruments, such as structured credit products," might wreak untold havoc. "Liberalization," which the "Washington consensus" and IMF had preached and helped realize, now threatens the US dollar and much else. "The rapid growth of hedge funds and credit derivative mechanisms in recent years adds to uncertainty," and might aggravate the "market turbulence and systemic impact" of once-benign events. Hedge funds, it warned, have already "suffered noticeable losses."

At the end of October, again the Financial Times, Jean-Claude Trichet, head of the European Central Bank, deplored these new financial products, which have been increasing and growing into the trillions. He wrote that he could not comprehend them; that there is scant oversight over them; that many are pure hype; that nothing prevents them from creating immense domino effects on the entire financial system were they to collapse, thereby also dragging the well-regulated parts of the system down. Then, at the beginning of November the quasi-official UK Financial Services Authority issued a report that detailed the existing risks to the entire world financial structure. Despite its tone, it is dynamite.

The FSA report documents the many risks to the private equity sector: excessive leverage, unclear ownership of risk, market abuses and insider trading. There are conflicts of interest of every sort; the system is opaque; hedge funds made inherent dangers even riskier. "Given current leverage levels and recent developments in the economic/credit cycle, the default of a large private equity backed company or a cluster of smaller private equity backed companies seems inevitable."

Given this growing consensus of risks, on November 13 Sir John Gieve, the deputy governor of the Bank of England, concluded, in the Financial Times, that each national state regulating full-blown financial crises was no longer feasible: the financial system is international in scope today and no national mechanism can handle it. There have been at least 13 borderline or full-blown financial crises since the late 1970s and some of the methods for dealing with them would be "less easy to deploy" under present conditions-which is a polite way of saying they were irrelevant. His conclusion: Regulators "should practise coping with global crisis," "work together" on practical examples to develop machinery, especially to avoid the "moral hazards" of bailing out firms in trouble, including "closing down a large firm in an orderly way."

The chances of developing a common trans-national approach or rules are close to zero, if only because nations of the world are rivals in the bid to attract financial companies and regulation, or lack of it, is a major factor on where to headquarter. When the next financial crisis occurs, and the likelihood of that happening has grown by leaps and bounds, it is more likely than ever to drag the entire global economy with it. At least the "experts" think so. They did not before now.

So economics may foul up politics. Perhaps not, but it could become a very important factor in the overall situation.


Power in Washington

President Bush made the election a referendum on the war and was badly repudiated; his party suffered a disaster. Disorientation, depression, and defeat have left the president and his neoconservatives adrift. They have power, two more years of it, and we are at the mercy of people who are irresponsible and dangerous. Their rhetoric proved a recipe for disaster in Afghanistan and Iraq — a surrealistic nightmare. The American public is largely antiwar (55 percent of those who voted disapproved of the war, most of them strongly); they voted against the war and only tangentially for Democrats, most of who vaguely implied they would do something about the Iraq war but immediately after the election shamelessly reaffirmed their support for its essence. But people, and voters in particular, are such a nuisance everywhere. More quickly than in the past, they respond to reality, which means that traditional politicians must betray them very speedily. They create certain decisive parameters that ambitious politicians flout at greater risk than ever because the people have shown themselves ready to vote the rascals-whether Democrats in 1952 and 1968 or Republicans last November — out of office. The American public is more antiwar than ever, and no one can predict what the future holds, including some Republicans outflanking the Democrats from a sort of antiwar left so that they can remain, or gain, office. That the people are subsequently cynically ignored-as they have been immediately after the last American election–is a fact also, but their role can neither be overestimated nor gainsaid. Experience shows that politicians, whatever they call themselves or in any nation we can think of, can never be trusted. Ever. But the facts on the ground — reality — are today very bad for those who advocate wars.


Israel: the Dream Comes Apart

Hawks in Israel, ascendant since the founding of the Jewish state, are still debating their thirty-three day war in Lebanon and the decisive limits to their once awesome, ultra-sophisticated modern military power exposed by their Lebanon adventure. The Israeli press is full of accounts of ministers’ sexual offenses and corruption. Ehud Olmert’s government is badly divided, backbiting, and may fall soon. The army is openly split and Olmert would like to dump its chief of staff, Dan Halutz, and the minister of defense. The Zionist project is in an unprecedented state of disrepair, with profound demoralization taking hold. Olmert himself is a complete mediocrity, a minor Likud politician who parlayed himself into the number two spot and was lucky. His comment when he visited the U.S. in the middle of November that America’s Iraq war had brought stability to the region either infuriated or embarrassed everyone. He is basically a shrewd politician but very stupid man.

The most devastating analyses of Israel’s war in Lebanon have appeared in Israel itself, and "the fact the Israeli army is at a low point," according to a writer in Haaretz, has goaded rather than deterred Iran. "Almost every weapon lost its significance and effectiveness as soon as it was used," Ofer Shelah wrote in the Jaffee Center’s Strategic Assessment. The Israeli military relied on massive, overwhelming firepower delivered by the most modern means possible and it failed to stop incoming rockets and enemy mobility, much less win the war. Hizbollah not only showed Syria how to defeat the Israeli army but made Iran much more confident they can carry on what it is doing. The entire government and army leadership was incompetent.
From its very inception there was a warrior ethic in the Zionist ideology, one it shared with diverse reactionaries in Europe. Both its left-wing as well as the Right have nourished it, and Joseph Trumpeldor, the hero of this militant mentality, was one of the founders of Zionist socialism-a leader of the Hashomer Hatzair, the far left of this tendency. But the cult of heroism in Israel has made way for military technocrats who read digital print-outs (as described in Defense Tech, Nov. 20, 2006.) Morale in Israel, and especially the once elitist military, has plummeted. The arms industry there is very large, and like its American equivalents need subsidies — computer-based war is very expensive and greatly helps employment. But Lebanon only showed Israel what the Americans learned elsewhere — it loses.

