Great summary of what is wrong with the United States by the man who should be king. Well, not king, but President

As Obummer continues his fucked up policies of throwing money to the people who least need it, the middle class is getting crushed

76 percent of American middle-class households not financially secure

As the economy continues to reel, a new report finds that 4 million American households lost economic security between 2000 and 2006, and that a majority of America's middle class households are either borderline or at high risk of falling out of the middle class altogether. The new report, "From Middle to Shaky Ground: The Economic Decline of America's Middle Class, 2000-2006" was published by the policy center Demos and the Institute for Assets and Social Policy (IASP) at Brandeis University.


"From Middle to Shaky Ground" is based on the Middle Class Security Index, co-developed by Demos and IASP/Brandeis, which uses government data and measures the financial security of the middle class by rating household stability across five core economic factors: assets, educational achievement, housing costs, budget and healthcare. Based on how a family ranked in each of these factors, they were defined as financially "secure," "borderline" or "at risk". In addition to the report, Demos and IASP/Brandeis have published an "Economic Security Scorecard" that the average family can use to measure where they fall on the Middle Class Security Index.

"The increases we're witnessing in housing costs and the number of families who lack health insurance, coupled with the extreme volatility of the average household's savings, show that a large percentage of America's middle class are not well equipped to weather this current economic storm," said Jennifer Wheary, one the report's co-authors and a Senior Fellow at Demos.

"From Middle to Shaky Ground" shows some worrying trends in America's households, including:

-- The median financial assets held by middle-class families declined by 22 percent. This means that for every dollar in median assets that middle-class families held in 2000, they held just 78 cents in 2006. These figures do not include home equity and therefore do not reflect additional losses families may have experienced due a decline in their home values.

-- Monthly housing expenses for the middle class rose by 9 percent. As a result, the percentage of middle-class families who match the Department of Housing and Urban Development's definition of "housing burdened" rose from 31 percent in 2000 to 37 percent in 2006.

-- The number of middle-class families in which at least one member lacks health insurance grew from 18 percent in 2000 to 25 percent in 2006.

"Declines such as these in any one area are alarming," said Tom Shapiro, Professor of Law and Director of the Institute on Assets and Social Policy at Brandeis. "Bad news across a range of areas supporting financial stability means the middle class is confronting its greatest challenge since the Great Depression."

Original article posted here.

The fucking scam marches on . . .

Fed Defies Transparency Aim in Refusal to Disclose

By Mark Pittman, Bob Ivry and Alison Fitzgerald

Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulsonsaid in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

Bloomberg News has requested details of the Fed lending under the U.S.Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

Treasury, Fed, Obama

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davisdidn't respond to a phone call and an e-mail seeking comment.

President-elect Barack Obama's economic adviser, Jason Furman, also didn't respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to ``make our government open and transparent so that anyone can ensure that our business is the people's business.''

The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

Sept. 14 Decision

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the ``lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,'' according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

`We Need Transparency'

``We need oversight,'' Paulson told lawmakers. ``We need protection. We need transparency. I want it. We all want it.''

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. ``Transparency is a big issue,'' he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Frank Backs Fed

``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee ChairmanBarney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. ``If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market'

Frank said the Fed shouldn't reveal the assets it holds or how it values them because of ``delicacy with respect to pricing.'' He said such disclosure would ``give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

``I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari said. ``That would unclog the market very quickly.''

TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

AIG Lending

The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.''

The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.

The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ratings Cuts

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

Original article posted here.

The gig is up. World starting to call the US on its shell game.

In America we distrust

The crisis of the U.S. financial system is the crisis of its imperial system, after it managed to defeat the U.S.S.R. and start a huge technological revolution. It might be the end of a period, but last century the United States came back twice from similar problems

by Francesco Sisci

BEIJING --

In these days the U.S. dollar is no longer what it used to be. For decades, concrete sign of power and wealth, it is now beleaguered, despite the recent rallies that have boosted its value against the European competitor – the euro. The American financial system in fact is crumbling day after day, and nobody knows when the fall of this extremely volatile market will stop or how much money it will have to burn before it can start all over again. At the moment nobody trusts the U.S. financial system, heart if not mind of the (formerly?) almighty American empire. So the once proud motto on the greenback “in God we trust” sounds now like the prayer of the despairing who cast their lot with God because everything else has failed.

Yet it did not begin yesterday, and it did not start with the financial derivatives, which now have become almost byword for deceit and trickery.

[1]

These two sets of data reveal the problem that, according to many economists, is at root of the present financial crisis: At the end of September, the overgrowth of the U.S. deficit reached the extraordinary total of U.S. $10.2 trillion—and it keeps growing!

The growth of public debt was an intentional policy started during the Ronald Reagan administration, and it was coupled with wide-ranging deregulation intended to boost America’s economy after the doldrums of the Vietnam War and the failures of the Carter administration. And, indeed, it did do so.

These policies worked miracles. They were a strategic weapon, as they provided the funds to engage the U.S.S.R. in an armament race that eventually bankrupted and thus defeated the Soviet enemy.

They also provided cheap credit that allowed America's stillborn computer industry to engage and defeat the competing Japanese computer giants then poised to surpass the United States.

Furthermore, the strategies endowed the American people with cheap money to start a spending spree, which proved to them U.S. affluence and guaranteed consensus for the ruling parties. The psychological depression of the Vietnam War and the former fear of being defeated by the communists were all gone.

It was a God-send all around. Besides, the largest part of this debt was domestic, and thus not influenced by the vagaries or blackmail of foreign governments. For many years, it was well below 60 percent of the GDP, the golden mark fixed by the European countries during the pact on the euro in the early 1990s as a standard of public discipline and well-being.

Snags

However, there were snags in this process. The debt was sold to the open market as bonds, and it was also monetized. That is, the Federal Reserve created an entry on its books to credit the U.S. Fractional Reserve Banking, this new checkbook money was treated as an asset to lend against for an amount equal to the dollar amount of the bonds the Federal Reserve was acquiring. The money created in this process not only included the new dollars that came into existence just to purchase the bonds, but also much more because this new money was now sitting in the form of checkbook money at the Federal Reserve.

The expansion of the money supply was many times the initial money created. That exact amount ended up being a function of the percentage of deposits banks must set aside as "reserves."[2]

The monetization of U.S. debt expanded the money supply, which tended to dilute the value of dollars already in circulation, put downward pressure on the dollar for short-term interest rates (thus, the banks had more to lend), and put upward pressure on inflation. Typically, this situation causes an inflationary boom that ends in a deflationary bust to complete the business cycle. However, the debt soared and inflation ultimately stayed relatively low in the 1990s, partly because China, Japan, and other Asian exporters were willing to sell America cheap products and get paid with money accumulated in reserves denominated in U.S. dollars.

