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Congress Pushing Covert Bailout to Save Big Finance and Screw Homeowners

By Zach Carter, AlterNet
Posted on April 9, 2009, Printed on April 9, 2009

U.S. policymakers just dealt struggling homeowners another devastating financial blow by helping Wall Street banks cook the books on their mortgages.
The real outrage, however, is that federal policymakers know the strategy they're adopting screws borrowers: they did the same thing in the 1980s to save banks from overwhelming losses on loans they'd made to developing nations, with horrific consequences for the global economy.
Under intense pressure from Congress and the banking lobby, regulators have approved a new accounting rule that allows banks leeway to value troubled mortgages and debt-backed securities at inflated prices. Banks typically have to value these assets at market prices: the amount investors might pay for them.
But with the U.S. economy fighting for life under a mountain of foreclosures, investors have figured out that these loans -- and the byzantine securities into which they were "sliced and diced" -- are not actually worth very much. As a result, nobody is buying them; their "market" has disappeared. 
So the banks now insist that hundreds of billions of dollars in debt-backed securities are not really worthless predatory garbage but merely assets being unfairly scorned by the trading markets. Their bargain-basement prices are artificially low.
So Big Finance has persuaded Congress and regulators to allow them to use secret proprietary "models" the banks own to assign values to these "toxic assets" without having to justify those numbers with concrete market information.
"The market would demonstrate that the value of these assets is much, much lower than what they've already got on the books," says Duke University Economics Professor William Darity. But once the new rules take effect, big losses on absurd mortgages will magically disappear with the stroke of a pen.
If that sounds like a back-door bailout, rest assured: it is. Even worse, it will actually hurt homeowners facing foreclosure. Allowing banks to use magical valuation models eliminates the incentives for them to modify loans that can't be repaid -- loan modifications that might enable families hit hard by this recession to stay in their homes.
Instead of encouraging banks to cut their losses by reducing the amount borrowers owe on their mortgages, regulators are giving them every reason to refuse to negotiate with their customers. 
This is exactly what happened in the foreign debt crisis of the 1980s.
"The commercial banks at the time essentially pushed loans on the developing countries," Darity says. "They tried to make it as attractive as possible for these governments to take on external debt, not necessarily with an expectation that the debt obligations would be paid." 
When it became clear that those countries simply could not afford to pay off the mountains of debt they had accumulated, the banks found themselves facing total financial ruin.
According to FDIC data, as early as 1982, at least eight of the largest U.S. banks -- including Citibank, Bank of America and JPMorgan -- would have been wiped out by the losses from those loans to foreign governments, yet all stayed in business thanks to accommodating regulators.  So it is with those "toxic assets" today, with bank balance sheets stretched beyond the breaking point thanks to defaults on expensive mortgages that will never be repaid. 
"You had a number of the largest money center banks that had losses so large that they would be insolvent," according to William Black, a senior banking regulator during the 1980s who now teaches law and economics at the University of Missouri. (A money center bank is one that lends to other banks, big corporations and governments rather than consumers. They're the ones often described as "too big to fail.")
"Insolvency is a somewhat kind word," Darity says, referring to both the foreign debt crisis of the '80s and the current financial mess. "Really, the banks are bankrupt." 
In August 1982, Mexico's minister of finance told U.S. Treasury officials and the International Monetary Fund that his country would not be able to make an interest payment on an $80 billion debt. Several other countries, including Brazil, Argentina, Chile and Venezuela soon announced that they too would not be paying interest on loans from Wall Street. It was obvious that the national economies of these highly indebted countries could not generate the funds necessary to pay off the U.S. banks. 
The government has a non-bailout solution for this problem, but it simply refused to use it with big banks during the Latin American debt crisis and in today's mortgage implosion. When banks destroy themselves with predatory loans, the government is supposed to take them over and work out their troubled loans with borrowers.
Shareholders who made bad bets on a busted bank get wiped out, and the management team responsible for the problem is shown the door. Eventually, the rehabilitated loans that borrowers can now afford get sold to a new set of investors and borrowers get relief. 
In the '80s, instead of requiring Citibank, Bank of America and JPMorgan to write off loans that were obviously never going to be paid back in full, regulators adopted a policy of simply looking the other way. Regulators knowingly allowed banks to pretend that their loans to foreign governments were perfectly healthy, ignoring the fact that the banks had not only suffered losses, but were essentially kaput.
It would be nearly five years after the debt crisis began before banks started accounting for losses on their loans to Latin American governments, according to the FDIC, with Citibank becoming the first to do so in May 1987. 
This proved extraordinarily destructive to the economies of developing nations, particularly in Latin America. Accounting giveaways made it unnecessary for banks to acknowledge reality, so instead of reducing the overall size of the loans, they only haggled over individual interest payments. 
"That was a major economic and political disaster," says Luiz Carlos Bresser-Pereira, who served as finance minister of Brazil during the debt crisis. Bresser-Pereira was at the heart of Brazil's debt negotiations with the U.S. Treasury Department, major U.S. banks, the IMF and the World Bank. 
Enormous portions of the national economy in countries like Brazil became completely devoted to meeting one-off interest payments.  Once each payment was made, a new round of negotiations would begin for the next payment.
Long-term solutions that allowed the economies of countries like Brazil to recover were off the table. Actually reducing how much Brazil owed would have required the banks to take losses, but regulators would allow banks to value the original bad loans at full price. In several cases, banks even issued more debt to countries to help them pay the interest on old loans, building up an even bigger mountain of debt and putting even more pressure on their economies. 
"This meant that they didn't work out the loans for years and years and years, and so the interest carry got bigger and bigger," Black says. "When they were paying high interest, people are actually suffering malnutrition. It's a big deal in that context." 
When Bresser-Pereira initially began discussions with big U.S. commercial banks and the IMF, his country had imposed a "moratorium" on its debt -- it was refusing to make interest payments until banks agreed to a long-term solution that would allow Brazil to get moving again. But banks were focused exclusively on short-term fixes. 
"They asked me to suspend the moratorium, and I said, 'Look, I will not suspend the moratorium if I do not have a good solution to the debt crisis. If we just suspend the moratorium and are not able to pay the debts, this makes no sense at all.' " 
Banks did not begin to seriously negotiate with developing nations on the full scope of their debt burden until they had actually started accounting for big losses on those loans.
In 1987, when the U.S. banks were first starting to see some red ink from their loans to foreign governments, Bresser-Pereira pitched a plan to the Treasury Department that would reduce Brazil's total debt burden. As banks wrote down the value of their loans, they became more willing to reduce that debt burden. 
"It would have been much better for them to have agreed earlier, for sure," Bresser-Pereiera says. "In 1987, they already knew that some of the money was lost, and they had already written it off in their balance sheets. So what they wanted was to continue to make business."
It is important to note that serious negotiations only began in 1987 -- Brazil would not actually reach formal agreements with its U.S. creditors until the early 1990s. 
"This also relates to the accounting practices that are involved in the current crisis," Darity says. "The foreign loans could be kept on the books as performing for far longer than domestic loans when the borrowers went into arrears. There are some similar kinds of accounting high jinks ... in the current crisis." 
The order here is crucial. Banks do not worry about borrowers' problems until their balance sheets make it financially acceptable to do so. By making it even easier for banks to hide losses on their balance sheets, regulators are approaching the issue precisely in reverse.
They should be forcing banks to take losses from bad lending, so that they have strong economic reasons to cut their losses and help borrowers stay in their homes. If banks do not have the funds to withstand the losses, the government should take them over and take care of their borrowers.
Instead, the government is protecting the banks, which are in trouble for engaging in predatory subprime lending, while the borrowers targeted by those lending schemes receive no relief.  
The Latin American debt crisis experience makes it pretty easy to predict the effects of today's accounting trickery: banks will do everything in their power to keep borrowers under their current loan contracts so they don't have to take massive losses on their balance sheets. This will involve short-sighted solutions that hurt homeowners and the broader economy.
We are already seeing some of this behavior from banks. According to Valparaiso University Law Professor Alan White, most borrowers who renegotiated the terms of their loan with their bank in the fall of 2008 actually ended up owing the bank more than they had previously. 
Unlike the Latin American debt crisis, however, banks will not be shipping the economic calamity overseas this time -- they'll be detonating it in neighborhoods around the United States. But, as with the crisis of the 1980s, the culpable loan pushers will be saved, while the troubled borrower will be screwed.
Zach Carter writes a weekly blog on the economy for the Media Consortium. His work has appeared in the American Prospect, the Atlanta Journal-Constitution and on CNBC.

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NEW YORK TIMES   April 9, 2009

U.S. Imagines the Bailout as an Investment Tool

By GRAHAM BOWLEY and MICHAEL J. de la MERCED
During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front.
Now, it seems, they will be asked to come to the aid of their banks — with the added inducement of possibly making some money for themselves.
As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds.
The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars. But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.
The potential risks — politically for the administration, and financially for would-be investors — are considerable.
The funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit.
But, as with any investment, there are risks. If, as some analysts suspect, the banks’ assets are worth even less than believed, the funds’ investors could suffer significant losses. Nonetheless, the administration and executives in the financial industry are pushing to establish the investment funds, in part to counter swelling hostility against the financial industry.
Many Americans are outraged that companies like the American International Group paid out many millions in bonuses despite crippling losses and multibillion-dollar rescues from Washington.
The embrace of smaller investors underscores the concern in Washington and on Wall Street that Americans’ anger could imperil further efforts to stimulate the economy with vast amounts of government spending. Many Americans say they believe the bailout programs — and the potentially rich profits they could yield — will benefit only a golden few, including some of the institutions that helped push the economy to the brink.
“This is an opportunity to forge an alliance between Main Street, Wall Street and K Street,” said Steven A. Baffico, an executive at BlackRock, referring to the Washington address of many lobbying firms. BlackRock, a giant money management firm, is playing a central role in the government’s efforts and is considering creating a bailout fund. “It’s giving the guy on Main Street an equal seat at the table next to the big guys,” he said.
The new funds are still under discussion, and they are unlikely to be established for several months, if indeed the plans go through at all.
But the comparison one industry official uses to illustrate the mistake that America must avoid is the large-scale privatization in Russia in the 1990s, which involved a transfer of entire industries to a few, well-connected oligarchs. That experience tarnished the idea of free-market capitalism in Russia and undermined its program to move toward a market economy.
“It is really, really important to allow Main Street in,” said the official, who was involved in discussions about the plan but who asked for anonymity because he was not authorized to speak about it publicly. “They are getting taxed for this problem. They should have an opportunity to participate in the recovery.”
Still, it is unlikely that everyday investors would play a major role in financing the bailouts through these funds. Hedge funds and other private investment firms are expected to invest far more money. The Treasury has not said how much money it intends to raise from individuals; first it wants to select about five fund managers to participate in the program to buy beaten-down securities. These firms must demonstrate an ability to raise about $2.5 billion among them. It may select several more fund managers later.
Perhaps more important than the money would be the political bonus of having thousands or even millions of taxpayers — whose portfolios have nose-dived during the crisis and whose tax dollars are financing bank bailouts and stimulus packages — profit from the toxic asset plan.
To head off the political risk of using public subsidies to move the assets from banks into the hands of private investors, the Treasury has already announced that, as part of its plan, it will retain part ownership of the toxic securities and loans, thus ensuring that taxpayers will share some of the gain if the assets’ prices rise.
But the plan to allow small investors to participate directly with their own money goes further.
Critics like Joseph E. Stiglitz, a Nobel Prize-winning economist, argue that the bailouts merely privatize profits and socialize losses.
But if the plan goes well, including everyday Americans as buyers of the assets may encourage them to support the government’s program and avoid another American International Group-style firestorm. If investors lose money, however, the effort could backfire.
“If this turns out to be great but you have kept it away from Mom and Pop and the rich are favored, that looks bad, but it’s also bad if you have people who are burned,” said Jay D. Grushkin, a partner at the law firm of Milbank, Tweed, Hadley & McCloy.
Some of the biggest investment managers in the United States, including BlackRock and Pimco, have been consulting with the government on ways to rebuild the country’s broken financial markets.
On the day the plan was announced by Treasury Secretary Timothy F. Geithner, both Bill Gross, the co-chief investment officer of Pimco, described it as a “win-win-win policy,” and
Laurence D. Fink, BlackRock’s chairman and chief executive, said his firm would take part.
The fund industry has been in discussion with the government but insists the Treasury has not been prescriptive about the type of funds it wants established. In its letters to potential investors, however, the Treasury requires fund managers to set out how they will include retail investors, saying applicants “must note whether, and if so how, it plans to structure the fund to facilitate the participation of retail investors in the fund.”
Individuals could participate in the funds by investing just a few hundred dollars, although the details are still being worked out.
If selected — likely to happen by mid-May — money managers like BlackRock could begin a fund within weeks.
As well as BlackRock and Pimco, Legg Mason, another big mutual fund company, and BNY Mellon Asset Management, a big asset manager, have said they are interested in starting retail investment funds to participate in the government’s plan.
For the investment managers, the benefits are potentially large. These big firms can charge healthy fees to investors for taking part. They will also have the marketing prestige of being the firms the government turns to at a time of crisis to help sort out the country’s financial mess.

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Roubini Says Bank Takeovers Deepened Financial Market Crisis 
Bloomberg News, April 9, 2009
By Lynn Thomasson and Thomas R. Keene
April 8 (Bloomberg) -- Bank takeovers worsened the financial crisis by making firms that were already too big even bigger, said Nouriel Roubini, the New York University professor who predicted the financial crisis.
“The institutions are insolvent,” Roubini said in a Bloomberg Radio interview. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail.”
JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. in March 2008, with help from the Federal Reserve, while Bank of America Corp. purchased Merrill Lynch & Co. Wells Fargo & Co. took control of Wachovia Corp. and PNC Financial Services Group Inc. got National City Corp.
Banks around the world have reported $1.29 trillion in credit losses tied to the housing market collapse since 2007. The deficits, which spurred the first simultaneous recessions in the U.S., Europe and Japan since World War II, pushed the American government to pledge $12.8 trillion to stabilize the banking system and revive economic growth. That figure amounts to $42,105 for every man, woman and child in the country.
The Standard & Poor’s 500 Index, which tumbled 38 percent in 2008, has rallied 22 percent after sinking to a 12-year low on March 9. Roubini said in a Bloomberg interview that day that the S&P 500 is likely to drop to 600 or lower this year as the global recession intensifies.

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‘New’ US shopper to emerge from crisis

FINANCIAL TIMES  By Jonathan Birchall in New York
Published: April 8 2009 19:58 | Last updated: April 8 2009 19:58
As the recession dramatic ally alters where and how Americans spend their money, there is an emerging consensus on the likely profile of the “new” US consumer who will emerge on the other side of the crisis.
A Citigroup report, for example, argues that US consumers are shifting towards “conscientious consumption”, embracing a “thriftiness” focused on value and quality, not quantity.

Euro RSCG, the global advertising group, says a recent survey of 500 people in the US, the UK and France pointed to a shift to “value” combined with a desire for “voluntary simplicity”. And consumer anthropologists suggest Americans will seek to “un-stuff” their lives, and focus more on the community.
Andrew Benett, of Euro RSCG Worldwide, says the changes are likely to be long-lasting. “I don’t think we are going to go back to the behaviours of the past, which were about excess and not thinking things through...we have moved on as consumers.”
The behavioural changes have included cutting back on “aspirational” luxury shopping. People are using cash and debit cards more than credit, while favouring lower-cost stores such as Wal-Mart and Costco. At supermarkets, well-known national brands have lost ground to retailers’ lower-cost own-brand products.
A survey carried out in October and November by TNS, the market research group, also found the frugal mood had affected US consumers who do have the money to spend – with families earning more than $100,000 using discount coupons more often and seeking out money-saving offers.
Joan Lewis, head of consumer and market research at Procter & Gamble, the world’s largest consumer products company, says there is a remarkable consistency in these shifts, in both developed and developing markets. “We think that many of these changes we have seen will remain for a long time,” she says.
In the US, tighter limits on consumer credit will underpin behavioural shifts. A recent survey of 5,000 US consumers by Alix & Partners predicted that post- recession spending would go back to just 86 per cent of pre-recession levels: about a 10 per cent drop in spending, or a $1,000bn (€760bn, £680bn) annual reduction.
Ed Kerschner, chief investment strategist at Citi Global Wealth Management, says the US has passed an “inflection” point, marking the end of an acceptance of conspicuous consumption that he traces back to the Reagan presidency of the early 1980s. The end of easy access to consumer credit will, he argues, lead to “thriftiness” focused on “value”, rather than “frugality” focused on low prices.
“It’s going to be about thrift...it’s not about being frugal or cheap,” he says.
Context-Based Research, which sent its cultural anthropologists out to US cities in December, said it heard consumers talking of “community”, “hard work”, and “taking responsibility”.
Robbie Blinkoff, Context’s principal anthropologist, says he expects to see the emergence of a new “reflective consumerism”.
He also says it is still hard to gauge the inevitable impact of the recession on young people. “When I pull out a credit card, my eight-year-old daughter says, “you are using debit, not credit, right, Dad?” It’s funny. But that will stick with her for the rest of her life.”

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Sheldon Filger

Writer, founder of GlobalEconomicCrisis.com
HUFFINGTON POST  Posted April 8, 2009 | 07:35 PM (EST)

IMF Nightmare Forecast: Economic Crisis Creates $4 Trillion In Toxic Assets

The International Monetary Fund is set to release an updated report on the scale of toxic assets that are sitting on the balance sheets of financial institutions and banks worldwide. To characterize the IMF revised numbers as jaw dropping would be a severe understatement; the International Monetary Fund will indicate that toxic assets now amount to a staggering $4 trillion. If there are any doubts remaining as to the severity of the global economic crisis, this most current estimate of the rot eating away at the global financial architecture should set them aside.
It was only back in January that the IMF had estimated that toxic assets tied to the United States stood at $2.2 trillion, while NYU professor of economics Nouriel Roubini provided a more sobering analysis that placed a figure of $3.6 trillion regarding toxic garbage sitting on global balance sheets, half that figure being directly tied to U.S. financial institutions. The revised IMF numbers, in my view, tell us two things: 1. The erosion in asset values across the world is accelerating and 2. No one knows for certain how catastrophic this financial cancer is; the only certainty is its virulence.
As expected, the United States is the major component in the IMF scenario of horrors, being the source of three-quarters of the $4 trillion nightmare forecast. However, nearly a trillion dollars of bad assets are, according to the IMF report, tied to Europe and Asia. That latter figure is actually a portent of much worse news, as all the macro-economic indicators from Europe and Asia are deteriorating. The Eurozone is in deep recession, Eastern Europe is defaulting on massive debts and the banking sector in the U.K. is for all intents and purposes insolvent. The world's second largest economy, Japan, is in free fall collapse, with catastrophic contraction of its critical export trade. China's export market is shrinking, in the process shattering Asian economies on her periphery. The OECD (Organization for Economic Cooperation and Development) is projecting that the economies of its thirty member countries will collectively contract by 4.3%, while global trade is reduced by a savage rate of 13%. These numbers suggest that the fundamentals that have facilitated the erosion in global asset values will be even more destructive in the months ahead.

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Financial Reports Show Five Biggest Banks Face Huge Loss Risk

Monday 09 March 2009
by: Greg Gordon and Kevin G. Hall  |  Visit article original @ McClatchy Newspapers
    Washington - America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.
    Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives - insurance-like bets tied to a loan or other underlying asset - surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
    The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.
    The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.
    While the potential loss totals include risks reported by Wachovia Bank, which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch, a major derivatives dealer.
    Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.
    With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.
    The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.
    The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen, a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments.
    J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns, and says it has limited its exposure. The New York-based bank, however, also has received $25 billion in federal bailout money.
    Gary Kopff, president of Everest Management and an expert witness in shareholder suits against banks, has scrutinized the big banks' financial reports. He noted that Citibank now lists 60 percent of its $301 billion in potential losses from its wheeling and dealing in derivatives in the highest-risk category, up from 40 percent in early 2007. Citibank is a unit of New York-based Citigroup. In Monday trading on the New York Stock Exchange, Citigroup shares closed at $1.05.
    Berkshire Hathaway Chairman Warren Buffett, a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates, ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.
    These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks ... When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."
    Most of the banks declined to comment, but Bank of America spokeswoman Eloise Hale said: "We do not believe our derivative exposure is a threat to the bank's solvency."
    While Bank of America advised shareholders that its risks from these instruments are no more $13.5 billion, Wachovia last year similarly said it could overcome major risks. In reporting a $707 million first-quarter loss, Wachovia acknowledged that it faced heavy subprime mortgage risks, but said it was "well positioned" with "strong capital and liquidity." Within months, losses mushroomed and Wachovia submitted to a takeover by Wells Fargo, which soon got $25 billion in federal bailout money.
    Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.
    "I don't trust any numbers on them," said David Wyss, the chief economist for the New York credit-rating agency Standard & Poor's.
    The risks of these below-the-radar insurance policies became abundantly clear last September with the collapse of investment banker Lehman Brothers and global insurer American International Group, both major swap dealers. Their insolvencies threatened to zero out the value of billions of dollars in contracts held by banks and others.
    Until then, "we assumed everyone makes good on the contracts," said Vincent Reinhart, a former top economist for the Federal Reserve Board.
    Lehman's and AIG's failures put in doubt their guarantees on hundred of billions of dollars in contracts and unleashed a global pullback from risk, leading to the current credit crunch.
    The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion, the worst quarterly performance in U.S. corporate history.
    The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.
    Banking industry officials stress that most of the exotic trades are less risky - such as interest-rate swaps, in which a bank might have tried to limit potential losses by trading the variable rate interest of one loan for the fixed-rate interest of another.
    In their annual reports to shareholders, the banks say that parties insuring credit-default swaps or other derivatives are required to post substantial cash collateral.
    However, even after subtracting collateralized risks, the banks' collective exposure is "a big, big number" and a matter for concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because agency policy restricts public comments.
    In their reports, the banks said that their net current risks and potential future losses from derivatives surpass $1.2 trillion. The potential near-term losses of $587 billion easily exceed the banks' combined $497 billion in so-called "risk-based capital," the assets they hold in reserve for disaster scenarios.
    Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank - $50 billion - and Bank of America - $45 billion, plus a $100 billion loan guarantee.
    The banks' quarterly financial reports show that as of Dec. 31:
·  J.P. Morgan had potential current derivatives losses of $241.2 billion, outstripping its $144 billion in reserves, and future exposure of $299 billion.
·  Citibank had potential current losses of $140.3 billion, exceeding its $108 billion in reserves, and future losses of $161.2 billion.
·  Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
·  HSBC Bank USA had current potential losses of $62 billion, more than triple its reserves, and potential total exposure of $95 billion.
·  San Francisco-based Wells Fargo, which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion, below the banks' combined reserves of $104 billion, but total future risks of about $109 billion.
    Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."
    The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated. However, government officials said in late February that federal examiners would review the top 19 banks' swap exposures in the coming weeks as part of "stress tests" to evaluate the institutions' ability to withstand further deterioration in the economy.
    Representatives for Citibank, J.P. Morgan and Wells Fargo declined to comment.
    Hale, the Bank of America spokeswoman, said that the bank uses swaps as insurance against its loan portfolio - they "gain value when the loans they are hedging lose value."
    She said that Bank of America requires thousands of parties that are guarantors on these insurance-like contracts to post "the most secure collateral - cash and U.S. Treasuries, minimizing risk roughly 35 percent." The collateral is adjusted daily.
    Bank of America's report of an $80.4 billion exposure doesn't count the collateral and "also assumes the default of each of the thousands of counterparty customers, which isn't likely," Hale said. Counterparties are the investors on the other side of the deal, often other banks or investment banks.
    In response to questions from McClatchy, HSBC spokesman Neil Brazil said that the bank closely manages its derivatives contracts "to ensure that credit risks are assessed accurately, approved properly (and) monitored regularly."

Published on Monday, March 9, 2009 by TomDispatch.com
Younger and Hungrier in America

The Struggle to Feed America's Nouveau Needy

by Nick Turse
The message is simple. Ever more Americans need food they can't afford. As tough economic times take their toll, increasing numbers of Americans are on tightened budgets and, in some cases, facing outright hunger. As a result, they may be learning a lot more about food banks and soup kitchens than most of them ever wanted to know.
In recent interviews with TomDispatch.com, representatives from food banks -- the non-profit organizations that distribute groceries to those in need via food pantries, shelters, and soup kitchens -- expressed alarm at the recent surge in need all across the country. At the same time, most stated that, however counterintuitive it might seem, financial contributions to their organizations are actually on the rise. So, too, are food prices, however -- and donations, unfortunately, are not keeping up with demand.
Food bank representatives agree on one thing: the need for their services is spiking in a way none of them can recall. Again and again, they emphasize that lines at food pantries are growing longer, seemingly by the month, and that those in line are younger and often more middle class than ever before.
Families who just months ago didn't even know what a food bank was and would never have considered visiting a food pantry now have far more intimate knowledge of both. Embarrassed to approach institutions that they previously identified with the poor and indigent, many, say food bank officials, are also waiting far too long to seek aid. Other formerly middle class Americans who have never dealt with, or even thought about, food insecurity before simply don't know whom to call or where to turn.
These points echo a December 2008 survey conducted by Feeding America [1], a national hunger-relief charity. Its network of more than 200 food banks in all 50 states distributes more than two billion pounds of donated groceries annually to 63,000 local charitable agencies. Its survey found that, of 160 food banks, 99.4% of them reported seeing more first-time users in 2008.
For America's food banks this has meant one thing: that they, too, are needier. They need ever more fresh food, non-perishable food, and non-food items like cleaning products and toiletries from wholesalers, retailers, food distributors, corporations, charities, government agencies, local farms, and individual donors. They need ever more storage and freezer space. They need ever more volunteers. They need ever more food that can be made available on appointed distribution days at food pantries. And they need ever more emergency food supplies, available on demand for people who suddenly realize that they are hungry and out of options, possibly for the first time in their lives.
The Face of Hunger Today
"Hunger does not discriminate, but the face of the hungry is growing younger," says Stanley Bray of the St. Louis Area Foodbank [2], which distributes food to more than 500 agencies, including food pantries, soup kitchens, shelters, and emergency food programs in 14 counties in eastern Missouri and 12 counties in southwestern Illinois. Bray's organization has seen a 15% increase in need just since October 2008. Thirty to forty percent of that 15%, he says, are first-time clients. "Typically, those who would have volunteered at the Foodbank are now recipients of food at local pantries," he notes.
Even as Americans who once might have donated food or money now find themselves in need, people still have the urge to help as best they can. At one West Coast food bank, a representative told me of a man who recently came in with a proposition. He needed six weeks of food assistance while he was putting together the money to travel across country and move back in with his parents. Until then, he suggested, he would work for the food bank to pay his way.
"I must say that we are amazed and touched by the attitude of our community. From large local financial services [wealth management] companies, to the local Rotaries, schools, small businesses, and countless individuals -- everybody seems to be sharing what they can," notes Iris Valanti of the Greater Pittsburgh Community Food Bank [3]. "Unlike the squabbling going on in Washington, people out here in real life are trying to pull together and do what they can."
But that communal spirit can only take food banks so far, given the troubling trends on the horizon. According to Valanti, large foundations are reviewing their "decimated portfolios" and trimming donations, leaving organizations like hers wondering what the future will bring. In fact, the Greater Pittsburgh Community Food Bank's subsidiaries are already struggling to obtain needed grants to secure new freezers to store food for the increasing number of nouveau needy. At the same time, she points out, food donations are actually down in her area, while the organization's food purchases have increased by an astonishing 560% in the last two years.
Valanti spelled out the enormity of the problem: "Fall quarter 2008 saw a 44% decrease in donated product we get through our national network partner Feeding America... The other trend was skyrocketing food prices. Our wholesale cost for a case of pasta, for instance, has risen 88% since 2006."
According to Cindy Stevens of the Community Food Bank of Eastern Oklahoma [4], demand for assistance began its current upswing after a major ice storm knocked out power in much of the area in December 2007. Food in refrigerators spoiled and many Oklahomans in the area were prevented from working, and thus from receiving paychecks. That led to the first "slight increase" in need, followed by a major jump when gas prices soared in the summer of 2008. Even though gas prices have fallen since, the economy has melted down with them.
"Our agencies report as much as a 40% increase in the number of people coming to them for assistance," she notes. Like other food assistance providers nationwide, her food bank has observed a clear shift in demographics. "Our agencies are reporting a change in clientele. Many of the people who are coming to them have never had to seek assistance before. Many of them have jobs or have just lost a job."
West Coast Woes
The San Diego Food Bank [5], which distributes groceries to 300 soup kitchens, senior centers, food pantries, churches, and other allied nonprofits in sprawling San Diego County, is facing similar marked increases in need. From December 2007 to December 2008, the number of people served by its USDA-funded Emergency Food Assistance Program, which aids low income people via 91 distribution sites, jumped from 37,302 to 65,663 -- a 76% increase. "It's unprecedented," says the Food Bank's Chris Carter. "We're seeing many more middle-class families coming in. I met a couple at one of our distributions, they have a mortgage and two car payments. They've both been laid off. The first thing to go is the food budget."
It can take several months for food stamps to kick in after they've been applied for, and, as Carter points out, "a lot of people don't have a couple of months. They need food immediately, so they're coming directly to us. We're seeing a dramatic increase in demand for food assistance across the board."
In some places, people need to wait for specific distribution days to get help from a food pantry. In San Diego, the needy don't have that worry; neither do people in Oakland, California, where the Alameda County Community Food Bank [6] operates an Emergency Food Helpline. With just a phone call, those in dire need can receive food at a local pantry on the very day they dial. In 13 years, the Bank's help line had received more than 1,500 calls a month only twice. In 2008, every month topped the 1,500 mark. For the last six months, the average has been more than 2,000 a month and is soon expected to break the 2,500-call barrier.
In the last three months of 2008, according to Brian Higgins, the Food Bank's Communications Manager, "We saw a 45% spike over the exact same period in 2007, which was, in itself, a record breaking year." Add those numbers to the 40,000 people fed each week by the organization which distributes about 15 million pounds of food per year, while keeping in mind that we're only talking about one small city, and you begin to get a sense of the enormity of the crisis bearing down on the country.
Oakland is a poor city and many there have long experienced privation. Not surprisingly, the current economic crisis has hit its population hard. In East Oakland, the city's neediest area, people line up each Friday at the Columbian Gardens food pantry in anticipation of a regular delivery of groceries from the county food bank. "Those lines have gotten longer and longer and longer," says Higgins. Phone calls for emergency food are increasing exponentially as well. Two years ago, the staff at Columbian Gardens used to distribute four to five emergency bags of staples, including canned goods and pasta, each day. Now, on a normal day, it's 25 to 30 bags.
Nor is the pain confined to perennially hard-hit East Oakland. The whole city is suffering. Next door to the Alameda County Community Food Bank, for example, a brand new $35 million Toyota dealership [7] -- the largest in all of Northern California -- was built from scratch on an empty lot. "It was open about eight weeks before it closed," comments Higgins -- and it's just one of numerous local businesses shutting down.
As a result, Oakland, historically saddled with the most impoverished senior population in all of California, is seeing new trends that the Food Bank's workers find chilling. Higgins notes that the population they serve now includes "more and more young people and working families. We're seeing people who made really decent money a couple years ago in real estate and other commission fields, who are down to nothing. They're having to make that call for first time."
Unfortunately, many put off calling for assistance for as long as possible. "People who work on our emergency food help-lines," he continues, "say there's a universal embarrassment about the calls they're getting now." Phone operators reassure clients that the food bank is there for that very reason, but shame and stigma have led to increased privation. "It really delays people calling."
At the Food Bank of Contra Costa and Solano [8], California, Lisa Sherrill has noted the same kind of spike in need. "Overall, we are serving 20% more people over two years ago," she wrote in a recent email. At some of its 29 Food Assistance Program sites, where boxes of fresh produce, bread, and other staples are handed out, demand is increasing by 5-10% a month.
Donated funds are on the rise, but they can't fully compensate for the surge in new assistance seekers. "There are many people in our Food Assistance lines that have never had to ask for food before," notes Sherrill. "Last week at a site in Antioch, we spoke with a man who has a master's [degree] in engineering, lost his job, and is having a hard time finding work because there aren't many opportunities, and what he can find he is being told he is overqualified for."
Alaska has fared better than many states. Lacking massive waves of home foreclosures and a startlingly high unemployment rate, it has been buffered from the worst of the hardships seen elsewhere. Still, the arrival of tough economic times was plainly visible last fall at "Thanksgiving Blessing," an annual holiday grocery distribution program spearheaded by the Food Bank of Alaska [9] and held at eight locations in Anchorage.
In 2008, according to Marleah LaBelle, communications manager for the food bank, 5,900 families turned out for Thanksgiving Blessing, a 42.7% increase over the previous year. "If you factor the 5,900 families, with an average family size of four, and the total population of Anchorage 260,283 -- that is roughly 10% of the population or one in ten families," LaBelle notes. A similar December program, "Neighborhood GIFT" (which also includes toy distribution) saw a 30% spike in turnout compared to 2007. "I saw people that I knew personally at both of the holiday food distributions, and they are people I had not previously considered to be 'low income,'" she adds.
Unfortunately, the holiday season spike proved no aberration in Anchorage. The food bank's affiliates have been reporting, across the board, 30-50% increases in people visiting their soup kitchens and food pantries. For instance, the number of clients at the Valley Open Bible Fellowship food pantry in Big Lake, Alaska, has doubled recently.
As elsewhere, monetary donations have also increased for the Food Bank of Alaska, but ever less retail food is now being donated -- a worrisome trend nationally in light of increased need. "Something that has been striking to nearly everyone at Food Bank of Alaska is how quickly the food comes off the shelves in the warehouse. As soon as donated food gets sorted, it almost instantly gets picked up," LeBelle wrote in a recent email.
What's Ahead for the Nouveau Needy?
Tens of millions of Americans were already suffering from hunger and food insecurity before the current depression. In fact, in 2006, the U.S. Department of Agriculture estimated that 35.5 million Americans were "food insecure." Now, however, those numbers are bound to swell, thanks to the growing ranks of America's nouveau needy. "It's the new face of hunger for us. Before we primarily served the low-income population, the working poor, as people call them," says the San Diego Food Bank's Chris Carter. "Now middle class families who were in retail jobs, construction, the real estate industry... are finding themselves in our lines. Some of these people are those who would have donated food to us before, who would never dream they'd be in one of our food lines, and now they need help."
From his conversations with clients at the food bank's distribution sites, Carter sees bleak times ahead, especially for the staggering number of people who have, as a last resort, been maxing out their credit cards. "We've seen the credit crunch on Wall Street and the ripple effect that it's had on more vulnerable industries across the country. I think there's going to be a credit tightening at the consumer level. When that happens we're going to see a huge surge in demand," he said recently. "This is going to get worse before it gets better."
Such prospects will spell trouble in the years ahead. The Federal government is now pouring hundreds of billions of dollars into bailing out broken banks. If hunger and need continue to skyrocket, food banks may be the next banks to break. Who will bail them out?

