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THE GLOBAL FINANCIAL MELTDOWN - Printable Version

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RE: The Global Financial Meltdown - Admin - 05-17-2009

THE MANY FACES OF BANK OF NATIONALIZATION

Dr. Jack Rasmus
http://www.kyklosproductions.com


Calls for nationalizing the banking industry have been bubbling since at least last September 2008, when the current Banking Panic began in the wake of the Lehman Brothers bank collapse, the initial AIG bailout, and the quick absorption of Merrill Lynch-Wachovia-Washington Mutual banks by their larger competitors, Bank of America, Wells Fargo, and JP Morgan Chase.

One of the first to raise the idea of the possible need for bank nationalization last fall were the editorialists from the Wall St. Journal, as well as ex-Federal Reserve chairman, Alan Greenspan. Of course, what the Journal’s editorialists and Greenspan meant by their idea of nationalization was the government should assume responsibility for cleaning up a bank’s bad assets at taxpayer expense, followed by the government quickly selling off the best of the bank’s remaining assets at firesale prices to new investors. The ‘nationalized’ bank would subsequently and promptly reopen for business in short order once again as a completely private institution, its ‘bills’ (bad assets) having been paid for by the taxpayer in the interim.

Nationalization is thus merely a kind of ad hoc bankruptcy proceeding declared and set in motion by the US government. The banks would not be ‘taken over’ in anything but a legal, formal sense. A quick transfer of bad assets follows, after which the institution is ‘spun off’ again and sold to private investors. Nationalization in this sense functions merely a tactical move for removing bad assets and resurrecting a zombie bank from the dead.

Something quite similar to this was in fact what occurred with the failure of the mid-sized regional bank, IndyMac, in late summer 2008. It was taken over by the U.S. government agency, the Federal Deposit Insurance Corporation, or FDIC. Today IndyMac has reopened expunged of its bad debts, which are now debts of the government and taxpayer. In fact, the same group of investors who once owned IndyMac have rebought it once again, at firesale prices, from the FDIC. They are the owners once again. The investors were ‘rescued’. Nationalization is thus a form of ‘investor rescue’, a kind of ‘temporary trusteeship’ in a formal, legal sense pending reprivatization.

What the Journal and Greenspan meant by bank nationalization is simply let’s ‘do and IndyMac’ for other, even bigger banks. There’s no idea implied that a bank might be more permanently taken over and operated on a day to day basis, not for the interests of private investors but for the broader public interest of the nation and all its inhabitants.

Since last fall 2008, when the bankers essentially went on strike in terms of refusing to lend to businesses and consumers except at all but the most usurous rates, debate has raged in ruling class circles as to what to do with the trillions of ‘bad assets’ on banks’ balance sheets. These ‘bad assets’ in the form of both ‘bad loans’ and ‘bad securities’ now amount to somewhere between $4 and $6 trillion, according to various sources such as Fortune Magazine, the Journal, reputable independent sources, such as NY University Professor, Nouriel Roubini, and even Treasury Secretary Geithner prior to his appointment in that official role. The central argument is that until the ‘bad assets’ are somehow relieved from the banks’ balance sheets, banks will continue to refuse to lend and the accelerating current decline in the real economy in the U.S. will continue to worsen.

The Journal-Greenspan notion of bank nationalization must be viewed as part of that ongoing capitalist class debate. Nationalization is merely a tactic for addressing bad asset removal and subsequent quick reprivatization, nothing more.

Other tactical proposals have contended since last fall with the idea of bank nationalization as ‘temporary trusteeship’ and means to remove bad assets. They include proposals such as creating an ‘Aggregator Bad Bank’, into which the government would deposit the banks’ bad assets’ after somehow purchasing them. But ‘purchasing’ has proved difficult since banks have actually refused to sell the bad assets. Banks have been ‘on strike’ since last fall, in other words, not only in terms of ‘refusing to lend’ but in terms of ‘refusing to sell’ bad assets as well.

Bad assets on banks’ books take two forms. One is ‘bad loans’ assets. Another is ‘bad securitized’ assets. According to legal accounting rules, banks can hold ‘bad loans’ on their books at their initial purchased values. Hence, they have little incentive to sell them at lower values and have to write-down the loss. But who wants to buy the loans at top dollar when it is clear they are worth far less than the banks are willing to sell them? Thus, no other investors have wanted to purchase the bad loans way above their market value since last September. And should the government do so it would mean a clear subsidization of the banks at taxpayer expense. So the ‘bad loans’ have not moved off the banks’ books. Something similar has been the case with the ‘bad securitized’ assets since last fall. These are the subprime mortgages, auto loans, credit cards, student loans and various other asset backed securities that have been
‘securitized’, or bundled, into new financial instruments for sale since 2002. Unlike ‘bad loans’, securitized bad assets must be valued at their true, virtually worthless, prices today. That means close to zero. While banks would like to sell these assets (to investors or government), they want to sell them only above their true ‘mark to market’ values. Investors, in turn, want only to buy them at their true, virtually worthless price—if at all. Some are considered so worthless, no one has stepped up to buy them. So, once again, the ‘bad assets’ in this form are not sold and remain ‘toxic’ on banks’ balance sheets, worsening with the passage of each day.

What is described in the preceding paragraph is the ‘grand dilemma’ faced by the financial system today. The US government, Treasury and Federal Reserve, have been trying various ways to expunge and rid the banks of the bad assets, without success to date. The banks in the meantime remain on strike and refuse to lend (or to sell the assets).

The aforementioned ‘Aggregator Bank’ is one idea for trying to rid the banks of their bad assets. Something like it was tried in Sweden in the early 1990s with success. However, that was one small country. The problem is many times more immense in the US (and globally) today. The Swedish government could successfully ‘buy up’ the bad assets and place them in the ‘Aggregator’ bank. The amounts to be ‘bought up’ today, however, are likely greater than any one government can finance, including the U.S. It has sometimes been said that the Swedish government ‘nationalized’ its banks in the process of setting up its ‘Bad Bank Aggregator’. But, once again, that idea of nationalization is simply a variation on the theme proposed by the Wall St. Journal and Greenspan.

Other variations on the theme that have also been confused with ‘nationalization’ have been efforts by the US Treasury and Federal Reserve to buy stock in the failing banks—whether in the form of preferred stock purchases, common stock, or some convertible arrangements combining both common and preferred. Instead of buying up the balance of the bad assets altogether (e.g. Aggregator bank), the idea here is to offset the bad assets on the banks’ books with the hope that, once the assets are neutralized, the banks will begin to lend again. Stock ownership, partial or even majority, is thus also identified with the idea of nationalization.

Thus last fall the Fed and Treasury bought 80% of the stock of AIG and therefore somehow effectively ‘nationalized’ it. But formal stock ownership is in no way equivalent to nationalization. To recall, AIG simply went on to act as it always had, throwing billion dollar parties for its managers and doling out huge sums of TARP money in bonuses. If there is any example of the limits of legal ownership definitions of nationalization, one need look no further than the experience of AIG.

The TARP program introduced last October was an attempt to generalize the AIG action. But at $700 billion it was soon apparent TARP was a drop in the bucket needed the $4-$6 trillion hole in bank balance sheets. Amazingly, what the TARP experiment shows is that the US government had no idea of the magnitude of the banks’ losses and how effectively the banks had hid that magnitude from the public and government itself. The TARP program quickly ran into the aforementioned problem of banks’ refusing to sell at anything but inflated, above-market prices for their bad assets. Then Secretary of Treasury Paulson panicked Congress and the public to give him the $700 billion, only to find it was a grossly insufficient amount and that, in any event, the banks refused to sell their bad assets unless massively subsidized by the government to do so.

When Citigroup and Bank of America collapsed in November 2008 the Treasury and Fed threw much of what remained of TARP funds at them (and more for AIG as well), and came up with hundreds of billions more in guarantees against their losses ($300 billion alone for Citigroup) from the Fed as stopgap measures. But Citigroup and Bank of America fell still further into a hole in January-February 2009, requiring still more bailout. By February it was becoming increasingly clear that that cumulative balance sheet hole in the big 19 banks continued to grow daily. At $4 to $6 trillion it was becoming increasingly unlikely even the US government could afford to buy all the bad assets on banks’ balance sheets on its own.

This re-ignited once again the discussion and debate on bank nationalization this past February. If the US government itself can’t afford to buy all the bad assets, why throw any taxpayer money at all down ‘the black hole’ some began to argue? Perhaps the banks were not ‘too big to fail’. Perhaps they should be allowed to go under. Or …perhaps the government should nationalize them. But if nationalization defined as bad asset clean up was not possible, what would nationalization now mean?

By early February the call for some kind of nationalization began to emerge from various directions. The AFL-CIO raised it, but provided no definition of what it should mean. Noted economists like nobel laureate, Joseph Stiglitz, called for it, as it NYU professor, Nouriel Roubini, whose predictions of the evolution of the crisis had proved correct for the past two years. James Baker, the main policymaker during the Reagan administration, came out for it. Greenspan reiterated that nationalization was necessary for an ‘orderly restructuring’ of the system. Key figures in the Republican party, such as Lindsey Graham, declared on public tv “if nationalization is what works, then we should do it”, as did Banking Committee chair in the Senate, Democrat Chris Dodd.

But immediately the Obama administration’s big guns responded, discouraging the idea and very talk of nationalization. Geithner, White House economic advisor, Larry Summers, and Fed chairman, Ben Bernanke, all quickly debunked the idea, as did House Banking Committee chairman, Barney Frank. Dodd in the Senate backtracked and joined the denial. They sounded off in unison with big bank CEOs, Ken Lewis of Bank of America, and Jaime Dimond of JP Morgan Chase, and Citigroup’s Vikram Pandit who declared it ‘would be a step backwards’.

The resistance to the very concept itself flowed from yet another scheme in the works by which to have the government and taxpayer subsidize the banks and investors to depart with the ‘bad assets’ on bank balance sheets. That latest scheme was revealed in early March with details later on what was called the ‘Private-Public Investment Program’, or PPIP, released by Geithner on March 23. But like TARP before it, PPIP was essentially still a ‘bad asset’ buy out idea. This time with the twist that somehow those speculator-investors, who created the financial crisis by issuing trillions in ‘securitized assets’ that went bust, would now come to the rescue of the system and buy up the bad assets—providing, of course, the government generously subsidized the process. That subsidization would be financed, this time with a twist, not only by the Treasury providing funds but by having the Federal Reserve print money to the tune of $ trillions
of dollars more. The government commitment to the banks thus overnight escalated from merely $3-$4 trillion to date to more than double that amount.

But should the newest bailout of banks fail, as it will, the question on the agenda once again is to proceed to some form of nationalization. The debate on nationalization is thus bound to reappear aggressively once more as it becomes clear the Geithner plan is failing.

But when the debate re-emerges anew, it can no longer be limited to its past definitions. Nationalization as mere stock ownership—indeed any kind of formal ownership—has already been attempted and failed. AIG alone is testimony to that fact. Nationalization as temporary trusteeship is clearly insufficient. It doesn’t address what’s to be done with the bad assets in the trillions that are taken under ‘trusteeship’. Nationalization as an Aggregator Bank raises the problem of how to capitalize an entire banking structure that is largely insolvent, which would cost several trillions of dollars to start. FDIC-IndyMac type takeovers raises similar problems. The FDIC cost of the IndyMac takeover was less than $10 billion. Bailing out Citigroup common stockholders alone will cost more than $1 trillion.

At the other end of the political spectrum, from the idea of nationalization as ‘bad asset’ purchase, is the idea of nationalization undertaken not in the interests of investors but of the nation itself. Who benefits in any nationalization arrangement is what is key. Is it the ‘nation at large’ or is it private individuals? It is called ‘NATIONalization’, for that reason. To call it nationalization, while in the service of individual investors, is to appropriate and distort the true meaning of the original term.

Who then is ‘the Nation’ that is supposed to benefit? There are 114 million households in the U.S. 91 million are households where wage and salary earners each earn $80K a year or less. The wealthiest 5% households, or roughly 5 million or so, earn the vast majority of their income from capital sources (capital gains, dividends, interest, rents, business incomes). The wealthiest 1% earn virtually all income from capital sources. The 91 million—i.e. the working and most of the middle class—are the overwhelming bulk of the nation. But they do not in any credible way benefit from ‘nationalization as investor bailouts’. Any true program of nationalization would thus have to show how the 91 million would in fact benefit. And if it can’t be shown they benefit, then the program, whatever its structure, simply can’t be called nationalization in any sense of the term.

Nor can true nationalization be limited simply to a legal arrangement, however much or what kind of stock (preferred, common, convertible) may or may not be purchased. Mere legal ownership is not nationalization. Nationalization implies control and control directly on behalf of the public interest, not private interests. But ‘control’ over what and in what form, is the next reasonable question?

There are all kinds and degrees of control. Formal stock ownership arrangements to date have required at most only occasional reporting by the bank in question. Reports and information is not per se control. Nor is vetoeing management decisions represent effective control. AIG and other banks that have taken $hundreds of billions of taxpayer money to date attest to the limits of reports of decisions made by managers representing private investors. Control must also mean more than the government simply ‘vetoing’ bank management decisions after the fact. Control must mean decision making itself.

But what kind of decisions? Certainly strategic decisions of the banks. And likely an important range of operational decisions as well. But for that, the government must fire all of a nationalized bank’s board of directors and appoint new directors, hopefully with labor, community, and other public representation. CEOs and senior management teams must be totally replaced. Second tier, operational decision making must be daily reviewed by the new senior management team. Key divisional and mid-level current managers may be left in place, providing their performance is closely reviewed on a periodic basis. All this is a minimum decision-making structure that accompanies true nationalization.

Opponents of this view of nationalization will argue that it will result, if implemented for one bank, in the collapse of stock prices for remaining banks as other banks shareholders realize their institution may be next in line and dump their stock. But that not need be the case necessarily. In taking over one bank, the government could announce it would guarantee stock prices of other, still private banks at their current levels at minimum. That would set a floor on stock price collapse and stabilize their stock prices.

Another argument of opponents of true nationalization is that the banks are fundamentally sound, only in need of liquidity. While that argument might have fooled people in 2008, it is now abundantly clear to all that the ‘big 19’ banks as a group are insolvent and not illiquid. ‘Too big to fail’ is clearly now ‘too big to bail’. The nation cannot afford these kind of institutions any longer. They are literally sucking the economic lifeblood from the country.

Still another opponent argument is to point to AIG and Fannie Mae/Freddie Mac and their continued loss of assets. Opponents then use those institutions as examples of the ultimate failure of nationalizations. But AIG and Fannie/Freddie are not examples of nationalization; they are examples of ‘failed investorization’ and of bungled bailouts.

Another common complaint levied against nationalization is that taking over a bank is too complex. The government does not have the personnel and doesn’t know how to run a bank efficiently. In answer to this, one need only argue how could government possibly do any worse than the so-called ‘private experts’ now running the banks and who have clearly run them into the ground. Today’s so-called bank experts have lost more than $5 trillion to date. Who could possibly do worse? By any private capitalist company’s standards, these experts should have all been fired long ago and the companies they’ve destroyed put into chapter 11 reorganization at minimum.

An entirely new banking structure is needed in America. Such a structure is quite possible, moreover. I have described some elements of such a structure in other recent publications. For a start, it could begin with a full nationalization of the residential mortgage markets and small business property markets. A new agency, the Home and Small Business Loan Corporation (HSBLC), based on experiences in the 1930s with the then Home Owners Loan Corporation and the Reconstruction Finance Corp., could not only clean up the current mess but could continue as the primary financial source for lending for all residential mortgages for consumers earning less than $200,000 per year and companies with 50 or less employees. As a second development, the Federal Reserve itself could be fully nationalization, removing it from its current status as partly private bank owned and financed and partly government. A fully nationalized Federal Reserve could then serve as a ‘lender of primary resort’ to all consumer loan markets—auto, student, and other consumer loans. Its local structure might include local credit unions and HUD offices to interface with the consumer. It is possible to expand on these ideas similarly for other credit markets. In short, there is another structure for banking that is imaginable.

Yes, every economy needs a credit system. The U.S. just doesn’t necessarily need the one it now has, which is destroying the real economy and millions of jobs by the month. Another is possible.

It is time therefore to prepare to shift the inevitable debate on bank nationalization that will soon emerge once again to consider other possible structures and arrangements—structures that exist for the purpose of serving the ‘NATION’ itself and not private investor interests. Structures in which decisions are not made by the private interests in their behalf but by representatives of the public interest on behalf of the public’s interest.

Jack Rasmus is the author of the forthcoming book, EPIC RECESSION AND GLOBAL FINANCIAL CRISIS, Pluto Books, 2009.


RE: The Global Financial Meltdown - Admin - 05-25-2009

GLOBAL SYSTEMIC CRISIS: "FINANCIAL SURREALISM AT THE HEART OF STOCK MARKET TRENDS"
When the world steps out of a 60 year old referential framework

GEAB
http://www.globalresearch.ca/index.php?context=va&aid=13640

The financial surrealism which has been at the heart of stock market trends, financial indicators and political commentaries in the past two months, is in fact the swan song of the referential framework within which the world has lived since 1945.

Just as in January 2007, the 11th edition of the GEAB described that the turn of the year 2006/07 was wrapped in a « statistical fog » typical of an entry into recession and designed to raise doubts among passengers that the Titanic was really sinking (1), our team today believes that the end of Spring 2009is characterized by the world’s final stepping out of the referential framework used for sixty years by global economic, financial and political players in making their decisions, in particular of its “simplified” version massively used since the fall of the communist bloc in 1989 (when the referential framework became exclusively US-centric). In practical terms, this means that the indicators that everyone is accustomed to use for investment decisions, profitability, location, partnership, etc ... have become obsolete and that it is now necessary to find new relevant indicators to avoid making disastrous decisions.

This process of obsolescence has increased dramatically over the past few months under pressure from two trends:

. first, the desperate attempts to rescue the global financial system, particularly the American and British systems, have de facto "broken navigational instruments" as a result of all the manipulation exerted by financial institutions themselves and by concerned governments and central banks. Among those panic-stricken and panic-striking indicators, stock markets are a perfect case as we shall see in further detail in this issue of the GEAB. Meanwhile, the two charts below brilliantly illustrate how these desperate efforts failed to prevent the world’s bank ranking from experiencing a major seism (it is mostly in 2007 that the end of the American-British domination in this ranking was triggered).

. secondly, astronomical amounts of liquidity injected in one year into the global financial system, particularly in the U.S. financial system, led all financial and political players to a total loss of touch with reality. Indeed, at this stage, they all seem to suffer from a syndrome of diver’s nitrogen narcosis – impairing those affected and leading them to dive deeper instead of surfacing. Financial nitrogen narcosis has the same effects than its aquatic counterpart.

Destroyed or perverted sensors, loss of orientation among political and financial leaders, these are the two key factors that accelerate the international system’s stepping out of the referential framework of the past few decades.




Top 20 financial institutions by market capitalization in 1999 (USD billions) - Source: Financial Times, 05/2009


Top 20 financial institutions by market capitalization in 2009 (USD billions) - Source: Financial Times, 05/2009
Of course, it is a feature of any systemic crisis and easy to establish that, in the international system we are used to, a growing number of events or trends have started popping out of this century-old framework, demonstrating how this crisis is of a kind unique in modern history. The only way to measure the magnitude of the changes under way is to step back several centuries. Examining statistical data gathered over the last few decades only enables one to see the details of this global systemic crisis; not the overall view.

Here are three examples showing that we live in a time of change that occurs only once every two or three centuries:

1. In 2009, the Bank of England official interest rate has reached its lowest level (0.5 percent) since the creation of this venerable institution, i.e. since 1694 (in 315 years).




Bank of England official interest rate since its creation in 1694 - Source: Bank of England, 05/2009
2. In 2008, the Caisse des Dépôts et Consignations, the French government’s financial arm since 1816 under all France’s successive regimes (kingdom, empire, republic…), experienced its first yearly loss ever (in 193 years) (2).

3. In April 2009, China became Brazil’s leading trade partner, an event which has always announced major changes in global leadership. This is only the second time that this has happened since the UK put an end to three centuries of Portuguese hegemony two hundred years ago. The US then supplanted UK as Brazil’s leading trade partner at the beginning of the 1930s (3).

It is not worth reviewing the many specifically US trends popping out of the national referential framework compared to the past century (there is no relevant referential framework older than that in the US): loss in value of the Dollar, public deficits, cumulated public debt, cumulated trade deficits, real estate market collapse, losses of financial institutions… (4)

But of course, in the country at the heart of the global systemic crisis, examples of this kind are numerous and they have already been widely discussed in the various issues of the GEAB since 2006. In fact, it is the number of countries and areas concerned, which is symptomatic of the world’s stepping out of the current referential framework. If there was only one country or one sector affected, it would simply indicate that this country/sector is going through an unusual time; but today, many countries, at the heart of the international system, and a multitude of economic and financial sectors are being simultaneously affected by this move away from a “century-old road”.




