Showing posts with label WorldCom. Show all posts
Showing posts with label WorldCom. Show all posts

Sunday, October 30, 2011

September 11 - Ten Years Later (Part 2)

Read: September 11 - Ten Years Later (Part 1)

If Oscar Wilde were around he might say “To start one war, Mr. Bush, was a necessity but to start two seems like recklessness”. 

As we continue to examine the impact of the decisions made by our government in the months and years after 9/11, it is important to look back at some of missed warning signs and lost opportunity costs for America that were a result of the course the Bush administration chose to set America on.

On 2nd December 2001 one of the world’s largest energy companies, named “America’s Most Innovative Company” for six consecutive years by Fortune magazine, with 22,000 employees and global revenues over $100 billion, filed for bankruptcy. Enron’s entire financial reporting had been based on institutionalized fraud. Their demise also led to the dissolution of an old and reputable accounting firm, Arthur Anderson, the firm responsible for auditing Enron’s books. Close on the heels of Enron a number of other companies fell to similar accounting scandals. These included ImClone and Global Crossing, followed in the summer of 2002 by WorldCom and Adelphia. This brought into question the accounting practices of virtually every corporation in America. It became clear that there were serious discrepancies between the financial pictures companies were presenting to Wall Street, publicly, and the actual state of their internal balance sheets – the vast majority of Corporations were obfuscating their financials using contemporary accounting rules. All this was unfolding against a backdrop of a darkening economic picture based on the stock market bubble which burst in the first quarter of 2001. The economic excesses that had accompanied the heady growth and profitability of the 1990’s were gone. Too many firms, especially those in the technology and telecommunications, had made poor decisions and investments in in the wrong type of assets. However, even as growth slowed there was one startling difference from all post war recessions. Most recessions have been driven by sharp decreases in consumption spending, particularly related to durables and housing. However, during the early 2000’s consumption spending had actually been increasing year on year. This recession was being driven by plunging business investment (source: Joint Economic Committee Reports 2003). There is no doubt that seeds of this economic slowdown were sowed in the Clinton years, and are not directly related to the Bush administration’s policies but it is abundantly clear is that the signs of America’s impending financial meltdown, including the underlying factors that caused it, had started to become apparent early on during Bush’s first term in office.

It was in 2001 that Bush administration became aware of the problems in the overheating US housing market. At the center of the problem were two Government sponsored enterprises (GSE) called Fannie Mae and Freddie Mac, whose government mandated mission was to keep mortgage interest rates low, so more Americans could afford to buy homes. By now it was well-known in Washington political circles that both institutions were so highly leveraged that a minor decline in housing values, as little as 1.3% to 2%, could wipe out both companies. And that their failure would have major repercussions on financial markets and US economic activity across the board. Bush was shot down by Democrats in Congress when he tried to bring additional oversight over these GSE’s in 2002. By early 2003 the signs had grown alarming; by this time these two mortgage lenders had more than $1.5 trillion in outstanding debt issued on their balance sheets.  In July, of the same year, a report by independent investigators concluded that “Freddie Mac manipulated its accounting to mislead investors, and critics said Fannie Mae does not adequately hedge against rising interest rates” (source: New York Times). However, with stiff resistance from Democrats, and the administration distracted by two wars, Bush chose to relinquish this battle and focus on what he clearly believed was far more important for securing America’s future: getting rid of Saddam Hussein. By the time Freddie and Fannie finally collapsed at the end of 2008, housing values had dropped 12.8%, since 2006. By now things were pretty dire and it became necessary for government to intervene in every part of the economy as Bush put it, “to prevent the crisis on Wall Street from becoming a crisis in communities across our country." Finding themselves in the midst of yet another crisis this administration decided once more to use fear to push through a $700 billion bailout plan for banks. Giving sweeping powers to the government to dispense gigantic sums of taxpayer dollars in a program that was sheltered from court review. TARP was a three page bill that did not specify which institutions would qualify or what criteria would be used, if any, or what taxpayers would get in return for the unprecedented infusion. It was designed to save companies that had brought this Armageddon upon themselves, and by an administration that had neglected to pay attention to many years of warnings. By all accounts, what would likely have been a minor economic downturn had it been handled when the warning signs first emerged resulted instead in a US and global financial catastrophe.

