Simon Johnson - IMF Cheif Economist says banking mafia have corrupted government.

Simon Johnson

Simon Johnson is a senior fellow at the Peterson Institute for International Economics since September 2008. Previously he was the International Monetary Fund's Economic Counselor and Director of the Research Department (2007–08). At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the first to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.

Professor Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at MIT's Sloan School of Management, a position he has held since 2004. His previous appointments include Assistant Director in the IMF's Research Department (2004–06) and visiting fellow at the Institute (2006–07).

The Quiet Coup

Atlantic Magazine -

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Simon Johnson MAY 1 2009

ONE THING YOU learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths

To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Simon Johnson, a professor at MIT’s Sloan School of Management, was the chief economist at the International Monetary Fund during 2007 and 2008. He blogs about the financial crisis at baselinescenario.com, along with James Kwak, who also contributed to this essay.

Michael Hudson - Chase Manhattan - says private debt as entire currency is an unrepayable pyramid scam.

Michael Hudson as Chase Manhattan balance of payment analyst - also thought he was part of something good - until;
"Back in the 1960s, I was Chase Manhattan Bank’s balance of payments analyst, and my job was to focus on the Latin American countries: Argentina, Brazil, and Chile, and my job was to calculate how much of a balance of payments surplus they could generate, and the idea of the bank marketing department was the entire economic surplus could be used to pay debt service to the seven major American banks.
Pretty quickly we found out that there wasn’t any surplus to pay the banks, and there was an international department that got very upset because he said “Look, I get promoted for making loans, and the real estate guys are making all the loans, you’re telling us they can’t afford to repay!” And he took it up to David Rockefeller, we went across the street to the Federal Reserve bank, and the Federal Reserve bank said “It’s in America’s interest to make these loans to Latin America. Mr. Hudson, according to your calculations, Britain can’t afford to replay any more.” “That’s right. I don’t see any way in which it can get the money to repay the debt.” And the Federal Reserve man said “Ah! But did you take into account the fact that the US Treasury is always going to lend Britain the money to pay? We will never let it go down.” I said, “Well, that’s a deus ex machina from outside the system. Yes, you can lend them the money to repay.”

A video of Michael Hudson making a speech - re the above - at a conference of the Institute of Institute for New Economic Thinking - in Berlin 2012;
Michael Hudson - Speech Institute for New Economic Thinking - Berlin 2012

Michael Hudson wrote this seminal document re money system reform April 2012
http://ineteconomics.org/sites/inet.civicactions.net/files/hudson-michael-berlin-paper.pdf

In the below television interview Michael Hudson describes how Iceland suffered a financial attack at the hands of criminal bankers (note first 30 secs is Icelandic language - then changes to English)

Martin Luther King 1967 - Beyond Vietnam - speech about money in war.

Much was made of the recent 2013 50th anniversary of Martin Luther King - I Had A Dream - speech - but I believe his later - Beyond Vietnam - speech - was even greater. In which he made it clear that he knew the detrimental impact that the senior most elements of international high finance were having upon the common people of every creed and colour around the globe. I wager that if it was a speech that got him assassinated - it was probably this one;

Video - Martin Luther King Jr.'s Speech - "Beyond Vietnam" 

Text -  Martin Luther King Jr.'s Speech - "Beyond Vietnam"

Mr. Chairman, ladies and gentlemen, I need not pause to say how very delighted I am to be here tonight, and how very delighted I am to see you expressing your concern about the issues that will be discussed tonight by turning out in such large numbers. I also want to say that I consider it a great honor to share this program with Dr. Bennett, Dr. Commager, and Rabbi Heschel, some of the most distinguished leaders and personalities of our nation. And of course it’s always good to come back to Riverside Church. Over the last eight years, I have had the privilege of preaching here almost every year in that period, and it’s always a rich and rewarding experience to come to this great church and this great pulpit.

