Mike Whitney: In your article “Global forces driving Middle East uprisings,” you suggest that the revolutions spreading across the Middle East are a reaction to neoliberalism. This is very different from what we read in the western media. The MSM seems more preoccupied with tyrants and “democracy” than economics and workers struggles. Would you explain what you think is going on?

Nick Beams: In my article I tried to point to the underlying economic forces driving the upheavals in the Middle East and which led to the entry of the working class into political arena. This struggle has begun as a fight against the autocratic and dictatorial regimes which impose the neoliberal economic agenda on behalf of international finance capital – both Tunisia and Egypt as well as Libya to some extent were held up by the International Monetary Fund (IMF) as examples of what should be done in the Middle East and North Africa.

The focus on the economic driving forces makes clear that genuine democracy will not be achieved by changing the faces of the old regime or even by introducing a parliamentary form of rule and elections. Real democracy can only come through the taking of political power by the working class and the establishment of a socialist economy, based on meeting social needs not the dictates of the profit system. Clearly such a perspective can only be realized on an international scale. Is such a perspective realistic? Are the serious of uprisings we have witnessed over the past three months confined merely to the Middle East? Not at all because, as I noted, the massive growth of social inequality, unemployment, falling real wages and ever worsening prospects for young people are global phenomena. We are only at the beginning of a world-wide upheaval, a new period of social revolution.

It is true that there has been much attention given in the mass media to “tyrants” and “democracy.” It needs to be pointed out that in the major capitalist countries the same neoliberal agenda, with the same consequences, is being imposed by what can best be described as “parliamentary dictatorships.” Two years ago the American people voted for “change you can believe in.” The Obama administration, however, serves the same corporate, financial and military interests as the Bush regime, in some cases even more ruthlessly. In Britain, at the elections last May the overwhelming majority of the electorate voted against the spending cuts – the deepest since the Great Depression – now being implemented by the Tory-Liberal Democrat coalition. In the Communist Manifesto Karl Marx explained that every capitalist government was simply the executive committee for managing the common affairs of the bourgeoisie. The present crisis has, so to speak, burned away the ideological and political coverings which served to obscure this essential truth for decades.

MW: Has the media created a false narrative to deceive people about what is really happening in the Middle East?

NB: The media, especially in the US, and everywhere else, including where I live, Australia, either directly serves the ruling elites or at least frames the so-called political debates within certain “acceptable” limits. The mass of the people are lied to – the lead-up to the Iraq war was only the most egregious example. This is why WikiLeaks has attracted such vicious opposition from within ruling circles, while at the same time receiving strong support from ordinary people all over the world.

Within the so-called mainstream mass media there is an almost total exclusion of the question of social class. Any mention of the enormous growth of social inequality is greeted with the cry “you are promoting a class war agenda” and declared out of bounds.

But notwithstanding the role of the mass media, hundreds of millions of people, perhaps billions, have identified with the struggle of the Egyptian masses – an expression of growing class consciousness. This is why we have seen slogans such as “Walk like an Egyptian” and references to “Hosni Walker” in the struggle in Wisconsin.

MW: Have the unions or other workers groups played much of a role in the uprisings in Egypt, Tunisia or Libya?

NB: The working class has played an extremely powerful role in the Egyptian revolution. It is its real driving force. It was the intervention of the working class, in the form of a series of strikes on February 9 and 10 and the developing movement towards a general strike that was the crucial factor in the decision of the upper echelons of the military that Mubarak had to go. I have gone further into these questions in a comment published on the World Socialist Web Site on February 25.

In Egypt, the official trade union apparatus was part of the regime and functioned as its direct instrument. But in that role it was not fundamentally different from the trade unions in the US or Australia. In the US, the UAW has played the key role in “restructuring” the auto industry and in Wisconsin the unions have already agreed to the cuts demanded by Walker. Their key demand is that the dues checkoff system remain. In Australia, the trade unions are the policemen for the Labor government’s Fair Work Australia legislation which makes any independent activity by workers virtually illegal.

