It’s all about perception management. The media is trying to dig up as much dirt as they can on Dominique Strauss-Kahn so they can hang the man before he ever sees the inside of a courthouse. It reminds me of the Terry Schiavo case, where devoted-husband Michael was pegged as an insensitive slimeball for carrying out the explicit wishes of his brain-dead wife. Do you remember how the media conducted their disgraceful 24 hour-a-day Blitzkrieg with the endless coverage of weepy Christian fanatics on the front lawn of the hospital while Hannity, Limbaugh and O’ Reilly fired away with their sanctimonious claptrap?

And now you’re telling me that that same media is just "doing their job?"

Give me a break.

Whoever wants to nail IMF chief Dominique Strauss-Kahn has really pulled out all the stops. Their agents have been rummaging through diaries, hotel registries, phone records, yearbooks, yada, yada, yada. The UK Telegraph even paid a visit to a high-priced DC knocking shop to get a little dirt from Madame Botox; whatever it takes to make a randy banker look like the South Hill rapist. And they’re doing a pretty good job, too. The cops have made sure that the "Great Seducer" always appears handcuffed and dressed in a "pervie" raincoat with 3-days stubble before they parade him in front of the media. On Wednesday – more grist for the mill – they released his mug-shot, an unflattering, deadpan photo that makes him look like Jack-the-Ripper. Was that the intention?

And, that’s not the half of it. The Big Money is exhuming every woman he’s ever had contact with for the last 30 years hoping they can glean some damning tidbit of information that will convince the doubters that beneath that sophisticated manner and $25,000 suit lurks a closet Bluebeard ready to snap up your daughters and defile your wives. Next thing you know, they’ll be trotting out Paula Jones and Tanya Harding claiming they spent a torrid night with the Marquis de Kahn in a trailerpark outside Winamucca.

Where does it stop? Or does it stop? Are we in for another year-long Clinton-Lewinski feeding frenzy where everyday we hear more lurid details about the sexploits of people who don’t really interest us at all?

Aren’t you at all curious about who’s behind this "lynching by media" scam? This is an all-out, no-holds-barred, steel-cage, take-down. The big boys save that kind of action for the worst offenders, that is, for the insiders who have broken "Omerta" or wandered off the reservation. I mean, they locked him up on Riker’s Island without bail, for Chrissake. What does that tell you? Even Bernie Madoff was allowed to stay in his $7 million Park Avenue penthouse while he waited for trial, but not Straus-Kahn. Oh, no. He get’s the royal treatment, even though he has no criminal record and nothing but the sketchy accusations of a chambermaid against him, he’s carted off to the state slammer where he can mingle with hardened criminals while dining on corn flakes and Wonder Bread.

You call that justice?

Can I tell you what this is all about? It’s about the dollar. That’s right. Strauss-Kahn was mounting an attack against the dollar and now the wrath of the Empire has descended on him like ton-of-bricks. Here’s the scoop from the UK Telegraph: "Dominique Strauss-Kahn, managing director of the International Monetary Fund, has called for a new world currency that would challenge the dominance of the dollar and protect against future financial instability…..

He suggested adding emerging market countries’ currencies, such as the yuan, to a basket of currencies that the IMF administers could add stability to the global system….Strauss-Kahn saw a greater role for the IMF’s Special Drawing Rights, (SDRs) which is currently composed of the dollar, sterling, euro and yen, over time but said it will take a great deal of international cooperation to make that work." ("International Monetary Fund director Dominique Strauss-Kahn calls for new world currency", UK Telegraph.)

So, Strauss-Kahn finds himself in the same crowd as Saddam Hussein and Libyan leader Muammar Gaddafi, right? You may recall that Saddam switched from dollars to euros about a year before the war. 12 months later Iraq was invaded, Saddam was hanged, and the dollar was restored to power. Gaddafi made a similar mistake when "he initiated a movement to refuse the dollar and the euro, and called on Arab and African nations to use a new currency instead, the gold dinar." ("Libya: All About Oil, or All About Central Banking?" Ellen Brown, Op-Ed News) Libya has since come under attack by US and NATO forces which have armed a motley group of dissidents, malcontents and terrorists to depose Gaddafi and reimpose dollar hegemony.

And now it’s Strauss-Kahn’s turn to get torn to shreds. And for good reason. After all, DSK actually poses a much greater threat to the dollar than either Saddam or Gaddafi because he’s in the perfect position to shape policy and to persuade foreign heads of state that replacing the dollar is in their best interests. And that is precisely what he was doing; badmouthing the buck. Only he was too dense to figure out that the dollar is the US Mafia’s mealticket, the main way that shifty banksters and corporate scalawags extort tribute from the poorest people on earth. Strauss-Kahn was rocking the boat, and now he’s going to pay.

Here’s a clip from CNN Money:

"The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world’s reserve currency.

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system….SDRs represent potential claims on the currencies of IMF members…..The IMF typically lends countries funds denominated in SDRs. While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.

"Over time, there may also be a role for the SDR to contribute to a more stable international monetary system," he said.

The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.

In addition to serving as a reserve currency, the IMF also proposed creating SDR-denominated bonds, which could reduce central banks’ dependence on U.S. Treasuries. The Fund also suggested that certain assets, such as oil and gold, which are traded in U.S. dollars, could be priced using SDRs." ("IMF discusses dollar alternative", CNN Money.)

Wow. So DSK was zeroing in on US Treasuries as well as the dollar? That’s the whole shooting match.

So, what type of progress was he making in converting USDs to SDRs? According to Reuters: "The IMF general resources credit outstanding increased to 65.5 billion Special Drawing Rights, or SDRs, ($104 billion) on May 12 from 6.0 billion SDRs at December 2007. The so-called new arrangement to borrow, which came into effect on April 1, increased the IMF’s available lending resources to 269 billion SDRs on May 12 from 120 billion SDRs on March 31."

Not a bad start for such an ambitious project. It looks like DSK’s dream of dethroning the dollar as the de facto "international currency" was beginning to gain momentum. But didn’t he know that his actions would anger some very powerful and well-connected people?

Well, if he did; he never let on. In fact, he started mucking around in other stuff, too, like when he intervened on behalf of Irish taxpayers, trying to protect them at the expense of foreign bondholders. That’s a big "No no" in banker’s world. They keep a list of "people who count", and taxpayers are not on that list. Here’s an excerpt from the Irish Times:

"Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. (Irish finance minister) Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US Treasury Secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks." ("Ireland’s future depends on breaking free from bailout", Morgan Kelly, Irish Times.)

So, Strauss-Kahn stuck up for Irish taxpayers over the banks, the bondholders, the ECB, and the US Treasury. Naturally, that made him persona non grata among the ruling throng.

And, there’s more, too, because Strauss-Kahn’s vision was not limited to currency alone, but involved broad structural changes to the IMF itself that would have reversed decades of neoliberal policies. DSK had settled on a new approach to policymaking; one that would abandon the worst elements of globalization and put greater emphasis on social cohesion, cooperation and multilateralism. Here’s an excerpt from the speech titled "Human Development and Wealth Distribution" he gave in November 2010:

"….Adam Smith – one of the founders of modern economics – recognized clearly that a poor distribution of wealth could undermine the free market system, noting that: “The disposition to admire, and almost to worship, the rich and the powerful and…neglect persons of poor and mean condition…is the great and most universal cause of the corruption of our moral sentiments.”

This was over 250 years ago. In today’s world, these problems are magnified under the lens of globalization….globalization also had a dark side. Lurking behind it was a large and growing chasm between rich and poor – especially within countries. An inequitable distribution of wealth can wear down the social fabric. More unequal countries have worse social indicators, a poorer human development record, and higher degrees of economic insecurity and anxiety. In too many countries, inequality increased and real wages stagnated – failing to keep up with productivity – over the past few decades. Ominously, inequality in the United States was back at its pre-Great Depression levels on the eve of the crisis….

An immediate task is to end the scourge of unemployment….Progressive taxation can also promote equity through redistribution, and this should be encouraged….“Inequality is corrosive” ….“it rots societies from within…it illustrates and exacerbates the loss of social cohesion…the pathology of the age and the greatest threat to the health of any democracy.” ("Human Development and Wealth Distribution", Dominique Strauss-Kahn, IMF.)

Can you believe it? DSK is lecturing bankers about redistribution? That’s not what they want to hear. What they want to hear is why ripping off poor people actually makes the world a better place. DSK’s speech just shows that he wasn’t drinking the Koolaid anymore. He was becoming a nuisance and they needed to get rid of him.

Does that mean he didn’t rape the woman who was in his hotel room?

Of course not. In fact, he could be guilty. But he deserves a fair trial, and someone’s making damn sure he doesn’t get one.

This originally appeared at GlobalResearch.

Mike Whitney [send him mail] lives in Washington state.

The Best of Mike Whitney

"Americans have grown gloomier about both the economy and the nation’s direction over the past three months even as the U.S. shows signs of moving from recession to recovery. Almost half the people now feel less financially secure than when President Barack Obama took office in January, a Bloomberg National Poll shows.

The economy is the country’s top concern, with persistently high unemployment the greatest threat the public sees. Eight of 10 Americans rate joblessness a high risk to the economy in the next two years, outranking the federal budget deficit, which is cited by 7 of 10. An increase in taxes is named as a high risk by almost 6 of 10.

Fewer than 1 in 3 Americans think the economy will improve in the next six months….Only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September." (Bloomberg)

The near-delirious optimism that followed the 2008 presidential election has fizzled in less than 12 months. While the policies of the Obama administration have improved Wall Street’s prospects for record profits and lavish bonuses, ordinary working people continue to fight to keep their jobs and maintain their standard of living. Recent data show that household debt which surged during the boom years is being pared back at a historic pace. Household debt to disposable income has plummeted from 136 percent to 122 percent in a little more than a year, leaving many families with little to spend at the malls or shopping centers.

Severe retrenchment has triggered a shift towards personal thriftiness which is reducing economic activity and strengthening deflationary pressures. 2010 is likely to be even worse, as mushrooming foreclosures and commercial real estate defaults force banks to slash lending accelerating the rate of decline. This is from Bloomberg:

"Foreclosure filings in the U.S. will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said. This year’s filings will surpass 2008′s total of 3.2 million as record unemployment and price erosion batter the housing market…

Foreclosure filings exceeded 300,000 for the ninth straight month in November, RealtyTrac said today. A weak labor market and tight credit are "formidable headwinds" for the economy, Federal Reserve Chairman Ben S. Bernanke said in a Dec. 7 speech in Washington. The 7.2 million jobs lost since the recession began in December 2007 are the most of any postwar economic slump, Labor Department data show. Unemployment, at 10 percent last month, won’t peak until the first quarter, Quigley said." (Bloomberg)

The Obama administration’s $787 billion stimulus pushed GDP into positive territory for the first time in more than a year, but the maximum impact has already been felt. President Obama — under advice from his chief advisors — has shifted his focus from soaring unemployment to long-term deficits. Additional stimulus will be no more than $200 billion, of which, a mere $50 billion will go towards jobs initiatives. At the same time, Fed chair Ben Bernanke will terminate the quantitative easing (QE) program which kept long-term interest rates low while providing financing for the housing market. When the program ends, rates will rise, housing prices will tumble, and liquidity will drain from the system. The end of QE coupled with dwindling stimulus ensures that economy will slide back into recession in the 2nd or 3rd Quarter of 2010.

Policymakers have decided to create conditions that are favorable to financial sector consolidation and the further privatization of public assets. The economy is being strangled by design.

Here’s economist Mark Thoma explaining why consumption will not return to pre-crisis levels:

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"For the immediate future and likely for much longer than that, slow consumption growth is expected. One way that could change is if the government implements a successful jobs program or uses some other means to increase household income (e.g. a payroll tax cut), and households spend rather than save the extra income…, but the political environment makes a jobs program or further fiscal policy action highly unlikely.

Similarly…the Fed is anxious to unwind its massive policy intervention, not extend it, so monetary policy is unlikely to help much either. Since monetary and fiscal policy authorities are unwilling to provide further help, slow growth is the best outcome we’re likely to get." ("Will Consumption Growth Return to Its Pre-Recession Level?" Mark Thoma, moneywatch.com)

Along with flagging consumption, economists Antonio Fatas and Ilian Mihov show why both investment and employment will not rebound in the way that many bullish analysts expect. By tracking the rate of recovery in the last 5 recessions, the two economists show that demand will remain flat for a prolonged period of time, precipitating a "jobless" and "investmentless" recovery. Their research supports additional stimulus to reduce the output gap and engage the labor force in productive activity. The administration’s policies are the exact opposite of the majority of professional economists who believe that deficits need to increase to effect overcapacity and underutilization. Obama is deliberately steering the economy into a double-dip recession.

While financial institutions have been propped up with zero-rates, myriad lending facilities and boatloads of Fed liquidity, the real economy continues to on a downward path. As households rebalance accounts and increase savings, the signs of distress are becoming more apparent. In Europe, the ECB and IMF have begun to use the financial crisis to wrest control of the budgets of deficits-plagued nations to apply business-friendly austerity measures. The economic meltdown — that was generated by overleveraged banks trading dodgy investment paper — is now being used to assert corporate/bank control over sovereign nations. Greece, Ireland, Iceland, Ukraine, Latvia, Lithuania, Portugal and Spain are all presently in the crosshairs of neoliberal restructuring. Surely, the same policies will be applied within the United States under the guidance of supply-side economist and chief advisor to the president, Lawrence Summers. Thus, in 2010, economic contraction will continue to force state and local governmnets to lay off millions of more workers while public assets and services are made available at firesale prices to private industry.

Debt deflation and deleveraging will continue into 2011, while foreclosures, personal bankruptcies and defaults continue to mount. The public’s frustration with ineffective government policies, is likely to change from pessimism to rage on short notice. The prospect of social unrest or sporadic incidents of violence can no longer be excluded.

This originally appeared at GlobalResearch.

Mike Whitney [send him mail] lives in Washington state.

The Best of Mike Whitney

Dubai World owners were caught up in the same heady debt-fueled commercial construction-binge that swept across the United States. The problem can be traced back to lax lending standards and low interest rates. Now demand has fallen off a cliff and credit is getting tighter. Dubai World can’t roll over its debt or meet its obligations. That’s what typically happens when credit bubbles burst.

On Thursday, Bank of America analysts issued a statement: “One cannot rule out — as a tail-risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s.”

This is nonsense. There will be no sovereign default. Abu Dhabi is not going to send global markets into a nosedive to save a few billion dollars. B of A is blowing smoke. Oil has already slipped $3 per barrel since the crisis began. There will probably be a tentative resolution by the time the markets open on Monday. That doesn’t mean that there aren’t important lessons to be learned from this latest financial calamity. There are.

First, it illustrates that the financial crisis is not over — households, businesses and countries are still deleveraging. This ongoing process will slow spending and increase defaults, bankruptcies and foreclosures. Government guarantees and stimulus programs will not reverse prevailing trends. More incidents like Dubai World should be expected. These "credit events" will disrupt the recovery and spur greater risk-aversion which will push stocks downward.

Arnab Das of RGE Monitor sums it up like this: "We’re bound to see a rise in risk aversion. The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.” (Bloomberg News)

Second, when these incidents take place, there’s likely to be considerable collateral damage from the unregulated insurance policies (credit default swaps) which underwrite the bonds. These CDS derivatives are not sold on a public exchange so no one knows who holds them, in what amount, or whether the issuer has sufficient capital reserves to pay off claims. We should expect a repeat of AIG over and over again (although smaller) until the system is either regulated or CDs are banned. The bottom line, is that the current financial architecture is not designed to work; it is designed to make a handful of speculators very rich. These speculators own congress, the White House and the financial media, which is why there has been no meaningful change in regulations.

Dubai is not Argentina. There will be a resolution and contractors will get paid, although not "in full." There will be losses. Big losses. But no contagion.

News of Dubai’s payment "standstill" roiled global markets where investor confidence was already thin. The dollar and yen strengthened and US Treasuries surged. The "flight to safety" is making it doubly hard for the Fed to reflate asset prices. Dubai-like credit events make investors jittery and they pull in their horns. That extends the slump and deepens the recession.

If the Dubai crisis drags on, the dollar will get stronger and the flourishing carry trade will crash. That means that the maxed-out banks (which are heavily invested in high-risk positions) will get clobbered once again. That’s the nightmare scenario.

The Fed has wrapped its arms around the financial system and provided unlimited guarantees on trillions of dollars of dodgy collateral. But that might not be enough.

Mike Whitney [send him mail] lives in Washington state.

The Best of Mike Whitney

When Lehman Bros flopped last year, markets went into freefall. A sharp correction turned into a full-blown panic. The bubble burst and trillions of dollars in credit vanished in a flash. Trading in exotic debt-instruments stopped overnight. A global sell-off ensued. Markets crashed. For a while, it looked like the whole system might collapse.

The Fed’s emergency intervention pulled the system back from the brink, but the economy is still wracked with deflation. Billions in toxic waste now clog the Fed’s balance sheet. The dollar has fallen like a stone.

When the financial system blows up and credit is sucked down a capital-hole, the economy goes into a downward spiral. Businesses slash inventory and lay off workers, workers have to cut back on spending and credit. That creates less demand for products, which leads to more lay-offs. This is the vicious circle policymakers try to avoid. That’s why Fed chair Ben Bernanke wheeled out the heavy artillery and launched the most aggressive central bank intervention in history.