Stock market trends – adjusted for inflation – during the last four major economic crises (grey: 1929, red: 1973, green: 2000, and blue: current crisis) - Source: Dshort/Commerzbank, 17/04/2009
Thus, to conclude this historical perspective, we want to emphasize that the stepping out of the century-old reference system is graphically visible in the form of a curve simply popping out of the frame which allowed ongoing trends and values to be represented for centuries. This popping out of traditional referential frameworks is speeding up, affecting increasing numbers of sectors and countries, enhancing the loss of meaning of indicators used daily or monthly by stock markets, governments, or official sources of statistics, and accelerating the widespread awareness that "the usual indicators" can no longer give any insight, or even represent the current world developments. The world will thus reach summer 2009 without any reliable references available.

Of course, everyone is free to think that a few points’ monthly variation of a particular economic or financial indicator, itself largely affected by the multiple interventions of public authorities and banks, carries much more value on the evolution of the current crisis than those stepping out of century-old referential frameworks. Everyone is also free to believe that those who anticipated neither the crisis nor its intensity are now in a position to know the precise date when it will end.

Our team advises them to go see (or see again) the movie Matrix (5) and to think about the consequences of manipulating the sensors and indicators of one’s perception of given environment. Indeed, as we will examine in detail in our special summer 2009 GEAB (N°36), the coming months could be entitled « Crisis Reloaded » (6).

In this 35th issue of the GEAB, we also express our advice on which indicators, in this period of transition between two referential frameworks, are able to provide dependable information on the evolution of the crisis and the economic and financial environment.

The two other major themes addressed in this May 2009 issue of the GEAB are, first, the programmed failure of the two major economic stimulus plans: namely the Chinese and American plans, and, secondly, the United Kingdom’s appeal to the IMF for financial assistance by the end of summer 2009.

In terms of recommendations, in this issue, our team anticipates the evolution of the worlds’ largest real estate and treasuries markets.

Notes:

(1) At that time, our team added «Just like always when change occurs, the passage by zero is characterized by a «fog of statistics» where indicators point in opposite directions and measurements provide contradictory results, with margins of error sometimes wider than the measurement itself. Regarding our planet in 2007, the on-going wreck is that of the US, that LEAP/E2020 has decided to call the « Very Great Depression », firstly because the « Great Depression » already refers to the 1929 crisis and the years after; and secondly because, according to our researchers, the nature and scope of the upcoming events are very different ». Source: GEAB N°11, 01/15/2007

(2) Source: France24, 04/16/2009

(3) Source: TheLatinAmericanist, 05/06/2009

(4) Political leaders and experts insist on comparing the current crisis to the 1929 crisis, as if the latter were a binding reference. However, in the US in particular, current trends in many fields have moved beyond the events which characterized the « Great Depression ». LEAP/E2020 already reminded in GEAB N°31 that relevant references were to be found in the 1873-1896 global crisis, i.e. more than a century back.

(5) In the Matrix series of movies, reality perceived by humans is created by computers. They think they live a comfortable life when in fact they live in squalor, but all their senses (sight, hearing, taste, touch, smell) are manipulated.

(6)The title of the second in this series of movies: « Matrix reloaded ».





RE: The Global Financial Meltdown - Admin - 05-25-2009

THE ECONOMY’s SEARCH FOR A "NEW NORMAL"

Shamus Cooke
http://www.globalresearch.ca/index.php?context=va&aid=13646


When the reality of the economic crisis first made itself known, many who realized what was happening dubbed it “the greatest crisis since the Great Depression.” This description was more than bombast; it was a sober analysis of the immensity of the economic problems in the country — problems that had been building up for years.

The mainstream media is now — for political reasons — in a constant clamor for the economy’s elusive “rock bottom.” This is so people will be more hopeful, less agitated, and more willing to let those who destroyed the economy continue running the country un-challenged. Every time a new economic indicator comes out that wasn’t “as bad as expected,” Wall Street cheers and politicians give their “we’ve turned the corner” speeches. Reality is thus turned on its head.

Regardless of what the media says, the reasons for calling this crisis the “worst since the Great Depression,” still exist. Not only this, but new problems are being created that are compounding the old.

One of the original, major concerns of the economy was the fact that the banks were bankrupt. This problem still persists, even after trillions of dollars of taxpayer money was given away, not to mention a “stress test” where the banks in fact “negotiated” the terms of the test. By pretending this problem doesn’t exist, the Obama administration is continuing the Bush-era approach to the banks: don’t ask, don’t tell. Banks will thus continue to be bailed out when their problems are too explosive to be ignored; credit will continue to be restricted, and a general level of instability will taint the system itself.

Another major problem of the economy is that consumers are bankrupt. Unemployment continues to skyrocket, ensuring that every month hundreds of thousands of less people will be able to consume, driving more establishments out of business. The people who lose their jobs thus fail to pay their mortgages, credit cards, student loans, etc., all furthering the losses of the banks.

The issue of debt is fundamental to understanding the current crisis: households, corporations, banks, and the government have all taken on massive levels of debt.

Getting rid of the debt is often referred to as “de-leveraging.” On all levels of society a gigantic de-leveraging is taking place; and only after this process is done will the elusive “bottom of the recession” be found, amidst a society that looks far different than the one we’re used to.

For example, households are rapidly getting rid of expenses they can no longer afford, due to either joblessness, low wages or lack of credit. They are thus saving more than they are spending. For an economy that depends on 70 percent consumer spending, this is a huge problem, not only for the U.S., but for the world as well, since many countries constructed their economies as export machines directed towards U.S. consumers.

Is this problem likely to go away anytime soon? Probably not. The recession is creating such dramatic effects on so many people that the consuming culture is being changed, much like what happened after the Great Depression. The New York Times notes:

“…forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered [!] by the financial crisis that spun the economy into recession.” (May 9, 2009)

If the U.S. consumer can no longer be the driving force of the economy, what will replace it? The elitist Economist magazine offered a cure: because consumer spending will be debilitated, “something else will have to grow more quickly. Ideally that would be exports and investment.” (May 6, 2009)

There is in fact little else that can be done if one is playing by the strict rules of the market economy. Obama again gave his allegiance to this broken system by agreeing with the Economist, when he stated, “We must lay a new foundation for growth and prosperity, where we consume less at home and send more exports abroad.”

The average person will be totally uninspired by this “solution.” Nevertheless, Obama should have answered an important question: why isn’t the U.S. an exporting economy now? And what would it take for it to be one in the future? The answers to these questions are intertwined with Obama’s proposal that Americans “consume less.”

In order for US corporations to sell products (export) on the world marketplace, they must have competitive prices. Labor is a key ingredient in determining the price of a commodity, since the other ingredients have relatively stable prices. The price of labor in the U.S. was, in part, the result of a strong labor movement, which achieved a living wage. This not only drove down profits for corporations, but made them less competitive on the world market — they consequently defected to countries that pay slave wages.

How, then, does Obama plan to “send more exports abroad?” The answer is simple: by insuring that Americans are able to “consume less.” For example, Obama’s Auto Task Force told Chrysler and GM workers that their incomes were too high, that they needed to make less so that their companies could “remain viable” (compete) on the global market. They were thus threatened with bankruptcy if they did not offer “significant concessions.” The workers conceded, and bankruptcy happened anyway — a phenomenon bound to happen again soon at GM — unless workers fight back.

If such a “restructuring” happens at a company the size of GM, the precedent would be haunting. Corporations of all kinds are looking to “de-leverage” in the same way to successfully survive the recession. They need to balance the books, and workers’ wages are one of the few options they have. Obama’s Auto Task Force is overseeing the destruction of the U.A.W., and clearing the path for this restructuring to happen across the U.S.

But falling wages have a negative side effect, aside from disgruntled workers. As Nobel Prize- winner Paul Krugman points out:

“Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.” (New York Times, May 3, 2009 )

His conclusion is sobering: “The risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.”

Equally concerning is the amount of debt the U.S. government has taken in bailing out banks and fighting foreign wars. The New York Times notes:

“[the national debt] has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion [!] will most likely be breached in the second half of this year.” (May 3, 2009)

The debt is so high that those financing it are getting worried, and thus demanding a higher rate of interest in repayment (since they correctly think they’ll be paid back in inflated dollars). Already the U.S. pays $176 billion a year in simply paying the interest on the debt, a number that is expected to reach $806 billion by 2019, according to the Congressional Budget Office.

This debt is of course unsustainable. There are numerous signs that overseas’ buyers are likely to reduce their investment, worried as they are about the U.S. money printing bonanza. In an effort to bolster confidence, Obama has plans to balance the budget by the end of his presidency. Again, a massive de-leveraging of debt will need to happen. Obama has made no secret of where this restructuring will come from: he has made repeated references to “reforming entitlement programs” (Social Security, Medicare, etc.).

It should be noted that the only other way Obama could balance the budget is if he taxed the super rich at a high rate while slashing military spending, neither of which is going to happen on its own. Nevertheless, these items must be central demands for the American worker, who is already under immense economic pressure, with more to come.

The recession is creating a “fight or die” environment for corporations and governments around the world. The super rich that currently control both entities are using their influence to ensure that workers carry the brunt of this burden. It doesn’t have to be so.

The fight for jobs, a living wage, progressive taxation, social security, and single payer healthcare are all topics capable of uniting the vast majority of U.S. citizens. If properly organized, and with the Labor Movement playing a leading role, such a coalition would have no problem overcoming the objections of those who oppose it — the tiny group of super rich benefiting from how things are currently.




RE: The Global Financial Meltdown - Admin - 05-25-2009

CREDIT WHERE CREDIT IS DUE
Economic Recovery? We're not out of the woods yet.

Mike Whitney
http://www.globalresearch.ca/index.php?context=va&aid=13674

The financial channels are abuzz with talk of a recovery, but we're not out of the woods yet. In fact, the deceleration in the rate of economic decline is not a sign of recovery at all, but proof that the economy is resetting at a lower level of activity. That means the recession will drag on for some time no matter what the Fed does. The problem is the breakdown in the securitzation markets which has cut off the flow of easy credit to consumers and businesses. The credit-freeze has caused a sharp drop in retail, auto sales, furniture, electronics, travel, global trade etc. Every sector has been hammered. Fed chief Ben Bernanke's lending facilities have helped to steady the financial system and Obama's fiscal stimulus will take up some of the slack in demand, but these are not a cure-all for a broken credit system. If the system isn't fixed, asset prices will continue to plunge and hundreds of financial institutions will face bankruptcy.

From Tyler Durden at Zero Hedge:

"In order to fully understand currency and price movements, one has to realize that the securitization of debt, and creation of derivatives amounted to a huge virtual printing press, primarily fueled by a massive increase in risk appetite which allowed for a huge expansion in the value of claims on financial assets and goods and services. It is worth pointing out, that the Fed has little to no control over this "printing press" at this point, which at last count was responsible for over 90% of the liquidity in the system." ("The Exuberance Glut or the Dollar-Euro Short Squeeze Race" Tyler Durden, Zero Hedge)

The faux-prosperity of the last decade was largely the result of a wholesale credit system which created a humongous amount of credit via sketchy debt instruments, off-balance sheet operations, massive leverage and derivatives. (The Fed's liquidity and conventional bank loans play a very small part in the modern credit system) Securitization--which is the conversion of pools of loans into securities--is at the center of the storm. It formed the asset-base upon which the investment banks and hedge funds stacked additional leverage creating an unstable debt-pyramid that couldn't withstand the battering of a slumping market. After two Bear Stearns funds defaulted 20 months ago, the securitization markets froze, credit dried up and the broader economy went into a tailspin. Now that investors know how risky securitized instruments really are, there's little chance that assets will regain their original value or that the market for structured debt will stage a comeback.

Bernanke's Term Asset-backed Loan Facility (TALF) is a attempt to restore the crashed system by offering participants generous government funding to purchase securities backed by mortgages, student loans, auto loans and credit card debt. But skittish investors have stayed on the sidelines. The severity of the downturn has dampened the appetite for risk. So Bernanke has cranked up the money supply, cut interest rates to zero and flooded the financial system with liquidity. His actions have convinced many of the experts that the country is on the fast-track to hyperinflation, but that may not be the case, as explained in the Hoisington Investment Management's Quarterly Economic Review:

"Despite near term deflation risks, the overwhelming consensus view is that “sooner or later” inflation will inevitably return, probably with great momentum.

This inflationist view of the world seems to rely on two general propositions. First, the unprecedented increases in the Fed’s balance sheet are, by definition, inflationary. The Fed has to print money to restore health to the economy, but ultimately this process will result in a substantially higher general price level. Second, an unparalleled surge in federal government spending and massive deficits will stimulate economic activity. This will serve to reinforce the reflationary efforts of the Fed and lead to inflation.

(But) let’s assume for the moment that inflation rises immediately. With unemployment widespread, wages would seriously lag inflation. Thus, real household income would decline and truncate any potential gain in consumer spending...

Inflation will not commence until the Aggregate Demand (AD) Curve shifts outward sufficiently to reach the part of the Aggregate Supply (AS) curve that is upward sloping.....Therefore, multiple outward shifts in the Aggregate Demand curve will be required before the economy encounters an upward sloping Aggregate Supply Curve thus creating higher price levels. In our opinion such a process will take well over a decade....

The statement that all the Fed has to do is print money in order to restore prosperity is not substantiated by history or theory. An increase in the stock of money will only lead to a higher GDP if V, or velocity, is stable. V should be thought of conceptually rather than mechanically. If the stock of money is $1 trillion and total spending is $2 trillion, then V is 2. If spending rises to $3 trillion and M2 is unchanged, velocity then jumps to 3.

... The historical record indicates that V may be likened to a symbiotic relationship of two variables. One is financial innovation and the other is the degree of leverage in the economy. Financial innovation and greater leverage go hand in hand, and during those times velocity is generally above its long-term average.

As the shadow banking system continues to collapse, velocity should move well below its mean, greatly impairing the efficacy of monetary policy...The problem for the Fed is that it does not control velocity or the money created outside the banking system. "( Hoisington Investment Management Quarterly review, thanks to Leo Kolivakis, of Pension Pulse, "Is Inflation inevitable?")

Bernanke can print as much money as he wants, but if the banks are hoarding, consumers are saving, businesses are cutting back, and all the money-multipliers are set to "Off"; there will be no inflation. Demand has to pick up, so that money begins to change hands quickly leading to vast amounts of new money competing for the same number of assets. But that won't happen while the economy is shedding 600,000 jobs a month, housing prices are tumbling and consumer balance sheets are being repaired.

So if inflation is not an immediate risk, and the economy continues to shrink, isn't Bernanke doing the right thing by trying to restart the securitization markets?

Opinions vary on this topic. On the one hand, Wall Street's method of deploying credit appears to be more efficient than conventional (bank) loans because the money is provided by investors who are looking for higher yield rather than bankers tapping into reserves. The problem is that securitization creates incentives for fraud by rewarding loan originators who lend to applicants who have no way of repaying the debt. Unless the system is heavily regulated to insure that traditional lending standards are maintained, speculative bubbles will reemerge and there will be more financial disasters in the future. The former head of the FDIC, William Seidman, anticipated this problem way back in 1993 after cleaning up the S&L crisis. Here's what he said in his memoirs:

“Instruct regulators to look for the newest fad in the industry and examine it with great care. The next mistake will be a new way to make a loan that will not be repaid.” (Bloomberg)

If regulators had heeded Seidman's advice, they could have steered the country away from the present calamity.

The problem with an unregulated credit system is that investment banks and hedge funds can skim lavish salaries and bonuses for themselves on the front end before anyone discovers that the loans are fraudulent and the securities worthless. Even so, neither congress nor the Treasury nor the Fed have taken steps to re-regulate the financial system or to hold any of the main players accountable. It's "anything goes". Bernanke has acted as Wall Street's chief enabler by underwriting shoddy non performing loans, propping up rotten assets with low interest funding, and bailing out investment giants with trillions in taxpayer-backed loans. None of the $12.8 trillion Bernanke has loaned or committed to financial institutions has been approved by Congress. The Fed operates beyond any mandate and outside of any law.

The debate about securitization goes beyond questions about the quality of the underlying loans to focusing on the process itself. Securitization greatly amplifies leverage by repackaging debt into complex instruments. It's a way of turbo-charging credit expansion. Joseph Stroupe summarizes the issue in a recent Asia Times article:

"Remember that there are two fundamental camps with respect to the answer to the question of what lies at the root of the present crisis. One camp holds that America's new generation of financial assets that resulted from the recently invented financial process known as "securitization" are fundamentally sound in value, and that an over-reaction on the part of investors to the subprime crisis has resulted in a panic-induced collapse in their valuations.

This camp believes that the securitization model can and should be revived, and that when investor confidence is restored in financial assets now seen as "toxic", then all will be well again, almost magically, as toxic assets become valuable and attractive once again. All that need be done, it is believed, is for the government to work with Wall Street to jump-start securitization, a model this camp vehemently denies has failed, even though many trillions of dollars both spent and committed already have so far failed to get securitization's heartbeat going again.

The other camp believes that the toxicity is inherent in the very nature of the newly developed financial assets themselves, and that once investors recognized this fact, then that is why their values collapsed. This camp sees the securitization model as fundamentally flawed, based as it is upon artificial inflation of assets, the shortsighted growth of serial asset bubbles created by an unholy de facto alliance of government, big Wall Street banks and credit-rating agencies whose credibility and integrity were profoundly compromised, and unsustainable negative real interest rates (the creation of a massive credit excess), without which the securitization model simply won't run." (Asia Times, Profits Mask the Coming Storm, W. Joseph Stroupe)

Bernanke says that the securitization markets are "frozen" and that the toxic assets should eventually regain much of their original value. But this is just wishful thinking. Investors aren't shunning these assets because they're afraid, but because the banks want too much for them given their implicit riskiness. Stroupe's analysis is closer to the truth; prices have collapsed because investors recognize the inherent toxicity of the assets themselves. The market isn't driven by fear, but by common sense. $.30 cents on the dollar is probably all they are worth.

PUTTING CREDIT BACK WHERE IT BELONGS

Do people realize that the reason their home equity is vanishing, their 401ks have been slashed in half and their jobs are at risk is because Wall Street was gaming the system with leverage and financial innovation? The current downturn is not really a recession at all; it's more like a self-inflicted wound perpetrated by avaricious speculators who put a gun to the economy's head and blew its brains out. The banks and Wall Street have created a capital hole so vast that the entire economy is being sucked into the abyss. And it all could have been avoided.

Credit production is too important and too lethal to entrust to profit-driven vipers whose only motivation is self-enrichment. The whole system needs rethinking and public input before Bernanke wastes trillions more trying to revive the same crisis-prone business model. If "credit is the economy's life's-blood," as President Obama says, then it should be distributed through a government-controlled public utility. The real lesson of the financial crisis is that privatizing credit has been a disaster.





RE: The Global Financial Meltdown - Admin - 05-25-2009

FINANCIAL IMPLOSION AND STAGNATION
Back To The Real Economy

John Bellamy Foster and Fred Magdoff
http://www.monthlyreview.org/081201foster-magdoff.php


But, you may ask, won’t the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure, and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed… We will then be in a new situation as unprecedented as the conditions from which it will have emerged.
—Harry Magdoff and Paul Sweezy (1988) 1

“The first rule of central banking,” economist James K. Galbraith wrote recently, is that “when the ship starts to sink, central bankers must bail like hell.”2 In response to a financial crisis of a magnitude not seen since the Great Depression, the Federal Reserve and other central banks, backed by their treasury departments, have been “bailing like hell” for more than a year. Beginning in July 2007 when the collapse of two Bear Stearns hedge funds that had speculated heavily in mortgage-backed securities signaled the onset of a major credit crunch, the Federal Reserve Board and the U.S. Treasury Department have pulled out all the stops as finance has imploded. They have flooded the financial sector with hundreds of billions of dollars and have promised to pour in trillions more if necessary—operating on a scale and with an array of tools that is unprecedented.

In an act of high drama, Federal Reserve Board Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson appeared before Congress on the evening of September 18, 2008, during which the stunned lawmakers were told, in the words of Senator Christopher Dodd, “that we’re literally days away from a complete meltdown of our financial system, with all the implications here at home and globally.” This was immediately followed by Paulson’s presentation of an emergency plan for a $700 billion bailout of the financial structure, in which government funds would be used to buy up virtually worthless mortgage-backed securities (referred to as “toxic waste”) held by financial institutions. 3

The outburst of grassroots anger and dissent, following the Treasury secretary’s proposal, led to an unexpected revolt in the U.S. House of Representatives, which voted down the bailout plan. Nevertheless, within a few days Paulson’s original plan (with some additions intended to provide political cover for representatives changing their votes) made its way through Congress. However, once the bailout plan passed financial panic spread globally with stocks plummeting in every part of the world—as traders grasped the seriousness of the crisis. The Federal Reserve responded by literally deluging the economy with money, issuing a statement that it was ready to be the buyer of last resort for the entire commercial paper market (short-term debt issued by corporations), potentially to the tune of $1.3 trillion.