Monetization might not be the core of the problem, as Spengler argues in a private exchange:

“Robert Mundell's groundbreaking paper in 1965 argued that an expansion of government debt relative to GDP could represent an increase in market efficiency, if it were issued in context of tax cuts that increased growth (market efficiency measured by the portion of total future income streams that could be discounted by the market). That was the foundation of what later became known as supply-side economics. In that sense the growth of debt was not necessarily a bad thing. As for monetization, the growth rate of the monetary base between 2001 and 2008 fell gradually to zero before spiking during the last few weeks due to massive intervention by the Fed. I don't believe that issuing public debt and monetizing it was the root cause of the crisis, although the deficit certainly was too large during much of this period. Rather, the massive increase in effective leverage by the banks due to use of derivatives created vulnerabilities that blew up starting in July 2007… Once the prospective returns to high-quality U.S. agency-backed mortgage-backed securities collapsed during the mid-2000s due to massive buying from Asia and Europe, the banks turned to manufacturing structured credit instead. The structured credit leverage machine in the banks, in turn, absorbed almost all the financing for corporate leverage (leveraged buyouts), and so forth.”

However, from abroad it is easier to see the continuity of the faults of a 25-year-old ballooning public debt sold abroad, and in times of crisis, the whole strategy is put under scrutiny. As the U.S. financial system asks for money, support, and understanding from foreign countries, it is hard to imagine that foreign creditors will be willing to carry on with a policy of buying bonds while accepting relatively minor fixing of the problem. A major overhaul and rethinking is due, and this can’t avoid issue of the American public debt.

Still, before rebutting the issue of public debt, one has to make clear that it was part of a complex program that brought many positive results.

Benefits of the snags

This practice immensely expanded the money in circulation, and this money was seminal for the growth of the computer and telecommunication industry, which revolutionized the world in the 1990s. It contributed to the risk funds that placed their bets with small-garage enterprises: One of them could succeed and 20 could fail, but the initial investor would still be rewarded with 100 times returns. Google, Yahoo, and many other present giants were engendered by this wealth of money supply and generosity of conditions. If interest rates had been higher and lending conditions stricter, this revolution might have not taken off.

Moreover, the technological and productivity boost contributed by the advances in computers created major economic growth that rewarded the easy money supply.

However, in the late 1990s, the Internet was already a bubble. Returns were not that great, and the public and advertising industry did not move from traditional media to the Internet fast enough to justify expectations from lenders and investors. Still, this could be dealt with. Asians, and especially the thrifty Chinese, were willing to save money and lend it to squandering Americans, building a virtuous chain linking the two economies. Americans would invest in China, upgrading the local technology and know-how. American and Chinese factories, which had learned the American ways, would send cheap exports to the U.S. This kept down world inflation and aided in the growth of the American service industry, which was selling more Asian products to Americans and shifting away from manufacturing. Part of the profit was returned to China, which in turn invested in U.S. debt to finance new American spending.

Yet, to pay off the interest on the bonds and keep alive this virtuous circle of Asian money looking for great returns in America, the U.S. had to provide grand new growth venues similar to the computer and Internet industries in the 1980s and 1990s. First of all, the money supply had to be kept abundant for it to move around looking for investment opportunities, such as new technologies that could replicate the computer revolution in other areas. A money crunch or a spike in interest rates in America would make the U.S. pay high interests on its bonds and could also sap Asian confidence in continuous economic growth in the United States and thus could push investors away from the golden sidewalks of Wall Street and its neighborhood.

With so much cheap money and investment flourishing, the only task for banks was to allocate the funds, without paying too much attention on the solidity of the assets financed. In the late 1990s, there was this crunch.

As the Washington Post reported:

“The Clinton administration, supported by then-Federal Reserve Chairman Alan Greenspan, refused to tighten regulations on financial derivatives, memorably dubbed ‘financial weapons of mass destruction’ by Warren Buffett. The 1999 repeal of the Glass-Steagall Act, a Depression-era law separating commercial banking and investment banking, passed with overwhelming bipartisan support in Congress and was signed into law by President Bill Clinton.”[3]

But this did not change the overall economic situation because technological revolutions do not turn up every day, and technological improvements do not deliver the same returns as a new product. An electric lamp that illuminates the night or a computer providing fast computation tools and instant, free telecommunication can promise immense returns. Improved brighter lamps and faster communication and computation facilities provide only incremental returns. These returns would not justify the massive amount of public debt in America in the first years of this century. Therefore, the George W. Bush administration, then in power, could choose to either (1) carry on with the Clinton policy of managed decrease of the public debt, (2) let the existing Internet bubble burst open and allow the market start afresh after the explosion, or (3) look for new expansion drives and bet on them.

In a way, there was no choice: Bush had to go for option (3) if he wanted to try to be reelected. If he chose option (1), he would have imposed harsher discipline on Americans who were looking for signs of recovery and welfare after the meager Clinton years, and he therefore might have lost votes. If he had chosen the purely liberal recipe (2), he could have opened a Pandora's box of social tensions that might have toppled him. The safest course was option (3), which could keep the growth going until reelection time, and then, in the following four years, he could assess the situation and recalibrate it, if necessary.

Politicians are no saints, and their political survival is the precondition for any policy. Therefore, Bush de facto had only option (3). Besides, the "war on terror" could have been a golden opportunity. The computer industry and Internet developed as spin-offs of military research in the 1980s—a new military campaign could have provided the same momentum for a technology revolution as the Cold War in the 1980s had done before.

War in Central Asia and the Middle East could have been a good thing. It gave the U.S. several things that were necessary at the time. (1) It had an inspirational ideological drive (the fight against Islam fundamentalism-terrorism) that was as real a threat to the world as communism had been before. (2) It promised to deliver cheap oil supplies that would grease the rusty clogs of American capitalism and help restart it. (3) It would democratize and stabilize the region, thus making it a part of the “Western world” market value system. This shift would definitively defeat the OPEC oil-producing cartel. It would also open a world of new consumers and producers and brush up the old continental Silk Road, which linked the Mediterranean to the Far East, placing it under American influence.

It was a promise of bonanza that—if it worked—would have more than justified the continuous growth of the U.S. debt, which Asians, in turn, would have been more than willing to keep financing just to be part of the game led by America. By the time this was over, new technologies and investment opportunities might have sprung up to reignite the whole process.

Who could have resisted the temptation? Yet, it did not work out. The strategy may have failed because of the deregulation of derivatives or the initial strategic approach to the war in Iraq. Still, with hindsight one can see it was ultimately because of hubris: There were too many goals (from oil to democracy) with too little thorough thinking.

Besides, after keeping the dollar exchange rate high vis-à-vis the euro, Bush let the dollar drop against the European counterpart. The objective bet was that, prompted by the cheap dollar, U.S.U.S. counterparts, abetted by the cheap dollar, simply grew lazy and did not invest in greater productivity and incremental improvements. manufacturers would bankrupt or at least beat their European competitors, who were hindered by the expensive euro, leaving American industries in globally dominant position. However, this did not occur. Prickled by the expensive euro, many European manufactures improved efficiency and productivity. Many U.S. counterparts, abetted by the cheap dollar, simply grew lazy and did not invest in greater productivity and incremental improvements.

Meanwhile, oil prices soared, clogging the arteries of the American-Asian industrial system with growing production prices and new inflationary pressures felt first in Asia and indirectly in America, too. High energy prices also boosted Russian confidence to the point that for a while the country dreamed of being an empire again and almost challenged the U.S. in Georgia.