Published on Monday, March 9, 2009 by The New York Times
Behind the Curve
by Paul Krugman
President Obama's plan to stimulate the economy was "massive," "giant," "enormous." So the American people were told, especially by TV news, during the run-up to the stimulus vote. Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious.
Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries - and suggest that the Obama administration's economic policies are already falling behind the curve.
To see how bad the numbers are, consider this: The administration's budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February - and it's rising fast.
Employment has already fallen more in this recession than in the 1981-82 slump, considered the worst since the Great Depression. As a result, Mr. Obama's promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least. It's a credible promise - his economists used solidly mainstream estimates of the impacts of tax and spending policies. But 3.5 million jobs almost two years from now isn't enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.
There are now three big questions about economic policy. First, does the administration realize that it isn't doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?
On the first two questions, I found Mr. Obama's latest interview with The Times anything but reassuring.
"Our belief and expectation is that we will get all the pillars in place for recovery this year," the president declared - a belief and expectation that isn't backed by any data or model I'm aware of. To be sure, leaders are supposed to sound calm and in control. But in the face of the dismal data, this remark sounded out of touch.
And there was no hint in the interview of readiness to do more.
A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan, so it was good to hear that Mr. Obama spends at least an hour each day with his economic advisors, "talking through how we are approaching the financial markets." But he went on to dismiss calls for decisive action as coming from "blogs" (actually, they're coming from many other places, including at least one president of a Federal Reserve bank), and suggested that critics want to "nationalize all the banks" (something nobody is proposing).
As I read it, this dismissal - together with the continuing failure to announce any broad plans for bank restructuring - means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery ... well, you get the picture.
Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along?
Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes - which they always want to do regardless of circumstances. If Mr. Obama comes back for a second round of stimulus, they'll respond not by being helpful, but by claiming that his policies have failed.
The broader public, by contrast, favors strong action. According to a recent Newsweek poll, a majority of voters supports the stimulus, and, more surprisingly, a plurality believes that additional spending will be necessary. But will that support still be there, say, six months from now?
Also, an overwhelming majority believes that the government is spending too much to help large financial institutions. This suggests that the administration's money-for-nothing financial policy will eventually deplete its political capital.
So here's the picture that scares me: It's September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it's still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.
But he can't get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.
O.K., that's a warning, not a prediction. But economic policy is falling behind the curve, and there's a real, growing danger that it will never catch up.

Geithner's Doomed Strategy

Fixing the Banks

By PETER MORICI
Timothy Geithner’s policy to fix the banks is destroying private equity and simply inadequate.
Outstanding mortgages total $11 trillion plus. Half were financed through Fannie Mae and other government banks. The balance were written by commercial banks, held as straight mortgages or bundled into collateralized-debt-obligations (CDOs) held by banks and fixed-income investors.
As housing prices fall, mortgage losses mount and will likely reach another $1 trillion. Banks take charges against capital to cover losses and could deplete capital and become insolvent. Through TARP, Treasury is boosting bank capital by buying dividend paying preferred shares, and is financing these purchases by selling $750 billion in bonds.
As housing prices fall, loan defaults and losses rise, and the CDOs held by banks fall in value. Housing prices are down by 27 percent since August 2006, and could easily fall another 15 or 25 percent.
About $400 billion in TARP funds are committed, and with housing prices dropping faster than Galileo’s rock, the remaining $350 billion will not be enough.
The Treasury is performing stress tests on the 19 largest banks to determine whether their common share equity could cover prospective losses. Citigroup and others will come up short if Treasury is honest about how much housing prices could fall.
Bankers usually include preferred shares and other assets when measuring capital adequacy to cover prospective losses, and by those measures, Citigroup and others remain well capitalized for now.
Treasury has offered banks the option of converting its preferred shares to common stock, eliminating the dividend on those shares but diluting private shareholder equity.
At Citigroup, Treasury is offering to convert $25 billion of preferred shares to common stock, if Citigroup suspends dividends to most private preferred shareholders and significant numbers convert to common shares.
Choosing between preferred shares paying nothing and high risk common shares worth just a bit, most will likely take the plunge.
These tactics essentially confiscate private equity—a government taking.
Washington’s stress tests and sacking of Citigroup motivate general fear among investors and are driving down most bank common stock prices. Coupled with the need for more government funds as housing prices fall, these make the government the inevitable controlling shareholder of the largest banks.
Comrade Stalin was not as stealth.
No solution to preserve private banking can be found without halting the freefall in housing prices. That will require an aggregator or bad bank to purchase about $2 trillion in mortgage-backed securities from banks.
Leaving alone mortgages that will be repaid, reworking those that could be repaid with some adjustments in principal and interest, and foreclosing on the rest, the aggregator banks could fix the number of foreclosures and limit the fall in housing prices. As many mortgages would be saved, and the aggregator bank, like the Savings and Loan Crisis Resolution Trust, would likely earn a profit. Hence, it could be financed with TARP funds and private investments.
The banks, though not free of other problems, would be strong enough to raise new capital, buy back the government’s preferred shares, and contribute to economic recovery.
Secretary Geithner has other plans whose motivations only the Gods above Mount Olympus can divine.
Peter Morici is a professor at the University of Maryland Smith School of Business

China adds deflation threat to economic woes

By JOE McDONALD, AP Business Writer Joe Mcdonald, Ap Business Writer Tue Mar 10, 7:59 am ET

BEIJING – China's consumer prices fell in February, adding the threat of deflation to the nation's economic woes, and officials warned the next few months look grim as the global downturn worsens.

The 1.6 percent year-on-year fall in the consumer price index, announced by the government Tuesday, highlighted weakness in the world's third-largest economy as exports and consumer demand cool. Such a decline, if it continues, can drag down growth if consumers put off purchases in expectation of lower prices, forcing companies to cut wages and investment.

"We expect negative CPI could persist for much of this year," Citigroup economist Ken Peng said in a report. But others said inflation might quickly turn positive again as the government pumps money into the stumbling economy as part of its massive stimulus plan.

A 1.9 percent decline in food prices, a major component of the index, and declines in international commodity prices helped to drag the index down. So did excess inventories for many industries.

The government downplayed the likelihood of a deflationary spiral. It said the fall in the CPI — the first in more than six years — was due in part to inflation being very high in February last year, when the index's rise reached a 12-year high of 8.7 percent.

Premier Wen Jiabao, the country's top economic official, said last week the government expects prices to rise 4 percent this year.

A fall in consumer prices will be a relief to struggling Chinese households. But deflation could undermine the 4 trillion yuan ($586
billion) stimulus, which aims to reduce reliance on exports by encouraging China's own consumers to spend more.

The industry minister warned Tuesday that many industries suffer from overcapacity, which could lead to pressure to cut prices further.

"Many industries have more supply than demand, so now that we are working to expand the capacity of these industries, they may face new problems because of shrinking demand," Li Yizhong said at a news conference.

Although city dwellers rarely see evidence of falling prices on grocery shelves, some businesses say they are cutting prices.

"We adjusted our prices downward by about 10 percent between December and February," said Zhai Zhi, a salesman at Synear Food Co., a maker of frozen dumplings and snacks based in central China's Henan province.

Synear was cutting prices to match competitors and reflect lower costs, he said.

Officials also warned Tuesday it was too soon to say economic conditions were improving. They were unusually somber at a time when Chinese leaders have been highlighting positive economic signs and trying to boost public confidence.

"We should not be overly optimistic. China's industry is still in its most difficult situation," Li said. "The international financial crisis has not bottomed out and it is having a more and more profound impact on China's economy."

Power consumption, a key economic indicator, fell by 3.7 percent in January and February from the year-earlier period, according to Li. He said output of nonferrous metals also fell, indicating slack industry demand.

Trade fell again in February, Commerce Minister Chen Deming said at the news conference with Li, though he gave no details. In January, exports dropped by 17.5 percent while imports fell 43 percent.

"It's fair to say in coming months we will see quite a grim picture,"
Chen said.

The first CPI decline since December 2002 suggests Beijing can cut interest rates further as it tries to spur growth.

Royal Bank of Scotland economist Ben Simpfendorfer said China faces a "more durable deflation problem" unless it revives private investment and consumption and reduces reliance on government spending.

Adding to the gloomy economic news, the government reported housing prices fell in February for a third month, reflecting a sales slowdown that analysts say could hurt the economy as demand for building materials and labor shrinks.

Prices nationwide fell by 1.2 percent from the same month of 2008, with some areas suffering double-digit declines, according to the Cabinet's National Development and Reform Commission. Prices of newly built homes plunged by 17.4 percent in the southern financial center of Shenzhen, which borders Hong Kong.

Published on Monday, March 9, 2009 by YES! Magazine

The Good Food Revolution

The lush landscape of Hawai‘i once offered abundant food. What can these islands teach us about food and sufficiency?

by Claire Hope Cummings

The island of Kaua‘i is one of the most beautiful and fragile places on earth. From above, it looks like a vibrant green flower, lush and pulsing with life, floating in the middle of the Pacific Ocean. The Hawaiian tourist industry calls it "The Garden Isle," comparing it to the Garden of Eden. The image of Hawai‘i has always been sold as a "paradise." But there is another side to life on this island, one that visitors rarely see.

The west side of this tiny island is home to the U.S. military's Pacific Missile Range and testing grounds, part of the longstanding military occupation of the Hawaiian islands, and to the headquarters of giant agrochemical corporations Syngenta and Dupont. These corporations test and produce genetically modified crops on former sugar plantation lands here and throughout Hawai‘i, along with toxic herbicides, insecticides, and fertilizers. It is the very worst of America's "agrochemical military industrial complex," imposed on the ancient homelands of a rich traditional farming and fishing culture, in the midst of some of the world's most precious biodiversity.

When I visited the west side of Kaua‘i in 2006, the local newspapers were full of reports of children from Waimea Canyon School who had been sickened by chemicals used on nearby test plots. As many as 60 people were affected, including teachers and staff. It happened again in 2007, with school children suffering nausea, headaches, and dizziness. In 2008, for the third time in three years, chemicals being tested for industrial agriculture sickened children and adults and sent them to clinics and the emergency room with tears in their eyes, holding their heads in their hands, or vomiting. The corporations responsible for the tests deny any role in the incidences. But the open air testing of chemicals and genetically modified crops is a now a persistent worry for people living in this small rural community. Local activists have suggested that the welcome sign at the Kaua‘i airport be changed to warn tourists of what is going on there: "Welcome to the Mutant Garden Island." Instead of being a source of health and well-being for the land and people, the American system of industrial agriculture <http://yesmagazine.org/article.asp?ID=3327>  [1] has become a source of problematic food and even fear.

The connection to the military is the key to understanding how this tragedy came about. Most of the toxic chemicals used in agriculture came from the implements of war, such as nerve poisons and defoliants developed during World War II. And our military has been repeatedly used to impose our system of industrial agriculture on other lands, depriving traditional farmers of their livelihoods and redirecting their natural resources to the use of U.S. business interests. American plantation owners used the military to force the monarchy of Hawai‘i out of power.
The takeover of Hawai‘i-the imposition of plantation agriculture on Hawai‘i's traditional system and the conversion of the Hawaiian people to a Western lifestyle-is a case history and a warning for all of us concerned about the future of food. We are facing an urgent problem:
Given global warming, growing populations, and declining natural resources, how will we feed ourselves?

Before colonization, Hawaiians had a sophisticated system of land, water, and ocean resource use that fed populations equal to or even greater than those on several of the islands today (excluding the urban populations of O‘ahu). Now, residents of Hawai‘i import 85 percent of their food. The descendants of the first Hawaiians, like most native peoples who have been colonized, suffer from some of the worst poverty and diet-related health problems of anyone living in the United States.

The food being imported into Hawai‘i is produced, processed, packaged, and transported using enormous amounts of fossil fuels. By one measure, the current U.S. food system uses 10 times more energy than it produces in the form of food calories. Even if you like industrial agriculture, its built-in obsolescence is a problem. When oil production peaks, and prices rise again, as they inevitably must, food in Hawai‘i will become unaffordable. What will happen when the gas pumps and grocery store shelves are empty? This is a question all of us will face <http://www.yesmagazine.org/article.asp?ID=1462>  [2], sooner or later, since we are all on what David Brower called "Earth Island," a small planet floating in a sea of space.

A Storied Land Mythologists like Joseph Campbell tell us that many creation myths are stories about how a food plant or animal came to people, usually as a gift from their creator.
<http://www.yesmagazine.org/article.asp?ID=726>  [3] But invariably, these gifts came with instructions about maintaining respect for and reciprocity with the sources of one's food, to assure its continuing productivity. These stories are central to the formation of a culture's core values. And they affect us now, not just in how we feed ourselves, but in how we relate to the natural world and each other.

A Hopi creation story, as told by Frank Waters in The Book of the Hopi, is a good example, illustrating the values inherent in the choices we make. As Waters explains, the continuity of the Hopi people comes from these values and the way corn forms the sacred center of their lives, kept alive in ritual and practices to this day.

Since the beginning of their existence, the Hopi have emerged through several worlds. Whenever they were overwhelmed by wickedness or corruption, their world would be destroyed. Later, they would emerge into the next world. At each emergence, the Creator would give them corn for sustenance. When the people entered the Fourth World, the one we are living in now, the Creator decided to find out how much greed and ignorance there still was among these humans. Many ears of corn were laid out of all different shapes, sizes, and colors. The people had divided into many races, and each was told to choose, according to its wisdom, the corn they would take with them into the Fourth World. They rushed forward and took different corn ears-long ears, fat ears, and ears of different colors. The Hopi held back and waited. All that was left for them was the smallest ear. But, they said, it was like "the original humble ear given them on the First World." They recognized that this corn would be the best one to help them survive the harsh desert climate where they now lived.

Traditional people worldwide have developed long-standing symbiotic relationships <http://www.yesmagazine.org/article.asp?ID=2696> [4]among themselves, their homelands, and their foods. And their farming practices are intimately adapted to the places they inhabit. All over the Americas, people developed corn varieties that were finely tuned to local conditions. According to Boone Hallberg, a botanist and one of the world's experts on corn, some of these varieties were drought-resistant; some withstood wind, crowding, local pests, and different soils; and some even fixed their own nitrogen. These plants are evidence of an incredible genius at work in the reciprocal relationships among people, plants, and place. New Mexican activist Miguel Santistevan describes how, in the Pueblos, each type of corn "drank" from its own river, producing seed that was specific to its own watershed.

One of the world's most influential creation stories comes from the Book of Genesis in the Bible. It is often told incorrectly, without the warnings and prohibitions that are in the story-as if the children of Adam and Eve were entitled to control creation. Whether you read this story literally or metaphorically, it has had a powerful impact on Western thought. Many scholars believe that our current environmental conditions came about because our society interpreted this story as a license to dominate nature. When told this way, the development of our military-industrial system of agriculture makes sense. We can see the long arc of history, the search-and-destroy missions throughout the ages, including manifest destiny and the conquest of native peoples, their lands, and their well-developed integrated food systems.

And the good, no, the really wonderful news, is that all over the world, people are engaged in relearning traditional ways, weaving them into new life-enhancing technologies, and making essential ecological and economic reconnections.

 We can see the gradual and painful dismembering of North America.
Europeans brought with them a fragmented system of agriculture, breaking the sod, fencing, and buying and selling parcels of land. Piece by piece, they went about destroying the natural systems that gave this land its enormous fertility. Their ancestors had deforested many European countries, and they continued seeking sustenance by taking more than was returned, depleting the resources they used, and then moving on. After using up the larger landscapes, they now have turned to smaller frontiers-genes and molecules.

Genetic engineering in agriculture was developed as a way to squeeze more from corn, wheat, and rice, turning these plants into little machines. We demanded that these plants put out more and more for us, and pumped them full of chemicals and hormones. Now, almost 80 percent of corn grown in the United States is genetically modified. The rest is contaminated with GMOs <http://www.yesmagazine.org/article.asp?ID=356>
[5], and the parent seed lines of corn are privately owned by the agrochemical companies. If we cared to learn, corn would have been able to teach us about generosity, adaptability, and resiliency. But rather than learn from nature, we still believe that our limited human imagination is sufficient and that we can solve systemic problems in mechanistic ways.

This approach is fundamentally flawed. Production-based solutions to hunger have failed miserably. And yet the urge to control nature seems unbounded. Farmers at the beginning of the 20th century could make a decent living. They saved and exchanged seeds <http://yesmagazine.org/article.asp?ID=3276>  [6], and bred their own crop varieties.

Then, in the 1920s and 1930s, a growing private seed industry used the new medium of radio advertising to heavily promote commercial hybrid seeds as the way to increase production. Hybrids can be bred to increase vigor, but they do not produce seed that is "true," meaning that each year new hybrid seeds have to be purchased and planted. On-farm seed saving and plant breeding began to go out of fashion. Not content with just a good share of the seed market, seed companies began pushing for changes to the law, and by the end of the 20th century, farm-based seed saving and plant breeding ended. Now, sexually reproducing, living plants can be patented-a moral, biological, and legal outrage.

American commodity agriculture has become a bloated industrial machine dependent on chemical inputs and government subsidies to survive.
Commodity farming is not about food for people. It's an extractive industry, often compared to mining. It mines the soil and pollutes the water and creates mountains and rivers of waste. Soil regenerates on a slow natural timescale, about one inch of topsoil in every 500 years.
The United States is losing topsoil 13 times faster than it can be replaced, costing the nation an estimated $37.6 billion in productivity losses each year. According to a recent U.S. Geological Survey, the one billion pounds of pesticides that American farmers use every year have contaminated almost all of the nation's streams and rivers, as well as the fish living in them, with toxic cancer-causing chemicals.
Fertilizers pour off farms into the Mississippi watershed, stimulating algae blooms in the Gulf of Mexico and creating a "dead zone" where nothing lives.

If science had remained publicly funded and in the hands of land grant universities committed to conducting research in the public interest, production-based innovations might have added another useful tool to farm technology. Instead, private commercial interests hijacked the research agenda and privatized its technologies. Corporations and a few foundations took over the social mechanisms for problem solving, leaving us with only for-profit solutions in the form of products. Government not only deregulated many toxic technologies; it abdicated its responsibility to protect our health and safety.

There are no brakes on this runaway technology train. The continual expansion of corporate power poses even greater looming dangers.
Biotechnology, especially as used in agriculture, has been harmful enough, but nanotechnology and synthetic biology, now being developed for biofuels, promise to do far more harm than good.

Industrial agriculture contributes almost 17 percent of all greenhouse gases, along with accelerating deforestation, desertification, and profligate water use. A study released in January this year in the journal Science predicts that half of the world's population will face food shortages <http://www.yesmagazine.org/article.asp?ID=2863>  [7] by the end of this century as rising temperatures, drought, and loss of soil moisture depress crop production. Who, indeed, will be feeding us then? Monsanto, with its patented "climate-ready" crops, or the organic farmer who sells at your local farmers market?

As a Native American friend of mine used to say, "Here's a little bit of native wisdom: If we don't change direction pretty soon, we'll end up right where we've been headed!"

Severing and Remembering

Another way to look at this rather dismal story is this: At every step of the way, we have disconnected and dismembered the intricate relationships that form the web of life <http://www.yesmagazine.org/article.asp?ID=1473>  [8]. Recombinant DNA technology, for instance, cuts a genome, inserts foreign material, and severs the original evolutionary lineage of that organism.

The solution to all this severing and disconnection is re-membering, meaning "to put back together." This is the fundamental lesson traditional peoples keep trying to teach us. They often say that they are minding the rituals that hold the world together. They say that if we want to save the places, peoples, and plants we love, we have to remember their stories. They know that the answers we seek are already available, once we begin reweaving the social and biological webs that sustain us.

Independent science supports this interconnected approach to solving problems. The biotechnology industry asked several major international institutions like the U.N. and the World Bank to study how best to feed the world. After a four-year global study, 400 experts prepared a peer-reviewed report, adopted by 60 countries, known as The International Assessment of Agricultural Knowledge, Science and Technology for Development. Ironically, the report said biotechnology cannot feed the world. There is now a consensus in government and the scientific community that small-scale farming, traditional knowledge, and a focus on local economic vitality and adaptable agro-ecological methods are the optimal way forward.

And the good, no, the really wonderful news, is that all over the world, people are engaged in relearning traditional ways, weaving them into new life-enhancing technologies, and making essential ecological and economic reconnections. Young farmers <http://www.yesmagazine.org/article.asp?ID=3293>  [9], urban activists, cooks and chefs, teachers and students, community organizers <http://www.yesmagazine.org/article.asp?ID=3332>  [10], and faith groups are bringing local organic food, seed saving, and sustainable work projects into the mix. The values of the natural world-diversity, integrity, adaptability, and resiliency-are reemerging and re-entering the cultural exchange, just when we need them the most.

On Kaua‘i, too, there are people engaged in remembering and reconnecting. Unlike the dry west side of the island, the North Shore is a lush place of almost heartbreaking beauty with a vibrant, racially mixed local culture. There, the Waipa Foundation hosts a weekly farmers market selling organic local food to support its work reviving traditional foodways. Like many Native Hawaiian organizations, they have a Hawaiian-language immersion school that integrates traditional food, farming, and fishing into their curriculum. They connect local farmers with schools, which are getting young people out of the classroom and into the mud of the taro patch. Activists on the island and throughout Hawai‘i are working toward food security. They achieved a ban on genetically modified coffee and are bringing back the original "gift economy" of exchanging traditional varieties of taro.

Just up the road from the Waipa farmers market, Limahuli Garden is restoring the traditional Hawaiian land-use system called an ahupua‘a.
Kawika Winter, an engaging young ethnobotanist, Native Hawaiian, and the garden's director, says the name lima huli means "turned hand." It refers to a Hawaiian proverb which, roughly translated, says, "If your hand is turned up, you will be hungry; if your hand is turned down, toward the soil, your belly will be full." The up-turned hand, Winter says, is not a positive symbol for Hawaiians. It is a sign of supplication. The down-turned hand, however, represents the hard work of cultivating the land.

Winter explains that the work they are doing there is all about remembering that the land is our ancestor. "We know that the way to get through difficult times is to use what was left to us-our land and our traditional knowledge. That will carry us into the future," he says.
"This is also our gift to the world."

Claire Hope Cummings wrote this article as part of Food for Everyone <http://www.yesmagazine.org/article.asp?id=3271>  [11], the Spring 2009 issue of YES! Magazine. Claire is an environmental lawyer, journalist, and the author of Uncertain Peril: Genetic Engineering and the Future of Seeds (Beacon Press, 2008).

Kiss the Banks Goodbye
It's Time to Put a Stop to This Farce!

By David Lindorff

Global Research, March 9, 2009

CounterPunch - 2009-03-06

The futility and stupidity of the Fed’s and the Obama administration’s policy of pumping ever more money into failing banks and insurance companies in a vain effort to get them lending again was demonstrated—if anyone was paying attention—by the collapse in auto sales this past month, with all the leading companies, Ford, GM and Toyota, reporting sales down by about 40%.
This fall off in car buying was despite record discounting by the auto industry, and offers of 0% financing.
Clearly, obtaining financing is not the reason people are not buying cars.
People are not buying cars because they are worried about having a job to enable them to pay back the loan.
It’s the same reason people aren’t buying houses. It’s not that you cannot get a mortgage. There are plenty of smaller banks that would be happy to lend money to buy a house these days. But who’s going to go out and buy a house in this economy? First of all, to buy a house, unless you are a first-time buyer, you have to sell your current house, but that would mean taking a huge loss. Indeed, one in five homes in America today is technically “underwater”—that is, it is worth less than the outstanding mortgage on the property. Probably another one in five are worth little more than the outstanding mortgage. No one would sell a house under either such circumstance.
The point here is that if people aren’t willing to spend money, then what good is it to give more money to banks and their shareholders, in hopes that they will start lending it? The lending business has two sides—those offering to make a loan, and those wanting to borrow. If there’s no borrower, no amount of money available for lending is going to change the fact that there will be no loans written.
Commercial lending is not that different in this regard. Companies generally borrow money to expand. You don’t need to borrow money when your business is shrinking, unless it is to try and stave off collapse. What a company does when its markets contract and its sales and earnings fall is it cuts back on production and lays off workers. It doesn’t need to borrow money to do this. Of course, if sales collapse too fast, the company could be caught owing back wages to workers. That’s true. And in that case, a company might want to borrow in order to meet its obligations, but that’s hardly the kind of loan a bank would want to make—to a dying enterprise unable to meet payroll.
Business borrows when it is expanding, because that’s a great investment. If you know that you can earn a 15% return on your investment in a period of economic growth, and you can borrow money for expanded production at 4%, that’s a great deal. It’s also a great deal for the bank, since lending to a company that is expanding is a pretty low-risk proposition. The central government wouldn’t have to press banks to lend to such companies. The banks would do it on their own.
So, with the economy still in free fall, with companies laying off American workers at a rate of over 20,000 per day, with real unemployment soaring past 18 percent—one in six American workers are now either out of work and looking for a job, out of work and giving up looking, or involuntarily working part-time—and with family wealth more than 50% eroded away, there is simply no way that Americans are going to turn around and start borrowing and spending again. And given that the American economy is 72% composed of consumer spending, there is no way that the economy is bouncing back anytime soon.
That means that the hundreds of billions of dollars that are being poured into the likes of Citibank and AIG are being completely wasted. It is simply a pointless and scandalous transfer or wealth from the American public to the shareholders of these companies—the very companies and people who caused this catastrophe in the first place.
If you wanted evidence of this futility, just check out the current market capitalization (the current value of all shares of a company) of Citigroup and AIG. Citigroup, despite having received $75 billion in taxpayer bailout money, is now worth $5.4 billion--which is less than Autozone, a chain of car parts stores, and less than H&R Block, the franchise chain of tax preparers. As for AIG, which has received an astonishing $180 billion in taxpayer bailout funds, its total market value today is less than $1 billion! All that bailout money has been lost into thin air, and the government today could buy both companies outright for about what it's blowing every month in Iraq.
It’s time to put a stop to this farce.
Restoring the American economy is not going to be a matter of simply jump-starting consumer spending, or even business investment. It’s going to take a long, hard, focused effort to move away from a parasitic consumer economy in which profits are largely made through speculation, and towards a real economy that actually makes things that people both here and around the world need.
The sooner this truth is recognized, the more resources the government will still have left to put into the kind of investments that can help make that happen—things like job creation, income supports, home refinancings and medical system reform that could help Americans get back on their feet. Of course, it would also be necessary to end the wars overseas and to dramatically slash military spending.
When former companies like Citicorp and AIG are history, and when former Lehman Brothers, Citibank and AIG managers, as well as most of the Pentagon Brass, are out working at civilian conservation corps camps helping to restore watersheds or replant forests, we will know that the government has finally “gotten” it.
Dave Lindorff  is a Philadelphia-based journalist and columnist. His latest book is “The Case for Impeachment” (St. Martin’s Press, 2006 and now available in paperback). He can be reached at dlindorff@mindspring.com

$5 Billion in Lobbying for 12 Corrupt Deals Caused the Multi-Trillion Dollar Financial Meltdown

By Robert Weissman, Multinational Monitor
Posted on March 9, 2009, Printed on March 9, 2009
http://www.alternet.org/story/130683/

What can $5 billion buy in Washington?

Quite a lot.

Over the 1998-2008 period, the financial sector spent more than $5 billion on U.S. federal campaign contributions and lobbying expenditures.

This extraordinary investment paid off fabulously. Congress and executive agencies rolled back long-standing regulatory restraints, refused to impose new regulations on rapidly evolving and mushrooming areas of finance, and shunned calls to enforce rules still in place.

"Sold Out: How Wall Street and Washington Betrayed America," a report released by Essential Information and the Consumer Education Foundation (and which I co-authored), details a dozen crucial deregulatory moves over the last decade -- each a direct response to heavy lobbying from Wall Street and the broader financial sector, as the report details. (The report is available at: www.wallstreetwatch.org/soldoutreport.htm.) Combined, these deregulatory moves helped pave the way for the current financial meltdown.

Here are 12 deregulatory steps to financial meltdown:

1. The repeal of Glass-Steagall

The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 and related rules, which prohibited banks from offering investment, commercial banking, and insurance services. In 1998, Citibank and Travelers Group merged on the expectation that Glass-Steagall would be repealed. Then they set out, successfully, to make it so. The subsequent result was the infusion of the investment bank speculative culture into the world of commercial banking. The 1999 repeal of Glass-Steagall helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that led many of the banks to ruin and rocked the financial markets in 2008.

2. Off-the-books accounting for banks

Holding assets off the balance sheet generally allows companies to avoid disclosing “toxic” or money-losing assets to investors in order to make the company appear more valuable than it is. Accounting rules -- lobbied for by big banks -- permitted the accounting fictions that continue to obscure banks' actual condition.

3. CFTC blocked from regulating derivatives

Financial derivatives are unregulated. By all accounts this has been a disaster, as Warren Buffett's warning that they represent "weapons of mass financial destruction" has proven prescient -- they have amplified the financial crisis far beyond the unavoidable troubles connected to the popping of the housing bubble. During the Clinton administration, the Commodity Futures Trading Commission (CFTC) sought to exert regulatory control over financial derivatives, but the agency was quashed by opposition from Robert Rubin and Fed Chair Alan Greenspan.

4. Formal financial derivative deregulation: the Commodities Futures Modernization Act

The deregulation -- or non-regulation -- of financial derivatives was sealed in 2000, with the Commodities Futures Modernization Act. Its passage orchestrated by the industry-friendly Senator Phil Gramm, the Act prohibits the CFTC from regulating financial derivatives.

5. SEC removes capital limits on investment banks and the voluntary regulation regime

In 1975, the Securities and Exchange Commission (SEC) promulgated a rule requiring investment banks to maintain a debt to-net capital ratio of less than 15 to 1. In simpler terms, this limited the amount of borrowed money the investment banks could use. In 2004, however, the SEC succumbed to a push from the big investment banks -- led by Goldman Sachs, and its then-chair, Henry Paulson -- and authorized investment banks to develop net capital requirements based on their own risk assessment models. With this new freedom, investment banks pushed ratios to as high as 40 to 1. This super-leverage not only made the investment banks more vulnerable when the housing bubble popped, it enabled the banks to create a more tangled mess of derivative investments -- so that their individual failures, or the potential of failure, became systemic crises.

6. Basel II weakening of capital reserve requirements for banks

Rules adopted by global bank regulators -- known as Basel II, and heavily influenced by the banks themselves -- would let commercial banks rely on their own internal risk-assessment models (exactly the same approach as the SEC took for investment banks). Luckily, technical challenges and intra-industry disputes about Basel II have delayed implementation -- hopefully permanently -- of the regulatory scheme.

7. No predatory lending enforcement

Even in a deregulated environment, the banking regulators retained authority to crack down on predatory lending abuses. Such enforcement activity would have protected homeowners, and lessened though not prevented the current financial crisis. But the regulators sat on their hands. The Federal Reserve took three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

8. Federal preemption of state enforcement against predatory lending

When the states sought to fill the vacuum created by federal non-enforcement of consumer protection laws against predatory lenders, the Feds -- responding to commercial bank petitions -- jumped to attention to stop them. The Office of the Comptroller of the Currency and the Office of Thrift Supervision each prohibited states from enforcing consumer protection rules against nationally chartered banks.

9. Blocking the courthouse doors: Assignee Liability Escape

Under the doctrine of “assignee liability,” anyone profiting from predatory lending practices should be held financially accountable, including Wall Street investors who bought bundles of mortgages (even if the investors had no role in abuses committed by mortgage originators). With some limited exceptions, however, assignee liability does not apply to mortgage loans, however. Representative Bob Ney -- a great friend of financial interests, and who subsequently went to prison in connection with the Abramoff scandal -- worked hard, and successfully, to ensure this effective immunity was maintained.

10. Fannie and Freddie enter subprime

At the peak of the housing boom, Fannie Mae and Freddie Mac were dominant purchasers in the subprime secondary market. The Government-Sponsored Enterprises were followers, not leaders, but they did end up taking on substantial subprime assets -- at least $57 billion. The purchase of subprime assets was a break from prior practice, justified by theories of expanded access to homeownership for low-income families and rationalized by mathematical models allegedly able to identify and assess risk to newer levels of precision. In fact, the motivation was the for-profit nature of the institutions and their particular executive incentive schemes. Massive lobbying -- including especially but not only of Democratic friends of the institutions -- enabled them to divert from their traditional exclusive focus on prime loans.

Fannie and Freddie are not responsible for the financial crisis. They are responsible for their own demise, and the resultant massive taxpayer liability.

11. Merger mania

The effective abandonment of antitrust and related regulatory principles over the last two decades has enabled a remarkable concentration in the banking sector, even in advance of recent moves to combine firms as a means to preserve the functioning of the financial system. The megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers (including repeal of Glass-Steagall) enabled them to combine size, explicit and implicit federal guarantees, and reckless high-risk investments.

12. Credit rating agency failure

With Wall Street packaging mortgage loans into pools of securitized assets and then slicing them into tranches, the resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated.