Yet, despite the attempt to pour money into the system to effect the resumption of the most basic operations of credit, the economy found itself in liquidity trap territory, resulting in a hoarding of cash and a cessation of inter-bank loans as too risky for the banks compared to just holding money. A liquidity trap threatens when nominal interest rates fall close to zero. The usual monetary tool of lowering interest rates loses its effectiveness because of the inability to push interest rates below zero. In this situation the economy is beset by a sharp increase in what Keynes called the “propensity to hoard” cash or cash-like assets such as Treasury securities.

Fear for the future given what was happening in the deepening crisis meant that banks and other market participants sought the safety of cash, so whatever the Fed pumped in failed to stimulate lending. The drive to liquidity, partly reflected in purchases of Treasuries, pushed the interest rate on Treasuries down to a fraction of 1 percent, i.e., deeper into liquidity trap territory. 4

Facing what Business Week called a “financial ice age,” as lending ceased, the financial authorities in the United States and Britain, followed by the G-7 powers as a whole, announced that they would buy ownership shares in the major banks, in order to inject capital directly, recapitalizing the banks—a kind of partial nationalization. Meanwhile, they expanded deposit insurance. In the United States the government offered to guarantee $1.5 trillion in new senior debt issued by banks. “All told,” as the New York Times stated on October 15, 2008, only a month after the Lehman Brothers collapse that set off the banking crisis, “the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks.”5 But only a few days later the same paper ratcheted up its estimates of the potential costs of the bailouts overall, declaring: “In theory, the funds committed for everything from the bailouts of Fannie Mae and Freddie Mac and those of Wall Street firm Bear Stearns and the insurer American International Group, to the financial rescue package approved by Congress, to providing guarantees to backstop selected financial markets [such as commercial paper] is a very big number indeed: an estimated $5.1 trillion.”6

Despite all of this, the financial implosion has continued to widen and deepen, while sharp contractions in the “real economy” are everywhere to be seen. The major U.S. automakers are experiencing serious economic shortfalls, even after Washington agreed in September 2008 to provide the industry with $25 billion in low interest loans. Single-family home construction has fallen to a twenty-six-year low. Consumption is expected to experience record declines. Jobs are rapidly vanishing. 7 Given the severity of the financial and economic shock, there are now widespread fears among those at the center of corporate power that the financial implosion, even if stabilized enough to permit the orderly unwinding and settlement of the multiple insolvencies, will lead to a deep and lasting stagnation, such as hit Japan in the 1990s, or even a new Great Depression. 8

The financial crisis, as the above suggests, was initially understood as a lack of money or liquidity (the degree to which assets can be traded quickly and readily converted into cash with relatively stable prices). The idea was that this liquidity problem could be solved by pouring more money into financial markets and by lowering interest rates. However, there are a lot of dollars out in the financial world—more now than before—the problem is that those who own the dollars are not willing to lend them to those who may not be able to pay them back, and that’s just about everyone who needs the dollars these days. This then is better seen as a solvency crisis in which the balance sheet capital of the U.S. and UK financial institutions—and many others in their sphere of influence—has been wiped out by the declining value of the loans (and securitized loans) they own, their assets.

As an accounting matter, most major U.S. banks by mid-October were insolvent, resulting in a rash of fire-sale mergers, including JPMorgan Chase’s purchase of Washington Mutual and Bear Stearns, Bank of America’s absorption of Countrywide and Merrill Lynch, and Wells Fargo’s acquiring of Wachovia. All of this is creating a more monopolistic banking sector with government support. 9 The direct injection of government capital into the banks in the form of the purchase of shares, together with bank consolidations, will at most buy the necessary time in which the vast mass of questionable loans can be liquidated in orderly fashion, restoring solvency but at a far lower rate of economic activity—that of a serious recession or depression.

In this worsening crisis, no sooner is one hole patched than a number of others appear. The full extent of the loss in value of securitized mortgage, consumer and corporate debts, and the various instruments that attempted to combine such debts with forms of insurance against their default (such as the “synthetic collateralized debt obligations,” which have credit-debt swaps “packaged in” with the CDOs), is still unknown. Key categories of such financial instruments have been revalued recently down to 10 to 20 percent in the course of the Lehman Brothers bankruptcy and the take-over of Merrill Lynch. 10 As sharp cuts in the value of such assets are applied across the board, the equity base of financial institutions vanishes along with trust in their solvency. Hence, banks are now doing what John Maynard Keynes said they would in such circumstances: hoarding cash. 11 Underlying all of this is the deteriorating economic condition of households at the base of the economy, impaired by decades of frozen real wages and growing consumer debt.

‘It’ and the Lender of Last Resort

To understand the full historical significance of these developments it is necessary to look at what is known as the “lender of last resort” function of the U.S. and other capitalist governments. This has now taken the form of offering liquidity to the financial system in a crisis, followed by directly injecting capital into such institutions and finally, if needed, outright nationalizations. It is this commitment by the state to be the lender of last resort that over the years has ultimately imparted confidence in the system—despite the fact that the financial superstructure of the capitalist economy has far outgrown its base in what economists call the “real” economy of goods and services. Nothing therefore is more frightening to capital than the appearance of the Federal Reserve and other central banks doing everything they can to bail out the system and failing to prevent it from sinking further—something previously viewed as unthinkable. Although the Federal Reserve and the U.S. Treasury have been intervening massively, the full dimensions of the crisis still seem to elude them.

Some have called this a “Minsky moment.” In 1982, economist Hyman Minsky, famous for his financial instability hypothesis, asked the critical question: “Can ‘It’—a Great Depression—happen again?” There were, as he pointed out, no easy answers to this question. For Minsky the key issue was whether a financial meltdown could overwhelm a real economy already in trouble—as in the Great Depression. The inherently unstable financial system had grown in scale over the decades, but so had government and its capacity to serve as a lender of last resort. “The processes which make for financial instability,” Minsky observed, “are an inescapable part of any decentralized capitalist economy—i.e., capitalism is inherently flawed—but financial instability need not lead to a great depression; ‘It’ need not happen” (italics added). 12

Implicit, in this, however, was the view that “It” could still happen again—if only because the possibility of financial explosion and growing instability could conceivably outgrow the government’s capacity to respond—or to respond quickly and decisively enough. Theoretically, the capitalist state, particularly that of the United States, which controls what amounts to a surrogate world currency, has the capacity to avert such a dangerous crisis. The chief worry is a massive “debt-deflation” (a phenomenon explained by economist Irving Fisher during the Great Depression) as exhibited not only by the experience of the 1930s but also Japan in the 1990s. In this situation, as Fisher wrote in 1933, “deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which it causes.” Put differently, prices fall as debtors sell assets to pay their debts, and as prices fall the remaining debts must be repaid in dollars more valuable than the ones borrowed, causing more defaults, leading to yet lower prices, and thus a deflationary spiral. 13

The economy is still not in this dire situation, but the specter looms.As Paul Asworth, chief U.S. economist at Capital Economics, stated in mid-October 2008, “With the unemployment rate rising rapidly and capital markets in turmoil, pretty much everything points toward deflation. The only thing you can hope is that the prompt action from policy makers can maybe head this off first.” “The rich world’s economies,” the Economist magazine warned in early October, “are already suffering from a mild case of this ‘debt-deflation.’ The combination of falling house prices and credit contraction is forcing debtors to cut spending and sell assets, which in turn pushes house prices and other asset markets down further… A general fall in consumer prices would make matters even worse.”14

The very thought of such events recurring in the U.S. economy today was supposed to be blocked by the lender of last resort function, based on the view that the problem was primarily monetary and could always be solved by monetary means by flooding the economy with liquidity at the least hint of danger. Thus Federal Reserve Board Chairman Ben Bernanke gave a talk in 2002 (as a Federal Reserve governor) significantly entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” In it he contended that there were ample ways of ensuring that “It” would not happen today, despite increasing financial instability:

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent) that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed, could find other ways of injecting money into the system—for example, by making low-interest-rate loans to banks or cooperating with fiscal authorities. 15

In the same talk, Bernanke suggested that “a money-financed tax cut,” aimed at avoiding deflation in such circumstances, was “essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money”—a stance that earned him the nickname “Helicopter Ben.”16

An academic economist, who made his reputation through studies of the Great Depression, Bernanke was a product of the view propounded most influentially by Milton Friedman and Anna Schwartz in their famous work, A Monetary History of the United States, 1867-1960, that the source of the Great Depression was monetary and could have been combated almost exclusively in monetary terms. The failure to open the monetary floodgates at the outset, according to Friedman and Schwartz, was the principal reason that the economic downturn was so severe. 17 Bernanke strongly opposed earlier conceptions of the Depression that saw it as based in the structural weaknesses of the “real” economy and the underlying accumulation process. Speaking on the seventy-fifth anniversary of the 1929 stock market crash, he stated:

During the Depression itself, and in several decades following, most economists argued that monetary factors were not an important cause of the Depression. For example, many observers pointed to the fact that nominal interest rates were close to zero during much of the Depression, concluding that monetary policy had been about as easy as possible yet had produced no tangible benefit to the economy. The attempt to use monetary policy to extricate an economy from a deep depression was often compared to “pushing on a string.”

During the first decades after the Depression, most economists looked to developments on the real side of the economy for explanations, rather than to monetary factors. Some argued, for example, that overinvestment and overbuilding had taken place during the ebullient 1920s, leading to a crash when the returns on those investments proved to be less than expected. Another once-popular theory was that a chronic problem of “under-consumption”—the inability of households to purchase enough goods and services to utilize the economy’s productive capacity—had precipitated the slump. 18

Bernanke’s answer to all of this was strongly to reassert that monetary factors virtually alone precipitated (and explained) the Great Depression, and were the key, indeed almost the sole, means of fighting debt-deflation. The trends in the real economy, such as the emergence of excess capacity in industry, need hardly be addressed at all. At most it was a deflationary threat to be countered by reflation. 19 Nor, as he argued elsewhere, was it necessary to explore Minsky’s contention that the financial system of the capitalist economy was inherently unstable, since this analysis depended on the economic irrationality associated with speculative manias, and thus departed from the formal “rational economic behavior” model of neoclassical economics. 20 Bernanke concluded a talk commemorating Friedman’s ninetieth birthday in 2002 with the words: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”21 “It” of course was the Great Depression.

Following the 2000 stock market crash a debate arose in central bank circles about whether “preemptive attacks” should be made against future asset bubbles to prevent such economic catastrophes. Bernanke, representing the reigning economic orthodoxy, led the way in arguing that this should not be attempted, since it was difficult to know whether a bubble was actually a bubble (that is, whether financial expansion was justified by economic fundamentals or new business models or not). In addition, to prick a bubble was to invite disaster, as in the attempts by the Federal Reserve Board to do this in the late 1920s, leading (according to the monetarist interpretation) to the bank failures and the Great Depression. He concluded: “monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral damage to the economy… Although eliminating volatility from the economy and the financial markets will never be possible, we should be able to moderate it without sacrificing the enormous strengths of our free-market system.” In short, Bernanke argued, no doubt with some justification given the nature of the system, that the best the Federal Reserve Board could do in face of a major bubble was to restrict itself primarily to its lender of last resort function. 22

At the very peak of the housing bubble, Bernankfe, then chairman of Bush’s Council of Economic Advisors, declared with eyes wide shut: “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”23 Ironically, it was these views that led to the appointment of Bernanke as Federal Reserve Board chairman (replacing Alan Greenspan) in early 2006.

The housing bubble began to deflate in early 2006 at the same time that the Fed was raising interest rates in an attempt to contain inflation. The result was a collapse of the housing sector and mortgage-backed securities. Confronted with a major financial crisis beginning in 2007, Bernanke as Fed chairman put the printing press into full operation, flooding the nation and the world with dollars, and soon found to his dismay that he had been “pushing on a string.” No amount of liquidity infusions were able to overcome the insolvency in which financial institutions were mired. Unable to make good on their current financial claims—were they compelled to do so—banks refused to renew loans as they came due and hoarded available cash rather than lending and leveraging the system back up. The financial crisis soon became so universal that the risks of lending money skyrocketed, given that many previously creditworthy borrowers were now quite possibly on the verge of insolvency. In a liquidity trap, as Keynes taught, running the printing presses simply adds to the hoarding of money but not to new loans and spending.

However, the real root of the financial bust, we shall see, went much deeper: the stagnation of production and investment.

From Financial Explosion to Financial Implosion

Our argument in a nutshell is that both the financial explosion in recent decades and the financial implosion now taking place are to be explained mainly in reference to stagnation tendencies within the underlying economy. A number of other explanations for the current crisis (most of them focusing on the proximate causes) have been given by economists and media pundits. These include the lessening of regulations on the financial system; the very low interest rates introduced by the Fed to counter the effects of the 2000 crash of the “New Economy” stock bubble, leading to the housing bubble; and the selling of large amounts of “sub-prime” mortgages to many people that could not afford to purchase a house and/or did not fully understand the terms of the mortgages.

Much attention has rightly been paid to the techniques whereby mortgages were packaged together and then “sliced and diced” and sold to institutional investors around the world. Outright fraud may also have been involved in some of the financial shenanigans. The falling home values following the bursting of the housing bubble and the inability of many sub-prime mortgage holders to continue to make their monthly payments, together with the resulting foreclosures, was certainly the straw that broke the camel’s back, leading to this catastrophic system failure. And few would doubt today that it was all made worse by the deregulation fervor avidly promoted by the financial firms, which left them with fewer defenses when things went wrong.

Nevertheless, the root problem went much deeper, and was to be found in a real economy experiencing slower growth, giving rise to financial explosion as capital sought to “leverage” its way out of the problem by expanding debt and gaining speculative profits. The extent to which debt has shot up in relation to GDP over the last four decades can be seen in table 1. As these figures suggest, the most remarkable feature in the development of capitalism during this period has been the ballooning of debt.

Table 1. Domestic debt* and GDP (trillions of dollars)


* The federal part of local, state, and federal debt includes only that portion held by the public. The total debt in 2007 when the federal debt held by federal agencies is added is $51.5 trillion.

Sources: Flow of Funds Accounts of the United States, Table L.1 Credit Market Debt Outstanding, Federal Reserve and Table B-1, Gross domestic product, 1959-2007, Economic Report of the President, 2008.

This phenomenon is further illustrated in chart 1 showing the skyrocketing of private debt relative to national income from the 1960s to the present. Financial sector debt as a percentage of GDP first lifted off the ground in the 1960s and 1970s, accelerated beginning in the 1980s, and rocketed up after the mid 1990s. Household debt as a percentage of GDP rose strongly beginning in the 1980s and then increased even faster in the late 1990s. Nonfinancial business debt in relation to national income also climbed over the period, if less spectacularly. The overall effect has been a massive increase in private debt relative to national income. The problem is further compounded if government debt (local, state, and federal) is added in. When all sectors are included, the total debt as a percentage of GDP rose from 151 percent in 1959 to an astronomical 373 percent in 2007!

This rise in the cumulative debt load as a percentage of GDP greatly stimulated the economy, particularly in the financial sector, feeding enormous financial profits and marking the growing financialization of capitalism (the shift in gravity from production to finance within the economy as a whole). The profit picture, associated with this accelerating financialization, is shown in chart 2, which provides a time series index (1970 = 100) of U.S. financial versus nonfinancial profits and the GDP. Beginning in 1970, financial and nonfinancial profits tended to increase at the same rate as the GDP. However, in the late 1990s, finance seemed to take on a life of its own with the profits of U.S. financial corporations (and to a lesser extent nonfinancial corporate profits too) heading off into the stratosphere, seemingly unrelated to growth of national income, which was relatively stagnant. Corporations playing in what had become a giant casino took on more and more leveraging—that is, they often bet thirty or more borrowed dollars for every dollar of their own that was used. This helps to explain the extraordinarily high profits they were able to earn as long as their bets were successful. The growth of finance was of course not restricted simply to the United States but was a global phenomenon with speculative claims to wealth far overshadowing global production, and the same essential contradiction cutting across the entire advanced capitalist world and “emerging” economies.

Chart 1. Private debt as percentage of GDP


Sources: Same as table 1.

Chart 2. Growth of financial and nonfinancial profits relative to GDP (1970 = 100)


Sources: Calculated from Table B–91—Corporate profits by industry, 1959–2007. Ta-ble B–1—Gross domestic product, 1959–2007, Economic Report of the President, 2008.

Already by the late 1980s the seriousness of the situation was becoming clear to those not wedded to established ways of thinking. Looking at this condition in 1988 on the anniversary of the 1987 stock market crash, Monthly Review editors Harry Magdoff and Paul Sweezy, contended that sooner or later—no one could predict when or exactly how—a major crisis of the financial system that overpowered the lender of last resort function was likely to occur. This was simply because the whole precarious financial superstructure would have by then grown to such a scale that the means of governmental authorities, though massive, would no longer be sufficient to keep back the avalanche, especially if they failed to act quickly and decisively enough. As they put it, the next time around it was quite possible that the rescue effort would “succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and precarious level. But sooner or later, next time or further down the road, it will not succeed,” generating a severe crisis of the economy.

As an example of a financial avalanche waiting to happen, they pointed to the “high flying Tokyo stock market,” as a possible prelude to a major financial implosion and a deep stagnation to follow—a reality that was to materialize soon after, resulting in Japan’s financial crisis and “Great Stagnation” of the 1990s. Asset values (both in the stock market and real estate) fell by an amount equivalent to more than two years of GDP. As interest rates zeroed-out and debt-deflation took over, Japan was stuck in a classic liquidity trap with no ready way of restarting an economy already deeply mired in overcapacity in the productive economy. 24

“In today’s world ruled by finance,” Magdoff and Sweezy had written in 1987 in the immediate aftermath of the U.S. stock market crash:

the underlying growth of surplus value falls increasingly short of the rate of accumulation of money capital. In the absence of a base in surplus value, the money capital amassed becomes more and more nominal, indeed fictitious. It comes from the sale and purchase of paper assets, and is based on the assumption that asset values will be continuously inflated. What we have, in other words, is ongoing speculation grounded in the belief that, despite fluctuations in price, asset values will forever go only one way—upward! Against this background, the October [1987] stock market crash assumes a far-reaching significance. By demonstrating the fallacy of an unending upward movement in asset values, it exposes the irrational kernel of today’s economy. 25

These contradictions, associated with speculative bubbles, have of course to some extent been endemic to capitalism throughout its history. However, in the post-Second World War era, as Magdoff and Sweezy, in line with Minsky, argued, the debt overhang became larger and larger, pointing to the growth of a problem that was cumulative and increasingly dangerous. In The End of Prosperity Magdoff and Sweezy wrote: “In the absence of a severe depression during which debts are forcefully wiped out or drastically reduced, government rescue measures to prevent collapse of the financial system merely lay the groundwork for still more layers of debt and additional strains during the next economic advance.” As Minsky put it, “Without a crisis and a debt-deflation process to offset beliefs in the success of speculative ventures, both an upward bias to prices and ever-higher financial layering are induced.”26

To the extent that mainstream economists and business analysts themselves were momentarily drawn to such inconvenient questions, they were quickly cast aside. Although the spectacular growth of finance could not help but create jitters from time to time—for example, Alan Greenspan’s famous reference to “irrational exuberance”—the prevailing assumption, promoted by Greenspan himself, was that the growth of debt and speculation represented a new era of financial market innovation, i.e., a sustainable structural change in the business model associated with revolutionary new risk management techniques. Greenspan was so enamored of the “New Economy” made possible by financialization that he noted in 2004: “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”27

It was only with the onset of the financial crisis in 2007 and its persistence into 2008, that we find financial analysts in surprising places openly taking on the contrary view. Thus as Manas Chakravarty, an economic columnist for India’s investor Web site, Livemint.com (partnered with the Wall Street Journal), observed on September 17, 2008, in the context of the Wall Street meltdown,

American economist Paul Sweezy pointed out long ago that stagnation and enormous financial speculation emerged as symbiotic aspects of the same deep-seated, irreversible economic impasse. He said the stagnation of the underlying economy meant that business was increasingly dependent on the growth of finance to preserve and enlarge its money capital and that the financial superstructure of the economy could not expand entirely independently of its base in the underlying productive economy. With remarkable prescience, Sweezy said the bursting of speculative bubbles would, therefore, be a recurring and growing problem. 28

Of course, Paul Baran and Sweezy in Monopoly Capital, and later on Magdoff and Sweezy in Monthly Review, had pointed to other forms of absorption of surplus such as government spending (particularly military spending), the sales effort, the stimulus provided by new innovations, etc. 29 But all of these, although important, had proven insufficient to maintain the economy at anything like full employment, and by the 1970s the system was mired in deepening stagnation (or stagflation). It was financialization—and the growth of debt that it actively promoted—which was to emerge as the quantitatively most important stimulus to demand. But it pointed unavoidably to a day of financial reckoning and cascading defaults.