The Fed dropped rates to zero, but its Quantitative Easing (QE) program (which monetizes the debt) actually pushes rates even lower to roughly negative 2 percent.

Bernanke has underwritten every sector of the financial system with government guarantees. He has provided full-value loans for dodgy collateral which is worth only a fraction of its original value. The market can no longer operate without the Fed. The Fed IS the market, which is why it is foolish to talk about a "recovery". The idea of recovery implies a free-standing system based on supply and demand. But, for now, the government provides the demand, which is why there is no market and no recovery. Analysts at Goldman Sachs sum it up like this:

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter."

Positive growth is an illusion created by government spending. The economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a "jobless recovery" is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn’t be confused with a genuine recovery.

The Fed faces stiff headwinds ahead. Low interest rates can have unintended consequences. The "cheapness" of the greenback has made the dollar the funding currency for the carry trade. Investors are borrowing low-cost dollars and using them to purchase higher-interest assets elsewhere. The process, which is rapidly escalating, is fraught with peril as economist Nouriel Roubini points out in an article in the Financial Times:

"Since March there has been a massive rally in all sorts of risky assets… and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable…

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronized rally… Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fueling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates…

Every investor who plays this risky game looks like a genius — even if they are just riding a huge bubble financed by a large negative cost of borrowing…

…This policy feeds the global asset bubble it is also feeding a new US asset bubble…
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy… This is keeping short-term rates lower than is desirable… So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate… the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long-leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets — equities, commodities, emerging market asset classes and credit instruments." ("The Mother of all Carry Trades Faces an Inevitable Bust," Nouriel Roubini, Financial Times.)

Everyone who watches the market has noticed the inverse correlation of stocks to the dollar. When the dollar fades, stocks soar. And when the dollar strengthens, stocks plunge. Eventually, the dollar will reverse-course and stage a comeback, probably when Bernanke stops his printing operations. That will trigger the next severe correction which will burst bubbles across all asset classes.

Bernanke’s success in reflating sagging asset prices has depended entirely on interest rate manipulation and liquidity injections. There’s been no effort to patch household balance sheets, increase production, or strengthen overall demand. It’s a clever trick by a master illusionist, but it has its costs. When the dollar rallies, markets will crash. And Bernanke will be responsible.

Mike Whitney [send him mail] lives in Washington state.

The Best of Mike Whitney

~ Stephen Foley, UK Independent

Stephen Foley is on to something. Lehman Bros. didn’t die of natural causes; it was drawn-and-quartered by high-ranking officials at the US Treasury and the Federal Reserve. Most of the rubbish presently appearing in the media, ignores this glaring fact. Lehman was a planned demolition (most likely) concocted by ex-Goldman Sachs CEO Henry Paulson, who wanted to create a financial 9-11 to scare Congress into complying with his demands for $700 billion in emergency funding (TARP) for underwater US banking behemoths. The whole incident reeks of conflict of interest, corruption, and blackmail.

The media have played a critical role in peddling the official "Who could have known what would happen" version of events. Bernanke and Paulson were fully aware that they playing with fire, but they chose to proceed anyway, using the mushrooming crisis to achieve their own objectives. Then things began to spin out of control; credit markets froze, interbank lending slowed to a crawl, and stock markets plunged. Even so, the Fed and Treasury persisted with their plan, demanding their $700 billion pound of flesh before they’d do what was needed to stop the bleeding. It was all avoidable.

Lehman had potential buyers — including Barclays — who probably would have made the sale if Bernanke and Paulson had merely provided guarantees for some of their trading positions. Instead, Treasury and the Fed balked, thrusting the knife deeper into Lehman’s ribs. They claimed they didn’t have legal authority for such guarantees. It’s a lie. The Fed has provided $12.8 trillion in loans and other commitments to keep the financial system operating without congressional approval or any explicit authorization under the terms of its charter. The Fed never considered the limits of its "legal authority" when it bailed-out AIG or organized the acquisition of Bear Stearns by JP Morgan pushing $30 billion in future liabilities onto the public’s balance sheet. The Fed’s excuses don’t square with the facts.

Here’s how economist Dean Baker recounts what transpired last September 15:

"Last September, when he (Bernanke) was telling Congress that the economy would collapse if it did not approve the $700 billion TARP bailout, he warned that the commercial paper market was shutting down.

This was hugely important because most major companies rely on selling commercial paper to meet their payrolls and pay other routine bills. If they could not sell commercial paper, then millions of people would soon be laid off and the economy would literally collapse.

What Mr. Bernanke apparently forgot to tell Congress back then is that the Fed has the authority to directly buy commercial paper from financial and non-financial companies. In other words, the Fed has the power to prevent the sort of economic collapse that Bernanke warned would happen if Congress did not quickly approve the TARP. In fact, Bernanke announced that the Fed would create a special lending facility to buy commercial paper the weekend after Congress voted to approve the TARP." ("Bernanke’s bad Money," Dean Baker, CounterPunch)

The reason Bernanke did not underwrite the commercial paper market was, if he had, he wouldn’t have been able to blackmail congress. He needed the rising anxiety from the crisis to achieve his goals.

Here’s a clip from an editorial in the New York Times (admitting most of what has already been stated) that tries to put a positive spin on the Fed’s behavior:

"Mr. Nocera says that almost everyone he’s ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman…. it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live. ("Lehman Had to Die So Global Finance Could Live," Sept. 14, 2009, New York Times)

So, according to the muddled logic of the NY Times, everything worked out for the best so there’s no need to hold anyone accountable. (Tell that to the 7 million people who have lost their jobs since the beginning of the meltdown.) This latest bit of spin is pure cover-your-ass journalism, an attempt to rewrite history and absolve the guilty parties. The fact is, Paulson and Bernanke deliberately created the crisis in order to jam their widely-reviled TARP policy down the public’s throat. The Times thinks the public should be grateful for that because, otherwise, the crooked insurance giant, AIG, would not have been bailed out and Goldman Sachs and other Wall Street heavies would not have been paid off.

The reason panic spread through the markets after Lehman filed for bankruptcy, was because the Reserve Primary Fund, which had lent Lehman $785 million (and received short-term notes called commercial paper) couldn’t keep up with the rapid pace of withdrawals from worried clients. The sudden erosion of trust triggered a run on the money markets. Here’s an excerpt from a Bloomberg article, "Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion":

"On Tuesday, Sept. 16, the run on Reserve Primary continued. Between the time of Lehman’s Chapter 11 announcement and 3 p.m. on Tuesday, investors asked for $39.9 billion, more than half of the fund’s assets, according to Crane Data.

“Reserve’s trustees instructed employees to sell the Lehman debt, according to the SEC.

“They couldn’t find a buyer.

“At 4 p.m., the trustees determined that the $785 million investment was worth nothing. With all the withdrawals from the fund, the value of a single share dipped to 97 cents.

“Legg Mason, Janus Capital Group Inc., Northern Trust Corp., Evergreen and Bank of America Corp.’s Columbia Management investment unit were all able to inject cash into their funds to shore up losses or buy assets from them. Putnam closed its Prime Money Market Fund on Sept. 18 and later sold its assets to Pittsburgh-based Federated Investors.

“At least 20 money fund managers were forced to seek financial support or sell holdings to maintain their $1 net asset value, according to documents on the SEC Web Site.

“When news that Reserve Primary broke the buck hit the wires at 5:04 p.m. that Tuesday, the race was on." (Bloomberg)

This is what a run on the shadow banking system looks like. Bernanke and Paulson pinpointed the trouble in the commercial paper market and used it to put more pressure on Congress to approve their bailout bill.

Bloomberg again:

"It was commercial paper and the $3.6 trillion money market industry that traded the notes that came close to sinking the global economy — not a breakdown in credit-default swaps or bank-to-bank lending….

“Like ice-nine, the fictitious substance in Kurt Vonnegut Jr.’s 1963 novel Cat’s Cradle, a single seed of which could harden all the world’s water, commercial paper was the crystallizing force that froze credit markets, choking off the ability of companies and banks to borrow money and pay bills." (Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion, Bob Ivry, Mark Pittman and Christine Harper, Bloomberg News)

Bernanke could have fixed the problem in an instant. All he needed to do was provide explicit government guarantees on money markets and commercial paper. That would have ended the bank-run pronto. But he chose not to. He chose to wait until Congress capitulated so he could net $700 billion for his banking buddies.

According to the UK Telegraph:

"On Thursday night, the Treasury went literally down on his knees before Nancy Pelosi, speaker of the House of Representatives, begging her to agree taxpayer money to bail out the financial system. Bernanke, a scholar of the financial panic that caused the Great Depression, told fearful lawmakers there wouldn’t be a banking system in place by Monday morning if they didn’t act. Paulson talked openly about planning for martial law, about how to feed the American people if banking and commerce collapsed."

Despite their dire warnings, on Monday morning, the banking system was still intact, just as it was a full month later when the first TARP funds were handed out to the big banks. It was all a hoax. The problem wasn’t the banks toxic assets at all, but the commercial paper and money markets. The Fed and Treasury knew that they could count on Congress’s abysmal ignorance of anything financial; and they weren’t disappointed. On October 3, 2008, Congress passed the Financial Rescue Plan (TARP). Paulson’s fear-mongering had triumphed.

Here’s a quick look at the Lehman chronology:

On Sept. 15, 2008, Lehman Bros. filed for bankruptcy sending the Dow plummeting 504 points.

On Sept. 17, the Dow falls 449 points in reaction to AIG bailout.

On Sept. 29, the Dow tumbles 777 points after House votes "No" on TARP.

On Oct. 3, the House passes Financial Rescue Plan (TARP). The Dow falls 818 points.

On Oct. 7, the Fed creates the Commercial Paper Funding Facility to backstop the commercial paper market. Two weeks later, Bernanke announces the Money Market Investor Funding Facility to make loans of longer maturities.

These are the two facilities which relieved the tension in the markets, not the TARP funds. It’s clear that Bernanke knew exactly how to fix the problem, because he did so as soon as the TARP was passed. Here’s economist Dean Baker in The American Prospect:

"Bernanke was working with Paulson and the Bush administration to promote a climate of panic. This climate was necessary in order to push Congress to hastily pass the TARP without serious restrictions on executive compensation, dividends, or measures that would ensure a fair return for the public’s investment.

“Bernanke did not start buying commercial paper until after the TARP was approved by Congress because he did not want to take the pressure off, thereby leading Congress to believe that it had time to develop a better rescue package. ("Did Ben Bernanke Pull the TARP Over Eyes?", Dean Baker, The American Prospect)

The American people have been ripped off by industry reps working the policy-levers from inside the government. That’s the real lesson of the Lehman bankruptcy. Happy anniversary.

Mike Whitney [send him mail] lives in Washington state.

The Best of Mike Whitney

The most serious problems facing the economy have not yet been addressed or resolved. Consumer spending and bank lending are still contracting, and the banks are buried beneath $1.5 trillion in toxic assets and non-performing loans. Also, the wholesale credit system, (securitization) which provided up to 40 per cent of the credit flowing into the economy, is barely operating. No one really knows whether the system is salvageable or not. On a fundamental level, the financial system is broken and neither the Fed’s zero percent interest rates nor Obama’s gigantic fiscal stimulus has reversed the prevailing downward trend. Capital has stopped moving; the velocity of money has slowed to a crawl. It’s true, things are getting worse slower, but the signs of "recovery" are as faint and irregular as a dying man’s breath.

The financial media has played a key role in restoring consumer confidence. Negative reports are air-brushed or shuffled to the back pages while modest improvements in housing, corporate earnings or "clunker" sales are splashed boldly across the headlines. Naturally, most of the media’s attention has focused on the 6-month rally in the stock market. The S&P 500 has lunged ahead 52 percent from its March 9 low. But equities are merely reacting to the ocean of liquidity the Fed has poured into the financial system through its quantitative easing (QE) and liquidity swaps. Market analyst Andy Xie explains how it all works in his article "New Bubble Threatens a V-shaped Rebound":

"Central banks around the world, although they haven’t done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets….

"A pure bubble tied to excess liquidity that affects one or many financial assets cannot last long. Its multiplier effect on the broad economy is limited. It could have a limited impact on consumption due to the wealth effect. As it neither stimulates the supply side nor boosts productivity, whatever story it is based on will have holes that become apparent to speculators. It doesn’t take long for them to flee. Furthermore, a pure liquidity bubble without support from productivity can easily lead to inflation, which causes tightening expectations that trigger a bubble’s burst.

“What we are seeing now in the global economy is a pure liquidity bubble. It’s been manifested in several asset classes. The most prominent are commodities, stocks and government bonds. The story that supports this bubble is that fiscal stimulus would lead to quick economic recovery, and the output gap could keep inflation down. Hence, central banks can keep interest rates low for a couple more years. And following this story line, investors can look forward to strong corporate earnings and low interest rates at the same time, a sort of a goldilocks scenario for the stock market.

“What occurred in China in the second quarter and started happening in the United States in the third quarter seems to lend support to this view. I think the market is being misled. The driving forces for the current bounce are inventory cycle and government stimulus." Andy Xie, "New Bubble Threatens a V-Shaped Rebound"

Fed chair Ben Bernanke’s low interest rates and monetization programs have flooded the markets and created the illusion of economic recovery. But investors and consumers remain skeptical. In fact, (according to zero hedge) less than $400 billion has moved from Money Markets into stocks in the last 6 months even though the index value has increased by more than $2.7 trillion. So, where did the money come from? The Fed has taken trillions in toxic securities onto its balance sheet, thus, providing financial institutions with the liquidity they need to goose the stock market. With securitization in a shambles, the banks have fewer opportunities to meet earnings expectations. Lending is down, but speculation is up. Way up.

Bernanke knows that neither stimulus nor liquidity will fix the economy. That’s because many of the financial institutions that took out loans from the Fed are technically insolvent. (Borrowing more money won’t help if you’re already drowning in red ink.) Even so, he is committed to keeping the big banks afloat and patching together the flawed wholesale credit system any way he can. This is why Bernanke should never have been reappointed. True, he demonstrated impressive imagination and skill in pumping liquidity into the financial system, but he’s done nothing to role up insolvent institutions or to purge toxic assets and non-performing loans from the system. The Fed has merely provided enough taxpayer-funded scaffolding to keep a rotten system propped up a little longer. What good does that do?

As early as 2006, the Bank for International Settlements (BIS) warned that loose monetary policy and complex debt-instruments were increasing systemic risk and could trigger a 1930s-type slump. In June 2008, the UK Telegraph wrote:

"A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to "clean up" once property bubbles have burst…

“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period….The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…

“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off. To deny this through the use of gimmicks and palliatives will only make things worse in the end." (UK Telegraph)

Far from heeding the BIS’s warning, Bernanke headed in the opposite direction, doing everything in his power to avoid price discovery and keep the price mortgage-backed securities (MBS) and other toxic assets artificially high by providing full-value, rotating loans to underwater financial institutions. At the same time the Fed was using public funds to prop up financial markets, Bernanke was shrugging off Congress’s attempts to find out which companies secured the loans; how much the loans were worth, the terms under which they were issued, and the true "mark-to-market" value of the collateral accepted by the Fed. On Aug 24, 2009, a federal judge ruling on a case brought by Bloomberg News against the Fed decided that "The Federal Reserve must make public reports about recipients of emergency loans from U.S. taxpayers under programs created to address the financial crisis, a federal judge ruled." There’s no doubt that the Fed will refuse to provide the relevant information as it would surely expose the Fed’s cozy and collusive relationship with the nation’s biggest banks. The Fed’s stonewalling in the Bloomberg case and refusal to let Congress audit its books stands in sharp contrast with Bernanke’s professed commitment to "transparency," a handy buzzword typically invoked by confidence men and charlatans when they feel noose tightening around their necks.

Green Shoots or “Sugar High”?

The bond market has not been duped by the "green shoots" hype. As Paul Krugman points out:

"Net yields on most longer-term Treasury securities are lower today than they were at the end of May, even as the economy has shown signs of recovery. The 10-year T-note yield is at 3.45 per cent today, down from 3.74 per cent on May 27….There’s no hint in the data of fears about (a) crowding out (b) inflation (c) default." In other words, bonds are priced for deflation, which casts doubt on the rally in the stock market.”

Deflation is now visible in every sector of the economy. The banks are facing major losses from dodgy assets and non-performing loans. (A recent article in US News and World Report predicted that the loss rate on bank loans could rise to 9.1 percent, worse than the 1930s.) Financial institutions and households are continuing to deleverage and pay down debt, business investment is a record lows, and unemployment is soaring. Rising defaults, foreclosures and bankruptcies all add to the massive debt liquidation that has brought about a steady decline in economic activity.

Exports are down, so is trucking. Railroad freight is off 18 per cent year-over-year. Department stores, building materials, restaurants, furniture sales, appliances, travel, retail, outdoor equipment, tech; down, down, down, down, down and down. You name it; it’s down. Consumer credit is plummeting and personal savings are up. Industrial production is down, PPI down. Capacity utilization has slipped to 68.5 per cent (another record). There’s so much slack in the system, inflation could be low for years. Commercial real estate — a $3.5 trillion industry — is plunging faster than residential housing. Corporate bond defaults are at record highs, Treasury yields are flat, and the dollar index is teetering at the brink. It’s a wasteland.