The credit rating agencies enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk -- as subsequent events have revealed. The credit rating agencies have a bias to offering favorable ratings to new instruments because of their complex relationships with issuers, and their desire to maintain and obtain other business dealings with issuers.

This institutional failure and conflict of interest might and should have been forestalled by the SEC, but the Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. In fact, the SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards -- even if the SEC knows those standards to be flawed.

From a financial regulatory standpoint, what should be done going forward? The first step is certainly to undo what Wall Street has wrought. More in future columns on an affirmative agenda to restrain the financial sector.

None of this will be easy, however. Wall Street may be disgraced, but it is not prostrate. Financial sector lobbyists continue to roam the halls of Congress, former Wall Street executives have high positions in the Obama administration, and financial sector propagandists continue to warn of the dangers of interfering with "financial innovation."
Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor,  and director of Essential Action.

The Recession Forces a Re-Think of America's Most Cherished Economic Theories

The Crisis vs. the Dogma

By MARK WEISBROT
A serious economic crisis can force some rethinking of economic and political dogma. The current crisis is serious for most of the world: the IMF is projecting world economic growth of just 0.5% this year – the worst since the second world war – and this number could easily be revised downward.
In the United States, one of the first casualties of the current recession was the extreme fiscal conservatism that has plagued the country for decades. It seems like ages since the Clinton administration, facing projected budget surpluses of more than $5tn, decided that it needed to pay off the entire national debt before committing to any new social spending. President Barack Obama's proposed budget has a deficit for this year of 12.3% of GDP – twice the size (relative to the economy) of the next largest deficit in the six decades since the second world war. (That was Ronald Reagan's "military Keynesian" budget of 1983.) Like his successor George W Bush, Reagan never admitted that deficit spending was needed to pull the economy out of recession. Instead he pretended that he was just meeting "defence needs" and granting tax cuts where tax cuts were due (mostly to the wealthy).
Today there is a pretty sizeable consensus that deficit spending is very necessary, whatever the Republican leadership may think – if they are thinking at all. This is really just a matter of national income accounting. With consumption and investment falling, that leaves only government purchases and net exports to pull us out of this recession. More on net exports (exports minus imports) in a minute – but for now this part of our economy is not set to grow enough to pull us out of the recession. Hence the need for the government to step in, in a big way.
Of course, this could be just a temporary change in thinking, with desperation focusing the mind. But there are some signs that it may persist. For example, the New York Times reported on Sunday that Obama's projected budget deficit for 2013 is "3% of the overall economy, a level that economists consider sustainable".
Indeed this is true, and the arithmetic is simple: If the debt grows at the same rate or slower than the GDP (in nominal terms) it will not grow as a percentage of the economy. That is what matters, not the absolute size of the public debt – a big scary number ($10.9tn) that is often thrown around by conservatives. As evident as this is, the major media have almost never looked at the problem in this way before.
Another long-held belief that is currently being challenged in practice but needs to be rethought is the extent to which the government can finance a fiscal stimulus through money creation, rather than by traditional borrowing. The conventional wisdom is that this would dangerously increase inflation. But inflation is falling in most of the world, and in the US, prices are actually dropping. The US consumer price index fell at an annual rate of 8.4% over the last quarter. Even the core index (excluding food and energy) was up by only 0.9% over the quarter, and the rate of inflation has been declining.
The US government has already financed at least $1.2tn of borrowing during this crisis by creating money, which was added to the Fed's balance sheet. This technically adds to the national debt, but since the government owes the money to itself, there is no net outflow of interest payments from the government on this debt. This reduces the long-term debt burden of the necessary stimulus. Clearly there are circumstances under which this "monetising" of some additional borrowing makes sense because the threat of increasing inflation is minimal. The present economic free-fall seems to be such a circumstance.
This has international implications as well. The Obama administration has proposed scaling back at least some foreign aid. Of course, much of our foreign aid is military aid that is often destructive. But it would be a shame to cut back on such life-saving aid that goes to fight Aids, tuberculosis, malaria and other diseases that plague the poorest counties – when this funding needs more than ever to be greatly expanded.
On a larger scale, since the dollar has a special status as the world's reserve currency, the United States could conceivably contribute to the world economic recovery by providing dollars to help developing countries through the international credit crunch and world recession. Our government has done a little bit of this: eg, it created an international currency swap arrangement of $30bn each for Brazil, Mexico, South Korea and Singapore, which added to the hard currency reserves that these countries could tap if necessary. But many countries are not adopting the expansionary macroeconomic policies that they – and the world – need, for fear of running short of foreign exchange.
In other words, the United States – because of the special position of the dollar – could to some extent play the role of a world central bank in the present world recession. This would help stimulate our own economic growth as well by increasing demand for US exports. Of course, if the dollar were to lose value internationally in the process (because of the increased supply of dollars worldwide), this would be an added gain for the US economy.
That is because the US dollar is overvalued, and this overvaluation has artificially stimulated our imports and reduced our exports for many years. The idea that the United States needs a "strong dollar" could be the next widely held economic misconception to bend to reality.
Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research.

The Deficit vs. Mass Unemployment

Depression Nostalgia?

By DEAN BAKER
The Washington policy debates of the last week would almost make a casual observer believe that the nation’s political leadership is in fact nostalgic for the good old days of the Great Depression when the country suffered double-digit unemployment for a decade.
The two big news items last week were a batch of absolutely horrible economic reports and the release of President Obama’s budget. The media almost completely ignored the former and focused its attention primarily on the budget. So, let’s start with the bad news.
As can be expected much of the bad news centered on housing. The National Association of Realtors reported that existing home sales fell below 4.5 million for the first time since the mid-90s. They also reported that the median house price dropped another $5,400 in January or 3.1 percent.
Since July, this series shows a drop in the median home price of 18.9 percent. Other data also showed house prices in a free fall, most notable the Commerce Department’s series on new home sales, which showed a drop of 10 percent in the median price between December and January. With vacant housing units at record levels, and many potential homebuyers no longer having the equity in their current homes for a down payment, it is difficult to see how this free fall stops any time soon.
Housing isn’t the only sector that’s plummeting. Investment fell at a 28 percent rate in the 4th quarter, the sharpest rate of decline in more than fifty years. New orders have fallen more than 5 percent in each of the last two months.
Along with the collapse of these sectors, the number of new unemployment claims just keeps rising. Last week, it was 667,000 new claims. February may show more than 700,000 jobs lost for the month in the report released on Friday. The unemployment rate is likely to hit 8.0 percent for the month and it could well be over 9.0 percent by the summer.
While this bad news was flowing, President Obama released the first budget of his presidency. It is an ambitious document. The proposal calls for directly confronting powerful interest groups in order to eliminate important sources of waste in the budget. For example, the budget eliminates subsidies to private insurers in Medicare and drug companies in Medicaid. The saving will go toward financing health care reform.
He also proposes to eliminate the fund managers’ tax break that allowed managers of hedge and equity funds (some of the richest people in the country) to pay tax at just a 15 percent rate. President Obama proposes to have these Wall Street tycoons subject to the same tax rates as everyone else.
There are many other areas where the budget turns to long neglected areas, most importantly a proposal to establish a cap and trade system to provide incentives to reduce greenhouse gas emissions. It is not clear that President Obama can accomplish the full agenda laid out in his budget, but there is no doubt that he hopes to accomplish a great deal in his term in office.
Remarkably, much of the discussion of the budget did not focus on President Obama’s agenda, but rather his deficit targets. In particular, many commentators questioned whether he would reach his deficit target for 2012 because the economy might be weaker than his budget assumes.
The pundits’ concern on this point should have caused people to throw their television sets, radios and newspapers out the window. Let’s suppose that the pundits are correct and the economy sinks farther and later grows more slowly than the Obama administration assumed in planning its budget.
Would the pundits have Obama therefore cut more spending and raise more taxes? This would be close to crazy. With the economy plummeting, the first priority of the administration and Congress must be to boost the economy.
If the unemployment rate is 12 percent when President Obama’s first term ends, he can forget about getting re-elected, even if the budget is balanced. On the other hand, if he has managed to bring the unemployment rate down to a reasonable level, no one other than a few Washington pundits will be bothered by the deficit that might have been necessary to achieve this result.
The electorate is well ahead of the punditry on this issue. The federal government is the only force capable of turning the economy around in the near future and sustaining growth. The public recognizes this fact and will demand good economic policy even as the punditry continue to push policies that would throw the economy into another depression. Even if they have very large megaphones, the punditry are thankfully still a very small minority and unlikely to get their dream.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

STAIRWAY TO RETAIL HEAVEN
by James Quinn
March 3, 2009
There's a lady who's sure
All that glitters is gold
And she's buying a stairway to heaven

When she gets there she knows
If the stores are all closed
With a word she can get what she came for

Ooh, ooh, ooh, ooh, ooh
And she's buying a stairway to heaven
Led Zeppelin – Stairway to Heaven
She was buying the stairway to heaven using her home equity line, but now that she is underwater on her mortgage she tried to pay using her Amex card, but her credit score had dropped to 600 and they cut her credit line in half. The stairway to heaven isn’t as easy to achieve as it used to be. Barney Frank and Nancy Pelosi feel bad for the lady. They are going to borrow against your children’s future tax dollars and give them to the lady, so she can buy that stairway to heaven. By making this deal with the devil, the corrupt politicians running this country have put us on an escalator to hell. A straight shooting blunt President from last century described what would destroy America.
“The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get rich quick theory of life.”
Theodore Roosevelt
Over the last 30 years Americans have learned to love soft living and fallen for the lie of prosperity at any price. In the last 10 years a significant number of delusional citizens have tested the get rich quick theory of life, twice. First, the internet bubble lured millions to believe that Pets.com was going to change the world and day trading was a road to riches. Once this bubble collapsed and wiped out millions of morons we moved onto the next bubble. Millions of Americans bought into the “fact” that home prices only go up. The National Association of Realtors dealt the propaganda that now was the best time to buy. Alan Greenspan provided the fuel with 1% interest rates and recommending ARMs for everyone. Banks and mortgage brokers provided the mortgage products that would allow someone with annual income of $25,000 to “buy” a $400,000 home. George Bush and Congress stood on the sidelines cheering everyone on. The get rich quick portion of our population (10% to 20%) began to buy multiple houses and flipping them before the ink was dry on the closing papers. Home prices doubled in many places in the space of a few years. This lured a vast amount of the population to borrow against the ever increasing value of their homes. Everyone knew that home prices never fall.
Well on his way, his head in a cloud,
The man of a thousand voices, talking perfectly loud.
But nobody ever hears him,
Or the sound he appears to make.
And he never seems to notice .....

But the fool on the hill
Sees the sun going down.
And the eyes in his head,
See the world spinning around.
The Beatles – Fool on the Hill
During the period of 2000 through 2008, I felt like the fool on the hill. I never bought an internet stock and couldn’t understand how people were getting rich buying and selling these stocks. I didn’t flip any condos, didn’t borrow against the equity of the house I’ve lived in since 1995, or buy a new BMW. None of the hype and enthusiasm made any sense to me, so I sat on the hill and watched the sun going down. Instead of having the satisfaction of making the right choices, my government is telling me that I should have joined the party. They are taking my money and handing it to the people who made wrong choices. Corrupted politicians, government bureaucrats and lying financial pundits are breathlessly awaiting the return of irrational exuberance. They believe that the American consumer just needs a little confidence to resume their rightful place in the world economic pyramid. I hate to be a wet blanket, but the American consumer isn’t coming back and the consequences of this fact have yet to be realized by the financial markets, foreign manufacturers, domestic retailers or politicians. The overhang of debt, continued home price depreciation, lack of savings, and aging of America will change the face of retailing for decades.
Why Worry?
The Consumer Confidence Index in February was 25, the lowest since the index inception in 1967. During the Dot.com bubble it reached an irrationally exuberant 140. It hovered in the 110 level through the housing bubble until late 2007. The good news is that it can’t go below zero. The CNBC pundits and Washington politicians think that Americans just need to get their confidence back and everything will be OK. There’s only one problem. You can’t spend confidence.
The index shows how fragile the psyches of Americans can be. In retrospect, the extreme confidence in early 2000 and high levels from 2004 through 2007 were completely unwarranted. The American public had a false sense of confidence inflated by our bubble economy. Now the confidence level is at a record low level. This level is rational. With the government reported unemployment rate of 7.6% and the true rate between 14% and 18%, consumers aren’t too confident. There are 235 million Americans of working age. Only 154 million are in the work force according to government statistics. Of those, 11.6 million are unemployed. There are 81 million Americans of working age who are not in the workforce. At least 10 million of these people would work if they had an opportunity. With the massive destruction of wealth in the last two years, many more of the 81 million will have to go back into the workforce, whether they like it or not.

The Long and Unwinding Road
The country has tried to spend its way to prosperity over the last three decades. Total consumer debt is just under $2.6 trillion, or $23,600 per household. This includes credit card debt, auto loans, and personal loans. There are approximately 170 million credit card holders who own 1.5 billion cards, or 9 cards per person. The average household carries nearly $8,700 in credit card debt. The average new car loan is $25,000 with a loan to value ratio of 93%. This means that the average new car owner is underwater on their loan as soon as they pull out of the dealership parking lot.
 
The credit card wasn’t invented until 1967. Americans have adapted quite well to this new fangled American invention. Since 1970 revolving credit debt has increased by 26,000%, from $3.7 billion to $963.5 billion. Over this same time frame GDP grew by 1,430%. These statistics prove to me that America has maintained its standard of living by using credit cards. The always loquacious Alan Greenspan concluded in 2005 that the geniuses at Citicorp, Bank of America, Capital One, among others had done a wonderful service to humanity by giving credit cards to people who could not pay them back. I can picture his hang dog jowls quivering while tears welled up in his lying eyes.
"As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. Without these forces, it would have been impossible for lower-income consumers to have the degree of access to credit markets that they now have. This fact underscores the importance of our roles as policymakers, researchers, bankers, and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers."
Only 23% of the credit cards in the country are in the hands of prime borrowers. Giving out credit cards like candy to people of limited means couldn’t possibly end badly. The MBA Wall Street geniuses gazed at their models and concluded that their million dollar bonuses were in the bag. According to Fitch, write-offs are breaching 8% and are headed towards 10%. Auto loan delinquencies are already at 10%. Maybe lending 120% of the value of those Cadillac Escalades to a person with no job or assets was a bad idea.

The worst recession since the Great Depression will lead to the unprecedented credit card write-offs. Guess who will step to the plate and cover these losses. Right again. You and I will pay for the noble experiment of giving credit cards to people with little or no income. The bank CEO’s walked away with hundreds of millions in pay, Congressmen who pushed for poor people to get the credit were re-elected, Alan Greenspan receives $150,000 per speaking engagement, and the U.S. taxpayer gets screwed.  

Anyone who thinks the U.S. consumer is close to resuming their spending habits should look at the chart below. Consumer credit outstanding as a % of GDP ranged between 12% and 14% from 1965 through 1995. It currently stands at 18%, with GDP in freefall. With GDP at $14 trillion, the American consumer will have to shed $600 billion of debt to achieve a 14% level. It will take years of debt reduction and GDP growth to rebalance the economy. The brilliant bank analyst Meredith Whitney lays out our bleak future:
I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy.

It is time to take the advice of John Lennon and stop riding on the merry-go-round of a materialistic society that tries to borrow and spend its way to prosperity.
People say I'm crazy doing what I'm doing
Well they give me all kinds of warnings to save me from ruin
When I say that I'm o.k. well they look at me kind of strange
Surely you're not happy now you no longer play the game

I'm just sitting here watching the wheels go round and round,
I really love to watch them roll,
No longer riding on the merry-go-round,
I just had to let it go.
John Lennon - Watching the Wheels
Home Sweet Home Equity
“Consumption doesn't drive an economy - entrepreneurship does that - while savings fuel it.”
Gerard Jackson
U.S. households accumulated an additional $8 trillion in debt over the past decade. As their home values rose relentlessly, it became passé to save for retirement. Old age would be funded from vast amounts of housing wealth. This made Americans less interested in saving their money as the chart below shows. At the height of housing mania, the savings rate went negative. The dream of a retirement financed by housing wealth has since been shattered.

Source : Carpe Diem
“Now remember, when things look bad and it looks like you're not gonna make it, then you got to get mean. I mean plumb, mad-dog mean! Cause if you lose your head and you give up, then you neither live nor win. That's just the way it is.”
Clint Eastwood in Outlaw Josey Wales
Things do look bad and Americans need to get mad-dog mean. The meanness that I’ve witnessed so far has been from 35 year old jerks driving leased BMW 525i’s who have 3 underwater condos and have lost 70% of their faux wealth in the market. They’re the ones who come up behind you at 90 mph, lock onto your bumper and flash their brights at you to get out of their way. I slow down.
Average Americans need to get mean about spending and saving. Between 2002 and 2008, Americans sucked over $3 trillion of equity out of their houses and spent it on gadgets and goodies. That well is dry. There are no more wells. Ignore the crap you are hearing from Paul Krugman about the paradox of thrift. You must become thrifty because you have no choice. The future is approaching at hyper-speed and Americans have saved little. Their choice is to save now or acquire a taste for dog food. The saving rate in January jumped to 5%, the highest level since 1995. This trend will continue up to 10% in the coming years.

For decades homeowners had a ridiculous notion that they should slowly but surely pay off their mortgages. Why pay off your mortgage when your home value is guaranteed to increase 10% per year for infinity? After the greatest housing boom in history Americans are left with 45% equity in their homes versus 68% in 1985. With home prices destined to fall another 20% to 30%, equity will fall to 35%. One in seven homeowners across the country has negative equity, and of homeowners who bought in the last five years, 29.5% are under water.

Reversion to the mean is a concept that government bureaucrats refuse to accept. They are willing to spend as much of your money as they can get their grubby little hands on to reverse a non-reversible trend. Home prices must fall another 30% to reach the long term mean value. Taking money from prudent homeowners giving it to deadbeat homeowners and allowing politically motivated judges to decide who deserves a lower mortgage will not reverse the downward trajectory of home prices. It will just prolong the pain and create unintended consequences.

The number of homes for sale is still at record levels. With foreclosures accelerating more houses will come onto the market and prices will fall. Unemployment will reach 10% in the next year. There are 2.1 million vacant homes in the U.S. today. This is 1 million more than the historical trend. No one is going to buy these homes at the current asking prices. If you wait until foreclosure, you may get a house 50% cheaper than today’s asking price. This is a rational approach and will lead to lower prices.

A normalized level of homes for sale would be in the range of 2 million. There is 9.5 months supply of homes for sale. A normalized level would be 4 months.

All the facts point to a significant further decline in home prices. Barney Frank’s efforts to mitigate foreclosures and prop up home prices with our tax dollars will fail. With prices falling for another two years and jobs disappearing at 500,000 per month, consumers will stay on the sidelines for years.
Dude, Where’s My Retirement?
At the end of 2007 the average 401k balance was $65,500. The median 401k balance was $19,000. This divergence shows there are a few people with huge 401k balances, while the majority has virtually no retirement savings. These balances were at the end of 2007. Balances are likely to be 40% lower today. Almost 20% of 401k participants had borrowed against their 401k at the end of 2007, with an average loan balance of $7,500. With plunging markets and home prices, the number of loans probably soared in 2008. A 45 year old couple with an $11,000 401k balance and an entire net worth of $110,000 and annual income of $62,000 is in a precarious position. They would have to be living in complete denial if they think they will have a comfortable retirement.

Americans bought into the lie that their homes could fund a glorious retirement of cruises, golf, and travelling the world. That illusion has been shattered. It will likely take 10 years to get back to breakeven on the losses they’ve experienced in the last 18 months. Anyone who has retired in the last five years or has plans to retire in the next five years has had their plans upended. They will have to go back to work or work longer, if they can find a job. There are 1,000 Americans per day turning 65. Only an insane person, after experiencing the losses of the last few years, would continue to spend on electric gadgets and luxury cars. If they don’t start to save at a rapid clip, they will experience a miserable stress filled old age.
Deleveraging and How I Learned to Love It
Men, all this stuff you've heard about America not wanting to fight, wanting to stay out of the war, is a lot of horse dung. Americans traditionally love to fight. All real Americans love the sting of battle. When you were kids, you all admired the champion marble shooter, the fastest runner, big league ball players, the toughest boxers. Americans love a winner and will not tolerate a loser. Americans play to win all the time. I wouldn't give a hoot in hell for a man who lost and laughed. That's why Americans have never lost, and will never lose a war... because the very thought of losing is hateful to Americans.
George C. Scott – Patton
Americans have gotten soft over the last few decades. It is time to fight and prove that we still have a backbone. The next decade will not be pleasant, but it will build character. The priorities of the country must be changed and it will be American consumers who will force the change. They have already begun the long trek back from a losing spending strategy to a saving strategy that could result in being a winner. The drop in retail sales in the last few months is the most dramatic in U.S. history. This is not a momentary blip in a long term uptrend. This is a paradigm shift.

From 1952 through 1982, consumer spending as a percentage of our economy ranged between 60% and 64%. The United States ran trade surpluses and manufactured things that other countries wanted. Since 1982 we’ve lived above our means, consumed 4% more per year than we produced, and borrowed the money from foreigners to live this way. In 2008, this ratio topped out at close to 71%, or $10 trillion of our $14 trillion economy. Since this was an unsustainable trend it will revert to the mean over the next decade. The reversion to 62% of GDP will reduce consumer spending by $1.3 trillion annually going forward.

To paraphrase famous American admiral John Paul Jones, we’ve only just begun to de-lever. When you accumulate debt over three decades, you don’t get rid of it in two years. Multi-decade expansions of debt are followed by a multi-decade deleveraging. The last time consumers pulled back for longer than one month was 1975. The consumer is in the process of collapsing. There will be false starts in a positive direction, but the overhang of consumer debt, relentless decrease in housing and stock values, and looming retirement funding will force Americans to dramatically cut their spending for decades. The retail industry will be devastated by this paradigm shift.

Knock, Knock, Knockin on Heaven’s Door
The managements of most retailers in the United States are not prepared for $1.3 trillion less consumer spending per year. Their little expansion models were built upon an existing over inflated demand extrapolated at 5% or greater growth for eternity. We know how well bank models worked out. The good news is that retailer expansion models will not bring down the financial system. The bad news is that thousands of retailers will go bankrupt because they planned their businesses based upon false assumptions. Any retailer that used leverage to expand based on faulty pie in the sky assumptions is headed to retail heaven.
Retail top management is notorious for copying the strategy of other successful retailers. Wal-Mart created the concentration strategy of dominating a market with multiple stores. Every retailer in America dreamed of replicating Wal-Mart’s success. Home Depot, Bed, Bath & Beyond, Target, Lowes, among others have followed this same strategy. Every retailer does the same thing. They know how many households are in a market and they multiply that number by the expected spending per household. There are three major errors that have been committed by every retailer in America. They failed to recognize that the spending per household was 30% over inflated due to debt financed demand. They then extrapolated the spending per household using a 5% to 10% growth rate. Lastly, they ignored the fact that their competitors had the same strategy.
I consider Lowes to be one of the best run retailers in the U.S., with beautiful stores and good service. But, their top management was clearly irrationally exuberant regarding their expansion plans. Lowes has annual sales of $45 billion with approximately 1,500 stores. This averages out to $30 million of annual sales per store. Their operating margin has been 10%. They opened a store in Plymouth Meeting, 20 minutes south of my home. Since it was the 1st store in the market, it likely generated annual sales of $40 million with a $4 million profit. Next they opened a store in Montgomeryville, 20 minutes northeast of my home. This store likely generated $30 million in sales, while reducing the sales of the Plymouth Meeting store by 15%. Next they opened a store in Oaks, 20 minutes west of my home. This store likely generated $25 million in sales, while reducing the sales of the Plymouth Meeting store by 10% and the Montgomeryville store by 10%. Now for the final nail in the coffin. They will open a 4th store in Hatfield, 5 minutes from my home in April. It will cannibalize the sales of all three other stores. Below is an analysis of the likely profit implications for Lowes. 000’s Omitted

This chart shows that Lowes likely generated more annual profit with two stores than with four stores. These figures don’t take into account that Lowes likely spent $20 million to build each of those stores. They have sunk $40 million into building the 3rd and 4th stores, while reducing annual profits. These figures have also not taken into account the future reduction in consumer spending. If Lowes has replicated this error across the country, their future will not be bright. The hubris and overconfidence of top retail executives will result in thousands of store closings and retail layoffs.
I have experienced the incompetence and shortsightedness of retail executives firsthand. It is amazing to me that supposedly intelligent executives could gamble with a $100 million investment based on ridiculous assumptions and blatant lies. Many retailers have a winning concept, but few have top executives who do not get caught up in their own press clippings. When executives are driven by ego and diversity agendas, while disregarding unequivocal facts, that retailer is destined to fall. Understanding your external environment, your competitors and changing trends are essential to long-term success. These executives forget that Montgomery Ward and K-Mart were once premier retailers. The accumulation of bad strategic decisions by management will eventually bankrupt even the best retail concept. Bad decisions by retail executives destroy the lives of long-time employees when they are forced to close stores and fire staff. I’ve dealt with executives who couldn’t spell strategic let alone think strategically. The retailers listed below have either collapsed or scaled back in the last year. The worrisome fact is that the decline in retail spending has only just begun.

A smart retail executive should be analyzing the current situation with a critical eye. Any executive who is planning for an upturn in spending by consumers next year is in for a rude awakening. The environment has changed forever and if they don’t adapt immediately, their companies will die. Based on the balance sheets and cash flows of the retailers in the following chart, I’ve categorized them according to their risk level. Most of the information is prior to the dreadful holiday sales season. Balance sheets and cash flows continue to deteriorate. Some of the retailers on this list will be a surprise. Those with huge short-term debt obligations run the risk of not being able to rollover that debt. Banks in the U.S. no longer lend money they just beg the government for more capital. Many of these retailers will not be in business five years from now. Others will need to close hundreds of stores to survive.

The words of George C. Scott as Patton describe how retailers and nations sometimes have a limited amount of time on top of the world.
For over a thousand years, Roman conquerors returning from the wars enjoyed the honor of a triumph - a tumultuous parade. In the procession came trumpeters and musicians and strange animals from the conquered territories, together with carts laden with treasure and captured armaments. The conqueror rode in a triumphal chariot, the dazed prisoners walking in chains before him. Sometimes his children, robed in white, stood with him in the chariot, or rode the trace horses. A slave stood behind the conqueror, holding a golden crown, and whispering in his ear a warning: that all glory is fleeting.
All glory is fleeting. The American conquerors have returned from the mall wars pulling carts laden with HDTVs, iPods, Rolexes, and other treasures. There is no more ammunition left to fight another war. Retailers and Nations alike can experience fleeting glory. The question is whether it is too late for lessons learned to be implemented in time.
Join me at TheBurningPlatform.com to debate the future of our country.

© 2009 James Quinn
Editorial Archives
Bio: James Quinn is a senior director of strategic planning for a major university. These articles reflect the personal views of James Quinn. They do not necessarily represent the views of his employer and are not sponsored or endorsed by his employer. He can be reached at quinnadvisors@comcast.net.

A Banana Republic by 2012?

Obama's Budget

By PAUL CRAIG ROBERTS

President Obama has presented the most irresponsible budget in US history.  His fiscal year 2010 budget projects federal spending of $3.5 trillion and a federal deficit of $1.75 trillion. In other words, 50 percent of the government’s budget consists of red ink.

And Americans are angry that sub-prime borrowers took mortgages they couldn’t afford.

The bald fact is that the US government is going to have to borrow
-- or print -- half of the money it intends to spend in Obama’s first budget. This fact has fallen through the cracks as New York Times headlines proclaim “A Bold Plan Sweeps Away Reagan Ideas.”  It certainly does sweep away Reagan ideas.  No Reagan budget ever presumed that the federal government could borrow half of its annual expenditures. Indeed, Obama’s budget deficit for 2010 alone exceeds the totality of “Reagan Deficits” for Reagan’s two terms of office.

As presidential budgets are marketing devices rather than financial statements, they are imbued with optimistic assumptions.  Obama’s budget is based on optimistic assumptions about the extent of decline in GDP.
A more realistic projection of GDP decline would reveal that Obama’s budget is the first since World War II in which more than half of the government’s expenditures must be financed by red ink. I suspect that the red ink component of the FY 2010 budget will surpass World War II budgets.

To whom can the US government turn for $1.75 trillion for FY 2010, on
top of $1.2 trillion for FY 2009?  

Not to taxpayers. Obama’s net tax increase comes to $170 billion over 10 years, or $17 billion a year, a drop in the bucket.  A supply-side economist could have told him that not even these paltry revenues will be realized.

Not to private savers. Americans are over their heads in debts.

Not to foreigners. Thanks to Clinton/Bush financial deregulation and Wall Street and bankster greed, the rest of the world is in financial turmoil and hasn’t $1.75 trillion in savings to lend.  Possibly, the stock market will collapse further, and whatever remaining wealth
Americans have will flow into “safe” US Treasuries.  

The only other alternative is the printing press. Printing press finance would destroy the dollar as reserve currency and ignite high inflation.
The US would be unable to pay for its imports, and Americans whose incomes do not rise with the rate of inflation would be plowed under.

This prospect is not a “war on terror” scare tactic like “anthrax,”
“weapons of mass destruction,” “al Qaeda connections,” and “Iranian
nukes.”  

The economic catastrophe that the US faces is very real.  But there is no awareness of this reality in Obama’s budget.  The crux of Obamanomics is the assumption that the economy can run forever on consumer loans, if we can just get the banks to lend, and the federal government can run forever on loans from China, Japan,and Saudi Arabia. 

Obama is requesting $130 billion for wars in Iraq and Afghanistan during 2010 plus a $75 billion supplemental  request for the wars during 2009.
This $205 billion is on top of $534 billion for the Pentagon in 2010,
for total military spending of $739 billion.  

The Chinese government’s budget shows China’s military spending at $59 billion in 2008.  (The Pentagon claims Chinese military spending is between $97 billion and $139 billion.)  Russia’s military spending in
2009 is projected to be about $50 billion.  

In the midst of the greatest economic crisis in US history when trillions of dollars are being added to US national debt, Obama’s budget spends more on two pointless wars  than the total military spending of China and Russia combined.  Obama’s wars serve only the profits of the military/security complex and the promotion rate of military officers.
The longer the wars continue, the larger the number of officers who can retire at higher ranks, thus further swelling future annual deficits and the national debt.

Moreover, as is becoming apparent, the Bush/Obama war in Afghanistan
cannot be fought without fighting a war in Pakistan.  

As if this isn’t enough war, Obama parrots Dick Cheney’s charge, totally unsupported by any evidence, that Iran is making nuclear weapons.  The chances are high that the new White House occupant will have us at war in Afghanistan, Pakistan, Iran, and Iraq.  As Obama’s wars expand, the
$205 billion for war in Iraq and Afghanistan will become $400 billion
annually and then $600  billion annually.  

Obama’s “troop withdrawal” from Iraq has proved to be just another con job.  Obama has announced that the withdrawal doesn’t include the 50,000 US soldiers who will remain in Iraq indefinitely--like the US troops that have been kept in Japan and Germany for 64 years and in Korea since
the early 1950s.   

Meanwhile Medicare is on the ropes. The latest Medicare trustees report says that Medicare’s funds for hospital payments will be exhausted in 10 years.  To make ends meet, Obama proposes cutting payments to Medicare providers. 

Obama’s plan is to make doctors and patients pay for Medicare. One way to get National Health is to make it uneconomic for private health care to service Medicare patients. Already many doctors will not accept Medicare patients because of the low payments, endless paperwork, and risk of prosecution for “over-billing.”  Looking at one recent Medicare patient medical bill, Medicare and supplemental insurance paid 29 percent of the billed amount, requiring the doctor to eat 58.5 percent of his charges and the patient to pay 12.5 percent.  The doctor was paid
$93.16 on a $320.89 bill.  And Obama wants to reduce payments to providers?

What is Obama thinking? A country that can’t afford Medicare can’t afford National Health. Medicare provides only for the elderly, and it provides very little.  A person pays the Medicare tax as long as he earns and on the totality of earnings.  For the rich the Medicare tax
can exceed the cost of a gold-plated private insurance policy.  

Basic Medicare leaves a person unprotected.  To provide better coverage, it is necessary to enroll in Medicare Part B for which the premium is $308.30 per month or $3,699.60 per year.  On top of this, a person needs a privately supplied supplemental policy to complete Medicare coverage.
AARP’s policy, which, after deductibles are met, covers half of drug costs, cost the “Medicare protected” elderly  $ 273.50 per month or
$3,282 per year.  The drug prescription plan passed by Congress costs the individual yet more.

The two supplements to Medicare cost the Medicare patient $6,981.60 per year. In addition, if the Medicare patient has much retirement income besides Social Security, he pays income tax on 85 per cent  of the $3,699.60 Medicare Part B premium as it is part of taxable Social Security, which for someone in the 25 per cent bracket is another $925 dollars.

In the late 1970s, Democratic Senator Russell Long, Chairman of the Senate Finance Committee, told me that as Social Security was collected as a tax on wages and salaries, the US government had promised never to tax the benefits.  So much for any commitment that the US government makes to the American people.

A top Social Security income, net of Medicare Part B premium, is $23,220 per year. Deduct the AARP policy, and the elderly who have paid in maximum Social Security taxes, get $20,000 per year.  Of course, few Social Security retirees receive the maximum payment.  AARP’s Public Policy Institute reports that in 2006 the average annual Social Security benefit for a retired worker was $12,372.  Such a worker would have little left after paying the Medicare Part B premium and an additional premium for a supplement.

Offshoring and “free trade” have destroyed employer-provided health coverage for millions of employees.  Private health care coverage can cost as much as one-third and even one-half of a person’s earned income, and some people are not insurable.  National Health seems to be in the cards --only there is no money for it.  All the money is being spent in pointless wars and on bailouts of financial fraud.  The Obama budget puts bankster bailouts and pointless wars ahead of the health of the American people.