And America, the ultimate consumer of Russian energy and Asian goods, could not find the money to foot the bill.

The sensible course of action should have been in 2007—or, even better, in 2006—to stop the run: drastically slow down money supply, import less, and cool down the economy. There were important signs that things were getting out of hand. An alarm bell should have sounded when the troubled Chinese economy, with foreign trade making up about 70 percent of its G.D.P. and exports about 40 percent of the G.D.P., was running a U.S. $300 billion surplus with America. In 2006 and 2007, China showed strong signs of economic overheating, and Beijing took steps to cool down the economy and rein in the money supply that was then going into the stock market and real estate. Because of the strong links between the two economies, if China has a fever, America will catch a cold sooner or later. But Americans did not realize it, and neither did the Chinese, who were worshipping the U.S. economy. There was greed, also. The Chinese were still hoping to get paid for their sacrifices and thriftiness through American bonds, which financed the squandering U.S. consumers. And the U.S. consumer lost track of who would pay the bill.

The paradigm of growth that had worked since Reagan was falling apart, but for months, many economists thought the worst was over and that this was a limited crisis. What had happened in America was the same as what was happening in China: There was a large money supply without rewarding returns in industry and new technologies, so investors found they could get better returns in the stock exchange and real estate. But at this point, the volumes were immense because they had multiplied the starting cash through the new derivatives.

This was not pure greed. The Clinton administration, coming to power after the fall of the Soviet empire, did not have enough money to finance the world order, which had doubled in size. The U.S. had to shoulder not just half of the world (the rest was formerly a Soviet burden) but all of it. The new derivatives and deregulation would provide the resources for new needs.

The current system worked for more than two decades, but now all of that is gone. Reaganomics, which started this whole process, does not work anymore—but what should be done?

After Reaganomics

The negative legacy of this disaster is huge. Its first victim is the reliability of the U.S. financial system, which, in turn, is the very heart of American power—Napoleon said he needed three things for war: money, money, money. Being dependable and reliable is the core of finance—it goes along with the saying “you can bank on it,” and it goes along with trading real goods and gold for banknotes, which are ultimately just sheets of paper. That was what made the world trust America in 1971, when it abandoned the gold standard, fixed in the 1944 Bretton Woods agreement, convincing everybody that the dollar greenback was as good as a bullion.

Sure, it is not the first time that America has gone under. In the 20th century, it happened twice.

In 1929, the crash of its stock exchange sunk the whole world into a depression for years. The U.S. itself seemed on the brink of disappearing, but it came back with vengeance by winning World War II and setting a new world order.

The second time was in early 1970s with the Vietnam War. The U.S. thought it was on the verge of not a local but a global defeat at the hands of the communists. That prompted Nixon to embrace the extraordinary opening of China. It was the last resort in the face of an overwhelming encroachment by an enemy threatening to take over Asia and the world. Yet, less than a decade later, the situation was reversed and the Soviets were being definitively beaten.

Will America come back after this, or is its position permanently compromised? To answer this question, one must see what was lost—or seriously dented—in this crisis: trust in the dollar (as an absolute symbol of the overall American strategy dating back to Reagan or from the 1971 drop of the gold standard) and trust in the “bankability” of its financial system.

However, after the fall of the U.S.S.R. in the 1990s, the world America took over was too big for its economy. This was unlike the situation at the end of World War II, when the U.S. economy was about half of the world economy. In 1945, America had de facto the only surviving and fully functional industrial complex. And in fact, America took over less than half of the world while the other half was under the influence of the Soviets.

In 1992, with the fall of the U.S.S.R., America was one of three main pillars of industrial production. The others were Western Europe and Japan, whose economies could challenge America’s but whose politics were subservient to the United States. They were pulled into post-Cold War efforts but dragged their feet. In fact, other countries wanted the U.S. to take the lead in many new political challenges, such as the war in Yugoslavia, during which America sent troops basically because the European powers had no stomach for a fight there or elsewhere.

In the 1990s, America tried to do too much with too little—and didn’t realize it. It overstretched its capability and economy, and this also sapped its spirit. But the U.S. still could have pulled through if the Iraqi war were better thought out and conducted or if derivatives were kept under control.

Now, the loss is not absolute, since it produced gigantic results, including the fall of the Soviet empire and the technological revolution of the Internet. Even in the face of the dramatic present crisis, it is hard to see a currency or a country replacing the dollar or the U.S. But, the present crisis proves that the dollar and the U.S. can’t answer for everything and can’t sustain the whole world alone. America's current search for support in Europe and Asia proves that America can’t do it alone. The U.S. soft power has been seriously dented, and this can’t be compensated for by the hard power of its military. If done at gunpoint, whatever the amount of money we talk about, justified earnings in financial transactions become simple highway robbery.

In a way, America has to recognize that the world has become too complex and large for the present American resources, and thus it needs to embrace some power-sharing.

On the other hand, the world can’t deny that, although no longer paramount, the dollar is still central.

This is a double challenge that likely future American President Barack Obama will have to address. The answer could be from the book of old Chinese imperial recipes: “Use foreigners against foreigners.” Or, translated in Roman imperial terms, use barbarian troops against barbarian hordes. America has been trying to do the opposite in the past two decades: doing everything itself, trusting none but its own troops and its own banks. The opposite should be true. By diluting its shares in the global stake-holding system, America could have a better grasp of the world, just like a rich man who agrees to scale down from 100 percent of a small company to 51 percent of a larger company.

This is the positive side for America, but the bitter pill is that power-sharing requires more responsible behavior. America's honor, its financial system, must be restored, as it will have to be more transparent to more stake-holders. The U.S. papers rightly complained about the scandal of the Chinese milk faked with melamine, and the world looked in horror at a history of Chinese low-quality paint for toys laced with lead and other substandard products. However, all of these scandals are dwarfed by the dimension of Wall Street's habit of producing pyramids of paper receipts leveraging 100 times the original collateral.

Let’s make no mistake, it will take years to restore America’s honor, and this restoration can’t be done in isolation, without other “stake-holding” countries. However, honor is the key for everything. Ancient China knew it.

The 4th century philosopher Wuma zi was quoted in the Mozi arguing as follows[4]:

“In the myriad things, nothing is to be valued above honor [yi, the sense of what is right].

If you tell a man ‘I’ll give you cap and shoes if you let me cut off your hands and feet,’ will he do it? Certainly he will not. Why? Because cap and shoes are less valuable than hands and feet. If you continue: ‘I’ll give you the rule of the world if you let me execute your person,’ will he do it? Certainly he will not. Why? Because the world is less valuable than one’s own person.”

However, concludes Wuma zi:

“One will fight to death over a single word, which makes honor being more valuable than one’s own person.”

Why, then, do people go to war, when they could lose their lives and benefits are very uncertain? Because for people, honor can be more valuable than one’s life.