In regard to Tunisia, there has been an attempt to glorify the role of the UGTT (the General Union of Tunisian Workers). The International Socialist Organization (ISO), for example, claimed that the UGTT had “proved to be a critical nucleus for organizing and uniting the employed and unemployed in protest.” In fact, the first reaction of the UGTT was to denounce the protest. The UGTT was central to implementing the IMF-backed “reforms” in Tunisia. See The American middle class “left” and the Tunisian revolution.

MW: Do you think that the United States can play a constructive role in helping the people of the region achieve their objectives?

NB: The first point to make it that the United States is not a unified whole. The Obama administration is working desperately to ensure that the situation in the Middle East is restabilized and that pro-imperialist regimes remain in charge. In the case of Libya, this may well involve direct military intervention under the pretext of averting a “humanitarian disaster” and dealing with the “tyrant” Gaddafi, with whom the US and the European powers have enjoyed the most cordial relations over the past decade.

The Libyan situation makes clear that nothing can really be understood about the events in the Middle East if they are examined through a simplistic pro and anti-democracy framework. The eruption against Gaddafi certainly began as a movement from below, from among the poorest layers of society. But at the same time the leadership of this movement has been seized by elements of the old regime who, up until just a few days ago, were loyal servants of the Gaddafi regime, having enforced its repression in the past. The independent interests of the working class must be disentangled from and developed against those sections of the bourgeoisie which are seeking to maintain control by breaking from the old order.

The rapid fracturing of the Libyan regime at the very first sign of serious opposition must indicate that divisions had been developing over the preceding period. In my opinion this too is bound up with the free market and privatization agenda pursued by the regime. It is one thing when the accumulation of wealth, power and privilege is bound up with state control over the economy, but when a process of privatization gets under way all sorts of divergent interests within the ruling apparatus can emerge. We saw this in Egypt as well with the intense hostility to Gamal Mubarak from sections of the regime because he was so closely involved with and benefited from the free market agenda of the past five years – an agenda which cut across their interests.

The American workers and students as well as the American people in general can certainly play a powerful role in aiding the movement in the Middle East by opposing the predatory plans of the Obama administration. But this is not a question of external solidarity. The most important question is to understand that workers all over the world are now involved in the common struggle against the global ruling classes. In this struggle, advances in one part of the world will materially assist struggles everywhere.

There is already a growing sentiment, after decades in which the class struggle has been suppressed by the trade union and social democratic apparatuses, that it is possible to fight. In the wake of the events in Egypt, workers everywhere can much more easily grasp what socialists mean when they explain that it is necessary for the working class to begin an independent struggle to assert its own economic and political interests against the entire official political apparatus and its servants in the trade unions. And a movement in America will give an enormous impetus to this process. The events in Wisconsin have already had a power effect and the more the independent struggle of the American working class develops the more the workers’ movement in every country will be strengthened.

MW: In your article, you quote Leon Trotsky who said that whatever its particular form, the situation in each country is “an original combination of the basic features of the world process.” Will you explain what this means and what bearing it might have on events in the ME?

NB: The passage I quoted comes from Trotsky’s introduction to the German edition of Permanent Revolution.

Anyone who wants to gain a real understanding of internationalism can do no better than read and study this work. Trotsky insisted, against the positions advanced by the Stalinist apparatus and its doctrine of socialism in one country, that internationalism rested above all on an understanding of the historical bankruptcy of the national state.

This analysis has the most direct bearing on events in the Middle East. It means that the movement of the working class will go forward to the extent that it is recognized that it is part of a struggle of the international working class. This is not a question of some kind of abstract phrase-mongering but the key to understanding difficult and complex historical questions that must be clarified if the movement is to go forward. In the final analysis, the decay and disintegration of all the national movements – from that of Nasser, to the PLO, and even Gaddafi, is not the outcome of “betrayals” by this or that leader but is rooted in the fact that they all based themselves on the national state.