I come to this great magnificent house of worship tonight because my conscience leaves me no other choice. I join you in this meeting because I am in deepest agreement with the aims and work of the organization that brought us together, Clergy and Laymen Concerned About Vietnam. The recent statements of your executive committee are the sentiments of my own heart, and I found myself in full accord when I read its opening lines: “A time comes when silence is betrayal.” That time has come for us in relation to Vietnam.

The truth of these words is beyond doubt, but the mission to which they call us is a most difficult one. Even when pressed by the demands of inner truth, men do not easily assume the task of opposing their government’s policy, especially in time of war. Nor does the human spirit move without great difficulty against all the apathy of conformist thought within one’s own bosom and in the surrounding world. Moreover, when the issues at hand seem as perplexing as they often do in the case of this dreadful conflict, we are always on the verge of being mesmerized by uncertainty. But we must move on.

Some of us who have already begun to break the silence of the night have found that the calling to speak is often a vocation of agony, but we must speak. We must speak with all the humility that is appropriate to our limited vision, but we must speak. And we must rejoice as well, for surely this is the first time in our nation’s history that a significant number of its religious leaders have chosen to move beyond the prophesying of smooth patriotism to the high grounds of a firm dissent based upon the mandates of conscience and the reading of history. Perhaps a new spirit is rising among us. If it is, let us trace its movement, and pray that our inner being may be sensitive to its guidance. For we are deeply in need of a new way beyond the darkness that seems so close around us.

Over the past two years, as I have moved to break the betrayal of my own silences and to speak from the burnings of my own heart, as I have called for radical departures from the destruction of Vietnam, many persons have questioned me about the wisdom of my path. At the heart of their concerns, this query has often loomed large and loud: “Why are you speaking about the war, Dr. King? Why are you joining the voices of dissent?” “Peace and civil rights don’t mix,” they say. “Aren’t you hurting the cause of your people?” they ask. And when I hear them, though I often understand the source of their concern, I am nevertheless greatly saddened, for such questions mean that the inquirers have not really known me, my commitment, or my calling. Indeed, their questions suggest that they do not know the world in which they live. In the light of such tragic misunderstanding, I deem it of signal importance to state clearly, and I trust concisely, why I believe that the path from Dexter Avenue Baptist Church—the church in Montgomery, Alabama, where I began my pastorate—leads clearly to this sanctuary tonight.

I come to this platform tonight to make a passionate plea to my beloved nation. This speech is not addressed to Hanoi or to the National Liberation Front. It is not addressed to China or to Russia. Nor is it an attempt to overlook the ambiguity of the total situation and the need for a collective solution to the tragedy of Vietnam. Neither is it an attempt to make North Vietnam or the National Liberation Front paragons of virtue, nor to overlook the role they must play in the successful resolution of the problem. While they both may have justifiable reasons to be suspicious of the good faith of the United States, life and history give eloquent testimony to the fact that conflicts are never resolved without trustful give and take on both sides. Tonight, however, I wish not to speak with Hanoi and the National Liberation Front, but rather to my fellow Americans.

Since I am a preacher by calling, I suppose it is not surprising that I have seven major reasons for bringing Vietnam into the field of my moral vision. There is at the outset a very obvious and almost facile connection between the war in Vietnam and the struggle I and others have been waging in America. A few years ago there was a shining moment in that struggle. It seemed as if there was a real promise of hope for the poor, both black and white, through the poverty program. There were experiments, hopes, new beginnings. Then came the buildup in Vietnam, and I watched this program broken and eviscerated as if it were some idle political plaything on a society gone mad on war. And I knew that America would never invest the necessary funds or energies in rehabilitation of its poor so long as adventures like Vietnam continued to draw men and skills and money like some demonic, destructive suction tube. So I was increasingly compelled to see the war as an enemy of the poor and to attack it as such.

Perhaps a more tragic recognition of reality took place when it became clear to me that the war was doing far more than devastating the hopes of the poor at home. It was sending their sons and their brothers and their husbands to fight and to die in extraordinarily high proportions relative to the rest of the population. We were taking the black young men who had been crippled by our society and sending them eight thousand miles away to guarantee liberties in Southeast Asia which they had not found in southwest Georgia and East Harlem. So we have been repeatedly faced with the cruel irony of watching Negro and white boys on TV screens as they kill and die together for a nation that has been unable to seat them together in the same schools. So we watch them in brutal solidarity burning the huts of a poor village, but we realize that they would hardly live on the same block in Chicago. I could not be silent in the face of such cruel manipulation of the poor.

