Firewall: In Defense of the Nation State

 « Pare-feu » – En défense de l’Etat-Nation (vidéo)

The Strong Dollar Illusion

By Peter Schiff

Economists who now see American troubles spreading around the world are predicting that foreign central banks will ignore the gathering inflation threat and follow the Fed down the rate cutting path. Similarly, they argue that since the downturn began here, the U.S. recovery will likely be underway while the rest of world is still decelerating. These assumptions have prompted a rally in the dollar, a sell-off in gold, commodities and foreign stocks, and have cast doubts on the ability of foreign economies to “decouple” from the United States. Investors should not take the bait.

America does indeed pose a global threat, but not for the reasons these economists suppose. Foreign economies are suffering not because Americans have slowed their voracious spending, but because they are defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world.

The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.

The current losses that banks in Europe and Asia are now suffering are real, but future losses can be avoided by suspending future lending to Americans. Shutting off this credit will of course torpedo the dollar, but that is precisely what must occur. By allowing the dollar to drop to its natural, unsupported level, not only will the American caboose be decoupled from the global gravy train, but the rest of the cars will move along the tracks much faster. Absent the U.S., there will still be plenty of consumers to buy what is produced, and plenty of investment opportunities for those with savings. Rather than dragging the global economy down, such a development would actually un-tether it.

On the other hand, left to its own devices, the American economy will implode. There will be fewer products for American consumers to buy and very little savings for anyone to borrow.

Some foolishly believe that many of the world’s problems result from dollar weakness, and that pushing the dollar back up would be good for all. For example, since the weak dollar is contributing to the rise in oil prices, a stronger dollar should help bring prices down. However, if foreign governments weaken their own currencies to push the dollar up, they will simply succeed in bringing oil prices down for Americans. Oil prices will go up for their own citizens. This can’t be an attractive bargain for any European or Asian political leader.

The weak dollar is merely a manifestation of substantial structural problems underlying the American economy. Unfortunately for us, the solution to those problems, as well as the global economic imbalances, can only be found in a weaker dollar. Efforts to artificially prop the dollar up will only exacerbate those imbalances, and make its ultimate fall that much more severe.

http://www.freebuck.com/articles/pschiff/080815pschiff.htm

Are You Enjoying the Fake Olympics?

Olympics Games 1968

Are you enjoying watching the fake Olympics? By “fake,” of course, I’m referring to all the fabrications that have emerged since the opening of the event. Each day, it seems, brings news of yet another fabrication by China. Here’s a short list of the fabrications that have been discovered so far:

• The weather is fake: Beijing is usually a smog pit with air so polluted that city-dwellers there almost never see the sun. To artificially clean up the air and create the image that Beijing is a clean city (it isn’t), Chinese officials ordered the shutting down of virtually all manufacturing plants, coal-fired power plants, and automobiles. They’ve basically shut down Beijing to create the impression that it’s a clean city, and when there’s still smog, they just call it, “mist.” (Tony Snow couldn’t have spun it better, huh?)

• The free speech is fake: All the freedom protestors who might have spoken out against China during the Olympics have been arrested and imprisoned, thereby creating the impression that there is no public dissent in China. (Need a kidney, anyone? Organs are suddenly available…)

• The opening ceremony was faked: The fireworks displayed during the opening ceremony were faked using pre-programmed computer generated images. Instead of watching live fireworks, viewers around the world were actually watching 3D computer animation.

• The Internet access is censored: Reporters from around the world have all had their internet access censored by Chinese authorities, restricting them from accessing websites that might be “dangerous” (like sites on religion or meditation).

• The singing was lip-synced by a pretty girl to replace an ugly girl: It turns out the beautiful voice singing the opening song of the ceremony did not belong to the face of the girl who was lip-syncing it. The actual singer, it turns out, was a bit too ugly to represent China, so they faked it and replaced the girl’s face with a cuter-looking girl who lip-synced the whole performance. Millie Vanilli, anyone?

• Swimmer Michael Phelps’ food is fake: Consuming a whopping 12,000 calories a day, Michael Phelps is a junk food junkie powered by empty calories. While you can get away with that when you’re 23 and exercising six hours a day, if Phelps continues his ingestion of fake food beyond his peak training years, he’ll soon have REAL diabetes and obesity. Fat makes you float, by the way, so it might actually provide real buoyancy to his swimming career…

• The ages and passports are faked: The Chinese gymnastics team won gold, helped in part by a tiny gymnast who, according to China’s own media, was 13 years old just nine months ago. Amazingly, she is now 16 years old, which just happens to be the minimum age to compete in the Olympics. This astonishing acceleration of aging is, of course, fully denied by Chinese authorities who provided forged passports for the girl to “prove” she was really 16. The IOC apparently has no interest in investigating this apparent fraud.

So I hope you’re enjoying the fake Olympics. Most of the athletes are real, of course. Their remarkable feats of human artistry, strength, endurance and athleticism are real, but the whole show surrounding it is fake, fake, fake! It’s all a fabricated show to keep the world occupied while your money, your health and your future is stolen from you by the criminal institutions of the world (governments, corporations, etc.), many of which are actually sponsoring the Olympics.

Much in America is fabricated, too…

Now, just in case you think China is the only country engaged in fakery, let me remind you that the United States is just as fake, but in different ways. In the U.S.:

• The war on terrorism is fake: It was all fabricated to keep the population in a state of fear so they wouldn’t notice their freedoms being stolen away.

• The mainstream media is fake: The news is largely fabricated or selectively edited to brainwash American consumers into thinking they live in a free country. Corporate press releases are run as “news” and any real news that threatens big advertisers is routinely censored.

• The money supply is fake: The U.S. is running on monetary fumes, borrowing trillions from countries like China that actually have REAL money, all while claiming the national debt doesn’t matter anymore. (It does.)

• The housing bubble was fake: As publicly predicted here on NaturalNews nearly two years ago, the housing bubble was fake, creating false wealth that created the impression that the economy was doing well. The whole thing was a charade, of course, and now housing values are plummeting and consumer spending is in a tailspin.

• Health care is fake: There’s no “health” in health care, and the entire disease industry in the United States is based on keeping people sick, ignorant and bankrupt.

• The corporate green movement is fake: Corporations love to act like they’re really “green” even as they continue polluting the planet.

• Even the breasts are fake! The U.S. is the plastic surgery capital of the world, where moms are now giving their teenage daughters breast augmentation surgery as a high school graduation present.

It’s quite fitting, then, that American viewers who live in a fabricated American reality can watch the fake Olympics by tuning into a fake television network where they can watch a fake opening ceremony that celebrates competition among fraudulent Olympics participants who compete for the only thing that’s still real in this global economy: GOLD!

http://www.naturalnews.com/z023862.html
About the author: Mike Adams is a consumer health advocate with a mission to teach personal and planetary health to the public He is a prolific writer and has published thousands of articles, interviews, reports and consumer guides, reaching millions of readers with information that is saving lives and improving personal health around the world. Adams is an honest, independent journalist and accepts no money or commissions on the third-party products he writes about or the companies he promotes. In 2007, Adams launched EcoLEDs, a manufacturer of mercury-free, energy-efficient LED lighting products that save electricity and help prevent global warming. He also founded an environmentally-friendly online retailer called BetterLifeGoods.com that uses retail profits to help support consumer advocacy programs. He’s also a noted pioneer in the email marketing software industry, having been the first to launch an HTML email newsletter technology that has grown to become a standard in the industry. Adams is currently the executive director of the Consumer Wellness Center, a 501(c)3 non-profit, and regularly pursues cycling, nature photography, Capoeira and Pilates. Known by his callsign, the ‘Health Ranger,’ Adams posts his missions statements, health statistics and health photos at www.HealthRanger.org

The US economy is in a funk

By Peter Morici

Troubles at United States banks are making mortgage, credit card and business loans scarcer and more expensive. Falling home prices, rising foreclosures and high gas prices have stalled home building and consumer spending. These problems are exacerbated by the long-festering trade deficits on oil and with Asia on consumer goods and cars that tap off demand for US-made goods and services.

How the George W Bush administration (and its successor) and the US Congress respond to these challenges will importantly determine how Americans emerge from the current malaise. With the right policies, the economy can grow at 3.5% to 4% a year, perhaps a bit more. Without meaningful reforms in banking and changes in energy and trade policies, the United States is headed for substandard growth and a declining standard of living for many workers.

Since 2005, US imports have exceeded exports by more than US$700 billion or more than 5% of gross domestic product (GDP). To finance the trade gap, Americans sell bonds and other securities to foreigners, including the People’s Bank of China and other central banks.

Until recently, money center banks and securities dealers, such as Citigroup and Merrill Lynch, recycled foreign funds to US consumers. Consumers borrowed ever-larger sums to live beyond their means through exotic mortgages, questionable auto loans and lax credit-card rules.

In the housing market, mortgage companies were aided by real-estate appraisers, who juiced estimated home values, and Wall Street bankers, who transformed shaky loans into seemingly low-risk mortgage-backed bonds for sale to insurance companies, pension funds and foreign investors. The bond rating agencies turned a blind eye and blessed these transactions.

These schemes now exposed, banks can’t securitize mortgages into bonds and must finance mortgages through more expensive certificates of deposit. US homebuyers must put up larger down payments and pay higher interest rates and fees to get loans.

The result is predictable: housing prices are falling. Builders have a 10-month supply of unsold new homes, and new home construction is down more than 55% since April 2006.

Rising delinquencies and repossessions are making similar abuses apparent in credit card and auto loans. Lenders face difficulties selling bonds to finance new loans and are increasing monthly interest rates and tightening qualifications.

Consumers can’t run up debt as easily to boost spending and live beyond their means. Sales are falling at shopping malls and restaurants, and consumer demand for US-made goods is stagnating.