And that is the same issue which confronts the working class in the major capitalist countries. The decay and disintegration of the trade unions and their transformation into the outright agencies of the corporations and the state is not a result of individual betrayals but flows from the fact that these organizations were based on the national state.

The working class needs new organizations, above all the construction of a world party grounded on the program of international socialism. That is the perspective of the International Committee of the Fourth International and the World Socialist Web Site.

* The term “Shock Doctrine” comes from Naomi Klein’s highly-recommended book of the same name. Published by Metropolitan Books. Henry Holt and Company, Inc.

It’s all in day’s work for Hugo Chavez.

While Obama has turned out to be the most disappointing president in the last century, Chavez continues to impress with his resolve to improve the lives of ordinary working people. For example, in just 12 years, Chavez has created a thriving national public health care system with 533 diagnostic centers and medical facilities spread throughout the capital. Health care is free and there have been over over 55 million medical consultations since Chavez launched the Misión Barrio Adentro program. Compare that to Obama’s wretched cash-giveaway to the giant US HMO’s which he has tried to promote as universal health care.

What a joke!

Chavez has also led the way to greater political engagement and activism by establishing over 30,000 communal councils and 236 communes, all focused on entering more people into the political process and empowering them to bring about change. In the US, grassroots organizations are  shrugged off by party leaders who take their marching orders from the deep-pocket elites who control both parties. And, as far as Obama is concerned, he could care less what his supporters think, which is why he went groveling to the Chamber of Commerce.

And what has Chavez done to loosen the stranglehold that corporations have on media? Here’s what Gregory Wilpert says in his article titled “An Assessment of Venezuela’s Bolivarian Revolution at Twelve Years”:

With regard to the media, ordinary Venezuelans now participate in the creation of hundreds of new and independent community radio and television stations across the country. Previous governments persecuted community media, but state institutions now actively support them – not with ongoing financing, but with training and start-up equipment.

The combination of greater inclusion and greater participation has led to a greater acceptance of Venezuela’s democratic political system, according to the annual Latinobarometro opinion polls, which allow for comparisons with other democracies in Latin America. That is, more Venezuelans believe in democracy than citizens of any other country in Latin America. Eighty-four percent of Venezuelans say, “democracy is preferable to any other system of government.

Last week, Chavez joined the battle against Coca-Cola by attending a rally of striking workers in the city of Valencia, home to the main Coca-Cola bottling plant in Venezuela. Chavez blasted Coke saying that if they didn’t want to follow “the constitution and the laws” then Venezuela could “live without Coca-Cola”.

Right on, Hugo! Tell Coke to pack sand!

The 1,300 striking workers are only asking for a meager raise to meet their growing expenses, but, of course, that cuts into corporate profits, so Coke is fighting their demands tooth-and-nail.

Try to imagine a scenario in which “business-friendly” Obama would take-on a major corporation?

Last week, Chavez announced that his government would spend another $700 million to fight homelessness and build another 40,000 houses. The president has stepped up his efforts since floods ravaged the country earlier in the year leaving tens of thousands without shelter. Chavez is determined not to make the same mistakes George Bush made following Katrina, when disaster victims were left to fend for themselves forcing a third of the New Orleans population to flee to other parts of the country.

And what effect has Chavez had on the Venezuelan economy? Here’s Wilpert again:

“Just as the Chavez government has democratized Venezuela’s political system over the past 12 years; it has done the same with its economic system, both on a macro-economic level and on a micro-economic level.

On a macro-economic level this has been achieved by increasing state control over the economy and by dismantling neo-liberalism in Venezuela. The Chavez government has regained state control over the previously quasi-independent national oil industry. The government nationalized private sub-contractors of the oil industry and incorporated them into the state oil company, giving workers full benefits and better pay. It also partially nationalized transnational oil company operations so that they control no more than 40% of any given oil production site. Then, the government eliminated the practice of “service agreements,” whereby transnational oil companies enjoyed lucrative concessions for oil production. Perhaps most importantly, the government increased royalties from oil production from as low as 1% to a minimum of 33%.