My third reason moves to an even deeper level of awareness, for it grows out of my experience in the ghettos of the North over the last three years, especially the last three summers. As I have walked among the desperate, rejected, and angry young men, I have told them that Molotov cocktails and rifles would not solve their problems. I have tried to offer them my deepest compassion while maintaining my conviction that social change comes most meaningfully through nonviolent action. But they asked, and rightly so, “What about Vietnam?” They asked if our own nation wasn’t using massive doses of violence to solve its problems, to bring about the changes it wanted. Their questions hit home, and I knew that I could never again raise my voice against the violence of the oppressed in the ghettos without having first spoken clearly to the greatest purveyor of violence in the world today: my own government. For the sake of those boys, for the sake of this government, for the sake of the hundreds of thousands trembling under our violence, I cannot be silent.

For those who ask the question, “Aren’t you a civil rights leader?” and thereby mean to exclude me from the movement for peace, I have this further answer. In 1957, when a group of us formed the Southern Christian Leadership Conference, we chose as our motto: “To save the soul of America.” We were convinced that we could not limit our vision to certain rights for black people, but instead affirmed the conviction that America would never be free or saved from itself until the descendants of its slaves were loosed completely from the shackles they still wear. In a way we were agreeing with Langston Hughes, that black bard from Harlem, who had written earlier:

O, yes, I say it plain,
America never was America to me,
And yet I swear this oath—
America will be!

Now it should be incandescently clear that no one who has any concern for the integrity and life of America today can ignore the present war. If America’s soul becomes totally poisoned, part of the autopsy must read “Vietnam.” It can never be saved so long as it destroys the hopes of men the world over. So it is that those of us who are yet determined that “America will be” are led down the path of protest and dissent, working for the health of our land.

As if the weight of such a commitment to the life and health of America were not enough, another burden of responsibility was placed upon me in 1954.* And I cannot forget that the Nobel Peace Prize was also a commission, a commission to work harder than I had ever worked before for the brotherhood of man. This is a calling that takes me beyond national allegiances.

But even if it were not present, I would yet have to live with the meaning of my commitment to the ministry of Jesus Christ. To me, the relationship of this ministry to the making of peace is so obvious that I sometimes marvel at those who ask me why I am speaking against the war. Could it be that they do not know that the Good News was meant for all men—for communist and capitalist, for their children and ours, for black and for white, for revolutionary and conservative? Have they forgotten that my ministry is in obedience to the one who loved his enemies so fully that he died for them? What then can I say to the Vietcong or to Castro or to Mao as a faithful minister of this one? Can I threaten them with death or must I not share with them my life?

Finally, as I try to explain for you and for myself the road that leads from Montgomery to this place, I would have offered all that was most valid if I simply said that I must be true to my conviction that I share with all men the calling to be a son of the living God. Beyond the calling of race or nation or creed is this vocation of sonship and brotherhood. Because I believe that the Father is deeply concerned, especially for His suffering and helpless and outcast children, I come tonight to speak for them. This I believe to be the privilege and the burden of all of us who deem ourselves bound by allegiances and loyalties which are broader and deeper than nationalism and which go beyond our nation’s self-defined goals and positions. We are called to speak for the weak, for the voiceless, for the victims of our nation, for those it calls “enemy,” for no document from human hands can make these humans any less our brothers.

And as I ponder the madness of Vietnam and search within myself for ways to understand and respond in compassion, my mind goes constantly to the people of that peninsula. I speak now not of the soldiers of each side, not of the ideologies of the Liberation Front, not of the junta in Saigon, but simply of the people who have been living under the curse of war for almost three continuous decades now. I think of them, too, because it is clear to me that there will be no meaningful solution there until some attempt is made to know them and hear their broken cries.