Similarly, banks are making fewer loans to businesses for worthwhile projects, and business spending on commercial buildings and new equipment and software is expected to stall in the second half of 2008 and 2009.

Thanks to this grand deleveraging, economic growth has averaged only 1% a year since the fourth quarter of 2007 and is expected to continue to limp along at that pace until the second half of 2009. It will take that long for the banks to clear out all their bad loans, for most of the expected 2 million-plus foreclosures and resales of homes to be completed, and households, generally, to restore their balance sheets through more conservative spending patterns.
Getting the economy going again will require getting the banks on a sound footing, so that mortgage money and other credit are available on reasonable terms. But if the United States is to grow at a decent, sustainable pace and avoid another credit crisis and deleveraging, it must reduce its trade deficit and reliance on foreign borrowing.

Simply, trade deficits of more than 5% of GDP require Americans to spend more than 105% of what they earn to maintain demand for domestically produced goods and services and sustain GDP growth and employment. Even if foreigners are willing to continue buying US bonds, financing American consumption at that level will require the banks and finance companies to write progressively more risky loans, as they did during the last economic expansion, until debts cannot be repaid.

Inevitably, that would end in another banking crisis and credit shortage, painful deleveraging, and period of slow growth similar to the current slog, or worse.

To accomplish healthy growth, the United States must slash its trade deficit, dramatically, over the next several years. Imported oil, cars from Japan and South Korea, and consumer goods from China account for nearly the entire US trade deficit. No permanent solution to the US quagmire is possible with addressing those issues.

Global oil supply has not kept up with demand in recent years, because several important exporters, including Venezuela, Russia, Nigeria and Mexico, have shunned the investment and know-how Western oil companies can offer to sustain their production.

In recent weeks, crude oil prices have receded, somewhat, but this is because the US, European and Japanese economies are slowing and speculators face more hurdles in financing positions, and not because the basic global supply imbalance has been redressed.

Higher oil prices may be here to stay, but the technologies to reduce US oil imports dramatically are at hand. Hybrids, plug-in electric and even hydrogen-powered vehicles are no longer fanciful proposals. Coal gasification is viable at $55 a barrel for oil, and more-efficient building designs, appliances and heating systems are all possible at affordable costs.

Economists assert that the market will provide, but they fail to reckon with the fact that most epic transformations in transportation technology – canals, turnpikes and national highways, railroads and airplanes – got boosts from the government to overcome the barriers created by habits and costs of switching. For example, the biggest problem getting into production and use of hydrogen cars will be the initial investment in fueling stations and quickly achieving a critical mass of vehicles on the road to sustain them.

Japan, Korea, India and China have promoted their domestic vehicle industry by limiting imports and exploiting the open US market, and now Japan, the most mature producer, boasts Toyota and Honda as the leaders in hybrids and greener vehicles.

The US should not turn to protectionism, but rather, it should use its large market to its advantage. It should require much higher mileage standards for automobiles and offer substantial product development assistance to US-based automakers and suppliers – that includes Toyota and Honda, as well as the Detroit Three, battery makers and other suppliers – to accelerate the build-out of high-mileage innovative cars.

The condition for assistance would be that beneficiaries do their research and development and first large production runs in the US, and share their patents at reasonable cost with one another. The huge US market would attract producers from around the world and rejuvenate the US auto supply chain.

Similarly, accelerating clean coal gasification, nuclear power and the hydrogen transformation, as well as mandating much more efficient buildings and home heating systems and appliances, would propagate exciting new technologies Americans could sell around the world.

Since January 2007, the dollar has fallen 12% against the euro, and a burst of commodity and manufactured exports have helped reduce the US non-oil trade deficit. However, as the dollar has weakened against the euro, China has stepped up its intervention in currency markets to keep its yuan inexpensive and exports growing. Factoring in higher oil prices too, the overall trade deficit is down only about $20 billion.

Although China has permitted the yuan to fall by 17% since July 2005, it has increased purchases of dollars with yuan to $640 billion annually in 2008, up from $462 billion in 2007. This provides a subsidy on exports and domestic import competing products equal to about 17% of China’s GDP, and pressures other Asian nations to pursue similar currency policies lest their industries lose competitiveness to Chinese manufacturers in vital US and European markets.

Moreover, by artificially accelerating Asian growth, this policy boosts Asian oil consumption and provides the hard currency to subsidize oil imports and domestic fuel prices, further exacerbating international oil shortages.

Cutting the US trade deficit with China and other Asian exporters requires that Washington find a way to persuade Beijing and other governments to end their currency market intervention.

Negotiations have not worked. The United States may have to resort to a tax on yuan-dollar transactions at a rate directly proportional to Chinese currency intervention to reduce imports in the near term. This would encourage China to stop intervening in currency markets and redirect investment toward more domestic consumption and investment in schools, hospitals and public infrastructure. Then the tax could be removed.

That may sound radical but redressing the trade deficit with China and other Asian exporters would also require major changes in American habits too.

As China and other foreign governments ended their purchases of dollars, US Treasury securities and private bonds, Americans would have to borrow less, save more and start living on what they earn. The US government would have to cut its budget deficit to near zero, and American households would have to save 5% to 10% of their disposable income, as opposed to the near zero levels accomplished during the recent economic expansion.

Getting through the current crisis requires unusual steps in credit markets. Federal efforts to route capable but currently distressed homeowners into sustainable mortgages and Federal Reserve to help the money center banks and securities firms will help avoid economic Armageddon. The same is true of Federal efforts to assist mortgage guarantors Fannie Mae and Freddie Mac.

However, achieving a sustainable economic expansion requires strong new disciplines, from loan officers on the ground to the executive suites at those New York banks. So far, federal credit market reforms have been focused on mortgage brokers and small lenders, rather than the business models pursued by the large money-center banks and securities dealers that bundle mortgages, credit-card debt and auto loans into bonds. These firms are largely locked out of the fixed-income market for the purposes of securitizing mortgages, owing to the absence of transparency in past practices and the dearth of meaning management reforms.

The Federal Reserve should start conditioning its discount window lending to large money-center banks and securities firms to meaningful reforms in securitization and management practices, or US credit markets will take several years to rebuild.

Regional banks or other financial institutions could emerge as major bundlers of mortgages and consumer and business loans for sale to insurance companies, pension funds and foreign investors, but that would take many months to effect too.

Either way, adequate credit to both home construction and business investment will not be available before 2010. Until then, growth will be slow, and closer to 1% than 3% per year.

At that point, if positive steps have been taken to encourage substantial new investments in alternative energy sources, conservation and transportation, and to substantially cut the trade deficit with China and other Asian exporters, the US economy could grow at 3.5% to 4% for quite a long time.

Otherwise the US economy will grow in spurts above 3%, punctuated by banking crises and periods of deleveraging. In some years, growth would exceed this rate, and for others, it would be less than 1%. Overall, the pattern will be in the range of about 2% a year or less.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the US International Trade Commission.

http://www.atimes.com/atimes/Global_Economy/JH19Dj08.html

WAG THE DOG:
HOW TO CONCEAL MASSIVE ECONOMIC COLLAPSE

Ellen Brown, August 14^th, 2008

“I’m in show business, why come to me?”
“War is show business, that’s why we’re here.”
                            – “Wag the Dog” (1997 film)

Last week, Fannie Mae and Freddie Mac had just announced record losses, and so had most reporting corporations. Unemployment was mounting, the foreclosure crisis was deepening, state budgets were in shambles, and massive bailouts were everywhere. Investors had every reason to expect the dollar and the stock market to plummet, and gold and oil to shoot up. Strangely, the Dow Jones Industrial Average gained 300 points, the dollar strengthened, and gold and oil were crushed. What happened?

It hardly took psychic powers to see that the Plunge Protection Team had come to the rescue. Formally known as the President’s Working Group on Financial Markets, the PPT was once concealed and its very existence denied as if it were a matter of strict national security. But the PPT has now come out of the closet. What was once a legally questionable “manipulator” of markets has become a sanctioned stabilizer and protector of markets. The new tone was set in January 2008, when global markets took their worst tumble since September 11, 2001. Senator Hillary Clinton said in a statement reported by the State News Service:

“I think it’s imperative that the following step be taken. The President should have already and should do so very quickly, convene the President’s Working Group on Financial Markets. That’s something that he can ask the Secretary of the Treasury to do. . . . This has to be coordinated across markets with the regulators here and obviously with regulators and central banks around the world.” ¹

The mystery over what was going on with the dollar the first week in August was solved by James Turk, founder of GoldMoney, who wrote on August 7:

“[T]he banking problems in the United States continue to mount, while the federal government’s deficit continues to soar out of control. . . . So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. Central banks have propped up the dollar, and here’s the proof.

“When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

“On July 16, 2008 . . . , the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. . . . So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff and doing so ignited a short covering rally, which is not too difficult to do given the leverage employed in the markets these days by hedge funds and others.”²

Just as central banks manipulate currencies in concert, so gold can be manipulated by massive selling of central bank reserves. Oil and any other market can be manipulated as well. But markets can be manipulated by only so much and for only so long without fixing the underlying problem. There is more bad news coming down the pike, news of such magnitude that no amount of ordinary manipulation is liable to conceal it.

For one thing, roughly $400 billion in ARMs (adjustable rate mortgages) have or will reset between March and October of this year. Assuming 3 to 6 months for strapped debtors to actually hit the wall with their payments, a huge wave of defaults is about to strike, continuing through March 2009 – just in time for the next huge wave of resets, in option ARMs.³ Option ARMs are loans with the option to pay even less than just the interest on the loan monthly, increasing the loan balance until the loan reaches a certain amount (typically 110% to 125% of the original loan balance), when it resets. The $800 billion credit line recently opened to Fannie Mae and Freddie Mac may be not only tapped but tapped out, at taxpayer expense. The underlying problem is little discussed but impossible to repair – a one quadrillion dollar derivatives scheme that is now imploding. Banks everywhere are facing massive writeoffs, putting the whole banking system on the brink of collapse. Only public bailouts will save it, but they could bankrupt the nation.