The main problem is falling demand from stagnant wages. 30 years of anti-labor hysteria and trickle down economics has produced a system where GDP depends on ever-increasing amounts of personal debt. But that only works for so long. When the housing bubble burst in 2006, asset prices began to tumble, and the debt-to-equity ratio for millions of households slipped into the red. Now comes the digging out phase.

It is mathematically impossible for the economy to recover without a strong consumer, but consumer spending will continue to fade until household leverage returns to its long-term trend. (Household borrowing is presently 27 percent above normal trend; about $3 trillion.) Economists Martin N. Baily, Susan Lund and Charles Atkins have written an invaluable "must read" analysis of the plight of the US consumer for McKinsey Global Institute titled: "Will U.S. Consumer Debt Reduction Cripple the Recovery?" Here’s an excerpt:

"Between 2000 and 2007 US households led a national borrowing binge nearly doubling their outstanding debt to $13.8 trillion. The amount of US household debt amassed by 2007 was unprecedented whether measured in nominal terms, as a share of GDP (98 per cent) or as a ratio of liabilities to personal disposable income (138 per cent) But as the global financial and economic crisis worsened at the end of last year, a shift occurred; US households for the first time since WW2 reduced their debt outstanding…. We show that the hit to consumption from household debt reduction, or "deleveraging" will depend on whether it is accompanied by personal income growth.

“Over the past decade US household spending has served as the main engine of US economic growth. From 2000 to 2007 US annual personal consumption grew by 44 per cent, from $6.9 trillion to $9.9 trillion — faster than either GDP or household income. Consumption accounted for 77 per cent of real US GDP growth during this period — high by comparison with both US and international experience. The US spendthrift ways have fueled global economic growth as well. The US has accounted for one-third of the total growth in global private consumption since 1990…. Powering the US spending spree through 2007 were three strong stimulants; a surge in household borrowing, a decline in saving, and a rapid appreciation of assets." (Martin N. Baily, Susan Lund and Charles Atkins, "Will U.S. Consumer Debt Reduction Cripple the Recovery?" McKinsey Global Institute.) To repeat: "Consumption accounted for 77 per cent of real US GDP growth during this period…"…"The US has accounted for one-third of the total growth in global private consumption."

It should be fairly obvious by now that US consumers are undergoing a generational shift and will not be able to lead the way out of the recession as they have in the past. Nor will they miraculously "bounce back" and provide demand for products made abroad. In fact, the export-driven model (Germany, South Korea, Japan, China) is sure to be challenged in ways that were unimaginable just two years ago. With credit lines being cut, and outstanding credit shrinking by trillions in the past year alone, and unemployment nudging 10 per cent (16 per cent in real terms) the consumer will not be the locomotive driving the global economy. Credit destruction, asset firesales, defaults, and foreclosures will continue for the foreseeable future choking off growth and pushing unemployment higher. Consumption patterns are changing dramatically, although their impact won’t be fully-felt until government stimulus programs run out. That’s when the signs of Depression will reappear once more.

This is why Bernanke should never have been reappointed as chairman. Bernanke understands the issues — underwater banks, overextended consumers, exotic debt-instruments (derivatives), and an out-of-control financial system — but he’s refused to do anything about them. He’s made no effort to re-regulate the financial system, but (oddly enough) wants Congress to reward his inaction by elevating him to "Chief Regulator." Go figure? He’s also done nothing to determine which institutions can be saved and which should be taken into conservatorship and have their assets put up for auction. Instead, he’s given a blanket guarantee to every brokerage house on Wall Street; their garbage paper can be easily traded for US Treasuries or liquidity at any of the Fed’s handy-dandy lending facilities. That’s not a sign of sound judgment; it’s a sign of "regulatory capture." Bernanke is a push-over; Chairman Milquetoast. That’s why Wall Street loves him; he gives them cheap capital with one hand and a pat on the back with the other.

It’s no secret what’s wrong with the economy; the banks are struggling and consumers are broke. But there are remedies, they simply require fresh thinking about regulation and how to maintain aggregate demand. (A boost in pay would be a good start.) The real problem is the institutional bias of the Fed itself. The Central Bank’s policies are shaped by its allegiance to its constituents, particularly the big banks. Anything that doesn’t advance the objectives of the financial establishment, is just not on the Fed’s radar. That’s why Bernanke’s lame efforts to revive the economy will continue to sputter, because we’ve gone as far as we can without fixing household balance sheets and purging the excessive debt from the system.

The Fed is an obstacle to change, which is why more and more people are starting to figure out that the Fed has got to go.

Mike Whitney [send him mail] lives in Washington state.

The Best of Mike Whitney

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"Come
and see our overflowing morgues and find our little ones for us…

You may
find them in this corner or the other, a little hand poking out,
pointing out at you…

Come
and search for them in the rubble of your "surgical"
air raids, you may find a little leg or a little head…pleading
for your attention.

Come
and see them amassed in the garbage dumps, scavenging morsels
of food…

Come
and see, come…"

~
"Flying Kites," Layla Anwar

The US Military
has won every battle it has fought in Iraq, but it has lost the
war. Wars are won politically, not militarily. Bush doesn’t understand
this. He still clings to the belief that a political settlement
can be imposed through force. But he is mistaken. The use of overwhelming
force has only spread the violence and added to the political instability.
Now Iraq is ungovernable. Was that the objective? Miles of concrete
blast-walls snake through Baghdad to separate the warring parties;
the country is fragmented into a hundred smaller pieces each ruled
by local militia commanders. These are the signs of failure not
success. That’s why the American people no longer support the occupation.
They’re just being practical; they know Bush’s plan won’t work.
As Nir Rosen says, "Iraq has become Somalia."

The administration
still supports Iraqi President Nouri al Maliki, but al-Maliki is
a meaningless figurehead who will have no effect on the country’s
future. He has no popular base of support and controls nothing beyond
the walls of the Green Zone. The al-Maliki government is merely
an Arab faade designed to convince the American people that political
progress is being made, but there is no progress. It’s a sham. The
future is in the hands of the men with guns; they’re the ones who
have divided Iraq into locally-controlled fiefdoms and they are
the one’s who will ultimately decide who will rule the state. At
present, the fighting between the factions is being described as
"sectarian warfare," but the term is intentionally misleading.
The fighting is political in nature; the various militias are competing
with each other to see who will fill the vacuum left by the removal
of Saddam. It’s a power struggle. The media likes to portray the
conflict as a clash between half-crazed Arabs – "dead-enders
and terrorists" – who relish the idea killing their countrymen,
but that’s just a way of demonizing the enemy. In truth, the violence
is entirely rational; it is the inevitable reaction to the dissolution
of the state and the occupation by foreign troops. Many military
experts predicted that there would be outbreaks of fighting after
the initial invasion, but their warnings were shrugged off by clueless
politicians and the cheerleading media. Now the violence has flared
up again in Basra and Baghdad, and there is no end in sight. Only
one thing seems certain, Iraq’s future will not be decided at the
ballot box. Bush has made sure of that.

The US military
does not rule Iraq nor does it have the power to control events
on the ground. It’s just one of many militias vying for power in
a state that is ruled by warlords. After the army conducts combat
operations, it is forced to retreat to its camps and bases. This
point needs to be emphasized in order to understand that there is
no real future for the occupation. The US simply does not have the
manpower to hold territory or to establish security. In fact, the
presence of American troops incites violence because they are seen
as forces of occupation, not liberators. Survey’s show that the
vast majority of the Iraqi people want US troops to leave. The military
has destroyed too much of the country and slaughtered too many people
to expect that these attitudes will change anytime soon. Iraqi poet
and blogger Layla Anwar sums up the feelings of many of the war’s
victims in a recent post on her web site "An
Arab Woman’s Blues":

"At
the gates of Babylon the Great, you are still struggling, fighting
away, chasing this or the other, detaining, bombing from above,
filling up morgues, hospitals, graveyards and embassies and borders
with queues for exit-visas.

Not one
Iraqi wishes your presence. Not one Iraqi accepts your occupation.

Got news
for you SOBs, you will never control Iraq, not in six years, not
in ten years, not in 20 years….You have brought upon yourself
the hate and the curse of all Iraqis, Arabs and the rest of the
world…now face your agony." (Layla Anwar; "An Arab
Woman’s Blues: Reflections in a sealed bottle")

Is Bush hoping
to change the mind of Layla or the millions of other Iraqis who
have lost loved ones or been forced into exile or seen their country
and culture crushed beneath the boot heel of foreign occupation?
The hearts and minds campaign is lost. The US will never be welcome
in Iraq.

According
to a survey in the British Medical Journal Lancet more than
a million Iraqis have been killed in the war. Another four million
have been either internally displaced or have fled the country.
But the figures tell us nothing about the magnitude of the disaster
that Bush has caused by attacking Iraq. The invasion is the greatest
human catastrophe in the Middle East since the Nakba in 1948. Living
standards have declined precipitously in every area – infant
mortality, clean water, food, security, medical supplies, education,
electrical power, employment etc. Even oil production is still below
pre-war levels. The invasion is the most comprehensive policy failure
since Vietnam; everything has gone wrong. The heart of the Arab
world has descended into chaos. The suffering is incalculable.

The main problem
is the occupation; it is the primary catalyst for violence and an
obstacle to political settlement. As long as the occupation persists,
so will the fighting. The claims that the so-called surge has changed
the political landscape are greatly exaggerated. Retired Lt. General
William Odom commented on this point in an interview on the Jim
Lehrer News Hour:

"The
surge has sustained military instability and achieved nothing
in political consolidation…. Things are much worse now. And
I don’t see them getting any better. This was foreseeable a year
and a half ago. And to continue to put the cozy veneer of comfortable
half-truths on this is to deceive the American public and to make
them think it is not the charade it is…. When you say that the
Lebanization of Iraq is taking place, yes, but not because of
Iran, but because the U.S. went in and made this kind of fragmentation
possible. And it has occurred over the last five years…. The
al-Maliki government is worse off now… The notion that there’s
some kind of progress is absurd. The al-Maliki government uses
its Ministry of Interior like a death squad militia. So to call
Sadr an extremist and Maliki a good guy just overlooks the reality
that there are no good guys." (Jim Lehrer News Hour)

The war in
Iraq was lost before the first shot was fired. The conflict never
had the support of the American people and Iraq never posed a threat
to US national security. The whole pretext for the war was based
on lies; it was a coup orchestrated by elites and the media to carry
out a far-right agenda. Now the mission has failed, but no one wants
to admit their mistakes by withdrawing; so the butchery continues
without pause.

How Will
It End?

The Bush administration
has decided to pursue a strategy that is unprecedented in US history.
It has decided to continue to prosecute a war that has already been
lost morally, strategically, and militarily. But fighting a losing
war has its costs. America is much weaker now than it was when Bush
first took office in 2000; politically, economically and militarily.
US power and prestige around the world will continue to deteriorate
until the troops are withdrawn from Iraq. But that’s unlikely to
happen until all other options have been exhausted. Deteriorating
economic conditions in the financial markets are putting enormous
downward pressure on the dollar. The corporate bond and equities
markets are in disarray; the banking system is collapsing, consumer
spending is down, tax revenues are falling, and the country is headed
into a painful and protracted recession. The US will leave Iraq
sooner than many pundits believe, but it will not be at a time of
our choosing. Rather, the conflict will end when the United States
no longer has the capacity to wage war. That time is not far off.

The Iraq War
signals the end of US interventionism for at least a generation;
maybe longer. The ideological foundation for the war (preemption/regime
change) has been exposed as a baseless justification for unprovoked
aggression. Someone will have to be held accountable. There will
have to be international tribunals to determine who is responsible
in the deaths of over one million Iraqis.

April
16, 2008

Mike Whitney
[send him mail] lives
in Washington state.

Mike
Whitney Archives

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On Friday,
Bear Stearns blew up. It was the worst possible news at the worst
possible time. A day earlier, the politically-connected Carlyle
Capital hedge fund defaulted on $16.6 billion of its debt. Carlyle
boasted a $21.7 billion portfolio of AAA-rated residential mortgage-backed
securities, but was unable to make a margin call of just $400 million.
(Where did the $21.7 billion go?) The news on Bear was the last
straw. The stock market started reeling immediately; shedding 300
points in less than an hour. Then, miraculously, the tide shifted
and the market began to rebound.

If there was
ever a time for Paulson’s Plunge Protection Team to come to the
rescue; this was it. For weeks, the markets have been battered with
bad news. Retail sales are down, unemployment is up, consumer confidence
is in the tank, inflation is rising, the dollar is on the ropes,
and the credit crunch has spread to even the safest corners of the
market. Facing these fierce headwinds, Washington mandarins and
financial heavyweights had to decide whether to sit back and let
one small investment bank take down the whole equities market in
an afternoon or stealthily buy a few futures and live to fight another
day? Tough choice, eh?

We’ll never
know for sure, but that’s probably what happened.

We’ll also
never know if Bernanke’s real purpose in setting up his new $200
billion auction facility was to provide the cash-strapped banks
with a place where they could off-load the mortgage-backed junk
that Carlyle dumped on the market when they went belly-up. That
worked out well, didn’t it? Now the banks can trade these worthless
MBS bonds with the Fed for US Treasuries at nearly full value. What
a deal! That must have been the plan from the get-go.

The Bear Stearns
bailout has ignited a firestorm of controversy about moral hazard
and whether the Fed should be in the business of spreading its largess
to profligate investment banks. But the Fed had no choice. This
isn’t about one bank caving in from its bad bets. The entire financial
system is teetering and a failure at Bear would have taken a wrecking
ball to the equities market and sent stocks around the world into
a violent death-spiral. The New York Times summed it up like this
in Saturday’s edition:

"If the
Fed hadn’t acted this morning and Bear did default on its obligations,
then that could have triggered a widespread panic and potentially
a collapse of the financial system."

Bingo.

So, what makes
Bear so special? How is it that one of the smallest investment banks
can pose such a threat to the whole system?

That’s the
question that will be addressed in the next couple weeks and people
are not going to like the answer. For the last decade or so the
markets have been reconfigured according to a new "structured
finance" model which has transformed the interactions between
institutions and investors. The focus has been on maximizing profit
by creating a vast galaxy of exotic debt-instruments which increase
overall risk and volatility in slumping market conditions.

Derivatives
trading which, according to the Bank of International Settlements,
now exceeds $500 trillion, has sewn together the various lending
and investment institutions in a way that one failure can set the
derivatives dominoes in motion and bring down the entire financial
scaffolding in a heap. That’s why the Fed got involved and (I believe)
approached Congress in a closed-door session (which was supposed
to be about FISA legislation) to inform lawmakers about the growing
possibly of a major economic meltdown if conditions in the credit
markets were not stabilized quickly.

The troubles
at Bear and the danger they pose to the overall system were articulated
in an article by Counterpunch co-editor, Alexander Cockburn in a
November, 2006 article "Lame
Duck: The Downside of Capitalism":

"In
a briefing paper under the chaste title, ‘Private Equity: A discussion
of Risk and Regulatory Engagement,’ the FSA raises the alarm.

"Excessive
leverage: The amount of credit that lenders are willing to extend
on private equity transactions has risen substantially. This lending
may not, in some circumstances, be entirely prudent. Given current
leverage levels and recent developments in the economic/credit
cycle, the default of a large private equity backed company or
a cluster of smaller private equity backed companies seems inevitable.
This has negative implications for lenders, purchasers of the
debt, orderly markets and conceivably, in extreme circumstances,
financial stability and elements of the UK economy."

Translation:
It’s about to blow!

"The
duration and potential impact of any credit event may be exacerbated
by operational issues which make it difficult to identify who
ultimately owns the economic risk associated with a leveraged
buy out and how these owners will react in a crisis. These operational
issues arise out of the extensive use of opaque, complex and time
consuming risk transfer practices such as assignment and sub-participation,
together with the increased use of credit derivatives. These credit
derivatives may not be confirmed in a timely manner and the amount
traded may substantially exceed the amount of the underlying assets."

Translation:
"The world’s credit system is a vast recycling bin of untraceable
transactions of wildly inflated value."

The problem
is that the oversight and stability of the world credit system
is no longer within the purview of familiar international institutions
like the International Monetary Fund or the Bank of International
Settlements. Private traders are now installed at all the strategic
nodes, gambling with stratospheric sums in such speculative pyramids
as the credit derivative market which was almost nonexistent in
2001, yet which reached $17.3 trillion by the end of 2005. Warren
Buffett, America’s most famous investor, has called credit derivatives
"financial weapons of mass destruction."

Cockburn’s
article anticipates the current problems at Bear and shows why the
Fed cannot allow them to fester and spread throughout the system.
The investment banks and brokerages all do business with each other,
taking sides in trades as counterparties. If one player goes down
it increases the likelihood of more failures. So the problem has
to be contained.

The volume
of derivatives contracts, that are not traded publicly on any of
the major exchanges, has exploded in the last few years. These unregulated
transactions, what Pimco’s Bill Gross calls the shadow banking system,
have taken center-stage as market conditions continue to deteriorate
and the downward-cycle of deleveraging begins to accelerate. The
ongoing massacre in real estate has left the structured investment
market frozen, which means that the foundation blocks (i.e., mortgage-backed
securities) upon which all this excessive leveraging rests; is starting
to crumble. It’s a real mess.