National Health advocates emphasize that a single-payer system is less expensive because it eliminates layers of profits.  It is also less expensive for a less promising reason.  Unless there is a parallel private health care system, National Health systems limit health spending to what is provided in the government budget.  Over time, health care has to compete with everything else in the budget. Every part of the budget has its partisans and special interests.  It is fantasy to assume that National Health will always be well funded.  Just look at the state of the National Health Service in the UK.

Obama’s plan to tax the rich is another con job.  Obama’s budget defines the rich as a person with a $250,000 before tax income.  But the  rich are the banksters, such as Hank Paulson with his $160 million annual bonus, and heads of hedge funds with their $1,000 million annual incomes.  Obama’s “tax the rich” scheme will devastate the upper middle class and leave the super rich undamaged.

Bush’s FY 2008 budget deficit was $450 billion.  The FY 2009 deficit is projected at $1.2 trillion. The budget deficit in Obama’s first budget
is $1.75 trillion, a fourfold increase in two years.  

Obama’s projected budget deficits are an understatement. For example, Obama’s budget assumes a less steep economic decline than the economy is experiencing, and it projects that war costs will drop to $50 billion annually beginning in 2011--this despite Obama sending more troops to Afghanistan and recent congressional testimony of Lt. General David Barno, former head of US forces in Afghanistan, who said the war in
Afghanistan could last until 2025.  

The “war on terror” will never end, because the moronic US government has defined everyone who resists US hegemony as a “terrorist.”  The great danger to American civil liberty is that the US government regards as terrorists American citizens who realize that the neoconservative dream of American hegemony is a fantasy.  As the Obama regime has not repealed the Bush regime rule -- “you are with us or against us” -- Americans who oppose hegemonic war are lumped into the “against us”
category.

There seems little chance that civil liberties will be restored. Obama and his “liberal” Justice (sic) Department have sided with Bush/Cheney on every important civil liberties issue.  Yet, the ACLU sees “hope” in Obama’s rhetoric!

On February 21 Yahoo News reported: “President Barack Obama's administration has sided with predecessor George W. Bush on the rights of detainees at Bagram air base in Afghanistan, saying they cannot challenge their detention in US courts. In a two-sentence court filing Friday, the US Justice Department said "the government adheres to its previously articulated position" of denying habeas corpus rights to Bagram detainees, backing a similar decision by the Bush administration.”

“Earlier this month,” Yahoo News reports, “the Obama administration backed another Bush anti-terror policy when it urged a federal court to dismiss a lawsuit accusing Boeing Company of helping fly suspects to secret CIA detention centers overseas. The Justice Department said the case should be thrown out to protect state secrets.”

Do you remember the illegal spying?  The US telecom industry succumbed to Bush regime pressure and broke the law together with President Bush.
The illegal act made the US telecom industry subject to lawsuits, but
the Bush regime placed its co-conspirators above the law.  

Now Obama has sided with the Bush regime.  On February 26,therawstory.com reported: “The Obama Justice Department continues to stand behind a Bush era law meant to prevent lawsuits against telecommunications companies accused of illegally sharing private customer information with intelligence agencies. In a brief filed late Wednesday obtained by Raw Story, the Department of Justice provided its views to Chief U.S. District Judge Vaughn Walker, after the San Francisco federal judge questioned the constitutionality of the wide-sweeping law and whether it gives the U.S. Attorney General too much power in deciding whether a company is immune from lawsuits after it has shared information with federal agents.”

On February 26 antiwar.comreported that the “new CIA director (Leon
Panetta) declares nothing has changed, nothing will change.”  Panetta declared that the US policy of conducting war on Pakistan’s sovereign territory “would continue.”  The attacks, Panetta claimed,  “have been successful.”  For the CIA, claims of success equal legality.  Did the Bush regime ever express greater arrogance and hubris?

With Rahm Israel Emanuel, an Israeli dual citizen, in charge of the White House and Obama’s schedule, Obama will have an even less independent foreign policy in the Middle East than Bush.  Somehow someone among the Obamacons managed to put forward an appointment that could challenge the Israel Lobby’s stranglehold.  Charles Freeman, former US ambassador to Saudi Arabia, former top Pentagon official, and president of the Middle East Policy Council, was chosen by Admiral Denis Blair, Director of National Intelligence, to head the National
Intelligence Council.  

The neocons went berserk.  Steve Rosen, formerly of AIPAC, currently indicted as an Israeli spy,  Gabriel Schoenfeld, who wants the New York Times indicted for allegedly violating the Espionage Act for reporting the Bush regime’s illegal spying, Daniel Pipes, who sees Muslim terrorists under every bed, Michael Rubin of the warmonger American Enterprise Institute, and Frank Gaffney, possibly the goofiest person in America,  damned Freeman’s appointment as “deeply troubling,” because
Freeman has an open mind on the Middle East situation.  

In other words, if you are not on Israel’s side, you are disqualified.

There is no more certain indication of continuing war in the Middle East on Israel’s behalf than for Freeman’s appointment to be blocked.

Pay close attention to this one. If Obama succumbs to the Israel Lobby and nixes Blair’s appointment of Freeman,  the US will have to finance interminable wars on top of trillion dollar bailouts and massive
unemployment.  

The US might not even make it to 2012 before it is a banana republic.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.
<http://www.amazon.com/exec/obidos/ASIN/0307396061/counterpunchmaga> He can be reached at: PaulCraigRoberts@yahoo.com

Zombie Banks Are Devouring Our Public Money with No End in Sight

By Bill Moyers, Bill Moyers Journal
Posted on March 4, 2009, Printed on March 4, 2009
http://www.alternet.org/story/129732/

The following is a transcript from the Feb. 27 edition of Bill Moyers Journal.

Remember when economists poked fun at Ronald Reagan's voodoo economics? Well, now they are dead serious about so-called "zombie banks" - financial giants like Citigroup and Bank of America whose debts are greater than their assets, with stock worth less than zero, and they're only able to stay alive by devouring federal bailout bucks. Those banks, in turn, are terrified by talk that the government might come in and nationalize them. Well, some critics ask, why not? Given all this, I wanted to talk to a man with a clear-eyed perspective on the worldwide economic impact of this banking crisis.
Robert Johnson was once the Chief Economist of the Senate Banking Committee under the chairmanship of that fiercest of budget pit-bulls, the late Wisconsin Senator William Proxmire. Johnson became a Managing Director at Soros Fund Management, and now serves on a United Nations Commission recommending reforms of the international monetary and financial system. ...
Given what we know is happening around the world, are you scared?
Johnson: Yes I am.
Moyers: What scares you the most?
Johnson: That everybody will stand and watch and cater to past patterns of power. The banking system has been the dominant sector in our society and in our politics, which is heavily money driven, for a very long time. As they falter, we could stagnate, catering to their needs disproportionately while the system sinks.
Moyers: This week, a term came into play that I hadn't heard before. People refer to Citibank, Citigroup, as zombie banks. What's a zombie bank?
Johnson: A zombie bank is a bank that's insolvent that's allowed to continue its activity. It's allowed to go on living as a dead financial entity.
Moyers: And what's the threat to the financial system of a zombie bank?
Johnson: That the zombie will continue to lose more, and the taxpayer, kind of off the government's budget, will continue to experience larger and larger burden of future losses.
Moyers: So are these negotiations going on this week between Treasury and Citigroup crucial to this process?
Johnson: I think they're crucial to the process. I also think, if you're going to allow them to act as zombies, then the regulators need to be really fierce. To curtail the activities within the bank while it's motoring along, hoping for a rebound.
Moyers: This is what puzzles me. I mean, Citigroup executives who got that bank into this ditch, seem to have as much authority in dealing with the government, the Treasury, as the Treasury has in dealing with them. Does that seem right to you?
Johnson: It doesn't seem right, but it does seem real. When one looks at websites, like OpenSecrets.org, and looks at the scale of campaign contributions that come from Wall Street, one understands why Wall Street, how do I say -- when they talk, people listen.
On the other side of that issue, the flood lights are so bright now we're talking about $700 billion for TARP. Obama has asked for another $750 billion in the budget this week for the banks.
We're talking a trillion and a half dollars. People can't do sneaky things on the side as easily. Because the scrutiny, the watchdogs have now arrived. They understand this is a colossal problem. So I do think there's more scope for good public policy because it's such a large and deep crisis.
Moyers: What have you learned this week about the Obama plan that encourages you?
Johnson: What encourages me is they're talking about very profound changes in financial regulation. I have yet to see the details. But Mr. Obama made a statement, a couple days ago, that was very, very concrete about: the old rules don't work.
President Barack Obama: And I intend to hold these banks fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer. This time, this time CEOs won't be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet. Those days are over.
Johnson: He also spoke about what you might call free market fundamentalism. Unfettered, unregulated markets as one pole, and what you might call administrative socialism as another pole. We've got to end up somewhere in the middle. Where the market's dynamism and flexibility is honored, but where you have real regulation and real enforcement. It's been a long time since the president has talked like that. So I think that's a hopeful sign.
But the question is, as this man stands at the crossroads, as a very young president, will he exert the will to implement what, say, his heart tells him when he gets it?
Moyers: What do you mean crossroads?
Johnson: The crossroads right now is that we could have a society become despondent. People who think that proper reforms, and proper business restructuring, are just romantic notions. And what Obama needs to do now is not talk, he needs to deliver the goods. He needs to deliver the goods plain and simple where people will regain their trust.
Moyers: How do we stop the bleeding?
Johnson: People talk of nationalization. I just call it restructuring. Restructuring is a part of capitalism. That's how the airlines get restructured when they go through bankruptcy. How you might have to deal with the auto industry, how you deal with venture capital projects. Do the same thing with the banks.
Moyers: The economist Dean Baker agrees with you. He says there's a growing consensus among economists like you, that this would be the fairest and most efficient thing to do. Put the banks through the same sort of receivership process that the FDIC, the Federal Deposit Insurance Corporation, uses all the time. Is this, however, nationalization in disguise?
Johnson: Well, I think the notion of nationalization has been a little bit of a PR spin. Restructuring is what you do as capitalist economies to maintain function and continuity. Nationalization invokes the specter of the state seizing the means of production, like Che Guevara is about to take over or something.
Moyers: Exactly what does it mean to nationalize the banks?
Johnson: Well, what I think they need to do is inspect them thoroughly, examine, mark down the assets to a conservative level that protects the taxpayer. See the resulting deficit on the balance sheet, which is the hole.
Then the government injects the capital. People continue to operate the banks. People who continue to work there then perhaps sign new contracts with the government. And the government just becomes the stockholder until such time that they sell the stock back to the market and get paid back a little bit for all the lost support that they're creating for these banks.
Moyers: Haven't we already nationalized some big banks? Washington Mutual, WaMu, Wachovia, which was taken over by Wells Fargo. They transferred control of the assets to new owners, and depositors, like me, didn't even notice that anything happened over the weekend.
Johnson: Well, that's what the process entails. The difference this time, to give the authorities some credit, is that there were people that could take over WaMu. There were people that could take over Wachovia. But now you have four enormous institutions, JP Morgan, Wells Fargo, Citigroup and Bank of America.
I don't know if there's anybody big enough to take them over. Though they could take over pieces. You could break them up and sell the pieces. And that would continue to function. The continuity of function that you described in your banking relationship is vital to preserve.
Moyers: So what's the objection to that from the people you talk to who don't like it?
Johnson: One is people feel the government would make a mess of running things. I actually don't agree with that.
Moyers: Well, FEMA's a pretty unsettling model.
Johnson: Yes, it is. But I would say you could work with Tim Geithner, who's quite a competent man, working with the existing Citibank management, with just a different set of stockholders. The one danger you have, when you keep these banks open, when they're insolvent, is they have a temptation to very risky activity.
Sort of like a quarterback throwing the Hail Mary pass. The losses on an interception accrue to the taxpayers. And the touchdown is kept by the stockholders. So if they take excessive risk in those times they can actually endanger the stockholders further. The plan that Geithner and the White House, the Obama administration, is adopting right now, which I will call intravenous drip capitalization, is one of forbearance. Meaning, don't realize the losses on the balance sheet now. Don't account for everything in a prompt way. Don't truncate the losses, but allow them to go on. And the danger is the ditch could get deeper and deeper.
Moyers: What's the most discouraging thing you've seen about the Obama plan?
Johnson: I think the capital assistance program is warehousing zombie banks and running the risk of the taxpayer over the next one or two years, will experience much larger losses.
Moyers: The capital assistance program. That is?
Johnson: That's the bailout, the drip intravenous capital injections.
Moyers: For which he's asking, in his budget this week, for another $750 billion.
Johnson: That's right. And I do think, perhaps, the reason they went with the intravenous program, is they were fearful, given the way the well was poisoned by Henry Paulson's TARP plan, that Congress won't give him any more money. But they're foreshadowing that the scope of the problem is enormous.
Perhaps the only difference between Secretary Geithner and myself might be that he knew after negotiations, he couldn't get all the money he needed. So he has to go on the drip until he builds a consensus, and then can do the more profound restructuring.
Moyers: And you're saying that the drip is too slow, too risky, too dangerous, and that what we need is immediate surgery?
Johnson: Well, I guess if the heart of the economy are the four or five major banks, you do need a transplant.
Moyers: And so the government would step in and do what?
Johnson: I would ask for letters of resignation from the top executives of all the major banks. I would not do a case by case restructuring. I would take the largest group all in and say, "I want everybody's letter for resignation."
You might not honor all those letters, but you'd have them. I would then say, "The stock is worth zero. The balance sheet is too far negative to continue risking the taxpayer's money." The examiners, somewhat like FDR did in a bank holiday, would examine the depth of the hole in those balance sheets.
Fill that hole with money, taxpayer's money, to recapitalize. Send them back out into the marketplace where people know they're wholly capitalized. And last thing I would do is I would separate the toxic assets from the bank that you put back in the marketplace.
So everybody knew the resulting creature was sound and confidence could rebuild. Inner bank credit could start to flow again, 'cause they aren't afraid of each other.
Johnson: But the question is would that resulting system of financial institutions, separated from the bad assets, recapitalized for the medium term, create new credit flows?
Give people confidence that there was fair play. That the economy and the financial system, I would say, was subject to the same discipline as the rest of us. There's an old saying about you don't ever want to walk under a guillotine, but after the blade falls, you can walk over it. Well after the blade falls people just start walking forward again. But they don't want to be walking under it.
Moyers: You're saying that the blade should fall, on the management of these banks, and the shareholders who went along with this excessive risk taking, because they wanted the big returns. The blade should fall on them. Get them out of the way. Government restructures. And then offers the banks back into the market and new investors come in.
Johnson: That's correct.
Moyers: So the people pay the price who bet wrong, right?
Johnson: That's correct. I think that's very fair. I think that's how markets are constructed.
Moyers: And what happened to the markets over these last 25 years. They created a lot of wealth for a few people, relatively, and then passed enormous losses onto the public.
Johnson: Yes. We had a very, very false vision of the sufficiency of markets left unfettered. When, in fact, the financial sector, as we now know, can spill over.
This is a fascinating dimension. Financiers used to say, with all of their academic consultants, and everything else, "You can leave us alone, and we'll create flexibility and prosperity. Trust us." And then, when they got in trouble, they say, "You have to bail us out, because if you don't, your hostage in society goes down with us." Which is kind of what's happening right now.
We had 25 years of excessive risk taking with people like Alan Greenspan and everybody else underwriting by rescuing each crisis. Robert Rubin and Larry Summers rescuing from the Mexican crisis, the Long-Term Capital Management deal, which didn't involve taxpayers' money but it involved public officials organizing it. But you kept anaesthetizing the fear of loss on the part of financiers, and they built the bubble bigger and bigger and bigger. And now they need the bailout. We made a mess of regulation in the old days because we acted like they would never do something that took excessive risk. And they did do things that took excessive risk.
Moyers: So we had a system that enabled them to take huge sums of cash out of the short run, and pass the long run losses onto the public. That's essentially what it comes down to.
Johnson: That's right.
Moyers: As you look around the world, and see what's happening, the consequences of our own financial meltdown, what's the worst case scenario?
Johnson: The worst case scenario is that the Asians have built a world based on export led growth. Ever since World War II, the United States consumer has been the buyer of last resort. The American consumer is shut down. If the Asians don't rebuild, based on the power of their own consumers, and they drop their exchange rate, what's called beggar thy neighbor devaluation, it can put deflationary stress back on the United States and on the European countries.
Moyers: Deflationary stress meaning?
Johnson: Lower prices. In other words, if the yen weakens tremendously, the US car companies have an even greater problem competing with Toyota and Nissan. But I think there's even a more violent possibility.
We have a group of countries in central Europe and Russia. CIS, the Commonwealth of Independent States that were in the transition, from the days of communism, and they haven't become mature industrial market economies.
Moyers: You mean, the Berlin Wall is down, but they haven't built up their own--
Johnson: They were on their way. But this disruption is so violent that we could see their social systems disrupted and shattered as credit is cut off, as banks pull back, as foreign direct investment ceases. And they could go back into turmoil. And the, what you might call architecture of the integrated world, would be shattered. They have a system there. They have this European Union. I think, if it starts to disintegrate, the Germans and the French are going to have to step forward.
So the existing constellation of property rights means the Swiss banks or the Austrian banks experience the default. But if the whole system disintegrates, they'll have to socialize those losses, just like the Americans are socializing the loss of its mega-banks.
Moyers: By socializing the losses you mean?
Johnson: The taxpayers of the respective countries would pay those losses together. So that a German bank may not be the one that created the losses, but they may have to bail out the Austrian banks to keep the whole system functioning.
Moyers: And then what happens to us? The United States?
Johnson: Well, if they don't handle that resolution well, the further weakening of those countries feeds back to weakening in the United States.
Moyers: What's the worst case scenario there for us?
Johnson: Well, the worst case scenario for us we saw in the 1930s, was the Great Depression. I don't think it's as likely. We have made some structural changes. Obama's administration did pass what I don't think was a strong or vigorous enough stimulus program, but they did pass a stimulus program, that will alleviate some of that downturn.
Moyers: When I talked to you last week, you were really pessimistic. This week you seem a little more hopeful. What's happened?
Johnson: Well, they say life is a fine balance between hope and despair. And I've seen this week on the positive side. Conversations about reinvigorated regulation. I've seen a very capable man appointed for procurement at the Pentagon to stop spending, Ashton Carter.
I've seen a budget plan that involved changes in tax loopholes, and a positive stride towards health care spending. And the only thing that sticks in my craw is I don't think that the bank resolution plan, the capital assistance program is strong enough or fast enough.
Bill Moyers is the host of Bill Moyers Journal.

Billions Dished Out in the Shadows

http://www.truthdig.com/report/item/20090303_billions_dished_out_in_the_
shadows/

Posted on Mar 3, 2009

By Robert Scheer

This is crazy! Forget the bleating of Rush Limbaugh; the problem is not with the quite reasonable and, if anything, underfunded stimulus package, which in any case will be debated long and hard in Congress.
The problem is with what is not being debated: the far more expensive Wall Street bailout that is being pushed through—as in the case of the latest AIG rescue—in secret, hurried deal-making primarily by the unelected secretary of the treasury and the chairman of the Federal Reserve.

Six months ago, we taxpayers began bailing out AIG with more than $140 billion, and then it went and lost $61.7 billion in the fourth quarter, more than any other company in history had ever lost in one quarter. So Timothy Geithner and Ben Bernanke huddled late into the night last weekend and decided to reward AIG for its startling failure with 30 billion more of our dollars. Plus, they sweetened the deal by letting AIG off the hook for interest it had been obligated to pay on the money we previously gave the company.

AIG doesn’t have to pay the 10 percent interest due on the preferred stock the U.S. government got for the earlier bailout funds because that interest will now be paid out only at AIG’s discretion, which means never. The preferred stock, which got watered down, carried a cumulative interest, meaning we taxpayers would have recaptured some money if the company ever got going again, but that interest obligation was waived in the new deal.

We’ve already given AIG a total of $170 billion—an amount that dwarfs the $75 billion allocated to helping those millions of homeowners facing foreclosures. And more will be thrown down the AIG rat hole because President Barack Obama is blindly following the misguided advice of his top economic advisers, who insist that AIG is too big to fail.

“AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans and Fortune 500 companies who together employ over 100 million Americans,” the joint Treasury Department and Fed statement declared while insisting that for that reason, plus the “systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high.”

What about the cost of inaction by Treasury and the Fed before this meltdown? If AIG were so important to the American economy, shouldn’t government regulators have been looking more closely at its activities?
They couldn’t then, and even now they don’t understand what AIG has been up to, because the company was allowed to operate in an essentially unregulated global economy in which multinational corporations have their way. As the Treasury/Fed statement concedes: “AIG operates in over 130 countries with over 400 regulators and the company and its regulated and unregulated subsidiaries are subject to very different resolution frameworks across their broad and diverse operations without an overarching resolution mechanism.”

Oh, really? And you’re discovering that only now, when you’re making us bail AIG out? It wasn’t that long ago that a couple of hustlers operating out of an AIG office in London were going wild making money off selling insurance on credit default swaps that no one could understand, but the company execs loved those huge profit margins. To challenge their maneuvering, as some in Congress attempted, was said by their defenders, including Geithner, to put them at an unfair disadvantage in the world market. Ignorance was bliss … until the bubble burst.

This was all belatedly conceded by Bernanke in his Senate testimony on
Tuesday: “AIG exploited a huge gap in the regulatory system. There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets—took huge losses. There was no regulatory oversight because there was a gap in the system.”

AIG used to be in the conventional insurance business, covering identifiable risks it knew something about, until it took advantage of deregulation and a lack of government surveillance to come up with contrived new financial products. Even Maurice Greenberg, the man who built AIG from the ground up over a span of 40 years before he was forced out amid corruption charges in 2005, admits that he didn’t understand the newfangled financial gimmicks that the company was peddling. This week, claiming he too was swindled, Greenberg sued in federal court, charging the AIG execs who forced him out with “gross, wanton or willful fraud or other morally culpable conduct,” over the credit default swap portfolio that was part of his settlement.

U.S. taxpayers now have ownership of almost 80 percent of AIG, but with the company’s once solid traditional insurance business now suffering a steep loss of consumer confidence, it’s not likely that even the formerly healthy parts of the company will be worth much. What we have here is all pain and no gain for the taxpayers roped into this debacle, which is proving to be the story of the entire banking bailout.

New York Times, March 4, 2009

Economic Scene

Job Losses Show Breadth of Recession

By DAVID LEONHARDT
<http://topics.nytimes.com/top/reference/timestopics/people/l/david_leon
hardt/index.html?inline=nyt-per>

What does the worst recession in a generation look like?

It is both deep and broad. Every state in the country, with the exception of a band stretching from the Dakotas down to Texas, is now shedding jobs at a rapid pace. And even that band has recently begun to suffer, because of the sharp fall in both oil and crop prices.

Unlike the last two recessions — earlier this decade and in the early 1990s — this one is causing much more job loss among the less educated than among college graduates. Those earlier recessions introduced the country to the concept of mass white-collar layoffs. The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree.

The Great Recession of 2008 (and beyond) is hurting men more than women <http://www.nytimes.com/2009/02/06/business/06women.html?_r=1> . It is hurting homeowners and investors more than renters or retirees who rely on Social Security <http://topics.nytimes.com/top/reference/timestopics/subjects/s/social_s
ecurity_us/index.html?inline=nyt-classifier>  checks. It is hurting Latinos more than any other ethnic group. A year ago, a greater share of Latinos held jobs than whites. Today, the two have switched places.

If the Great Recession, as some have
<http://www.reuters.com/article/ousiv/idUSTRE51B45820090212>  called <http://www.nytimes.com/2009/03/01/opinion/01ferguson.html>  it, has a capital city, it is El Centro, Calif., due east of San Diego, in the desert of California’s Inland Valley. El Centro has the highest <http://www.bls.gov/news.release/metro.nr0.htm>  unemployment rate in the nation, a depressionlike 22.6 percent.

It’s an agricultural area — because of water pumped in from the Colorado River, which allows lettuce, broccoli and the like to grow — and unemployment is in double digits even in good times. But El Centro has lately been hit by the brutal combination of a drought, a housing bust and a falling peso, which cuts into the buying power of Mexicans who cross the border to shop.

Until recently, El Centro was until recently one of those relatively cheap inland California areas where construction and home sales were booming. Today, it is pockmarked with “bank-owned” for sale signs. A wallboard factory in nearby Plaster City — its actual name — has laid off workers once kept busy by the housing boom. Even Wal-Mart <http://topics.nytimes.com/top/news/business/companies/wal_mart_stores_i
nc/index.html?inline=nyt-org>  has cut jobs, Sam Couchman, who runs the county’s work force development office, told me.

You often hear that recessions exact the biggest price on the most vulnerable workers. And that’s true about this recession, at least for the moment. But it isn’t the whole story. Just look at Wall Street, where a generation-long bubble seems to lose a bit more air every day.

In the long run, this Great Recession may end up afflicting the comfortable more than the afflicted.

•

The main reason that recessions tend to increase inequality is that lower-income workers are concentrated in boom-and-bust industries.
Agriculture is the classic example. In recent years, construction has become the most important one.

By the start of this decade, the construction sector employed more men without a college education than the manufacturing sector did, Lawrence Katz, the Harvard <http://topics.nytimes.com/top/reference/timestopics/organizations/h/har
vard_university/index.html?inline=nyt-org>  labor economist, points out.
(As recently as 1980, three times as many such men worked in manufacturing as construction.)

The housing boom was like a giant jobs program for many workers who otherwise would have struggled to find decent paying work.

The housing bust has forced many of them into precisely that struggle and helps explain the recession’s outsize toll on Latinos and men. In the summer of 2005, just as the real estate market was peaking, I spent a day visiting home construction sites in Frederick, Md., something of a Washington exurb, interviewing <http://www.nytimes.com/2005/07/09/realestate/09complex.html>  the workers. They were almost exclusively Latino.

At the time, the national unemployment rate for Latino men was 3.6 percent. Today, when there aren’t many homes being built in Frederick or anywhere else, that unemployment rate is 11 percent. And this number understates the damage, since it excludes a considerable number of immigrants who have returned home.

Frederick was typical of the boom in another way, too. It wasn’t nearly as affluent as some closer suburbs. Now the bust is widening that gap.

If you look at the interactive map with this column, you will see the places that already had high unemployment before the recession have also had some of the largest increases. Some are victims of the housing bust, like inland California. Others are manufacturing centers, as in Michigan and North Carolina, whose long-term decline is accelerating. Rhode Island, home to both factories and Boston exurbs, has one of the highest jobless rates in the nation. All of these trends will serve to increase inequality. Yet I still think the Great Recession will eventually end up compressing the rungs on the nation’s economic ladder, for the same three fundamental reasons that the Great Depression <http://topics.nytimes.com/top/reference/timestopics/subjects/g/great_de
pression_1930s/index.html?inline=nyt-classifier>  did. Why?

The first is the stock market crash. Clearly, it has hurt wealthy and upper middle-class families, who own the bulk of stock, more than others. In addition, thousands of high-paying Wall Street jobs — jobs that have helped the share of income flowing to the top 1 percent of earners soar in recent decades — will disappear.

Hard as it may be to believe, the crash will also help a lot of young families. The stocks <http://topics.nytimes.com/your-money/investments/stocks-and-bonds/index
.html?inline=nyt-classifier>  that they buy in coming years are likely to appreciate far more <http://www.businessweek.com/1999/99_17/b3626126.htm>  than they would have if the Dow were still above 14,000. The same is true of future house purchases for the one in three families still renting a home.

The second reason is government policy. The Obama administration plans <http://www.whitehouse.gov/omb/budget/>  to raise taxes on the affluent, cut them for everyone else (so long as the government can afford it, that is) and take other steps to reduce inequality. Franklin D.
Roosevelt
<http://topics.nytimes.com/top/reference/timestopics/people/r/franklin_d
elano_roosevelt/index.html?inline=nyt-per>  did something similar and it had a huge effect.

Of course, these two factors both boil down to redistribution. One group is benefiting at the expense of another. Yes, many of the people on the losing end of that shift have done quite well in recent years, far better than most Americans. Still, the shift isn’t making the economic pie any bigger. It is simply being divided differently.

Which is why the third factor — education — is the most important of all. It can make the pie larger and divide it more evenly.

That was the legacy of the great surge in school enrollment during the Great Depression. Teenagers who once would have dropped out to do factory work instead stayed in high school, notes Claudia Goldin, an economist who recently wrote a history <http://www.hup.harvard.edu/catalog/GOLRAC.html?show=reviews>  of education with Mr. Katz.

In the manufacturing-heavy mid-Atlantic states, the high school graduation rate was just above 20 percent in the late 1920s. By 1940, it was almost 60 percent. These graduates then became the skilled workers and teachers who helped build the great post-World War II American economy.

Nothing would benefit tomorrow’s economy more than a similar surge. And there is some evidence that it’s starting to happen. In El Centro, enrollment at Imperial Valley Community College <http://www.imperial.edu/>  jumped 11 percent this semester. Ed Gould, the college president, said he expected applications to keep rising next year.

Unfortunately, California — one of the states hit hardest by the Great Recession — is in the midst of a fiscal crisis. So Imperial Valley’s budget is being capped. Next year, Mr. Gould expects he will have to tell some students that they can’t take a full load of classes, just when they most need help.