They must see Americans as strange liberators. The Vietnamese people proclaimed their own independence in 1954—in 1945 rather—after a combined French and Japanese occupation and before the communist revolution in China. They were led by Ho Chi Minh. Even though they quoted the American Declaration of Independence in their own document of freedom, we refused to recognize them. Instead, we decided to support France in its reconquest of her former colony. Our government felt then that the Vietnamese people were not ready for independence, and we again fell victim to the deadly Western arrogance that has poisoned the international atmosphere for so long. With that tragic decision we rejected a revolutionary government seeking self-determination and a government that had been established not by China—for whom the Vietnamese have no great love—but by clearly indigenous forces that included some communists. For the peasants this new government meant real land reform, one of the most important needs in their lives.

For nine years following 1945 we denied the people of Vietnam the right of independence. For nine years we vigorously supported the French in their abortive effort to recolonize Vietnam. Before the end of the war we were meeting eighty percent of the French war costs. Even before the French were defeated at Dien Bien Phu, they began to despair of their reckless action, but we did not. We encouraged them with our huge financial and military supplies to continue the war even after they had lost the will. Soon we would be paying almost the full costs of this tragic attempt at recolonization.

After the French were defeated, it looked as if independence and land reform would come again through the Geneva Agreement. But instead there came the United States, determined that Ho should not unify the temporarily divided nation, and the peasants watched again as we supported one of the most vicious modern dictators, our chosen man, Premier Diem. The peasants watched and cringed and Diem ruthlessly rooted out all opposition, supported their extortionist landlords, and refused even to discuss reunification with the North. The peasants watched as all of this was presided over by United States influence and then by increasing numbers of United States troops who came to help quell the insurgency that Diem’s methods had aroused. When Diem was overthrown they may have been happy, but the long line of military dictators seemed to offer no real change, especially in terms of their need for land and peace.

The only change came from America as we increased our troop commitments in support of governments which were singularly corrupt, inept, and without popular support. All the while the people read our leaflets and received the regular promises of peace and democracy and land reform. Now they languish under our bombs and consider us, not their fellow Vietnamese, the real enemy. They move sadly and apathetically as we herd them off the land of their fathers into concentration camps where minimal social needs are rarely met. They know they must move on or be destroyed by our bombs.

So they go, primarily women and children and the aged. They watch as we poison their water, as we kill a million acres of their crops. They must weep as the bulldozers roar through their areas preparing to destroy the precious trees. They wander into the hospitals with at least twenty casualties from American firepower for one Vietcong-inflicted injury. So far we may have killed a million of them, mostly children. They wander into the towns and see thousands of the children, homeless, without clothes, running in packs on the streets like animals. They see the children degraded by our soldiers as they beg for food. They see the children selling their sisters to our soldiers, soliciting for their mothers.

What do the peasants think as we ally ourselves with the landlords and as we refuse to put any action into our many words concerning land reform? What do they think as we test out our latest weapons on them, just as the Germans tested out new medicine and new tortures in the concentration camps of Europe? Where are the roots of the independent Vietnam we claim to be building? Is it among these voiceless ones?

We have destroyed their two most cherished institutions: the family and the village. We have destroyed their land and their crops. We have cooperated in the crushing of the nation’s only noncommunist revolutionary political force, the unified Buddhist Church. We have supported the enemies of the peasants of Saigon. We have corrupted their women and children and killed their men.

Now there is little left to build on, save bitterness. Soon the only solid physical foundations remaining will be found at our military bases and in the concrete of the concentration camps we call “fortified hamlets.” The peasants may well wonder if we plan to build our new Vietnam on such grounds as these. Could we blame them for such thoughts? We must speak for them and raise the questions they cannot raise. These, too, are our brothers.