Derivatives
trading, particularly in credit default swaps, is oftentimes exceeds
the value of the underlying asset many times over. Credit Default
Swaps are financial instruments that are based on loans and bonds
that speculate on a company’s ability to repay debt (a type of unregulated
insurance). The CDS market is roughly $45 trillion, whereas, the
aggregate value of the US mortgage market is only $11 trillion;
four times smaller. That’s a lot of leverage and it can have a snowball
effect when the CDS trades begin to unwind.

In truth, the
biggest risk to the financial system is counterparty risk; the possibility
that some large investment bank, like Bear, goes under and sucks
the rest of the market with it from the magnitude of its losses.
Last year, Bear was the 12th largest counterparty to CDS trades
according to Fitch ratings. If they were to suddenly disappear,
the effects to the rest of the system would be catastrophic.

Fed Chairman
Bernanke sat on the board of the FOMC when the investment gurus
and brokerage sharpies customized the markets in a way that enhanced
their own personal fortunes while increasing the risks of systemic
failure. The SIVs, the conduits, the opaque derivatives, the off-balance
sheets operations, the dark pools, the massive leverage, and the
reckless expansion of credit; all emerged during his (and Greenspan’s)
tenure. The Federal Reserve has its own large share of responsibility
for the brushfire it is presently trying to put out.

Now, in capitalism’s
extreme crisis Bernanke, acting beyond his mandate, invokes a law
that hasn’t been used since the 1960s so the Fed can become the
creditor for an institution that attempted to enrich itself through
wild speculative bets on dubious toxic investments which are now
utterly worthless.

March
17, 2008

Mike Whitney
[send him mail] lives
in Washington state.

DIGG THIS

"Market
conditions are the worst anyone in this industry can ever remember.
I don’t think anyone has a recollection of a total disappearance
in liquidity…There are billion of dollars worth of assets out
there for which there is just no market." Alain Grisay, chief
executive officer of London-based F&C Asset Management Plc;
Bloomberg News

The hurricane
that began with subprime mortgages, has swept through the credit
markets wreaking havoc on municipal bonds, hedge funds, complex
structured investments, and agency debt (Fannie Mae). Now the first
gusts from the Force-5 gale are touching down in the real economy
where the damage is expected to be widespread. The Labor Department
reported on Friday that US employers cut 63,000 jobs in February,
the biggest monthly decline in five years. The cut in payrolls added
to the 22,000 jobs that were lost in January. 52,000 jobs were cut
in manufacturing, while 331,000 have been lost in construction since
September 2006.

The Labor Department
also reported on Wednesday that worker productivity slowed significantly
in the last quarter of 2007. When productivity is off; labor costs
go up which adds to inflationary pressures. That makes it harder
for the Fed to lower rates to stimulate the economy without inviting
the dreaded "stagflation" – slow growth and rising
prices.

The news on
commercial construction is equally bleak. The Wall Street Journal
reports:

"For
the second month in a row, the Commerce Department reported a
decline in spending on nonresidential construction – which
includes everything from hospitals to office parks to shopping
malls…. Signs of trouble cropped up at the end of the year.
As credit markets tightened, office space sold in the fourth quarter
dropped 42 per cent from a year earlier, and sales of large retail
properties declined 31 per cent, says Real Capital Analytics,
a New York real-estate research group…. If spending continues
to slow, construction workers, who are reeling from the housing
slowdown, face more layoffs." ("Building Slowdown Goes
Commercial," Wall Street Journal)

Commercial
real estate is the next shoe to drop. There’s a tremendous oversupply
of retail space nationwide and the bloodletting has just begun.
Builders have continued to put up shopping malls and office buildings
even though residential real estate has gone off a cliff. Now the
battered banks will have to repossess thousands of empty buildings
in strip malls with no chance of leasing them out in the near future.
It’s a disaster. From December 2007 to January 2008, spending on
commercial construction took its steepest drop in 14 years. The
sudden downturn is adding more and more people to the unemployment
lines.

So, what does
it all mean? Unemployment is up, productivity is down, inflation
is increasing, the dollar is underwater, commercial real estate
is in the tank and the country is sliding inexorably into recession.

As
for the housing market:

"Housing
is in its “deepest, most rapid downswing since the Great Depression,”
the chief economist for the National Association of Home Builders
said Tuesday, and the downward momentum on housing prices appears
to be accelerating.

“Housing
is in a major contraction mode and will be another major, heavy
weight on the economy in the first quarter,” said David Seiders,
the NAHB’s chief economist." ("Rapid Deterioration,"
MarketWatch)

Home sales
are down 65 per cent from their peak in 2005. Inventory is stacked
a mile-high. Vacant homes now number about 2 million; an increase
of 800,000 since 2005. Demand is weak and prices are plummeting.
It’s all bad. Meanwhile, the Federal Reserve and the Bush administration
are scrambling to devise a plan that will keep homeowners from packing
it in altogether and walking away from their mortgages. But what
can they do? Will they really write-down the principle on the mortgages
like Bernanke recommends and face years of litigation from bond
holders who bought mortgage-backed securities under different terms?
Or will they simply allow the market to clear and send 2 million
homeowners into foreclosure in 2008 alone?

The deflating
housing bubble is finally being felt in the broader economy. Home
equity is vanishing which is putting downward pressure on consumer
spending and shrinking GDP. Also, the dollar is at historic lows,
and an intractable credit crunch has left the financial markets
in disarray. Experts are now predicting that consumer spending won’t
rebound until housing prices stop falling which could be late into
2009. When Japan experienced a similar credit/real estate meltdown;
it took more than a decade to recover. There’s no reason to believe
that the present crisis will unwind any faster.

On Friday,
banking giant USB estimated that credit woes would end up costing
financial institutions $600 billion, three times more than their
original estimate of $200 billion. But USB’s forecast does not take
into account the $6 trillion of lost home equity if housing prices
fall 30 per cent in the next two years (which is very likely). Nor
does it account for the potential losses in the structured finance
market where $7.8 trillion of loans (which are presently in "pooled
securities") have gone into a deep-freeze. There’s no way of
knowing how much capital will be drained from the system by the
time all of this plays out, but if $7 trillion was lost in the dot.com
bust, then it should greatly exceed that figure.

The housing
bubble was entirely avoidable. It was the policies of the Federal
Reserve which made it inevitable. By fixing interest rates below
the rate of inflation for almost 3 years, Greenspan ignited speculation
in housing and created a false perception of prosperity. In truth,
it was nothing more than asset-inflation through the expansion of
debt. The Fed’s actions were complemented by repeal of regulatory
legislation which prevented the commercial banks from dabbling in
securities trading. Once the laws were changed, the banks were free
to peddle their mortgage-backed securities to investors around the
world. (A-rated mortgage-backed bonds are currently fetching just
13 per cent of their face value!) Now, those sketchy bonds are blowing
up everywhere leaving large parts of the financial system dysfunctional.

As investors
continue to run away from anything remotely connected to mortgages;
the price of risk, as measured by the spread on corporate bonds,
has skyrocketed. In fact, investors are even shunning overextended
GSEs like Fannie Mae and Freddie Mac. As the number of foreclosures
continues to soar, the aversion to risk will intensify triggering
a savage unwinding of leveraged bets in the hedge funds as well
as a wider paralysis in the financial markets.

There’s absolutely
no doubt now that the storm that is currently ripping through the
financials will soon bring Wall Street to its knees. It may be a
good time to remember that on March 24, 2000, the NASDAQ peaked
at 5048. On October 9, 2002 it bottomed-out at 1114; a loss of nearly
80 per cent. Could it happen again?

You bet. Expect
to see the Dow hugging 7,000 by year end.

The Wall Street
Journal ran an article on Tuesday which outlined how the banks changed
standards at the Basel meetings in Switzerland to give them greater
autonomy in deciding issues that should have been governed by strict
regulations:

"Some
of the world’s top bankers spent nearly a decade designing new
rules to help global financial institutions stay out of trouble…Their
primary tenet: Banks should be given more freedom to decide for
themselves how much risk they should take on, since they are in
a better position than regulators to make that call." ("Mortgage
Fallout Exposes Holes in New Bank-risk Rules," Wall Street
Journal)

It is a classic
case of the foxes deciding they should oversee the hen-house.

The Basel Committee
on Banking Supervision is an industry-led group comprised of the
central bank governors from the G-10 countries: Belgium, Canada,
France, Italy, Japan, the Netherlands, Sweden, Switzerland, Britain
and the US. Basel is supposed to establish the rules for maintaining
sufficient capitalization for banks so that depositors are protected.
But it’s a sham. It appears to be more focused on maintaining US
and European dominance over the developing world and making sure
the levers of financial power stay in the manicured paws of western
banking mandarins.

Now that the
financial system is in terminal distress, many people are questioning
the wisdom of handing over so much power to organizations that don’t
operate in the public’s interest. Thomas Jefferson anticipated this
scenario and issued a warning about the perils of abdicating sovereignty
to unelected, profit-oriented bankers. He said:

"If
the American people ever allow private banks to control the issue
of our currency, first by inflation, then by deflation, the banks
and the corporations that will grow up will deprive the people
of all property until their children wake up homeless on the continent
their fathers conquered."

Even though
the nation is stumbling towards an economic hard landing; the banks
are still only interested in finding a way to save themselves. Last
week, the New York Times revealed a "confidential proposal"
from Bank of America to members of Congress asking the US government
to guarantee $739 billion in mortgages that are at "moderate
to high risk" of defaulting to save the banks from potential
losses. On Thursday, Rep. Barney Frank – operating in the interests
of his banking constituents – made an appeal in the House of
Representatives on this very issue, saying that congress should
consider buying up some of these sinking mortgages to help struggling
homeowners. But why should the taxpayer pay for the mistakes of
privately-owned banks; especially when those banks have been bilking
the public out of billions of dollars through the sale of worthless
subprime securities?

The Fed has
already lowered the Fed Funds rate by 2.25 basis points to 3 per
cent (more than a full-point below the current rate of inflation)
to help the banks recoup some of their losses from their bad bets.
Bernanke has also opened a Temporary Auction Facility (TAF), which
allows the banks to use mortgage-backed securities (MBS) and other
structured investments as collateral at 85 per cent their face value.(even
though the bonds are only worth pennies on the dollar on the open
market). So far, the TAF has secretly loaned out $75 billion to
capital-depleted banks, which Bernanke thinks is a positive development.
But why is the Fed chief encouraged by the fact that the country’s
largest investment banks need to borrow billions of dollars at bargain
rates just to stay solvent? The truth is that many of the banks
are just padding their flagging balance sheets so they can scour
the planet looking for investors to buy parts of their franchises.

On Tuesday,
Bernanke addressed the Independent Community of Bankers of America,
exhorting them to take whatever steps are required to keep homeowners
with negative equity from walking away from their mortgages. Along
with the proposed "rate freeze" on adjustable rate mortgages
(ARMs); the Fed chief also suggested that the lenders lower the
principle on the mortgages to entice homeowners to keep making nominal
payments on their loans. But, clearly, foreclosure is the wisest
choice for many homeowners who may otherwise be chained to an asset
of steadily declining value for the rest of their lives. Homeowners
should base their decisions on what is in their best long-term financial
interests, just as the bankers would do. If that means walking-away,
then that is what they should do. The homeowner is in no way responsible
for the problems deriving from the subprime/securitization scam.
That was entirely the work of the bankers.

The FDIC has
begun to increase staff at many of its regional offices to deal
with the anticipated rash of bank failures in states hardest hit
by the housing bust. California, Florida and parts of the southwest
will definitely need the most attention. These states are undergoing
a housing depression and many of the smaller banks which issued
the mortgages and commercial real estate loans are bound to get
hammered. They simply do not have the capital cushion to withstand
the tsunami of defaults and foreclosures that are coming. Depositors
should make sure that all their savings are covered under FDIC rules;
no more than $100,000 per account. Money markets are not insured.

Also, the G-7
nations announced last week that if "irrational" price
movements persist, they would "collectively take suitable measures
to calm the financial markets." The group added that they would
conduct their activities secretively for maximum effect. Consider
how desperate the situation must really be for G-7 finance ministers
to issue a public warning that they are planning to intervene in
the market to prevent a calamity. This is stunning. The group did
not specify whether they were talking about propping up the stumbling
greenback or buying up futures in the equities markets like a global
Plunge Protection Team. Nevertheless, their comments add to the
growing perception that things are out of control and deteriorating
quickly.

With oil, gold
and food prices soaring, the Fed has been roundly criticized for
cutting rates and risking further erosion to the value of the dollar.
(This morning the dollar fell to $1.53 on the euro!) But Bernanke
is right; the real danger is deflation. We are at the beginning
of a consumer-led recession; characterized by weakening demand,
lack of personal savings, declining asset-values (particularly homes)
and over-indebtedness. The Fed’s increases to the money supply via
low interest rates will not affect the dramatic economic slowdown
that will be evident within the year. Trillions of dollars of derivatives,
over-leveraged subprime assets and otherwise bad bets are all unwinding
at the same time, draining an ocean of virtual capital from the
economy. If credit keeps getting destroyed at the present pace,
the country will be in the grips of a depression-like slump by 2009.
The Wall Street Journal's Greg Ip puts it like this in his
article "For the Fed, a Recession — Not Inflation — Poses Greater
Threat":

"So why
is the Fed more worried about growth than inflation? First, it thinks
run-ups in commodity prices explain the increases, not only in overall
inflation but also in core inflation: higher energy costs have “passed
through” to other goods and services. Core inflation rose and fell
with energy inflation between early 2006 and mid-2007, and the Fed
thinks the same thing is probably happening now. If energy and food
prices stop rising – they don’t have to actually fall –
both overall and core inflation should recede.

Ip continues:
"Fed officials don’t think the latest jump (in food and energy)
can be justified by fundamental supply and demand…. A more likely
explanation, investors perhaps alarmed by the Fed’s dovish stance,
are pouring money into commodity funds and foreign currencies as
a hedge against inflation…. But speculative price gains can’t
be sustained if the fundamentals don’t support them. If the Fed
and the futures markets are right, prices will be lower, not higher,
a year from now."

Bernanke is
right on this point. Temporary price increases are not the result
of shortages, increased production costs, or fundamentals, but speculation.
In fact, demand for petroleum products has been down by 3.4 per
cent over the last four weeks compared to the same time last year,
which means that prices will probably drop steeply once the commodities
frenzy runs out of steam. Investors are simply looking for somewhere
to put their money rather than in shaky corporate bonds or overpriced
equities. Commodities are the logical alternative. But as soon as
consumer spending stalls, all asset-classes will fall accordingly,
including gold and oil. (And, yes, the dollar should recover some
lost-ground, however temporary.)

Many analysts
believe oil’s rally will be short-lived. Falling demand for overall
petroleum products, which was down 3.4 percent over the last four
weeks compared to the same time last year, suggest prices could
drop steeply once the dollar-driven oil investment frenzy runs out
of steam, analysts said.

Cyclical
downturn or post-bubble recession?

An article
in the New York Times by Morgan Stanley’s Asia chairman,
Stephen Roach, states that the country is not in a cyclical downturn,
but post-bubble recession. There is a big difference. The Fed’s
interest rate cuts and Bush’s "Stimulus Plan" are unlikely
to stop housing prices from continuing to fall nor will they miraculously
fix the problems in the credit markets. The massive expansion of
credit in the last 6 years has created a $45 trillion derivatives
balloon that could implode or just partially unwind. No one really
knows. And no one really knows how much damage it will cause to
the global financial system. Stay tuned.

Roach notes
that the recession of 2000 to 2001 was a collapse of business spending
which only represented a 13 per cent of GDP. Compare that to the
current recession which "has been set off by the simultaneous
bursting of property and credit bubbles…. Those two economic sectors
collectively peaked at 78 percent of gross domestic product, or
fully six times the share of the sector that pushed the country
into recession seven years ago."

Not only will
the impending recession be six times more severe; it will also be
the death-knell for America’s consumer-based society. Attitudes
towards spending have already changed dramatically since prices
on food and fuel have increased. That trend will only grow as hard
times set in.

Roach adds:
"For asset-dependent, bubble-prone economies, a cyclical recovery
— even when assisted by aggressive monetary and fiscal accommodation
— isn't a given…. Washington policymakers may not be able to arrest
this post-bubble downturn. Interest rate cuts are unlikely to halt
the decline in nationwide home prices…Aggressive interest rate
cuts have not done much to contain the lethal contagion spreading
in credit and capital markets. A more effective strategy would be
to try to tilt the economy away from consumption and toward exports
and long-needed investments in infrastructure.”

The Federal
Reserve and Washington policymakers are still stuck in the past
trying to revive consumer spending by creating another equity bubble
with low interest rates and their $600 per person "stimulus"
giveaways. This is a mistake. Invest in infrastructure and environmentally-friendly
technologies, rebuild the economy from the ground up, reestablish
fiscal sanity and minimize deficit spending, put America back to
work making things that people use and that improve society, and
(as Roach says) "help the innocent victims of the bubble's
aftermath — especially lower- and middle-income families."
And, most importantly, abolish the Federal Reserve and give the
control of our money back to our elected representatives in Congress.
That is the only way to put America’s economic future back in the
hands of the people.