In banking, as we saw, honor is everything. Otherwise, it is robbery, and to resist a robbery people may be willing to die or go to war. If America wants to restore its honor, it needs to thoroughly clean its financial system and have a bigger strategy for the future, together with its stakeholders. It is much more than a new Bretton Woods—it is a new world order that Obama will have to help organize. He can’t do it alone, but he could lead it. If he doesn’t, it will not be just the U.S. banks that will suffer.

I am grateful to Pansak Vinyaratn, Gianni De Michelis, Lorenzo Infantino and Enrico Colombatto for important discussions and advise.

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[1] U.S. Debt from 1940 on. Red lines indicate the public debt and black lines indicate the gross debt. The difference is that the gross debt includes funds held by the government (i.e. the Social Security Trust Fund). The second chart shows debt as a percentage of the U.S. G.D.P. or dollar value of economic production per year. (Note: The two charts above do not include the recent rise of the public debt to above $10 trillion on September 30, 2008.) Data from the FY 2009 U.S. Budget historical tables is available at [whitehouse.gov/omb].
[2] See, for instance, "The Macro Economy Today" by Bradley Schiller and "Secrets of the Temple" by William Greider.
[3] Editorial, Washington Post, October 20, 2008.

[4] Mozi yinde 47/1-3, translation adapted from A.C. Graham “Disputers of the Tao” p. 62, La Salle, Illinois, 1999.

Original article posted here.

Obama's and our masters

Nearly a trillion dollars. No accountability.

China targets second prong of US global strength (after nuclear arsenal)

U.S. has plundered world wealth with dollar: China paper

BEIJING (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.

The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.

"The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University.

Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.

"The U.S. dollar is losing people's confidence. The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance," he wrote.

Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.

A two-day Asia-Europe Meeting (ASEM) of 27 EU member states and 16 Asian countries was set to open on Friday. Though few analysts expect much in the way of concrete agreements, Shi said it could prove momentous.

"How can Europe and Asia grasp each other's hands and together confront the once-in-a-century global financial crisis sparked by the U.S.; how can they construct a new equitable and safe international financial order?" he said.

"The world is waiting for this Asian-European meeting to achieve big results in financial cooperation."

Original article posted here.

A heavy price for idiocy and lassitude

The Idiots Who Rule America

By: Chris Hedges

Our oligarchic class is incompetent at governing, managing the economy, coping with natural disasters, educating our young, handling foreign affairs, providing basic services like health care and safeguarding individual rights. That it is still in power, and will remain in power after this election, is a testament to our inability to separate illusion from reality. We still believe in "the experts." They still believe in themselves. They are clustered like flies swarming around John McCain and Barack Obama. It is only when these elites are exposed as incompetent parasites and dethroned that we will have any hope of restoring social, economic and political order.

"Their inability to see the human as anything more than interest driven made it impossible for them to imagine an actively organized pool of disinterest called the public good," said the Canadian philosopher John Ralston Saul, whose books "The Unconscious Civilization" and "Voltaire's Bastards" excoriates our oligarchic elites. "It is as if the Industrial Revolution had caused a severe mental trauma, one that still reaches out and extinguishes the memory of certain people. For them, modern history begins from a big explosion--the Industrial Revolution. This is a standard ideological approach: a star crosses the sky, a meteor explodes, and history begins anew."

Our elites--the ones in Congress, the ones on Wall Street and the ones being produced at prestigious universities and business schools--do not have the capacity to fix our financial mess. Indeed, they will make it worse. They have no concept, thanks to the educations they have received, of the common good. They are stunted, timid and uncreative bureaucrats who are trained to carry out systems management. They see only piecemeal solutions which will satisfy the corporate structure. They are about numbers, profits and personal advancement. They are as able to deny gravely ill people medical coverage to increase company profits as they are able to use taxpayer dollars to peddle costly weapons systems to blood-soaked dictatorships. The human consequences never figure into their balance sheets. The democratic system, they think, is a secondary product of the free market. And they slavishly serve the market.

Andrew Lahde, the Santa Monica, Calif., hedge fund manager who made an 870 percent gain last year by betting on the subprime mortgage collapse, has abruptly shut down his fund, citing the risk of trading with faltering banks. In his farewell letter to his investors he excoriated the elites who run our investment houses, banks and government.

"The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking," he said of our oligarchic class. "These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

"On the issue of the U.S. Government, I would like to make a modest proposal," he went on. "First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reined in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government."

Democracy is not an outgrowth of free markets. Democracy and capitalism are antagonistic entities. Democracy, like individualism, is not based on personal gain but on self-sacrifice. A functioning democracy must defy the economic interests of elites on behalf of citizens. This is not happening. The corporate managers and government officials trying to fix the economic meltdown are pouring money and resources into the financial sector because they only know how to manage and sustain established systems, not change them. Financial systems, however, are not pure scientific and numerical abstractions that exist independently from human beings.

"When the elite begin to think that money is real, the crash is coming," Saul said in a telephone interview. "That is just a given in history. Because what they've done is pull themselves out of the possibility of looking in the mirror and thinking, this is inflation, speculation, this is fluff. They can't do it. And when you say to them, gosh, this is not real. And they say, oh, you don't understand, you're so old-fashioned, you still think this is about manufacturing. And of course, it's basic economics. And that's what happens every single time.

"The difficulty is you have a collapse, you have a loss of face by the people who are there, and it's not just George Bush, it's very, very deep," Saul said. "What we're talking about is the need to rethink the departments of economics, of political science. Then you have to rethink the whole analytic method of the World Bank. If I'm the secretary of the treasury, and not a guy like Henry Paulson, but I mean a sort of normal secretary of the treasury or minister of finance, and I say, OK, we've got a real problem, let's get the senior civil servants in here. Gentlemen, ladies, OK, clearly we have to go in another direction, give me some ideas. Well, those people don't have any other ideas because at this point they're about the fourth generation of what you might call neoconservative globalist managers, unfairly summarized. So they then go to the people who work for them, and you work down; there's no one in there with an alternate approach. I mean they'll have little alternatives, but no basic differences in opinion. And so it's very difficult to turn anything around because they've eliminated all opposing ideas inside. I mean it's the problem of the Soviet Union, right?"

Saul pointed out that the first three aims of the corporatist movement in Germany, Italy and France during the 1920s, those that went on to become part of the Fascist experience, were "to shift power directly to economic and social interest groups, to push entrepreneurial initiative in areas normally reserved for public bodies" and to "obliterate the boundaries between public and private interest--that is, challenge the idea of the public interest."

Sound familiar?

"There are a handful of people who haven't been published in mainstream journals, who haven't been listened to, who have been marginalized in every way," Saul said. "There are a couple of them and you could turn to them. But then who do you give the orders to? And the people you give the orders to, they are not going to understand the orders because it hasn't been a part of their education. So it's a real problem of a good general who suddenly finds that his junior generals and brigadiers and corporals, you want them to do irregular warfare and they only know how to do trenches. And so how the hell do you get them to do this thing which they've never been trained to do? And so you get this kind of disorder, confusion inside, and the danger of what rises up there is populism; we've already had populism in a way, but we could get more populism, more fear and anger."