The Spectacular, Sudden Crash of the Global Economy

By Joshua Holland, AlterNet
Posted on February 24, 2009, Printed on February 24, 2009
http://www.alternet.org/story/128412/

The worldwide economic meltdown has sent the wheels spinning off the project of building a single, business-friendly global economy. 
Worldwide, industrial production has ground to a halt. Goods are stacking up, but nobody's buying; the Washington Post reports that "the world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores." A Hong Kong-based shipping broker told The Telegraph that his firm had "seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster." The Economist noted that one can now ship a container from China to Europe for free -- you only need to pick up the fuel and handling costs -- but half-empty freighters are the norm along the world's busiest shipping routes.  Global airfreight dropped by almost a quarter in December alone; Giovanni Bisignani, who heads a shipping industry trade group, called the "free fall" in global cargo "unprecedented and shocking."
And while Americans have every reason to be terrified about their own econopocalypse, the New York Times noted that everything is relative: 
In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad. 
Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent. 
Chinese manufacturing declined in each of the last five months; according to the Financial Times, "More than 20 [million] rural migrant workers in China have lost their jobs and returned to their home villages or towns as a result of the global economic crisis." The UN estimates that the downturn could claim 50 million jobs worldwide, prompting Dennis Blair, the U.S. National Intelligence Director, to warn Congress that, "instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism." 
Riots, strikes and other forms of civil unrest have become widespread the world over; governments have fallen. In Europe, parties of the far right and left have seen their fortunes rise. 
The model of economic globalization that's dominated during the past 40 years is, if not dead, at least in critical condition. Few progressives will mourn its demise -- it was both a proximate cause of the economic meltdown in which we find ourselves today, and one of its victims. But if we are reaching the end of an era, questions arise about not only what will replace it, but also how we'll finance the government spending that most economists agree will be required to stave off a long, painful depression. 
Always a Flawed Model 
For almost 40 years, smooth-talking snake-oil salesmen in well-tailored suits have pitched the wonders of a globalized economy. Politicians and pundits alike insisted that the wealthy states at the core of that worldwide economy could shift labor-intensive production to the poorer countries at the edges, in search of a cheaper pair of hands and less nettlesome regulations, and that ordinary working people would benefit. Whatever pain Americans might feel as a result of the project was merely temporary “displacement,” they argued, and anyway those cheap toys at Wal-Mart more than offset any problems that might come along with the decimation of America’s middle class. After all, a little lead never hurt anyone. 
The same hucksters sold a similar bill of goods to the developing world. Look outward, they said, build export economies and turn those peasants into factory line workers. Sign treaties forcing governments to let multinationals move goods and capital freely, keep their regulators out of the way of Big Business’s profits and prosperity will surely follow. Most governments adhered to this pro-corporate orthodoxy, slashing taxes on foreign companies and scrapping various controls on foreign investment. Largely unregulated “free trade” zones proliferated along the world’s significant shipping routes.  
The result was an explosion in international trade and a distinct increase in economic inequality in both poorer and richer countries. 
Among the wealthy countries, nowhere was this truer than in the United States, with its fealty to a mythic “free market” and its elites’ scorn for a robust safety net. After union-busting, global trade deals have done the most damage to workers’ bargaining power. Whereas companies used to negotiate with their employees in relatively good faith, those negotiations are now overshadowed by the threat -- ubiquitous in labor disputes today -- to simply move the whole plant to Mexico or China. 
The result was an illusion of prosperity. Corporate profits rose (in 2004, corporate profits took the largest share of national income since they started tracking the data in 1929 and wages took the smallest), and high earners did very well too. When the oil shock hit in 1973, those in the top one percent of the income ladder took in just over 9 percent of the nation’s income; by 2006, they grabbed almost 23 percent. In the intervening years, their average incomes more than tripled (Excel file).  
The rest of us didn’t do as well. In 1973, the bottom 90 percent of the economic pile -- most of us -- shared two-thirds of the nation’s income; by 2006, we got half. If you take off the top ten percent of the income ladder, the rest of the country in 2006 earned, on average, 2 percent less than they did 30 plus years earlier, despite the fact that the economy as a whole had grown by 160 percent over that time.  
But we continued to buy; it's become almost a cliché to say that American consumerism is the engine of the global economy.
How did we do it with incomes stagnating? First, women entered the workforce in huge numbers, transforming the “typical” single-breadwinner family into a two-earner household. (Between 1955 and 2002, the percentage of working-age women who had jobs outside the home almost doubled.) 
After that, we started financing our lifestyles through debt -- mounds of it. Consumer debt blossomed; trade deficits (which are ultimately financed by debt) exploded and the government started running big budget deficits year in an year out. In the period after World War Two, while wages were rising along with the overall economy, Americans socked away over 10 percent of the nation’s income in savings. But in the 1980s, that began to decline -- the savings rate fell from 11 percent in the 1960s and ‘70s, to 7 percent in the 1980s, and by 2005, it stood at just one percent (household savings that year were actually in negative territory). 
After the collapse of the dot-com bubble and the recession that followed it, the economic “expansion” of the Bush era was the first on record in which median incomes never got back to where they were before the crash. Fortunately for Wal-Mart shoppers, a massive housing bubble was rising. Americans started financing their consumption by taking chunks of equity out of their homes. The result: in 2005, long before the housing bubble crashed, the average amount of equity Americans had in their homes was already the lowest it had ever been. 
We hear a lot of chatter about a “credit crunch” being at the root of our economic woes -- that banks aren’t lending to otherwise qualified individuals and businesses. The truth, however, is that before the housing (and stock) markets crashed, the average American household already had 20 percent more in debt than it earned in a year. 
Already deeply in the hole, when the markets crashed, consumers stopped spending, and that's fueled millions of layoffs, led to a mountain of foreclosures, and left state budgets decimated. The connection between decades of false prosperity, the piles of household debt that resulted, and the degree to which that left American families vulnerable to the bubble’s crash is not difficult to see. 
Global Illusion of Prosperity  
During the “era of globalization," massive increases in trade created a similar illusion of prosperity, masking a long-term decline in real economic growth worldwide. 
Much of Asia has become a huge production platform for the West. It’s been said, half-jokingly, that the modern global economy works something like this: the U.S. produces pieces of green paper, which it trades to China for the goods lining the shelves of Wal-Mart and Target, the Chinese trade those pieces of paper to the oil-producing states for energy, and the oil producers exchange them with Europe for Mercedes and foie gras. 
Economist Robert Brenner described a "long downturn" in the world's wealthiest countries, noting that their economies grew by a steady rate of 5 percent or more each year from the end of World War II through the 1960s, but in the 1970s their growth fell to 3.6 percent, and it has averaged around 3 percent since 1980. 
But as the social scientist Walden Bello pointed out, even those anemic numbers are misleading. “China's 8-10% annual growth rate has probably been the principal stimulus of growth in the world economy in the last decade,” he wrote. Without China’s (and to a lesser degree India’s) consistent growth rates, global economic expansion has been all but nonexistent.  
China became an export engine by keeping wages down through repressive union-busting and by drawing on an almost endless supply of poor rural peasants to work its production lines.  
While global trade flows have exploded, much of that trade has been between multinationals based in the advanced economies and their own offshore units. They ship production overseas, but the goods produced end up back in domestic markets; it’s a means of avoiding “first-world” wages, public interest regulations and environmental restrictions. 
China and the U.S. have developed a precariously symbiotic relationship. As Walden Bello wrote, “With its reserve army of cheap labor unmatched by any country in the world, China became the ‘workshop of the world,’ drawing in $50 billion in foreign investment annually by the first half of this decade.” To survive, firms all over the world, "had no choice but to transfer their labor-intensive operations to China to take advantage of what came to be known as the ‘China price,’ provoking in the process a tremendous crisis in the advanced capitalist countries’ labor forces.” 
It was always an unsustainable model; the United States’ annual trade deficit with China -- financed by debt -- was $6 billion as recently as the mid-1980s; by last year it had exploded to $266 billion.
Defenders of the global trade regime have long argued that China’s currency will rise in value against the dollar, the trade deficit will shrink, and there will be significant “decoupling” between the two economic powerhouses as a new generation of middle-class consumers in the East Asian countries begin demanding a greater share of all those manufactured goods. 
On the surface, it appeared that at least the last part of that was indeed happening. As Bello noted, “To satisfy China's thirst for capital and technology-intensive goods, Japanese exports shot up by a record 44%, or $60 billion. Indeed, China became the main destination for Asia's exports, accounting for 31% while Japan's share dropped from 20% to 10%. China is now the overwhelming driver of export growth in Taiwan and the Philippines, and the majority buyer of products from Japan, South Korea, Malaysia, and Australia.”  
But Bello went on to describe that this "decoupling" was also an illusion: 
Research by economists C.P. Chandrasekhar and Jayati Ghosh, underlined that China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, "if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession," they asserted, "this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries." 
The collapse of Asia's key market has banished all talk of decoupling. The image of decoupled locomotives — one coming to a halt, the other chugging along on a separate track — no longer applies, if it ever had. Rather, U.S.-East Asia economic relations today resemble a chain-gang linking not only China and the United States but a host of other satellite economies. They are all linked to debt-financed middle-class spending in the United States, which has collapsed.
We often hear that U.S. consumer spending accounts for 70 percent of the economic activity in the country. Do the math: with 20 percent of the world’s economic activity, U.S. consumers -- most weighed down with stagnant wages and maxed-out credit -- make up about 14 percent of the planet’s economic demand. Add the other affluent countries (which were also heavily invested in our real estate market and related securities), and it’s easy to see why the economic meltdown has grown to global proportions. The dominoes are tumbling. 
What’s Next? 
International trade existed long before the era of economic globalization, and will continue after its demise. The so-called “free trade” agreements championed by both Democratic and Republican lawmakers, liberals and conservatives alike, for the past few decades was always less about trade than constraining the policy options of governments through treaty.  
The one likely bright spot in all this is that the cookie-cutter, one-size-fits-all economic orthodoxy lies in ruins. What will replace it is a question for the long-term. 
The more immediate question is two-fold. First, in a global economic crisis such as the one we’re experiencing today, where is the engine of rapid growth that might pull the world’s economy out of the doldrums? Recessions of recent years -- in the early 1980s, the early 1990s and the early 2000s -- weren’t global in nature; rapidly developing economies in Asia and Eastern Europe, and later the rise of the U.S. housing market, pulled the world out of the doldrums. It’s difficult to see where that kind of growth might be found today. 
And then there is the question of how long foreign investors will continue to run our tab. As Americans’ demand for just about everything has tanked, economists from across the political spectrum have called on the government to take up the slack. So we got a big stimulus package -- probably the first in a series -- which will be tacked onto a budget that was already deeply in the red. The hole is cavernous, and we have little choice to dig deeper. In 2008, the official deficit was around $500 billion; the most optimistic projections are deficits averaging around $1.35 trillion in both 2009 and 2010.
In 2006, economist Barry Bosworth testified before Congress that “net foreign lending” had been almost $800 billion in the red -- a negative 7.2 percent of national income. “This degree of reliance on foreign financing is unprecedented,” he explained, “but has been achieved with relatively few strains because foreigners perceive the United States as offering safe and attractive investment opportunities.”  
Right now, foreign investors are still snapping up American debt -- the dollar is seen as a safe haven in turbulent seas. But how long, and to what extent they will continue to do so are crucial questions.  
China, with the world’s largest foreign currency holdings -- about 70 percent of which is in U.S. treasury bills -- is still buying, at least for the moment. Luo Ping, director-general of the China Banking Regulatory Commission, recently asked, "Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven," he explained. "For everyone, including China, it is the only option."
But the Chinese are concerned about the stability of their investments. If the U.S. government needs to raise the interest rates on its securities to attract enough foreign investment to cover our shortfall, the value of those T-bills China and other central governments are holding will drop. 
Last week, Secretary of State Hillary Clinton acknowledged that the world economy is anything but decoupled, all but begging the Chinese to continue to buy our debt. According to Agence France Presse, “Clinton and Chinese Foreign Minister Yang Jiechi largely agreed to disagree on human rights,” while “she focused on the need for China to help finance the massive 787-billion-dollar US economic stimulus plan by continuing to buy US Treasuries.”   
In a moment of clarity -- one that shone a light on the rot of the global economic system that has prevailed for the past 40 years, Clinton explained to the Chinese media, "We have to incur more debt … the US needs the investment in Treasury bonds to shore up its economy to continue to buy Chinese products."

Published on Wednesday, February 25, 2009 by The Financial Times
How Bank Bonuses Let Us All Down
by Nassim Nicholas Taleb
One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street - as John Thain, former Merrill Lynch chief executive, put it - is there to "reward talent". While I find this notion of "talent" debatable, I fully agree that incentives are the heart of capitalism and free markets - but certainly not that incentive scheme.
In fact, the incentive scheme commonly in place does the exact opposite of what an "incentive" system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically - while bankers strike it rich. Furthermore, it is that incentive scheme that got us in the current mess.
Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a "systemic crisis" or a "black swan" for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.
Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the "free option" on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.
If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him - only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives.
For hedge funds and medium-sized companies, the incentive problem might be a simple governance issue between private entities free to choose their contract terms. However, when it comes to banks and other "too big to fail" entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back.
The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations.
First, those who are taking risks even outside Tarp or society's protection can still be gaming the system - since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future.
Second, Vikram Pandit, Citigroup's chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do.
Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out. They too should have their past profits clawed back.
Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses.
Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.
No incentive without disincentive. And never trust with your money anyone making a potential bonus.

A Planet on the Brink: Economic Crash Will Fuel Social Unrest

By Michael T. Klare, Tomdispatch.com
Posted on February 24, 2009, Printed on February 25, 2009
http://www.alternet.org/story/128716/

The global economic meltdown has already caused bank failures, bankruptcies, plant closings, and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet. But another perilous consequence of the crash of 2008 has only recently made its appearance: increased civil unrest and ethnic strife. Someday, perhaps, war may follow.
As people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants, and ethnic minorities. (The list could, in the future, prove long and unnerving.) If the present economic disaster turns into what President Obama has referred to as a "lost decade," the result could be a global landscape filled with economically-fueled upheavals.
Indeed, if you want to be grimly impressed, hang a world map on your wall and start inserting red pins where violent episodes have already occurred. Athens (Greece), Longnan (China), Port-au-Prince (Haiti), Riga (Latvia), Santa Cruz (Bolivia), Sofia (Bulgaria), Vilnius (Lithuania), and Vladivostok (Russia) would be a start. Many other cities from Reykjavik, Paris, Rome, and Zaragoza to Moscow and Dublin have witnessed huge protests over rising unemployment and falling wages that remained orderly thanks in part to the presence of vast numbers of riot police. If you inserted orange pins at these locations -- none as yet in the United States -- your map would already look aflame with activity. And if you're a gambling man or woman, it's a safe bet that this map will soon be far better populated with red and orange pins.
For the most part, such upheavals, even when violent, are likely to remain localized in nature, and disorganized enough that government forces will be able to bring them under control within days or weeks, even if -- as with Athens for six days last December -- urban paralysis sets in due to rioting, tear gas, and police cordons. That, at least, has been the case so far. It is entirely possible, however, that, as the economic crisis worsens, some of these incidents will metastasize into far more intense and long-lasting events: armed rebellions, military takeovers, civil conflicts, even economically fueled wars between states.
Every outbreak of violence has its own distinctive origins and characteristics. All, however, are driven by a similar combination of anxiety about the future and lack of confidence in the ability of established institutions to deal with the problems at hand. And just as the economic crisis has proven global in ways not seen before, so local incidents -- especially given the almost instantaneous nature of modern communications -- have a potential to spark others in far-off places, linked only in a virtual sense.
A Global Pandemic of Economically Driven Violence
The riots that erupted in the spring of 2008 in response to rising food prices suggested the speed with which economically-related violence can spread. It is unlikely that Western news sources captured all such incidents, but among those recorded in the New York Times and the Wall Street Journal were riots in Cameroon, Egypt, Ethiopia, Haiti, India, Indonesia, Ivory Coast, and Senegal.
In Haiti, for example, thousands of protesters stormed the presidential palace in Port-au-Prince and demanded food handouts, only to be repelled by government troops and UN peacekeepers. Other countries, including Pakistan and Thailand, quickly sought to deter such assaults by deploying troops at farms and warehouses throughout the country.
The riots only abated at summer's end when falling energy costs brought food prices crashing down as well. (The cost of food is now closely tied to the price of oil and natural gas because petrochemicals are so widely and heavily used in the cultivation of grains.) Ominously, however, this is sure to prove but a temporary respite, given the epic droughts now gripping breadbasket regions of the United States, Argentina, Australia, China, the Middle East, and Africa. Look for the prices of wheat, soybeans, and possibly rice to rise in the coming months -- just when billions of people in the developing world are sure to see their already marginal incomes plunging due to the global economic collapse.
Food riots were but one form of economic violence that made its bloody appearance in 2008. As economic conditions worsened, protests against rising unemployment, government ineptitude, and the unaddressed needs of the poor erupted as well. In India, for example, violent protests threatened stability in many key areas. Although usually described as ethnic, religious, or caste disputes, these outbursts were typically driven by economic anxiety and a pervasive feeling that someone else's group was faring better than yours -- and at your expense.
In April, for example, six days of intense rioting in Indian-controlled Kashmir were largely blamed on religious animosity between the majority Muslim population and the Hindu-dominated Indian government; equally important, however, was a deep resentment over what many Kashmiri Muslims experienced as discrimination in jobs, housing, and land use. Then, in May, thousands of nomadic shepherds known as Gujjars shut down roads and trains leading to the city of Agra, home of the Taj Mahal, in a drive to be awarded special economic rights; more than 30 people were killed when the police fired into crowds. In October, economically-related violence erupted in Assam in the country's far northeast, where impoverished locals are resisting an influx of even poorer, mostly illegal immigrants from nearby Bangladesh.
Economically-driven clashes also erupted across much of eastern China in 2008. Such events, labeled "mass incidents" by Chinese authorities, usually involve protests by workers over sudden plant shutdowns, lost pay, or illegal land seizures. More often than not, protestors demanded compensation from company managers or government authorities, only to be greeted by club-wielding police.
Needless to say, the leaders of China's Communist Party have been reluctant to acknowledge such incidents. This January, however, the magazine Liaowang (Outlook Weekly) reported that layoffs and wage disputes had triggered a sharp increase in such "mass incidents," particularly along the country's eastern seaboard, where much of its manufacturing capacity is located.
By December, the epicenter of such sporadic incidents of violence had moved from the developing world to Western Europe and the former Soviet Union. Here, the protests have largely been driven by fears of prolonged unemployment, disgust at government malfeasance and ineptitude, and a sense that "the system," however defined, is incapable of satisfying the future aspirations of large groups of citizens.
One of the earliest of this new wave of upheavals occurred in Athens, Greece, on December 6, 2008, after police shot and killed a 15-year-old schoolboy during an altercation in a crowded downtown neighborhood. As news of the killing spread throughout the city, hundreds of students and young people surged into the city center and engaged in pitched battles with riot police, throwing stones and firebombs. Although government officials later apologized for the killing and charged the police officer involved with manslaughter, riots broke out repeatedly in the following days in Athens and other Greek cities. Angry youths attacked the police -- widely viewed as agents of the establishment -- as well as luxury shops and hotels, some of which were set on fire. By one estimate, the six days of riots caused $1.3 billion in damage to businesses at the height of the Christmas shopping season.
Russia also experienced a spate of violent protests in December, triggered by the imposition of high tariffs on imported automobiles. Instituted by Prime Minister Vladimir Putin to protect an endangered domestic auto industry (whose sales were expected to shrink by up to 50% in 2009), the tariffs were a blow to merchants in the Far Eastern port of Vladivostok who benefited from a nationwide commerce in used Japanese vehicles. When local police refused to crack down on anti-tariff protests, the authorities were evidently worried enough to fly in units of special forces from Moscow, 3,700 miles away.
In January, incidents of this sort seemed to be spreading through Eastern Europe. Between January 13th and 16th, anti-government protests involving violent clashes with the police erupted in the Latvian capital of Riga, the Bulgarian capital of Sofia, and the Lithuanian capital of Vilnius. It is already essentially impossible to keep track of all such episodes, suggesting that we are on the verge of a global pandemic of economically driven violence.
A Perfect Recipe for Instability
While most such incidents are triggered by an immediate event -- a tariff, the closure of local factory, the announcement of government austerity measures -- there are systemic factors at work as well. While economists now agree that we are in the midst of a recession deeper than any since the Great Depression of the 1930s, they generally assume that this downturn -- like all others since World War II -- will be followed in a year, or two, or three, by the beginning of a typical recovery.
There are good reasons to suspect that this might not be the case -- that poorer countries (along with many people in the richer countries) will have to wait far longer for such a recovery, or may see none at all. Even in the United States, 54% of Americans now believe that "the worst" is "yet to come" and only 7% that the economy has "turned the corner," according to a recent Ipsos/McClatchy poll; fully a quarter think the crisis will last more than four years. Whether in the U.S., Russia, China, or Bangladesh, it is this underlying anxiety -- this suspicion that things are far worse than just about anyone is saying -- which is helping to fuel the global epidemic of violence.
The World Bank's most recent status report, Global Economic Prospects 2009, fulfills those anxieties in two ways. It refuses to state the worst, even while managing to hint, in terms too clear to be ignored, at the prospect of a long-term, or even permanent, decline in economic conditions for many in the world. Nominally upbeat -- as are so many media pundits -- regarding the likelihood of an economic recovery in the not-too-distant future, the report remains full of warnings about the potential for lasting damage in the developing world if things don't go exactly right.
Two worries, in particular, dominate Global Economic Prospects 2009: that banks and corporations in the wealthier countries will cease making investments in the developing world, choking off whatever growth possibilities remain; and that food costs will rise uncomfortably, while the use of farmlands for increased biofuels production will result in diminished food availability to hundreds of millions.
Despite its Pollyanna-ish passages on an economic rebound, the report does not mince words when discussing what the almost certain coming decline in First World investment in Third World countries would mean:

"Should credit markets fail to respond to the robust policy interventions taken so far, the consequences for developing countries could be very serious. Such a scenario would be characterized by... substantial disruption and turmoil, including bank failures and currency crises, in a wide range of developing countries. Sharply negative growth in a number of developing countries and all of the attendant repercussions, including increased poverty and unemployment, would be inevitable."
In the fall of 2008, when the report was written, this was considered a "worst-case scenario." Since then, the situation has obviously worsened radically, with financial analysts reporting a virtual freeze in worldwide investment. Equally troubling, newly industrialized countries that rely on exporting manufactured goods to richer countries for much of their national income have reported stomach-wrenching plunges in sales, producing massive plant closings and layoffs.
The World Bank's 2008 survey also contains troubling data about the future availability of food. Although insisting that the planet is capable of producing enough foodstuffs to meet the needs of a growing world population, its analysts were far less confident that sufficient food would be available at prices people could afford, especially once hydrocarbon prices begin to rise again. With ever more farmland being set aside for biofuels production and efforts to increase crop yields through the use of "miracle seeds" losing steam, the Bank's analysts balanced their generally hopeful outlook with a caveat: "If biofuels-related demand for crops is much stronger or productivity performance disappoints, future food supplies may be much more expensive than in the past."
Combine these two World Bank findings -- zero economic growth in the developing world and rising food prices -- and you have a perfect recipe for unrelenting civil unrest and violence. The eruptions seen in 2008 and early 2009 will then be mere harbingers of a grim future in which, in a given week, any number of cities reel from riots and civil disturbances which could spread like multiple brushfires in a drought.
Mapping a World at the Brink
Survey the present world, and it's all too easy to spot a plethora of potential sites for such multiple eruptions -- or far worse. Take China. So far, the authorities have managed to control individual "mass incidents," preventing them from coalescing into something larger. But in a country with a more than two-thousand-year history of vast millenarian uprisings, the risk of such escalation has to be on the minds of every Chinese leader.
On February 2nd, a top Chinese Party official, Chen Xiwen, announced that, in the last few months of 2008 alone, a staggering 20 million migrant workers, who left rural areas for the country's booming cities in recent years, had lost their jobs. Worse yet, they had little prospect of regaining them in 2009. If many of these workers return to the countryside, they may find nothing there either, not even land to work.
Under such circumstances, and with further millions likely to be shut out of coastal factories in the coming year, the prospect of mass unrest is high. No wonder the government announced a $585 billion stimulus plan aimed at generating rural employment and, at the same time, called on security forces to exercise discipline and restraint when dealing with protesters. Many analysts now believe that, as exports continue to dry up, rising unemployment could lead to nationwide strikes and protests that might overwhelm ordinary police capabilities and require full-scale intervention by the military (as occurred in Beijing during the Tiananmen Square demonstrations of 1989).
Or take many of the Third World petro-states that experienced heady boosts in income when oil prices were high, allowing governments to buy off dissident groups or finance powerful internal security forces. With oil prices plunging from $147 per barrel of crude oil to less than $40 dollars, such countries, from Angola to shaky Iraq, now face severe instability.
Nigeria is a typical case in point: When oil prices were high, the central government in Abuja raked in billions every year, enough to enrich elites in key parts of the country and subsidize a large military establishment; now that prices are low, the government will have a hard time satisfying all these previously well-fed competing obligations, which means the risk of internal disequilibrium will escalate. An insurgency in the oil-producing Niger Delta region, fueled by popular discontent with the failure of oil wealth to trickle down from the capital, is already gaining momentum and is likely to grow stronger as government revenues shrivel; other regions, equally disadvantaged by national revenue-sharing policies, will be open to disruptions of all sorts, including heightened levels of internecine warfare.
Bolivia is another energy producer that seems poised at the brink of an escalation in economic violence. One of the poorest countries in the Western Hemisphere, it harbors substantial oil and natural gas reserves in its eastern, lowland regions. A majority of the population -- many of Indian descent -- supports President Evo Morales, who seeks to exercise strong state control over the reserves and use the proceeds to uplift the nation's poor. But a majority of those in the eastern part of the country, largely controlled by a European-descended elite, resent central government interference and seek to control the reserves themselves. Their efforts to achieve greater autonomy have led to repeated clashes with government troops and, in deteriorating times, could set the stage for a full-scale civil war.
Given a global situation in which one startling, often unexpected development follows another, prediction is perilous. At a popular level, however, the basic picture is clear enough: continued economic decline combined with a pervasive sense that existing systems and institutions are incapable of setting things right is already producing a potentially lethal brew of anxiety, fear, and rage. Popular explosions of one sort or another are inevitable.
Some sense of this new reality appears to have percolated up to the highest reaches of the U.S. intelligence community. In testimony before the Senate Select Committee on Intelligence on February 12th, Admiral Dennis C. Blair, the new Director of National Intelligence, declared, "The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications... Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period" -- certain to be the case in the present situation.
Blair did not specify which countries he had in mind when he spoke of "regime-threatening instability" -- a new term in the American intelligence lexicon, at least when associated with economic crises -- but it is clear from his testimony that U.S. officials are closely watching dozens of shaky nations in Africa, the Middle East, Latin America, and Central Asia.
Now go back to that map on your wall with all those red and orange pins in it and proceed to color in appropriate countries in various shades of red and orange to indicate recent striking declines in gross national product and rises in unemployment rates. Without 16 intelligence agencies under you, you'll still have a pretty good idea of the places that Blair and his associates are eyeing in terms of instability as the future darkens on a planet at the brink.
Michael T. Klare is a professor of peace and world security studies at Hampshire College and the author, most recently, of Rising Powers, Shrinking Planet: The New Geopolitics of Energy (Metropolitan Books).

Recipe for Disaster: The Formula That Killed Wall Street

 By Felix Salmon

 Global Research <http://www.globalresearch.ca> , February 25, 2009

wired.com
<http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all > 

 In the mid-'80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits. Their methods for minting money worked brilliantly... until one of them devastated the global economy.

A year ago, it was hardly unthinkable that a math wizard like David X.
Li <http://en.wikipedia.org/wiki/David_X._Li> might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function <http://en.wikipedia.org/wiki/Copula_%28statistics%29> , looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon.
One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

How could one formula pack such a devastating punch? The answer lies in the bond market <http://en.wikipedia.org/wiki/Credit_market> , the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.

A bond, of course, is just an IOU, a promise to pay back money with interest by certain dates. If a company—say, IBM—borrows money by issuing a bond, investors will look very closely over its accounts to make sure it has the wherewithal to repay them. The higher the perceived risk—and there's always some risk—the higher the interest rate the bond must carry.

Bond investors are very comfortable with the concept of probability. If there's a 1 percent chance of default but they get an extra two percentage points in interest, they're ahead of the game overall—like a casino, which is happy to lose big sums every so often in return for profits most of the time.

Bond investors also invest in pools of hundreds or even thousands of mortgages. The potential sums involved are staggering: Americans now owe more than $11 trillion on their homes. But mortgage pools are messier than most bonds. There's no guaranteed interest rate, since the amount of money homeowners collectively pay back every month is a function of how many have refinanced and how many have defaulted. There's certainly no fixed maturity date: Money shows up in irregular chunks as people pay down their mortgages at unpredictable times—for instance, when they decide to sell their house. And most problematic, there's no easy way to assign a single probability to the chance of default.

Wall Street solved many of these problems through a process called tranching, which divides a pool and allows for the creation of safe bonds with a risk-free triple-A credit rating <http://en.wikipedia.org/wiki/Bond_credit_rating> . Investors in the first tranche, or slice, are first in line to be paid off. Those next in line might get only a double-A credit rating on their tranche of bonds but will be able to charge a higher interest rate for bearing the slightly higher chance of default. And so on.

The reason that ratings agencies and investors felt so safe with the triple-A tranches was that

they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.

Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation. Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.

Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.

To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.

But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.

If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.

But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.

In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?

Here's what killed your 401(k)   David X. Li's Gaussian copula function
as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.

Probability

Specifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer.

Survival times

The amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies.

Equality

A dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.

Copula

This couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number.
Errors here massively increase the risk of the whole equation blowing up.

Distribution functions

The probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates.

Gamma

The all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.

Enter Li, a star mathematician who grew up in rural China in the 1960s.
He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo. In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.

Li's trajectory is typical of the quant era, which began in the mid-1980s. Academia could never compete with the enormous salaries that banks and hedge funds were offering. At the same time, legions of math and physics PhDs were required to create, price, and arbitrage Wall Street's ever more complex investment structures.

In 2000, while working at JPMorgan Chase, Li published a paper <http://www.riskmetrics.com/publications/working_papers/default_correlation.html>  in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps <http://www.investopedia.com/terms/c/creditdefaultswap.asp> .

If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.

When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).

It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's <http://www.moodys.com/> —or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs <http://en.wikipedia.org/wiki/Collateralized_debt_obligation> . You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared <http://www.investopedia.com/terms/c/cdo2.asp> , which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie <http://www.stanford.edu/%7Eduffie/> , a Stanford University finance professor who served on Moody's Academic Advisory Research Committee.
The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote <http://www.sec.gov/comments/s7-04-07/s70407-1.pdf>  derivatives guru Janet Tavakoli <http://www.tavakolistructuredfinance.com/biography.html> in 2006.

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott <http://www.wilmott.com/>  wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone.
During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.

In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.

In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do.
But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.

Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years.
But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.

Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.

"Everyone was pinning their hopes on house prices continuing to rise,"
says Kai Gilkes
<https://www.creditsights.com/team/research/Kai+Gilkes.htm>  of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."

Bankers should have noted that very small changes in their underlying assumptions could result in very large changes in the correlation number. They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere. Where had the risk gone?

They didn't know, or didn't ask. One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test. Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions. Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked. They could, however, understand something as simple as a single correlation number. That was the problem.

"The relationship between two assets can never be captured by a single scalar quantity," Wilmott says. For instance, consider the share prices of two sneaker manufacturers: When the market for sneakers is growing, both companies do well and the correlation between them is high. But when one company gets a lot of celebrity endorsements and starts stealing market share from the other, the stock prices diverge and the correlation between them turns negative. And when the nation morphs into a land of flip-flop-wearing couch potatoes, both companies decline and the correlation becomes positive again. It's impossible to sum up such a history in one correlation number, but CDOs were invariably sold on the premise that correlation was more of a constant than a variable.

No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005 <http://math.bu.edu/people/murad/MarkWhitehouseSlicesofRisk.txt> .

"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.

Nassim Nicholas Taleb <http://www.fooledbyrandomness.com/> , hedge fund manager and author of The Black Swan
<http://www.amazon.com/Black-Swan-Impact-Highly-Improbable/dp/1400063515
> , is particularly harsh when it comes to the copula. "People got very
excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."

Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.

In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

As Li himself said
<http://nakedshorts.typepad.com/nakedshorts/2005/09/the_li_model_so.html
>  of his own model: "The most dangerous part is when people believe
everything coming out of it."

Felix Salmon (felix@felixsalmon.com) writes the Market Movers financial blog at Portfolio.com.

James Galbraith: Obama Isn't Doing Enough to Solve the Financial Crisis

By Nick Baumann, MotherJones.com
Posted on February 27, 2009, Printed on February 27, 2009

The financial crisis is even worse than people think (and people already think it's pretty bad), and we aren't doing enough to stop it, economist and Mother Jones contributor <http://www.motherjones.com/authors/james-k-galbraith>  James K.
Galbraith told the House Financial Services Committee on Thursday morning. From his prepared testimony:

In 1930, John Maynard Keynes wrote, "The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history." That catastrophe was the Great Crash of 1929, the collapse of money values, the destruction of the banking system. The questions before us today are: is the crisis we are living through similar? And if so, are we taking adequate steps to deal with it? I believe the answers are substantially yes, and substantially no.

Galbraith pointed to six significant problems with the Obama administration's response to the financial crisis. First, he said, the White House is being way too optimistic:

... [B]ad news has been outrunning the forecasts for months.
Professional economists, working with the normal models, failed to predict the crisis. In many important cases, including high officials, they actively denied it could happen. Chairman Bernanke was typical:
through July of 2007, he argued that the Federal Reserve Board's predominant concern was inflation; thus the Federal Reserve was unable to give Congress a foretaste of a crisis that was to erupt within days.
And as the crisis has unfolded, events have repeatedly come in worse than expected or caught us by surprise. This should tell us something.

Second, we know that the origins of the crisis lie in a breakdown of the banking and financial system, following a breakdown in the regulation of mortgage originations, in underwriting, and in credit default swaps.
This is something we have not seen in our lifetimes. We know that the actions already taken in response – the TARP, the nationalization of the commercial paper market and the swap agreements with the ECB and other central banks – are unprecedented. We know that these measures have, at best, only averted a deeper catastrophe. And we know that the baseline forecast, which is a mechanical procedure based on statistical relationships between non-financial variables, for the most part, takes none of this into account.

We therefore have no basis for confidence in the baseline forecasts, and we should prepare ourselves, as Churchill said to Parliament at the time of Dunkirk, "for hard and heavy tidings."

The second problem Galbraith identified with the Obama administration's response to the crisis is an over-reliance on monetary policy:

[M]onetary policy today has little power to restore growth. In the Depression they called it "pushing on a string." With interest rates already at zero, there is little more the Federal Reserve can do.

The Obama administration's bank rescue plan is also fatally flawed, Galbraith says:

The bank plan appears to turn on a metaphor. Credit is "blocked" or "frozen." It must be made to "flow again." Take a plunger to the toxic assets, a blowtorch to the pipes, it's said, and credit will flow. This will make the recession essentially normal, validating the baseline forecast. Add the stimulus to a normalization of credit, and the crisis will end. That's the thinking, so far as I can tell, of the Treasury department in this new administration.

But common sense begins by noting that the metaphor is wrong. Credit is not a flow. It is not something that can be forced downstream by clearing a pipe. Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. The borrower must meet two conditions ... [creditworthiness and willingness to borrow] ... The "credit-flow" metaphor implies that people came flocking to the auto showrooms last November and were turned away because there were no loans to be had. This is not true. What happened was that people stopped coming in. And they stopped coming in because, suddenly, they felt poor, uncertain and afraid.

In this situation, stuffing the banks with money will not change their behavior... [T]he bank chiefs have made it very clear, in testimony here and elsewhere: they will not return to ordinary commercial, industrial and residential lending until they can see a reasonable way to make money at it... More likely, they will hunker down, invest in Treasuries and prime corporate bonds, and rebuild capital for the long-term, as they did from 1989 to 1994. Only this time, with the yield curve as flat as it is and the insolvencies as deep as they are, it could take a decade or longer.

[...]

The Treasury plan, if put in place as described, would have a perverse effect on the distribution of wealth. To guarantee bad assets at rates above their market value is simply a transfer to those who hold those assets. It would enable them to convert those assets, sooner or later, to cash. The plan would thus preserve the wealth of bank insiders and financial investors, while failing to prevent the collapse of the wealth of almost everyone else. I cannot believe that the American public will tolerate this, for very long.

[...]

In short, the Treasury plan will not achieve its stated goals, and meanwhile risks both triggering inflation and obstructing growth.

Galbraith sees no alternative to putting "several very big banks" that are "deeply troubled" into receivership, breaking them up, firing existing management, and selling them in parts or relaunching them as "multiple mid-sized institutions. While that happens, he says, there should be a publicly-run bank "to provide the loans to businesses – small, medium and large – sufficient to keep them running through the crisis," as the Reconstruction Finance Corporation did during the Depression.

The fourth point that Galbraith emphasizes is that Social Security and Medicare are not causing our problems, and a "preoccupation" with the two programs is "actively dangerous to the prospects for economic recovery." He calls for a "permanent increase" in Social Security benefits, a payroll tax holiday, and a reduction in the age of eligibility for Medicare:

These measures are among the most promising available at this moment.
Congress should be prepared to use them if and when it becomes clear that the present policies are insufficient.

"The housing crisis," Galbraith says, "is at the root of our difficulties," but "There is no way for public policy to stabilize housing prices as such in the near term." But there are other things we can do, and in this sphere, at least, Galbraith thinks the Obama team is on the right track:

The administration's plan of action in the housing sphere is a bright spot on the policy horizon. It meets, so far as I can tell, the tests of fairness and sustainability reasonably well. But it does so only for a limited class of borrowers, who are not too deeply underwater already on their homes. It will provide a measure of relief, but it will not, so far as I can tell, either stop the wave of foreclosures or prevent a continued decline in prices.

Galbraith points to two alternative housing plans that "might work." The first is a moratorium of new foreclosures and the creation of an organization like the depression-era Home Owners Loan Corporation "for triage and renegotiation on a case-by-case basis." (James Ridgeway, Mother Jones' senior Washington correspondent, called for a similar plan <http://www.motherjones.com/politics/2008/09/fanniefreddie-bailout-socia
lism>  in September.) The other alternative would be to allow the normal
foreclosure process to work but to have the government buy foreclosed homes and allow the previous owners to rent their houses while maintaining an option to repurchase their homes from the government at a later date. "This would have the advantage of protecting against moral hazard, while at the same time preserving occupancy, to the maximum extent possible," Galbraith says.