That’s a plan
we can all get behind. It’s time to split the new wood and start
fresh.

March
10, 2008

Mike Whitney
[send him mail] lives
in Washington state.

DIGG THIS

"Facts
do not cease to exist because they are ignored."
~ Aldous Huxley

The credit
storm which began in July when two Bear Stearns hedge funds were
forced to liquidate, has continued to intensify and roil the markets.
Last week the noose tightened around auction-rate securities, a
little-known part of the market that requires short-term funding
to set rates for long-term municipal bonds. The $330 billion ARS
market has dried up overnight pushing up rates as high as 20% on
some bonds – a new benchmark for short-term debt. Auction-rate
securities are now headed for extinction just like the other previously-vital
parts of the structured finance paradigm. The $2 trillion market
for collateralized debt obligations (CDOs), the multi-trillion-dollar
mortgage-backed securities market (MBSs) and the $1.3 asset-backed
commercial paper (ABCP) market have all shut down, draining a small
ocean of capital from the financial system and pushing many of the
banks and hedge funds closer to default.

The price of
insuring corporate bonds has skyrocketed in the last few weeks making
it more difficult for businesses to get the funding they need to
expand or continue present operations. Much of this has to do with
the growing uncertainty about the reliability of credit default
swaps, a $45 trillion dollar market which remains virtually unregulated.
Credit-default swaps are a type of financial instrument that are
used to speculate on a company’s ability to repay debt. They pay
the buyer face value in exchange for the underlying securities or
the cash equivalent if a borrower fails to adhere to its debt agreements.
When the price of CDSs increases, it means that there is greater
doubt about the quality of the bond. Prices are presently soaring
because the entire structured finance market – and anything
connected to it – is under withering attack from the meltdown
in subprime mortgages. As foreclosures continue to rise, the securities
that were fashioned from subprime loans will continue to unwind,
destroying trillions of dollars of virtual-capital in the secondary
market.

It all sounds
more complicated than it really is. Imagine a 200-ft. conveyor belt
with two burly workers and a mountain-sized pile of money on one
end, and a towering bonfire on the other. Every time a home goes
into foreclosure, the two workers stack the money that was lost
on the transaction – plus all of the cash that was leveraged
on the home via "securitization" and derivatives –
onto the conveyor-belt where it is fed into the fire. That is precisely
what is happening right now and the amount of capital that is being
consumed by the flames far exceeds the Fed’s paltry increases to
the money supply or Bush’s projected $168 billion "surplus
package." Capital is being sucked out of the system faster
than it can be replaced, which is apparent by the sudden cramping
in the financial system and a more generalized slowdown in consumer
spending.

According to
a recent Bloomberg article:

"A year
ago $20 million would have gotten Luminent Mortgage Capital Inc.
access to $640 million in loans to buy top-rated mortgage-backed
securities. Now that much cash gets the firm no more than $80
million. …(Only) 6 lenders are offering 5 times leverage, while
a year ago, 20 banks extended 33 times."

The banks are
not providing anywhere near as much money for leveraged investments
as they did just last year. And, when credit shrinks on a national
scale – as it is – so does the economy. It’s a simple
formula; less money means less economic activity, less growth, fewer
jobs, tighter budgets, more pain.

Bloomberg continues:

"Wall
Street firms, reeling from $146 billion in losses on their debt
holdings, are fueling a credit crisis by clamping down on lending
to investors and hedge funds that use borrowed money to buy securities.
By pulling back, (the banks) are contributing to reduced demand
and lower prices throughout the fixed-income world."

The banks are
in no position to be extravagant because they’re already saddled
with $400 billion in MBSs and CDOs – as well as another $170
billion in private equity deals – for which there is currently
no market. They’ve had to dramatically cut back on their lending
because they either don’t have the resources or are facing bankruptcy
in the near future.

An article
which appeared on the front page of the Financial Times last week,
illustrates how hard-pressed the banks really are:

"US
banks have been quietly borrowing massive amounts of money from
the Federal Reserve…$50 billion in one month."

The Fed’s new
Term Auction Facility "allows the banks to borrow money against
all sort of dodgy collateral," says Christopher Wood, analyst
at CLSA. "The banks are increasingly giving the Fed the garbage
collateral nobody else wants to take … [this] suggests a perilous
condition for America’s banking system."

The move has
sparked unease among some analysts about the stress developing in
opaque corners of the US banking system and the banks’ growing reliance
on indirect forms of government support." ("US Banks borrow
$50 billion via New Fed Facility," Financial Times.)
(The
story appeared nowhere in the US media.)

At the same
time the banks are getting backdoor injections of liquidity from
the Fed, banking giant Citigroup has been trying to off-load some
of its branches so it can cover its structured investment losses.
It all looks rather desperate, but scouring the planet for capital
to shore up flagging balance sheets is turning out to be a full-time
job for many of America’s largest investment banks. It is the only
way they can stay one step ahead of the hangman.

In the last
few days, gold has spiked to $950, a new high, while oil futures
passed the $100 per barrel mark. The battered greenback has already
taken a beating, and yet, Fed chairman Bernanke is signaling that
there are more rate cuts to come. The prospect of a global run on
the dollar has never been greater. Still, Bernanke will do whatever
he can to resuscitate the faltering banking system, even if he destroys
the currency in the process. Unfortunately, interest rates alone
won’t cut it. The banks need capital; and fast. Meanwhile, the waning
dollar has sent food and energy prices soaring which is leaving
consumers without the discretionary income they need for anything
beyond the basic necessities. As a result, retail sales are down
and employers are forced to lay off workers to reduce their spending.
This is all part of the self-reinforcing negative-feedback loop
that begins with falling home prices and then rumbles through the
broader economy. There is no chance that the economy will rebound
until housing prices stabilize and the rate of foreclosures returns
to normal. But that could be a long way off. With housing inventory
at historic highs and mortgage applications at new lows, the economy
could keep somersaulting down the stairwell for a full two years
or more. Only then, will we hit rock-bottom.

The country
is now headed into a deep and protracted recession. Low interest
credit and financial innovation have paralyzed the credit markets
while inflating a monstrous equity bubble that is wreaking havoc
with the world’s financial system. The new market architecture,
"structured finance" has collapsed from the stress of
falling asset-values and rising defaults. Many of the banks are
technically insolvent already, hopelessly mired in their own red
ink. Public confidence in the nations’ financial institutions has
never been lower. Monetary policy and deregulation have failed.
The system is self-destructing.

Now that the
credit crunch has rendered the markets dysfunctional, spokesmen
for the investor class are speaking out and confirming what many
have suspected from the very beginning; that the present troubles
originated at the Federal Reserve and, ultimately, they are the
ones who are responsible for the meltdown. In an article in the
Wall Street Journal this week, Harvard economics professor
and former Council of Economic Advisers under President Reagan,
Martin Feldstein, made this revealing admission:

"There
is plenty of blame to go around for the current situation. The
Federal Reserve bears much of the responsibility, because of its
failure to provide the appropriate supervisory oversight for the
major money center banks. The Fed’s banking examiners have complete
access to all of the financial transactions of the banks that
they supervise, and should have the technical expertise to evaluate
the risks that those banks are taking. Because these banks provide
credit to the nonbank financial institutions, the Fed can also
indirectly examine what those other institutions are doing.

The Fed’s
bank examinations are supposed to assess the adequacy of each
bank’s capital and the quality of its assets. The Fed declared
that the banks had adequate capital because it gave far too little
weight to their massive off balance-sheet positions – the
structured investment vehicles (SIVs), conduits and credit line
obligations – that the banks have now been forced to bring
onto their balance sheets. Examiners also overstated the quality
of the banks’ assets, failing to allow for the potential bursting
of the house price bubble. The implication of this for Fed supervision
policy is clear. The way out of the current crisis is not."

How odd? So,
when all else fails, tell the truth?

But Feldstein
is right; the Fed refused to perform its oversight duties because
its friends in the banking industry were raking in obscene profits
selling sketchy, subprime junk to gullible investors around the
world. They knew about the "massive off balance-sheet positions"
which allowed the banks’ to create mortgage-backed securities and
CDOs without sufficient capital reserves. They knew it all; every
last bit of it, which simply proves that the Federal Reserve is
an organization which serves the exclusive interests of the banking
establishment and their corporate brethren in the financial industry.

Surprised?

The upcoming
global recession/depression will give us plenty of time to mull
over the ruinous effects of Fed policy and to devise a plan for
abolishing the Federal Reserve once and for all. That is, if they
don’t destroy us first.

February
22, 2008

Mike Whitney
[send him mail] lives
in Washington state.

DIGG THIS

Even veteran
Fed-watchers were caught off-guard by Chairman Bernanke’s performance
before the Senate Banking Committee on Thursday. Bernanke was expected
to make routine comments on the state of the economy but, instead,
delivered a 45-minute sermon detailing the afflictions of the foundering
financial system. The Senate chamber was stone-silent throughout.
The gravity of the situation is finally beginning to sink in.

For the most
part, the pedantic Bernanke looked uneasy; alternately biting his
lower lip or staring ahead blankly like a man who just watched his
poodle get run over by a Mack truck. As it turns out, Bernanke has
plenty to worry about, too. Consumer confidence has dropped to levels
not seen since the 1970s recession, real estate has gone off a cliff,
credit-brushfires are breaking out everywhere, and the stock market
continues to gyrate erratically. No wonder the Fed-chief looked
more like a deck-hand on the Lusitania than the monetary-czar of
the most powerful country on earth.

Bernanke’s
prepared remarks were delivered with the solemnity of a priest performing
Vespers. But he was clear, unlike his predecessor, Greenspan, who
loved speaking in hieroglyphics.

Bernanke:

As you know,
financial markets in the United States and in a number of other
industrialized countries have been under considerable strain since
late last summer. Heightened investor concerns about the credit
quality of mortgages, especially subprime mortgages with adjustable
interest rates, triggered the financial turmoil. However, other
factors, including a broader retrenchment in the willingness of
investors to bear risk, difficulties in valuing complex or illiquid
financial products, uncertainties about the exposures of major
financial institutions to credit losses, and concerns about the
weaker outlook for the economy, have also roiled the financial
markets in recent months."

Yes, of course.
The banks are ailing from their subprime investments while Europe
is sinking fast from $500 billion in unsellable asset-backed garbage.
The whole system is clogged with crappy paper and deteriorating
collateral. Now there are problems popping up in auction rate sales
and the normally-safe municipal bonds. The whole financial Tower
of Babel is cracking at the foundation.

Bernanke continues:

Money center
banks and other large financial institutions have come under significant
pressure to take onto their own balance sheets the assets of some
of the off-balance-sheet investment vehicles that they had sponsored.
Bank balance sheets have swollen further as a consequence of the
sharp reduction in investor willingness to buy securitized credits,
which has forced banks to retain a substantially higher share
of previously committed and new loans in their own portfolios.
Banks have also reported large losses, reflecting marked declines
in the market prices of mortgages and other assets that they hold.
Recently, deterioration in the financial condition of some bond
insurers has led some commercial and investment banks to take
further markdowns and has added to strains in the financial markets.

Bernanke sounds
more like an Old Testament prophet reading passages from the Book
of Revelations than a Central Banker. But what he says is true;
even without the hair-shirt. The humongous losses at the investment
banks have forced them to go trolling for capital in Asia and the
Middle East just to stay afloat. And, when they succeed, they’re
forced to pay excessively high rates of interest. The true cost
of capital is skyrocketing. That’s why the banks are protecting
their liquidity and cutting back on new loans. Most of the banks
have also tightened lending standards which is slowing down the
issuance of credit and threatens to push the economy into a deep
recession. When banks cramp-up, the overall economy shrinks. It’s
just that simple, no credit, no growth. Credit is the lubricant
that keeps the capitalist locomotive chugging-along. When it dwindles,
the system screeches to a halt.

“DOWNSIDE
RISKS TO GROWTH HAVE INCREASED”

Bernanke again:

In part as
the result of the developments in financial markets, the outlook
for the economy has worsened in recent months, and the downside
risks to growth have increased. To date, the largest economic
effects of the financial turmoil appear to have been on the housing
market, which, as you know, has deteriorated significantly over
the past two years or so. The virtual shutdown of the subprime
mortgage market and a widening of spreads on jumbo mortgage
loans have further reduced the demand for housing, while foreclosures
are adding to the already-elevated inventory of unsold homes.
Further cuts in homebuilding and in related activities are likely….
Conditions in the labor market have also softened. Payroll employment,
after increasing about 95,000 per month on average in the fourth
quarter, declined by an estimated 17,000 jobs in January. Employment
in the construction and manufacturing sectors has continued to
fall, while the pace of job gains in the services industries has
slowed. The softer labor market, together with factors including
higher energy prices, lower equity prices, and declining home
values, seem likely to weigh on consumer spending in the near
term.

So, let’s
summarize. The banks are battered by their massive subprime liabilities.
Housing is in the tank. Manufacturing is down. Food and energy are
up. Unemployment is rising. And consumer spending has shriveled
to the size of an acorn. All that’s missing is a trumpet blast and
the arrival of the Four Horseman. How is it that Bernanke’s economic
post-mortem never made its way into the major media? Is there some
reason the real state of the economy is being concealed from ‘we
the people’?

Bernanke continues:

On the inflation
front, a key development over the past year has been the steep
run-up in the price of oil. Last year, food prices also increased
exceptionally rapidly by recent standards, and the foreign exchange
value of the dollar weakened…. (If) inflation expectations to
become unmoored or for the Fed’s inflation-fighting credibility
to be eroded could greatly complicate the task of sustaining price
stability and reduce the central bank’s policy flexibility to
counter shortfalls in growth in the future.

Right. So,
if the Fed’s rate-cutting strategy doesn’t work and the economic
troubles persist (and prices continue to go through the roof) then
we’re S.O.L. (sh** out of luck) because the Fed has no more arrows
in its quiver. It’s rate cuts or death. Great. So, we can expect
Bernanke to hack away at rates until they’re down to 1% or lower
(duplicating the downturn in Japan) hoping that the economy shows
some sign of life before it takes two full wheelbarrows of greenbacks
to buy a quart of milk and a few seed-potatoes.

Sounds like
a plan!

We don’t blame
Bernanke. He’s been remarkably straightforward from the very beginning
and deserves credit. He’s simply left with the thankless task of
mopping up the ocean of red ink left behind by Greenspan. It’s not
his fault. He should be applauded for dispelling the decades-long
illusion that a nation can borrow its way to prosperity or that
chronic indebtedness is the same as real wealth. It’s not; and the
bill has finally come due.

Of course,
now that the low-interest speculative orgy is over; there’s bound
to be a painful unwind of hyper-inflated assets, falling home prices,
tumbling stock markets, increased unemployment, and a generalized
credit-contraction throughout the real economy. Ouch. Who said it
was going to be easy?

Bernanke’s
summation:

At present,
my baseline outlook involves a period of sluggish growth, followed
by a somewhat stronger pace of growth starting later this year
as the effects of monetary and fiscal stimulus begin to be felt….
It is important to recognize that downside risks to growth remain,
including the possibilities that the housing market or the labor
market may deteriorate to an extent beyond that currently anticipated,
or that credit conditions may tighten substantially further.

(Editor’s
translation) “Discount everything I’ve said here today if the economy
blows up — as I fully-expect it will — from decades of regulatory
neglect and the myriad multi-trillion dollar Ponzi-schemes which
have put the entire financial system at risk of a major heart attack."

Bernanke’s
candor is admirable, but it is little relief for the people who
will have to soldier-on through the hard times ahead. Perhaps, next
time he could spare us all the lengthy oratory and just forward
a brief cablegram to Congress saying something like this:

“We are deeply
sorry, but we have totally fu**ed up your economy with our monetary
hanky-panky. You are all in very deep Doo-doo. Prepare for the worst.”

Our sincerest
regrets,
The Fed

February
19, 2008

Mike Whitney
[send him mail] lives
in Washington state.

DIGG THIS

“The
current crisis is not only the bust that follows the housing boom,
it’s basically the end of a 60-year period of continuing credit
expansion based on the dollar as the reserve currency. Now the
rest of the world is increasingly unwilling to accumulate dollars.”

~
George Soros, World Economic Forum, Davos, Switzerland

Global market
turmoil continued into a second week as stock markets in Asia and
Europe took another tumble on Monday on growing fears of a recession
in the United States. China’s benchmark index plummeted 7.2% to
its lowest point in six months, while Japan’s Nikkei index slipped
another 4.3%. Equities markets across Asia recorded similar results
and, by midmorning in Europe, all three major indexes — the UK FTSE
"Footsie," France’s CAC 40, and the German DAX — were
recording heavy losses. It’s now clear that Fed Chairman Bernanke’s
"surprise" announcement of a 75 basis points cut to the
Fed Funds rate last Tuesday has neither stabilized the markets nor
restored confidence among jittery investors.

At the time
of this writing, the storm clouds are swiftly moving towards Wall
Street where markets are likely to be roiled on the very day that
President Bush will give his farewell State of the Union speech.