Perhaps a more difficult but no less necessary task is to speak for those who have been designated as our enemies. What of the National Liberation front, that strangely anonymous group we call “VC” or “communists”? What must they think of the United States of America when they realize that we permitted the repression and cruelty of Diem, which helped to bring them into being as a resistance group in the South? What do they think of our condoning the violence which led to their own taking up of arms? How can they believe in our integrity when now we speak of “aggression from the North” as if there was nothing more essential to the war? How can they trust us when now we charge them with violence after the murderous reign of Diem and charge them with violence while we pour every new weapon of death into their land? Surely we must understand their feelings, even if we do not condone their actions. Surely we must see that the men we supported pressed them to their violence. Surely we must see that our own computerized plans of destruction simply dwarf their greatest acts.

How do they judge us when our officials know that their membership is less than twenty-five percent communist, and yet insist on giving them the blanket name? What must they be thinking when they know that we are aware of their control of major sections of Vietnam, and yet we appear ready to allow national elections in which this highly organized political parallel government will not have a part? They ask how we can speak of free elections when the Saigon press is censored and controlled by the military junta. And they are surely right to wonder what kind of new government we plan to help form without them, the only real party in real touch with the peasants. They question our political goals and they deny the reality of a peace settlement from which they will be excluded. Their questions are frighteningly relevant. Is our nation planning to build on political myth again, and then shore it up upon the power of a new violence?

Here is the true meaning and value of compassion and nonviolence, when it helps us to see the enemy’s point of view, to hear his questions, to know his assessment of ourselves. For from his view we may indeed see the basic weaknesses of our own condition, and if we are mature, we may learn and grow and profit from the wisdom of the brothers who are called the opposition.

So, too, with Hanoi. In the North, where our bombs now pummel the land, and our mines endanger the waterways, we are met by a deep but understandable mistrust. To speak for them is to explain this lack of confidence in Western worlds, and especially their distrust of American intentions now. In Hanoi are the men who led this nation to independence against the Japanese and the French, the men who sought membership in the French Commonwealth and were betrayed by the weakness of Paris and the willfulness of the colonial armies. It was they who led a second struggle against French domination at tremendous costs, and then were persuaded to give up the land they controlled between the thirteenth and seventeenth parallel as a temporary measure at Geneva. After 1954 they watched us conspire with Diem to prevent elections which could have surely brought Ho Chi Minh to power over a unified Vietnam, and they realized they had been betrayed again. When we ask why they do not leap to negotiate, these things must be considered.

Also, it must be clear that the leaders of Hanoi considered the presence of American troops in support of the Diem regime to have been the initial military breach of the Geneva Agreement concerning foreign troops. They remind us that they did not begin to send troops in large numbers and even supplies into the South until American forces had moved into the tens of thousands.

Hanoi remembers how our leaders refused to tell us the truth about the earlier North Vietnamese overtures for peace, how the president claimed that none existed when they had clearly been made. Ho Chi Minh has watched as America has spoken of peace and built up its forces, and now he has surely heard the increasing international rumors of American plans for an invasion of the north. He knows the bombing and shelling and mining we are doing are part of traditional pre-invasion strategy. Perhaps only his sense of humor and of irony can save him when he hears the most powerful nation of the world speaking of aggression as it drops thousands of bombs on a poor, weak nation more than eight hundred, or rather, eight thousand miles away from its shores.

At this point I should make it clear that while I have tried to give a voice to the voiceless in Vietnam and to understand the arguments of those who are called “enemy,” I am as deeply concerned about our own troops there as anything else. For it occurs to me that what we are submitting them to in Vietnam is not simply the brutalizing process that goes on in any war where armies face each other and seek to destroy. We are adding cynicism to the process of death, for they must know after a short period there that none of the things we claim to be fighting for are really involved. Before long they must know that their government has sent them into a struggle among Vietnamese, and the more sophisticated surely realize that we are on the side of the wealthy, and the secure, while we create a hell for the poor.

Surely this madness must cease. We must stop now. I speak as a child of God and brother to the suffering poor of Vietnam. I speak for those whose land is being laid waste, whose homes are being destroy, whose culture is being subverted. I speak for the poor in America who are paying the double price of smashed hopes at home, and dealt death and corruption in Vietnam. I speak as a citizen of the world, for the world as it stands aghast at the path we have taken. I speak as one who loves America, to the leaders of our own nation: The great initiative in this war is ours; the initiative to stop it must be ours.