Indeed, some mainstream analysts, under the pressure of events, were forced to acknowledge by summer 2008 that a massive devaluation of the system might prove inevitable. Jim Reid, the Deutsche Bank’s head of credit research, examining the kind of relationship between financial profits and GDP exhibited in chart 2, issued an analysis called “A Trillion-Dollar Mean Reversion?,” in which he argued that:

U.S. financial profits have deviated from the mean over the past decade on a cumulative basis… The U.S. Financial sector has made around 1.2 Trillion ($1,200bn) of ‘excess’ profits in the last decade relative to nominal GDP… So mean reversion [the theory that returns in financial markets over time “revert” to a long-term mean projection, or trend-line] would suggest that $1.2 trillion of profits need to be wiped out before the U.S. financial sector can be cleansed of the excesses of the last decade… Given that...Bloomberg reports that $184bn has been written down by U.S. financials so far in this crisis, if one believes that the size of the financial sector should shrink to levels seen a decade ago then one could come to the conclusion that there is another trillion dollars of value destruction to go in the sector before we’re back to the long-run trend in financial profits. A scary thought and one that if correct will lead to a long period of constant intervention by the authorities in an attempt to arrest this potential destruction. Finding the appropriate size of the financial sector in the “new world” will be key to how much profit destruction there needs to be in the sector going forward.

The idea of a mean reversion of financial profits to their long-term trend-line in the economy as a whole was merely meant to be suggestive of the extent of the impending change, since Reid accepted the possibility that structural “real world” reasons exist to explain the relative weight of finance—though none he was yet ready to accept. As he acknowledged, “calculating the ‘natural’ appropriate size for the financial sector relative to the rest of the economy is a phenomenally difficult conundrum.” Indeed, it was to be doubted that a “natural” level actually existed. But the point that a massive “profit destruction” was likely to occur before the system could get going again and that this explained the “long period of constant intervention by the authorities in an attempt to arrest this potential destruction,” highlighted the fact that the crisis was far more severe than then widely supposed—something that became apparent soon after. 30

What such thinking suggested, in line with what Magdoff and Sweezy had argued in the closing decades of the twentieth century, was that the autonomy of finance from the underlying economy, associated with the financialization process, was more relative than absolute, and that ultimately a major economic downturn—more than the mere bursting of one bubble and the inflating of another—was necessary. This was likely to be more devastating the longer the system put it off. In the meantime, as Magdoff and Sweezy had pointed out, financialization might go on for quite a while. And indeed there was no other answer for the system.

Back to the Real Economy: The Stagnation Problem

Paul Baran, Paul Sweezy, and Harry Magdoff argued indefatigably from the 1960s to the 1990s (most notably in Monopoly Capital) that stagnation was the normal state of the monopoly-capitalist economy, barring special historical factors. The prosperity that characterized the economy in the 1950s and ’60s, they insisted, was attributable to such temporary historical factors as: (1) the buildup of consumer savings during the war; (2) a second great wave of automobilization in the United States (including the expansion of the glass, steel, and rubber industries, the construction of the interstate highway system, and the development of suburbia); (3) the rebuilding of the European and the Japanese economies devastated by the war; (4) the Cold War arms race (and two regional wars in Asia); (5) the growth of the sales effort marked by the rise of Madison Avenue; (6) the expansion of FIRE (finance, insurance, and real estate); and (7) the preeminence of the dollar as the hegemonic currency. Once the extraordinary stimulus from these factors waned, the economy began to subside back into stagnation: slow growth and rising excess capacity and unemployment/underemployment. In the end, it was military spending and the explosion of debt and speculation that constituted the main stimuli keeping the economy out of the doldrums. These were not sufficient, however, to prevent the reappearance of stagnation tendencies altogether, and the problem got worse with time. 31


The reality of creeping stagnation can be seen in table 2, which shows the real growth rates of the economy decade by decade over the last eight decades. The low growth rate in the 1930s reflected the deep stagnation of the Great Depression. This was followed by the extraordinary rise of the U.S. economy in the 1940s under the impact of the Second World War. During the years 1950–69, now often referred to as an economic “Golden Age,” the economy, propelled by the set of special historical factors referred to above, was able to achieve strong economic growth in a “peacetime” economy. This, however, proved to be all too temporary. The sharp drop off in growth rates in the 1970s and thereafter points to a persistent tendency toward slower expansion in the economy, as the main forces pushing up growth rates in the 1950s and ’60s waned, preventing the economy from returning to its former prosperity. In subsequent decades, rather than recovering its former trend-rate of growth, the economy slowly subsided.

Table 2. Growth in real GDP 1930–2007


Source: National Income and Products Accounts Table 1.1.1. Percent Change from Preceding Period in Real Gross Domestic Product, Bureau of Economic Analysis.

It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles—despite (and also because of) the weakening of capital accumulation proper—together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand,” beginning in the 1980s. 32 But such a financialized growth pattern was unable to produce rapid economic advance for any length of time, and was unsustainable, leading to bigger bubbles that periodically burst, bringing stagnation more and more to the surface.

A key element in explaining this whole dynamic is to be found in the falling ratio of wages and salaries as a percentage of national income in the United States. Stagnation in the 1970s led capital to launch an accelerated class war against workers to raise profits by pushing labor costs down. The result was decades of increasing inequality. 33 Chart 3 shows a sharp decline in the share of wages and salaries in GDP between the late 1960s and the present. This reflected the fact that real wages of private nonagricultural workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage rate in 1967), despite the enormous growth in productivity and profits over the past few decades. 34

Chart 3. Wage and salary disbursements as a percent-age of GDP


Sources: Economic Report of the President, 2008, Table B-1 (GDP), Table B–29—Sources of personal income, 1959–2007.

This was part of a massive redistribution of income and wealth to the top. Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for each added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000. In the United States the top 1 percent of wealth holders in 2001 together owned more than twice as much as the bottom 80 percent of the population. If this were measured simply in terms of financial wealth, i.e., excluding equity in owner-occupied housing, the top 1 percent owned more than four times the bottom 80 percent. Between 1983 and 2001, the top 1 percent grabbed 28 percent of the rise in national income, 33 percent of the total gain in net worth, and 52 percent of the overall growth in financial worth. 35

The truly remarkable fact under these circumstances was that household consumption continued to rise from a little over 60 percent of GDP in the early 1960s to around 70 percent in 2007. This was only possible because of more two-earner households (as women entered the labor force in greater numbers), people working longer hours and filling multiple jobs, and a constant ratcheting up of consumer debt. Household debt was spurred, particularly in the later stages of the housing bubble, by a dramatic rise in housing prices, allowing consumers to borrow more against their increased equity (the so-called housing “wealth effect”)—a process that came to a sudden end when the bubble popped, and housing prices started to fall. As chart 1 shows, household debt increased from about 40 percent of GDP in 1960 to 100 percent of GDP in 2007, with an especially sharp increase starting in the late 1990s. 36

This growth of consumption, based in the expansion of household debt, was to prove to be the Achilles heel of the economy. The housing bubble was based on a sharp increase in household mortgage-based debt, while real wages had been essentially frozen for decades. The resulting defaults among marginal new owners led to a fall in house prices. This led to an ever increasing number of owners owing more on their houses than they were worth, creating more defaults and a further fall in house prices. Banks seeking to bolster their balance sheets began to hold back on new extensions of credit card debt. Consumption fell, jobs were lost, capital spending was put off, and a downward spiral of unknown duration began.

During the last thirty or so years the economic surplus controlled by corporations, and in the hands of institutional investors, such as insurance companies and pension funds, has poured in an ever increasing flow into an exotic array of financial instruments. Little of the vast economic surplus was used to expand investment, which remained in a state of simple reproduction, geared to mere replacement (albeit with new, enhanced technology), as opposed to expanded reproduction. With corporations unable to find the demand for their output—a reality reflected in the long-run decline of capacity utilization in industry (see chart 4)—and therefore confronted with a dearth of profitable investment opportunities, the process of net capital formation became more and more problematic.

Chart 4. Percent utilization of industrial capacity


Source: Economic Report of the President, 2008, Table B–54—Capacity utilization rates, 1959–2007.

Hence, profits were increasingly directed away from investment in the expansion of productive capacity and toward financial speculation, while the financial sector seemed to generate unlimited types of financial products designed to make use of this money capital. (The same phenomenon existed globally, causing Bernanke to refer in 2005 to a “global savings glut,” with enormous amounts of investment-seeking capital circling the world and increasingly drawn to the United States because of its leading role in financialization.)37 The consequences of this can be seen in chart 5, showing the dramatic decoupling of profits from net investment as percentages of GDP in recent years, with net private nonresidential fixed investment as a share of national income falling significantly over the period, even while profits as a share of GDP approached a level not seen since the late 1960s/early 1970s. This marked, in Marx’s terms, a shift from the “general formula for capital” M(oney)-C(commodity)–M¢ (original money plus surplus value), in which commodities were central to the production of profits—to a system increasingly geared to the circuit of money capital alone, M–M¢, in which money simply begets more money with no relation to production.

Chart 5. Profits and net investment as percentage of GDP 1960 to present


Sources: Bureau of Economic Analysis, National Income and Product Accounts, Table 5.2.5. Gross and Net Domestic Investment by Major Type, (Billions of dollars). Table B-1 (GDP) and Table B-91 (Domestic industry profits), Economic Report of the President, 2008.

Since financialization can be viewed as the response of capital to the stagnation tendency in the real economy, a crisis of financialization inevitably means a resurfacing of the underlying stagnation endemic to the advanced capitalist economy. The deleveraging of the enormous debt built up during recent decades is now contributing to a deep crisis. Moreover, with financialization arrested there is no other visible way out for monopoly-finance capital. The prognosis then is that the economy, even after the immediate devaluation crisis is stabilized, will at best be characterized for some time by minimal growth, and by high unemployment, underemployment, and excess capacity.

The fact that U.S. consumption (facilitated by the enormous U.S. current account deficit) has provided crucial effective demand for the production of other countries means that the slowdown in the United States is already having disastrous effects abroad, with financial liquidation now in high gear globally. “Emerging” and underdeveloped economies are caught in a bewildering set of problems. This includes falling exports, declining commodity prices, and the repercussions of high levels of financialization on top of an unstable and highly exploitative economic base—while being subjected to renewed imperial pressures from the center states.

The center states are themselves in trouble. Iceland, which has been compared to the canary in the coal mine, has experienced a complete financial meltdown, requiring rescue from outside, and possibly a massive raiding of the pension funds of the citizenry. For more than seventeen years Iceland has had a right-wing government led by the ultra-conservative Independence Party in coalition with the centrist social democratic parties. Under this leadership Iceland adopted neoliberal financialization and speculation to the hilt and saw an excessive growth of its banking and finance sectors with total assets of its banks growing from 96 percent of its GDP at the end of 2000 to nine times its GDP in 2006. Now Icelandic taxpayers, who were not responsible for these actions, are being asked to carry the burden of the overseas speculative debts of their banks, resulting in a drastic decline in the standard of living. 38

A Political Economy

Economics in its classical stage, which encompassed the work of both possessive-individualists, like Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill, and socialist thinkers such as Karl Marx, was called political economy. The name was significant because it pointed to the class basis of the economy and the role of the state. 39 To be sure, Adam Smith introduced the notion of the “invisible hand” of the market in replacing the former visible hand of the monarch. But, the political-class context of economics was nevertheless omnipresent for Smith and all the other classical economists. In the 1820s, as Marx observed, there were “splendid tournaments” between political economists representing different classes (and class fractions) of society.

However, from the 1830s and ’40s on, as the working class arose as a force in society, and as the industrial bourgeoisie gained firm control of the state, displacing landed interests (most notably with the repeal of the Corn Laws), economics shifted from its previous questioning form to the “bad conscience and evil intent of the apologetics.”40 Increasingly the circular flow of economic life was reconceptualized as a process involving only individuals, consuming, producing, and profiting on the margin. The concept of class thus disappeared in economics, but was embraced by the rising field of sociology (in ways increasingly abstracted from fundamental economic relationships). The state also was said to have nothing directly to do with economics and was taken up by the new field of political science. 41 Economics was thus “purified” of all class and political elements, and increasingly presented as a “neutral” science, addressing universal/transhistorical principles of capital and market relations.

Having lost any meaningful roots in society, orthodox neoclassical economics, which presented itself as a single paradigm, became a discipline dominated by largely meaningless abstractions, mechanical models, formal methodologies, and mathematical language, divorced from historical developments. It was anything but a science of the real world; rather its chief importance lay in its role as a self-confirming ideology. Meanwhile, actual business proceeded along its own lines largely oblivious (sometimes intentionally so) of orthodox economic theories. The failure of received economics to learn the lessons of the Great Depression, i.e., the inherent flaws of a system of class-based accumulation in its monopoly stage, included a tendency to ignore the fact that the real problem lay in the real economy, rather than in the monetary-financial economy.

Today nothing looks more myopic than Bernanke’s quick dismissal of traditional theories of the Great Depression that traced the underlying causes to the buildup of overcapacity and weak demand—inviting a similar dismissal of such factors today. Like his mentor Milton Friedman, Bernanke has stood for the dominant, neoliberal economic view of the last few decades, with its insistence that by holding back “the rock that starts a landslide” it was possible to prevent a financial avalanche of “major proportions” indefinitely. 42 That the state of the ground above was shifting, and that this was due to real, time-related processes, was of no genuine concern. Ironically, Bernanke, the academic expert on the Great Depression, adopted what had been described by Ethan Harris, chief U.S. economist for Barclays Capital, as a “see no evil, hear no evil, speak no evil” policy with respect to asset bubbles. 43

It is therefore to the contrary view, emphasizing the socioeconomic contradictions of the system, to which it is now necessary to turn. For a time in response to the Great Depression of the 1930s, in the work of John Maynard Keynes, and various other thinkers associated with the Keynesian, institutionalist, and Marxist traditions—the most important of which was the Polish economist Michael Kalecki—there was something of a revival of political-economic perspectives. But following the Second World War Keynesianism was increasingly reabsorbed into the system. This occurred partly through what was called the “neoclassical-Keynesian synthesis”—which, as Joan Robinson, one of Keynes’s younger colleagues claimed, had the effect of bastardizing Keynes—and partly through the closely related growth of military Keynesianism. 44 Eventually, monetarism emerged as the ruling response to the stagflation crisis of the 1970s, along with the rise of other conservative free-market ideologies, such as supply-side theory, rational expectations, and the new classical economics (summed up as neoliberal orthodoxy). Economics lost its explicit political-economic cast, and the world was led back once again to the mythology of self-regulating, self-equilibrating markets free of issues of class and power. Anyone who questioned this, was characterized as political rather than economic, and thus largely excluded from the mainstream economic discussion. 45

Needless to say, economics never ceased to be political; rather the politics that was promoted was so closely intertwined with the system of economic power as to be nearly invisible. Adam Smith’s visible hand of the monarch had been transformed into the invisible hand, not of the market, but of the capitalist class, which was concealed behind the veil of the market and competition. Yet, with every major economic crisis that veil has been partly torn aside and the reality of class power exposed.

Treasury Secretary Paulson’s request to Congress in September 2008, for $700 billion with which to bail out the financial system may constitute a turning point in the popular recognition of, and outrage over, the economic problem, raising for the first time in many years the issue of a political economy. It immediately became apparent to the entire population that the critical question in the financial crisis and in the deep economic stagnation that was emerging was: Who will pay? The answer of the capitalist system, left to its own devices, was the same as always: the costs would be borne disproportionately by those at the bottom. The old game of privatization of profits and socialization of losses would be replayed for the umpteenth time. The population would be called upon to “tighten their belts” to “foot the bill” for the entire system. The capacity of the larger public to see through this deception in the months and years ahead will of course depend on an enormous amount of education by trade union and social movement activists, and the degree to which the empire of capital is stripped naked by the crisis.

There is no doubt that the present growing economic bankruptcy and political outrage have produced a fundamental break in the continuity of the historical process. How should progressive forces approach this crisis? First of all, it is important to discount any attempts to present the serious economic problems that now face us as a kind of “natural disaster.” They have a cause, and it lies in the system itself. And although those at the top of the economy certainly did not welcome the crisis, they nonetheless have been the main beneficiaries of the system, shamelessly enriching themselves at the expense of the rest of the population, and should be held responsible for the main burdens now imposed on society. It is the well-to-do who should foot the bill—not only for reasons of elementary justice, but also because they collectively and their system constitute the reason that things are as bad as they are; and because the best way to help both the economy and those at the bottom is to address the needs of the latter directly. There should be no golden parachutes for the capitalist class paid for at taxpayer expense.

But capitalism takes advantage of social inertia, using its power to rob outright when it can’t simply rely on “normal” exploitation. Without a revolt from below the burden will simply be imposed on those at the bottom. All of this requires a mass social and economic upsurge, such as in the latter half of the 1930s, including the revival of unions and mass social movements of all kinds—using the power for change granted to the people in the Constitution; even going so far as to threaten the current duopoly of the two-party system.

What should such a radical movement from below, if it were to emerge, seek to do under these circumstances? Here we hesitate to say, not because there is any lack of needed actions to take, but because a radicalized political movement determined to sweep away decades of exploitation, waste, and irrationality will, if it surfaces, be like a raging storm, opening whole new vistas for change. Anything we suggest at this point runs the double risk of appearing far too radical now and far too timid later on.

Some liberal economists and commentators argue that, given the present economic crisis, nothing short of a major public works program aimed at promoting employment, a kind of new New Deal, will do. Robert Kuttner has argued in Obama’s Challenge that “an economic recovery will require more like $700 billion a year in new public outlay, or $600 billion counting offsetting cuts in military spending. Why? Because there is no other plausible strategy for both achieving a general economic recovery and restoring balance to the economy.”46 This, however, will be more difficult than it sounds. There are reasons to believe that the dominant economic interests would block an increase in civilian government spending on such a scale, even in a crisis, as interfering with the private market. The truth is that civilian government purchases were at 13.3 percent of GNP in 1939—what Baran and Sweezy in 1966 theorized as approximating their “outer limits”—and they have barely budged since then, with civilian government consumption and investment expenditures from 1960 to the present averaging 13.7 percent of GNP (13.8 percent of GDP). 47 The class forces blocking a major increase in nondefense governmental spending even in a severe stagnation should therefore not be underestimated. Any major advances in this direction will require a massive class struggle.

Still, there can be no doubt that change should be directed first and foremost to meeting the basic needs of people for food, housing, employment, health, education, a sustainable environment, etc. Will the government assume the responsibility for providing useful work to all those who desire and need it? Will housing be made available (free from crushing mortgages) to everyone, extending as well to the homeless and the poorly housed? Will a single-payer national health system be introduced to cover the needs of the entire population, replacing the worst and most expensive health care system in the advanced capitalist world? Will military spending be cut back drastically, dispensing with global imperial domination? Will the rich be heavily taxed and income and wealth be redistributed? Will the environment, both global and local, be protected? Will the right to organize be made a reality?

If such elementary prerequisites of any decent future look impossible under the present system, then the people should take it into their own hands to create a new society that will deliver these genuine goods. Above all it is necessary “to insist that morality and economics alike support the intuitive sense of the masses that society’s human and natural resources can and should be used for all the people and not for a privileged minority.”48

In the 1930s Keynes decried the growing dominance of financial capital, which threatened to reduce the real economy to “a bubble on a whirlpool of speculation,” and recommended the “euthanasia of the rentier.” However, financialization is so essential to the monopoly-finance capital of today, that such a “euthanasia of the rentier” cannot be achieved—in contravention of Keynes’s dream of a more rational capitalism—without moving beyond the system itself. In this sense we are clearly at a global turning point, where the world will perhaps finally be ready to take the step, as Keynes also envisioned, of repudiating an alienated moral code of “fair is foul and foul is fair”—used to justify the greed and exploitation necessary for the accumulation of capital—turning it inside-out to create a more rational social order. 49 To do this, though, it is necessary for the population to seize control of their political economy, replacing the present system of capitalism with something amounting to a real political and economic democracy; what the present rulers of the world fear and decry most—as “socialism.”50

John Bellamy Foster is editor of Monthly Review and professor of sociology at the University of Oregon. He is the author of Naked Imperialism (Monthly Review Press, 2006), among numerous other works. Fred Magdoff is professor emeritus of plant and soil science at the University of Vermont in Burlington, adjunct professor of crops and soils at Cornell University, and a director of the Monthly Review Foundation. This article is the final chapter in John Bellamy Foster and Fred Magdoff's book, The Great Financial Crisis: Causes and Consequences (Monthly Review Press, January 2009).