We may elect representatives to Congress to end the war in Iraq, but the war goes on. We may plead with these representatives to halt Bush's illegal wiretapping but the telecommunications lobbyists make sure it remains in place. We may beg them not to pass the bailout but 850 billion taxpayer dollars are funneled upward to the elites on Wall Street. We may want single-payer, not-for-profit health care but it is not even discussed as a possibility in presidential debates. We, as individuals in this system, are irrelevant.

"I've talked to several Supreme Court justices, several times in several countries," Saul told me, "and I say, look, in your rulings, can you differentiate easily in cases between the social contract and the commercial contract, and to which the answer is, we can no longer differentiate. And that lies at the heart of the problem. You don't have the concept of the other, and of obligation of the individual leading to individualism. You can't have that if the whole legal system has slipped over the last, really, 50 years, increasingly, to a confusion between the social contract and the commercial contract. Because they are two completely different things. The social contract is about the public good, responsible individualism, imagining the other. The commercial contract is a commercial contract. They're not supposed to be confused. They don't actually fit together. The commercial contract only works properly when the social contract works in a democracy."

The working class, which has desperately borrowed money to stay afloat as real wages have dropped, now face years, maybe decades, of stagnant or declining incomes without access to new credit. The national treasury meanwhile is being drained on behalf of speculative commercial interests. The government--the only institution citizens have that is big enough and powerful enough to protect their rights--is becoming weaker, more anemic and less able to help the mass of Americans who are embarking on a period of deprivation and suffering unseen in this country since the 1930s. Consumption, the profligate engine of the U.S. economy, is withering. September retail sales across the U.S. fell 1.2 percent. The decline was almost double the 0.7 percent drop analysts expected from consumers, whose spending represents two-thirds of U.S. economic activity. There were 160,000 jobs lost last month and three-quarters of a million jobs lost this year. The reverberations of the economic meltdown are only beginning.

I do not think George W. Bush or Barack Obama or John McCain or Henry Paulson are fascists. Rather, they are part of a cabal of naive, mediocre and self-deluded capitalists who are steadily weakening political and economic structures to a point where our democracy will become so impotent that it can be blown aside, probably with broad popular support. The only question is how this will happen. Will there be a steady and slow decline as in the late Roman Empire when the Senate ended as a farce? Will we see a powerful right-wing backlash from those outside the mainstream political system, as we did in Yugoslavia, and the rise of a militant Christian fascism? Will there be a national crisis that allows those in power to instantly sweep away all constitutional rights in the name of national security?

I do not know. But I do know that what is coming, as long as our oligarchy remains in charge, will not be good. We will either recover the concept of the public good, and this means a revolt against our bankrupt elite and the dynamiting of the corporatist structure, or we will extinguish our democracy.

Original article posted here.

And this is before the repercussions of the crash post . . .

Nearly 30% of US Families Subsist on Poverty Wages

By Tom Eley

A report released Tuesday by the Working Poor Families Project reveals that more than 28 percent of American families with one or both parents employed are living in poverty.

The report, “Still Working Hard, Still Falling Short,” is based on data for the period from 2004 through 2006 gathered from the US Bureau of Labor Statistics, the US Census Bureau’s American Community Survey and the Census Bureau’s Current Population Survey.

The report finds that 9.6 million households can be described as low-income or “working poor”—defined as families that earn less than 200 percent of the official poverty level. There were 350,000 more such families in 2006 than in 2002. More than 21 million children now live in low-income working families—an increase of 800,000 in four years.

In 2006 there were more than 29 million jobs in the US that paid below the official poverty level—defined as $9.91 an hour for full-time labor—an increase of nearly 5 million poverty-wage jobs from 2002.

Family income inequality also increased rapidly between 2002 and 2006, the report says. In 2006, the top 20 percent of US households earned on average 9.2 times as much as the bottom quintile.

The report notes that working poor families “lack the earnings necessary to meet their basic needs—a struggle exacerbated by soaring prices for food, gas, health and education.” About 60 percent of low-income working families are forced to spend more than one-third of their income on housing, and nearly 40 percent lack health insurance for one or both parents.

These families struggle under poverty conditions despite parents working long hours. According to the report, “Adults in low-income working families worked on average 2,552 hours per year in 2006, the equivalent of almost one-and-a-quarter full-time workers.”

This total is about one third of all the hours that pass in a year. It is nearly twice the total yearly work hours of the average German worker, who works 1,362 hours per week, and 162 hours more per year than the average South Korean worker, according to statistics from the Organization for Economic Cooperation and Development.

The report documents the sharp decline in living standards for wide layers of the working class, the result of decades of corporate downsizing and wage-cutting presided over by Democratic and well as Republican administrations. It shows that poverty-level jobs are increasingly common and are held by broad sections of the population. Contrary to certain stereotypes promoted by the media, the majority of families living on poverty wages are neither immigrants, minorities or families with a single parent.

Some 72 percent of poor families, according to the report, hold jobs. More than half are headed by married couples, 69 percent have only American-born parents, 89 percent have a parent between the ages of 25 and 54, and 43 percent have white non-Hispanic parents. Only 25 percent receive food stamp assistance.

The study breaks its statistics down to the state level. In general, the conditions of working families are worst in the South and the non-Pacific West. Texas, for example, has the fourth highest number of working families defined as low-income, the second lowest percentage of low-income families who have a high school diploma or its equivalent, the second highest number with no post-secondary school experience, the fewest with health insurance, and the third highest family income inequality.

New York has the highest family income inequality in the nation, California the fourth highest.

The impoverishment of ever-larger sections of the working class population is the outcome of a number of processes: the dismantling of large sections of basic industry, the wave of union-busting and strike-breaking in the 1980s, the gutting of social welfare programs, the betrayal of the working class by the trade union organizations.

The other side of this process is the vast enrichment of the top 10 percent of the US population and the ever-greater concentration of wealth in the hands of the financial elite.

A survey carried out in March by Equilar and reported by the New York Times revealed that the CEOs of the 200 largest publicly traded companies earned an average of $11.7 million in 2007.

In 2005, the top 1 percent of US households accounted for 21.8 percent of all pre-tax income, twice the figure in 1970s. This represented the greatest concentration of income since the year before the onset of the Great Depression, 1928, when about 24 percent of national income went to the top percentile.

It should be noted that the “Still Working Hard, Still Falling Short” report reflects conditions that existed prior to the eruption of the financial crisis in August of 2007 and the subsequent slide into recession.

Original article posted here.

Blueprint for disaster

The Woman Who Could Have Prevented This Financial Mess Was Silenced by Greenspan, Rubin and Summers

By Katrina vanden Heuvel

A sad tale emerges of willfully arrogant behavior designed to undermine a wise woman's good judgment.
Tools

"Break the Glass" was the code-name high-level Treasury Department figures gave the $700 billion bailout; it was to be used only as a last-resort measure.

Now millions have been sprayed and damaged by broken glass.