In the non-oil sector the government nationalized key (previously privatized) industries, such as: steel production (Sidor), telecommunications (Cantv), electricity distribution (production was already in state hands), cement production (Cemex), banking (Banco de Venezuela), and food distribution (Éxito).”

So, dear reader, are people better off with the telecommunications and electric companies privately owned by cutthroats like Enron (and the other Wall Street pirates) or should they be turned into public utilities?

How about oil? Are BP and Exxon better suited for the task than the public sector?

And what about banking: Would you feel safer with Uncle Sam or Goldman Sachs?

Chavez has slashed the poverty rate in half, lowered unemployment from 15% in 1999 to 7% today, and shrunk inequality to the lowest level in Latin America. In Venezuela people are getting healthier and living longer. They’re better paid and more politically engaged. “84% of Venezuelans say that they are satisfied with life, which is the second highest level in Latin America.” And guess what? Chavez is strengthening social security and retirement programs, not trying to destroy them by handing them over to Wall Street in the form of private accounts.

And Chavez’s generosity has not been limited to Venezuela either. In fact, he was the first world leader to offer medical and food aid to Katrina victims. (Although you won’t read that in an American newspaper!) And he still provides free heating fuel to poor people in the northeast United States. Venezuela-owned Citgo joined with Citizens Energy “to provide hundreds of thousands of gallons of free and low-cost heating oil to needy American families and homeless shelters across the US.” According to Citizens Energy President Joseph P. Kennedy, “Every year, we ask major oil companies and oil-producing nations to help our senior citizens and the poor make it through winter, and only one company, CITGO, and one country, Venezuela, has responded to our appeals.”

That’s right; no other oil company has given even one stinking dime to the charity. Chavez has provided over 170 million gallons of heating oil since 2005.

In contrast, Barack Obama has done nothing for the poor, the homeless, ordinary workers, or the middle class. Zilch. He’s been a dead-loss for everyone except the richest of the rich. Maybe we should swap him for Chavez?

Alan Nasser: No, it’s not possible for student debtors to escape financial devastation by declaring bankruptcy. This most fundamental of consumer protections would have been available to student debtors were it not for legislation explicitly designed to withhold a whole range of basic protections from student borrowers. I’m not talking only about bankruptcy protection, but also truth in lending requirements, statutes of limitations, refinancing rights and even state usury laws – Congress has rendered all these protections inapplicable to federally guaranteed student loans. The same legislation also gave collection agencies hitherto unimaginable powers, for example to garnish wages, tax returns, Social Security benefits and — believe it or not — disability income. Twisting the knife, legislators made the suspension of state-issued professional licenses, termination of public employment and denial of security clearances legitimate measures to enable collection companies to wring financial blood from bankrupt student-loan borrowers. Student loan debt is the most punishable of all forms of debt — most of those draconian measures are unavailable to credit card companies. (Maybe I’m being too harsh. Sallie Mae recently announced that it will after all forgive a debt under either of two conditions: in case the borrower dies or becomes totally disabled.)

MW: Is it fair to say that the student loan industry is a scam that targets borrowers who will never be able to repay their debts? Are these students like the people who were seduced into taking out subprime loans? How much money is involved and how much of that money is either presently in default or headed for default?

AN: It’s as fair as fair can be. First, the student loan industry is huge — a large majority of students from every type of school are in debt. Debt is held by 62 percent of students enrolled at public colleges and universities, 72 percent at private non-profit schools and 96 percent at private, for-profit (“proprietary”) schools. It was announced last summer that total student loan debt, at $830 billion, now exceeds total US credit card debt, which is itself bloated to the bubble level of $827 billion. And student loan debt is growing at the rate of $90 billion a year. So we’re not talking small change.