Finally, Galbraith says, the Obama administration has to think long-term, especially about infrastructure, energy, and the dollar. He calls for curtailing crude oil imports, instituting a national infrastructure fund, and conserve energy. On the dollar, he says:

[While] the world crisis has revealed the relative strength of the dollar and the structural weakness of the euro and of other major currencies, ... it awakens an equally serious danger, which is that instability between world currencies could produce a cumulative spiral of global economic collapse. This is an important danger, for which we are ill-prepared. There needs to be a new attention to the financial architecture, both to achieve a coordinated fiscal expansion and to admit the serious possibility of an even larger crisis.

The bottom line, Galbraith emphasizes, is that he believes "we are not in a temporary economic lull, an ordinary recession, from which we will emerge to return to business-as-usual." Instead, he says, "We are at the beginning of a long, profound, painful process of change." On that last bit, at least, Galbraith and the Obama administration can probably agree.

Housing Price Decline Accelerates

Wednesday 25 February 2009, Truthout.org
by: Dean Baker, The Center for Economic and Policy Research
    Housing aid should be focused on nonbubble markets.
    The data in the December Case-Shiller 20-City index indicate that the rate of housing price decline is continuing to accelerate. The data show that house prices in the 20 cities fell at a rate of 2.0 percent in the month of December and were falling at a 21.3 percent annual rate in the last quarter of 2008.
    It is important to remember that these data reflect sale prices in the three month period from October to December. Since there is typically a 6-8 week period between contracts and closing, these data reflect contracts in a period centered on October. This means that the data is already somewhat dated when it is released. If the recent rate of price decline has persisted, prices are already 8 percent lower on average than the data indicate.
    For the fourth consecutive month, prices declined in all twenty cities in the index. While prices continue to decline rapidly in former bubble markets, there were also sharp drops in some markets that had been less affected by the bubble. For example, prices in Minneapolis fell 4.1 percent in December and have fallen at a 31.5 percent annual rate over the last quarter. Prices in Atlanta fell 2.0 percent in December and have fallen at a 21.5 percent rate over the quarter.
    However, most of the bubble markets continue to deflate rapidly. Prices in Phoenix, San Francisco, and Miami fell by 4.5 percent, 3.2 percent, and 2.7 percent, respectively, in December. The respective annual rate of price declines in these cities over the last quarter is 35.9 percent, 32.6 percent, 28.2 percent.
    The implications of this rate of house price decline are striking. The country is losing approximately $400 billion in housing equity every month and would lose more than $4 trillion in housing equity over the course of a year at these rates of decline. Such rapid rates of price decline also make mortgage lending far more risky. A mortgage issued with a 20 percent down payment will be underwater in less than a year with the current rate of price decline shown in the 20-city index. In the cities with the fastest rate of price decline, a mortgage with a 20 percent down payment could be underwater in less than six months.
    The rapid disappearance of home equity also means that fewer buyers will be able to put up any substantial down payment. As plunging home prices destroy home equity, even many long-time homeowners will find themselves in the same situation as first-time homebuyers if they try to buy a new home. With little or no equity in their current home, they will also struggle to find sufficient funds for a down payment.
    This background must be kept in mind when assessing the Obama administration's housing proposal. Given the vast oversupply of housing and the sharp downward momentum in the housing market, a $75 billion program is almost certainly too small to have a substantial impact on the rate of price decline in a $20 trillion market. It is also not clear that it will provide substantial assistance to the homeowners who take part in the program.
    In the partially deflated bubble markets, homeowners are still likely to be paying more in housing costs even after the payment reductions in the Obama plan than they would pay to rent a comparable unit. Given the continuing decline in house prices and the fact that many are already underwater, most homeowners are likely to still end up with no equity when they leave their home. (The median period of homeownership is just seven years.) Given these circumstances, it is difficult to see this plan as especially positive.
    This sort of plan could have been more effective if it focused on the markets where the bubble had already deflated, as measured by the price-to-rent ratio. In these cases, the mortgage subsidies would actually allow homeowners to make monthly payments that are comparable to rents and leave them in a situation where they may end up with equity in their homes. Also, by focusing its money on markets where prices are not over-valued, the government could possibly provide an effective floor.
    ---------
    Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.

Arianna Huffington

HUFFINGTON POST  Posted February 24, 2009 | 07:24 PM (EST)

The Credit Card Debt Crisis: The Next Economic Domino

Hot on the heels of the banking crisis, the employment crisis, and the mortgage/foreclosure crisis, the country is on the verge of experiencing a credit card crisis.
According to the Federal Reserve, the total outstanding credit card debt carried by Americans reached a record $951 billion in 2008 -- a number that will only climb higher as more and more people reach for the plastic to make ends meet. What's more, roughly a third of that is debt held by risky borrowers with low credit ratings.
Credit card defaults are on the rise and are expected to hit 10 percent this year. This will obviously drive many banks closer to failing their stress tests -- but it will have an even greater impact on the lives of people who find themselves sinking deeper and deeper into debt.
It's a particularly vicious economic circle: every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials like food, housing, and medical care -- the costs of which continue to escalate. But as their debt rises, they find it harder to keep up with their payments. When they don't, banks, trying to offset losses in other areas, then turn around and hike interest rates and impose all manner of fees and penalties... all of which makes it even less likely consumers will be able to pay off their mounting debts.
And that's not the end of the economic downward spiral. As more and more Americans default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street "creativity," credit card debt is routinely bundled together into "credit-card receivables" and sold to investors -- often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market. This market motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.
As these borrowers continue to default, banks and the investors who bought their packaged debt will take a serious hit. And how are the credit card companies trying to offset the rise in bad debts? By raising rates on the rest of their customers -- making it likely that more of them will end up defaulting, causing even more losses for the banks. And round and round and round we go.
And such is the paradoxical nature of the meltdown that Americans keep being encouraged to go back to spending in order to get the economy rolling again. But the problem is, more and more Americans are broke. So the only way they can spend is to charge it, running up balances on credit cards that are structured in a way that makes it harder and harder to pay them off.
Getting dizzy yet?
For years, credit card companies have been fattening their bottom lines with an ever-widening array of fees. Late fees, cash-advance fees, over-the-limit fees. In 2007, lenders collected over $18 billion in penalties and fees. JPMorgan Chase, the nation's top credit card lender, recently began charging many of its customers $10 a month for carrying a large balance for too long a time -- that's on top of the interest they are already collecting on those balances.
And interest rates are escalating. Earlier this month, Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent (so nice of them to shave off the .01 to keep it from being 30 percent, isn't it?). The company also recently raised rates by 3 percent on millions of non-payment-missing customers. Citibank is not alone: Capital One raised its standard rate on good customers by up to 6 points, and American Express raised rates by 2-3 percent on the majority of its customers.
Sen. Chris Dodd, chairman of the Senate Banking Committee, accuses the banks of "gouging," saying, "the list of questionable actions credit card companies are engaged in is lengthy and disturbing."
Perhaps he should send the bankers a Bible bookmarked to Deuteronomy 23:19: "thou shalt not lend upon usury to thy brother." Indeed, Sen. Bernie Sanders told me last week that he is working on "anti-usury" legislation.
For their part, the bankers have tried to cloak their behavior with corporatespeak. A Citibank spokesman called the rate hikes the result of "severe funding dislocation," and said, "Citi is repricing a group of customers in our Citi-branded consumer credit card business in the U.S. to appropriately manage these risks." An AmEx spokeswoman chalked up its rate hike to "the cost of doing business."
Making such pronouncements particularly galling is the fact that many of the banks summarily raising interest rates and piling on the penalties have received billions in bailout money. Our money. We gave Citi $45 billion, Bank of America $45 billion, JPMorgan $25 billion, AmEx $3.4 billion, Capital One $3.6 billion, and Discover $1.2 billion. In fact, American Express, Capital One, and Discover all converted to bank holding companies to make themselves eligible for bailout funds.
Yet that money seems to have been delivered with no strings attached. Banks cash their bailout checks, then turn around and gouge their most vulnerable customers. Priceless.
One of the ironies of the credit card crisis is that the financial industry laid the foundation for much of the trouble we are seeing with its full-throated -- and deep-pocketed -- support of the cynically named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a truly loathsome piece of legislation that opened the door to many of the banking abuses we are witnessing. It made it much tougher for Americans to file for bankruptcy -- even the millions of hardworking Americans whose bankruptcy is the result of a serious illness (fully half of all bankruptcies are the result of crushing medical expenses). It also did nothing to rein in the kinds of lending abuses that frequently turn manageable debt into unmanageable personal financial catastrophes.
The financial industry spent $100 million lobbying to get the bill passed -- and millions more in campaign contributions. The result was a sweetheart law for the financial industry -- with 18 Senate Democrats voting for it.
And the banking lobbyists are at it again.
There are currently several bills in Congress designed to roll back some of the worst provisions of the 2005 legislation. In the Senate, Robert Menendez has put forth the "Credit Card Reform Act," and Chris Dodd has introduced The Credit Card Accountability, Responsibility and Disclosure Act ("the Credit CARD Act"). In the House, there is Rep. Carolyn Maloney's Credit Cardholders' Bill of Rights.
The banking industry is pushing back hard. But wait, you might ask, aren't the banks broke? So where'd they get the money to lobby against credit card reform?
From us. There may not be much transparency about the hundreds of billions of taxpayer dollars doled out through the TARP program, but we know where at least some of the money has gone: into making sure that none of the Bankers Gone Wild behavior that led to the current disaster is curtailed.
In December, the Fed approved new rules that will, among other things, limit arbitrary rate increases on credit cards, cap some fees, and require the credit card companies to more clearly disclose the often confusing -- if not downright misleading -- terms customers are agreeing to. But these rules won't go into effect until July 2010.
Why would the Fed make rules that won't go into effect for a year and a half? We can't afford to wait until then.
Congress needs to tell the bankers that their Beltway credit has been denied and pass laws reforming the credit card mess -- before the credit card blaze turns into another economic conflagration.

From Global Finance to the Nationalization of the Banks: Eight Theses on the Economic Crisis

 By Prof. Leo Panitch and Prof. Sam Gindin 

Global Research <http://www.globalresearch.ca> , February 25, 2009

The Bullet. Socialist Project  

1. The current economic crisis has to be understood in terms of the historical dynamics and contradictions of capitalist finance in the second half of the 20th century. Even though the spheres of capitalist finance and production are obviously intertwined (in significant ways today more than ever before), the origins of today's US-based financial crisis are not rooted in a profitability crisis in the sphere of production, as was the case with the crisis of the 1970s, nor in the global trade imbalances that have emerged since. Although the growing significance of finance in the major capitalist economies was already strongly registered by the 1960s, it was the role finance played in resolving the economic crisis of the 1970s that explains the central place it came to occupy in the making of global capitalism. The inflation that was the main symptom of that crisis had a strong negative impact on those holding financial assets and destabilized the international role of the dollar. Under the guidance of the US Federal Reserve, financial markets used very high interest rates to drive up unemployment, defeat trade union militancy and restrict public welfare expenditures in the early 1980s - all of which had come to be seen as the source of the intractable profitability and inflation problems of the previous decade. Yet it was precisely the contradictory ways finance contributed to global capitalism's successes in the closing decades of the 20th century that laid the foundation for the massive capitalist crisis that now closes the first decade of the 21st century.

2. The spatial expansion and social deepening of capitalism in the last quarter century could not have occurred without innovations in finance.
The development of securitized financial markets and the internationalization of American finance allowed for the hedging and spreading of the risks associated with the global integration of investment, production and trade. This provided risk insurance in a complex global economy without which capital accumulation would otherwise have been significantly restricted. At the same time, finance penetrated more and more deeply into society, integrating subordinate classes as debtors, savers, and even investors through private pensions, consumer credit and mortgages for private housing. This became especially important in facilitating the maintenance of consumer demand in a period of wage stagnation and growing inequality. In terms of directly fostering capital accumulation, finance was not only an important site of technological innovation in computerization and information systems, but also facilitated innovation more generally in high tech sectors through venture capital, especially in the US. The central role of the US dollar and Treasury bonds in the global economy as the key store of value and the basis for all other calculations of value, alongside the global institutional predominance of US financial institutions, acted as a vortex for drawing the global surplus to American financial markets and instruments. This allowed for the mobilization of cheap global credit for the US economy, and sustained its place as the major import and consumer market in the global economy.
The lowering of US interest rates was important to the macroeconomic stability reflected in the fewer and milder recessions within the US in comparison with the post-war era (‘The Great Moderation,’ as economists refer to the 1983-2007 period).

3. The competitive volatility of global finance produced a series of financial crises whose containment required repeated state intervention.
Global financial competition for higher yields led to institutional and market innovations that allowed greater leveraging and therefore more credit relative to the capital base. This in fact amounted to a vast increase in the effective money supply, but rather than yielding the price inflation that monetarists predicted, the defeat of labour and the increased corporate ability to fund investments with internal funds meant that increased liquidity translated into asset inflation. This asset inflation was uneven across sectors, producing financial bubbles from stock markets to real estate at various times, while the size of these bubbles was expanded by virtue of the material expansions in the real economy related to each of these areas. The bursting of these bubbles became a common feature of capitalism and the state interventions required to contain them reinforced the confidence that supported future bubbles. The alleged withdrawal of states from markets amidst the globalization of capitalism was a neoliberal ideological
illusion: states in the developed capitalist countries pumped more liquidity into the banks in the face of financial crises, while they ensuring that crises in the developing countries were generally used to impose financial discipline. The neoliberal American state played the most active role as the imperial guarantor, coordinator and fire-fighter-in-chief for global capitalism.

4. Both finance's central role in the making of global capitalism and the American state's role in sustaining it produced the bubble that emerged inside the US housing sector. Rising demand for home ownership at all income levels, partly reflecting limits on public housing since the crisis of the 1970s, was encouraged by US government support for meeting housing needs through financial markets backed by mortgage tax deductions. And, reflecting the increasingly unequal income distribution that was the consequence of the defeat of labour generally and the restructuring of production and employment, a broad stratum of the working class population also sustained their consumption through taking out second mortgages on the bubble-inflated values of their homes, But all this was really only made possible by the acceleration of financial securitization and the creation of a broader market for mortgage-backed securities in particular. This developed amidst rising house prices that apparently increased the wealth and credit-worthiness of those borrowing, and gave rise to the acceptance of lower standards (including for ‘teaser’ subprime mortgage rates) by regulatory agencies, largely supported by both parties in Congress. The Federal Reserve's low interest rate policies, especially in the wake of the bursting of the dot-com bubble, reinforced by the high demand for US Treasury securities as the safest store of value in a highly volatile global financial system, intensified competitive pressures on finance everywhere to get higher yields through greater leveraging of assets and innovative securitization to stretch the boundaries of risk. The historical safety of collateralized home loans (with such a large portion having been backed by the US government) reinforced the confidence in perpetually rising home prices and made housing debt the most attractive arena for the systemic exercise of arbitrage between low-interest US Treasury bonds and high-interest mortgage-backed securities.

5. The inevitable bursting of the housing bubble had such a profound impact because of its centrality to sustaining both US consumer demand and global financial markets. The eventual bursting of the housing bubble was inevitable once, as was the case by 2005, housing prices peaked. By this time, not only had the Fed's low interest rate policy come to an end, but teaser rates on many subprimes had run out. The rise in foreclosures and the number of houses offered for resale had immediate effects on housing prices, new home construction and furniture and appliance sales. Moreover, by virtue of the loss in value of the primary asset figuring in workers' perceptions of their personal wealth, this in turn led to an overall decline in US consumer spending and import demand in a way that the bursting of stock market bubbles had not. At the same time, since the spreading of risk in subprime mortgages had been effected through their packaging into derivative securities with more highly-rated tranches of debts, the housing crisis undermined the econometric equations that valued these assets in global financial markets. Mortgage-backed securities became difficult to value and to sell, and this produced a contagion throughout financial and inter-bank markets that spread the collapse internationally. Taken together with the impact of the housing crisis on mass consumption behaviour, and thus on the US economy's ability to function as the key global consumer, illusions that other regions might be able decouple from the US in this crisis were quickly dispelled.

6. The crisis reinforced the centrality of the American state in the global capitalist economy while multiplying the difficulties entailed in managing it. The rise of the US dollar in currency markets and the enormous demand for US Treasury bonds as the crisis unfolded reflected the extent to which the world remained on the dollar standard and the American state continued to be regarded as the ultimate guarantor of value. Treasury bonds are in demand because they remain the most stable store of value in a highly volatile capitalist world: illusions that foreign states were previously doing the US a favour by buying Treasury securities may finally be dispelled by this crisis. The American state's central role in terms of global crisis management - from currency swaps to provide other states with much needed dollars to overseeing policy cooperation among central banks and finance ministries - has also been confirmed in this crisis. Yet despite its very active interventions, the American state has proved unable to contain the effects of this particular crisis. The massive drops of liquidity that it has helicoptered onto the financial system since August 2007 have not restored the banks' capacity or willingness to lend at anything like previous rates - even to each other, let alone to firms or to consumers.
The whole system of securitized finance that has grown up over the past few decades - whereby the risk on mortgages, consumer credit and business loans is sliced, diced, repackaged and traded around the world
- has imploded.

7. The scale of the crisis today is such that nationalization of the financial system cannot be kept off the political agenda. It is increasingly apparent, that monetary and fiscal stimulation alone are unlikely to succeed in ending the crisis since the banking system's dysfunctionality today undermines the multiplier effect, just as new regulations are supposed to make finance more cautious and prudent in their lending. Indeed, there has been an increasing realization that it may not be possible to keep off the political agenda much longer the issue of bringing large portions of the financial system into public ownership. This is advanced today along the lines of the temporary nationalizations that took place in Sweden and Japan during their financial crises in the 1990s whereby the state took on the banks' bad debts and then passed the banks back to the private sector. It is a measure of the severity of the crisis that nationalization is now being quite generally proposed even within the US although it poses a host of problems as a way of saving global capitalism. It is highly significant that the last time the nationalization of the banks was seriously raised, at least in the advanced capitalist countries, was in response to the 1970s crisis by those elements on the left who recognized that the only way to overcome the contradictions of the Keynesian welfare state in a positive manner was to take the financial system into public control. Now that bank nationalization is back on the political agenda (albeit now coming from very different sources), it is very important to contrast the type of band-aid nationalization now being canvassed with the demand for turning the whole banking system into a public utility, which would allow for the distribution of credit and capital to be undertaken in conformity with democratically established criteria. And it is necessary to point out that this would have to involve not only capital controls in relation to international finance but also controls over domestic investment, since the point of making finance into a public utility is to transform the uses to which it is now put.

8. The call for nationalization of the banks provides an opening for advancing broader strategies that begin to take up the need for systemic alternatives to capitalism. The severity of today's economic crisis once again exposes the old irrationality of the basic logic of capitalist markets. As each firm (and indeed state agency) lays off workers and tries to pay less to those kept on, this has the effect of further undercutting overall demand in the economy. At the same time, the financial crisis exposes new irrationalities, not least those contained in the widespread proposals for trading in carbon credits as a solution to the climate crisis, which involve depending on volatile derivatives markets that are inherently open to the manipulation of accounts and to credit crashes. In the context of such readily visible irrationalities, a strong case can be made that - to save jobs and the communities that depend on them in a way that converts production to ecologically-sustainable priorities during the course of this crisis - we need to break with the logics of capitalist markets rather than use state institutions to reinforce them. We need to put on the public agenda the need to change our economic and political institutions so as to allow for democratic planning to collectively decide how and where we produce what we need to sustain our lives and our relationship to our environment. However deep the crisis, however confused and demoralized are capitalist elites both inside and outside the state, and however widespread the popular outrage against them, making this case will certainly require hard and committed work by a great many activists, many of whom will see the need for building new movements and parties to this end. This is what is really needed if this crisis is not to go to waste. •

Leo Panitch is Canada Research Chair in Comparative Political Economy at York University. His most recent books are American Empire and the Political Economy of International Finance and Renewing Socialism:
Transforming Democracy, Strategy and Imagination.

Sam Gindin, formerly Chief Economist and Assistant to the President of the Canadian Autoworkers Union, holds the Packer Professorship in Social Justice at York University. He is the author of The Canadian Auto
Workers: The Birth and Transformation of a Union and (with Panitch) Global Capitalism and American Empire.

The World Economic forum (WEF): Requiem for an overweight

 By Eric Walberg

 Global Research <http://www.globalresearch.ca> , February 4, 2009

 "The WEF is not a government of the world,” said organiser Andre Schneider wistfully in the crisp Davos air.

The world’s economic elite gathered in a subdued atmosphere at this year’s World Economic Forum to assess the now global economic crisis.
New York University professor Niso Abuaf compared it to a funeral, though not for the sake of the dead “ancien regime”, but “for the ones staying behind.” Attendees at the wake included 40 heads of state, 1400 business leaders and the usual assortment of “social entrepreneurs”.

There were significant departures from earlier gatherings. The keynote speaker was Russian Prime Minister Vladimir Putin, who used his 30-minute speech to portray Russia as a reliable partner in energy, trade and politics amid the widening global economic crisis. He described the world financial crisis as a “perfect storm” in which “we are all in the same boat,” acknowledging that Russia has been hit by the plummeting oil prices and a virtual western financial boycott following the war with Georgia last summer. Andrei Kostin, chairman of VTB Bank, admitted that without a recovery in the West, “a Russian return to stable economic growth is not possible.”

United States President Barack Obama and his new cabinet were conspicuous in their absence. Also conspicuous by their absence were the private bankers — “banksters”, in the words of US president Franklin Delano Roosevelt. G8 central bank heads attended, with the notable exception of US Federal Reserve Chairman Ben Bernanke, presumably to avoid being tarred and feathered. Some of the other guilty parties were less shy, with this year’s sponsors including Citigroup, Bank of America, Merrill Lynch, UBS and Satyam, the global technology services company that has the distinction of being considered India ’s biggest fraud. “The critics do ask if those who have been part of the problem can be part of the solution,” equivocated Schneider before insisting, “Yes, that’s the only way to find the solution.” It never crossed his mind that the culprits might better serve the “global public interest”
from behind bars, stripped of their ill-gotten gains.

One of the few voices of reason was Harvard economics professor Ken Rogoff, who insisted that governments would have to take over the failing banks, divide their assets into good and bad, and then restructure them. Institutions like Citi and Bank of America will have to go, boards will have to be fired and equity stakeholders wiped out, Rogoff told CNBC.com. “They have to do a bad bank, but if that’s all they do then it’s idiotic.”

Nassim Nicholas Taleb also told WEFers that governments had to nationalise the banks, limiting the rewards handed out to those who work in what he calls the “utility” part of the system and keeping a completely uninsured second leg that can take all the risks it wants and lose its shirt. “They rigged the game... For someone who loves free markets, a total nationalisation of the part of the business that requires insurance and does clearing and payments needs to happen. I want them poor and they deserve to be poor. You can’t have capitalism without punishment.” If only.

Ex-World Bank economist and Nobel Prize winner Joseph Stiglitz went a step further, advising the UK government not to prop up a corrupt edifice, but to let the entire banking system collapse in order to build up a well-regulated system from scratch under temporary state control.
“The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?” he asked a Daily Telegraph reporter rhetorically the day after the funeral wake was over. Of course, pulling the plug on the British banks could mean the collapse of the entire international banking system, but this may happen anyway.

The debate about nationalisation of banks led to one about the need for a new “sheriff” to police global financial markets. Pooh-poohed just last year, it is now virtually conventional wisdom, showing how far the global elite has had to shift along the ideological spectrum because of the crisis. The hardcore globalists argued that a new international body is needed, with authority to prevent banks and corporations from using so-called offshore banking (read: money laundering and tax evasion) to bypass national governments. The softcore argue that those national governments should merely work together in a less formal fashion to coordinate policing. Even the Great Deregulator Bernanke said from afar recently, “The world is too interconnected for nations to go it alone in the economic, financial, and regulatory policies.”

The silver lining in the current crisis is that everyone agrees that something must be done and fast. Bankers are at long last in the dock, a golden opportunity for governments to push for better regulation. Obama’
s Chief of Staff Rahm Emanuel’s philosophy is, “You never want a serious crisis to go to waste.” This crisis is an “opportunity to reweigh your life”, as Abuaf calls the funeral gathering mourning the overweight corpse, a chance to tame the world banksters.

It is unlikely that some World Financial Control Centre will be agreed any time in the near future, nor would this necessarily be a positive development, given who would most likely fill its seats at this point.
Giving the IMF, World Bank or Bank of International Settlements greater authority would be putting the fox among the chickens.

There is still plenty of room for regional institutions to better coordinate their activity. During the recent crisis — when it was already too late — it became clear that there was no budget for EU financial intervention in an emergency or even a pan-European banking supervisor. The failed bank Fortis was carved into chunks which national governments dealt with separately. A plan to correct this yawning gap will be presented this month, no doubt providing the European Central Bank with greater powers.

Charles Goodhart, a former top official at the Bank of England was
pessimistic: “The only people who can take up action are the nation states. I think the crisis has set back globalism and world federalism by a long way.”

One national government which intends to do something about the problem is Obama’s. There are signs Obama may be biting the financial bullet.
Incensed by the $18.4 billion Wall Street bonuses for 2008, Obama told reporters, “That is the height of irresponsibility. It is shameful.” He pointed to a $50 million corporate jet that Citigroup ordered “at the same time it was taking TARP money,” demanding the plane order be cancelled and stating a cap on Wall Street incomes would be part of TARP II. Waste not (the serious crisis), want not.

He was one of the signatories of last year’s congressional Stop Tax Haven Abuse Act that blacklisted Jersey , Guernsey and 32 other jurisdictions. Eighty-three of the largest 100 US corporations use tax havens to avoid taxation, and Obama promised to introduce a law to stop this within weeks of taking power. France and Germany are drawing up a similar blacklist, much to the UK’s disgruntlement — if Jersey and Guernsey go under, they would topple London from its role as premier world bankster (sorry, banker). French Prime Minister Francois Fillon told French parliament, “Black holes like offshore centres should no longer exist. Their disappearance must be a prelude to a reform of the international financial system.”

Transparency International France estimates that about $10 trillion are stashed in secret offshore accounts away from the prying eyes of regulators or tax inspectors. Given the importance of tax havens and offshore banking to both the biggest corporations and to the biggest drug and arms dealers, if Obama holds firm — against intense lobbying, you can be sure — this could be the most important legacy of his presidency, fulfilling his fervent wish to make it into the history books beside his beloved Lincoln, who famously said during the Civil War, “I have two great enemies, the Southern Army in front of me and the bankers in the rear.”

This push for global regulation of the criminals is part of the process of greater globalisation for us all. Schneider may be right that the WEF is no world government, but it and the likes of it are where economic policy is formulated these days. The Bush regime already agreed to a proposal by Britain and France for a “college of supervisors” at the G20 summit in Washington last November. We are being globalised whether we like it or not. The question is: who will supervise the supervisors? It all comes down to responsible national governments with the interest of their citizens in mind, not just of their banksters and corporate sponsors.

As each country goes to the ballot box over the next few years, the crisis will play itself out in electoral populist battles, and this time, voters will be expecting action, not just more of the same. To get it, they will have to mobilise their own “sheriffs” to police their fair-weather politicians. Stay tuned for the G20 update of the global soap-opera in April.

Runaway Wall Street

http://www.truthdig.com/report/item/20090204_runaway_wall_street/

Posted on Feb 4, 2009

By Robert Scheer
It is instructional that only one of the three tax-challenged Obama appointees has survived public scorn to retain a high position in the new administration. Oddly enough, it is Treasury Secretary Timothy Geithner, the man who will collect our taxes, whose career has not been stunted by his failure to pay them.
What makes Geithner so special? The answer, provided by everyone from the president to the media pundits, is that his services are indispensable because he has the expertise in regulating markets needed to preside over the most massive government intervention in the economy. Are they kidding?
Both in his years in the Clinton treasury and as chair of the New York Federal Reserve Bank, Geithner has been paving the way for a runaway Wall Street. Nor has he changed his ways, as was evidenced once again last week with his appointment of Mark Peterson, a Goldman Sachs vice president and lobbyist, to be his top aide. Peterson had lobbied strenuously for precisely the deregulation that the Obama administration now concedes needs reversing. It was confirmation that Goldman Sachs runs the Treasury Department—no matter which party is in power. 
Last October the New York Times ran a devastating story entitled “The Guys from ‘Government Sachs,’” spotlighting the many Goldman Sachs alums operating under the firm’s former head, Henry Paulson, after he was named Treasury Secretary. The problem is that Geithner, whom Obama appointed as Paulson’s replacement, was totally enmeshed in Paulson’s handout to Wall Street while chair of the New York Fed. In that capacity, Geithner was intimately involved in the highly questionable negotiations to bail out AIG, in which Goldman had a $20 billion partnership at risk.
Goldman Sachs CEO Lloyd C. Blankfein was present for those rushed and highly guarded weekend meetings which resulted in an initial $85 billion bailout for AIG, and has since grown to $122 billion. As the Times reported, “Mr. Paulson helped select a director form Goldman’s own board to lead AIG.” That decision to save AIG came after the New York Fed, led by Geithner, summarily spurned requests to save Goldman competitor Lehman Brothers. While he opposed Lehman’s attempt to reconstitute as a bank holding company and therefore obtain federal financing, he later supported a similar request by Goldman Sachs.
Another major player in those machinations was Robert Rubin, who headed Goldman Sachs before becoming treasury secretary under Clinton and who pushed for the radical deregulation that is at the center of the banking crisis. Geithner was a protégé of Rubin’s in that effort, as was Lawrence Summers, who went on to be Clinton’s treasury secretary after Rubin moved on to head Citigroup. Regrettably, Summers is now the key White House economics adviser.
Rubin, Geithner and Summers are hell-bent on denying the responsibility of their deregulation initiatives for the economic crisis. But the reality is that the merger of investment and commercial banks with insurance companies and stock brokers was illegal before the approval of their legislation, which reversed the Glass-Steagall Act passed under Franklin Delano Roosevelt. So, too, the newfangled financial instruments exempted from any government regulation, thanks to the Commodity Futures Modernization Act that Summers got Clinton to sign into law a month before he left office.
The reversal of Glass-Steagall unleashed the robber barons, as was freely conceded by Goldman CEO Blankfein in an interview he gave to the New York Times in June of 2007. “If you take an historical perspective,” Blankfein said, gloating back then about the vast expansion of Goldman Sachs, “We’ve come full circle, because that is exactly what the Rothchilds or J.P. Morgan the banker were doing in their heyday. What caused an aberration was the Glass-Steagall Act.”
The “aberration” being the sensible regulation of Wall Street to prevent another depression, which now seems dangerously close at hand. Since Glass-Steagall was repealed in 1999, Goldman Sachs experienced a 265 percent growth in its balance sheet, totaling $1 trillion in 2007.
What we need is an honest accounting of how we got into this mess, beginning with an investigation of the role of Goldman Sachs as the most insidious Wall Street player. But we are not likely to get that from an administration populated by Goldman’s Washington allies.
On Tuesday, the new Attorney General Eric Holder assured Wall Street that “We’re not going to go out on any witch hunts.” But what if the once-celebrated financial wizards, still allowed to dominate our economic policies, are indeed wicked witches?

U.S. Property Owners Lost $3.3 Trillion in Home Value (Update1)
By Dan Levy

Feb. 3 (Bloomberg) -- The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession, Zillow.com said.
The median estimated home price declined 11.6 percent in 2008 to $192,119 and homeowners lost $1.4 trillion in value in the fourth quarter alone, the Seattle-based real estate data service said in a report today.
“It’s like a runaway train gaining momentum,” Stan Humphries, Zillow’s vice president of data and analytics, said in an interview. “It’s difficult to say when we’ll see a bottom to the housing market.”
The U.S. economy shrank the most in the fourth quarter since 1982, contracting at a 3.8 percent annual pace, the Commerce Department said Jan. 30. Record foreclosures have pushed down prices as unemployment rose. More than 2.3 million properties got a default or auction notice or were seized by lenders last year, according to RealtyTrac Inc., a seller of data on defaults.
About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said.
Values have dropped for eight straight quarters. They fell in Manhattan for the first time since Zillow began including the New York City borough in its records two years ago.
Manhattan Declines
Manhattan’s estimated median price dropped 5.8 percent to $914,544. Seattle and Portland, Oregon, values tumbled 12.1 percent and 11.7 percent, respectively, the first time those cities dropped more than the nation, Zillow said.
Greenwich, Connecticut fell 5.8 percent to $1.5 million and Brooklyn, New York, declined 2.3 percent to $504,652.
More than 2.6 million U.S. jobs were cut in 2008 and the unemployment rate rose to 7.2 percent in December, the highest in almost 16 years, the Labor Department said.
“A witch’s brew of economic insecurity, foreclosures and tightened lending standards are helping to keep hard-hit markets down and to widen the scope of markets showing declines,” Humphries said in a statement accompanying the report.
The number of homeowners with negative equity, or those who owed more on their homes than the property was worth, rose to 17.6 percent from 14.3 percent in the third quarter, Zillow said. The company began its quarterly reports in 2006.
More Foreclosures
“Negative equity will trigger new foreclosures, and that will add to inventory and depress prices,” Humphries said.
Almost 90 percent of the 161 metropolitan areas Zillow surveys showed values falling in the fourth quarter, including Rochester, New York and Winston-Salem, North Carolina, which had previously held up, Zillow said.
Estimated median prices tumbled 6.2 percent to $395,478 in the New York-Northern New Jersey-Long Island metropolitan area. They fell 21 percent to $410,692 in Los Angeles. Values dropped 26.8 percent to $182,483 in Las Vegas and decreased 22.3 percent to $179,847 in Phoenix, according to Zillow.
Fayetteville, North Carolina, led the nine Zillow markets showing price increases, with a 6.9 percent gain to a median $112,737. Values in Yakima, Washington, advanced 6.2 percent to $134,545. Utica-Rome, New York, rose 5.3 percent to $107,595, according to Zillow.
Zillow compiles data from multiple listing services, county assessors and recorders, and information from its users.

