Fran O'Sullivan: Obama's New Year solution no solution at all

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Banana republic label sticks as plutocrats deny role in US fiscal woes

President Barack Obama's ready resort to "fiscal cliff interruptus" does not address the United States' entrenched economic problems, let alone build world confidence that his nation is intent on putting its house in order.

It is simply a stop-gap measure that does not face up to America's basic problem of spending far more than it earns. Washington's brinkmanship (of which we are all heartily tired) will resume when politicians on Capitol Hill set about raising the US$16.4 trillion ($20 trillion) debt ceiling next month to avoid a major default.

Here's a safe bet. While other nations are scolding US political elites over their failure to deal with their country's pressing fiscal issues, the US is unlikely to be molested by any stern criticism from New Zealand's political leaders in the short term.

In reality, the so-called New Year's Eve solution merely postpones the reckoning while Obama resumes his holiday in Hawaii - the same state where John Key takes his annual summer holiday break. Let's acknowledge that the Obamas traditionally stay in Kailua outside Honolulu while the Key family stay at their holiday apartment in Maui

But if Obama and Key do happen to bang into each other in the warm Hawaiian surf, or at one of the salubrious golf courses that Key favours, can any of us really see our "loves to be liked"' PM challenging the US President to ensure America's pretensions to global leadership are not simply a mirage?

Yet, Australian Treasurer Wayne Swan took to Twitter to express his frustration with the United States: "We (in Australia) are not immune from global developments."

The Chinese state-owned news agency Xinhua predictably argued the fiscal cliff is the latest sign of the inherent long-term unsustainability of the US economy.

But the strongest criticism came from Mexico's El Economista newspaper, which labelled the US "una republica bananera", a reference to the designation Washington powerbrokers appended to Mexico during its currency crisis.

The Mexicans have a point. While the US is not simply dependent on a small number of primary exports (the standard definition of a banana republic), it arguably does boast an entrenched plutocracy that runs the national economy through the established power structure.

It's a plutocracy whose very excesses make a mockery of the cut in living standards that ordinary Americans have had to bear since the global financial crisis left Main Street liable for Wall Street's cavalier behaviour.

The most egregious example was the breathtakingly arrogant decision by Goldman Sachs last week to help 10 of its executives dodge the fiscal cliff tax increase for higher-paid Americans by accelerating the delivery of US$65 million in stock awards, including for CEO Lloyd Blankfein, to take place in 2012 instead of this month.

Let's face it, there is yet to be any substantive explanation why the legal book was not thrown at Goldman Sachs after the US Senate's Permanent Subcommittee on Investigations released a 635-page report entitled "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse", which alleged the bank might have misled investors and profited from the collapse of the mortgage market at the expense of its clients. Goldman's has denied the allegation.

Goldman's behaviour clearly undercuts Obama's claim that his fiscal cliff deal fulfils his election promise to raise taxes on the rich.

What Key does know a lot about - but rarely talks publicly about - is the growing sense that problems bequeathed to the international financial system by "Masters of the Universe" like Goldman Sachs are not over. He has discussed it with US Treasury Secretary Tim Geithner.

Former US Assistant Treasury Secretary Paul Roberts reckons the fiscal cliff is a "hoax designed to shift the attention of policymakers, the media and the attentive public, if any, from huge problems to small ones".

Roberts reckons the fiscal cliff is about small numbers compared to the "derivatives tsunami or to the bond market and dollar market bubbles".

He says the US could cut federal government spending by US$1.3 trillion over 10 years by "simply taking a three-month vacation each year from Washington's wars".

The real problem is the private sector, where little progress has been made in reducing the size of the US$227 trillion derivatives tsunami where four US banks (including Goldman's) have derivatives exposure equal to 3.3 times world gross domestic product.

Roberts says: "When I was a US Treasury official, such a possibility would have been considered beyond science fiction."

It would be stirring to know that Key - who is a former Merrill Lynch banker - is investigating this issue and that he does have the moxie to say to Obama he is distressed that Goldman's outrageous behaviour robs the US Government of its moral legitimacy.

It's tempting to say 'fat chance'. But if the world is to prosper, it requires powerbrokers to tell the truth.

- NZ Herald

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