How many of these students are subprime borrowers? That is, how closely do student loans resemble junk mortgages? The answer hinges on three factors: how these loans are rated, how likely the borrower is to repay, and the default rate on student loans.

The ratings of student loans are supposed to reflect the “health” of those loans, defined as the likelihood that the borrowers will default. This is officially measured by what is called the “cohort-default rate,” a very poor instrument because it measures only defaults during the first two years of repayment. What we want is data on lifetime defaults. The Department of Education collects the relevant data, but has misrepresented the facts in its public statements.

In September 2008, then-Secretary of Education Margaret Spellings announced in a news release that default rates on federal loans were “historically low”: only 5.2 percent of recent grads were in trouble. Spellings used the cohort-default rate to arrive at this figure. But the Department’s Inspector General Office employed a more realistic method in its 2003 audit, which calculated lifetime risk. It estimated that over their lifetime between 19 and 31 percent of college freshmen and sophomores would default on their loans (depending on the type of loan and when it was taken on). For community college students, the prospects were grimmer still: between 30 and 42 percent were expected to default. And the future was most discouraging for students at for-profits: between 38 and 51 percent were anticipated to default.

You can see that the default rate among student borrowers is expected to be higher than that for subprime home mortgages.

You might think that these alarming figures would motivate the feds to conduct checks to better assess the creditworthiness of would-be borrowers. But federal loans are doled out with no assessment of whether the borrower will be able to repay. Private lenders do no better. In recent years they have taken to “direct-to-consumer” loans. Loans marketed directly to students typically have higher interest rates and are of course not overseen by the college’s financial aid office. These loans are enormously profitable. In 2007 alone, one company reported making more than $1 million in such loans to Seattle University students. The financial security of the borrowers was of no interest to the lender.

That student borrowers will in fact be in a position similar to subprime mortgage debtors is also indicated in the Bureau of Labor Statistics December 2009 projection of job growth over the next ten years. Most of these jobs will be low paying and will not require a bachelor’s degree.

And don’t think that predatory lenders market loans only to actual students. Potential students are targeted as well. A major mantra nowadays is that the best protection against unemployment is a college education, which has led some private lenders to recruit borrowers… at the unemployment office!

There are a whole lot of subprime student loans out there hanging like a sword of Damocles over the heads of very many college students and grads.

Since the original article appeared, I’ve received an avalanche of comments and stories from former and current students relating their often tragic stories. Here is a representative letter, whose author gave permission to use his name:

My name is Luther Callahan and I am one of the many many students who believed in the dream of being highly educated in order to provide a good life for my family. Well…my wife and I believed believed in this. I can not find gainful employment. My wife has been furloughed on her job and has not received a raise in five years.

We don’t expect anyone to give us anything this is why we went out and got educated. However, everyone is more than willing to take what we do not have (money). Student loans are due and we can not pay them all. We are receiving the standard threats and are at our wits end as to what to do. Where are the solutions? What is in the works that will alleviate student stress?

Some of the heartless employees of these banks ask outlandish questions like “what was your plan for paying the money back?” I would tell them I did not plan for there to be a global financial meltdown. I had no idea that this would occur. I did not plan for there to be employment freezes and massive layoffs and cuts within my state. We are at a loss and these banks are poised to take everything.

MW: How is the government assisting this scam?

AN: We’ve just seen one way that government aids and abets the lenders, by fudging default rates. But government’s participation in this rip-off goes deeper than that. The Department of Education has its own loan program and, accordingly, a positive interest in defaults. It makes a financial killing on its recovery of defaulted Federal Family Education Loan Program (FFELP) loans.