Insurers Overcharged Medicare for Prescriptions, Report Finds

Sunday 01 February 2009
by: David Goldstein, McClatchy Newspapers

    Washington - If you buy medicine through Medicare's prescription drug program, you could be paying too much.
    The taxpayers who finance Medicare aren't doing too well, either.
    Insurance companies involved in the Medicare prescription drug benefit have overcharged subscribers and taxpayers by several billion dollars, according to the inspector general for the Department of Health and Human Services. Eighty percent of the participating insurance companies owe the program an estimated $4.4 billion for 2006 alone.
    Medicare, however, has been slow to do something about it. In fact, the agency doesn't even know how much money the insurance companies owe taxpayers because it hasn't begun most of the financial audits needed to determine that.
    "It shows a mindset that could care less about wasting taxpayer money, that has no problem with padding profits of drug companies with hard-earned taxpayer dollars," said Sen. Claire McCaskill, a Missouri Democrat.
    McCaskill, a former state auditor, has asked the Centers for Medicare and Medicaid Services, which administers the program, to explain why so many audits haven't been done and how it plans to collect the $4.4 billion.
    Medicare is the federal health insurance program for people 65 and older. The optional prescription drug benefit, which subsidizes the costs of medicine for subscribers, was the subject of an intense political debate before Congress enacted the program in 2003.
    The program's nearly 27 million beneficiaries generally pay for the coverage, known as Medicare Part D, through a monthly premium that's deducted from their Social Security checks. That and Medicare subsidies paid for by taxpayers pay for the $60 billion program.
    CMS contracts with private insurance companies to provide the drug coverage. Each offers a bid, which represents the company's estimate of the average monthly revenue it would need to provide the basic prescription drug benefit to each beneficiary.
    Medicare is required to complete financial audits of at least a third of all the insurance companies that offer the prescription drug benefit to determine how they set their prices.
    For 2006, the first year of the program, Medicare was required to perform 165 audits. However, the inspector general found that, as of April, it had begun only seven, or 4 percent.
    With 158 other audits from 2006 remaining to be done and audits for 2007 and 2008 waiting in the wings, problems found in the first year of the program aren't likely to be fixed before 2010, according to the inspector general's report.
    The financial fallout could snowball "to the detriment" of beneficiaries and the program.
    "Delaying financial audits increase the risk that (the companies) will use inaccurate and unsupported ... data to estimate the cost of providing Part D benefits in future plan years," the report said.
    In response to the findings, the Medicare agency issued a statement indicating that as of Jan. 28, it had either begun or completed 103 of the 165 required audits for the plan in 2006.
    Medicare officials said they limited the initial financial audits to seven to "test the audit protocol." The agency waited until April to begin the others because insurance companies had until March 31 to submit all of their 2006 contract data.
    Critics find that less than reassuring.
    "I think they're not minding the store," said Paul Precht, director of policy for the Medicare Rights Center, a national nonprofit group that counsels Medicare subscribers. "I think that if there's a political will to hold the plans accountable, and if resources would be devoted to conducting these audits, you're going to get money back for the taxpayers."
    Robert Zirkelbach, a spokesman for America's Health Insurance Plans, an association that represents insurance companies, defended how they managed the program in 2006.
    "Health plans based their bids on the best projections available at the time," he said. "Since that was the first year, health plans did not have experience projecting Part D expenditures. As plans have gotten experience, they've been able to have more accurate projections."
    Inspector General Daniel Levinson found a number of problems. Among them:
    A quarter of all bid audits done for the years 2006 and 2007 had errors that resulted in higher profits for the insurance companies, higher costs for Medicare and higher premiums or fewer benefits for the beneficiaries.
    One mistake, if corrected, would have lowered monthly premiums by about $9. In another, one plan priced the co-pay for a generic drug at $5 instead of $4, the correct amount.
    Another financial error occurred when an insurance company overcharged for mail-order prescriptions. Some administrative and marketing costs also were "unreasonably high."
    Costs charged by companies in some cases were questionable because the supporting financial data was "poor" and "inadequate."
    However, none of the findings resulted in changes to the program, the inspector general found, because the bid audits are done after the contracts with the insurance companies are signed and beneficiaries are enrolled.
    The insurance companies never faced penalties for their mistakes and overcharges because the bid audits don't say whether errors are "misrepresentations" or honest mistakes.
    That means problems haven't been fixed, the inspector general said.
    "Bid audits are not designed to lead to sanctions," the report says. "However, without any consequences ... their deterrent effect is limited."

Hunger in the U.S.: A Problem as American as Apple Pie

By Joel Berg, Seven Stories
Posted on February 4, 2009, Printed on February 4, 2009 http://www.alternet.org/story/115109/

The following is an excerpt from All You Can Eat: How Hungry Is America <http://www.powells.com/partner/32513/biblio/9781583228548> , by Joel Berg.

We have long thought of America as the most bounteous of nations … [t]hat hunger and malnutrition should persist in a land such as ours is embarrassing and intolerable. More is at stake here than the health and well-being of [millions of] American children. … Something like the very honor of American democracy is involved. -- President Richard Nixon, May 6, 1969, Special Message to Congress Recommending a Program to End Hunger in America

Try explaining to an African that there is hunger in America. I’ve tried, and it’s not easy.

In 1990, while on vacation, I was wandering alone through the dusty streets of Bamako, the small capital of the West African nation Mali, when a young man started walking alongside me and struck up a conversation. At first, I thought he wanted to sell me something or ask me for money, but it turned out he just wanted to talk, improve his English and learn a little about America. (He had quickly determined by my skin color that I was non-African and by my sneakers that I was
American.)

When he asked me whether it was true that everyone in America was rich, I knew I was in trouble. How could I explain to him that a country as wealthy as mine still has tens of millions suffering from poverty and hunger? How could I explain to him that America -- the nation of Bill Gates, "streets paved with gold," Shaquille O’Neal and all-you-can-eat-buffets -- actually has a serious hunger problem? That in a country without drought or famine and with enough food and money to feed the world twice over 1-in-8 of our own people struggles to put food on their tables?

In Mali, such a statement was a hard sell. While that nation has one of the planet’s most vibrant cultures, it also has one of the least-developed economies. The country has a per capita annual income of $470, meaning the average person makes $1.28 per day -- and many earn far less than that, eking out subsistence livings through small-scale farming or other backbreaking manual labor. With the Sahara desert growing and enveloping ever-increasing swaths of Mali, the nation frequently suffers from widespread drought and famine. According to the United Nations, 28 percent of Mali’s population is seriously undernourished.

I tried to tell him that not all Americans were as rich as he thought, and that much of the wealth he saw was concentrated among a small number of people while the majority toiled to make a basic living. I explained that living in a cash economy such as America’s presents a different set of challenges than living in a subsistence and barter-based economy, which exists in much of Mali. That in America, you have to pay a company for oil, gas and all other basic necessities. You must pay a landlord large sums of money to live virtually anywhere. That while many workers in America earn a minimum wage equaling less than $11,000 a year for full-time work (the U.S. federal minimum wage was then $5.15 per hour), they often pay more than $1,500 per month in rent, which equals $18,000 per year. So, many actually pay more in rent than they earn. Then they have to figure out a way to pay for health care, child care, transportation, and yes, food. When Americans have expenses that are greater than their income, they must go without basic necessities.

I thought I was very persuasive, but I still don’t think I convinced him. Given that English was likely his third or fourth language, perhaps he didn’t precisely understand what I was saying. Perhaps concepts such as paying for child care didn’t resonate with him since few Malians pay others to care for their children. Moreover, I bet that -- all my caveats aside -- $11,000 a year sounded like a great deal of money to him.

Standing there in Africa, for the first time in my life I briefly had a hard time convincing even myself that hunger in the United States was something that I should seriously worry about given that things were obviously so much worse elsewhere. After all, I was forced to consider that, as bad as hunger is in America, U.S. children rarely starve to death anymore, while they still do in parts of the developing world.

But then I recalled all the people I had met throughout America who couldn’t afford to feed their families -- who had to ration food for their children, choose between food and rent, or go without medicine to be able to buy dinner -- and I reminded myself that, just because they weren’t quite dropping dead in the streets didn’t mean that their suffering wasn’t significant indeed. And then I further reminded myself that America was the nation of Bill Gates -- and more than 400 other billionaires, not to mention more than 7 million millionaires -- so it was particularly egregious that my homeland allowed millions of children to suffer from stunted growth due to poor nutrition. I thus came back to the same conclusion I reach every day: while hunger anywhere on the planet is horrid and preventable, having it in America is truly unforgivable.

It is not surprising that it is often difficult to convince average Americans that there is a serious hunger problem in the United States.
Our nation tends to think of hunger as a distant, overseas, Third World problem. Our collective mental images of hunger are usually of African children with protruding ribs and bloated bellies -- surrounded by flies and Angelina Jolie -- sitting in parched, cracked dirt. When I try to explain U.S. hunger to Americans, some automatically assume I am inflating the extent of the problem. They simply don’t see it in their daily living. They know that America is the richest and most agriculturally abundant nation in the history of the world. They can’t believe that a place with so much obesity can have hunger. And besides, they assume that I am exaggerating because I am an advocate, and it is my job to exaggerate.

35.5 Million … and Counting

When people look at the facts for themselves, they discover the shocking
reality: hunger amidst a sea of plenty is a phenomenon as American as baseball, jazz and apple pie. Today in the United States -- because tends of millions of people live below the meager federal poverty line and because tens of millions of others hover just above it -- 35.5 million Americans, including 12.6 million children, live in a condition described by the government as "food insecurity." Which means their households either suffer from hunger or struggle at the brink of hunger.

Primarily because federal anti-hunger safety net programs have worked, American children are no longer dying in significant numbers as an immediate result of faminelike conditions -- although children did die of malnutrition here as recently as the late 1960s. Still, despite living in a nation with so many luxury homes that the term "McMansion"
has come into popular usage, millions of American adults and children have such little ability to afford food that they do go hungry at different points throughout the year -- and are otherwise forced to spend money on food that should have been spend on other necessities like heat, health care or proper child care.

Most alarmingly, the problem has only gotten worse in recent years. The
35.5 million food-insecure Americans encompass a number roughly equal to the population of California. That figure represents a more than 4 million-person increase since 1999. The number of children who live in such households also increased during that time, rising by more than half a million children. The number of adults and children who suffered from the most severe lack of food -- what the Bush administration now calls "very low food security" and what used to be called "hunger" -- also increased in that period from 7.7 million to 11.1 million people -- a 44 percent increase in just seven years.

While once confined to our poor inner cities (such as Watts, Harlem, Southeast D.C., the Chicago South Side, and the Lower Ninth Ward of New
Orleans) and isolated rural areas (such as Appalachia, the Mississippi Delta, Indian reservations and the Texas/Mexico border region), hunger
-- and the poverty that causes it -- has now spread so broadly that it is a significant and increasing problem in suburbs throughout the nation.

Meanwhile, just as more people need more food from pantries and kitchens, these charities have less to give. Since the government and private funding that they receive is usually fixed, when food prices increase, charities are forced to buy less. When those fixed amounts from government actually decrease (as they have in recent years), the situation goes from bad to worse.

In May 2008, America’s Second Harvest Food Bank Network -- the nation’s dominant food bank network (which, in late 2008, changed its name to Feeding America) -- reported that 100 percent of their member agencies served more clients than in the previous year, with the overall increases estimated to be 15 to 20 percent. Fully 84 percent of food banks were unable to meet the growing demand due to a combination of three factors: increasing number of clients; decreasing government aid; and soaring food prices.

The number of "emergency feeding programs" in America -- consisting mostly of food pantries (which generally provide free bags of canned and boxed groceries for people to take home) and soup kitchens (which usually provide hot, prepared food for people to eat on site) -- has soared past 40,000. As of 2005, a minimum of 24 million Americans depended on food from such agencies. Yet, given that more than 35 million Americans were food insecure, this statistic meant that about 11 million -- roughly a third of those without enough food -- didn’t receive any help from charities.

We live in a new gilded age. Inequality of wealth is spiraling to record heights, and the wealthiest are routinely paying as much as $1,500 for a case of champagne -- equal to five weeks of full-time work for someone earning the minimum wage. While welfare reform is still moving some families to economic self-sufficiency, families being kicked off the rolls are increasingly ending up on the street. Homelessness is spiking.
Poverty is skyrocketing. And the middle class is disappearing.

Meanwhile, soaring food prices have made it even more difficult for families to manage. Food costs rose 4 percent in 2007, compared with an average 2.5 percent annual rise for the 1990-2006 period, according to the U.S. Department of Agriculture. For key staples, the hikes were even
worse: milk prices rose 7 percent in 2007, and egg prices rose by a whopping 29 percent.

It was even tougher for folks who wanted to eat nutritiously. A study in the Seattle area found that the most nutritious types of foods (fresh vegetables, whole grains, fish and lean meats) experienced a 20 percent price hike, compared to 5 percent for food in general. The USDA predicted that 2008 would be worse still, with an overall food price rise that could reach 5 percent, and with prices for cereal and bakery products projected to increase as much as 8.5 percent.

As author Loretta Schwartz-Nobel has chronicled in her 2002 book, Growing Up Empty: The Hunger Epidemic in America <http://www.powells.com/partner/32513/biblio/9780060195632> , the nation’s hunger problem manifests itself in some truly startling ways.
Even our armed forces often don’t pay enough to support the food needs of military families. Schwartz-Nobel describes a charitable food distribution agency aimed solely at the people who live on a Marine base in Virginia and includes this quote from a Marine: "The way the Marine Corps made it sound, they were going to help take care of us, they made me think we’d have everything we needed. … They never said you’ll get no food allowance for your family. They never said you’ll need food stamps … and you still won’t have enough." Schwatz-Nobel also quoted a Cambodian refugee in the Midwest: "My children are hungry. Often we are as hungry in America as I was in the (refugee) camps."

America’s Dirty Secret Comes Out of Hiding

From 1970 to 2005, the mass media ignored hunger. But due to the surge of intense (albeit brief) media coverage of poverty in the aftermath of Hurricane Katrina, and subsequent reporting of food bank shortages and the impact of increasing food prices on the poor, the American public has been slowly waking to the fact that hunger and poverty are serious, growing problems domestically. Plus, more and more Americans suffer from hunger, have friends or relatives struggling with the problem, or volunteer at feeding charities where they see the problem for themselves.

Harmful myths about poverty are also starting to be discredited. While Americans have often envisioned people in poverty as lazy, healthy adults who just don’t want to work, 72 percent of the nation’s able-bodied adults living in poverty reported to the Census Bureau in
2006 that they had at least one job, and 88 percent of the households on food stamps contained either a child, an elderly person or a disabled person. It is harder and harder to make the case that the trouble is laziness and irresponsibility. The real trouble is the inability of many working people to support their families on meager salaries and the inability of others to find steady, full-time work.

Fundamentally a Political Problem

As far as domestic issues go, hunger is a no-brainer. Every human being needs to eat. Hunger is an issues that is universally understandable.
And everyone is against hunger in America. Actually, you’d be hard-pressed to find anyone in America who says they’re for hunger.

Unlike other major issues such as abortion, gun control and gay marriage
-- over which the country is bitterly divided based on deeply held values -- Americans of all ideologies and religions are remarkably united in their core belief that, in a nation as prosperous as America, it is unacceptable to have people going hungry.

Even ultraconservative President Ronald Reagan, after being embarrassed when his top aide Edwin Meese suggested that there was not really hunger in America and that people were going to soup kitchens just so they could get a "free lunch," was quickly forced to issue a memo stating his abhorrence of domestic hunger and his intention to end it. Since then, Presidents George H.W. Bush, Bill Clinton and George W. Bush -- and high-profile members of the Senate and the House -- have all given speeches laced with ringing denunciations of domestic hunger. Even right-wing think tanks -- which often minimize the extent of hunger or say that hunger is the fault of hungry people -- claim they want to end any hunger that may exist.

So why haven’t we ended this simple problem? One word: politics.

If we were to put the American political system on trial for its failures, hunger would be "Exhibit A." Domestic hunger is not a unique problem; it is actually emblematic of our society’s broader problems.
The most characteristic features of modern American politics -- entrenched ideological divisions, the deceptive use of statistics, the dominance of big money, the passivity and vacuity of the media, the undue influence of interest groups and empty partisan posturing -- all work in tandem to prevent us from ending domestic hunger.

If we can’t solve a problem as basic as domestic hunger -- over which there is so much theoretical consensus -- no wonder we can’t solve any of our more complicated issues such as immigration and the lack of affordable health care. In 1969, reaching a similar conclusion, Sen.
George McGovern, D-S.D., chairman of the Senate Select Committee on Nutrition and Human Needs, put it this way:

Hunger is unique as a public issue because it exerts a special claim on the conscience of the American people. … Somehow, we Americans are able to look past slum housing … and the chronic unemployment of our poor.
But the knowledge that human beings, especially little children, are suffering from hunger profoundly disturbs the American conscience. … To admit the existence of hunger in America is to confess that we have failed in meeting the most sensitive and painful of human needs. To admit the existence of widespread hunger is to cast doubt on the efficacy of our whole system. If we can’t solve the problem of hunger in our society, one wonders if we can resolve any of the great social issues before the nation.

It is not surprising that liberal McGovern would make such a statement, but it is a bit shocking that Republican Nixon -- McGovern’s opponent in the 1972 presidential election -- made similar statements during his presidency, after having denied that hunger was a serious problem. The reason Nixon finally acknowledge domestic hunger -- and ultimately took serious action to rescue it -- was that he was forced to do so by a combination of grassroots citizen agitation and concentrated national media attention on the issue.

In more recent decades, we’ve gone backward, and our modern elected officials deserve most of the blame. While, in the 1970s, the newly instituted federal nutrition safety net that Nixon and McGovern helped create ended starvation conditions and almost eliminated food insecurity altogether, in the early 1980s, Reagan and a compliant Democratic Congress slashed federal nutrition assistance and other antipoverty programs. Reagan also began the multi-decade process of selling the nation on the false notion that the voluntary and uncoordinated private charity could somehow make up for a large-scale downsizing in previously mandatory government assistance. Predictably, hunger again rose.

Both Bush administrations and the Newt Gingrich Congress enacted policies that worsened America’s hunger problem. But when a somewhat more aggressive Democratic congress took over in 2007, Congress slightly raised the minimum wage and added a bit more money for the Special Supplemental Nutrition Program for Women, Infants and Children -- better known as the WIC food program -- and, in 2008, they somewhat increased food stamp benefits. Certainly, small advances under Democratic leadership were much better than the consistent setbacks under the Republicans. But even liberal Democratic leaders have proved unlikely to propose bolder efforts because they worry that such a focus might turn off middle-class "swing voters," and because big-money donors -- who now control the Democratic Party nearly as much as they control the Republican Party -- have different priorities.

Even when elected officials of both parties do want to substantively address hunger and poverty, they usually get bogged down in all-but-meaningless ideological debates, rhetorical excesses and score-settling partisan antics. Certainly, it’s not just elected officials who are to blame. Many religious denominations that denounce hunger also teach their congregations (consciously or unconsciously) that hunger is an inevitable part of both human history and God’s will.
While it should be ameliorated with charitable acts, they sadly teach, it can’t really be eliminated. Businesses that donate food to charities often oppose increases in the minimum wage and other government policies that would decrease people’s need for such donated food. The news media, funded by ads from businesses and politicians, rarely point out these discrepancies and focus instead on cheerleading for superficial, holiday-time charitable efforts.

But most harmfully, Americans all over the country have been tricked into thinking that these problems can’t be solved and that the best we can hope for is for private charities to make the suffering marginally less severe. America can end hunger. By implementing a bold new political and policy agenda to empower low-income Americans and achieve fundamental change based upon mainstream values, America can end hunger quickly and cost-effectively. That achievement would concretely improve tens of millions of lives, and, in the process, provide a blueprint for fixing the broader problems of our entire, bilge-ridden political system.

Outside the Taylor Grocery and Restaurant (which serves the world’s best grilled catfish) in Taylor, Miss., is a sign that says, "Eat or We Both Starve." Not only is that slogan a good way to sell catfish, it is a great way to sum up why our collective self-interest should compel us to end domestic hunger.

No society in the history of the world has sustained itself in the long run with as much inequality of wealth as exists in America. Growing hunger and poverty, if left unchecked, will eventually threaten the long-term food security, finances and social stability of all Americans, even the ones who are currently middle class or wealthy. At the dawn of a new presidency, as the nation clamors for change and a new direction, hunger is a problem too simple and too devastating to ignore.

Joel Berg is executive director of the New York City Coalition Against Hunger and served eight years in the Clinton administration in senior executive service positions at the Department of Agriculture. He is the author of the new book ALL YOU CAN EAT: How Hungry Is America?

Doing the Recovery Right
Wednesday 28 January 2009
by: Robert Pollin, The Nation

Over the past couple of years, there has been a dramatic reversal of thinking: the idea has emerged that protecting the environment - in particular, defeating global warming - can also be an effective engine of economic growth, job creation and even poverty reduction. A small band of determined activist organizations, including the Apollo Alliance, Green For All and 1Sky, deserve credit for pushing this idea into the mainstream. Labor and environmental organizations like the Steelworkers and the Natural Resources Defense Council were open to persuasion. By the time the presidential campaign began, Hillary Clinton and Barack Obama had both incorporated variations on this idea as major planks in their platforms.

    Now, under President Obama, the idea of a green recovery - an investment program to promote energy efficiency and the development of renewable energy - is a central feature of his $825 billion program to defeat the most severe financial crash and recession since the 1930s.

    Of course, arguments about trade-offs and unintended consequences have not disappeared. Robert Stavins, chair of the Environment and Natural Resources Faculty Group at Harvard, recently offered this
analogy: "Let's say I want to have a dinner party. It's important that I cook dinner, and I'd also like to take a shower before the guests arrive. You might think, Well, it would be really efficient for me to cook dinner in the shower. But it turns out that if I try that I'm not going to get very clean and it's not going to be a very good dinner."

    A weighty intellectual pedigree does undergird the Stavins story.
This is a proposition developed by Jan Tinbergen, co-recipient of the first Nobel Prize in Economics and a lifelong leftist. Tinbergen held that you need separate policy tools to address distinct policy aims - that, in other words, trying to kill two birds with one stone is not likely to succeed. As the Obama administration begins spending in the range of $150 billion to create jobs and fight global warming through a single tool of green investments, it is clearly an appropriate time to examine how much Tinbergen's law might actually apply to our current situation.

    What Is the Green Investment Agenda?

    The transformation of our fossil fuel driven economy into a clean energy economy will be the work of a generation, engaging a huge range of people and activities. But focusing on essentials, there are only three interrelated projects that will drive the entire enterprise:
dramatically increasing energy efficiency; equally dramatically lowering the cost of supplying energy from such renewable sources as solar, wind and geothermal power; and mandating limits and raising prices on the burning of oil, coal and natural gas.

    In the preliminary version of the stimulus program drafted by House Democrats in mid-January, the green recovery components of the overall
$825 billion measure include about $45 billion for retrofitting buildings to increase their energy efficiency significantly; $20 billion to upgrade the public transportation system; $32 billion for building "smart grid" electrical transmissions systems that can, among other things, efficiently use power from renewable sources; and $8 billion for renewable energy research and commercialization (allowing that the exact allocations for various purposes are not yet entirely clear).

    The piece that's missing is some mechanism for limiting the burning of fossil fuels. One option is to raise taxes on purchasing oil, coal and natural gas. Congress has also considered "cap and trade" proposals for the past few years, which would set increasing limits on total carbon emissions and require corporations to pay the government for rights to produce fossil fuels. A significant bloc in Congress, including some liberal Democrats like Senator Sherrod Brown of Ohio, has opposed such measures because they would impose higher energy prices on businesses and individuals. But some version of this proposal will have to be implemented - if not amid the recession itself, soon thereafter - to advance a successful environmental agenda.

    Success in combining the three projects - energy efficiency, renewable energy and limits on fossil fuel consumption - could produce a decisive environmental victory. It could also serve social justice in several ways, by lessening the risks of extreme weather patterns like Hurricane Katrina, allowing us to breathe clean air and breaking our dependence on oil companies and foreign oil oligarchies. But these achievements still do not tell us how a green investment project could also advance a broader social justice agenda, to promote good jobs and economic security, and to fight poverty. Are these connections real?

    Green Investments and Full Employment

    First and foremost, the green investment project is a social justice agenda to the degree it promotes full employment at decent wages. For a generation coming out of the Great Depression, the goal of full employment was the moral centerpiece of economic policy around the world. But full employment has been off the radar screen since the elections of Margaret Thatcher in 1979 and Ronald Reagan in 1980. It has been easy to forget its transformative power as a policy goal.

    Whether you can get a job - and if so, whether the job offers decent pay, a clean and safe environment and fair treatment for you and your co-workers - matters a lot to almost everyone. Correspondingly, unemployment can have a devastating impact on families, even with two wage earners. A full employment economy also means greater business opportunities for small and large firms and strong incentives for private businesses to increase their level of investment.

    Since World War II, the closest we have come to full employment was in the late 1960s and late 1990s to 2000, when the unemployment rate fell to 4 percent and below. In both periods, low unemployment increased workers' bargaining power, which brought rising wages. Poverty fell as businesses were forced to hire people who had been left out. But in the 1960s the engine of employment expansion was spending on Vietnam, an immoral war. In the 1990s to 2000 job growth was driven by the irrational Wall Street dot-com frenzy. By contrast, a green investment program can underwrite a durable full employment economy precisely because it is environmentally sustainable and morally just.

    The green investment project can advance a full employment agenda because it will create about seventeen jobs for every $1 million in outlays, whereas spending the same $1 million in the oil and coal industries creates about 5.5 jobs - i.e., the job-creation effect of green investments is more than three times larger than that for fossil fuel production. The main reasons for this disparity have nothing to do with whether the investments are green. Rather, there are two primary factors at play. The first is the higher "labor intensity" of spending on green projects - more money is spent on hiring people and less on machines, supplies and consuming energy. This becomes obvious if we imagine hiring construction workers to retrofit buildings or install solar panels, or bus drivers to expand public transportation offerings, as opposed to drilling for oil off the coasts of Florida, California and Alaska. The second factor is the "domestic content" of spending - how much money is staying within the US economy as opposed to buying imports or spending abroad. When we retrofit public buildings and private homes to raise their energy efficiency, or improve our public transportation systems, virtually every dollar is spent within the US economy. By contrast, only 80 cents of every dollar spent in the oil industry remains in the United States.

    As a tool for fighting the recession, the green recovery project has as its first purpose injecting more money into the economy as quickly as possible. In this way, a $100 billion green investment program would create on the order of 1.7 million new jobs.

    Over the longer term, though, the green investment agenda will not simply entail expansion in energy efficiency and renewable investment spending but also a corresponding decline in spending on oil, coal and natural gas. Yet this longer-term agenda can still promote a full employment economy. If we allow that every $1 million in new green investments will be matched by an equal fall in spending within the fossil fuel industry, we will still net about 11.5 jobs each time $1 million transfers from fossil fuels to clean energy (i.e., seventeen jobs for green investments minus 5.5 lost in oil, natural gas and coal).
We spend about $600 billion a year in the oil, natural gas and coal sectors. Transferring, for example, 25 percent of those funds into energy efficiency and renewable energy projects would therefore yield about 1.7 million new jobs.

    The importance of pursuing this agenda is underscored by the long-term effects of globalization on the US labor market. Over time, globalization is making more and more US jobs vulnerable to outsourcing to low-wage economies. In a widely discussed article in Foreign Affairs in 2006, Princeton economist Alan Blinder argued that increasingly services that can be carried over the Internet - including the telephone operators in India with whom we are familiar, but also back-office accountants, lawyers, engineers and laboratory technicians as well as their support staffs - can be supplied by employees in poor countries who work for, say, one-fifth the wages of their US counterparts. These would be in addition to the manufacturing jobs that have long been forced to compete with China and other low-wage countries. Blinder's conclusion is that something like 20 to 30 percent of all US jobs - in the range of 30 million to 40 million in all - are vulnerable to these outsourcing pressures. The only way to counter these pressures is for employment creation to be made a centerpiece of our public policy. The green investment agenda cannot fulfill this role on its own, but it can move us a good distance in the right direction.

    Devil in the Details

    Of course, there will be excellent, good, bad and disastrous ways to execute the particulars of advancing a unified program for green investments and full employment. Among the most important considerations are regional fairness, cushioning the negative impact on workers and communities tied to the fossil fuel industries, and making the best of the opportunities and challenges posed by the construction industry.

    Regional equity. Although all regions can gain significantly from this green recovery program, their ability to capture the benefits of specific technologies like solar or wind power varies according to their climate and geography. But all regions are equally capable of making investments to improve energy efficiency dramatically through retrofitting buildings, expanding public transportation systems and increasing the efficiency and stability of the electric grid. Similarly, all areas of the country have renewable energy resources (for example, underground heat for geothermal energy or nonfood agricultural products to generate biomass fuels) and the ability to produce goods and services (research on biofuel refining or even accounting support) that will be demanded during the clean energy transition. Government support for green investment should therefore be allocated on an equitable basis by region; for example, based on a combination of population levels and proportion of GDP.

    Fossil fuel jobs and communities. About 3.5 million Americans are either employed in producing oil, natural gas and coal, or their jobs are linked to the traditional energy suppliers. These jobs will obviously dry up as we reduce fossil fuel dependence. Communities tied to these industries - coal-mining towns throughout much of Appalachia and the oil-rich areas of Texas, Oklahoma, Louisiana and Alaska - will obviously be hurt. But it is important to remember that the green investment agenda will create far more jobs overall, including for people now employed in the traditional fossil fuel sectors. Some of these jobs will be in specialized areas, such as installing solar panels and researching new building material technologies. But the vast majority of jobs will be in the same employment areas in which people already work, in every region and state.

    Constructing wind farms, for example, creates jobs for sheet metal workers, machinists and truck drivers, among many others. Increasing the energy efficiency of buildings through retrofitting requires roofers, insulators and building inspectors. Expanding mass-transit systems employs civil engineers, electricians and dispatchers. In addition, all these green energy investment strategies engage a normal range of service and support activities - including accountants, lawyers, office clerks, human resources managers, cashiers and retail salespeople. That said, some significant part of the spending on the clean energy transformation will have to be directed to assist the communities that will be most negatively affected by the contraction of the fossil fuel industries.

    Construction jobs. Roughly 30 percent of the job creation generated by the green investment agenda will be in the construction industry, although construction accounts for only about 6 percent of US employment. In the short term, construction has been hit severely by the housing bubble collapse, with nearly 900,000 jobs lost since September 2006. The Obama green recovery agenda can bring back most of these jobs.
Construction jobs cannot be outsourced. Retrofitting a home in Maryland can be done only in Maryland. The public transportation in Los Angeles can be upgraded only in Los Angeles. On average, construction jobs pay decently, because unions still have a strong presence in the industry.
Construction unions have also frequently created job ladders for those in low-paying entry-level positions. These opportunities for low-level workers in construction are far more favorable than, for example, those facing workers in the restaurant, hotel or nursing fields.

    On the other hand, employment in construction has long been dominated by white males. The industry has a history of hiring discrimination against women and racial minorities, and even now, nearly 60 percent of construction jobs are held by white non-Hispanic males.
Women who try to enter construction trades also face sexual harassment and work schedules that are not family-friendly. It is essential that the green investment agenda include strong measures to break down the employment barriers in these trades. It would be an important first step for Hilda Solis, Obama's pick for labor secretary, a Hispanic with a strong record of supporting the rights of all working people, to revive the Labor Department's long dormant Federal Contract Compliance programs. If enforced, these measures would go far toward providing women and minorities a fair share of the construction jobs generated by the green investment agenda.

    Beyond this, the green investment program cannot be seen as sole driver of a social justice agenda, either as a short-term stimulus or a long-run program for equitable and sustainable economic growth. Two other obvious investment targets are healthcare and educational services (i.e., spending on teachers, administrators, scholarships, hot lunch programs and bus drivers, as opposed to constructing new school buildings). In terms of promoting productivity and public well-being, investments in health and education are at least as important as public transportation and the energy grid. In addition, the employment impact of investing in healthcare is roughly equal to the average for green investments, while educational services investments generate about 40 percent more jobs. Jobs in education and healthcare are also divided much more evenly by gender and race than those in construction (white non-Hispanic males make up only 15 percent of the overall workforce in healthcare and 22 percent in education).

    Green Investments Lower Energy Costs

    If government policy aims to discourage fossil fuel consumption either through a cap-and-trade mandate or a carbon tax - as it must - this will raise the price of oil, coal and natural gas. However, this does not have to bring a fall in living standards. One simple solution, as proposed by California businessman Peter Barnes and my University of Massachusetts colleague James Boyce, is to rebate the government revenues generated by a carbon tax or the auctioning of cap-and-trade permits back to all energy consumers according to a fair set of principles. The most important aim would be at least to help lower-income families to meet the fossil fuel price increases.

    Beyond this, the green investment agenda, especially in the area of energy efficiency, should lead to significantly lower energy costs, which will benefit lower-income households. The two basic ways to do this are through improving access to public transportation and increasing the energy efficiency of residential buildings.

    Public transportation accounts for an abysmally low share of travel in the United States, even though ridership rose over the past two years, following the oil price spike. As of 2007, automobile travel accounted for 99 percent of transportation spending even for the least well-off 20 percent of households, despite the fact that public transportation is about 60 percent cheaper per mile. The reasons most Americans, including those with less money, do not use public transportation are straightforward: access is bad, off-peak service is limited and transferring is difficult. If the average lower-income household were to increase its public transportation use to just 25 percent of its transportation budget, it would save nearly $500 a year, raising its living standard about 2.4 percent. [For more on the need for public transit investment, see Ben Adler, "Ticket to Ride"]

    In terms of residential energy efficiency, for the average individual family residence, a one-time $2,500 investment in retrofitting - caulking air leaks and windows, improving insulation and buying more efficient appliances - can reduce annual energy consumption by 30 percent. This would produce an average saving in home energy costs of about $900 a year. Of course, low-income families are much more likely to be renters than homeowners. The green residential retrofit program must therefore stipulate ways to pass along the savings to tenants through rent reductions.