Another aspect of economic growth is immigration, which early on Bush showed he realized the importance and benefits to the US economy. He saw a need to reform the stagnant US immigration policy. He called for a new and large-scale guest worker program, paths to legalization for existing illegals, and had five meetings with Vincente Fox, the Mexican President, all in his first nine months in office. However, when it became known that all of the 9/11 hijackers had entered the US with legal visas, and that some has stayed after expiration, it changed the complexion of the debate on immigration along with his administration’s healthy stance on it. The administration decided to view the issue of immigration through the lens of ‘homeland security’. One accompanied with rhetoric that heightened fear and focused on detection of terrorists along with greater powers for law enforcement. America went from taking pride in being a nation of immigrants to being afraid of them. In the two years after 9/11 legal immigration fell by 34%, naturalization decreased 19% and employment based immigration also declined, as percentage of overall legal immigration, while absolute numbers dropped by 53% (source: Migration Policy Institute, 2004). To give you one example of the effect of the Bush policies on immigration, pre-9/11 it would have taken an Indian student who came to attend college in America about 18 months to become a permanent resident, and five years to become eligible for citizenship. Today, the same Indian student would have to wait 70 years for a permanent resident visa (source: National Foundation for American Policy). There is no dispute among economists about the importance of immigration, and that it is fundamental to the success of the American economy. Immigrants have founded 52% of Silicon Valley’s companies, creating millions of American jobs (source: Foreign Born Entrepreneurs: An Underestimated American Resource). This is not just true of higher income, better educated immigrants but also uneducated, low skilled workers. Without immigrants “the pace of recent U.S. economic growth would have been impossible. Since 1990, immigrants have contributed to job growth in three main ways: they fill an increasing share of jobs overall, they take jobs in labor-scarce regions, and they fill the types of jobs native workers often shun.” (source: Federal Reserve Bank of Dallas). Instead of using the opportunity to rally Congress to fix loopholes, and sensibly and securely reform what was without a doubt an antiquated and outdated visa system, the Bush administration followed through on a knee-jerk path, deciding to clamp down with archaic rules that made it much more difficult to get any type of US visa and effectively encouraged, if not forced, the smartest minds from around the world to return home after receiving an American college degree.

Across the board this administration seemed to believe it could have its cake and eat it. In late 2002, Cheney summoned Bush’s economic team to his office to push for another round of tax cuts to stimulate the slowing economy. Paul O’Neill, then the Treasury Secretary, and the entire White House economic team had become convinced that the country was careening toward a fiscal crisis, and they pleaded with Cheney to start reining in government spending. Instead, Cheney used Reagan’s words that “deficits don’t matter,” to completely shut down Paul H. O’Neill and the economic team. This was just a few months before the Iraq invasion began. Apart from the two rounds of tax cuts, which added roughly $1 trillion to the deficit over ten years, Bush also created a Medicare drug entitle­ment that will cost an estimated $800 billion in its first decade, he increased federal education spending 58 percent faster than inflation. He became the first President in US history to spend 3 percent of GDP on federal antipoverty programs. He also spent billions bailing out the Detroit auto industry and ended his final term with the $700 billion toxic asset recovery program. It is worth noting that during his two terms the income disparity grew, the poverty rate increased, unemployment rose to reach 7.8% in January, 2009 (the highest level in more than 15 years). When President Bush took office, the national debt stood at $5.727 trillion and when he left office it was more than $9.849 trillion (source: CBS News). That is an increase of a staggering 71.9 percent on Bush's watch. There were a total of seven debt ceiling increases, almost one for every year Bush spent in office. Interestingly, most of Bush’s spending was financed by issuing US treasury bonds (about 40 – 45 percent bought by foreign powers). When Bush took office in February 2001, the mainland Chinese owned a paltry $63.7 billion in U.S. debt. When Bush left office at the end of January 2009 the mainland Chinese owned $739.6 billion in US debt (source: Treasury.gov).

There is no doubt that these were extenuating circumstances, and 9/11 changed America forever; no argument there. The issue has more to do with the priorities and focus of this administration for the many years after 9/11, and their fixation with a hurriedly planned and poorly executed War on Terror. As a result the vast majority of domestic and foreign policy decisions seem to be devoid of short-term priorities and long-term thinking. It was as if this administration decided that the 9/11 attacks gave them cart blanche and zero accountability for all their actions. That it also did not matter how America would pay for its out-of-control spending, as long as it was done in the name of ‘national security’. It seems this administration was perfectly content kicking the can down the road. This at a time when America was clearly in alarming decline with corporate innovation dying, the education system in shambles, entitlement programs going bust and the country heading towards insurmountable debt. Without the distractions of a spiraling situation in Iraq, a war that deeply divided the country and created an acrimonious stalemate in Washington, Congress would also have been much more focused domestically and compelled to act. And had Bush not been completely consumed by his war on terror it is certain he would have also paid greater attention to the many warning signs of US economic decline. All this coupled with a complete lack of diplomacy in his first-term resulted in alienating long-term US allies, weakening its moral authority and having the mighty US military power humbled by a bunch of rag-tag rebels, in both Iraq and Afghanistan. Consider that Bush’s global war on terror will continue to cost US taxpayers for at least another generation, and has almost single-handedly been responsible for tilting the balance of global economic power squarely into the hands of China. In the end, we must ourselves this one question - was all this worth it just to get rid of Saddam Hussein?