RE: The Global Financial Meltdown - Admin - 05-25-2009

BOGUS SOLUTIONS TO THE FINANCIAL CRISIS : THE LATEST IN JUNK ECONOMICS

Prof. Michael Hudson
http://www.globalresearch.ca/index.php?context=va&aid=13702

Marginalist Panaceas to Today’s Structural Problems

It looks like bookstores are about to be swamped this summer and fall by a forest of advice for which publishers gave respectable advances a year ago as the economy was going off the rails. Seeking to minimize the risk of cognitive dissonance, the marketing strategy seems to be to offer advice by well-placed or celebrity insiders on how to recover the kind of free lunch that American pension plans – and popular hopes for easy wealth – have long assumed to be part of the natural law of economic growth, if only it can be better managed. The fantasy people want to buy is that the happy 1981-2007 era of debt-leveraged price gains for real estate, stocks and bonds can be brought back. But the Bubble Economy was so debt-leveraged that it cannot reasonably be restored. This means that publishers have achieved the marketer’s dream of planned obsolescence: Readers a year or so from now will have to buy a new slew of books as they feel hungry again from the lack of intellectual protein.

For the time being we are supposed to be satisfied Wall Street defenses of the Bush-Obama (Paulson-Geithner) attempt to re-inflate the Bubble by a bailout giveaway that has tripled America’s national debt in the hope of getting bank credit (that is, more debt) growing again. The problem is that debt leveraging is what caused the economic collapse. A third of U.S. real estate is now estimated to be in negative equity, with foreclosure rates still rising. So publishers have only a short window of opportunity to sell the current spate of books before people wake up to the fact that attempts to renew the Bubble Economy will make our financial overhead heavier.

In the face of this stultifying financial trend, the book-buying public is being fed appetizers pretending that economic recovery simply requires more “incentives” (a euphemism for special tax breaks for the rich) to encourage more “saving,” as if savings automatically finance new capital investment and hiring rather than what really happens: Money is being lent out to create yet more debt owed by the bottom 90 percent to the economy’s top 10 percent. Publishers evidently believe that the way to attract readers – and certainly to get reviews in the major media – is to propose easy solutions. The theme of most of this year’s Bubble books therefore is how we could have avoided the Bubble “if only…” If only there had been better regulation, for instance.

But to what aim? After blaming Alan Greenspan for playing the role of “useful idiot” by promoting deregulation and blocking prosecution of financial fraud, most writers trot out the approved panaceas: federal regulation of derivatives (or even banning them altogether), a Tobin tax on securities transactions, closure of offshore banking centers and ending their tax-avoidance stratagems. But no one is going so far as to suggest attacking the root of the financial problem by removing the general tax deductibility of interest that has subsidized debt leveraging, taxing “capital” gains at the same rate as wages and profits, or closing the notorious tax loopholes for the finance, insurance and real estate (FIRE) sectors.

Right-wing publishers are re-warming their articles of faith such as giving more tax incentives to “savers” (another euphemism for more giveaways to the rich) and a re-balanced federal budget to avoid “crowding out” private investment. One of Wall Street’s dreams is to privatize Social Security to create yet another Bubble to feed off of. (Fortunately, such proposals failed during the Republican-controlled Bush administration as a result of taxpayer outrage after the dot.com bubble burst in 2000.)

What is not heard is a call to finance Social Security and Medicare out of the general budget instead of keeping their funding as a special regressive tax on labor and its employers, available for plunder by Congress to finance tax cuts for the upper wealth brackets. Yet how can America achieve competitiveness in global markets with its pre-saving retirement tax (Social Security) and privatized health insurance, debt-leveraged housing costs and related personal and corporate debt overhead? The rest of the world provides much lower-cost housing, health care and related employee costs – or simply keeps labor near subsistence levels. Our lack of affordability is a major problem for continued dreams of a renewed Bubble Economy, yet the international dimension is ignored.

The latest panacea being offered to jump-start the economy is to rebuild America’s depleted infrastructure. Alas, Wall Street plans to do this Tony Blair-style, by public-private partnerships that incorporate enormous flows of interest payments into the price structure while providing underwriting and management fees to Wall Street. Falling employment and property prices have squeezed public finances so that new infrastructure investment will take the form of installing privatized tollbooths over the economy’s most critical access points such as roads and other hitherto public transportation, communications and clean water.

Surprisingly, one does not hear even an echo of calls to restore state and local property taxes to their Progressive Era levels so as to collect the “free lunch” of rising land prices and harness its gains over time as the main fiscal base. This would hold down land prices (and hence, mortgage debt) by preventing rising location values from being capitalized into new mortgage loans against “capital” gains and paid out as interest to the banks. Restoring Progressive Era tax philosophy (and pre-1930 property tax levels) would have the additional advantage of shifting the fiscal burden off income and sales – a policy that would make labor, goods and services more affordable. Instead, most reforms today call for further cutting property taxes to promote more “wealth creation” in the form of higher debt-leveraged property price inflation. Instead of housing prices falling and income and sales taxes being reduced, rising site values merely will be recycled to the banks for ever larger mortgages, not taxed to benefit local government. In this scenario, local governments are forced to shift the fiscal burden onto consumers and business, impoverishing the community.

The new books advocate merely marginal changes to deep structural problems. They include the usual pro forma calls to re-industrialize America, but not to address the financial debt dynamic that has undercut industrial capitalism in this country and abroad. How will these timid “reforms” look in retrospect a decade from now? The Bush-Obama bailout pretends that banks “too-big-to-fail” only face a liquidity problem, not the growing bad-debt problem we now face along with the economy’s widening inability to pay. The reason why past Bubbles cannot be re-inflated is that they have reached their debt limit, not only domestically, but also the international political limit of global Dollar Hegemony.

What needs to be written about is what the marginalists leave out of account and what academic jargon calls “exogenous” considerations, which turn out to be what economics really is all about: the debt overhead; financial fraud and crime in general (one of the economy’s highest-paying sectors); military spending (a key to the U.S. balance-of-payments deficit and hence to the buildup of central bank dollar reserves throughout the world); the proliferation of unearned income and insider political dealing. These are the core phenomena that “free market” idea strippers have relegated to the “institutionalist” basement of the academic economics curriculum.

For example, the press keeps on parroting the Washington mantra that Asians “save” too much, causing them to lend their money to America. But the “Asians” saving these dollars are the central banks. Individuals and companies save in yuan and yen, not dollars. It is not these domestic savings that China and Japan have placed in U.S. Treasury securities to the tune of $3 trillion. It is America’s own spending – the trillions of dollars its payments deficit is pumping abroad, in excess of foreign demand for U.S. exports and purchases of U.S. companies, stocks and real estate. This payments deficit is not the result of U.S. consumers maxing out on their credit cards. What is being downplayed is that military spending in most years since the Korean War (1951) that has underlain the U.S. balance-of-payments deficit. Now that foreign countries are starting to push back, this trend cannot continue much longer.

Inasmuch as China’s central bank is now the largest holder of U.S. Government and other dollar securities, it has become the main subsidizer of the U.S. balance-of-payments deficit – and also the domestic U.S. federal budget deficit. Half of the federal budget’s discretionary spending is military in character. This places China in the uncomfortable position of being the largest financier of U.S. military adventurism, including U.S. attempts to encircle China and Russia militarily to block their development as economic rivals during the past fifty years. That is not what China intended, but it is the effect of global dollar hegemony.

Another trend that cannot continue is “the miracle of compound interest.” It is called a “miracle” because it seems too good to be true, and it is – it cannot really go on for long. Heavily leveraged debts go bad in the end, because they accrue interest charges faster than an economy’s ability to pay. Basing national policy on dreams of paying the interest by borrowing money against steadily inflating asset prices has been a nightmare for homebuyers and consumers, as well as for companies targeted by financial raiders who use debt leverage to strip assets for themselves. This policy is now being applied to public infrastructure into the hands of absentee owners, who will themselves buy these assets on credit and build the resulting interest charges into the new service prices they collect, in addition to being allowed to treat these charges as a tax-deductible expense. This is how banking lobbyists have shaped the tax system in a way that steers new absentee investment into debt rather than equity financing.

The irresponsible cheerleaders applauding a Bubble Economy as “wealth creation” (to use one of Alan Greenspan’s favorite phrases) would like us, their audience, to believe that they knew that there was a problem all along, but simply could not restrain the economy’s “irrational exuberance” and “animal spirits.” The idea is to blame the victims – homeowners forced into debt to afford access to housing, pension-fund savers forced to consign their wage set-asides to money managers at the large Wall Street firms, and companies seeking to stave off corporate raiders by taking “poison pills” in the form of debts large enough to block their being taken over. One looks in vain for an honest acknowledgement of how the financial sector has turned into a Mafia-style gang more akin to post-Soviet kleptocrat insiders than to Schumpeterian innovators.

The cursorily reformist gaggle of post-Bubble tomes assumes that we have reached “the end of history” as far as financial problems are concerned. What is missing is a critique of the big picture – how Wall Street’s collaboration in financializing the public domain has inaugurated a neo-feudal tollbooth economy while privatizing the government itself, headed by the Treasury and Federal Reserve. Left untouched is the story how industrial capitalism has succumbed to an insatiable and unsustainable finance capitalism, whose newest “final stage” seems to be a zero-sum game of casino capitalism based on derivative swaps and kindred hedge fund gambling innovations.

What has been lost are the Progressive Era’s two great reforms. First, minimization of the economy’s free lunch of unearned income (e.g., monopolistic privilege and privatization of the public domain in contrast to one’s own labor and enterprise) by taxing absentee property rent and asset-price (“capital”) gains, keeping natural monopolies in the public domain, and anti-trust regulation. The aim of progressive economic justice was to prevent exploitation – e.g., charging more than the technologically necessary costs of production and reasonable profits warranted. Progressive Era reforms had a fortuitous byproduct: Minimization of the free lunch enabled economies such as the United States to out-compete others that didn’t embrace progressive fiscal and financial policy, creating a Leviathan that has now fallen to its knees.

The second Progressive Era reform was to steer the financial sector so as to fund capital formation. Industrial credit was best achieved in Germany and Central Europe in the decades prior to World War I. But the Allied victory led to the dominance of Anglo-American banking practice based on loans against property or income streams already in place. Because of this, today’s bank credit has become decoupled from capital formation, taking the form mainly of mortgage credit (80%), and loans secured by corporate stock (for mergers, acquisitions and corporate raids) as well as for speculation. The effect is to spur asset-price inflation on credit, in ways that benefit the few at the expense of the economy at large.

The consequences of debt-leveraged asset-price inflation are clearest in the post-Soviet “Baltic syndrome,” to which Britain’s economy is now succumbing. Debts are run up in foreign currency (real estate mortgages, tax-avoidance funds and flight capital), without exports having any prospect of covering their carrying charges as far as the eye can see. The result is a debt trap – chronic austerity for the domestic market, causing lower capital investment and living standards without hope of recovery.

These problems illustrate the extent to which the world economy as a whole has pursued the wrong course since World War I. This long detour has been facilitated by the failure of socialism to provide a viable alternative. Although Russia’s bureaucratic Stalinism got rid of the post-feudal free lunch of land rent, monopoly rent, interest and financial or property-price gains, its bureaucratic overhead overpowered the economy in the end and Russia fell. Ideology aside, the question is whether the Anglo-American brand of finance capitalism will follow suit from its own internal contradictions.

The flaws in the U.S. economy are tragic because they are so intractable, embedded as they are in the very core of post-feudal Western economies. This is what Greek tragedy is all about: A tragic flaw that dooms the hero from the outset. The main flaw embedded in our own economy is rising debt in excess of the ability to pay, which is part of a larger flaw – the financial free lunch that property and financial claims extract in excess of corresponding costs as measured in labor effort and an equitably shared tax burden (the classical theory of economic rent). Like land seizure and insider privatization deals, such wealth increasingly is inherited, stolen or obtained through political corruption. Adding insult to injury, wealth and revenue extracted via today’s finance capitalism avoids taxation, thereby receiving an actual fiscal subsidy as compared to tangible industrial investment and operating profit. Yet academics and the popular media treat these core flaws as “exogenous,” that is, outside the realm of economic analysis.

Unfortunately for us – and for reformers trying to rescue our post-Bubble economy – the history of economic thought has been suppressed to give the impression that today’s stripped-down, largely trivialized junk economics is the apex of Western social history. One would not realize from the present discussion that for the past few centuries a different canon of logic existed. Classical economists distinguished between earned income (wages and profits) and unearned income (land rent, monopoly rent and interest). The effect was to distinguish between wealth earned through capital and enterprise that reflects labor effort, and unearned wealth from appropriation of land and other natural resources, monopoly privileges (including banking and money management) and inflationary asset-price “capital” gains. But even the Progressive Era did not go much beyond seeking to purify industrial capitalism from the carry-overs of feudalism: land rent and monopoly rent stemming from military conquest, and financial exploitation by banks and (in America) Wall Street as the “mother of trusts.”

What makes today’s Bubble different from previous ones is that instead of being organized by governments as a stratagem to dispose of their public debt by creating or privatizing monopolies to sell off for payment in government bonds, the United States and other nations today are going deeply into debt simply to pay bankers for bad loans. The economy is being sacrificed to reward finance instead of remaining viable by subordinating and channeling finance to promote economic growth via an affordable economy-wide cost structure. Interest-bearing debt weighs down the economy, causing debt deflation by diverting saving into debt payments instead of capital investment. Under this condition “saving” is not the solution to today’s economic shrinkage; it is part of the problem. In contrast to the personal hoarding of Keynes’s day, the problem is that the financial sector is now using its extractive power as creditor instead of wiping out the economy’s bad-debt overhang in the historically normal way, by a wave of bankruptcies.

Today, the financial sector is translating its affluence (at taxpayer expense), into the political power that threatens to pry yet more public infrastructure away from state and local communities and from the public domain at the national level, Thatcher- and Blair-style. It will be sold off to absentee rentier buyers-on-credit to pay off public debt (while cutting taxes on wealth yet further). No one remembers the cry for what Keynes called “euthanasia of the rentier.” We have entered the most oppressive rentier epoch since feudal European times. Instead of providing basic infrastructure services at cost or subsidized rates to lower the national cost structure and thus make it more affordable – and internationally competitive – the economy is being turned into a collection of tollbooths. How disheartening that this year’s transitory wave of post-Bubble books fails to place the financialization of the U.S. and global economies in this long-term context.


CREDIT DEFAULT SWAPS: THE POISON IN THE FINANCIAL SYSTEM

Mike Whitney
http://www.globalresearch.ca/index.php?context=va&aid=13717

In a little more than a decade, Credit Default Swaps (CDS) have ballooned into a multi-billion dollar industry which has changed the fundamental character of the financial system and increased systemic risk by many orders of magnitude. CDS, which were originally created to reduce potential losses from defaulting bonds, has turned into a cash cow for the big banks, generating mega-profits on, what amounts to, nothing more than legalized gambling. In the case of insurance giant AIG, losses from CDS transactions has already cost the American people $150 billion, and yet their still has been no serious effort in Congress to ban them once and for all. Even worse, CDS is the root-cause of systemic risk which connects hundreds of financial institutions together in a lethal daisy-chain that threatens to crash the entire system if one of the main players goes under.

CDS contracts are not cleared on a centralized exchange nor are they government regulated. That means that no one really knows whether issuers of CDS can pay off potential claims or not. It's a Ponzi-insurance racket of the first order. AIG is a good example of a company that gamed the system and then walked away with millions for its efforts. They sold more CDS than they could cover and then--when the debts started piling up around their eyeballs--they trundled off to the Fed for a multi-billion dollar bailout. Fed chief Bernanke later said that he was furious over the AIG's fiasco, but it didn't stop him from shovelling the losses onto the public ledger and making the taxpayer the guarantor for all AIG's bad bets. Keep in mind, that AIG was selling paper that had zero capital backing, an activity is tantamount to counterfeiting. Still, no one has been indicted or prosecuted in the affair. Defrauding clients and then sticking it to Joe six-pack has become de rigueur on Wall Street.

CDS have spider-webbed their way into every corner of the financial system lashing-together banks and other financial institutions in a way that if one defaults the others go down too. This is what's really meant by "too big to fail"; a euphemism which refers to the tangle of counterparty deals which has been allowed to spread--regardless of the risk--so that a handful of banksters can rake in obscene profits. CDS has become the bank cartel's golden goose; a no-risk revenue-generating locomotive that accelerates the transfer of public wealth to high-stakes speculators. If it wasn't for the turbo-charged profits from derivatives transactions, many of the banks would have already gone belly up.

From Dr. Ellen Brown:

"Credit default swaps are the most widely traded form of credit derivative. They are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff if the company defaults within a certain period of time, while the “protection seller” collects periodic payments for assuming the risk of default...

In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined." ("Credit Default Swaps: Evolving Financial Meltdown and Derivative Disaster Du Jour", Dr. Ellen Brown, globalresearch.ca)

The numbers boggle the mind, but they are real just the same, as are the losses, which will be eventually shifted onto the taxpayer. That much is certain.

Treasury Secretary Geithner has recently sounded the alarm for more regulation, but it's just another public relations stunt. Geithner is an industry rep whose sole qualification for the job as Treasury Secretary is his unwavering loyalty to the banking establishment. He has no intention of increasing oversight or tightening supervision. All the blather about change is just his way of mollifying the public while he tries to sabotage congressional efforts to re-regulate the derivatives market. In the next few weeks, Geithner will probably roll out a whole new product-line of reforms accompanied with the usual claptrap about free markets, innovation and "protecting the public's interest". It's all fakery; just more tedious sleight-of-hand carried out by agents of the banking industry working from inside the administration. Fortunately, sad sack Geithner is the world's worst pitchman, which means that every word he utters will be parsed by scores of bloggers trying to figure out what he really means. That will make it especially hard to for him to pull the wool over the public's eyes again.

Swaps originated in the 1980s as a way for financial institutions to hedge against the risk of sudden price movements or interest rate fluctuations. But derivatives trading took an ugly turn after congress passed the Clinton-era Commodity Futures Modernization Act of 2000. The bill triggered a sea-change in the way that CDS were used. Industry sharpies figured out how to expand leverage via complex instruments balanced on smaller and smaller morsels of capital. It's all about maximizing profits with borrowed money. CDS provided the perfect vehicle; after all, with no regulators, it's impossible to know who's got enough money to pay off claims. Besides, gambling on the creditworthiness of bonds for which one has no "insurable interest" can be fun; like taking out an insurance policy on a rivals home and waiting for it to burn down. This is the perverted logic of Wall Street, where every disaster ("credit event") turns into a fortune.

Cleaning up the financial system doesn't require a complete ban on CDS. There is a solution to this mess, and it's not complicated. There needs to be strict regulatory oversight of all issuers of CDS to make sure they are sufficiently capitalized, and there needs to be a central clearing-platform for all trades. That's it. (Note: There are serious questions about the IntercontinentalExchange, or ICE, due to its close connection to the banks) Geithner is trying to torpedo the nascent reform-effort by proposing bogus fixes that preserve the banks monopoly on the derivatives issuance. He's the banks main water-carrier. Now we can see why the financial industry is consistently the largest contributor of any group to political campaigns. They need friends in high places so they can continue their scams without interruption.

"Too big to fail" is a snappy PR slogan, but it's largely a myth. No financial institution is too big for the government to take into conservatorship; to put the bad assets up for auction, replace the management and restructure the debt. It's been done before and it can be done again without damaging the broader system. The real problem is separating healthy financial institutions from insolvent ones now that the whole system is stitched together in a complex net of counterparty deals.

Credit default swaps form the bulk of those counterparty transactions, which makes them the main source of systemic risk. To fix the problem, current contracts must be either unwound or allowed to lapse, while new contracts must be traded on a central clearinghouse where regulators can decide whether sellers are adequately capitalized or not. The Fed's solution--underwriting the entire financial system to prevent another Lehman Bros. fiasco---doesn't address the fundamental problem; it just puts more pressure on the dollar which is already beginning to buckle. The question now is whether Congress will pull their heads out of the sand long enough to do the people's work and pass the laws that will re-regulate the system. There is a remedy, but it requires action, and fast. Without course-correction, the prospect of a derivatives meltdown gets bigger by the day.




RE: The Global Financial Meltdown - Admin - 06-06-2009

THE BIG COLLAPSE COULD BE VERY NEAR

Robert Wenzel
http://www.globalresearch.ca/index.php?context=va&aid=13826

The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.

The Federal Reserve leaked to CNBC's Steve Liesman on Friday that they weren't targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren't targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It's always been, "no." Now it's maybe.

What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It's a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.

Translation, the Fed doesn't know what is going on, but they are really scared.

Here's more from Bull:

The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government bonds and a healthy demand for credit? If so, there might be less need for the Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities...

An obvious culprit for the move in bond yields is the country's record fiscal deficit, which will generate a massive amount of new government issuance.

The U.S. Treasury must sell a record net $2 trillion in new debt in 2009 to fund a $1.8 trillion projected fiscal deficit, resulting from falling tax revenues, an economic stimulus package and sundry bank bailouts.

It's the Chinese, and any other Treasury bond buyer who follows the markets, that have pulled away, to varying degrees from buying Treasury long securities. No one wants to be the last one holding bonds, where the new debt about to be issued is in the trillions.