In a revealing Wall Street Journal report (“US Gets Tough on Failure to Repay Student Loans – Education Department Wields Heavy Hand in Some Hard-Luck Cases – No Breaks in Bankruptcy Court“, Jan. 6, 2004) John Hechinger reveals that for every dollar the Education Department pays out in default claims, it is able to rake back the entire principal, plus almost 20 percent in interest, penalties and fees. And keep in mind that the value of the default portfolio includes not merely principal plus interest at time of default, but also the interest that continues to accrue after default. Let’s bring this up to date with a glance at Table 4 in the Supplement to president Obama’s 2010 budget. We find that the most recent recovery rate — the amount recovered compared to the amount of the defaulted loan — for defaulted FFELP loans is 122 percent. This is the highest recovery rate for all types of federal loan, and more than twice the rate for the next highest loan category. You get a sense of the relative enormity of Uncle Sam’s looting binge when you look at the recovery rate for credit card defaults — about 25 cents on the dollar.

Alan Collinge of StudentLoanJustice.org has shown that the Department of Education makes more on defaulted loans than it does on loans in good stead. Washington has just as much an interest in encouraging student loan defaults as do, for example, collection companies, which obviously live off defaults. This is exactly what the first president Bush meant when he declared his intention to “run government like a business.” Government itself has become a predatory lender. It has the same incentive to benefit from default as do private lenders.

MW: How do private loan companies benefit from defaults?

AN: Here, briefly, is what gives private companies a more than casual interest in default. It was Congressional legislation that screwed students to the benefit of holders of defaulted loans. Legislators put in place a new fee system which permitted holders of defaulted loans to appropriate 20 percent of of all payments from debtors before any of those payments are applied to principal and interest. Because Congress chose to withhold key consumer protections from student borrowers (for details, see below, question 4), the latter are virtually forced to enroll in “loan rehabilitation” programs. The borrower is subject to a form of extortion, whereby (s)he essentially buys her way out of allegedly more severe penalties with payments that are rarely applied to principal or interest on the defaulted loan. These outlays are in effect the price of access to a substitute loan, accompanied of course by additional fees. The new loan is typically larger than the defaulted one. Much as the limp “regulations” on the financial sector deliberately leave room for the kind of risky trading that is likely to bring about a repeat of the September 2008 debacle, the “rehabilitation” process makes it more likely that the debtor will default again.

The fee system is at the heart of the private lenders’ affection for default. It gives to loan guarantors the same kind of interest in default that is so obvious in the case of collection companies. Collinge has analyzed IRS filings of guarantors of federal student loans. It turns out that guaranty agencies average about 60 percent of their income from fees alone. If the default rate declines, so do the fees and income of the guarantors.

The biggest private lenders, like SLM Corporation (Sallie Mae) and Citigroup, have interests comparable to the guarantors’. This is because the latter, as well as some of the biggest collection agencies, are themselves often owned by the lenders. The lender, guarantor and collector thus form a system of interwoven interests: a lender defaults a loan, which then becomes bloated with collection fees, which then generates a flow of revenues to the guarantor and the collector. If the latter two are owned by the lender, we have income continuously flowing to all three – provided that borrowers continue to default, which is made more likely by the process I just described.

Sallie Mae’s 2003 annual report draws a vivid picture of the vast profits made on defaulted loans. The company set an earnings record that year, and the report is explicit that collections on defaulted loans were the golden goose. The company’s 2005 annual report shows that its managed loan portfolio grew by 87 percent between 2000 and 2005. In that same period its fee income grew by 228 percent.

MW: Are former and active-duty members of the military being targeted?

AN: I mentioned earlier that 96 percent of students at for-profit schools have taken student loans and that these students are, according to Department of Education studies, most likely to default. These schools target the military market with an aggressive and highly successful recruitment campaign. High numbers of active duty and recently discharged military personnel attend for-profits. 29 percent of military enrollments are in the for-profit sector, and 40 percent of annual tuition assistance to veterans winds up going to proprietary schools. Data from the US Army and Defense Department show that the University of Phoenix, the largest university in North America, is the third largest receiver of education funding from the US Army.