What to do? War and threats of war have been used historically to distract the population and deflect public scrutiny from economic calamity. As the scheme was summed up in the trailer to the 1997 movie “Wag the Dog” —

“There’s a crisis in the White House, and to save the election, they’d have to fake a war.”

Perhaps that explains the sudden breakout of war in the Eurasian country of Georgia on August 8, just 3 months before the November elections. August 8 was the day the Olympic Games began in Beijing, a distraction that may have been timed to keep China from intervening on Russia’s behalf. The mainstream media version of events is that Russia, the bully on the block, invaded its tiny neighbor Georgia; but not all commentators agree. Mikhail Gorbachev, writing in The Washington Post on August 12, observed:

“What happened on the night of Aug. 7 is beyond comprehension. The Georgian military attacked the South Ossetian capital of Tskhinvali with multiple rocket launchers designed to devastate large areas. Russia had to respond. To accuse it of aggression against ‘small, defenseless Georgia’ is not just hypocritical but shows a lack of humanity. . . . The Georgian leadership could do this only with the perceived support and encouragement of a much more powerful force.” ⁴

Bruce Gagnon, coordinator of the Global Network against Weapons and Nuclear Power, commented in OpEdNews on August 11:

“The U.S. has long been involved in supporting ‘freedom movements’ throughout this region that have been attempting to replace Russian influence with U.S. corporate control. The CIA, National Endowment for Democracy . . . , and Freedom House (includes Zbigniew Brzezinski, former CIA director James Woolsey, and Obama foreign policy adviser Anthony Lake) have been key funders and supporters of placing politicians in power throughout Central Asia that would play ball with ‘our side’. . . . None of this is about the good guys versus the bad guys. It is power bloc politics . . . . Big money is at stake . . . . [B]oth parties (Republican and Democrat) share a bi-partisan history and agenda of advancing corporate interests in this part of the world. Obama’s advisers, just like McCain’s (one of his top advisers was recently a lobbyist for the current government in Georgia) are thick in this stew.”⁵

Brzezinski, who is now Obama’s adviser, was Jimmy Carter’s foreign policy adviser in the 1970s. He also served in the 1970s as director of the Trilateral Commission, which he co-founded with David Rockefeller Sr., considered by some to be the “master spider” of the Wall Street banking network.⁶ Brzezinski, who wrote a book called The Grand Chessboard, later boasted of drawing Russia into war with Afghanistan in 1979, “giving to the Soviet Union its Vietnam War.”⁷ Is the Georgia affair an attempted repeat of that coup? Mike Whitney, a popular Internet commentator, observed on August 11:

“Washington’s bloody fingerprints are all over the invasion of South Ossetia. Georgia President Mikhail Saakashvili would never dream of launching a massive military attack unless he got explicit orders from his bosses at 1600 Pennsylvania Ave. After all, Saakashvili owes his entire political career to American power-brokers and US intelligence agencies. If he disobeyed them, he’d be gone in a fortnight. Besides an operation like this takes months of planning and logistical support; especially if it’s perfectly timed to coincide with the beginning of the Olympic games. (another petty neocon touch) That means Pentagon planners must have been working hand in hand with Georgian generals for months in advance. Nothing was left to chance.”⁸

Part of that careful planning may have been the unprecedented propping up of the dollar and bombing of gold and oil the week before the curtain opened on the scene. Gold and oil had to be pushed down hard to give them room to rise before anyone shouted “hyperinflation!” As we watch the curtain rise on war in Eurasia, it is well to remember that things are not always as they seem. Markets are manipulated and wars are staged by Grand Chessmen behind the scenes.

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles.  In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.”  She shows how this private cartel has usurped the power to create money from the people themselves and how we the people can get it back.  Her websites are webofdebt.com and ellenbrown.com.

___________________

http://www.webofdebt.com/articles/wag_the_dog.php

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Bringing Down Bear Began as $1.7 Million of Options

By Gary Matsumoto

On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street’s devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.

Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash.

“Even if I were the most bearish man on Earth, I can’t imagine buying puts 50 percent below the price with just over a week to expiration,” said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. “It’s not even on the page of rational behavior, unless you know something.”

`Lottery Ticket’

The 57,000 puts that traded March 11 at the $30 strike price and the 1,649 that traded at $25 were collectively worth about $1.7 million, Bloomberg data show. Each put is equal to 100 shares of stock.

“That trade amounted to buying a lottery ticket,” said Michael McCarty, chief options and equity strategist at New York-based brokerage Meridian Equity Partners Inc. “Would you buy $1.7 million worth of lottery tickets just because you could? No. Neither would a hedge fund manager.”

During the next four days, New York-based Bear Stearns unraveled in the swiftest investment-banking failure in Wall Street history. Speculation about a cash shortage proved self- fulfilling, causing customers and lenders to demand their money back. Bear Stearns’s stock sank 47 percent to $30 on Friday, March 14. That’s when the Fed moved to stave off a panic by helping the U.S. Treasury arrange JPMorgan Chase & Co.’s purchase of the company for $2 a share, a price unimaginable to the firm’s 14,000 employees.

Wall Street Seizure

In the aftermath, Bear Stearns Chief Executive Officer Alan Schwartz told Congress that the firm was toppled by rumor- mongering and abusive trading. Regulators have begun peeling back trading records, hunting for suspects.

Schwartz and officials at the SEC declined to comment for this story.

The fire sale of Bear Stearns was the climax of a nine- month credit seizure that started with the failure of two Bear Stearns hedge funds, caused more than $490 billion of losses and writedowns in the banking and securities industry and ousted the CEOs of Citigroup Inc., Merrill Lynch & Co., and UBS AG. Never in its 95-year history had the Fed done so much to rescue Wall Street during its worst financial crisis in at least two decades.

The DNA

Evidence of any scheme to bring down Bear Stearns is most likely buried in options data, according to former government investigators. Options, contracts to buy or sell shares by a certain date at a specific price, can offer forensic evidence of market manipulation and insider trading, said Brent Baker, a former U.S. Securities and Exchange Commission Enforcement Division lawyer who helped prosecute Anthony Elgindy, the stock- picker convicted in 2005 on 11 counts of securities fraud, wire fraud, extortion and racketeering.

“On CSI Wall Street, the options are the DNA,” he said, referring to the television series, “Crime Scene Investigation.”

While Bear Stearns executives tried to quash rumors about the firm’s insolvency with press releases and television appearances by its CEO Schwartz, the number of $30 Bear Stearns put options held by speculators soared 10,768 percent from Monday March 10 to Tuesday March 11, Bloomberg data show.

On March 11, when the Fed said it planned to make up to $200 billion available through weekly auctions and for the first time lend cash in exchange for debt that included the devalued mortgage-backed securities that contributed to the credit seizure, one or more unidentified traders requested the Chicago Board Options Exchange list the even deeper out-of-the-money strike at $25.

Stock in Freefall

Bear Stearns also was rocked that week by failed trades, a problem associated with naked short selling. Failed trades in Bear Stearns soared more than 10,800 percent during the week of March 10, according to data released by the SEC.

Bear Stearns fell 11 percent to $62.30 in the first trading day of the week on speculation that the firm had insufficient liquidity, or enough funds to cover any sudden withdrawals. The 58-year-old Schwartz, who was in Palm Beach, Florida, at an industry conference, was puzzled by the rumors, according to people who talked to him. He was told by associates that the firm had no shortage of cash. Clients weren’t pulling their money, trading counterparties weren’t refusing to do business with Bear Stearns, and short-term credit lines weren’t being cut.

To quell the speculation, the company issued a two- paragraph statement at the end of the day, saying its financial position was “strong.”

Bankruptcy Put

Hedge funds, concerned about losing their money, weren’t convinced. Eagle Asset Management Inc. moved to other prime brokers, according to Managing Director Todd McCallister. Investors who had credit default swap contracts with Bear Stearns turned to Goldman Sachs Group Inc. and other Wall Street firms, asking them to buy the contracts.

On Wednesday, March 12, Schwartz appeared on CNBC, live from Florida, saying the company had ample resources to weather the credit crunch. While for the moment, at least, that assuaged concerns in the market, the capital flight began again the next day. Many of Bear Stearns’s traditional creditors reduced or halted their lending to the 85-year-old company founded by Joseph Bear and Robert Stearns.

By the end of the day, Bear Stearns’s cash was almost depleted and its stock closed at $57. As Schwartz realized the company couldn’t function on Friday without access to overnight borrowing, he called government officials, regulators and JPMorgan CEO Jamie Dimon.

Fed Steps In

After discussions late into Thursday night, the Fed agreed to provide cash through JPMorgan, the second-biggest U.S. bank by market value, because Bear Stearns didn’t have direct access to the Fed as a lender of last resort.

Then, on March 14, the CBOE listed a series of put options with less than five days to expiration. The lowest strike price, $5, was more than 90 percent out-of-the-money in what options traders refer to as a “bankruptcy put.” Bear Stearns slumped 47 percent that day to $30 in NYSE trading.

The out-of-the-money Bear Stearns puts point to a raid, said Baker, who’s now a securities lawyer whose clients include companies that have filed complaints over naked short selling.

The $25 Bear Stearns puts, and others obtained March 14 involving the right to sell 630,000 shares at a strike price of $5 by March 22, were “bizarre,” according to Haugh, the PTI partner who spent 18 years as a CBOE options-market maker.