There are many dangers, from fascistic politicians like Avigdor Lieberman becoming even more powerful, to yet greater emigration abroad of those Jews with high skills. The latter is happening. Israel’s ability to flout European opinion with impunity or to have Washington embark on military adventures from which Israel gains is increasingly limited. France has warned Israel that should it initiate a war with Iran it would create "a total disaster" for the entire world". Oil prices would rise, the entire Arab world would unite behind the Iranians, and Israel would be targeted but so would other nations. Even more important, Israeli strategists admit that Iranian nuclear weapons would only create a stable deterrent relationship between the two nations, and are not an "existential threat."


Repentance or Rapture?

Above all, in Iraq the American government is facing the failure of its entire Middle East project, an illusion in which the Israelis have a profound interest. Bush and gang are in a state of denial, but the U.S. is going the way of its defeat in Korea and Vietnam, and its military is increasingly overstretched and demoralized. It has based its foreign policies on fantasies and non-existent dangers, neo-con dreams and desires, only partially to meet equally illusory Israeli objectives to transform the entire Middle East so that it accepts Israel in whatever form the fickle Israeli electorate presents it. American foreign policy has been fraught with dangers since 1945, and I have documented them extensively, but this is the worst set of incompetents ever to hold power in Washington. It "shocked and awed," to use the departed Secretary of Defense’s phrase, itself. Things are going disastrously for conservative warriors.
But it is very difficult to anticipate what this administration will come up with, though disasters over the past six years have made a number of alternatives far less probable. In a way, that is a good thing, although the cost in lives lost and wealth squandered has been immense. The Baker/Hamilton bipartisan commission is deeply split and if — with emphasis on "if" — if it happens to come up with a clear alternative the president is free to ignore it. The Pentagon has formulated alternatives, summed up as "go big," "go long"-both of which would require 5 to 10 years to "Iraqize" the war– or "go home", but it is divided also. One thing certain, however, is that it has neither manpower, materiel, nor political freedom to make the same mistakes as in Vietnam-as the first two alternatives would have it do. There are no options in Iraq because the U S has traumatized the entire nation and created immense problems for which it has no solutions. No one can predict what it will do in Iraq because the administration wishes to preserve the illusion of success and is genuinely confused how to proceed. It has produced chaos. Iraq is very likely to remain a tragedy, one wracked by violence, for years to come. The Bush administration has created a massive disaster involving the lives of many millions of people.

A great deal depends on the President, whose policy has utterly failed in Iraq, is failing in Lebanon, and one of his options is escalation — war with Iran. Israel might attack Iran in order to drag America in, but by itself it can only be a catalyst. Olmert and Bush approach these issues in a remarkably similar fashion. Either way, Bush has not ruled out war with Iran despite warnings from many military men that such a conflict would have vast repercussions, probably last years, and the U.S. would likely lose the war, even if it used nuclear weapons, after creating an Armageddon.

A number of the neocon theoreticians have repented the Iraq adventure, and even criticized some the basic premises that motivated it, but it would be an error to assume that this administration has some contact with reality and can be educated-by the electorate or by alienated neocon intellectuals. There are still plenty of people in Washington who advocate going for broke, who still retain fantastic illusions. There remains the imponderable factor of rapture — fantasy and illusions mixed with desires. Is victory around the corner if we escalate with more troops? Will the Iraqi troops the Americans train attain victory over enemies that eluded U.S. forces? Many much wiser presidents have pursued such chimeras. Why not Bush too? Facts on the ground, which are much greater in constricting American power than they were six years ago, are a critical factor. They may not be sufficient to prevent irrational behavior. We simply cannot know.

All of these factors, and perhaps others not mentioned here, will affect each other. The whole is very often no stronger than all the parts. All surprises that thwart the Bush administration’s freedom to act are now to be welcomed, and while the world’s financial system is the leading candidate for upsetting the U.S.’s calculations, it is scarcely the only one. The facts on the ground, realities rather than decisions, are usually crucial, and here the U S is losing in its megalomaniac ambition to shape the world. It has been this way for many nations led by men far superior in intellect to George Bush.

Wishes are not reality and the U S has an endemic ability to hold onto its wishes and fantasies as long as possible. Desire often leads to its acting despite itself. But its resources are far more constrained now than they were six years ago, much less for the United States during the Vietnam War-which it lost. The American public is already deeply alienated, the world financial system is teetering, the U S’ military resources are virtually exhausted.

We shall see.

GABRIEL KOLKO is the leading historian of modern warfare. He is the author of the classic Century of War: Politics, Conflicts and Society Since 1914, Another Century of War? and The Age of War. He has also written the best history of the Vietnam War, Anatomy of a War: Vietnam, the US and the Modern Historical Experience. His latest book is After Socialism.