This is the message of the great Buddhist leaders of Vietnam. Recently one of them wrote these words, and I quote:

Each day the war goes on the hatred increased in the hearts of the Vietnamese and in the hearts of those of humanitarian instinct. The Americans are forcing even their friends into becoming their enemies. It is curious that the Americans, who calculate so carefully on the possibilities of military victory, do not realize that in the process they are incurring deep psychological and political defeat. The image of America will never again be the image of revolution, freedom, and democracy, but the image of violence and militarism.

Unquote.

If we continue, there will be no doubt in my mind and in the mind of the world that we have no honorable intentions in Vietnam. If we do not stop our war against the people of Vietnam immediately, the world will be left with no other alternative than to see this as some horrible, clumsy, and deadly game we have decided to play. The world now demands a maturity of America that we may not be able to achieve. It demands that we admit we have been wrong from the beginning of our adventure in Vietnam, that we have been detrimental to the life of the Vietnamese people. The situation is one in which we must be ready to turn sharply from our present ways. In order to atone for our sins and errors in Vietnam, we should take the initiative in bringing a halt to this tragic war.

I would like to suggest five concrete things that our government should do to begin the long and difficult process of extricating ourselves from this nightmarish conflict:

Number one: End all bombing in North and South Vietnam.

Number two: Declare a unilateral cease-fire in the hope that such action will create the atmosphere for negotiation.

Three: Take immediate steps to prevent other battlegrounds in Southeast Asia by curtailing our military buildup in Thailand and our interference in Laos.

Four: Realistically accept the fact that the National Liberation Front has substantial support in South Vietnam and must thereby play a role in any meaningful negotiations and any future Vietnam government.

Five: Set a date that we will remove all foreign troops from Vietnam in accordance with the 1954 Geneva Agreement. [sustained applause]

Part of our ongoing [applause continues], part of our ongoing commitment might well express itself in an offer to grant asylum to any Vietnamese who fears for his life under a new regime which included the Liberation Front. Then we must make what reparations we can for the damage we have done. We must provide the medical aid that is badly needed, making it available in this country if necessary. Meanwhile [applause], meanwhile, we in the churches and synagogues have a continuing task while we urge our government to disengage itself from a disgraceful commitment. We must continue to raise our voices and our lives if our nation persists in its perverse ways in Vietnam. We must be prepared to match actions with words by seeking out every creative method of protest possible.

As we counsel young men concerning military service, we must clarify for them our nation’s role in Vietnam and challenge them with the alternative of conscientious objection. [sustained applause] I am pleased to say that this is a path now chosen by more than seventy students at my own alma mater, Morehouse College, and I recommend it to all who find the American course in Vietnam a dishonorable and unjust one. [applause] Moreover, I would encourage all ministers of draft age to give up their ministerial exemptions and seek status as conscientious objectors. [applause] These are the times for real choices and not false ones. We are at the moment when our lives must be placed on the line if our nation is to survive its own folly. Every man of humane convictions must decide on the protest that best suits his convictions, but we must all protest.

Now there is something seductively tempting about stopping there and sending us all off on what in some circles has become a popular crusade against the war in Vietnam. I say we must enter that struggle, but I wish to go on now to say something even more disturbing.

The war in Vietnam is but a symptom of a far deeper malady within the American spirit, and if we ignore this sobering reality [applause], and if we ignore this sobering reality, we will find ourselves organizing “clergy and laymen concerned” committees for the next generation. They will be concerned about Guatemala and Peru. They will be concerned about Thailand and Cambodia. They will be concerned about Mozambique and South Africa. We will be marching for these and a dozen other names and attending rallies without end unless there is a significant and profound change in American life and policy. [sustained applause] So such thoughts take us beyond Vietnam, but not beyond our calling as sons of the living God.

In 1957 a sensitive American official overseas said that it seemed to him that our nation was on the wrong side of a world revolution. During the past ten years we have seen emerge a pattern of suppression which has now justified the presence of U.S. military advisors in Venezuela. This need to maintain social stability for our investments accounts for the counterrevolutionary action of American forces in Guatemala. It tells why American helicopters are being used against guerrillas in Cambodia and why American napalm and Green Beret forces have already been active against rebels in Peru.