But more than a decade ago, a woman you're likely never to have heard of, Brooksley Born, head of the Commodity Futures Trading Commission -- a federal agency that regulates options and futures trading -- was the oracle whose warnings about the dangerous boom in derivatives trading just might have averted the calamitous bust now engulfing the US and global markets. Instead she was met with scorn, condescension and outright anger by former Federal Reserve Chair Alan Greenspan, former Treasury Secretary Robert Rubin and his deputy Lawrence Summers. In fact, Greenspan, the man some affectionately called "The Oracle," spent his political capital cheerleading these disastrous financial instruments.

On Thursday, the New York Times ran a masterful and revealing front page article exposing the culpability of Greenspan, Rubin and Summers for the era of dangerous turbulence we live in.

What these "three marketeers" -- as they were called in a 1999 Time magazine cover story -- were adept at was peddling the timebombs at the heart of this complex crisis: exotic and opaque financial instruments known as derivatives -- contracts intended to hedge against risk and whose values are derived from underlying assets. To cut to the quick, Greenspan, Rubin and Summers opposed regulating them. "Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury," recalls Alan Blinder, a former Federal Reserve board member and economist at Princeton University, in the Times article.

In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it." Born called for greater transparency -- disclosure of trades and reserves as a buffer against losses.

Instead of heeding this oracle's warnings, Greenspan, Rubin & Summers rushed to silence her. As the Times story reveals, Born's wise warnings "incited fierce opposition" from Greenspan and Rubin who "concluded that merely discussing new rules threatened the derivatives market." Greenspan deployed condescension and told Born she didn't know what she doing and she'd cause a financial crisis. (A senior Commission director who worked with Born suggests that Greenspan and the guys didn't like her independence. " Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.")

In early 1998, according to the Times story, one of the guys, Larry Summers, called Born to "chastise her for taking steps he said would lead to a financial crisis. But Born kept at it, unwilling to let arrogant men undermine her good judgment. But it got tougher out there. In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr., called on Congress "to prevent Ms. Born from acting until more senior regulators developed their own recommendations." (Levitt now says he regrets that decision.) Months later, the huge hedge fund Long Term Capital Management nearly collapsed -- confirming some of Born's warnings. (Bets on derivatives were a key reason.)

"Despite that event," the Times reports, " Congress (apparently as a result of Greenspan & Summer's urging, influence-peddling and pressure) "froze" Born's Commissions' regulatory authority. The next year, Born left as head of the Commission. Born did not talk to the Times for their article.

What emerges is a story of reckless, willful and arrogant action and behavior designed to undermine a wise woman's good judgment. The three marketeers' disdain for modest regulation of new and risky financial instruments reveals a faith-based fundamentalist approach to the management of markets and risk. If there is any accountability left in our system, Greenspan, Rubin and Summers should not be telling anyone how to run anything. Instead, Barack Obama might do well to bring back Brooksley Born and promote to his team economists who haven't contributed to the ugly mess we're in.

Original article posted here.

You've just been bought and sold: to a bank

Rescue for the Few, Debt Slavery for the Many

By MICHAEL HUDSON

We are now entering the financial End Time. Bailout “Plan A” (buy the junk mortgages) has failed, “Plan B” (buy ersatz stocks in the banks to recapitalize them without wiping out current mismanagers) is fizzling, and the debts still can’t be paid. That is the reality Wall Street avoids confronting. “First they ignore you, then they denounce you, and then they say that they knew what you were saying all the time,” said Gandhi. The same might be said of today’s overhang of debts in excess of the economy’s ability to pay. First the policy makers pretend that they can be paid, then they denounce the pessimists as spreading panic, and then they say that of course students have been taught for four thousand years now how the “magic of compound interest” keeps on doubling and redoubling debts faster than the economy can squeeze out an economic surplus to pay.

What has ended is the idea that “the magic of compound interest” can make economies rich without having to work and without industry. I hope we have seen the end of derivatives formulae seeking to make money by playing in a zero-sum game. A debt overhang always ends either in foreclosure of the debtor’s property, or in a debt annulment to preserve the economy’s overall freedom and equity.

This means that the postmodern economy as we know it must end – either in financial polarization and debt peonage to a new oligarchic elite, or in a debt cancellation, a Jubilee Year to rescue society. But when the government says that it is reviewing “all” the options, this reality is not one of them. Treasury Secretary Henry Paulson’s first option was to buy packages of junk mortgages (collateralized debt obligations, CDOs) to save the wealthiest institutional investors from having to take a loss on their bad bets. When this was not enough, he came up with “Plan B,” to give money to banks. But whereas Britain and European countries talked of nationalizing banks or at least taking a controlling interest, Mr. Paulson gave in to his Wall Street cronies and promised that the government’s stock purchases would not be real. There would be no dilution of existing shareholders, and the government’s investment would be non-voting. To cap the giveaway to his cronies, Mr. Paulson even agreed not to ask executives to give up their golden parachutes, exorbitant annual bonuses or salaries.

Plan A (the $700 billion to buy mortgage-backed junk that the private sector will not buy) failed partly because it let financial institutions avoid putting a fair value on the debt packages they were selling. Instead of telling the truth about their financial position by marking assets to market prices), they can “mark to model,” Enron-style. We have seen the result: A solid week of plunging stock market prices. The public media call this a panic, but there is nothing irrational about it. Who in their right mind would buy securities or buy into a bank without knowing what the securities were worth? Faith in junk mathematical models has ended.

So we still await a public response to the problem of how to write down debts. Whose economic interest will have to give: that of debtors, as increasingly has been the case over the past eight centuries; or that of creditors, which have fought back to create a neoliberal economy controlled by the FIRE sector?

It is not too late to decide which road to take, but Wall Street bankers and creditors have taken the lead in positioning themselves. Seeing which way the political winds were blowing, they moved to empty out the Treasury before the November 3 elections much like medieval citizens fleeing a horde of Mongolian raiders under Genghis Khan. “We’re moving. Clean out the cupboards,” much as Lehman Brothers emptied out their foreign bank accounts in Britain and elsewhere just before declaring bankruptcy, taking what they could and steering it to their best friends.

The pretense was that a bailout was needed to restore confidence. But the ensuing week showed that the claims were false. It didn’t turn the stock market around as promised. The Dow Jones Industrial Average fell 2,200 points from Wednesday, October 1 through the following Friday October 10 – eight straight trading days, not even pausing for the usual zigzags. Friday’s plunge was 100 points a minute for the first seven minutes – a 690 point drop to under 8000. Each 100 points was more than a 1 percent drop, which was reflected on the NASDAQ. Nothing could withstand the pressure of so many Americans cashing in their mutual funds overnight and so many foreigners in earlier time zones putting in sell-at-market orders.

Short sellers made one of the largest and quickest fortunes ever, and then covered their positions by buying back the stocks they had pre-sold. This pushed prices up even into positive territory just before 10:30 AM when George Bush began to speak. Half the financial stocks showed gains – a sign that the Plunge Protection Team had jumped in. But Mr. Bush said nothing helpful and stocks went back into freefall, ending down another 128 points despite the upcoming weekend G7 meeting. There was no talk at all of reducing debt levels – only of giving more money to banks, insurance companies and other money managers, as if “pushing on a string” somehow would lead them to lend yet more to an already debt-ridden economy.