Military personnel are often targeted while still enlisted. They are attracted to the relative ease with which they can attend school, often at night, on the weekends, or for active-duty military, even while deployed. With the recent reduction of troops in Iraq, more service members are returning to the United States. Waiting for them are generous G.I. Bill benefits that allow them to pursue vocational or baccalaureate degrees at accredited colleges. The for-profit sector is poised to corner that market as public institutions squeeze their enrollments, raise tuition and watch public support of higher education dwindle in the current resurrection of pre-Keynesian economic policy.

The job prospects for military personnel at for-profits are predictably poor, which of course contributes to the unmanageability of the substantial debt that many of them incur. A Bloomberg report quotes a retired Marine Corps Colonel who now directs human resources for U.S. Fields Operations at Schindler Elevator Corp., as saying “we don’t even consider” online for-profit degree-holding candidates for the company’s management development program.

MW: Why haven’t the victims of these toxic loans used social networking and campus organizing to fight back against this ripoff? Are there grounds for a class action suit? What about organizing a collective action to withhold loan payment for one month to send a message to the banks?

AN: There have been isolated instances of efforts to educate and mobilize. My and Kelly Norman’s original article has been made into a booklet by an Indiana University faculty member, for distribution to the student body. And many readers have forwarded the article to their circle. But the key to effective resistance is organization, and the most likely initiators of organization, the left-of-liberal Left, remains dormant. We can’t even get it together to mobilize an antiwar movement in this age of official permanent war.

During the period of widespread student opposition to the Vietnam war there were intercampus communications networks that helped to bring about nationally coordinated demonstrations and draft resistance. A comparable network, organized around the student debt crisis, could be formed if a few campuses got the ball rolling by developing student and faculty organizations dedicated to informing and mobilizing students and those in solidarity with them to resist debt predation. Your suggestion of a payment moratorium is a good one. One of its chief benefits in my opinion would be to draw attention to the issue as a catalyst for the ultimate development of a broader resistance to the entire regime of austerity and debt peonage that the vested interests are imposing on working people.

Alan Nasser is professor emeritus of Political Economy at The Evergreen State College in Olympia, Washington. He co-authored “The Student Loan Debt Bubble” along with Kelly Norman, which appeared in CounterPunch. He can be reached at ude.neergrevenull@aressan.

Don’t get me wrong; Goldman is guilty as hell. They slapped together a Kamikaze CDO that was designed to blow up, and then they schluffed it off on their clients without filling them in on the details. It’s called “withholding material information”, and its no-no. It’s like wrapping smelly fish in yesterday’s paper and pawning it off as fresh-caught Blackmouth. You can’t do that. According to former regulator William Black, “Goldman did not just withhold information, they told people, ‘Hey, the investment decisions are being made by experts who would only choose good quality stuff’, when. in fact, the stuff that was put in was chosen because it was considered the most likely to suffer near-term downgrades.”

So Goldman was minting its own roadside bombs and getting input from notorious hedge fund short-seller, John Paulson, who planned to bet against the same CDO. But what’s most shocking, is that Goldman was caught schtuping its own clients just to make a buck. That’s going to haunt them for a very long time. Trust is important, even on Wall Street. Goldman’s reputation is shot.

Here’s a statement from Goldman: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’”

Yikes. This worse than I thought. Are they really going to use the “I didn’t know the gun was loaded” defense?

Here’s a clip from an article by Gretchen Morgenson and Louise Story in the New York Times which explains what Goldman was up to:

Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson”…

In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly. Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked.

Banks also set up ever more complex deals that favored those betting against C.D.O.’s. At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.”¹

That sums it up, doesn’t it? Goldman is a serial arsonist. Here’s a passage from the Goldman Sales Primer:

Rule #1–Burn the client

Rule#2–Laugh all the way to the bank

Rule#3–Deny everything.