`One Tick’

“An incredible amount of bearish activity could have been generated by just 10 to 15 people,” Haugh said. “Other people then pile in, because they think somebody knows something.”

John Olagues, who started trading options 30 years ago, said he has never experienced anything like it. Olagues, who runs a New Orleans consulting company called Truth in Options, also manages more than $1 million for a client who had a stake in Bear Stearns, which plummeted 94 percent in value on March 17. The drop prompted Olagues to start poring over options trading records and call officials at the CBOE.

“In just one tick, the company’s share price lost nearly all its value, a steeper drop than Enron’s right before its de- listing in 2001,” said 63-year-old Olagues, referring to the bankruptcy of Houston-based energy trading company Enron Corp. “I’ve never seen a stock perform like that in my life.”

Olagues, who was an options market maker at the Pacific Exchange and then the CBOE from 1976 to 1984, said he knows all about so-called time decay, implied volatility, arbitrage and the complexities of options trading. The former all-conference pitcher at Tulane University, who started Truth in Options in 2003, said he has found options transactions that convince him Bear Stearns was the victim of insider trading.

Vertical Put

“I would stake my reputation on that,” he said.

Olagues said he was able to avoid losses for his client on Friday, March 14. His hedged position — a so-called vertical put spread designed to absorb losses as great as 50 percent — made money by the closing bell that day. The hedging failed the next trading day, March 17, when the stock opened at $3.17.

“Nobody prepares for the stock going from $57 to $3 in just two days,” he said.

Schwartz told the U.S. Senate Banking Committee on April 3 that there are “lots of reasons why people could have a financial motivation to induce panic” and “a lot of trading would point to that.”

SEC Review

Bear Stearns has forwarded options data to the Senate Banking Committee and the SEC, said a person close to the firm, who declined to be identified.

SEC Chairman Christopher Cox told Congress last month that the agency is probing whether illegal trading spurred the collapse of Bear Stearns and the 72 percent drop this year in Lehman Brothers Holdings Inc.’s market value. The inquiry focuses on investors suspected of seeking to profit by intentionally spreading false information about the companies.

The SEC subpoenaed Wall Street’s largest firms and hedge funds for trading records and communications, including e-mails. The agency also enacted an emergency limit on so-called naked short sales in Freddie Mac, Fannie Mae and 17 brokerages as it prepares broader rules to thwart stock manipulation. That limit expires at midnight tomorrow.

Naked shorting, which can be illegal, occurs when short sellers who intend to profit from a decline in securities prices fail to borrow stock by the settlement date. Traders can use that method to drive down prices by flooding the market with sell orders.

`Turbocharge’ Effect

The strategy can “turbocharge” the effect of false rumors on a stock price, Cox said on a July 16 conference call with reporters. The SEC will consider new rules to prevent improper short selling, Cox told Congress on July 24. It also may force investors to disclose “substantial” bets on falling stocks, he said.

On Tuesday, March 11, when Federal Reserve Bank Chairman Ben Bernanke attended a luncheon with Wall Street executives at the New York Fed and the CBOE listed its $25 Bear Stearns put option, McCarty of Meridian red-flagged Bear Stearns in his “MEP Noteworthy Option Activity” memo.

What got McCarty’s attention that day was the volume of put trading in strike prices of $35 and below. Investors traded 84,109 puts at strike prices that would require a calamitous drop to make money, he said.

Big Bets

“Somebody placed some big bets that day that paid off,” McCarty said. “The question is, did they make it pay off?”

On March 14, when Schwartz sought emergency funding, Bear Stearns opened at $54.24 in NYSE trading. That day, the CBOE listed eight new put options that expired in five days with strike prices that ranged from $22.50 to $5. The lowest was 90.7 percent below the opening stock price.

Gail Osten, a spokeswoman for the CBOE, declined to say who placed the order for the options.

“Nobody in their right mind would buy that put unless you knew what was going down,” said Ray Wollney, Olagues’s partner at Truth in Options. On Friday, March 14, a total of 6,303 of the March $5 Bear Stearns puts traded.

That night, Schwartz got a call from Treasury Secretary Henry Paulson making it clear that Bear Stearns had until Sunday evening to find a buyer because the Fed planned to withdraw its financial backing. Paulson, who didn’t want the government to appear to be bailing out a Wall Street firm, then brokered the sale to JPMorgan.

Convincing the Board

Schwartz and Bear Stearns Chairman James “Jimmy” Cayne convinced fellow board members by explaining that their only alternative was to accept the deal or face bankruptcy. The agreement was announced Sunday night.

Options bets that looked irrational on Friday proved brilliant on Monday, when the shares traded between $3 and $5. By Wollney’s calculations, the traders who spent $35.8 million on the deep out-of-the-money puts reaped an estimated $274 million windfall from the plunge in Bear Stearns.

Peter Chepucavage, a former general counsel for compliance at Nomura Securities and onetime SEC lawyer, said the Bear Stearns bets were neither smart nor lucky.

“When you buy $5 strikes when the stock is trading over $50, you either have to be manipulating, or you have to have insider information,” said Chepucavage, who’s now with Washington-based Plexus Consulting.

`Riddled With Bullets’

John Welborn, a London School of Economics-educated economist who works at Haverford Group investment firm in Salt Lake City, has been analyzing data released by the SEC on Bear Stearns shares sold but not delivered to buyers within the required three-day limit.

From March 10 to March 14, SEC data show that the failed Bear Stearns trades jumped to 2.1 million from 19,424, Welborn said. The failed trades correlate with increases in the firm’s put volume. The volume of Bear Stearns puts soared to 237,770 on March 11 from 32,081 on March 7. Put contracts doubled again to 445,635 on March 14.

“It looks to me like Bear Stearns got riddled with bullets,” Welborn said.

The question is whether the trading was premeditated and designed to ruin Bear Stearns, Chepucavage said. If there is a link between these separate activities, only subpoena power will be able to establish it, he said.

“Track the rumors,” Chepucavage said. “Follow the puts.”

To contact the reporters on this story: Gary Matsumoto in New York at gmatsumoto@bloomberg.net.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aGmG_eOp5TjE&refer=home

The ominous sound of jingle mail: The death of the American suburbs

At first everything looks reassuringly normal. After all, aren’t peace, quiet and order what suburban America is supposed to be all about? But then you notice them – the weeds sprouting in once-mulched flowerbeds, the lawns that haven’t been mown in this most lawn-conscious of universes, and the blue plastic key boxes for agents showing the house to allow themselves and their clients in. And then there are the For Sale signs, two three or four on every block, some with the dreaded word, “foreclosure”, appended.

Two such empty houses stand on the small circle in which the cul-de-sac of Quell Court, in Dale City, Northern Virginia, comes to an end. “I think the guy opposite got in trouble after a divorce, the other one I’m not sure what happened,” says Munawar Khan, who can see both of them from his front room window. “But I’m pretty sure both are in short sale now.” Mr Khan, who moved into Quell Court in January, should know. He’s a realtor (as estate agents are known here) himself.

Dale City, in Prince William County, 30 miles south of Washington DC, is quintessential outer suburb America: a township of 60,000, notable for huge shopping malls, vast churches, and sprawling parking lots and – until recently, a home building boom that it seemed would never end.

The place was largely the creation of a property developer called Cecil Don Hylton, who named it because of the wooded hills and dales in this corner of Greater Washington. “The friendliest little city around,” Dale City likes to call itself. Right now however, it is an epicentre of the housing crisis that is shaking the US and global economy to its core, a case study of the American Dream gone wrong.

Hylton’s conceit was to give every neighbourhood a name that ended in “dale” and then have every road in it starting with the same letter. Thus Queensdale, with local thoroughfares called Quinn Lane, Queensdale Drive, Quate Road, Qualls lane and logically enough, Quell Court.

The street is very much the upmarket end of Dale City. The houses don’t quite fall into the “McMansion” category, but come close. Typically they have four or five bedrooms and as many bathrooms, two- or three-car garages, and stand on an acre or more of land. Many have those “baronial” style double storey entrance halls that Americans so love. At the height of the boom they would go for over $650,000 (£330,000). Now you can pick one up for $450,000 or so.

Tom Morcom, vice president of the Dale City branch of real estate brokerage colossus Coldwell Banker, is a 30-year veteran of the business. He’s seen three or four such cycles, but never, he says, a boom and bust like this. “This used to be the top selling area in Northern Virginia,” he explains. “It was once a blue collar area, but moved upmarket, offering good dollar value.”

At the peak of the boom, in late 2005 and early 2006, the sky seemed the limit. Everyone – young professionals, middle class families with kids, and property investors – sought to buy in places like Dale City, close but not too close to Washington, offering every modern convenience in a suitably rural environment.

And everyone wanted a piece of the action. The builders had a field day. “Sometimes they would add $60,000 to the price for $10,000 worth of extras,” says Munawar Khan. But nobody cared. Lenders too were awash with money. Caveat emptor, one may say. Should not borrowers have read the fine print and known what they were getting into? But for Mr Morcom, the prime culprits were the mortgage operators and other greedy lenders who made the risky loans, before passing the risks on to greedy Wall Street investors, with the disastrous consequences of which the world is now only too well aware.

“Even at the height of the boom, we never showed properties unless the client had a letter of pre-qualification from a lender, saying funds would be available,” Mr Morcom says. “We only saw the terms of the loan at settlement, right at the end of the buying process. Some would make your blood run cold, three month adjustable mortgages and that sort of thing. As long as credit was cheap and house prices kept rising, the party could continue.”

In Dale City, prices rocketed over 130 per cent between 2000 and 2006. Since then they have plunged 30 to 40 per cent, and foreclosures – forced repossessions – hit one of the highest rates in the country.