It is with such activity that the words of the late John F. Kennedy come back to haunt us. Five years ago he said, “Those who make peaceful revolution impossible will make violent revolution inevitable.” [applause] Increasingly, by choice or by accident, this is the role our nation has taken, the role of those who make peaceful revolution impossible by refusing to give up the privileges and the pleasures that come from the immense profits of overseas investments. I am convinced that if we are to get on to the right side of the world revolution, we as a nation must undergo a radical revolution of values. We must rapidly begin [applause], we must rapidly begin the shift from a thing-oriented society to a person-oriented society. When machines and computers, profit motives and property rights, are considered more important than people, the giant triplets of racism, extreme materialism, and militarism are incapable of being conquered.

A true revolution of values will soon cause us to question the fairness and justice of many of our past and present policies. On the one hand we are called to play the Good Samaritan on life’s roadside, but that will be only an initial act. One day we must come to see that the whole Jericho Road must be transformed so that men and women will not be constantly beaten and robbed as they make their journey on life’s highway. True compassion is more than flinging a coin to a beggar. It comes to see than an edifice which produces beggars needs restructuring. [applause]

A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth. With righteous indignation, it will look across the seas and see individual capitalists of the West investing huge sums of money in Asia, Africa, and South America, only to take the profits out with no concern for the social betterment of the countries, and say, “This is not just.” It will look at our alliance with the landed gentry of South America and say, “This is not just.” The Western arrogance of feeling that it has everything to teach others and nothing to learn from them is not just.

A true revolution of values will lay hand on the world order and say of war, “This way of settling differences is not just.” This business of burning human beings with napalm, of filling our nation’s homes with orphans and widows, of injecting poisonous drugs of hate into the veins of peoples normally humane, of sending men home from dark and bloody battlefields physically handicapped and psychologically deranged, cannot be reconciled with wisdom, justice, and love. A nation that continues year after year to spend more money on military defense than on programs of social uplift is approaching spiritual death. [sustained applause]

America, the richest and most powerful nation in the world, can well lead the way in this revolution of values. There is nothing except a tragic death wish to prevent us from reordering our priorities so that the pursuit of peace will take precedence over the pursuit of war. There is nothing to keep us from molding a recalcitrant status quo with bruised hands until we have fashioned it into a brotherhood.

This kind of positive revolution of values is our best defense against communism. [applause] War is not the answer. Communism will never be defeated by the use of atomic bombs or nuclear weapons. Let us not join those who shout war and, through their misguided passions, urge the United States to relinquish its participation in the United Nations. These are days which demand wise restraint and calm reasonableness. We must not engage in a negative anticommunism, but rather in a positive thrust for democracy [applause], realizing that our greatest defense against communism is to take offensive action in behalf of justice. We must with positive action seek to remove those conditions of poverty, insecurity, and injustice, which are the fertile soil in which the seed of communism grows and develops.

These are revolutionary times. All over the globe men are revolting against old systems of exploitation and oppression, and out of the wounds of a frail world, new systems of justice and equality are being born. The shirtless and barefoot people of the land are rising up as never before. The people who sat in darkness have seen a great light. We in the West must support these revolutions.

It is a sad fact that because of comfort, complacency, a morbid fear of communism, and our proneness to adjust to injustice, the Western nations that initiated so much of the revolutionary spirit of the modern world have now become the arch antirevolutionaries. This has driven many to feel that only Marxism has a revolutionary spirit. Therefore, communism is a judgment against our failure to make democracy real and follow through on the revolutions that we initiated. Our only hope today lies in our ability to recapture the revolutionary spirit and go out into a sometimes hostile world declaring eternal hostility to poverty, racism, and militarism. With this powerful commitment we shall boldly challenge the status quo and unjust mores, and thereby speed the day when “every valley shall be exalted, and every mountain and hill shall be made low [Audience:] (Yes); the crooked shall be made straight, and the rough places plain.”