    Two Birds With One Stone?

    In undertaking a project as massive as the one I am outlining - to replace our current fossil fuel driven economy with a clean energy economy and to concurrently establish full employment as a central policy aim - we obviously cannot proceed flippantly. If serious critics are explaining why it cannot be done, we need to be confident we can answer them. If a thinker of the stature of Jan Tinbergen says you cannot - at least most of the time - kill two birds with one stone, we need to consider finding another stone or allowing one of the birds to fly away unscathed. Pursuing complementary large-scale investment programs in healthcare and education, which, among other benefits, will spread the expansion of employment opportunities fairly across gender and racial lines, is one critical example where another stone is surely necessary.

    But all sides also need to be open to evidence. The central facts here are irrefutable: spending the same amount of money on building a clean energy economy will create three times more jobs within the United States than would spending on our existing fossil fuel infrastructure.
The transformation to a clean energy economy can therefore serve as a major long-term engine of job creation. If managed correctly, it can also become a cornerstone of a long-term full employment program in this country, which in turn will be the most effective tool for moving people out of poverty and into productive working lives. In short, the transition to a clean energy economy has the capacity to merge the aims of environmental protection and social justice to a degree that is unprecedented. It is an opportunity that must not be lost.

 Robert Pollin, a professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts, is co-author of Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy.

Letting the health care market segment wither by lack of public support will do no one any good.

Published on Saturday, January 31, 2009 by the Portland Press Herald (Maine)
Final Piece in Our Economic Collapse

by John Rockefeller
Having campaigned on a broadly sketched platform of hope for those on the fringes of economic and physical viability, President Obama is watching the ticker line expand to the point where half of the U.S. population considers itself either underemployed or underserved.
An expanding percentage of this group -- 43.6 million by the Centers for Disease Control's 2006 pre-recession count -- are without health care.
This number has certainly burgeoned well beyond the 50 million mark given the fresh round of layoffs, financial failures and re-budgeting by the recently unemployed.
My concern, and the concern of many, surrounds the disappearance of Obama's commitment to health care provision for the uninsured and underserved members of our population.
We are about to ignore our single functional economic engine -- that of the health care sector -- by prioritizing long-dead sectors of finance and auto manufacturing.
FACING A FISCAL TROUGH
If we fail to rescue health care and public health itself as we move forward, we will be entering a fiscal trough that may take decades to rebuild.
Now would be the perfect time to pick the sector with most viability to fuel our recovery. Later will be far too late.
As we pour countless, and lightly accounted for, billions into bailouts and tax cuts for those having sufficient income to avail themselves of such stimulus measures, we are leaving an ever larger proportion of our country behind, and in the most dire state of need.
Health has been largely commoditized and subjected to profit-focused market efficiencies for the past quarter century, leaving more and more Americans behind in the eternal rush to the margin.
As this process unfolded, and despite the loss of millions on the health care coverage rolls, there were ample dollars to ensure the profitability of health as a commodity.
This will not be the case moving into the near and distant future. Health care is, like so much else, heading into its own meltdown, and it will make the financial collapse of 2008 look like a mere blip on the Bloomberg screen.
With the U.S. economy claiming more and more members of the middle class for transition toward the poverty line, we are about to enter a period in our history defined by a statistical majority in the U.S. population having little or no access to health care - at a time when health care is acting as one of the few profit-making sectors in our economy.
With a spiking unemployment rate in the health care sector and a dilapidated pharmaceutical industry that continues its merger mentality to control costs no longer borne by a viable financial sector, we are heading into an uncharted abyss of social disaster.
TURN THE TIDE AROUND
The only way to stem the tide on this decline -- and its accompanying fiscal and public health consequences -- is to fund health care as the fiscal engine it has recently become amidst the financial sector collapse.
Had the health care sector been given half of the recent financial and auto manufacturing bailout funding, we would have been able to expand and extend health care coverage.
We would thereby be capturing the remaining stability of this sector as an engine of economic and public health recovery.
It surprises me that the economists and health care consultants working in the Obama administration have not taken this opportunity to the bank.
They could have made a difference by diverting meaningless cash dumps from non-functional industries into the single most viable and necessary industry in the country.
I am sad to say that the crash of the health care economy will be heard in a very different way than the crashes that recently preceded it.
It will take our final breath economically, and literally with the disappearance of greatly diminished health care services to all economic classes in the United States.
Copyright 2009 by The Portland Press Herald/Maine Sunday Telegram
John Rockefeller of Camden is CEO of a management consulting firm, Zero Consult Ltd., based in Boston.

Is the Entire Bailout Strategy Flawed? Let's Rethink This Before It's Too Late

By Joseph Stiglitz, CNN
Posted on February 2, 2009, Printed on February 2, 2009
http://www.alternet.org/story/124166/

America's recession is moving into its second year, with the situation only worsening.
The hope that President Obama will be able to get us out of the mess is tempered by the reality that throwing hundreds of billions of dollars at the banks has failed to restore them to health, or even to resuscitate the flow of lending.
Every day brings further evidence that the losses are greater than had been expected and more and more money will be required.
The question is at last being raised: Perhaps the entire strategy is flawed? Perhaps what is needed is a fundamental rethinking. The Paulson-Bernanke-Geithner strategy was based on the realization that maintaining the flow of credit was essential for the economy. But it was also based on a failure to grasp some of the fundamental changes in our financial sector since the Great Depression, and even in the last two decades.
For a while, there was hope that simply lowering interest rates enough, flooding the economy with money, would suffice; but three quarters of a century ago, Keynes explained why, in a downturn such as this, monetary policy is likely to be ineffective. It is like pushing on a string.
Then there was the hope that if the government stood ready to help the banks with enough money -- and enough was a lot -- confidence would be restored, and with the restoration of confidence, asset prices would increase and lending would be restored.
Remarkably, Bush administration Treasury Secretary Henry Paulson and company simply didn't understand that the banks had made bad loans and engaged in reckless gambling. There had been a bubble, and the bubble had broken. No amount of talking would change these realities.
It soon became clear that just saying that we were ready to spend the money would not suffice. We actually had to get it into the banks. The question was how. At first, the architects of the bailout argued (with complete and utter confidence) that the best way to do this was buying the toxic assets (those in the financial market didn't like the pejorative term, so they used the term "troubled assets") -- the assets that no one in the private sector would touch with a 10-foot pole.
It should have been obvious that this could not be done in a quick way; it took a few weeks for this crushing reality to dawn on them. Besides, there was a fundamental problem: how to value the assets. And if we valued them correctly, it was clear that there would still be a big hole in banks' balance sheets, impeding their ability to lend.
Then came the idea of equity injection, without strings, so that as we poured money into the banks, they poured out money, to their executives in the form of bonuses, to their shareholders in the form of dividends.
Some of what they had left over they used to buy other banks -- to pursue strategic goals for which they could not have found private finance. The last thing in their mind was to restart lending.
The underlying problem is simple: Even in the heyday of finance, there was a huge gap between private rewards and social returns. The bank managers have taken home huge paychecks, even though, over the past five years, the net profits of many of the banks have (in total) been negative.
And the social returns have even been less -- the financial sector is supposed to allocate capital and manage risk, and it did neither well. Our economy is paying the price for these failures -- to the tune of hundreds of billions of dollars.
But this ever-present problem has now grown worse. In effect, the American taxpayers are the major provider of finance to the banks. In some cases, the value of our equity injection, guarantees, and other forms of assistance dwarf the value of the "private" sector's equity contribution; yet we have no voice in how the banks are run.
This helps us understand the reason why banks have not started to lend again. Put yourself in the position of a bank manager, trying to get through this mess. At this juncture, in spite of the massive government cash injections, he sees his equity dwindling. The banks -- who prided themselves on being risk managers -- finally, and a little too late -- seem to have recognized the risk that they have taken on in the past five years.
Leverage, or borrowing, gives big returns when things are going well, but when things turn sour, it is a recipe for disaster. It was not unusual for investment banks to "leverage" themselves by borrowing amounts equal to 25 or 30 times their equity.
At "just" 25 to 1 leverage, a 4 percent fall in the price of assets wipes out a bank's net worth -- and we have seen far more precipitous falls in asset prices. Putting another $20 billion in a bank with $2 trillion of assets will be wiped out with just a 1 percent fall in asset prices. What's the point?
It seems that some of our government officials have finally gotten around to doing some of this elementary arithmetic. So they have come up with another strategy: We'll "insure" the banks, i.e., take the downside risk off of them.
The problem is similar to that confronting the original "cash for trash" initiative: How do we determine the right price for the insurance? And almost surely, if we charge the right price, these institutions are bankrupt. They will need massive equity injections and insurance.
There is a slight variant version of this, much like the original Paulson proposal: Buy the bad assets, but this time, not on a one by one basis, but in large bundles. Again, the problem is -- how do we value the bundles of toxic waste we take off the banks? The suspicion is that the banks have a simple answer: Don't worry about the details. Just give us a big wad of cash.
This variant adds another twist of the kind of financial alchemy that got the country into the mess. Somehow, there is a notion that by moving the assets around, putting the bad assets in an aggregator bank run by the government, things will get better.
Is the rationale that the government is better at disposing of garbage, while the private sector is better at making loans? The record of our financial system in assessing credit worthiness -- evidenced not just by this bailout, but by the repeated bailouts over the past 25 years -- provides little convincing evidence.
But even were we to do all this -- with uncertain risks to our future national debt -- there is still no assurance of a resumption of lending. For the reality is we are in a recession, and risks are high in a recession. Having been burned once, many bankers are staying away from the fire.
Besides, many of the problems that afflict the financial sector are more pervasive. General Motors and GE both got into the finance business, and both showed that banks had no monopoly on bad risk management.
Many a bank may decide that the better strategy is a conservative one: Hoard one's cash, wait until things settle down, hope that you are among the few surviving banks and then start lending. Of course, if all the banks reason so, the recession will be longer and deeper than it otherwise would be.
What's the alternative? Sweden (and several other countries) have shown that there is an alternative -- the government takes over those banks that cannot assemble enough capital through private sources to survive without government assistance.
It is standard practice to shut down banks failing to meet basic requirements on capital, but we almost certainly have been too gentle in enforcing these requirements. (There has been too little transparency in this and every other aspect of government intervention in the financial system.)
To be sure, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk taking. Ownership cannot be a one-sided bet.
Of course, most of the employees will remain, and even much of the management. What then is the difference? The difference is that now, the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.
There are several other marked advantages. One of the problems today is that the banks potentially owe large amounts to each other (through complicated derivatives). With government owning many of the banks, sorting through those obligations ("netting them out," in the jargon) will be far easier.
Inevitably, American taxpayers are going to pick up much of the tab for the banks' failures. The question facing us is, to what extent do we participate in the upside return?
Eventually, America's economy will recover. Eventually, our financial sector will be functioning -- and profitable -- once again, though hopefully, it will focus its attention more on doing what it is supposed to do. When things turn around, we can once again privatize the now-failed banks, and the returns we get can help write down the massive increase in the national debt that has been brought upon us by our financial markets.
We are moving in unchartered waters. No one can be sure what will work. But long-standing economic principles can help guide us. Incentives matter. The long-run fiscal position of the U.S. matters. And it is important to restart prudent lending as fast as possible.
Most of the ways currently being discussed for squaring this circle fail to do so. There is an alternative. We should begin to consider it.

Published on Monday, February 2, 2009 by The New York Times
Bailouts for Bunglers
by Paul Krugman
Question: what happens if you lose vast amounts of other people's money? Answer: you get a big gift from the federal government - but the president says some very harsh things about you before forking over the cash.
Am I being unfair? I hope so. But right now that's what seems to be happening.
Just to be clear, I'm not talking about the Obama administration's plan to support jobs and output with a large, temporary rise in federal spending, which is very much the right thing to do. I'm talking, instead, about the administration's plans for a banking system rescue - plans that are shaping up as a classic exercise in "lemon socialism": taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right.
When I read recent remarks on financial policy by top Obama administration officials, I feel as if I've entered a time warp - as if it's still 2005, Alan Greenspan is still the Maestro, and bankers are still heroes of capitalism.
"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," says Timothy Geithner, the Treasury secretary - as he prepares to put taxpayers on the hook for that system's immense losses.
Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama's top economic adviser, "think governments make poor bank managers" - as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.
And this prejudice in favor of private control, even when the government is putting up all the money, seems to be warping the administration's response to the financial crisis.
Now, something must be done to shore up the financial system. The chaos after Lehman Brothers failed showed that letting major financial institutions collapse can be very bad for the economy's health. And a number of major institutions are dangerously close to the edge.
So banks need more capital. In normal times, banks raise capital by selling stock to private investors, who receive a share in the bank's ownership in return. You might think, then, that if banks currently can't or won't raise enough capital from private investors, the government should do what a private investor would: provide capital in return for partial ownership.
But bank stocks are worth so little these days - Citigroup and Bank of America have a combined market value of only $52 billion - that the ownership wouldn't be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.
My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn't they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.
If news reports are right, the bank rescue plan will contain two main elements: government purchases of some troubled bank assets and guarantees against losses on other assets. The guarantees would represent a big gift to bank stockholders; the purchases might not, if the price was fair - but prices would, The Financial Times reports, probably be based on "valuation models" rather than market prices, suggesting that the government would be making a big gift here, too.
And in return for what is likely to be a huge subsidy to stockholders, taxpayers will get, well, nothing.
Will there at least be limits on executive compensation, to prevent more of the rip-offs that have enraged the public? President Obama denounced Wall Street bonuses in his latest weekly address - but according to The Washington Post, "the administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid" because "harsh limits could discourage some firms from asking for aid." This suggests that Mr. Obama's tough talk is just for show.
Meanwhile, Wall Street's culture of excess seems to have been barely dented by the crisis. "Say I'm a banker and I created $30 million. I should get a part of that," one banker told The New York Times. And if you're a banker and you destroyed $30 billion? Uncle Sam to the rescue!
There's more at stake here than fairness, although that matters too. Saving the economy is going to be very expensive: that $800 billion stimulus plan is probably just a down payment, and rescuing the financial system, even if it's done right, is going to cost hundreds of billions more. We can't afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership.

Is America on the Brink of a Food Crisis?

By Robert Jensen, AlterNet
Posted on January 29, 2009, Printed on January 29, 2009
http://www.alternet.org/story/122822/

As everyone scrambles for a solution to the crises in the nation's economy, Wes Jackson suggests we look to nature's economy for some of the answers. With everyone focused on a stimulus package in the short term, he counsels that we pay more attention to the soil over the long haul.  
"We live off of what comes out of the soil, not what's in the bank," said Jackson, president of the Land Institute. "If we squander the ecological capital of the soil, the capital on paper won't much matter."  
Jackson doesn't minimize the threat of the current financial problems but argues that the new administration should consider a "50-year farm bill," which he and the writer/farmer Wendell Berry proposed in a New York Times op-ed earlier this month.
Central to such a bill would be soil. A plan for sustainable agriculture capable of producing healthful food has to come to solve the twin problems of soil erosion and contamination, said Jackson, who co-founded the research center in 1976 after leaving his job as a environmental studies professor at California State University, Sacramento.  
Jackson believes that a key part of the solution is in approaches to growing food that mimic nature instead of trying to subdue it. While Jackson and his fellow researchers at the Land Institute continue their work on natural systems agriculture, he also ponders how to turn the possibilities into policy. He spoke with me from his office in Salina, Kansas.  
Robert Jensen: This is a short-term culture, and federal policies typically are aimed at short-term results. Why the call for a farm bill that looks so far ahead, especially in tough economic times?  
Wes Jackson: For the past 50 or 60 years, we have followed industrialized agricultural policies that have increased the rate of destruction of productive farmland. For those 50 or 60 years, we have let ourselves believe the absurd notion that as long as we have money we will have food. If we continue our offenses against the land and the labor by which we are fed, the food supply will decline, and we will have a problem far more complex than the failure of our paper economy.  
We need to reverse that destructive process, which means recognizing the need for fundamental changes in the way agriculture is practiced. That requires thinking beyond the next quarterly earnings report of the agribusiness corporations and beyond this fiscal year of the feds. We need farm bills -- laid out in five-year segments, with a view to the next 50 years -- that can be mileposts for moving agriculture from an extractive to a renewable economy.  
RJ: What are some of the key aspects of a long-term solution?  
WJ: Support for soil conservation and protecting water resources have to be central. There needs to be funding for research on a different model for agriculture. And we have to avoid wasting any more resources on biofuels made from annual crops, especially corn, which is certain to exacerbate soil erosion, chemical contamination and a larger dead zone in the gulf.  
RJ: But it is true that most people, including those in the new administration, are focused on short-term problems in the financial and industrial economy. Is there any chance people -- especially people in an overwhelmingly urban nation -- will pay attention right now?  
WJ: Remember, if our agriculture is not sustainable then our food supply is not sustainable, and food is an issue as close to every one of us as our own stomachs. Either we pay attention or we pay a huge price, not so far down the road. When we face the fact that civilizations have destroyed themselves by destroying their farmland, it's clear that we don't really have a choice. Beyond that, changing the way agriculture is practiced would incorporate partial solutions to major problems that people do care about: climate change, overconsumption of energy, water problems. Yes, a 50-year bill is sensible right now.  
RJ: What would such a 50-year plan look like? What are the key features?  
WJ: We start by acknowledging the necessity of moving from an extractive, unsustainable economy to one that is renewable and sustainable, and the first place to look is to the production of the most basic commodity -- food. Once we face that necessity, we move to examining the possibilities for achieving this, recognizing that we have to act now while we still have slack, some room to move. Here's a sobering thought: If we don't achieve this sustainability first in agriculture, it's highly unlikely we will in any other sector of the economy and society. That's what makes this so imperative.
RJ: OK, start with the necessity: How is agriculture, as it is practiced today, an extractive enterprise that is unsustainable?  
WJ: All organisms are carbon-based and in a constant search for energy-rich carbon. About 10,000 years ago, humans moved from gathering/hunting to agriculture, tapping into the first major pool of energy-rich carbon -- the soil. It was agriculture that allowed us effectively to mine, as well as waste, the soil's carbon and other soil-bound nutrients. Humans went on to exploit the carbon of the forests, coal, oil and natural gas. But through all that, we've continued to practice agriculture that led to soil erosion beyond natural replacement levels. That's the basic problem of agriculture.  
Added to the problem of soil loss, the industrialization of agriculture has given us pollution by toxic chemicals, now universally present in our farmlands and streams. We have less soil and it is more degraded. We've masked that for years through the use of petrochemicals -- pesticides, herbicides, fertilizers. But that "solution" is no solution and is, in fact, part of the problem. There are no technological substitutes for healthy soil and no miraculous technological fixes for the problem of agriculture. We need to move past the industrial model and adopt an ecological model.  
RJ: This concern about chemicals has led to increased support for organic agriculture. Is that the solution?  
WJ: Organic agriculture is a start but by itself is insufficient. Eliminating the chemicals is only half the problem -- we still have to deal with soil erosion. Remember that we humans had organic agriculture until very recently, when we got industrial agriculture, and we still lost soil all along the way, for the last 10,000 years. There is good reason to believe we started the increase of carbon dioxide into the atmosphere about then (with the carbon compound of the soil being oxidized). It has only become a crisis in our time due to the scale increase of people and material and energy throughput.  
RJ: OK, so organic alone isn't the answer. Isn't that where no-till or minimum-till farming comes in?  
WJ: Those methods help deal with erosion, but as practiced today they require unacceptable levels of chemical inputs and end up eliminating biodiversity. Once again, it doesn't offer a way out of the extractive economy and the problem of contamination.  
RJ: So, where does that leave us?
WJ: Let's go back to basics: The core of this idea is the marriage of agriculture and ecology. As Wendell [Berry] says, we need to take nature as the measure. We need to look to nature for models of how to manage ecosystems in a sustainable fashion. At the Land Institute, we think that leads to perennial polycultures. Instead of annual crops grown in monocultures on an industrial model, we are looking at perennials in mixtures, which we think can solve a number of problems regarding erosion and contamination.  
RJ: Before I ask about the details, a basic question: Is that feasible, given the 6.5 billion people on the planet? Can such strategies focused on perennials produce enough food?  
WJ: First, let's recognize that without fossil fuels, the industrial-agriculture strategies we have now could not feed even the current population, and population growth makes these changes more important than ever. As populations grow, there's increasing pressure to put more and more marginal land into production, which increases the rate of degradation. A new model is essential.  
At the Land Institute, we've been working on perennializing the major crops and domesticating a few promising wild species. By increasing the use of mixtures of grain-bearing perennials, we can not only better protect the soil but also help reduce greenhouse gases, fossil-fuel use and toxic pollution. Carbon sequestration would increase, and the husbandry of water and soil nutrients would become much more efficient.  
RJ: Let's assume that natural systems agriculture and similar projects hold the promise you suggest. Those practices will have to be implemented in the real world, which is structured by the larger extractive economy in capitalism, at a time of crisis -- some would say, even, a time of collapse. What has to happen to make that possible?  
WJ: You're right that it's not just about plants and science; it's also about people and society. We think that protecting the soil is not only an ecological imperative but an opportunity for positive economic and cultural change as well. The proposals we're discussing would increase employment opportunities in agriculture -- sustainable farming will require more "eyes per acre," and replacing fossil-fuel energy with human energy and ecological knowledge makes good economic sense. With the reduced need for the hoe or plow, and land management relying more on fire and grazing, we draw on the naturalist instinct in nearly all of us, rather than presenting farm work as nothing but the "sweat of the brow" amid "thistles and thorns." This will be necessary to counter the longstanding denigration of the countryside and rural communities, which has been a feature of our so-called cosmopolitan culture.  
We're seeing that on a small scale now, with more young farmers staying on the land, with creative new endeavors in community-supported agriculture. People recognize that life is more than working in a small cubicle and consuming in a big-box store. People are hungry for good food, and they're also hungry for a good life. People are ready to explore what it would mean to come home, not to a romanticized vision of the past but to a sustainable future.  
RJ: How would a farm bill that you and Wendell might write differ from what we see today?  
WJ: The farm bills we've had largely address exports, commodity problems, subsidies and food programs. They all involve here-and-now concerns. A 50-year farm bill represents a vision that stresses the need to protect soil from erosion, cut the wastefulness of water, cut fossil-fuel dependence, eliminate toxins in soil and water, manage carefully the nitrogen of the soil, reduce dead zones, restore an agrarian way of life and preserve farmland from development. The best way to accomplish most of these goals is to gradually increase the number of acres with perennial vegetation, first of all through rotations and increase in the number of grass-fed dairies sprinkled about the countryside, and second, through progress toward perennializing the major crops. A good bill could help farmers accomplish those things.  
RJ: It's also likely that many people reading this will dismiss you as idealistic, as unrealistic. How would you answer that?  
WJ: These are the same people who believe it's realistic to continue practices they know to be unsustainable. The basic choice is simple: Do we want to work at coming up with a system that can produce healthful food and healthy communities, one that is economically and ecologically viable? Or do we want to continue to contaminate our soil and water as we watch that soil continue to be eroded by that water? That contamination and erosion are both material reality and metaphor for our cultural and economic condition.  
Look, I'm a scientist from the countryside, which means I have spent my life dealing with reality in research and on the farm. These are necessary and possible goals. Without the necessity, it may be considered grandiose. Without the possibility, it could be regarded as grandiose. The test for grandiosity, in my view, fails. As a nation, we are blessed with some of the world's best soils. Increasingly, city people want healthier and safer food. And we're at a political moment when everybody and his dog is talking about the need for change. So, let's get to it.
Robert Jensen is a journalism professor at the University of Texas, Austin and board member of the Third Coast Activist Resource Center. His latest book, All My Bones Shake: Radical Politics in the Prophetic Voice, will be published in 2009 by Soft Skull Press. He also is the author of Getting Off: Pornography and the End of Masculinity (South End Press, 2007).

Obama’s New Bank Giveaway

Is this administration’s bank policy Bush-3 – or Clinton-5 or Reagan 8?

 By Michael Hudson

 Global Research <http://www.globalresearch.ca> , January 29, 2009

 After

(1) threatening for eight years that the prospect of a trillion-dollar deficit spread over a generation or so is sufficient reason to stiff Social Security recipients and abolish debts to the nation’s retirees, and

(2) after the Bush administration provided $8 trillion over the past three months in cash-for-trash swaps of good Treasury bonds for Wall Street junk derivatives, the Obama Administration is now speaking of

(3) some $2 to $4 trillion more to be given in just the next week or so.

Not a single Republican Congressman went along, just as Rep. Boehmer refused to support the Bush bailout on that fatal Friday when Mr. McCain and Mr. Obama debated each other over marginal issues not touching on the giveaway, which both candidates passionately supported. The Party of Wealth sees the political handwriting on the wall, for which the Party of Labor seems happy to take all responsibility. This probably is the only place where I’d like to see "bipartisanship." Watch the campaign contributions flow for an index of how well this will pay off for the Democrats!

How many families would like a "give-back" on every bad investment they’
ve ever made? It’s like a parent coming to a child who has just broken a toy, saying "That’s all right. We’ll just go out and buy you a new one."
This from the apostles of "responsibility" for poverty, for mortgage debtors owing more than they can afford to pay, for people who get sick and can’t afford medical care, and for states and cities now left high and dry by the fiscal wipe-out that the Bush-Obama "cleanup" has foisted onto the economy. No do-over for anyone but the hundred or so billionaires who have just been endowed with enough free money to become America’s ruling elite for the rest of the 21st century.

After spending a lifetime denouncing socialism as inherently unfair, Wall Street is now doing a hideous parody – as if "socialism for the rich" were not an oxymoron in the first place. Certainly the banks are not being "nationalized." Giving away the largest sum of spendable securities in history without direct managerial power that goes with ownership is not "nationalization." Ask Lenin.

Now that the details of the new, larger but definitely not improved bank giveaway of between $2 and $4 trillion more have been leaked out in time for Wall Street’s Davos attendees to celebrate, we may ask whether, financially speaking, the Obama Administration should best be thought of as Bush-3 – or indeed, whether it is still on a pro-creditor trend that may better be traced as Clinton-5, or perhaps even Reagan-8. Since 1980 the financial sector has made a sustained money grab at the expense of labor and "taxpayers." More accurately, it has been a debt grab, on the opposite side of the balance sheet from assets.

Backed by Mr. Summers, Boris Yeltsin’s Harvard Boys transferred trillions of dollars of Russian mineral wealth and public enterprises into the hands of kleptocrats. That was an asset transfer, pure and simple. In 1997, to be sure, the IMF gave Russia a loan that immediately disappeared into the kleptocrats’ bank accounts, to be paid out of subsequent oil-export proceeds. But assets were the name of the game.
Today’s U.S. giveaway has a new twist. The analogy is the "watered stocks" and bonds that railroad magnates and Wall Street emperors of finance gave themselves and their political mouthpieces, simply adding the interest coupons and dividends onto the prices charged the public as if they were real "costs." Today’s version – "watered Treasury bonds" – are being created on the public sector’s balance sheet. "Taxpayers" must pay bear the interest charges – leaving less for the infrastructure investment that Mr. Obama suggests we may need.

The Bush-Obama bailout bore "small print" already has given Wall Street a decade’s tax-free status by letting it count its financial losses against its tax liability. So not only has there been a great fiscal giveaway, there has been a tax shift off finance onto labor and industry. States and localities already have begun to announce plans to sell off roads and airports, land and other public assets to the financial sector in order to finance their looming budget deficits (which localities are not allowed to run under present legislation). No federal funding has been granted to finance the cities as their tax receipts plunge. There has been a token amount to relieve some low-income families saddled with junk mortgages. But this does not involve actually giving them a spendable money "bonus." Their role is simply to be trotted out like widows and orphans used to be, as justification to bail out banks for their bad gambles on currency, interest rates and bond derivative gambles. Insolvent debtors are merely passive vehicles to get a book-credit of mortgage relief that the government will turn over in their name to their bankers to make these institutions whole.

Whole, and then some! Chris Matthews just reported his statistic of the day (January 29): $18.4 billion in Wall Street bonuses, paid for out of the government giveaway.

This is called "saving the economy." That is as much an oxymoron as "socializing the losses." Socializing the losses would mean wiping the mortgages and other bank loans of debtors off the books. These giveaways are to keep the debts on the books, but for the government to buy them and make the creditors whole – while a quarter of real estate has fallen into Negative Equity as its debts are not being bailed out but kept on the books. The economy’s "toxic waste" remains. But a matching volume of new waste is being created and given to a few hundred families. No wonder the stock market soared by 200 points on Wednesday, led by bank stocks!

In the seemingly frenetic ten days since Mr. Obama took office, it is beginning to look as if his good political decisions regarding Guantanamo, Iraq, employee rights to sue for employer wrongdoing, are sugar coating for the giveaway to Wall Street, a quid pro quo to avert opposition from his Democratic Party constituency. At least this seems to be their effect. To accuse Mr. Obama of a giveaway would seem at first glance to contradict the basic thrust of his actions – or would be if one did not take into account his appointments of Larry Summers at the White House and the conspicuous leadership role in the bailout played by Barney Frank in the House and Chuck Schumer in the Senate.

There is a simple way to think about what has happened – and why it won’
t help the economy, but will hurt it. Suppose the new $4 trillion "bad bank" works. The government shell will give away Treasury bonds for bad bank loans and derivatives gambles, without the government "marking to market." (So much for the pretense that giving Wall Street credit is "free market" policy. But the alternative to free markets does not turn out to be "socialism" at all, even if "socialism for the rich." There are worse words for it, which I won’t use here.)

The real question is what the Wall Street elite will do with the money.
From Chuck Schumer and Barney Frank through Larry Summers, the Obama administration hopes that the banks will lend it out to Americans.
Borrowers are to take on yet more debt – enough to start re-inflating house prices and making homes yet more unaffordable, requiring buyers to take on yet larger mortgages. Larger mortgages at rising prices are supposed to help the banks rebuild their balance sheets – to earn enough to compensate for their gambling losses.

But this neglects the fact that today’s looming depression is caused by debt deflation. Families, businesses and government having to spend more wage income, profits and tax revenues on debt service instead of buying goods and services. So why is the solution to this debt overhead held to be yet MORE debt? Is there not something crazy here?

The government’s solution, placed in its hands by the financial lobbyists, is to bail out the bankers and Wall Street while leaving the "real" economy even more highly indebted. All this talk about "more credit" being needed, all this begging of banks to lend more money and then extract yet more interest and amortization from the economy, is leading it even deeper into the debt hole. It is not helping families repay their debts. And indeed, homeowners whose mortgages already exceed the market price of their property are not going to be able to borrow more.

It would take only $1 trillion or so – or simply to let "the market"
work its magic in the context of renewed debtor-oriented bankruptcy laws – to cure the debt problem. But that obviously is not what the government aims to solve at all. It simply wants to make creditors whole – creditors who are, after all, the largest political campaign contributors and lobbyists these days.

The most important thing to understand about the present economic crisis is that it was not necessary technologically, politically or fiscally.
Government at the state, local and federal levels are strapped for funds – but only because the natural source of taxation, land rent and monopoly rent and the user fees from public enterprise have been financialized. That is, whereas property taxes used to finance about three-quarters of state and local budgets back in 1930, today they supply only about a sixth. The shrinkage has not been passed on to homeowners and renters or commercial users. Prices for homes and office buildings are set by the marketplace. The rise in market price has been pledged to bankers as mortgage interest. The financial sector thus has replaced government as recipient of the economic surplus – leaving the public sector starved of cash.

The financial sector also has replaced the government as economic planner. This role has followed from its monopoly in credit creation, which turns out to be the key to resource allocation.

Bank credit is created freely. Governments could do the same. Indeed, this is what the U.S. Treasury did during America’s Civil War, when it issued greenback credit.

If today’s looming economic depression is a manmade (that is,
lobbyist-financed) phenomenon, then what policy is needed as a remedy?

2009 Bailout.

The American Economy is Not Coming Back

The Ugly Truth

By DAVE LINDORFF
President Barack Obama and his economic team are being careful to couch all their talk about economic stimulus programs and bank bailout programs in warnings that the economic downturn is serious and that it will take considerable time to bounce back.
I’m reminded of an experience I had with Chinese medicine when I was living in Shanghai back in 1992. I had come down with a nasty case of the flu while teaching journalism at Fudan University on a Fulbright Scholar program. A Chinese colleague suggested I go to the university clinic. When I told him there wasn’t much point since doctors couldn’t do much for the flu besides recommend fluids and bed rest, he said, “That’s Western doctors. You could go to the Chinese medicine doctors at the clinic. They can help you.”  I figured, what the hell, and we went.  The doctor inquired into the lurid details of my illness—how my bowel movements looked, the color of the mucus in my nose, etc.  He didn’t really examine me physically. Then he prescribed an incredible number of pills and teas and sent me home with a huge bag of stuff, and instructions on the regimen for taking them through the course of each day.  I followed the directions dutifully, and my colleague came by each day to check on my progress.  By the fifth day, when I was still running a fever and feeling terrible, I told him I didn’t think the Chinese medicine was working.  He replied confidently, “Chinese medicine takes a long time to work.”
I laughed at this.  “Sure,” I said. “But the flu only lasts a week or so, and now, when I get better, you’ll say it was the Chinese medicine, right?” 
He smiled and agreed. “Yes. You are right.”
Obviously the Obama administration recognizes that it needs to keep the finger of blame for the current economic collapse squarely pointed at the Bush administration, which is certainly fair in large part (though the Clinton deregulation of the banking industry played a major part in the financial crisis and its enthusiastic promotion of globalization began the massive shift of jobs overseas that has left the nation’s productive capacity hollowed out). But it also seems to recognize that it cannot tell the bitter truth, which is that our national economy will never “bounce back” to where it was in 2007.
America, and individual Americans, have been living profligately for years in an unreal economy, propped up by easy credit which inflated the value of real estate to incredible levels, and which led people to spend way beyond their means.  Ordinary