There are alternatives. One is the short sale, taking place in Quell Court, whereby the lender agrees with the distressed homeowner to buy back the property at the current market price. For example, you might owe $300,000 on your mortgage, when your home now fetches only $260,000. The bank says fine, and closes out the mortgage, forgiving the unpaid $40,000 difference.

For a bank, it’s not a great arrangement – but much better than foreclosure. The homeowner also has a stake in the process, keeping his credit rating clean. In a foreclosure, a bank typically loses 40 per cent of the value of the property, double that of a short sale. The process is costly and time-consuming – and can get very ugly indeed. “I’ve seen foreclosed homes where the evicted owner has trashed the place, and ripped out the kitchen, bathroom fixtures, even the air conditioning,” Mr Khan says.

Such is the distressed state of the modern American suburb – its problems made worse still by the sky-high price of petrol that has turned the daily commute into another drain on income and increased the appeal of living as close as possible to work.

If anything, America’s housing crisis is deepening. President Bush may have signed into law last week a bill that shores up Fannie Mae and Freddie Mac, the two giant entities that underwrite almost half the country’s mortgage debt, and enables borrowers trapped in unaffordable mortgages to replace them with cheaper fix rate loans backed by the government. But house prices are still falling, sucking ever more people into the negative equity quagmire even as their monthly payments are soaring.

Some warn of an even more perilous trend – of “jingle mail”, when home owners who can afford their mortgages decide there’s no point throwing good money after bad, when they already owe more than their house is worth, and the monthly payment jumps yet again. They simply put the keys through the letterbox and walk away. The result is foreclosure and a temporary hit to their credit rating. But US law makes it difficult for a bank to chase borrowers for an unpaid mortgage loan. In the end, the slate is wiped clean.

For its part however, the bank has no choice but to repossess and sell the property, but for far less than the value of the loan. The risk thus is of further capital write-downs and more curbs on lending that will only make the present credit crunch even more painful.

But in Dale City, the first sprouts of hope may be poking up through the rubble of the bust of 2007/2008. Markets bring recovery as well as ruin, and prices have now fallen so low that buyers are flocking in. In June, bargain hunters pushed home sales up by 83 per cent from a year earlier.

The median home price here has dropped to $225,000 from $400,000-plus in just two years. “$300,000 row houses are selling for less than half that,” Mr Khan says. “Amazingly there are properties here, 30 miles from Washington, for under $100,000.” The new trend does not mean the end of the US housing crisis, or even the beginning of the end. But it’s a sign that bad times, like good times, do not last for ever.

http://www.independent.co.uk/news/world/americas/the-ominous-sound-of-jingle-mail-the-death-of-the-american-suburbs-884251.html

The Real State of the US Economy:

Henry Paulson has lost the control over US finance

Global Research, August 2, 2008

When Henry Paulson agreed to leave his job as chairman of the powerful Wall Street investment bank, Goldman Sachs to go to Washington as Treasury Secretary in 2006 he demanded extraordinary powers as de facto economic czar. He got it. Paulson is also head of the President’s Working Group on Financial Markets — the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The Working Group is the financial world’s equivalent of the Pentagon war room. Paulson, not Fed chairman Bernanke, is the person running the Administration’s crisis management. And his recent actions indicate he has lost control as the snowballing problems from the semi-government mortgage companies Freddie Mac and Fannie Mae to the collapse of the multi-trillion dollar market in Asset Backed Securities (ABS) to the real economy are compounding into the worst crisis since the 1930’s Great Depression.

‘The US banking system is sound.’

In an eerie echo of President Herbert Hoover in 1930, during a Presidential campaign against Roosevelt, following the stock market crash and collapse of numerous smaller banks, Paulson recently appeared on national TV to declare “our banking system is a safe and sound one.” He added that the list of “troubled” banks “is a very manageable situation.” In fact what he did not say was that the US bank deposit insurance fund, the Federal Deposit Insurance Corporation (FDIC) has a list of problem banks that numbers 90. Not included on that list are banks such as Citigroup, until recently the largest bank in the world.

The statement is hardly reassuring. The California savings bank, IndyMac Bank which was declared insolvent a month ago was not on the FDIC list a week before it collapsed. The reality is the crisis created by “securitizing” millions of home mortgages into new financial instruments and selling the packages to pension funds and investors is unfolding like a snowball rolling down the Swiss Alps.

Indication of the lack of control is the statement just weeks ago by Paulson that “financial institutions must be allowed to fail.” That was two weeks before Paulson went to Congress to ask for “Congressional authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac.” As I noted in my recent piece, Financial Tsunami: The Next Big Wave is Breaking: Fannie Mae Freddie Mac and US Mortgage Debt , those two private companies insured some $6 trillion worth of home mortgages, half the entire US mortgage debt. Paulson defended the request by calling Freddie Mac and Fannie Mae “the only functioning part of the home loan market.”

That comes back to the statement about a “sound banking system”. Can we have a sound banking system where the only functioning part is literally insolvent—its debts greater than its assets?

It is well known on Wall Street that some of the largest financial institutions have huge undeclared problems with Asset Backed Securities they have valued far above their worth to make their books look better than they are. The names Citigroup, Lehman Bros., Morgan Stanley, even Paulson’s old firm, Goldman Sachs and of course the inventor of sub-prime mortgage securitization, Merrill Lynch, all hold a huge percentage of what are called Level Three assets, these being assets where no one is willing to buy but the bank declares their worth based on “fantasy.” In short the value of those core financial institutions of the US financial system is massively overvalued compared with their value were they forced to sell into the open market today. In a sobering aside, readers should not expect any serious economic remedies for the crisis from a President Barack Obama. Obama’s National Campaign Finance Chairman is Chicago real estate billionaire, Penny Pritzker, who is heir to among other things the Hyatt Hotels. It was Pritzker together with Merrill Lynch ten years ago who first developed the model for securitizing “sub-prime” real estate, the trigger for the current Financial Tsunami crisis.

Already Citigroup has been forced to go to Dubai hat in hand and ask for billions in cash. After it announced it would not need more capital. Now Citigroup just announced plans to sell some $500 billion more assets to raise funds. Is Citigroup really solvent is the question sober investors are asking. Similarly Merrill Lynch raised $6.6 billion from Kuwait Mizuho, stated it was fine and weeks later had to raise still more capital. Morgan Stanley sold a 10% share of the company to China International Corp.

The real economy contracting rapidly

Behind the reassuring statements from Paulson and others that the “worst is over” the reality of the credit collapse since August 2007 is a deepening economic contraction which I have said several times in this space will surpass the Great Depression of the 1929-1938 period. A goof friend who is an unemployed homebuilder in a prosperous part of Arizona just sent me the following list of US department retail store closures. It is worth noting that over 70% of the US GDP is consumer spending and that the entire Federal Reserve strategy of Alan Greenspan after the March 2000 collapse of the stock market bubble, was to bring US interest rates to their lowest levels since the 1930’s in order to stimulate consumer spending on credit, i.e. debt, to avoid “recession.” Note the scale of the following store closings across America in recent weeks:

Ann Taylor closing 117 stores nationwide.

Eddie Bauer to close more stores after closing 27 stores in the first quarter.

Cache, a women’s retailer is closing 20 to 23 stores this year.

Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide

Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men’s stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women’s and J. Jill.

Gap Inc. closing 85 stores

Foot Locker to close 140 stores

Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.

Levitz – the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.

Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores.

Disney Store owner has the right to close 98 stores.

Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world’s largest home improvement store chain has ever closed a flagship store.

CompUSA (CLOSED).

Macy’s – 9 stores closed

Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery

and Hollywood Video stores in addition to the 520 locations the video rental

chain closed last fall as part of bankruptcy.

Pacific Sunwear – 153 Demo stores closing

Pep Boys – 33 stores of auto parts supplier closing

Sprint Nextel – 125 retail locations to close with 4,000 employees following 5,000 layoffs last year.

J. C. Penney, Lowe’s and Office Depot are all scaling back

Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs.

Wilsons the Leather Experts – closing 158 stores

Bombay Company: to close all 384 U.S.-based Bombay Company stores.

KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.

Dillard’s Inc. will close another six stores this year.

For anyone familiar with American shopping malls and retailing, this represents a staggering part of the daily economic life of the nation, from furniture stores to clothing to video rentals to leather. The process has only begun and neither major party Presidential candidate has dared to mention this on the ground economic reality, because they evidently have no solutions to offer that would not jeopardize their campaign finances. Obama is tied to not only Pritzker but also to Omaha billionaire, Warren Buffett and George Soros. McCain depends on the traditional money contributions of the Republican Party which demand permanent tax reform for highest income earners and a pro-bank laissez faire treatment of millions of homeowners facing home foreclosure and asset seizure by banks.

Banks across the country have severely cut back on loans, fearful of bad debts. That has aggravated the consumer collapse documented above. Hundreds of thousands of real estate brokers, small and large bankers, furniture workers and salespeople, and construction workers are unable to find work. Jobs are being cut wholesale and those working are often on reduced hours. Car sales in June plunged by 28% for Ford, 18% for General Motors and even 21% for Toyota which will mean more layoffs in coming weeks. This will be the next wave of unemployment.

The economic reality is not reflected in official US Commerce Department or Labor Department statistics. There the data is constantly being “revised” to hide the grim reality in an election year.

My good friend, economist John Williams of California, has meticulously tracked such “data revisions” for more than 25 years and found the manipulation of reality so alarming that he founded an independent subscriber service titled “Shadow Government Statistics” (http://www.shadowstats.com/ ), where he makes best estimate calculations of the reality not the official mythology.