Bull continues with the part of the message the Fed really wanted to get out: With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

"I'm in wait-and-see mode," said one Fed official who spoke on the condition of anonymity. "We laid out the asset purchase plan and we're following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don't think we should be chasing a long-term interest rate," the official said. It's the same message as Friday. The Fed does not want to spook the world into thinking that it can't push long term rates down, so it says it is not trying. But if rates continue to climb, a panic out of Treasury securities is a very likely scenario. And Bernanke has only one play to force long rates back down, buy every long bond in sight, which of course is highly inflationary and puts upward pressure on rates. How's that for a dilemma?

The end of the current financial system, as we know it, may be imminent. If you would have asked me even two weeks ago if collapse was imminent, I would have said it was highly unlikely, now I am saying it is possible. Bernanke may be able to patch things up short-term, if he is lucky, but in the long term the U.S. financial structure is in serious trouble. There is just too much Treasury debt that needs to be raised. An international panic out of Treasury securities, even a slow controlled panic, means the Fed will be the major buyer. This will ultimately mean record inflation.

And keep this in mind, we have never seen a collapse of a currency like the dollar. Even the hyperinflation during Germany's Wiemar Period can not serve as an example. Since the dollar is the reserve currency of most of the world, a panic out of the dollar means more dollars will return to the U.S. shores than any country has ever experienced.

Other countries have had collapsed currencies, but never in the history of world of finance has so much currency been held outside a country of issue that could come flying back, almost on a moments notice. If the panic out of the dollar starts, even if Bernanke stops printing money (unlikely), all the dollars flying back into the U.S. could cause a huge price inflation all on its own.



OUR ECONOMY IS GOING TO KEEP TANKING UNTIL WE STOP SHOVELING
BILLIONS TO RICH PEOPLE


Pam Martens
http://www.globalresearch.ca/index.php?context=va&aid=13865

For the past eight months, we have been a nation focused on bailouts and bankruptcies. For the past ten years, we have been a nation ignoring massive wealth transfer and wealth concentration through a rigged Wall Street.

As simple and clear as this picture is, some of the brightest minds in this country are unwilling to connect the cause and effect of wealth in too few hands to bankruptcies and a tanking economy.

Wealth-deprived consumers can't buy the goods and services being produced. This leads to repetitive cycles of layoffs and growing unemployment which leads to more wealth-deprived consumers leading to more overcapacity in production plants, more layoffs, more shrinking purchasing power.

The accompanying, and equally dangerous, problem is that concentrated wealth stifles the very innovation that is necessary to create new industries, new jobs and lead us out of the downward economic spiral.

Let's think about the individuals who tapped into Wall Street's rigged wealth transfer system and what they have done with their ill-gotten loot: typically, they own three or more homes, fancy cars, multiple country club memberships, airplanes, yachts, and numbered offshore bank accounts. The problem is, they just can't buy enough to compensate for the purchases they have deprived hundreds of thousands of other consumers from being able to make.

Goods sit on shelves, new orders get cancelled, leading to production cuts, layoffs, plant closings and bankruptcies.

In a nutshell, it's the $1 Billion that Sandy Weill extracted from Citigroup as its former CEO and Chairman that's the problem; it's the $42 million condo he bought that's depriving 140 other people from having $300,000 to buy a home ready to go into foreclosure for want of a buyer. It's the hundreds of millions Weill is throwing around to plaster his name and his wife's name on buildings that could be in the hands of 10,000 consumers going out to buy Chrysler and GM cars now gathering dust on the lots of dealers about to go bust.

It's also that Sandy Weill and his colleagues of that era on Wall Street did not do anything worthy or smart in exchange for extracting that wealth from the system. They repealed the regulations that had kept the system on a more solid footing, then looted the system and left it a basket case. We have no residual benefits of innovation to compensate for all that missing wealth.

And that is the real and overlooked attendant danger: too many billionaires sitting atop too many billions tied up in mansions and yachts means that millions of budding innovators and entrepreneurs are being deprived of adequate funds to create the breakthroughs that will lead to new industries and future job growth.

And let's not forget about the trillions of dollars of wealth that evaporated in bogus ventures that Weill and his fellow Wall Streeters brought to market on NASDAQ. Add those trillions to the bailout trillions and you're looking at a lost generation of funds for innovation.

What all of this means is that President Obama has precious little time left to stop rewarding failure and bad behavior before his own Presidency is deemed a failure. It was difficult enough to countenance the reappearance in his administration of all those Wall Street faces who failed to rein in the Wall Street abuses or, worse, aided and abetted the actual creation of the opaque system that permitted the looting and pillaging. But this past week's news that the President might be considering a pivotal role for the Federal Reserve in the new regulatory structure planned for Wall Street crosses the line, if true, from hubris to outright contempt for the American people.

The inherent cronyism of the Federal Reserve renders it utterly useless as a watchdog. (Why is it even necessary to have to state that obvious fact when no one can shake loose from the Fed what it's done with trillions in taxpayer dollars or why it failed to police these Frankenbanks in the first place.) The same thing is true of the U.S. Treasury, which can't auction its own debt without the goodwill of its Wall Street primary dealers.

According to March 31, 2009 data from the Federal Deposit Insurance Corporation, there are 8,246 FDIC insured institutions with total assets of $13.5 Trillion and domestic deposits of $7.5 Trillion. Four institutions, Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc., four institutions out of 8,246, control 35% of all the insured domestic deposits and 46% of the assets according to the March 31, 2009 figures from the FDIC.

Has the Federal Reserve taken steps to reduce this massive concentration since the financial crisis began? Quite the contrary. Bank of America was allowed to purchase the investment bank and brokerage firm Merrill Lynch as well as subprime lender Countrywide Financial; JPMorgan Chase took over the investment bank and brokerage firm Bear Stearns as well as Washington Mutual; Wells Fargo & Co. took over Wachovia.

The Federal Reserve's answer to concentrated wealth is to concentrate it further. The Federal Reserve's answer to unmanageable, dysfunctional banking institutions is to make them more unmanageable and more dysfunctional.

President Obama needs to do three things quickly to get the country back on course: he needs to separate investment banking/brokerage from commercial banks. This will restore risk taking and innovation to where it belongs, in non FDIC insured institutions. He needs to put new faces that Americans can trust in charge of real regulators with real powers. He needs to stop funneling money to zombie institutions that haven't created anything of innovative value in a decade and channel those funds into innovative research and development projects.

President Obama needs to step up to the plate and stop listening to conflicted advisors. The fate of a nation, as well as his place in history, hangs in the balance.


Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com





The Global Financial Meltdown - Admin - 06-07-2009

MORE FINANCIAL TURMOIL AHEAD: A STOCK MARKET BEAR RALLY BUILT ON SAND
Bob Chapman

http://theinternationalforecaster.com/International_Forecaster_Weekly/Market_Distortions_A_Product_Of_Fed_Decisions

A recovery is supposed to be in the works in the midst of increased savings, declining debt balances on credit cards, more bankruptcies, higher unemployment and new wave of foreclosures. Consumer participation in GDP is down from 72% to 70.4%. Bank and other financial firms’ balance sheets are what they say they are and we have a stock market bear rally built on sand just as we had in 1931. And, lest we forget, bogus government statistics calculated to confuse professionals and investors alike.

What an upside down world. How do you make money when you are losing money? Wait until late July and in August when the second quarter earnings are released by financial firms. They won’t be pleasant reading. The market rally and much of the earnings are simply fraud. Wall Street and investors simply shrug their shoulders and look away. They know but they do not want to know. Ever present in the scams is the SEC, which has never seen a major firm they did not like. Acting on violations only when forced too at large firms and perpetually pursuing the small and medium sized brokers and brokerage firms and newsletter writers. Then there is the veracity of our government for which few have any respect, trust or confidence.

Our treasury department woefully short of revenues has the privately owned Federal Reserve monetizing sovereign debt because they cannot sell it all, some $300 billion in Treasuries and $750 billion in Agency debt as the Fed monetizes an additional $1.5 trillion in bank owned CDOs, collateralized debt obligations, so as to remove them from bank balance sheets so they can purchase Treasuries to compete the daisy chain of fraud. Ten-year Treasury note yields as a result have traded up to 3.84% from 2.35% just five months ago. Foreigners are sellers as an avalanche of Treasuries hit the street. The demand for Treasury funds over the next few years will be colossal. If government raises taxes the economy will fall further. As we forecast earlier the Fed could monetize $2.5 and $4 trillion in Treasuries and other toxic waste by the end of the calendar year. Incidentally, there is not a remote chance that the Fed will ever be able to withdraw funds from the system and every professional has to know that. The result is a collapsing dollar and higher gold and silver prices in anticipation of higher inflation. This year the dollar could easily break 71.18 on the USDX, the dollar index, versus six major weighted currencies. That would again cause, as it did from 11/07 to 6/08, countries and foreign businesses to reject taking dollars in trade. Such an event is in our crystal ball. Propaganda and smoke and mirrors won’t work this time.

Earlier this week our Secretary of the Treasury was booed, jeered and laughed at during a speech to students at Beijing University. That is what minds outside of the box think of our monetary policy. He said trust me, they said no. Needless to say, this was little reported in the mainstream media. The people representing the money powers that control our nation are viewed as an international disgrace. Foreigners recognize the financial Mafia that runs America, but most Americans are clueless to who the real power running America is.

We have heard much about the 40 to 60 times deposit ratios used by banks in the 2003 thru present period. Normally that ratio is 8 to 10 to one dollar on deposit. We painfully remember the subprime and ALT-A loans and the totally unqualified that received them. Then the loans that Fannie Mae and Freddie Mac should have never approved and finally the asset backed securities and collateralized debt obligation bonds foisted on professionals at AAA when they were in fact BBB.

What has not been publicized was the SEC position under pressure from the elitists on Wall Street during the easy money period and the steep yield curve to exempt brokerage houses from the net capital rule. That as well led to leverage of 40 to 60 to one. If the banks could do it they wanted to be able to do it too to compete. That decision ultimately led to five failures. Even a mitigating gold standard could not have surmounted lack of regulation. After almost 50 years in the markets and a former brokerage house owner we know financial institutions should never be allowed to self regulate. If we have financial regulation we cannot have regulators who are friend s with the people they regulate. No revolving door between Wall Street and the regulator. The same goes for the revolving door between Wall Street and banking and Washington, particularly in the Treasury Department. Real interest rates will always rise in a period of monetary and fiscal profligacy similar to what we are now experiencing as a result of unbridled leverage.

Keynesians will tell us such financial discipline is not possible in the real world, but of course it is. They just want to perpetually break the rules. There is no such thing as a self-regulating monetary policy. Distortion reigns instead of a slightly expansive classical free-market model. Markets can be far more rational then they are presently if the players are not allowed to run wild, as we have seen since 2002. In addition a privately owned Federal Reserve should never be allowed to exist never mind take on government responsibilities, such as financial regulation, which is currently contemplated. The Fed has always subordinated monetary policy to the desires of Wall Street and banking and at times has bowed to political expediency. The Fed is responsible for every recession and depression we have had since 1913. The great market distortions are all a product of Fed decisions. The Fed is now using adversity to expand its empire, taking on the responsibilities of government when it should not be allowed too. Its power to print money and credit has to be ended. No more papering over their mistakes or willful arrangements with Wall Street and banking. Who caused the dotcom boom and the housing bubble, they did.

As we predicted long end interest rates are already telling us that their policies are flawed as Treasuries fall in value and yields rise, a reflection of coming inflation, as the same time the dollar is falling and gold and silver are rising. The Fed is in a box and they cannot get out. From a fiscal perspective we have had five administrations that have created tremendous fiscal debt. The damage done by the last two administrations was horrendous. Don’t forget as interest rates rise on debt service the debt gets larger and larger. These higher rates are already limiting any housing recovery and we see rates moving higher; at least to 4% on the 10-year Treasury note. That would translate into a 30-year fixed rate mortgage of about 5-1/2%. That rate will disqualify many borrowers as unsold inventory increases via further foreclosures that will last into 2012. That means further price declines. That will further destabilize the banking system. The unsold housing inventory in lenders hands and the value of CDO and ABS bonds will fall as well.

The answer is elimination of the Fed. Its powers would be returned to the Treasury, which would have to be transparent and the revolving door between Treasury and Wall Street and banking closed. The Treasury would have to run a tight ship limiting money and credit creation to 5% and by raising interest rates. The crisis has to be addressed eventually and the longer it takes the worse it will be. The power to run Washington by Wall Street and banking has to end. The connection has to be broken. Treasury and Congress have to start acting responsibility and the financial service sector will have to accept lower profits, lower bonuses and a smaller industry.

Credit default swaps have to be settled and banned and all derivatives regulated. There has to be a permanent cap on leverage at banks and brokerage houses of 10 to one and their underlying financial bases have to be changed and closely monitored. If we do not make these changes the financial system as we now see it is doomed.

Within 2-1/2 years Treasury short-term debt will be $16.6 trillion, or 110% of GDP. This is close to 1`21% of GDP attained after WWII, as Thomas Jefferson said, “Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible.” This is the kind of society we have today. This year foreigners will have to buy $862 billion treasuries, up from $724 billion. We don’t see that happening so the Fed will have to buy $1.5 trillion worth, perhaps more.

Legislation to give Congress greater oversight of the Federal Reserve has been severely watered down on the Senate floor in private negotiations between Sen. Charles Grassley (R-IO), the top ranking Republican on the Finance Committee, who wanted more oversight and Richard Shelby (R-AL).

The Grassley Amendment intended to give the Comptroller General of the Government Accountability Office power to audit any action taken by the Fed – the third undesignated paragraph of Section 13 of the Federal Reserve Act, which would be almost everything that the Fed has done on an emergency basis to address the financial crisis, encompassing its massive expansion of opaque buying and lending.

Handwritten into the margins, however, is the amendment that watered it down “with respect to a single and specific partnership or corporation.” With that qualification, the Senate severely limited the scope of the oversight. Richard Shelby was fully responsible for this course of action. Actions will be limited to specific companies. This modified version does not allow the GAO to look at all taxpayer risk. It in no way threatens the Fed’s monopoly on monetary policy and their secret independence. The list of Fed actions that can be probed are listed but they still could be knocked out in committee. They are:

1. Actions related to Bear Stearns and its acquisition by JP Morgan Chase, including:

a. Loan To Facilitate the Acquisition of The Bear Stearns Companies, Inc. by JPMorgan Chase & Co. (Maiden Lane I)

b. Bridge Loan to The Bear Stearns Companies Inc. Through JPMorgan Chase Bank, N.A.

2. Bank of America -- Authorization to Provide Residual Financing to Bank of America Corporation Relating to a Designated Asset Pool (taken in conjunction with FDIC and Treasury)

3. Citigroup -- Authorization to Provide Residual Financing to Citigroup, Inc., for a Designated Asset Pool (taken in conjunction with FDIC and Treasury)

4. Various actions to stabilize American International Group (AIG), including a revolving line of credit provided by the Federal Reserve as well as several credit facilities (listed below). AIG has also received equity from Treasury, through the TARP, which would also be captured in amendment #1020.

a. Secured Credit Facility Authorized for American International Group, Inc., on September 16, 2008

b. Restructuring of the Government's Financial Support to American International Group, Inc., on November 10, 2008 (Maiden Lane II and Maiden Lane III)

c. Restructuring of the Government's Financial Support to American International Group, Inc., on March 2, 2009

5. TALF -- finally, amendment #1020 would expand GAO's authority to oversee the TARP, including the joint Federal Reserve-Treasury Term Asset-Backed Securities Loan Facility (TALF)

*Neither* Amendment #1021 nor #1020 would include short-term liquidity facilities:

1. Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
2. (AMLF)
3. Commercial Paper Funding Facility (CPFF)
4. Money Market Investor Funding Facility (MMIFF)
5. Primary Dealer Credit Facility and Other Credit for Broker-Dealers (PDCF)
6. Term Securities Lending Facility (TSLF)

Section 404 of the Sarbanes-Oxley legislation has been a bonanza for accounting firms. It has caused a high proportion of major foreign companies to de-list themselves from the NYSE and it has erected an artificial barrier to the globalization of capital markets. Thus, it isn’t all bad as depicted by corporate America.

The size of the commercial paper market, a vital source of short-term funding for daily operations of many companies, fell $3.6 billion to $1.245 trillion, from $1.248 trillion the previous week. Asset-backed CP outstanding fell 8.3 billion to $557.4 billion after falling $8.7 billion the prior week. The top was $2.2 trillion.

Mortgage rates surged 0.38%. The 30-year fixed rate was 5.29% up from 4.91%.

Sales were weaker than expected at 63% of the 30 retailers tracked by Thomson Reuters. The S&P retailers index fell 2.5%. May same store sales fell 4.8%.

The International Council of Shopping Centers forecast a 3 to 4 percent drop in June same store sales, down from 4.6% in May.

Freight traffic on railroads continued down for the week of 5/23 yoy, off some 21.5%, but up 4.9% week-on-week. Loadings were down 16.4% in the West and 28% in the East. Farm products fell 4.8% and metallic ores fell 59.7%.

Trailers or containers fell 19.1% yoy, and container volume fell 19.1% yoy, as trailer traffic fell 37.2%.

Year-to-date carloads are off 19.3% ytd and trailers and containers 16.8%. Total volume was down 18.2%.

Something that should be remembered is that in 1930 government bonds were used massively for capital safety. In 1931, investors had doubts and started switching to gold, which ran up in price forcing interest rates higher. This is what is happening today.

In 1930, there was no shortage of bank reserves and that carried into 1931. There were excess reserves and interest rates were very low.

The financial atmosphere in 1928-29 was the same as it was here in 2005 and 2006. It was a new era, nothing could possibly go wrong. The Fed refused to reign in cheap money and credit. Commercial paper rates were 1.25% and excess reserves increased four-fold. In the late summer of 1931 gold began its run. History is about to repeat itself.

Fed Chairman Ben Bernanke deliberately lied to Congress this week. The Fed and the NY fed pumped credit aggressively after the 1929 crash and for the remainder of the 1930s. The exception was 1932 when gold took its big run. Bernanke denied this and it is an historical fact. He also duplicitously told Congress the Fed will not monetize debt, but that is exactly what he is doing. Ben is part of the fascist propaganda machine. Tell a lie long enough and big enough and everyone will believe it. This can be called Fed speak. Big Brother would have been very proud of Ben and his fellow Illuminists.

Dick Cheney attempted to win support for harsh interrogation of 'suspected terrorists' by controlling the information Congress would receive on the matter, a report says.

In 2005, the former US vice president directed 'at least four' related briefings with Congressmen during which he would produce 'an impassioned defense' of 'enhanced interrogation techniques' -- the former administration's euphemism for torture, The Washington Post reported on Wednesday.

"This is a really important issue for the security of the United States," one official quoted Cheney as having told the lawmakers.

Officials, attending the meeting from the Central Intelligence Agency (CIA), with whom the program is associated, would also try quelling the Congressmen's concerns about the program saying the agency owed half of its information on alleged 'terrorists' to the methods.

The former top gun has produced an 'overrated' account of the security gains of the former administrations 'anti-terror' campaign.

He has claimed that the Bush administration's trademark 'war on terror' was likely to have saved "violent death of thousands, if not hundreds of thousands, of people" - an achievement which resembles that of World-War-II intelligence heroes.

The paper quoted Sen. Lindsey O. Graham (R-S.C.) as confirming Cheney's leading role in selling the program. "His office was ground zero. It was his office you dealt with at the end of the day."

Two more Iranian families accuse Blackwater, now known as Xe, of murdering their husbands and fathers in Baghdad and covering it up. Azhar Abdullah Ali, 33, a father of three, was a security guard for the Iraqi Media Network when Blackwater mercenaries killed him and two others on Feb. 7, 2007, according to the federal complaint. The family of Rahim Khalaf Sa'adoon claims drunken Blackwater mercenary Andrew Moonen killed Sa'adoon on Christmas Eve, "for no reason," as Sa'adoon guarded the vice president of Iraq. The security guard family's complaint states: "The Sabah Salman Hassoon, Azhar Abdullah Ali, and Nibrass Mohammed Dawood are but one of a staggering number of senseless deaths that directly resulted from Xe-Blackwater's misconduct," according to the complaint.
Sa'adoon left two young children and his wife.
Named as defendants are Erik Prince, Prince Group, EP Investments LLC, EP Investments LLC, Greystone, Total Intelligence, The Prince Group LLC, Xe, Blackwater Worldwide, Blackwater Lodge and Training Center, Blackwater Target Systems, Blackwater Security Consulting, and Raven Development Group.
Both families seek punitive damages for war crimes, wrongful death, assault and battery, spoliation of evidence, and negligence. They are represented by Susan Burke with Burke O'Neil of Philadelphia.

Nonmanufacturing activity lost ground at a slightly slower pace in May, amid signs the sector may be preparing for recovery.

The Institute for Supply Management, a private research group, reported Wednesday that its NMI/PMI index stood at 44.0 from 43.7 in April and 40.8 in March.