In Monday’s
Financial Times, Harvard economics professor, Lawrence Summers,
made an impassioned plea for further government action in addition
to the Fed’s rate cuts and Bush’s $150 billion "stimulus plan."
Summers believes that steps must be taken immediately to mitigate
the damage from the sharp downturn in housing and persistent troubles
in the credit markets. He suggests a "global coordination of
policy" with the other foreign central banks. It is a tacit
admission that the Fed has lost control of the system and cannot
solve the problem by itself.

Summers is
right; although it’s easy to wonder why he remained silent for so
long while the markets were soaring and the investment banks were
reaping trillions of dollars in profits on a "structured investment"
swindle which has left the global financial system teetering on
the brink of catastrophe. Now that the US economy is sliding towards
recession; Summers has suddenly found his voice and is calling for
"transparency." How convenient.

"Financial
institutions are holding all sorts of credit instruments that are
impaired but are difficult to value, creating uncertainty and freezing
new lending. Without more visibility, the economy and financial
system risk freezing up as Japan's did in the 1990s."

Right again.
The banks are "capital impaired" because they are holding
nearly $600 billion in mortgage-backed assets which are declining
in value every month. This is forcing many banks to conceal their
real condition from investors while they scour the planet for the
extra capital they need to continue operations. As long as the banks
are in distress, consumer and business lending will dwindle and
the economy will continue to shrink. The main gear in the credit-generating
mechanism is now broken. The rate cuts can provide liquidity, but
they cannot bring insolvent banks back from the dead. Summers is
expecting too much.

The United
States has led the world into the greatest credit bust in history,
and yet, few people have any idea of what has transpired. The US
current account deficit — nearly $800 billion — has been recycling
into US Treasuries and securities from foreign investors. Up to
this point, American markets were an attractive place to put one’s
savings. The dollar was strong, and the stock market had a proven
record of profitability and transparency. But since President Bill
Clinton repealed Glass-Steagall in 1999, the markets have been reconfigured
according to an entirely new model, "structured finance."
Glass-Steagall was the last of the Depression-era bulwarks against
the merging of commercial and investment banks. As a result banking
has changed from a culture of "protection" (of deposits)
to "risk taking," which is the securities business. Through
"financial innovation" the investment banks created myriad
structured debt instruments which they sold through their Enron-like
"off balance" sheets operations (SIVs and Conduits) to
credulous investors. Now, trillions of dollars of these subprime
and mortgage-backed bonds — many of which were rated triple A —
are held by foreign banks, retirement funds, insurance companies,
and hedge funds. They are steadily losing value with every rating’s
downgrade. Here
is a graph which illustrates how the scam works.

Summers, of
course, understands the enormity of the swindle that has taken place
beneath the noses of US regulators, but chooses not to hold any
of the main actors accountable. Instead, he draws our attention
to a little-known part of the market which will probably lead the
way to a stock market crash and a system-wide meltdown.

Here’s Summers:

"It
is critical that sufficient capital is infused into the bond insurance
industry as soon as possible. Their failure or loss of a AAA rating
is a potential source of systemic risk. Probably it will be necessary
to turn in part to those companies that have a stake in guarantees
remaining credible because they have large holdings of guaranteed
paper. It appears unlikely that repair will take place without
some encouragement and involvement by financial authorities. Though
there are many differences and the current problem is more complex,
the Long-Term Capital Management work-out is an example of successful
public sector involvement."

Some of the
largest bond insurers are currently unable to cover the losses that
are piling up from the meltdown in mortgage-backed securities (MBSs)
and collateralized debt obligations (CDOs). Their business model
is hopelessly broken and they will require an immediate $143 billion
bailout to maintain operations. The largest of the bond insurers
is MBIA.

“MBIA’s total
exposure to bonds backed by mortgages and CDOs was disclosed to
be $30.6 billion, including $8.14 billion of holdings of CDO-squareds
(eds. note; pure garbage). MBIA was being priced as a weak CCC-rated
credit when it issued its bonds last week; it is now being priced
for a bankruptcy. MBIA’s stock, which traded just under $68 per
share last October, dropped another $3.50 this morning to under
$10.00 per share." (Stock analyst Michael Lewitt, quoted
in Bloomberg)

Barclay’s estimates
that the investment banks alone are holding as much as $615 billion
of structured securities guaranteed by bond insurers. If the insurers
default, hundreds of billions will be lost via downgrades.

So, in practical
terms, what does it mean if the bond insurers go under?

It means that
the system will freeze and the stock market will crash. Here’s how
TV stock guru Jim Cramer summed it up last week in an interview
with MSNBC’s Chris Matthews:

But, Chris,
there is something I would urge all the candidates to think about
and our Treasury Secretary, which is that there are a group of
insurance companies which insure all these bad mortgages and,
Cris, I think they are all about to go belly-up, and that will
cause the Dow Jones to decline 2,000 points. They’ve got to be
shut down and the insurance given to a New Resolution Trust. This
is going to happen in maybe two or three weeks, Chris, it going
to on the front of every newspaper and no one in Washington is
even willing to admit it.

Chris Matthews:
"So who are you including in these mortgage companies that
are going to go belly-up; give me a description?"

These are
MBIA and Ambac remember the companies that Merrill Lynch and Citigroup
wrote down a lot of stuff the other day? All these companies are
relying on insurance to save them. The insurers don’t have the
money. There’s also personal mortgage insurance; that’s PMI, is
one company; MGIC is another. Chris, I am telling you that these
companies do not have the capital to "make good." And
when they do fall, and I believe it is when — if the government
does not have a plan in action; you will not be able to open the
stock market when they collapse. No one is even talking about
the fact that these major insurers, who insure $450 billion of
mortgages are all about to go under. (See
the whole video.)

Cramer is correct
in assuming that the market won’t open. And yet, so far, nothing
has been done to avert the disaster which lies just ahead. Maybe
nothing can be done?

So, how did
things get so bad, so fast? How could the world’s most resilient
and profitable markets be transformed into a carnival sideshow peddling
poisonous "mortgage-backed" snake-oil to every gullible
investor?

Author and
stock market soothsayer Pam Martens puts it like this:

How could
a layered concoction of questionable debt pools, many of dubious
origin, achieve the equivalent AAA rating as U.S. Treasury securities,
backed by the full faith and credit of the U.S. government, and
time-tested over a century of panics, crashes and the Great Depression?

How did a
200-year-old “efficient” market model that priced its securities
based on regular price discovery through transparent trading morph
into an opaque manufacturing and warehousing complex of products
that didn’t trade or rarely traded, necessitating pricing based
on statistical models? (The
Free Market Myth Dissolves into Chaos, Pam Martens, CounterPunch.)

How, indeed?

The answer
to all these questions is "deregulation." The financial
system has been handed over to scam-artists and fraudsters who’ve
created a multi-trillion dollar inverted pyramid of shaky, hyper-inflated,
subprime slop that they’ve sold around the world with the tacit
support of the ratings agencies and the US political establishment.
(wink, wink) Now that system is about to collapse and there’s nothing
that the Federal Reserve can do to stop the Great Credit Unwind
of ’08. As economist Ludwig von Mises said:

“There is
no means of avoiding the final collapse of a boom brought on by
credit expansion. The question is only whether the crisis should
come sooner as a result of a voluntary abandonment of further
credit expansion, or later as a final and total catastrophe of
the currency system involved.”

January
29, 2008

Mike Whitney
[send him mail] lives
in Washington state.

DIGG THIS

Is there
anyone who still does not understand that talk of ‘inflation’
by officialdom is just a red herring intended to distract us from
the far more dangerous dragon of deflation?

~
Mike Shedlock, Mish’s Global Economic Trend Analysis

We are to about
see how much George Bush really believes the “supply side”
mumbo-jumbo he’s been spouting for the last seven years. Last
week’s Labor Department report confirmed that unemployment is
on the rise (5%) and that corrective action will be required to avoid
a long and painful recession. There’s a good chance that the
Chameleon in Chief will jettison his “trickle down” doctrine
for more conventional Keynesian remedies like slashing interest rates,
government programs, and tax relief to middle and low-income people.
On Monday Bush announced that his team of economic advisors was patching
together an “Economic Stimulus Package” that will be unveiled
later this month in the State of the Union Speech. The goal is to
rev up sagging consumer spending and slow down business contraction.
Ironically, the UK Telegraph dubbed the stimulus plan Bush’s
“New Deal.” It’s a shocking about-face for a president
that has been clobbering the middle class since he took office and
who balks at even providing temporary shelter for disaster victims.
Now Bush is going to have to give away the farm just to keep the economy
from crashing. Good luck. Clearly, the prospect of a system-wide meltdown
in banking, real estate and equities has become a “Road to Damascus”
moment for lame-duck George.

The up-tick
in unemployment is just the final part of an otherwise bleak economic
picture. Manufacturing is hurting too. Last Wednesday, the December
ISM Manufacturing Index plunged to 47.7, its lowest level in five
years. The news put the stock market into a 200-plus nosedive
and sent gold soaring over $800 per ounce. Since then, the news
has gotten progressively worse. The market fell another 200-plus
points on the Labor Dept’s report on Friday, followed by
238 point jolt on Tuesday on rumors of (potential) bankruptcy
at mortgage lending giant, Countrywide Financial, and a 2.6% plunge
in pending housing sales from the National Association of Realtors.
By the time ATT announced its fears of “reduced consumer
spending” the market was already barrel rolling towards earth
in a sheet of flames.

The Dow
Jones is now 10% off its yearly high, the official sign of a correction.
More important, equities blew through their support levels indicating
a basic change in the market’s trajectory. It’s a primary
bear market now and any rebound will be temporary. There’s
still a lot of fat to be trimmed before overvalued stocks return
to the mean. No wonder Bush is nervous.

The constant
rate cuts and geopolitical jitters have sent gold skyrocketing.
Since August 2007, gold has gone from $650 per ounce to $887,
a whopping $237 in just 5 months. If that is not an indictment
of the Federal Reserve and their “loosey-goosey” monetary
policy; then what is? According to the Wall Street Journal
“gold and oil have run almost in perfect tandem. The price
of gold has risen 239% since 2001, while the price of oil has
risen 267%. That means if the dollar had remained as ‘good
as gold’ since 2001, oil today would be selling at about
$30 a barrel, not $99.” (WSJ, 1/4/08)

That’s
right; the price of gas today is attributable to war, tax cuts
and the relentless expansion of credit by the Federal Reserve
– NOT OIL SHORTAGES!

Escalating
energy prices are increasing the cost of food production, which
creates a self-reinforcing inflationary cycle. Additional rate
cuts will only weaken the dollar further and put an even greater
burden on maxed-out consumers.

Before he
left on his “Victory Tour” of the Middle East, Bush
said:

“When
Congress comes back, I look forward to working with them, to deal
with the economic realities of the moment and to assure the American
people that we will do everything we can to make sure we remain
a prosperous country.”

The economic
realities that Bush will be facing are the anticipated “hard
landing” from a nationwide housing slump coupled with a credit
crunch that is strangling the banking and financial industries.
The country is lurching recklessly into a deflationary death-spiral
while Bush makes a pointless junket to the scene of his biggest
foreign policy flop. What a joke. When he returns, Bush will find
that he is constrained in his “stimulus” plan due to
massive fiscal deficits, which are the result of the enormous
tax cuts and gluttonous military budget.

“This
isn’t like 2000 when the US was running a large fiscal surplus
of $300 billion or 2.5% GDP,” said economist Nouriel Roubini.
“Now that all the fiscal stimulus bullets have been spent
on the most reckless and unsustainable tax cuts in history –
the administration is left with very little room (to maneuver)
in bad times . . . We are now stuck in a situation where the room
for any meaningful fiscal stimulus . . . is gone. . . . We did
indeed waste all our macro policy bullets in 2001-2004 in “the
best recovery that money can buy” and now we are left with
relatively limited room for monetary and fiscal policy stimulus.
This is one of the main reasons why the recession of 2008 will
be more severe and protracted than the mild 2001 recession.”
(Nouriel Roubini, Global EconoMonitor)

Still, there
will be a stimulus package – however meager – and there’ll
also be more rate cuts by the Fed. That means that gold and oil
will continue to soar and the dollar will continue to get hammered.
Bernanke’s options are limited, as are Bush’s. The system
is grinding to a halt and the Fed chief will have to use the tools
at his disposal to try to stimulate economic activity. It won’t
be easy. Presently, he faces a number of challenges. Home prices
are falling, retail spending is off, commercial real estate is
in a sharp downturn, and many of the major investment banks are
capital impaired from their poor investments in mortgage-backed
bonds. If the Fed’s “low interest” smelling salts
don’t revive the comatose American consumer – and get
the cash registers at Target and Billy McHales ringing again –
the world will face a global slowdown. That’s why the Fed
Funds rate will probably get hacked by 50 basis points by month’s
end and Comrade Bush’s economic team will concoct a fiscal
bailout plan worthy of Fidel Castro.

Are
We There Yet?

A growing
number of market analysts believe we’re already in recession.
David Rosenberg of Merrill Lynch put it like this: “According
to our analysis, this [recession] isn’t even a forecast any
more but is a present day reality.”

Rosenberg
argues that a weakening employment picture and declining retail
sales signal the economy has tipped into its first month of recession.
Mr. Rosenberg points to a whole batch of negative data to support
his analysis, including the four key barometers used by the National
Bureau of Economic Research (NEBR) – employment, real personal
income, industrial production, and real sales activity in retail
and manufacturing.” (UK Telegraph)

Whether
one chooses to call it a recession or not is irrelevant. When
the two behemoth asset-classes – real estate and securities
– begin to cave in, there’s bound to be some ugly fallout.
Housing stayed strong during the dot.com bust. Not this time.
No way. The whole system is keeling over and it could take the
bond market along with it. As the two gigantic equity bubbles
lose gas, consumer spending will stall, business activity will
slow, more workers will get laid off, and prices will tumble.
Equities and commodities will be hit hard (even gold) and housing
prices will dive to new lows as the pool of potential buyers grows
smaller and smaller.

These problems
will be further aggravated by the lack of personal savings and
the huge debt-load which will push increasing numbers of homeowners,
credit card customers, even student loan recipients into default.
By 2009, bankruptcy will be the fastest growing fad in American
pop culture.

Housing
Doom

Many experts
are now predicting that home prices will dip 30% by the end of
2008. That means that nearly 20 million homeowners will be “upside-down”,
that is, they will owe more on their mortgage than the current
value of the house. (Imagine owing $400,000 on a home that is
currently worth $325,000!) 40% of all homeowners in the US will
be upside-down by the end of next year. This is a grave systemic
problem that will have widespread implications. Experts already
know that when mortgage holders have “negative equity”
they are much more inclined to put their keys in the mailbox and
skip town. Hence, the name for this increasingly common practice
– “jingle mail.” Secretary of the Treasury Henry
Paulson is desperately trying to put together a national “rate
freeze” to avoid, what could be, the most devastating surge
of foreclosures the world has ever seen. Paulson’s rate freeze
does not offer “New Hope” as promised but, rather, a
lifetime of servitude paying off an asset of ever-decreasing value.
Underwater homeowners are better off taking the hit to their credit
and letting the bank repo the house. Let the bank worry about
it. They created this mess.

The housing
bubble is deflating faster than anyone had anticipated. Overall
sales have slipped more than 40% from their peak in 2005 whereas,
prices have gone down a mere 6.5%. Prices, which are a lagging
indicator, have a lot further to drop before they touch bottom.
Robert Schiller, Professor of Economics at Yale University and
author of Irrational Exuberance, “predicted that
there was a very real possibility that the US would be plunged
into a Japan-style slump, with house prices declining for years.

Professor
Shiller, co-founder of the respected S&P Case/Shiller house-price
index, said: “American real estate values have already lost
around $1 trillion [£503 billion]. That could easily increase
threefold over the next few years. This is a much bigger issue
than sub-prime. We are talking trillions of dollars’ worth
of losses.” (Times Online, UK)

Schiller’s
on the right track, but his estimates are way too conservative.
After all, in 2002, the median price of a single-family home in
Los Angeles was $270,000. But, by 2006, the cost of that same
house had doubled, to $540,000 – “pushed by unbridled
speculation fueled by unparalleled access to mortgage capital.”
(LA Times) The problem was cheap credit that was readily
available to anyone who could fog a mirror. All that has changed.
The banks have tightened up their lending standards, and jumbo
loans (loans over $417,000) are nearly impossible to get. So,
why doesn’t Schiller believe that prices will return to 2002
levels? They will. And they’ll go even lower; much lower.
In fact, real estate is quickly becoming the leper at the birthday
party; everyone is staying away. That means that prices will fall
– and more rapidly than anyone imagined. The word is out
on housing and it’s not good. The blood is in the water.
Get out before the pool of mortgage applicants dries up entirely.

Banking
Tsunami

The US banking
industry has never faced greater challenges than it does today.
Many of America’s largest and most prestigious investment
banks are seriously under-capitalized and buried beneath hundreds
of billions of dollars in complex, structured investments that
are being downgraded on a weekly basis. On top of that, many of
the banks main sources of revenue have vanished as investor interest
in sophisticated mortgage-backed bonds and derivatives has disappeared
altogether. For example, the sales of collateralized debt obligations
(CDOs) “plunged 85% to $15.69 billion in the fourth quarter.”
Also, “The value of Alt-A mortgages . . . issued in the third
quarter fell 64% to $39.3 billion from the second quarter’s
record high of $109.5 billion . . . S&P said the dramatic
drop is the result of ‘unprecedented credit and liquidity
disruptions’ for both borrowers and lenders” (Dow Jones)
These are steep declines and represent a serious loss of revenue
from the banks’ bottom line.