By Williams’ calculations the US economy first entered recession, defined as two consecutive quarters of negative GDP growth, at the end of 2006. Ever since, the recession has deepened, dramatically so in the past 12 months. Little known is the fact that the Labor Department also publishes six different unemployment statistics from U1, U2 through to U6 being the most comprehensive. The reported “official unemployment” is the very narrowly defined U3 which stands at 5.5%. However, as Williams notes, U6 is the real measure and that officially shows 9.7% unemployed. His calculations put the figure at 13.7% actually unemployed and seeking work.

A personal account

The unemployed homebuilder from Arizona I mentioned above recently sent me the following personal note on the situation:

“Here is how it looks to people like me: Real estate dealings fuelled the economy in most areas of the country for the past decade or more. We’ve been in a market downturn for three years. We have seen the cost of doing business increase for builders, along with a big drop in buyers as everyone tightens their belts, or can’t sell existing homes. Many employers have gone under ending thousands of jobs. If they have a job people are worried about losing it. Driving long distances to work is not possible with gasoline costs double that of 2006. There has been a 40% drop in most peoples’ home equity worth. Many people are “underwater” on their homes, meaning they owe more than the market price is worth today. So many under-employed don’t show up in government unemployed statistics. Self employed like me never get counted.”

The Arizona homebuilder continued, “Today nobody is building. Unsold home inventories are triple that of 2003. Banks no longer give easy credit for home buyers. Many realtors I know have gone two years without selling a home. Empty storefronts are becoming common. In many areas unemployment among construction trades people is 50% or more. Tens of thousands of illegal Mexicans who did most of the manual labor have returned to Mexico to find work. What now? Well, I do handyman projects of all sorts, big or small and make about 70-90% of what it takes to survive with a family of a wife and three young children. My savings make up the rest. That can’t go on for too much longer. We went from affluent and comfortable to nervous and broke with diminished opportunities in just three years. We used to be the middle class.”

To be continued.

F. William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). He is at work on a new book, from which this has been adapted, Power of Money: The Rise and Decline of the American Century. He may be reached through his website, www.engdahl.oilgeopoitics.net.

www.globalresearch.ca/index.php?context=va&aid=9728

Apocalypse Down-under:

Aussie bank’s write-offs signal doom for Wall Street

By: Mike Whitney

Monday’s trading on the New York Stock Exchange (NYSE) was a real humdinger. It started off with the White House announcing that this year’s fiscal deficit would soar to a new record of nearly $500 billion. That was followed by news of rising oil prices, weak quarterly earnings and a slowdown in consumer spending. Plunk, plunk, plunk; one domino after another. By mid-morning the markets were in full retreat. That’s when investment giant Merrill Lynch announced that it would notch a $4.6 billion second-quarter loss and write-downs of $9.4 billion on collateralized debt obligations (CDOs) and other mortgage-related assets. That’s when the dookie really hit the fan. Stocks quickly went verticle and the rout was on. By the closing bell the Dow was down 240 points. Traders staggered from floor of the exchange slumped-over and bedraggled looking like they just got a missive from the draft board. The optimism is being wrung from the markets faster than the credit at an over-levered hedge fund. Every day brings another dismal surprise.

And, yet, on Tuesday, the market staged a valiant comeback surging 260 points in a matter of hours. It was enough to give the fund managers a bit of a lift and hope that things are finally turning around. But the market’s woes are far from over. They’re deeply-rooted and spreading like Kudzu throughout the system. The International Monetary Fund summed it up in warning they issued earlier in the week:

“Global financial markets are ‘fragile’ and indicators of systemic risk remain ‘elevated’…Credit quality ‘across many loan classes has begun to deteriorate with declining house prices and slowing economic growth.’ Bank balance sheets are under ‘renewed stress’ and the decline in bank share prices has made it more difficult to raise new capital. (There is an) ‘increased likelihood of a negative interaction between banking system adjustment and the real economy.’ (Financial Times)

The IMF also stuck by its earlier prediction that total losses to financial institutions from the credit crisis would reach $1 trillion ($945 billion) a sum that will have devastating consequences for industry, consumers and the global economy. Tuesday’s festivities on Wall Street are likely to be short-lived. It’s just a one-day lull in the storm.

Over at Nouriel Roubini’s blog, Dr. Doom made this observation about the Merrill Lynch’s troubles:

“Merrill Lynch’s decision to ’sell’ a good chunk of its remaining CDOs at 22 cents to the dollar has been widely praised as the firm finally recognizing the full extent of its losses on these toxic instruments. This batch of $30.6 billion of CDOs was already marked down to $11.1 billion. Now with the ’sale’ of it to Lone Star at a price of 6.7 billion Merrill Lynch is taking another $4.4 billion write-down and ’selling’ it at 22% of the original face value. But is this a market-based ’sale’? No way, calling this transaction a ’sale’ is a joke.” (Nouriel Roubini’s Global EconoMonitor)

This isn’t a “sale”; it’s more like abandoning a sinking ship. The investment chieftains are getting scorched by their downgraded assets and have started dumping them at any cost. There’s no market for mortgage-backed anything now, and there won’t be until housing finds a bottom. By time that happens, most of the CEOs and CFOs in the mega-brokerage houses will be squatting on streetcorners on the lower East Side with tin-cup in hand. It’s that bad.

The Merrill Lynch deal illustrates just how crazy things have gotten. Merrill said it “will provide financing to the purchaser for approximately 75% of the purchase price.” Whoa. In other words, the banks are so anxious to off-load their junk-paper, they’re almost paying people to take it off their hands. Now that’s desperation! No wonder the market is snorkeling its way to the bottom of the fishbowl. The problems haunting the financial markets have cross-pollinated with the real economy and are spreading misery everywhere. Unemployment is rising, growth is slowing, inflation is up, the dollar is down. We’ve heard it many times before, but it’s still jarring to see General Motors stock fall below Bed & Bath, or Starbucks shut down 600 stores, or million dollar McMansions sell for $425,000, or millions of middle-class families join the food stamp rolls. That’s tragic no matter how you slice it.

Now that the working stiff is maxed out on his mortgage, worried about losing his job, and trying to keep food on the table; the least congress can do is scatter the oil speculators; right?

Wrong. On Monday, the Financial Times reported that: “A US Senate proposal designed to curb speculation and increase transparency in the energy markets was blocked by Republican legislators on Friday. The move frustrates Democratic efforts to show the party is taking action on record petrol prices. The Stop Excessive Speculation Act, sponsored by Harry Reid, the Senate majority leader, fell 10 votes short of clearing a procedural hurdle.”

Unbelievable. $4.00 gasoline and millions of consumers that are flat-broke and congress still refuses lend a hand? What a scrubby band of sandbaggers.

The scariest news of the week comes from down-under, where the National Australia Bank (NAB) announced it would “slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90pc write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless….The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100pc write-off on a clutch of “senior strips” of collateralized debt obligations (CDO) worth £450m – even though they were all rated AAA. (Ambrose Evans Pritchard, “Australia faces worse crisis than America”, UK Telegraph)

This is a huge story with grave implications for America’s struggling banking system. No wonder the establishment media is avoiding it like the plague. If AAA rated CDOs are worthless, then some of the biggest financial institutions in the country will be packed off to the boneyard feet-first.

The original article appeared in the Business Spectator and was titled “NAB will shock Wall Street”, by Robert Gottliebsen. “Shock” is an understatement. This is more like a meat cleaver crashing down on a butcher block. Schwook! This is a must-read for anyone who is following the meltdown in the financial markets. Here is an extended excerpt from Gottliebsen’s article:

“The National Australia Bank’s decision to write off 90 per cent of its US conduit loans will have dramatic repercussions around the world. Wall Street will be deeply shocked when they understand the repercussions of what NAB has done. It is clear global banks have nowhere near provided for their exposures to US housing loans which in the words of John Stewart are experiencing a “meltdown”.

We are now way beyond sub-prime. NAB says that it is suffering a 55 per cent loss on American housing loans – an event that has never happened in the history of a developed country in recent memory. This is an unprecedented event and means that the cost of bailing out the US financial system is now far beyond the highest estimates. A US recession is now locked in, but more alarmingly, 55 per cent loan losses point to the possibility of a depression.

It means the cost of bailing out housing exposures to the two mortgage insurers will be so great that it will leave no room to bail out anything else and there are several US banks that are now in big trouble. NAB says that the dislocation in the residential market is separate from the corporate market, but the flow on is inevitable.” ( The Business Spectator,”NAB will shock Wall Street”)

The conduits are off-balance sheets operations run by the banks which contain hundreds of billions of dollars of bonds which are now essentially worthless. So far, many of the banks have not accurately reported the losses from these operations hoping that the housing market will stabilize and the value of the bonds will rebound. The action taken by the National Australia Bank is a “game-changer”; it’s like the Grim Reaper swooping down on Wall Street and lopping-off the top of every big investment bank in downtown Manhattan.

Gottliebsen again:

“The global banks have been marking to market the assets they held on their balance sheet, but the vast amounts held in so called ‘conduit trust accounts’ have not been written down because they were not marketable. NAB wrote them down when they saw the bad mortgages….US banks have written down $450 billion in bad housing loans. The revelation from NAB means that they will now certainly need to take provisions to $1,000 billion. But write-downs of $1,300 billion and perhaps even more are on the cards.”

(Business Spectator, http://www.businessspectator.com.au/bs.nsf/Article/NAB-will-shock-Wall-Street-GV4M7?OpenDocument&src=sph )

Tuesday’s “sucker rally” in the stock market was just the convulsive writhing of a dying bull. It won’t last. Once the bad news sinks in; investors will pull up stakes, equities will fall, and banks will crumble. The big-hand just inched a little closer to midnight.

http://www.informationclearinghouse.info/article20385.htm

State, Local and Private Pensions:The Next Big Bail Out

By: MICHAEL HUDSON

The great economic fight of our epoch is being waged by the FIRE sector – Finance, Insurance and Real Estate – against the industrial economy and consumers. Its objective is to maximize property prices and the volume of debt relative to what labor and industry are able to earn.