If Congress really wanted to restore confidence, here’s what it might have done: First, mark to market, not to model. Investors no longer believe America’s Enron-style accounting, debt rating agencies or monoline risk insurers. They don’t trust U.S. banks to be honest about their financial positions. They worry about the fraud charges brought by attorneys general in eleven states against predatory lenders such as Countrywide and Wachovia that Citibank, JPMorgan Chase and Bank of America were so eager to buy.

So is it too late for Congress to change its mind and repeal the giveaway? If the $700 billion handout didn’t stabilize the unsalvageable for small investors, pension funds and even the financial sector itself, what did it do?

What the Fed has been doing while the media have not been looking?

Let’s put the giveaway in perspective. While Senators and Congressmen subject to voters’ choice were debating $700 billion for the major Wall Street contributors to both parties (admittedly only for starters, Mr. Paulson explained), the Federal Reserve already had given even more, without any public discussion and without the major media noticing. Since Bear Stearns failed in March, the Federal Reserve has used the small print of its charter to go outside its normal customers (which are supposed to be commercial banks), to give investment banks, brokerage houses and now large corporations almost indiscriminately some $875 billion in “cash for trash” swaps. (The statistics are released each week in the Fed’s H41 report.) Like Aladdin offering new lamps for old, the Fed has exchanged Treasury securities for junk mortgages and other securities that brokerage houses and investment banks did not have time to pawn off onto OPEC, Asian sovereign wealth funds or other investors.

The press lauds Mr. Bernanke as “a student of the Great Depression.” If he were, he should know that what led to the 1929 collapse were harsh U.S. Government creditor policies toward its World War I Allied governments. This created a situation where the Federal Reserve had to provide easy credit to hold interest rates artificially low so as to encourage U.S. investors to lend to Britain and Germany, which would use these dollar inflows to pay their Inter-Ally arms and reparations debts. Mr. Bernanke’s predecessor, Alan Greenspan, promoted easy credit simply for ideological reasons, to enrich Wall Street by enabling it to sell more debt.

A student of the Great Depression would understand the conflicts of interest between retail commercial banking and wholesale investment banking and money management that led Congress to pass the Glass-Steagall Act in 1933 – conflicts unleashed once again when Pres. Clinton backed then-Fed Chairman Alan Greenspan and Republican leader (and McCain hero) Senator Phil Gramm in leading the repeal of this act, opening up the floodgates to today’s financial double-dealing that has cost the American economy so much.

If Mr. Bernanke does know this history, his behavior is simply that of an opportunistic student of the art of political self-advancement, toadying to Wall Street in campaigning for one last great rip-off before the Bush Administration goes out of business. The Fed has given Wall Street newly minted Treasury bonds, added to the national debt out of thin air. It has done this without feeling any need to rationalize it by drawing absurd public-relations pictures about how the government may “make a profit for taxpayers.”

The Fed Chairman is not elected democratically. He traditionally is designated by the Wall Street financial sector that the Fed is supposed to regulate, acting as its lobbyist for creditor interests – the top 10 percent of the population – against that of the indebted “bottom 90 percent.” This “independence of the central bank” is trumpeted as a hallmark of democracy. But it is undemocratic, precisely by being isolated from public control.
The Age of Oligarchy

Treasury Secretary Paulson has no such luxury. The Treasury is supposed to represent the national interest, not that of bankers – even though its head these days is drawn from Wall Street and acts as its lobbyist. Mr. Paulson presented his almost totalitarian giveaway gruffly to Congress on a take-it-or-leave it basis, announcing that if Congress did not save Wall Street from taking losses on its mountain of bad loans, the banks were willing to crash the economy out of spite. “Please don’t make us wreck the economy,” he said in effect. As Margaret Thatcher used to say while selling off the British government’s crown jewels in the 1980s, TINA: There is no alternative.

In making this bold threat Mr. Paulson behaved as arrogantly as Lehman’s CEO Richard Fuld did when he tried to bluff Korea and other prospective investors into paying the full, fictitiously high book value for his company. (His bluff failed and Lehman went bankrupt, wiping out its shareholders, including the employees and managers who held 30 percent of its stock.) There turned out to be an alternative after all. Responding to the loudest public condemnation in memory, Congress called Mr. Paulson’s bluff.

What made his $700 billion Troubled Asset Relief Program (TARP) so much more visible to the media than the Fed’s actions is that Congress is involved, and this is an election year. The level of deception and false argument is therefore enormous – along with a few tradeoffs and tax cuts to distract attention. Erstwhile Republican opponent Sen. Jeff Sessions of Alabama came right out and said that “This bill has been packaged with a lot of very popular things to give it even more momentum,” so that (as The New York Times explained), “instead of siding with a $700 billion bailout, lawmakers could now say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools in rural areas where the federal government owns much of the land.”

Left behind while Wall Street’s believers in the rapture of free markets were swept up to heaven by “socialism for the rich” have been mortgage debtors, student-loan debtors, the Pension Benefit Guarantee Corporation (PBGC, some $25 billion short), the Federal Deposit Insurance Corporation (FDIC, about $40 billion short), as well as Social Security which, we are warned, may run up a trillion dollar deficit thirty or forty years down the line. Only the wealthiest have been beneficiaries, not voters, homeowners and other debtors.

Still, Congress was panicked into acting on Friday, October 3, because a week earlier, September 26, stocks fell 777 points after Congressmen responded to an unprecedented volume of voter protest against the bailout. “This sucker could go down,” Pres. Bush warned as Wall Street’s lobbyists blamed the market downturn to the failure of Congress to preserve the “monetary system,” and specifically the banks and insurance companies that already had lost their net worth and were plunging deeper into Negative Equity territory. Democratic leaders Barney Frank and House Speaker Nancy Pelosi said, in effect, “Look what you’ve done! You irresponsible politicians are grandstanding on principle, and wiping out peoples’ stock market savings and threatening their pension funds. If you don’t give Wall Street firms enough money to cover their losses so that everyone wins, they’ll kill the economy until they get their way.” Well, they didn’t quite say this, but that was basically their message. It certainly was Wall Street’s message: “Wall Street to Economy: Your money or your life.”

So Congress gave in. Democrats ran like lemmings to “save the economy.” Yet the stock market fell a few hundred points, and kept on plunging all week long, much worse and much faster than had occurred right after Congress had initially defeated the bill.

The “Reality Problem”

What did the “free market” theory underlying the giveaway leave out of account? For starters, “the monetary system” turns out to be a euphemism for the fortunes of financial gamblers using junk mathematics (the Merton-Scholes derivatives formula) based on junk economics (blessed with Nobel Prizes) to buy, speculate and even to insure junk mortgages, junk bonds and junk commercial paper and derivatives based on their relative prices. So what is left out first of all was full knowledge of the value of what is being bought and sold. Mark-to-market models leave the price up to the investment bankers. If trust existed and there really was honor among these thieves, a government bailout would not be necessary, because “the market” could clear.