Many of
the banks are simply in “survival mode” trying to conceal
the magnitude of their losses from their shareholders while attempting
to attract capital from overseas investors to shore up their sagging
collateral. (via Sovereign Wealth Funds)

The banks
are now struggling to fulfill their function as the main conduit
for providing credit to consumers and businesses. They have curtailed
their lending as their capital base has steadily eroded through
persistent downgrading. The Federal Reserve has tried to resolve
this issue by opening a Temporary Auction Facility (TAF), which
allows the banks to secretly borrow billions from the Fed without
the embarrassment of disclosing the transaction to the public.
The banks are also free to use Mortgage-backed securities (MBS)
and commercial paper (CP) as collateral for securing the Fed repos.
It’s a sweetheart deal and more than 100 financial institutions
have already taken advantage of the Fed’s largesse.

This is
a bad sign. It indicates that the banks are seriously overextended,
“capital impaired” and need a handout from the Central
Bank to keep from defaulting. It means that the vaults are stuffed
with worthless mortgage-backed slop that they are deliberately
hiding from their shareholders and depositors. If there were adequate
regulation then the banks would never have been allowed to dabble
in such risky debt instruments as subprime loans and toxic CDOs.
The whole catastrophe could have been avoided. Instead, hundreds
of billions of dollars will be wiped out, a number of banks will
fail, and public confidence in their institutions will be shattered.

This week,
the Federal Reserve announced that it “will increase the
size of two scheduled auctions of emergency loans by 50 percent
to $30 billion as part of a global attempt by central bankers
to restore faith in the money markets.” (AP) In other words,
the Fed will provide an even bigger begging bowl to prop up the
banks to maintain the appearance of solvency. It is an utter sham.

Inflation
vs. Deflation

The size
and scale of the approaching recession is impossible to forecast.
The real estate and stock markets will undoubtedly see trillions
of dollars in losses, but what about the estimated $300 trillion
dollars of derivatives, credit default swaps and other abstruse
counterparty options? Will the global economy freeze up when that
ocean of cyber-capital suddenly evaporates? Will that virtual
wealth simply vanish into the ether when the underlying assets
(CDOs, MBSs, ABCP) are downgraded to pennies on the dollar, or
when the number of home foreclosures catapults into the millions,
or when the dollar slips to a fraction of its current value? No
one really knows.

But Atlanta
Fed President Dennis Lockhart summarized what we can expect in
a speech he gave last week titled “The Economy in 2008.”
He said:

“A
sober assessment of risks must take account of the possibility
of protracted financial market instability together with weakening
housing prices, volatile and high energy prices, continued dollar
depreciation, and elevated inflation.”

Amen.

What the
upcoming recession “will look like” has been the topic
of a fierce debate on the Internet. Everyone seems to agree that
this is not a typical economic downturn resulting from overproduction,
under-consumption or malinvestment. Rather, it is the crashing
of humongous equity bubbles that were generated by the Fed’s
abusive expansion of credit and the unprecedented proliferation
of opaque structured-debt instruments. Many believe that the unwinding
of these bubbles will trigger a round of hyperinflation which
is already evident in soaring food, energy and health care costs.
These prices are bound to increase substantially as the Fed continues
to cut rates and further undermine the dollar.

But the
real issue (it seems to me) is the unfathomable loss of market
capitalization, the growing insolvency of maxed-out consumers,
and the inability of the banks to freely extend credit to responsible
loan applicants. These three things are likely to drag down all
asset-classes, slow business activity to a crawl, and compel consumers
to hoard rather than spend. The dollar will strengthen in a deflationary
environment (if that is any consolation?).

Paul L.
Kasriel, Sr. V.P. and Director of Economic Research at The Northern
Trust Company answers some typical questions about deflation in
a recent interview with economic guru Mike Shedlock (Mish):

Mish: Would you say that consumer debt in the US as opposed to
the lack of consumer debt in Japan increases the deflationary
pressures on the US economy?

Kasriel:
Yes, absolutely. The latest figures that I have show that banks’
exposure to the mortgage market is at 62% of their total earnings
assets, an all time high. If a prolonged housing bust ensues,
banks could be in big trouble.

Mish:
What if Bernanke cuts interest rates to 1 percent?

Kasriel:
In a sustained housing bust that causes banks to take a big
hit to their capital it simply will not matter. This is essentially
what happened recently in Japan and also in the US during the
great depression.

Mish:
Can you elaborate?

Kasriel:
Most people are not aware of actions the Fed took during the
great depression. Bernanke claims that the Fed did not act strong
enough during the Great Depression. This is simply not true.
The Fed slashed interest rates and injected huge sums of base
money but it did no good. More recently, Japan did the same
thing. It also did no good. If default rates get high enough,
banks will simply be unwilling to lend which will severely limit
money and credit creation.

Mish:
How does inflation start and end?

Kasriel:
Inflation starts with expansion of money and credit. Inflation
ends when the central bank is no longer able or willing to extend
credit and/or when consumers and businesses are no longer willing
to borrow because further expansion and /or speculation no longer
makes any economic sense.

Mish:
So when does it all end?

Kasriel:
That is extremely difficult to project. If the current housing
recession were to turn into a housing depression, leading to
massive mortgage defaults, it could end. Alternatively, if there
were a run on the dollar in the foreign exchange market, price
inflation could spike up and the Fed would have no choice but
to raise interest rates aggressively. Given the record leverage
in the U.S. economy, the rise in interest rates would prompt
large scale bankruptcies. These are the two “checkmate”
scenarios that come to mind. (read
the whole interview here)

Summary: When
banks don’t lend and consumers don’t borrow; the economy
crashes. End of story. The whole system is predicated on the prudent
use of credit. That system is now in terminal distress. Everyone
to the bunkers.

Perhaps
the whole “inflation-deflation” debate is academic.
The real issue is the length and severity of the impending recession.
That’s what we really want to know. And how many people will
needlessly suffer.

January
19, 2008

Mike Whitney’s
[send him mail] lives
in Washington state.

DIGG THIS

Alan Dershowitz
is a skillful debater, a capable attorney, and a focussed defender
of Israel. He is also a Harvard professor and a former member of
OJ Simpson’s legal defense called the Dream Team.

An article
by Dershowitz appeared on op-ed page of the Wall Street Journal
on November 7, 2007, titled "Democrats and Waterboarding."
In that article Dershowitz makes a spirited defense of waterboarding,
going so far as to say that (he believes) the Democrats "will
lose the presidential race if it defines itself as soft on terror."
Dershowitz thinks the Democrats are headed for trouble if they assume
the "pacifistic stance" that he identifies with Cindy
Sheehan and Michael Moore. By using Moore and Sheehan as examples,
it is clear that Dershowitz accepts the media’s attempts to dismiss
them as part of an imaginary "leftist fringe."

Instead, Dershowitz
holds up ex-New York Mayor Rudolph Giuliani as an example of a candidate
whose popularity has steadily grown because of his "tough"
stance on national security issues. Dershowitz uses the "national
security" hobgoblin in the same way as Bush: to justify government
activities that conflict with our existing laws and basic principles.
It is a neat bit of lawyerly footwork, but unconvincing.

In Dershowitz’s
defense, it is true that he does not approve of "the routine
use of torture," but only in the rare situation when it might
be useful in gaining "preventive intelligence information about
imminent acts of terrorism — the so-called “ticking bomb” scenario."
But, who decides? Do we bestow this authority on men who have already
proven to be untrustworthy — on men who have already created an
industrial scale system of torture in black sites around the world?
Who do we trust with these new powers?

And how do
we know when a so-called "terrorist suspect" is a terrorist
at all? Are we being asked to forgo due process and the presumption
of innocence along with our revulsion to cruel and inhuman treatment?

Dershowitz
loves to use the "ticking time-bomb" scenario and trots
it out at every opportunity. It is a very persuasive argument, until
one really examines the implications. Jos Padilla was supposedly
a "ticking time-bomb," wasn’t he? According to the earliest
public statements by the Bush administration, Padilla had smuggled
a nuclear device or "dirty bomb" into the country and
was planning to use it in a terrorist attack against American civilians.
But it wasn’t true. The government had fabricated the entire story
and kept him in prison without charges for over 4 years on claims
that were manifestly false. The Bush administration has never offered
an explanation for their lies.

Padilla’s attorney
has produced convincing evidence that he was repeatedly tortured
in prison and was, thus, driven insane. And for what? The government
knew that he was not involved in a terrorist plot to kill Americans.
Under Dershowitz’s regime, Padilla’s treatment would be entirely
justified. Is that what we want?

The "ticking
time-bomb" argument is a way of challenging our core values.
It’s a test. It’s like asking, "How much are we really willing
to sacrifice for the sake of our beliefs? Are we willing to risk
our lives and the lives of the people we love?" Or are we ready
to “throw in the towel” and hand the government even greater and
more lethal powers hoping that they’ll keep us safe?

Dershowitz
says, "I am personally opposed to the use of torture."
But that is not true. If he is opposed to torture then how does
he explain his support for "torture warrants"? The two
are mutually exclusive.

In Dershowitz’s
book, Shouting
Fire: Civil Liberties in a Turbulent Age, he says:

"No
torture would be permitted without a “torture warrant” being issued
by a judge…. An application for a torture warrant would have
to be based on the absolute need to obtain immediate information
in order to save lives coupled with probable cause that the suspect
had such information and is unwilling to reveal it…. The warrant
would limit the torture to nonlethal means, such as sterile needles,
being inserted beneath the nails to cause excruciating pain without
endangering life."

It’s shocking
that a respected author and attorney would actually qualify the
type of needles ("sterile") that can be used while conducting
torture. Can we see how outrageous this is?

The excerpt
proves that Dershowitz advocates torture. The support for "torture
warrants" is support of torture. Period. It doesn’t matter
if the torture is limited to extreme cases or not. It’s barbarism.
More importantly, it is barbarism that is vindicated by the state.

Dershowitz
has been defending his position on torture for more than 4 years.
Here are his comments in 2002 from the op-ed page of the San
Francisco Chronicle:

"If
American law enforcement officers were ever to confront the law
school hypothetical case of the captured terrorist who knew about
an imminent attack but refused to provide the information necessary
to prevent it, I have absolutely no doubt that they would try
to torture the terrorists into providing the information.

Moreover, the
vast majority of Americans would expect the officers to engage in
that time-tested technique for loosening tongues, notwithstanding
our unequivocal treaty obligation never to employ torture, no matter
how exigent the circumstances." ("Want to Torture; Get
a Warrant," SF Chronicle 2002)

Dershowitz
is mistaken. According to every survey conducted in the last 5 years,
the majority of American people are overwhelming opposed to torture
and — I dare say — they are equally opposed to cops who take the
law into their own hands and "engage in that time-tested technique
for loosening tongues." What Dershowitz is suggesting here
is deadly serious and paves the way for routine abuses of power
and police brutality. It is a wonder that the Bar hasn’t stepped
in and chastised him for his public stance on this issue.

Dershowitz’s
logic is also flawed. His argument can be reduced to this: "The
cops are going to torture anyway, so let’s give them the green light
by providing them with "torture warrants"? Isn’t that
what he is saying?

This is from
the same article:

"Every
democracy, including our own, has employed torture outside of
the law…. Throughout the years, police officers have tortured
murder and rape suspects into confessing — sometimes truthfully,
sometimes not truthfully."

Again, this
is poorly argued. Dershowitz is using the same feeble defense that
schoolchildren use when they’re caught breaking the rules: "Everyone
else was doing it." That is not an acceptable defense for torture.

Finally, Dershowitz
offers this threadbare excuse for waterboarding:

"There
are some who claim that torture is a nonissue because it never
works — it only produces false information. This is simply not
true, as evidenced by the many decent members of the French Resistance
who, under Nazi torture, disclosed the locations of their closest
friends and relatives."

Dershowitz
is invoking the classic "ends justifies the means" defense,
but not very cogently. What difference does it make if the information
that is extracted through "physical coercion" is of some
utility or not if the system you are trying to defend has been obliterated
by your actions? It doesn’t require a finger-wagging patriot or
a moralizing scold to see that state-sanctioned torture means the
end of the republic. There is no such thing as "legal torture."
It is a contradiction in terms. Torture is an assault on the fundamental
rights of man and the rule of law. It is one of the "red lines"
that we don’t cross because on the other side is tyranny.

There are certain
basic assumptions upon which our country was founded and the entire
legal and political system rests. These are our core beliefs; they
are not facts. That’s why the preamble of the Constitution reads:
"We hold these truths to be SELF EVIDENT" because the
founders posited that these beliefs did not require proof among
civilized people. Among those "assumptions" are the ideas
of "inalienable rights" and the intrinsic value of man.
Inalienable rights can’t be casually swept away by a presidential
signing statement or a congressional edict legalizing "torture
warrants" any more than the Congress can haphazardly repeal
habeas corpus by passing the Military Commissions Act. That’s beyond
their "pay grade." These officials weren’t elected to
rewrite the Constitution, but "to preserve, protect and defend"
it to the best of their ability. These core principles cannot be
changed without destroying the country itself.

Is that the
hidden agenda here; to reshape the nation according to an ethos
that is more disposed to autocratic government?

The Constitution
isn’t a security blanket. If we want to minimize the number of terrorist
attacks on American citizens or US institutions; we should stop
using war as an implement of foreign policy. As Noam Chomsky says,
"The best way to stop terrorism; is stop committing it."
That’s good advice. We ought to put that on a billboard in front
of the White House so the occupants can mull it over every day on
their way to work.

Dershowitz’s
ruminations on waterboarding offer nothing constructive as far as
national security is concerned. It’s just more demagoguery.

I agree with
Dershowitz that “waterboarding cannot be decided in the abstract."
Nor has it been. It has been thoroughly researched and condemned
under the Geneva Conventions, the US military, and every human rights
organization on earth. The issue has already been decided. It is
torture, pure and simple, and no amount of legalistic gibberish
changes a thing.

There’s another
reason for rejecting torture besides the fact that it is morally
abhorrent, or because it conflicts with our reading of the Constitution,
or even because it abrogates the presumption of innocence, due process,
the right to attorney, habeas corpus and every other principle to
which we claim to adhere.

The real reason
that torture should be rejected is because it confers more authority
on the state than is prudent for the safety and welfare of "We
the people." The state is now — and has always been — the greatest
threat to human rights and civil liberties. That’s truer today —
in our post–9-11 world — than ever before. The state is the
natural enemy of personal freedom.

Dershowitz’s
polemic has nothing to do with his alleged interest in the security
of the American people. That’s hogwash. It is an attempt to expand
the authority of the state by softening public attitudes towards
torture. It’s a blatant power-grab, pure and simple; and should
be repudiated by anyone who grasps its true meaning.

December
13, 2007

Mike Whitney’s
[send him mail] lives
in Washington state.

DIGG THIS

Lately it seems
as though everyone wants to take a poke at the dollar. Last week,
it was the Brazilian supermodel who demanded euros for her jaunts
on the catwalk instead of USD. The week before that, hip-hop impresario,
Jay-Z, released a video dissin’ the dollar and praising the euro
as the "baddest Dude in the ‘hood."

Lambasting
the greenback has become trendy. It’s a favorite pastime of politicians,
too. At the November OPEC meeting in Riyadh, Iran’s president Mahmoud
Ahmadinejad asked the assembled finance ministers to “study the
feasibility of selling oil in another currency.” Ahmadinejad disparaged
the dollar as “a worthless piece of paper."

The fiery Venezuelan
President, Hugo Chavez, followed Ahmadinejad’s lead predicting that
the demise of the dollar would mean the “end of the Empire.”

Hugo may be
on to something. The dollar is America’s Achilles heel; if the dollar
tanks, so does the empire. That means the taxpayer will have to
foot the bill for Bush’s bloody-interventions in Iraq and Afghanistan,
rather than the Chinese. That also means that the US will have to
export something of greater value than Daisy Cutters and gulags.
That could be a tall-order, now that Bush has boarded up the factories,
hollowed out the industrial base, and outsourced 3 million manufacturing
jobs. We’ll have to scrape the rust off the machinery and get back
into the widget-making business like we were before the Free Trade
fiasco.

Central banks
across the globe are trying to figure out how to ditch their dollar
reserves without triggering a stampede for the exits. No one wants
to see that. But, then, nobody wants to be stuck with vaults full
of Uncle Sam’s green confetti either. So, the question arises; What
is the best way to divest oneself of $5.6 trillion (total USD held
overseas) before the Lusitania capsizes?

Kuwait, Venezuela,
Iran, Russia, and Norway have already opted to ignore the destabilizing
effects of “conversion” from dollars and are in some stage of divestiture.
Others will follow. The UAE, Bahrain, Qatar, Oman and Saudi Arabia
are considering switching from the dollar-peg to a basket of currencies
so they can hedge against the inflation that’s battering their economies.
It’s only a matter of time before the Petrodollar System — which
links the dollar to petroleum sales and creates a de facto “international
currency” — unravels completely, precipitating the final collapse
of Breton Woods.