Rising debts and real estate prices go together, because asset prices depend on how much banks will lend. For creditors, the dream is to obtain an ultimate backup at public expense: government insurance that they will not lose when debtors are unable to pay. The political problem is how to get the government to insure and protect bankers rather than debtors, given that debtors are much more numerous when it comes to the voting booth. In such cases campaign contributions are the balancing factor. Governments are “privatized” and “financialized,” that is, turned from democracies into oligarchies. The banking system aims to make sure that the only losers are the customers it is supposed to serve: debtors, homeowners and employees of companies being “financialized” as the economy is de-industrialized. Indeed, financialization and de-industrialization are becoming almost synonymous. The trick is to get voters to think they are getting rich while actually they are being painted into a debt corner, along with their employers, local government and the federal government too.

For a while the bad-debt overhead can be bailed out by creating yet more debt, backed by public guarantees in what even the Wall Street Journal acknowledges is “socialism for the rich,” that is, privatizing the profit and socializing the losses. But when has government been anything else, for thousands of years before anyone coined the term “socialism”? The so-called July 30 “housing bill” supports the price of mortgages that are the major asset base of most banks and other financial institutions today. What ultimately supports the price of these mortgage packages is the price of the real estate pledged as collateral. And despite Mr. Greenspan’s celebration of soaring housing prices as “wealth creation,” it really was debt creation. As housing prices plunge, the debts remain in place.

The question is, whose balance sheets are to plunge into negative equity territory – those of indebted homeowners, or those of banks that have made the bad loans and the financial institutions (largely pension funds, I’m sorry to say) that have bought “toxic mortgages”?

Financial bubbles in their early phase inflate asset prices more rapidly than debts rise. This helps the financial sector encourage a belief that debt pollution is a quick way to make the economy rich – as long as one looks at financial balance sheets rather than tracing growth in the actual means of production and living standards. Living in the short run, most people do not see the financial war going on, and imagine that finance and industry, labor and capital are fighting for the same kind of economic growth and wealth. The reality is a conflict between financial and industrial growth objectives, subject to the adage that the solution to every problem tends to create yet new, unforeseen problems – ones often are larger in scale, requiring yet new solutions that cause yet larger and even more unforeseen. This is how societies transform themselves for better or for worse, crisis by crisis.

Usually each side fights for its economic interests. But it is best not to crow too loudly over victory. The financial bailout is depicted as a housing bill, not as a giveaway to financial interests. And it is best not to acknowledge that the financial system’s victory now threatens to push the economy further down the road to insolvency, headed by a squeeze on state and local finances, and pension funding public and private. Problems threaten to arise when creditors win too one-sided a victory.

Here’s what has happened so far. Early on the morning of July 30, President Bush signed the law that the Senate had passed at a special session the previous Saturday. Its aim was to restore U.S. housing prices to unaffordably high levels, requiring new buyers to run even deeper into debts to obtain housing. Rather than rolling debts back to more affordable levels, the government now will use its own credit to guarantee payment on whatever portion of the unpayable exponential growth in debt cannot be sustained by the economy at large.

The new “housing law” (a more honest title would have been the “financial bailout and giveaway act of 2008”) authorizes the Treasury and Federal Reserve Board to provide unlimited credit to Fannie Mae and Freddie Mac, and infuse new lending power to the Federal Housing Administration (FHA) and localities to support the “real estate market.” This is a euphemism for saving mortgage lenders from the traditional response to falling property prices – defaults and walk-aways. The idea is for government loans to replace the bad loans that existing mortgage holders are stuck with, and to do so before property prices sink by another 25 percent.

The cover story highlighted in the first line of the press release was that the new act was “intended to provide mortgage relief for 400,000 struggling U.S. homeowners and to stabilize financial markets.” The real aim is to help struggling banks and institutional investors, with little likely aid for homeowners. Mortgage defaults and foreclosures were threatening to wipe out the collateral valuations for the loans packaged and sold to U.S. pension funds, other institutional investors and foreign banks – including the $1 trillion in Fannie Mae and Freddie Mac securities to foreign central banks and sovereign wealth funds.

Piercing the cloud of public relations rhetoric, the actual impact on strapped mortgage debtors is that the increased funding for Fannie Mae, Freddie Mac and FHA are part of a $1.4 trillion emergency supply of government credit intended to keep housing prices from falling back to more affordable levels. An alternative use of this funding would have been to save individual debtors from foreclosure and re-set their mortgages at more realistic levels. But the constituency of the Treasury and Federal Reserve is Wall Street, not homeowners. This is not a constituency whose interests reflect those of the economy as a whole over the long run.

Finance and real estate extract interest and rents from the rest of the economy, shrinking rather than expanding it. This causes property prices to fall. Speculators (who have made up about 15 percent of the housing market in recent years – one out of every six buyers) stop buying, while an over-supply of foreclosed or abandoned properties come onto the market. Falling prices push debt-leveraged homeowners into negative equity, followed by banks and the hapless buyers of the mortgages they have sold off.

During the real estate bubble homeowners, commercial speculators and corporate raiders were able to borrow the interest charges by refinancing their properties at higher and higher appraisals. But banks now are pulling back from mortgage lending, largely because buyers of packaged mortgages find themselves stuck with paper that is a far cry from the security its AAA bond ratings implied. Companies that have insured these mortgages are far undercapitalized to sustain the risks, and themselves are threatened with bankruptcy. So the mortgage packagers and insurers Fannie Mae and Freddie Mac are being kept in business to “save the real estate market,” by which is meant the exponential growth of debt.

The parties being bailed out are the large institutions that hold the bad mortgages extended and packaged in recent years, and companies on the hook for having insured the face value of these mortgages. The growth of real estate debt has been achieved by the semi-public Fannie Mae and Freddie Mac providing “liquidity” not just by buying up and packaging mortgages in bulk, but by insuring their income streams. As William Poole, head of the St. Louis Federal Reserve Bank from 1998 to 2008, points out: “Fannie and Freddie exist to provide guarantees for mortgage-backed securities trading in the market. The business is simply insurance.” This insurance against mortgagees defaulting (and ultimately against banks and mortgage brokers making bad loans beyond the home buyer’s ability to pay) is what has made their sale so irresponsibly liquid. And matters have reached the point where between two and three million U.S. homeowners are still expected to default this year, leading to foreclosures.

Mr. Poole adds that the government’s assumption of the mortgages underwritten and guaranteed by these two public agencies technically doubles the federal debt, from $5 to $10 trillion. The asset side of the government balance sheet also rises, but there may be a substantial shortfall. Private bondholders and stockholders of Fannie and Freddie also have claims on these assets, so any attempt at real-world accounting becomes thoroughly tangled.

A deeper problem is that Fannie and Freddie underwrote and insured a debt increase whose continued exponential growth is unsustainable, because it causes domestic debt deflation. What Mr. Greenspan called “wealth creation” – pumping up housing and stock market prices on credit – was actually debt creation. Asset prices are a function of how much banks will lend. If they lend more money on easier and easier terms, property prices will continue to soar. This is why the economy is facing debt deflation. More and more money will be diverted from being spent on consumption and paying taxes, in order to pay creditors. This will shrink the domestic market, squeezing profits, and also will squeeze state and local finances.

The government will not solve this problem by providing yet more loans for stronger parties to buy the existing supply of homes otherwise in foreclosure. The dream is to keep housing high-priced to support the mortgage lenders, not for prices to fall so that new buyers do not need to run so heavily into debt to afford housing.

Supporting real estate prices thus entails keeping the existing volume of debt on the books, and indeed running up even more debt. This levies an enormous charge on the economy to pay interest and amortization. These payments leave less available to be spent on goods and services or paid in taxes. The economy shrinks, leaving it even less able to carry its debt burden. Many individuals no doubt will default on their credit card debt, auto debt and other debts, but the largest remaining debt consists of pension and health care obligations to the private and public sector work force.

This problem has been growing beneath the view of most public media. Private-sector pensions are insured by the federal Pension Benefit Guarantee Corporation (PBGC), which is substantially undercapitalized. A much larger problem is state and local pension programs. not only are underfunded; they have no insurance at all. The expectation was that public-sector pensions would be paid out of rising property tax revenues and capital gains. But taxing property now threatens to cause defaults on mortgage payments. This is the corner into which the economy has painted itself by trying to preserve the exponential growth of mortgage debt.

To cap matters, this threatens to push state and local budgets into deficit at a time when their pension and medical insurance payments are soaring. On the expense side of their balance sheet, localities must spend more money to cope with the consequences of empty houses being stripped of building materials, occupied by squatters, burned down and generally becoming a source of blight. On the fiscal income side, states and localities are facing populist political pressure crafted by large real estate interests and promoted with the usual flow of crocodile tears on behalf of retirees and other homeowners whose debt squeeze prompts them to support politicians promising to reduce property taxes.

At first glance the connection between bailing out Fannie Mae and, behind it, the real estate market to keep prices high for American homeowners might not seem closely linked to corporate, state and local pension plans. So let us trace the linkage. Bailing out mortgage lenders ultimately must be achieved at the expense of state and local property tax revenues. Revenue that is used to pay interest is not available to pay taxes. If debts are to continue to grow exponentially and extract more carrying charges, this forces a tax shift onto labor and industry.

For the past century the financial sector has made steady incursions to take over what used to be the role of government. Today’s libertarian anti-tax “free market” rhetoric is simply a cover for the financial sector’s replacement of elected democratic government. Forward planning is being distorted to serve the financial sector, not aiming to promote long-term growth and raise living standards, and certainly not to protect the public sector’s fiscal position.