That reading was below the 45.0 expected by economists. The ISM also said that its May business activity/production index came in at 42.4, from 45.2 in April.

The ISM report, which is comprised mainly of the service sector activities that make up the bulk of U.S. economic activity, arrives at a time when economic data are suggesting the recession may no longer be getting worse.

Factory orders rose in April less than expected, a barometer of capital spending by businesses plunged, and inventories fell an eighth straight month.

Orders for manufactured goods increased 0.7%, following a downwardly revised 1.9% decline in March, the Commerce Department said Wednesday. Originally, factory orders were seen dropping by 0.9% in March.

Economists had forecast overall April factory goods orders would rise by 1.0%. The report underscored the weakness of a sector that, while showing signs of improvement, is still limping.

Non-defense capital goods orders excluding aircraft decreased 2.4% in April after sliding 1.4% in March. Those bookings are seen as a yardstick for capital spending by businesses. Demand for durable goods were revised down to an increase of 1.7% in April. Last week, Commerce, in an early estimate, said durables surged 1.9% in April. Durables are expensive goods made to last at least three years, such as cars. Durables fell 2.2% in March.

Non-durable goods factory orders decreased 0.1%, after falling by 1.6% in March. A sign of future factory demand fell, down for seven straight months. Unfilled orders decreased 1.2% in April, after dropping 1.7% in March.

Business spending was atrocious in the first quarter of this year. Outlays fell by 36.9% January through March, after dropping 21.7% in the fourth quarter. The economy in those six months was dreary, with gross domestic product down 6.3% in the fourth quarter and 5.7% during the first quarter. Nearly half of that 5.7% drop was caused by U.S. businesses liquidating inventories to adjust for receding demand. The factory data Wednesday showed manufacturers' inventories in April dropped 1.0%, after falling 1.2% in March.

More liquidation could be in the offing. The latest Commerce Department report on business inventories showed the inventory-to-sales ratio was a relatively high 1.44 in March. The gauge indicates how well firms are matching supply with demand. It measures how long in months a firm could sell all current inventory. A year earlier, the I/S ratio was 1.28.

The government now has an equity stake in auto lender GMAC Financial Services after providing $12.5 billion in aid to keep loans flowing to buyers of GM and Chrysler cars, the Treasury Department said Tuesday.

The Treasury holds a 35.4 percent stake in GMAC, after exchanging an $884 million loan it made to General Motors Corp. for that equity under an earlier agreement.

GM filed for Chapter 11 bankruptcy protection Monday, a historic move designed to remake the automaker as a smaller and leaner company, that also made the federal government its principal owner with a 60 percent stake.

The government has a vested interest in seeing GMAC, Chrysler and GM succeed in order to recoup the billions in aid it has doled out to the companies. Analysts have suggested the federal support for GMAC will help make it a lending powerhouse that will give GM and Chrysler a big advantage over their competitors — including U.S. rival Ford Motor Co. — which hasn't taken government aid.

Mortgage rates rose sharply last week, and the volume of mortgage applications filed fell a seasonally adjusted 16.2% compared with the previous week, the Mortgage Bankers Association said Wednesday.

Applications were up an unadjusted 14.4% for the week ended May 29 from the comparable week in 2008, according to the Washington-based MBA's survey, results for which were adjusted to account for the Memorial Day holiday.

The latest survey, which covers half of all U.S. retail residential mortgage applications, mirrored a similar pattern for mortgage filings seen in the week ended May 22. See full story.

Yields on Treasury notes, a key benchmark for setting mortgage rates, spiked a week ago. See Bond Report.

The most recent week-to-week drop in overall mortgage application volumes stemmed from a 24.1% decrease in refinancing activity among homeowners, the data showed. Filings seeking mortgages to purchase homes were up a seasonally adjusted 4.3%. The MBA's four-week moving average for all mortgages was down a seasonally adjusted 9.0%. Refinancings made up 62.4% of all mortgage applications last week, down from 69.3% the previous week. Applications for adjustable-rate mortgages accounted for 3% of all activity, up from 2.6%. Interest rates charged on 30-year fixed-rate mortgages averaged 5.25% last week, up from 4.81% the previous week -- the largest week-to-week jump since October 2008.

Points to obtain the rate averaged 1.02, down from 1.28 the week before. A point represents 1% of the total mortgage amount, charged as prepaid interest.

The average rate on 15-year fixed-rate mortgages came to 4.8% last week, up from 4.44% the week before, with points decreasing to 1.10 from 1.16.

And one-year ARMs averaged 6.61%, up from 6.55%, with points increasing to 0.15 from 0.12

Arthur Samberg, once the world’s biggest hedge-fund manager, said a federal insider-trading investigation is forcing him to shut Pequot Capital Management Inc. more than two decades after starting its first fund.

“With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business,” Samberg wrote in a letter to clients yesterday. Pequot oversees $3.47 billion, according to a May 15 regulatory filing, down from $4.3 billion in November and $15 billion in 2001, when it was the top-ranked hedge-fund firm by assets.

The U.S. Securities and Exchange Commission in January resumed a probe into whether Samberg’s funds illegally profited in 2001 by trading on inside information about Microsoft Corp., people familiar with the matter said at the time. That was about a year after the agency told Samberg and Morgan Stanley Chief Executive Officer John Mack they wouldn’t be accused of wrongdoing related to insider trading.

California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment Development Department.

This latest fiscal crisis won't immediately affect the 1.1 million Californians now collecting benefits because the state is using an interest-free federal loan to cover their checks. But the state is supposed to repay that loan and restore its unemployment fund to solvency by 2011 - and right now, policymakers aren't sure exactly how to do that, or at what cost. "The deficit that California looks like it is facing is staggering," said Bud Bridger, fiscal officer for the unemployment insurance program.

To rebalance the system and pay back the federal loan, lawmakers must raise payroll taxes on employers, reduce benefits for recipients, or both.

In 2009 and 2010, the state expects to pay out $29 billion in benefits. It will collect just $11 billion. Counting the small positive balance that was in the fund at the end of 2008, the result is a $17.8 billion deficit at the end of 2010.

Upon further review, April Factory Orders were revised lower, to -1.9% from -0.9%.

Under the FASB’s new rules, companies can exclude non-temporary losses from net income. That’s on top of other things it already excludes.

By the comprehensive income benchmark, S%P 500 companies had combined losses in their previous four quarters of about $200 billion.

The gulf between net and comprehensive income usually isn’t as wide as it is now. General Electric CO. reported 2008 net income of $17.4 billion and a $12.8 billion comprehensive loss. Citigroup Inc.’s $48.2 billion comprehensive loss was $20.5 billion wider than the bank’s net loss.

The financial-services industry is taking steps to delay an accounting rule

that would force banks and others to bring some of their off-balance-sheet vehicles back onto their books next year, which could force some to raise additional capital.

Citigroup disclosed that it “will seek authorization from investors to increase its

outstanding common shares to as much as 60 billion, from a current limit of 15 billion.”

The government’s approach to the bankruptcies of General Motors Corp. and Chrysler LLC illustrates how this new, unstated policy works: Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group.

The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations.

Rising yields on long-term Treasury debt is a signal that the Federal Reserve should being raising interest rates, said Thomas Hoenig, the president of the Kansas City Federal Reserve district bank on Wednesday…"I suggest strongly that we need to be alert to the markets' message and begin in earnest to bring monetary policy into better balance before inflation forces get out of hand," Hoenig said.

The number of U.S. workers filing new claims for jobless benefits fell slightly as expected last week while total claims dropped for the first time since the start of the year, a fresh signal that the worst of the labor-market downturn has passed.
Still, the figures point to another sizable drop in payrolls, in excess of 500,000, when May employment data are released Friday.

Initial claims for jobless benefits fell 4,000 to 621,000 in the week ended May 30, the Labor Department said in its weekly report Thursday. The previous week's figure was revised up slightly.

Economists surveyed by Dow Jones Newswires had expected initial claims would fall by 3,000.

The four-week average of new claims, which aims to smooth volatility in the data, rose 4,000 to 631,250. Meanwhile, the tally of continuing claims - those drawn by workers for more than one week in the week ended May 23 - slid 15,000 to 6,735,000, the first decline since Jan. 3. The unemployment rate for workers with unemployment insurance was 5%, unchanged from the previous week, which was revised down.

Not adjusted to reflect seasonal fluctuations, Illinois reported the largest jump in new claims during the May 23 week, 3,881, due to layoffs in the trade, service and manufacturing sectors.

North Carolina reported the largest decrease, 3,952, due to fewer layoffs in the construction, furniture and transportation industries

Productivity grew at a solid pace last quarter despite a steep contraction in output, suggesting companies have responded quickly to the recession by shedding workers and cutting hours. Non-farm business productivity rose 1.6%, at an annual rate, in the first quarter, the Labor Department said in revised figures released Thursday. That was double the first estimate of a 0.8% rise.

Economists in a Dow Jones Newswires survey had expected the revised data to show a 1.2% increase. Productivity, which is defined as output per hour worked, slid 0.6% in the fourth quarter of 2008.

Unit labor costs - a key gauge of inflationary pressures - rose 3% last quarter, at an annual rate, largely in line with expectations. They were up just 2.2% from one year ago, an indication that wage inflation remains contained.

Over the long run, productivity is key to improved living standards by spurring rising output, employment, incomes and asset values.

There's a downside to that type of efficiency, though. Labor markets will likely remain under pressure in the near term as firms cut back on labor in response to, or anticipation of, weak demand. The May employment report, due Friday, is expected to show another monthly drop in payrolls in excess of 500,000, though that decline wouldn't be quite as severe as the first four months of the year.

Non-farm business output tumbled 7.6% during the first quarter, at an annual rate, the Labor Department said Thursday. That was on the heels of a 8.8 plunge the previous quarter. Hours worked declined 9% last quarter, the biggest drop since 1975.

Productivity in the manufacturing sector slid 2.7% last quarter. Manufacturing output fell a record 21.7% and hours worked tumbled 19.5%, which was also a record.
Hourly compensation in the nonfarm business sector increased 4.6% last quarter. Real compensation, adjusted for inflation, jumped 7.1%

The Federal Deposit Insurance Corp., unable to get U.S. banks to sell toxic loans in a government program, plans to sell hard-to-price assets seized from failed lenders using guaranteed debt financing.

A test auction of illiquid bank assets, planned this month, was delayed yesterday after lenders raised capital without needing to sell bad loans, the agency said. The FDIC will instead use debt guarantees as an incentive for buyers of assets when lenders are in receivership, the agency said.

“If the FDIC can sell bad assets of failed banks, they will be a winner and it gives opportunities for the private sector as well,” said Ralph “Chip” MacDonald, a partner specializing in financial services at law firm Jones Day in Atlanta.

The Obama administration unveiled the two-part Public- Private Investment Program on March 23 as a centerpiece of its effort to shore up the financial system by removing illiquid assets. It would be funded by $75 billion to $100 billion from the

Treasury’s Troubled Asset Relief Program.

Since the program was announced, U.S. banks have raised capital through stock sales and by converting preferred shares, and as of yesterday the total reached almost $100 billion, according to data compiled by Bloomberg.

“Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system,” FDIC Chairman Sheila Bair said yesterday in a statement in Washington.

President Obama's push for healthcare reforms gets a boost today from a new study by Harvard University researchers that shows a sizable increase over six years in bankruptcies caused in part by ever-higher medical expenses.

The study found that medical bills, plus related problems such as lost wages for the ill and their caregivers, contributed to 62% of all bankruptcies filed in 2007. On the campaign trail last year and in the White House this year, Obama had cited an earlier study by the same authors showing that such expenses played a part in 55% of bankruptcies in 2001.

Medical insurance isn't much help, either. About 78% of bankruptcy filers burdened by healthcare expenses were insured, according to the survey, to be published in the August issue of the American Journal of Medicine.

With companies in no mood to hire, the U.S. unemployment rate jumped to 9.4 percent in May, the highest in more than 25 years. But the pace of layoffs eased, with employers cutting 345,000 jobs, the fewest since September.

If laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the unemployment rate would have been 16.4 percent in May, the highest on records dating to 1994. Our calculation shows U6 to be 20.4% based on the 1980 formula which does not include the Birth/Death ratio.

Even with layoffs slowing, companies will be reluctant to hire until they feel certain that economic conditions are improving and that any recovery will last.

Since the recession began in December 2007, the economy has lost a net total of 6 million jobs.

As the recession -- which is now the longest since World War II -- bites into sales and profits, companies have turned to layoffs and other cost-cutting measures to survive the fallout. Those include holding down workers' hours and freezing or cutting pay.

The average work week in May fell to 33.1 hours, the lowest on records dating to 1964. The number of people out of work six months or longer rose to more than 3.9 million in May, triple the amount from when the recession began.

Construction companies cut 59,000 jobs, down from 108,000 in April. Factories cut 156,000, on top of 154,000 in the previous month. Retailers cut 17,500 positions, compared with 36,500 in April. Financial activities cut 30,000, down from 45,000 in April. Even the government reduced employment -- by 7,000 -- after bulking up by 92,000 in April as it added workers for the 2010 Census.

Education, health care, leisure and hospitality were among the industries adding jobs in May.

The deepest job cuts of the recession came in January when 741,000 jobs disappeared, the most since 1949.

Federal Reserve Chairman Ben Bernanke repeated his prediction this week that the recession will end this year, but again warned that any recovery will be gradual.

Many economists believe the jobless rate will hit 10 percent by the end of this year. Some think it could rise as high as 10.7 percent by the second quarter of next year before it starts to make a slow descent. The post-World War II high was 10.8 percent at the end of 1982.

Ripple-effects from General Motors Corp.'s filing for bankruptcy protection -- the fourth largest in U.S. history -- could muddy the outlook, some analysts said. GM said earlier this week it will close nine factories and idle three others indefinitely as part of its restructuring. The closings, which will take place through the end of 2010, will cost up to 20,000 workers their jobs.

Government auditors would be allowed to examine the Federal Reserve’s response to the financial crisis – a move many believe would threaten the Fed’s independence – under an amendment adopted by the oversight committee of the US House of Representatives.

The amendment, proposed by congressman Dennis Kucinich, is subject to referral to the House financial services committee as well as approval in the Senate, and may never be law.

But it highlights the growing pressure in Congress for greater scrutiny of giant Fed lending and asset purchase programmes put in place to fight the financial crisis. The possibility of greater scrutiny could deter private sector companies from participating in some Fed programmes, reducing their effectiveness.

The Kucinich amendment goes far beyond legislation recently signed into law by Barack Obama, US president, which gives auditors access to Fed programmes that are blended with government bail-out funds.

It would give the Government Accountability Office authority to audit the Fed’s entire activities, including its commercial paper programme, primary dealer loans, term auction facility, foreign exchange swaps and asset purchases.

The Fed declined to comment on the amendment. But Ben Bernanke, Fed chairman, has told Congress’s joint economic committee he will “resist any attempt to dictate to the Federal Reserve how to make monetary policy”.

Mr Bernanke has said he views the Fed’s loan and asset purchase programmes as an extension of core monetary policy in extreme circumstances – a strategy he calls “credit easing”.

But critics, including within the US central bank, say its operations have crossed the line between fiscal and monetary policy, which is murky when interest rates are close to zero.

Some current and former senior Fed officials fear these actions invited a Congressional backlash against Fed independence, which is now emerging.

At the House budget committee this week, Democratic representative Lloyd Doggett told Mr Bernanke: “the Fed . . . seems to have sprung into action through the back door as a way for some to avoid another request to the Congress for public funds through the front door.”

In addition to pressure for more Fed disclosure, there has been talk of a renewed effort to strip the regional Fed presidents of votes at the federal open market committee.

The US Federal Reserve on Thursday damped expectations that it was preparing to prop up the market for distressed bubble-era securities backed by mortgages.

Hopes that the Fed would in the coming months start providing financing to investors seeking to buy residential mortgage-backed securities (RMBS) – many of which have lost their triple A credit ratings – have pushed prices on these assets higher in recent months.

William Dudley, president of the Federal Reserve Bank of New York, said on Thursday that a decision had not been made. “We have not made a final decision on whether it is doable and, if it is doable, whether it is worth the cost,” he said.

Mr. Dudley, who took over from Tim Geithner in January, has overseen the implementation of the $1,000bn term “asset-backed securities loan facility” (Talf), a key plank in the US government’s efforts to plug the hole left by the collapse of the asset-backed securities markets.

So far, the Talf has been used to finance the purchases of securities backed by loans to consumers, such as car and credit card loans. The Talf lends money to investors such as hedge funds on favourable terms, which encourages the purchases. This week, Talf financed 13 deals worth $16.4bn.

“We’re not back yet to the $200bn annual rate of issuance [for consumer loan-backed securities] before the crisis and we don’t expect to get there, but we are making a good start,” M.r Dudley said, stressing that the “securitisation markets are still significantly impaired”.

Now, the Fed is working to extend the Talf into more complex areas, such as loans backed by commercial property and also purchases of existing mortgage-backed securities, part of the pool of toxic assets that have contributed to billions of dollars of writedowns.

Funding purchases of toxic assets presents huge administrative hurdles because each security has to be analysed. Mr Dudley said many of these securities were no longer rated triple A, which may make them too risky. His comments on residential mortgage-backed securities are believed to also apply to commercial mortgage-backed securities. Although most of these are rated triple A, a wave of downgrades is anticipated soon by Standard and Poor’s.

It is in the commercial mortgage market – used to fund office blocks and shopping centres – that the Talf is most needed, however.

The 9.4 percent May unemployment rate is based on 14.5 million Americans out of work. But that number doesn't include discouraged workers, people who gave up looking for work after four weeks. Add those 792,000 people, and the unemployment rate is 9.8 percent.

--The official rate also doesn't include "marginally attached workers," or people who have looked for work in the past year but stopped searching in the past month because of barriers to employment such as child care, poor health or lack of transportation. Add those 1.4 million people, and the unemployment rate would be 10.6 percent.

--The official rate also doesn't include "involuntary part-time workers," or the 2.2 million people like Noel who took a part-time job because that's all they could get, plus those whose work hours dropped below the full-time level. Once those 9.1 million workers are added to the unemployment mix, the rate would be 16.4 percent.

All told, nearly 25 million Americans were either unemployed, underemployed or had given up looking for a job in May.

The ranks of involuntary part-timers has increased by 4.9 million in the past year, according to a May study by the Federal Reserve Bank of Cleveland. Many economists now predict unemployment won't peak until 2010. And since employers generally increase the hours of existing workers before hiring new ones, workers could be looking for full-time jobs for some time.

Even so, one economist said the increase in involuntary part-timers might have a silver lining. Gary Burtless, a senior fellow in economic studies at the Brookings Institute, said employers are likely cutting back everyone's hours instead of laying off people.

The Federal Reserve's latest weekly money supply report Thursday shows seasonally adjusted M1 rose by $12.2 billion to $1.602 trillion, while M2 rose $30.8 billion to $8.358 trillion.

Rumor has it that JPMorgan Chase has big loan problems in the Middle East.

Russian President Dmitry Medvedev says Russia and China should consider switching to domestic currencies without using the US dollar, as China has done with Brazil and Belarus, using currency swaps. Russian – Chinese trade in 2008 was $50 billion.

Yes, there were 345,000 jobs lost in May, but the Birth/Death ratio added 220,000 jobs out of thin air. The true number of jobs lost was 565,000.

Payrolls in construction fell 59,000 versus a fall of 108,000 in April as the government stimulus package takes hold. Services lost 120,000 and manufacturing 156,000 versus 154,000 in April.

The Economic Cycle Research Institute’s US Future Inflation

Gauge designed to anticipate cyclical swings in the rate of inflation, rose to 79.8 in May from 78.1 in April. This is exactly as we predicted, the affect of monetization.

The annualized growth rate climbed to a minus 26.9% from 33.8%.

As long as China continues to both run a trade surplus and manipulate its currency it has little choice but to put the proceeds in the Treasury market.

The Fed has hired lobbyist Linda Robertson as it seeks to counter skepticism in Congress about the Fed’s growing power over the US financial system. She previously headed the Washington lobbying office for Enron. She was also an adviser to all three of Clinton’s administration’s Treasury Secretaries.

The Fed is in deep trouble and we hope we were responsible for part of it.

On Thursday, the Fed reported holding 1.114 trillion in securities: held outright of which only $18 billion were T-bills, $540 billion were T-notes, $80 billion were Agency securities and $437 billion were mortgage backed bonds. The worse the Treasury market performs the longer the Fed becomes. The Fed is in deep trouble because as time goes on at least $2.5 trillion more will be added; perhaps by the end of the year.

Benefit spending soars to new high: The recession is driving the safety net of government benefits to a historic high, as one of every six dollars of Americans' income is now coming in the form of a federal or state check or voucher.

Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009, the Bureau of Economic Analysis reports.

That's the highest percentage since the government began compiling records in 1929. [More than 30s]

In all, government spending on benefits will top $2 trillion in 2009 — an average of $17,000 provided to each U.S. household, federal data show.