Talk of America’s
impending currency disaster is no longer relegated to the Internet
blathershere. Mainstream journalists have joined the chorus and
are sending up their own red flags. The UK Telegraph’s economics’
editor, Liam Halligan, made this grim observation in his recent
article, “Bet Your Bottom Dollar Tensions Will Follow”:

“The importance
of “dollar divestment” cannot be overstated. At the very least it
means the greenback has much further to fall — plunging the US into
recession. But it begs a bigger, more alarming, question. How will
Washington react to the end of the US hegemony?”

The dollar
was savaged by the monetary policies of the Federal Reserve. The
Fed’s policies were designed to coincide with Bush’s Middle East
Crusade. They were supposed to work like two wheels on the same
axle. The administration believed that, by 2007, the military would
need only 30,000 or so troops to maintain security in Iraq. That
would give Bush’s legions the chance to turn east and push on to
the next target-state, Iran. If things went according to plan —
and no one thought the high-tech US war machine could be stopped
— the US would control two-thirds of the world’s oil. This would
allow America to keep writing bad checks on green paper for the
next century.

But then, of
course, the plan hit a snag. The Iraqi resistance mushroomed, the
US got bogged down in an “unwinnable” war, and the once-mighty dollar
shriveled into nothingness. Now we’re at a turning point and our
leaders are in a state of denial. Bush is still playing Teddy Roosevelt,
while Paulson and Bernanke are just plain shell-shocked. They probably
know the game is over. As the dollar continues to wither; the frustration
is beginning to mount in Europe. Liam Halligan sums it up like this:

“Europe has
finally had enough of America’s “benign neglect” dollar policy.
As a large economic area, with a floating exchange rate, the eurozone
suffers most. Over the past seven years, the single currency has
risen by a shocking 82 per cent against the greenback. That’s hammered
eurozone exports — provoking serious trade disputes between the
EU and US, the world’s two biggest trading blocks. No wonder French
President Nicolas Sarkozy describes America’s drooping dollar as
“a precursor to economic war." (UK Telegraph, “Bet Your
Bottom Dollar tensions Will Follow”)

Sarkozy is
leading the charge for “intervention”; the buzzword for shoring
the greenback through exchange controls and buying up billions of
dollars. But it’s a risky business; especially when net capital
inflows — which are the monthly purchases of US-backed securities
and Treasuries — have gone negative for the last two months. That
means the US isn’t attracting enough foreign investment to finance
its trade deficit. So the dollar will have to fall to compensate.

So, how much
loot is Sarkozy willing to put up to keep the dollar from slumping
further — $100 billion, $500 billion, $1,000 billion? And where’s
the bottom?

The fact is,
the greenback took a “header” down the stairwell and by the time
it picks itself up, it could be eye to eye with the peso. Who knows?
Maybe its time we all learned Spanish?

More than two-thirds
of all sovereign foreign exchange holdings are denominated in dollars.
When those dollars are converted into back into foreign currencies
and start recycling into the US; we’re in deep trouble. Inflation
will soar. Surely, the Fed must have known this day would come when
they were pumping trillions of dollars into subprime mortgages and
complex debt-instruments which served no earthly purpose except
to fatten the bottom line for rapacious bankers and hedge-fund managers.
The Fed also knew that the nation’s wealth was not being “efficiently
deployed” for capital improvements on factories, technology or industry.
Oh, no. That would have ensured that America would remain competitive
in the global marketplace into the new century. Instead, the money
was shoveled into the bottomless sinkhole of stucco homes with composition
roofing and toxic credit default swaps.

The stock market
lost another 237 points yesterday; the third 200-plus slide in a
week. Now all three indexes are down more than 10% since their record
high on Oct 9. Treasury yields are plunging as investors flee the
stock market looking for safety. That means the Fed will have to
slash rates again at its December 11 meeting to provide more low
interest crack for the investor class. Traders see an 82% chance
that Bernanke will cut the Fed Fund’s rate by another quarter point
to 4.25%. All that is likely to do is put the dollar into free fall
and send food, oil and gold prices to the moon. It won’t pay off
the overdue mortgage payments and it won’t remove the billions of
dollars of debt from the banks’ balance sheets. It’s pointless.
The US is headed for a “hard landing” and its dragging the rest
of the world along with it.

Harvard Economics
professor, Lawrence Summers offered this sobering warning yesterday
in an article in the Financial Times, “Wake up to the dangers
of a deepening crisis”:

“Three months
ago it was reasonable to expect that the subprime credit crisis
would be a financially significant event but not one that would
threaten the overall pattern of economic growth. This is still
a possible outcome but no longer the preponderant probability.
Even if necessary changes in policy are implemented, the odds
now favor a US recession that slows growth significantly on a
global basis. Without stronger policy responses than have been
observed to date, moreover, there is the risk that the adverse
impacts will be felt for the rest of this decade and beyond. Several
streams of data indicate how much more serious the situation is
than was clear a few months ago.”

We’re doomed.

November
29, 2007

Mike Whitney’s
[send him mail] lives
in Washington state.

DIGG THIS

America is
finished, washed up, kaput. Foreign investors and central banks
around the world have lost confidence in US markets and are headed
for the exits. The dollar is sinking, the country is insolvent,
and its leaders are barking mad. Investors are voting with their
feet. They’ve had enough. Capital is flowing to China and the Far
East in a torrent. It’s “sayonara” downtown Manhattan and “Hello”
Tiananmen Square.

The dollar
fell another 2 per cent last night, gold soared to $840 per ounce,
oil topped $98 per barrel, General Motors reported a $39 billion
loss after the market closed on Tuesday, the real estate market
continued its downward slide, and the major investment banks are
marching in lock-step towards bankruptcy.

The news is
all bad. The nation’s economic foundation is in shambles. US credibility
is shot. Bush and Greenspan have put us on the road to ruin. Now
their work is done. We’re flat broke.

The catalogue
of fiscal ailments now facing the country is too long to list. We’d
need a ledger the size of a small encyclopedia. There’s been a stampede
away from the dollar even though it’s already lost over 60 per cent
of its value since Bush took office and even though central banks
around the world will lose their shirts if it collapses. They don’t
care. They’re getting out while they can.

Cheng Siwei,
the vice chairman of China’s National People’s Congress, announced
yesterday that China would continue to diversify its $1.4 trillion
reserves away from the dollar to “stronger currencies” like the
euro. “Strong currencies”; isn’t that Paulson’s line? Siwei’s comments
ignited a firestorm in the currency markets triggering a big blow-off
of the greenback. The poor dollar has no place to go now but down,
and it’s on a greased pole to the bottom. With consumer spending
paralyzed by the decline in home equity and frozen wages, and the
banks “stuffed to the gills” with over a trillion dollars of mortgage-backed
sludge; the prognosis for the hobbled dollar is looking grimmer
by the day. The bulging trade deficits and dwindling foreign inflows
haven’t helped either. The greenback has suddenly become the global
pariah; all it needs is a leper’s rattle and a tin cup.

The news is
no better in the real estate industry either, where the nation’s
biggest builders are reporting record losses and inventory is backed
up 11 months. Sales are off 22 per cent in one year alone. Foreclosures
are skyrocketing, jumbo loans (over $417,000) are impossible to
get regardless of one’s credit history, 40 per cent of all mortgages
(subprime, Alt-A, piggyback, reverse amortization, interest-only)
have been eliminated, and entire projects in Florida, Arizona, Las
Vegas, and California’s Central Valley have stopped building altogether.
Tens of thousands of unoccupied homes across the Southwest have
been reduced to ghost towns. Nothing is selling. The building boom,
that began when Alan Greenspan ginned-up the Fed’s printing presses
in 2002, has turned into the biggest housing bust in American history.

On top of that,
the banks are tightening lending standards and shunning potential
buyers just when the economy needs a boost in demand. Loan originations
are down and bankers are spooked by the gathering storm in the credit
markets. That means that home sales will continue to be sluggish,
prices will correct more quickly, and the anticipated “soft landing”
will turn into a full-blown crash.

New home construction
has accounted for 2 out of every 5 new jobs created in the last
5 years. Most of those workers are either delivering pizzas, cleaning
bed pans or are lining up at the soup kitchen. The BLS’s numbers
on employment are bogus. It’s just more government bunkum. They’re
predicated on a “birth-death” model that creates millions of fictitious
jobs out of whole cloth. In truth, unemployment is soaring and the
most vulnerable and impoverished among us are taking a beating from
the housing debacle.

According to
the Mortgage Bankers Association of Washington, the total of mortgage
loans outstanding in 2006 was $10.9 trillion; $6 trillion of which
were transformed into securities (CDOs, MBSs) About $1.5 trillion
of those securities are subprime; another $1 trillion Alt-A (nearly
as risky) and at least another $1.5 trillion in adjustable rate
mortgages (ARMs). At least 20 per cent of these shaky liabilities/securities
will default, and yet, no one really knows who is holding them on
their books. All of the major financial institutions – the
insurance companies, foreign banks, hedge funds, investment banks
— have purchased these CDO “roadside bombs” and mixed them in with
their other performing loans and hard assets. The projected explosions
have already begun to take their toll on the financial giants —
Citigroup and Merrill Lynch are just the latest victims; others
will follow. The problem can’t be fixed with Bernanke’s low interest
rates. The bad debts are everywhere and must accounted for and written
down. That puts us on the threshold of a jarring market-downturn
triggered by an unprecedented number of defaults that will rumble
through the entire system. Bankruptcies will pop up everywhere at
random. It is a blueprint for economic chaos. And it is unavoidable.

The global
markets have never seen a financial typhoon of this magnitude before.
Mortgage lenders, homeowners, banks, hedge funds, bond insurers,
etc. will all either go under or feel the sting of a slumping market.

Many of the
major investment banks are already broke; it’s clear from their
own reporting. Charles Hugh Smith sums it up like this in his recent
article “Empire of Debt: The Great Unraveling”:

“If
their bad bets were marked to market, Citicorp and Merrill Lynch
would be declared insolvent. Why? Because they are insolvent — right
now. The meaning of insolvency is straightforward: their losses
exceed their capital. Recall that these firms list assets of $100
billion (or whatever) but their actual net capital is on the order
of 2.5 per cent to 5 per cent — a mere sliver of their stated assets.
In other words: a 5 per cent loss of their stated assets wipes them
out. The game is now over, and the players shuffling losses can
only last a few more days or weeks.”

Up to this
point, the banks have been able to place a sizeable portion of their
“hard-to-value” assets in a Level-3 grab bag, which allowed company
accountants to assign a value to those assets according to their
own judgment. No more. The new FASB 157 regulation will force the
banks to use “market prices” to determine the true value of their
holdings. Some analysts believe that these new disclosure rules
may result in $200 billion write-downs on assets and require the
over-leveraged banks to increase their capital reserves. That will
slow down lending and put a wrinkle in the banks’ bottom line. In
any event, once the law is enacted; we’ll see who’s “faking” the
value of their assets or as Warren Buffett says, “Who’s swimming
with their clothes off.

Professor Nouriel
Roubinisummed it up like this:

“The amount
of losses that financial institutions have already recognized
— $20 billion — is just the very tip of the iceberg of much larger
losses that will end up in the hundreds of billions of dollars.
Calling this crisis a sub-prime meltdown is ludicrous as by now
the contagion has seriously spread to near prime and prime mortgages.
And it is spreading to every corner of the securitized financial
system that is either frozen or on the way to freeze. The reality
is that most financial institutions have barely started to recognize
the lower “fair value” of their impaired securities. The credit
crunch is getting worse and its financial and real fallout will
be severe.” (Nouriel Roubini blog.)

The constant
drumbeat of bad news is having a numbing affect on Wall Street.
Traders’ are tight-lipped and downcast. Spirits are sagging. No
one likes losing money, and yet, the credit storm shows no signs
of letting up anytime soon. Yesterday, the Dow Jones Industrial’s
took another 360-point pounding before the bell rang. Another day,
another bloodbath. The subprime virus has now infected the broader
markets leaving the once-brawny financial giants bruised and reeling
like Joe Frazier in the Thrilla in Manila. A few more down-days
like yesterday and they’ll be carrying out hedge funds feet first.

The stock market
is looking more and more like a glass pitcher propped up on the
edge of a bookshelf. One little bump, and down she goes.

November
10, 2007

Mike Whitney’s
[send him mail] “stock-n-trade”
is landscaping. He never even sat down at a computer keyboard until
Bush gave his “axis of evil” speech. Then, he figured it was time
to get to work.

DIGG THIS

"The
American Republic is in remnant status. The stage is set for our
country to devolve into a military dictatorship, and few seem
to care."

~
Rep. Ron Paul

First we stop
the killing, and then we restore the Constitution. These are our
two main priorities. And that's why I'm voting for Ron Paul. He
is the only candidate (with a chance to win) who's promising to
do both. And he'll keep his word. That makes him the only truly
American candidate running for president.

Paul is serious
about withdrawing US troops from Iraq. He knows that the war was
a mistake and believes that the American occupation must end. He
has promised to stop the ongoing slaughter of Iraqi civilians. That
should be the primary moral consideration for anyone casting a ballot
on November 3.

Will you vote
to stop the killing or not? It's as simple as that.

Paul has also
promised to restore the rule of law — to repeal the Patriot Act
and the Military Commissions Act; to reinstate Posse Comitatus,
due process, habeas corpus, and the "presumption of innocence."
He'll make sure that US prisoners — whether they be American citizens
or foreign nationals — are treated in way that complies with our
treaty obligations, the Geneva Conventions, the Bill of Rights,
and the basic tenets of human decency.

Under Paul,
the torture will stop. Period.

What other
candidate will stop the torture of US prisoners? What other candidate
will stop the government's spying on the American people? What other
candidate will challenge Bush's claim that the president can arbitrarily
cast an American citizen in prison and keep him there as long as
he chooses without charging him with a crime?

Bush has abolished
the basic safeguards which protect the citizen from the long-arm
of the state. The legal system needs to be purged of his executive
signing statements and presidential decrees. Only Paul promises
to restore the Constitution. There is no second choice.

Paul is the
only candidate who grasps the economic problems facing the nation
from our massive deficit spending, the destruction of our manufacturing
base, and the falling dollar. He may not be able to pull us back
from the brink, but he will rebuild confidence in our currency,
our markets, and our trade policies. That's the best we can hope
for given the mess that Bush has created.

On November
5, Guy Fawkes Day, the Paul campaign raised over $4.07 million in
one day, mostly from private citizens. He surpassed all the other
candidates except Hilary Clinton and has raised more than $6.84
million in the first five weeks of this quarter alone. Paul's "purely"
grassroots movement is energized by working class Americans who
see his candidacy as a last-ditch effort to end the war in Iraq,
reestablish fiscal sanity, and restore civil liberties.

Despite the
fact that Paul has strong personal approval ratings and polls well
against his competitors, the media has deliberately — and very successfully
— kept him out of the public eye. That will be more difficult to
do now that his campaign war-chest is bursting with contributions
and his base of support is expanding across the country.

We expect the
media to abandon its failed strategy of simply ignoring Paul and
take the more aggressive approach of attacking him outright. Now
that Paul has established himself as a credible threat to the warmongering,
autocratic corporate elites, he will have to be discredited through
a coordinated media-blitz which will target his voting record, his
character, and any other personal foible which may incite public
scorn.

He's got a
bull's-eye on his back.

We've seen
it all before, haven't we? The politics of personal destruction
organized and directed from the penthouse suites of the media's
corporate offices?

Perhaps, it
will be a repeat of the "Dean Scream," where the voice
of antiwar candidate Howard Dean was isolated from the crowd noise
— and played on the mainstream media over 900 times in 48 hours
— making Dean look like a maniac and torpedoing whatever chance
he may have had of winning the Democratic nomination.

Or maybe it
will be like John McCain's "rumored" out-of-wedlock black
baby in the South Carolina primary? Or the "Swift-boating"
of John Kerry in the 2004 presidential election? Or the attacks
on Dan Rather following his report that the president was a slacker
who vamoosed from the "Champagne Unit" of the Texas National
Guard during wartime?

Whatever the
plan may be, we should know by now that the media will continue
to act as the chief adversary of the American people and the cause
of liberty.

But don't expect
the Paul supporters to throw in the towel like the weak-kneed Dean
throng. These guys are stubborn and resolute. And they won't budge
on matters of principle. They're not taken in by the media's cheesy
smear-campaigns and they won't jump off the bandwagon at the first
sign of trouble.

The Paul crowd
has some heavy artillery of their own, too — and they're wheeling
it into place right now. Their ranks are gradually swelling, the
money is pouring in, and they are not going to give up their country
without a fight.

This election
is shaping up to be a clash of ideals between the people who still
believe in freedom and those who don't. It's going to be hand-to-hand
combat and it'll probably crack the country in two.

Good. Let the
battle begin. As Thomas Jefferson said, "Every generation needs
a new revolution."

November
8, 2007

Mike Whitney’s
[send him mail] “stock-n-trade”
is landscaping. He never even sat down at a computer keyboard until
Bush gave his “axis of evil” speech. Then, he figured it was time
to get to work.