One of the lesser-known features of this week’s real estate bailout is the endorsement of “negative mortgages.” These debt agreements add the accrual of interest onto the principal. The cover story is that this enables low-income homeowners to keep their houses with a lower carrying charge, borrowing the interest rather than paying it. But this means that what used to accrue to homeowners or their heirs as a “capital” (land-price) gain henceforth will accrue to the mortgage lender. For over a century, the main way that most American families have become rich has been by the free lunch of exponentially rising land prices. What is to rise exponentially in years to come is now their debt overhead. It is the financial sector that will get the free lunch of land-price gains.

Adding the interest charge onto the principal is how Ponzi schemes work. They cannot work for long, because no real economy can keep up with “the magic of compound interest.” The Bush-Paulson bailout plan calls for mortgages to become larger and larger, regardless of whether property prices keep pace. The interest is to accrue to the federal government as mortgagee at first, but this innovation is really a test run. It is the path of least resistance for private banks to start making mortgage loans that give them a return in the form of “capital” gains as well as interest.

These gains consist of the inflation of land prices in cases where state, local and federal government fails to capture this gain for the economy at large. So the scheme obliged the public sector to turn elsewhere than property for its revenues – namely, to consumers and industry.

Who is not going to get paid: bankers and bondholders, or pensioners?

From corporate balance sheets to today’s state and municipal fiscal crises, what appears at first glance to be a pension and Social Security problem turns out to be a financialization (debt) problem. In an attempt to maximize dividend payouts, companies in the auto, steel airlines and other industries made a bargain with labor to take its wages in the form of deferred pension and health-care payments. And labor – being much more farsighted than corporate financial managers – chose to defer the latter.

In the case of public sector pensions, the problem is the anti-tax ideology promoted by the financial sector, which prefers government to borrow from the wealthy rather than tax them. Cities from New York to San Diego chose not to raise taxes but to promise public sector employees future retirement income and health care. Also like companies, they chose to finance their budgets by borrowing, by issuing bonds rather than by taxing their traditional real estate tax base. In a nutshell, they chose to borrow from the rich rather than tax them.

Corporate and public bond issuers point out that there is not enough revenue to pay all claimants. But rather than blaming the lenders for making loans to be paid by carving up and selling off assets rather than by producing more, financial lobbies are taking a neo-Malthusian position. They are blaming the corporate and public sector cost squeeze on pension obligations stemming from the fact that people are living longer. The number of retirees per employee or taxpayer is rising – and the much-vaunted rise of science, technology and productivity is not supposed to be able to carry this extra load.

Or rather, economies cannot carry this load and also pay exponentially rising debt service and money-management fees. But this blame-the-victim logic ignores the fact that today’s debts – and property prices – are growing at compound interest, beyond the ability of economies to produce a net economic surplus to pay. Something has to give. For the financial sector, what gives is supposed to be labor’s wages, industry’s profits and the government’s taxing power.

We got into this mess by giving special tax breaks to real estate and finance at the expense of labor and industry, and warping the tax system to favor debt over equity. Financial managers and politicians conformed to type by living in the short-run. Labor did not demand that government take responsibility for what is commonly provided to employees and retirees in most civilized countries: a living income and health care. Instead, both labor and its employers took this responsibility on the private sector itself. It was a cost that other countries are spared from having to bear – and from having to “financialize” by pre-saving in the form of financial speculation, to pay pensions and health care out of capital gains that are to be ensured by the government cutting taxes to leave more profits and other revenue to capitalize into yet higher loans to bid up asset prices. The entire detour of financialization has added a vast non-production cost to the expense of doing business and hiring labor in America. To put matters bluntly, we have taken a wrong path – yet hardly anyone in authority is explaining how to retrace our steps to get out of the present dilemma.

As long as one believes that government can only add to overhead waste – and that the financial sector can only “economize” and make the economy more efficient – there will be little motivation to seek an alternative. Without doubt, one can point to exorbitant retirement giveaways such as New York City’s pension arrangements for public transport workers, policemen and firemen. Their craft unions obtained pension and health care rights substantially above those of the labor force in general. But such deviations from the norm are inevitable in a system where pensions and health care are left to company-by-company, city-by-city and state-by-state negotiations rather than negotiated nationally as is the case in social democracies. The situation is the same with taxes negotiated at the local level. Companies and real estate investors play states and cities against each other to extract special tax breaks for locating in their areas. Political lobbying and insider dealing become rife under such conditions.

At the root of America’s pension and health care problems is an ideological opposition to public services and taxation at the national level. In the aftermath of World War II, corporations opposed “socialized medicine.” This left companies to pay for health care out of their earnings rather than leaving it to government to organize and pay out of the general tax base. This probably made sense to the vested interests when they bore the brunt of progressive taxation. But they seem not to have noted that this attitude has ceased to be self-serving now that the richest families have shifted the taxes onto the lower brackets. General Motors recently has protested that health care costs more money per auto than steel. Yet someone must pay for health care and retirement. If not the government, then who – besides one’s employer? So one wonders just what General Motors wants more: the luxury of an obsolete anti-Bolshevist rhetoric, or to make consumers pay for their health care and Social Security as “user fees” without the upper tax brackets taking the responsibility that they take in countries with more progressive tax systems.

In retrospect it would seem that companies did not act in their self-interest when they insisted on taking responsibility on themselves for providing medical care whose price has soared, largely because the medical profession itself has been taken over by financialized health management organizations (HMOs) in the insurance sector (an increasingly prosperous element of the FIRE sector). They have put doctors as well as patients on rations – fee-for-service in the case of physicians, and rationed care for the hapless insured. And this is supposed to be the free market alternative to centralized planning!

The explanation for companies acting this way is to be found in the era of progressive taxation. More than two centuries of classical economic analysis had shown the logic of taxing predatory wealth (land ownership, monopoly rights and financial claims on the economy) rather than labor and industry. The objective was to tax all forms of income that were not necessary for production to take place. Above all were rights to land, which is provided by nature, for the purpose of charging an access fee, and other extractive property rights and financial charges loaded on top of what actually is needed to be spent on production.

The early income tax captured such “unearned income.” The wealthy classes thus opposed public provision of services, including medical care as well as basic infrastructure, in an epoch when they were the major parties being taxed. But being sclerotic and rigid, the rentier classes failed to shift their attitudes toward public service as they moved to free themselves from taxation. Ever since the United States enacted its first modern income tax in 1913, finance and its major clients – real estate and monopolies – have lobbied to distort the tax code to make their gains tax-exempt. Rather than declaring taxable income, they count as a cost of production interest and over-depreciation for real estate, as well as payments to corporate shells in offshore tax-avoidance centers. The finance and property sectors also take their returns in the form of capital gains rather than as profits, trading through financial hedge funds whose revenue is taxed at only half the rate of normal income.

The wealthiest 1% take their returns in the form of bonuses, not wages, and enjoy a cut-off point of only $102,000 for FICA Social Security and Medicare wage withholding. When Wall Street Journal editorials assert that the richest 1% earn “only” a small portion of taxable income, all this really means is that a shrinking portion of their economic returns are deemed subject to the income tax. Their buildup of wealth takes a form not classified as “income.” Inherited wealth meanwhile is the great loophole for avoiding ever having to pay capital gains that have accrued on real estate and other assets rising in price.

If the rentier classes act flexibly, they will see that as they shed their national, state and local fiscal burden, it is time to “socialize of the risks” as a travesty of true socialism by passing the costs of pensions and health care off of companies and localities onto the federal government. After all, now that labor and consumers are paying the lion’s share of taxes, is it not all right to extend public spending to take over areas of cost hitherto borne by corporate business and other private-sector employers? This promises to be the next big political fight.

But ideological sloganeering dies slowly, and corporate business and the financial sector continue to oppose “big government” even as they are un-taxed. That is the problem with the vested interests: they live only for themselves in the short run. The financial mentality is opportunistic (“after me, the deluge”), caring little about the future. Labor cannot enjoy this luxury. It needs to look to how it will live after its working years end and health care becomes a rising expense. This perspective involves a more far-sighted economic and social contract.

Meanwhile, property taxes continue to be phased out as the basis for state and local finance. The tax burden is being shifted onto income and sales levies that fall on consumers, not on the preferred tax status of high finance and property. For many years now, the political drive to un-tax real estate led cities such as San Diego and entire states such as New Jersey to pay their work force in the form of retirement and health care obligations rather than current wages, while borrowing from the rich rather than taxing them. The income hitherto paid as property tax was available either to pledge to bankers for loans to buy property rising in price as it was untaxed.

All this was fiscal and economic madness from a long-term vantage point – not the madness of crowds, but that of self-serving lobbying by the financial sector. The result has been a trend that cannot go on for long. But having managed to free themselves from progressive wealth and income taxation, the vested financial and property interests evidently believe that they can pull the same trick again and free themselves from the obligation to live up to the pension and health care promises that corporate and public-sector employers have made to their work force.

Such evasion requires a populist rhetoric. Malthusian doctrine worked well two centuries ago, so why not try it once again? Blame population growth – in this case, not the tendency of the poor to have more children, but the ability of employees to live beyond the retirement age at which they were supposed to die if they had conformed to the models used so hopefully by their employers in explaining their financial position. The claim is being made that paying business and public-sector commitments to labor will bankrupt both. There is no mention of debt payments to bondholders for funds borrowed to cut progressive taxes on the rich. Nor is the burden of high housing and other real estate prices that the July 30 bailout of mortgage lenders aims to create.

Something has to give, but it is this old worldview. No doubt when the next financial crisis hits we will see all the usual journalistic adjectives: “unexpected,” “surprising everyone by the depth of the problem,” etc. Give me a break! Can no major media see the obvious trends at work?

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

http://www.counterpunch.org/hudson07312008.html