The Treasury said it will sell $127B of bills, notes and bonds next week - $35B in 3s, $19B in 10s and $11B of 30s, $31B in three-month bills and $31B in six-month bills.

South Korea’s National Pension Service, the country’s largest investor, said it will maintain its U.S. government bond holdings even as it cuts the percentage they comprise.

“We are planning to reduce the weightings of American Treasuries, but that doesn’t mean we will be selling Treasuries because our fund size is growing,” National Pension said in a statement in response to questions from Bloomberg News. “We don’t have a specific plan to sell Treasuries.”

The Fed monetized $7.49B of 2s and 3s on Thursday. After abstaining for about a week, the Fed has conducted back-to-back monetizations.

While most key economic indicators are decreasing at a slower rate, the year-over-year contractions in truck tonnage accelerated because businesses are right-sizing their inventories, which means fewer truck shipments. The absolute dollar value of inventories has fallen, but sales have decreased as much or more, which means that inventories are still too high for the current level of sales. Until this correction is complete, freight will be tough for motor carriers.

NYSE data released yesterday shows that Goldman Sachs again is dominating program trading. For the week of May 26 to 29, Government Sachs traded 741.7m shares for its own account, 13.5m for customer facilitation, and 115.4m as agent. This is approximately 7–1 proprietary to customer.

California is paying out so much for jobless benefits and collecting so little in payroll taxes that its unemployment insurance fund could be $17.8 billion in debt by the end of 2010, according to a new report from the state Employment

Development Department.

Unemployment insurance is funded primarily by a payroll tax that costs employers up to $434 per employee, per year. That formula hasn't been changed since 1985.

The decision, which would make it hard for Americans in London to open bank accounts and trade shares, is being discussed by executives at Britain’s banks and brokers who say it could become too expensive to service American clients. The proposals, which were unveiled as part of the president’s first budget, are designed to clamp-down on American tax evaders abroad. However bank bosses say they are being asked to take on the task of collecting American taxes at a cost and legal liability that are inexpedient.

A decision by Falls Police to use a Taser to obtain a DNA sample from a suspect in an armed robbery, shooting and kidnapping is not unconstitutional.

Ron Paul’s audit the Fed bill is now up to 186 cosponsors!

That means over 40% of the entire House of Representatives is currently signed onto HR 1207.

And thanks to your hard work, Representative Steve Scalise is one of the 186 proud cosponsors.

Not only has over forty percent of the House cosponsored HR 1207, but Barney Frank has even promised Ron Paul that he will hold hearings in the House Financial Services Committee.

When these hearings occur in a few months, Ron wants to have a majority of House members on board . . . so there will be no stopping Audit the Fed.

It is amazing what we’ve been able to accomplish in the House on the back of tireless grassroots efforts.

But now it is time to start thinking about the next step.

Pretty soon we will be turning our attention to the Senate, where we are certain to face a more difficult fight. There, corporate lobbyists and Beltway insiders wield even more powerful influence.

Many Senators are already bought and sold by Wall Street bankers and their Federal Reserve flunkies.

And the Banking Lobby is already pumping piles of cash into Senate campaign coffers in a preemptive stand against Federal Reserve transparency.

Fortunately, Campaign for Liberty has been developing a grassroots program and a massive marketing campaign to counter the banksters’ efforts.

And we’re almost ready to launch. But it won’t be cheap, and we can’t afford to run out of gas before the job is done and Audit the Fed is passed.

Can you chip in $25 to help counter the millions of Wall Street dollars and corporate contributions ?

If you can afford more, every extra dollar will be poured into our campaign to pass Audit the Fed in the Senate.

As we close in on 50% support for Audit the Fed in the House of Representatives, the time is nearing to officially unleash the Ron Paul R3volution on the Senate.

If you can, please click here to make a contribution to help Campaign for Liberty launch our Audit the Fed program in the Senate.

In Liberty,

John Tate




The Global Financial Meltdown - Admin - 06-11-2009

GLOBALIZATION AND THE `AUTO' BAILOUTJ
John Hoefle
http://www.larouchepub.com/other/2009/3623globezation_auto_bailout.html


June 5—The bankruptcy of General Motors, once one of the world's industrial giants, is the result of a policy shift which began the day President Franklin Roosevelt died. Though it officially filed for bankruptcy on June 1, 2009, GM has been bankrupt for years, hemorrhaging money at an accelerating rate. At the time of its bankruptcy filing, the company had a net worth of negative $90 billion.

The U.S. government has now pumped over $70 billion into GM and Chrysler, their suppliers, and GMAC, the former finance arm of GM—which is now a bank holding company. Our government could have bought the lot of them outright far cheaper: GM had a market capitalization of less than $1 billion when it failed, and, at about $1 a share, was still overpriced.

Chrysler is being taken over by Italian automaker Fiat, and the "new" GM has said it will reduce its dependence upon its domestic manufacturing capability by importing cars it makes overseas. GM will shed several of its brands, reduce its workforce by some 21,000 union workers (from about 125,000 U.S. employees prior to the bankruptcy), and close 14 plants and three parts-distribution centers. By 2012, it expects to have just 33 plants in the United States, down from 47 just last year. In the early 1980s, it had 150 U.S. assembly plants and employed some 349,000 workers.

It would appear that we taxpayers got very little for our $70 billion, and that is true—but this so-called "bailout" of the auto sector never has been about saving auto production and auto jobs. What it is, is part of the bailout of the financial sector.

Industrial Takedown
Coming out of World War II, the United States was the most powerful industrial power the world had ever seen, and under President Roosevelt, was committed to leading the world forward into new prosperity. One element of that prosperity was the elimination of the colonialism of the Anglo-Dutch Liberal system. Naturally, the oligarchs did not like that. And as soon as FDR died, on April 12, 1945, they set about dismantling the U.S. from within.

This was the origin of the policy of post-industrialism, which was based upon the phony theory that services, information, and finance were the natural successors to industry. Under the sway of this false ideology, we began to shift our attention from the development of our physical economy, towards pushing papers and manipulating money. It took a while to overcome America's can-do disposition, but we eventually turned our back on nuclear power, thus cutting off the leap into a new era of scientific and technological progress. As we lost contact with our heritage, we began to turn "green," adopting an anti-science outlook and viewing the world in terms of money and profit. It is that shift which has destroyed our productive base, and allowed the financial parasites to take over.

Under the control of the financier class and its expanding system of corporate cartels, we began to move our production of goods overseas, to places where labor was cheaper. We were told this would make us more competitive—and more profitable—but it was a lie. What happened is that we systematically dismantled our manufacturing base, eliminating skilled and decent-paying jobs by the millions, until our former industrial heartland became a disaster area. The parasites of Wall Street and the City of London did indeed get richer, some of them obscenely rich, but the American people, the working people who are the foundation of our nation, did not. Instead, they found themselves with ever declining standards of living, working in lower-paying jobs, with growing debts, and despair.

Today, we see the last vestiges of our former industrial might withering on the vine. What remains of our productive base largely revolves around that which President Dwight Eisenhower warned us about, the military-industrial complex. We still produce weaponry and war materiel, ever-intrusive police-state products, and related items, though even there, we buy much from overseas.

Auto-Destruct
What we are witnessing in the auto sector is not a "rescue," but continued destruction, another looting operation by the global financier parasites. The so-called auto bailout is nothing but an attempt to control the damage to the financial sector caused by the collapse of the auto companies. What is being protected is not production, but the valuations of the debt and other financial obligations of the auto sector, and the derivatives bets piled atop those obligations. That is why the government bailed out GMAC, why it poured $5 billion into Chrysler and $50 billion into GM. It was yet another backdoor bailout of banks like JP Morgan Chase and Citigroup, of the hedge and private equity funds, and others. Auto production was not saved—it will continue to decline and be globalized.

The unions are not being saved, far from it. Chrysler's union retiree health fund will own 55% of the post-bankruptcy, Fiat-run Chrysler, but in return gave up claims to much of the $10 billion Chrysler owed it. The union members may have believed it was the best deal they could get, but they are being taken for a ride. The Chrysler dealers are also getting the shaft. After helping the company by loading up on inventory, many of them were cut loose, given a month to liquidate their stocks of cars and trucks. Money talks, everyone else walks.

The GM case is not much different. In its bankruptcy filing, it listed $173 billion in debts, against assets of $82 billion. Under its bankruptcy plan, the U.S. government would own 60% of the "new" GM, while the governments of Canada and Ontario would own a combined 12%. The union health trust would own 17.5%, and the company's pre-bankruptcy bondholders would own 10%. In return for its 60% share of a company with a net worth of minus $90 billion, the U.S. government will pay $30 billion. The United Autoworkers' retiree health fund will exchange the $20 billion it is owed by GM for that 17.5% stake, plus $9 billion in notes and preferred stock. That may seem reasonable, until you consider what such a stake in a dying company is really worth.

Death of a Nation
To understand what is happening here, and to effectively fight it, one must step back and view the matter in a larger perspective. The issue is not GM or Chrysler, or even auto production, but the collapse of the U.S. economy, and its looting by the global financial oligarchy. The auto sector is not in trouble because its executives made poor decisions—though they did. The auto sector is in trouble because a decision was made by the financiers to collapse the core of the U.S. machine-tool capability, which is crucial for new leaps of productivity in the United States and the world. It is the nation which is dying, and taking the auto sector with it.

Rather than deal with that crucial problem, the Obama Administration, like the Bush Administration before it, has decided to save the fictitious paper values of Wall Street, the trillions of dollars of unpayable debts and quadrillions of dollars of derivatives bets. To do so, it must mercilessly impose austerity upon the American people, raising taxes, cutting services, dismantling the social safety net at a time when our citizens need it more than ever.

The purpose of all of this is not really to save the financial system, which is already dead. The purpose is to complete the destruction of the United States, as a necessity for destroying the nation-state system as a rival to imperial rule. The United States, which was committed under FDR to ending the colonial system, is instead being reabsorbed into the Anglo-Dutch Liberal empire, under the guise of "saving our economy."

We are killing ourselves, destroying our economy and our people, and for what? The perpetuation of some medieval system which should have died last century, and would have, had FDR lived, and we not been so damned stupid.
  
    
OUT OF THE ASHES OF GM: THE PHOENIX OF RENEWABLE ENERGY

Ellen Brown      
 
Pontiac Firebird

It may be prophetic that among the brands GM chose to kill was the Pontiac Firebird, a classic hot car of the 1960s sporting the fabled Phoenix on its hood. In mythology, the Phoenix was a colorful bird that incinerated itself in its nest, then rose from the ashes as its own offspring. GM too, says Michael Moore, could be reborn as something else. In a June 1 eulogy of sorts, he wrote:

“So here we are at the deathbed of General Motors. The company’s body not yet cold, and I find myself filled with—dare I say it—joy. It is not the joy of revenge against a corporation that ruined my hometown … Nor do I, obviously, claim any joy in knowing that 21,000 more GM workers will be told that they, too, are without a job. But you and I and the rest of America now own a car company!”

What would we want with a car company? Moore suggests that the bankrupt mega-builder of obsolete gas guzzlers can be transformed into a mega-builder of things we need more—mass transit vehicles, including bullet trains, light rail mass transit lines, energy efficient clean buses, hybrid or all-electric cars, and alternative energy devices such as batteries, windmills, and solar panels. The factories that built the cars that helped destroy the environment can become the tools for cleaning it up. This would, of course, take some investment; but Moore suggests that to pay for it all, the government could impose a two-dollar tax on every gallon of gasoline.


It sounds good right up to the gas tax, a regressive tax that would hit hardest in the wallets of the poor and would raise alarm bells for politicians, the oil lobby, and voters. Isn’t there some way to fund the plan without driving up the tax burden or the national debt? In fact, there is.

TO PUT OUR NEW CAR COMPANY TO GOOD USE, WE JUST NEED TO OWN A BANK

The federal government could create its own credit with its own government-owned lending facility, on the model of the Reconstruction Finance Corporation used by President Roosevelt to fund the New Deal. But instead of merely recycling borrowed money as Roosevelt did, the new facility could actually create credit on its books. Its capital base could be leveraged into many times that sum in loans, in the same way that private banks routinely create money (or “credit”) today. Assuming a reserve requirement of 10%, if the $300 billion or so that remains of the TARP money were deposited in the new bank, this money could be leveraged into $3 trillion in loans. If the money were counted as capital, at an 8% capital requirement it could become $3.75 trillion in loans, or 12.5 times the original sum.

Indeed, it is the sovereign right of governments to create the national money supply, but few governments exercise that right today. The only money the U.S. government now issues are coins, which compose only about one ten-thousandth of the U.S. M3 money supply. The rest is created by private banking institutions when they make loans. This includes the privately-owned Federal Reserve, which creates Federal Reserve Notes (dollar bills) and lends them to the government and to commercial banks. Federal Reserve Notes compose only 3% of the money supply. All of the rest consists merely of credit created on the books of private banks.

Many authorities have attested that banks simply create the money they lend as accounting entries on their books. The Federal Reserve Bank of Dallas states on its website:

“Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank … holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”

This was confirmed recently by President Obama himself. In a speech at Georgetown University on April 14, he said:

“[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks—‘where’s our bailout?’ they ask—the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”

The money generated by banks through the multiplier effect comes at a heavy cost in interest. One advantage of a government-owned bank is that it could fund public projects interest-free or nearly interest-free, cutting production costs dramatically. Interest comprises as much as 77% of the cost of goods and services, such as public housing, that require large amounts of capital. The cost of interest is lower for labor-based services such as garbage collection, for which it makes up only about 12% of the cost. Averaging them all together, the overall cost of interest has been estimated to be about half the cost of everything we buy. If money for infrastructure development were issued interest-free, projects currently considered unsustainable because of the burden of interest could become not only self-sustaining but actually profitable for the government.

In The Modern Universal Paradigm (2007), Rodney Shakespeare gives the example of the Humber Bridge, which was built in the UK at a cost of £98 million. Every year since the bridge opened in 1981, it has turned an operating profit; that is, its running costs (basically repair, maintenance, and staff salaries) have been exceeded by the fees it receives from travelers crossing the river Humber. But by the time the bridge opened in 1981, interest on its construction loans had driven its cost up to £151 million; and by 1992, only 10 years later, the debt had shot up to a breath-taking £439 million. The UK government was forced to intervene with sizeable grants and writeoffs to save the local residents from bearing the brunt of these costs. If the bridge had been financed with interest-free, government-issued credit, these costs could have been avoided and the bridge could have funded itself.

In March of this year, Congressman Chris Van Hollen introduced a bill to establish a Green Bank aimed at catalyzing clean energy and energy efficient projects. The proposed bank would be an independent, tax-exempt, wholly owned corporation of the United States, with the exclusive mission of providing a comprehensive range of financial support to qualified clean-energy and energy-efficiency projects in the U.S. If this Green Bank were operated on the fractional reserve system, its initial capital base could be leveraged many times as loans. The loans could then be paid off with the income generated by the projects, preventing inflation and allowing additional loans to be made. Unlike the bank bailouts that have eaten up so much of the government’s revenues, green projects create real goods and services and real profits; and the projects could be particularly profitable if they were created without the burden of interest.

HISTORICAL PRECEDENTS
Funding public projects with government-issued credit is not a new idea. It has a long and successful history, including these notable examples:
In the early eighteenth century, the colony of Pennsylvania issued money that was both lent and spent by the local government into the economy, producing an unprecedented period of prosperity. This was done without producing price inflation and without taxing the people.




RE: The Global Financial Meltdown - Admin - 06-13-2009

EMERGENCY STATEMENT FROM LYNDON LAROUCHE
http://www.larouchepac.com/node/10575

The information from Europe, from experts — let's keep it that way — is that what happened with the Air France Flt447, as far as anyone can tell now, from among the relevant experts — this is not official, but it's the opinion of the relevant experts — that one of two things could have brought down the plane, in a pattern of the type which has been presented to us. Both involve an explosion underneath the cockpit, in the nose of the aircraft. Such an explosion would have neutralized all control of the electronics for the pilot and the plane would have gone out of control.

That is what the best guess of the experts is, and there's no information available which points in any contrary direction, and there's no evidence presented, which precludes exactly what the alternatives are I've proposed: Either a clever sort of bomb, placed underneath the cockpit of the plane, or some equivalent type of development, would explain the whole process. But that's the only option we have.

The problem is now, apparently, is that this is a hot potato, and we're in a period of governments, in which no government in any part of the world, is presently prepared to face reality. And among those who are least prepared to face reality, is the present government of the United States, because we have lunatic in the cockpit of the U.S. Presidency. And that's the other problem.

Now, the other side of this case is, you know, we're talking about the incompetence of various economists, groups of economists, and the incompetence of governments, to deal with the present world, onrushing general breakdown crisis, of both the present monetary system of the world, but also a breakdown of the physical economic systems of the world, as a by-product of the breakdown of the monetary system.

Now, if something happened, such as Russia pressuring China to break with the dollar, and if China agreed, you would have an immediate breakdown of the functioning of the U.S. Federal and state governments! And, of course, a catastrophe throughout Europe.

Now, the key point here is: As we know, the present President of the United States and his crew in charge now, and the financial interests which have been controlling the government since no later than September of 2007, that these people, who are running the United States, who are managing its policies, particularly its economic-financial policies, have been going in exactly the wrong direction, in everything they've done! And what Obama has done, with his so-called health-care program is the worst possible thing that could happen. Because, not only is it genocide — in fact, Hitler-modeled genocide — but it is accelerating the rate of structural breakdown, of the internal institutions of the United States, and we're in such a situation, with what's being done to the health-care system by Obama and his crew, is that if a worst-case development — that is, one of the likely worst-case developments in terms of the flu epidemics could occur, we could have a disaster beyond belief inside the United States itself.

Now, let's assume the case, that China, under crisis pressure — and the British and the United States government are now putting China under tremendous pressure with this game about the Tienanman Square scenario, the way it's being played now — they're putting China under tremendous pressure. And if China were to agree, under the strain of U.S. current pressure, and European pressure at the same time, to cancel its relationship to the dollar, as it's being pressed to do, you would have an instant disintegration of the U.S. government, and the entire system of government.

Now: This comes into the next point. There is no one, in a position now, to deal with this problem, unless I'm on deck and directing it. I know how to deal with this problem, as I've specified. None of the current actors, controlling the U.S. financial-economic management policy, is competent. There are competent people in the wings in the U.S. government. But they're not in charge, they're not shaping policy. We have a similar situation, even worse in some respects, in Western and Central Europe. Western and Central Europe is in a process of self-inflicted disintegration, under the present euro system.

We have a crisis in Britain, in which the dumping of Gordon Brown, which is something he richly deserves, but the world doesn't deserve it, because there is no one in the British situation who is capable of handling the situation from that side!

So, what you have, you have, in Europe, the Continental nations of Europe, of Western and Central Europe, have no competence presently to deal with the present situation. They don't have the institutional authorities, or other competences required. The British system is chaotic, and a crisis there can be fatal. If the China break occurs, then the whole world system is going down, and it comes down to who's sitting on top of the policy-shaping under emergency conditions in Washington. And I'm afraid, that without my being in a kind of supercargo position, to steer these guys through what they don't know how to do, I don't think the United States will survive.

So, while people are worried about a lot of things, while the Obama crew is pulling police-state, Gestapo-type operations against our people in the field, in reaction to our participation in the Tuesday event, while that's going on, we're the only ones on the scene, with my know-how, who knows how to steer, advise and steer leading circles in the United States to deal successfully with this crisis. And of course, the first thing would be, to scrap the whole Obama health-care program: scrap it, entirely! No Hitler policies in the United States!

We have to go into an emergency reorganization, establish emergency agreements with various governments in the world, put the whole world system, overnight, in an operation very similar to what happened in March 1st of 1968: to have a sudden, international agreement freezing the systems of the world, under an interim working agreement to maintain stability, to freeze continued payments in certain categories of financial assets, and to create new vehicles of credit of long-term secured credit by international agreement, which will enable us to immediately reverse the trend toward massive unemployment, and reduction in agricultural and industrial production, and related infrastructural production, in the United States, and Europe, and elsewhere. Emergency actions of that type can be taken. It requires immediate agreement among certain nations, at least a significant number of major ones, who, if they agree, can agree within 24 to 48 hours of negotiation, on these kinds of measures, I know the kind of measures that will work, and I know where I can find the kinds of people, who will know, in various governments, how to implement those kinds of measures.

We can prevent this planet from going into a Dark Age, which we're on the edge of plunging into right now! And we have this combination.

People are looking at the crisis they want to look at; they're looking at the issues they wish to look at; they're looking at the problems they like to talk about: They're not facing the real, deadly danger here: We are now in the process of a general breakdown crisis of the financial-monetary and physical economic systems of the entire planet! There's been no such thing in all known history, as history, at any one time in this planet, of this type. Certainly not in what we call, normally, ancient history, since 1700 B.C. and so forth, up to the present time. There is no precedent, in that known history, for anything like which is coming down on us