“Free market” ideology assumes that each party will act in his or her self-interest. If this is so, why should foreign governments accumulate more dollar claims on the U.S. Treasury, which already owes their central banks $4 trillion? When there hardly were enough Treasury securities to go around even as the United States ran unprecedented federal budget deficits, U.S. officials urged these banks and sovereign wealth funds to buy packaged mortgages yielding a higher rate of return. And at least by buying these bonds, foreign governments would not be accused of funding America’s war in Iraq that most of their voters opposed. But investors made a fatal mistake in believing U.S. representations of the value of their junk-mortgage packages. This trust has now been lost, all the more so since the bailout’s permission to keep on “marking to market.”

Congress thought that its $700 billion would distract attention at least until the November 4 election. But to no avail. Markets fell 157 points on Giveaway Friday, and kept on going down another 800 points on Monday, October 6 (to about 9500) before bouncing 500 points off the floor, only to fall even more through Friday. So the giveaway failed in its stated purpose to rescue stock market investors (“peoples’ capitalism”) or their pension funds. But that was not its real purpose. The time simply had come to clear out and take whatever one could.

Making banks and insurers in the zero-sum derivative game whole, so that winners can collect their bets while losers can sell their bad investments to the Treasury, is supposed to re-inflate the credit pyramid. The idea is to solve the debt problem with yet more debt to prop up housing prices once again to unaffordable levels! This is not a long-term solution, but it would give insiders enough time to arrange a do-over and get out of the game more quickly, to sell out their junk mortgages and junk bonds to the proverbial “greater fool” – in this case, the “greater fool of last resort,” the U.S. Treasury, as long as it can be run by Mr. Paulson or, under Mr. Obama, perhaps the former Goldman-Sachs official Robert Rubin.

The banks are to “earn” their way out of their negative equity position by selling more of their product – credit – to increase the economy’s debt levels and hence receive more interest payments. The problem is that most families are already “loaned up.” They have no more discretionary income to pledge to carry more debt. Without writing down their debts, there will be no fresh lending, and hence no source of credit and purchasing power for new autos, appliances, goods and services in general. Debt deflation is being imposed on the “real” economy. Creditors and speculators alone are to be made whole.

If no revenue was available for future Social Security, public health care and repair the nation’s depleted infrastructure before this giveaway, think of how bare the cupboard must be now that the government has run up the recent trillions of dollars in new debt rather than writing off a penny of the bad mortgage debts being blamed for causing the debacle.

We can see where this is leading. The wealthiest 1 percent of the population will come into possession of even more returns to wealth than the 57 percent that they are now taking. In contrast to the Statue of Liberty’s inscription “give me your poor … yearning to breathe free,” the Fed – and now the Treasury, with Congressional blessing – is taking from the public purse and giving to America’s wealthiest investors and insiders. This “Robin Hood in Reverse” program is being done without strings, without asking banks to stop paying dividends, exorbitant executive salaries and golden parachutes, and without taking over banks with negative net worth of the kind that many homeowners are experiencing.

Nobody is talking about a debt write-down or moratorium. The subprime mortgage problem could have been solved by writing down just $1 or $2 trillion of the face value and interest rates of predatory loans. Instead, the $10+ trillion in financial-sector damage in recent weeks reflects Wall Street’s fraudulent packaging and sale of junk mortgages at unrealistically high prices, using junk mathematics to calculate junk derivatives and sell them to gullible investors who believe that the pretenses these mathematics, credit ratings and projected income have a basis in reality.

The amazing feature of today’s crash is how many Wall Street firms actually believed that the game of musical financial chairs could go on before they had to stop dancing and indeed, escape from the room. I remember one day back in the 1970s when I warned Frank Zarb of Lazard Freres about the likelihood of Third World debt defaults, and suggested that the firm should do an ability-to-pay analysis. “We don’t have to do any such thing,” he replied. “We have the schedule of what they owe right here in this IMF report.” It was a thick printout of the scheduled debt service for an African country that soon became insolvent. But Wall Street’s mentalité was that of Herbert Hoover on the eve of the Great Depression: A debt is a debt, and that is that. The response is to blame the victim, as if the irresponsibility lies with debtors rather than creditors.

No reversal of the Bush tax cuts is offered to re-inflate the economy, no move toward more progressive taxation of Wall Street speculators who pay only a 15 percent “capital gains” tax rate instead of the much higher income-tax and FICA withholding rates that wage-earners pay. (Wall Street has its own golden parachute program, so why should it pay for Social Security for the rest of society?) There is to be no reduction in the special tax benefits for real estate, whose tax favoritism led to the crisis by “freeing” more income from the tax collector to be pledged to mortgage bankers as interest. The Bubble Economy is to be re-inflated by Fannie Mae, Freddie Mac and the FHA lending to help buyers bid up housing and commercial office prices once again to a rate that promises to impose debt peonage on homeowners.

The budget deficit will soar, without any prosecution of tax evasion scams by UBS or KPMG. Instead of a fiscal or regulatory comet driving these dinosaurs to extinction, the climate has turned more conducive to their proliferation. Our Age of Deception is to be locked in even more tightly. The Congressional bailout’s suspension of mark-to-market rules to rely on Wall Street’s “self-regulation” should win a prize for Oxymoron of 2008 as investors have no clue as to what financial assets are worth. No wonder lending has dried up, especially to banks themselves.

Just as financial victims fail to vote and support their self-interest, predators also turn out to pursue self-defeating “free market” strategies. The financial sector’s short-termism is the greatest enemy to its survival. It has translated its wealth into a fatal political control of its legal climate, blocking [with the explicit support of Barack Obama, Editors] Congressional efforts to rewrite the oppressive bankruptcy laws that credit-card banks lobbied so hard to pass, [with vital help from Joe Biden, the senior senator from credit card company HQ, the state of Delaware, Editors] crucial. These hard bankruptcy terms prevent the courts from renegotiating homeowner debts to keep property occupied, accelerating the real estate price collapse. The result is today’s negative equity, posing the question of just who is to bear the cost of bring debts back in line with the economy’s ability to pay. Will it be the financial institutions that sponsored asset-price inflation and lobbied for deregulation of lenders? Or, will it be the debtors who thought they were riding the wave to get an inflationary free lunch?

Instead of requiring creditors to absorb losses on the excess of debts over what can be paid, the debts are being kept in place, not scaled back to what the economy can pay. The government is to make creditors and computerized derivatives speculators whole – and will act as collecting agent for the overhead of bad debts the economy has run up.

Today we can see the debt-fueled bubble of asset-price inflation that Alan Greenspan trumpeted as real wealth creation for what it really is – credit creation to bid up real estate, stock market and packaged-debt prices. Tangible capital formation has been left out of account, as if postindustrial economies no longer need it.

Will voters see the asymmetry in Congress’s failure to offer debt relief for homeowners as real estate prices plunge below the mortgages that are owed? Will its members be blamed for not rewriting the nation’s bankruptcy laws to free families from debt peonage – and free housing markets from the price declines that result from today’s proliferation of foreclosure sales? For that matter, will there be no relief for corporations having to cut back investment in order to service their junk bonds and other debts with which Wall Street’s corporate raiders and “shareholder activists” have loaded then down?

Evidently not.

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

Original article posted here.