A genuine revolution of values means in the final analysis that our loyalties must become ecumenical rather than sectional. Every nation must now develop an overriding loyalty to mankind as a whole in order to preserve the best in their individual societies.

This call for a worldwide fellowship that lifts neighborly concern beyond one’s tribe, race, class, and nation is in reality a call for an all-embracing and unconditional love for all mankind. This oft misunderstood, this oft misinterpreted concept, so readily dismissed by the Nietzsches of the world as a weak and cowardly force, has now become an absolute necessity for the survival of man. When I speak of love I am not speaking of some sentimental and weak response. I’m not speaking of that force which is just emotional bosh. I am speaking of that force which all of the great religions have seen as the supreme unifying principle of life. Love is somehow the key that unlocks the door which leads to ultimate reality. This Hindu-Muslim-Christian-Jewish-Buddhist belief about ultimate reality is beautifully summed up in the first epistle of Saint John: “Let us love one another (Yes), for love is God. (Yes) And every one that loveth is born of God and knoweth God. He that loveth not knoweth not God, for God is love. . . . If we love one another, God dwelleth in us and his love is perfected in us.” Let us hope that this spirit will become the order of the day.

We can no longer afford to worship the god of hate or bow before the altar of retaliation. The oceans of history are made turbulent by the ever-rising tides of hate. History is cluttered with the wreckage of nations and individuals that pursued this self-defeating path of hate. As Arnold Toynbee says: “Love is the ultimate force that makes for the saving choice of life and good against the damning choice of death and evil. Therefore the first hope in our inventory must be the hope that love is going to have the last word.” Unquote.

We are now faced with the fact, my friends, that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history, there is such a thing as being too late. Procrastination is still the thief of time. Life often leaves us standing bare, naked, and dejected with a lost opportunity. The tide in the affairs of men does not remain at flood—it ebbs. We may cry out desperately for time to pause in her passage, but time is adamant to every plea and rushes on. Over the bleached bones and jumbled residues of numerous civilizations are written the pathetic words, “Too late.” There is an invisible book of life that faithfully records our vigilance or our neglect. Omar Khayyam is right: “The moving finger writes, and having writ moves on.”

We still have a choice today: nonviolent coexistence or violent coannihilation. We must move past indecision to action. We must find new ways to speak for peace in Vietnam and justice throughout the developing world, a world that borders on our doors. If we do not act, we shall surely be dragged down the long, dark, and shameful corridors of time reserved for those who possess power without compassion, might without morality, and strength without sight.

Now let us begin. Now let us rededicate ourselves to the long and bitter, but beautiful, struggle for a new world. This is the calling of the sons of God, and our brothers wait eagerly for our response. Shall we say the odds are too great? Shall we tell them the struggle is too hard? Will our message be that the forces of American life militate against their arrival as full men, and we send our deepest regrets? Or will there be another message—of longing, of hope, of solidarity with their yearnings, of commitment to their cause, whatever the cost? The choice is ours, and though we might prefer it otherwise, we must choose in this crucial moment of human history.

As that noble bard of yesterday, James Russell Lowell, eloquently stated:

Once to every man and nation comes a moment do decide,
In the strife of truth and Falsehood, for the good or evil side;
Some great cause, God’s new Messiah offering each the bloom or blight,
And the choice goes by forever ‘twixt that darkness and that light.
Though the cause of evil prosper, yet ‘tis truth alone is strong
Though her portions be the scaffold, and upon the throne be wrong
Yet that scaffold sways the future, and behind the dim unknown
Standeth God within the shadow, keeping watch above his own.

And if we will only make the right choice, we will be able to transform this pending cosmic elegy into a creative psalm of peace. If we will make the right choice, we will be able to transform the jangling discords of our world into a beautiful symphony of brotherhood. If we will but make the right choice, we will be able to speed up the day, all over America and all over the world, when justice will roll down like waters, and righteousness like a mighty stream. [sustained applause]

*. King says “1954,” but most likely means 1964, the year he received the Nobel Peace Prize.