Of course, when the SEC lowered the boom on Friday, everyone at CNBC (the business channel) went into mourning. The moaning and groaning persisted all day. All the cliches about “intrusive government” and the “chilling” effect this would have on the markets, were dusted off and reiterated with religious solemnity. Jim Cramer, “Mad Money’s” blabbering fu**head , defended Goldman saying the victims should have known what was going on. “Caveat emptor”, proclaimed Cramer. Buyer beware! If you get reamed, it’s your fault. Fortunately, the SEC doesn’t see it that way. Goldman’s defrauded its clients and now Goldman must pay. Expect a mile-long oil-slick of well-dressed lawyers winding-away from Goldman’s downtown offices on Monday.

Fabrice Tourre is the Goldman vice president who is at the center of the controversy. He describes himself as the “fabulous Fab”, and appears to be a likable goofball who performed his duties like he was playing a video game. He was main engineer of the Frankenstein CDO that did all the damage. Unfortunately, for fabulous Fab, he left behind a damning paper-trail of what he was up to. Here’s the e mail that grabbed the attention of the SEC:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Right. So it’s all fun-and-games for V.P. Numskull. At least this leaves open the “insanity defense”. Keep in mind, these are supposed to be “the smartest guys in the room”. Small room. Here’s a clip from the Wall Street Journal:

Early in the year, Mr. Tourre — began structuring Abacus, a new structured product to be made up of a collection of risky home loans…..

Dozens of deals like Abacus were packaged over the course of several years, said people familiar with the matter. Structured products had become so successful, in fact, that in 2008, Mr. Tourre moved to the firm’s London office to help launch the same business in Europe.²

Sure, screwing people is a “growth industry”. And a big organization like Goldman has a reservoir full of snakeoil, so it doesn’t have to worry about running-low on reserves. Just stitch-together a bunch of junk securities, dress them up in sequins and gold-lame’, dump them off on investors, and rake in big profits when the ship sinks. Wash, rinse, repeat. Tourre knew his job and did it well. The fault doesn’t lie with him. This goes all the way to the top, CEO Lloyd Blankfein, the man in the wheelhouse directing traffic. That’s where the buck stops.

But don’t count your chickens too soon. This whole matter smacks of politics bigtime. Obama probably just wants to push his financial reform bill across the finish line and is beating up on Goldman to get the public fired up. In fact, that’s probably what it is; just a bit of political step-dancing to build support for his agenda. Might as well put away those orange jumpsuits for now. It’s all theater.

1. “Banks Bundled Bad Debt, Bet Against It and Won”, Gretchen Morgenson and Louise Story, New York Times.
2. “Trader Seized on Mortgage-Security Boom,” Wall Street Journal.

It’s clear that the problem isn’t going to go away. In the last week, three more incidents have surfaced adding more fuel to the fire.  In Wisconsin, Father Lawrence Murphy abused as many as 200 boys at a Milwaukee school for the deaf. One of the victims, Arthur Budzinski, has been all-over TV telling his story and blaming the pope. It’s pretty heart-wrenching stuff too. According to Budzinski’s daughter Gigi:

“The pope knew about this. He was the one who handled the sex abuse cases. So, I think he should be accountable, because he did nothing.”

This is bad. Anyone can see that the Vatican was shuffling predators from one spot to another trying to keep the details out of the news.  Maybe Benedict thought he was doing the right thing? Maybe he thought he was just being loyal or protecting the church from litigation? Who knows what he thought; it’s beside the point. The bottom line is that people’s lives have been ruined and someone has to pay.

Here’s another bombshell which appeared in the Associated Press last week:

In a signed statement last year, the 67 former pupils at a school for the deaf in Verona described sexual abuse, pedophilia and corporal punishment from the 1950s to the 1980s. They named 24 priests, brothers and lay religious men at the Antonio Provolo Institute for the Deaf.

One victim, Alessandro Vantini, told the AP last year that priests sodomized him so relentlessly he came to feel “as if I were dead.

“How could I tell my papa that a priest had sex with me?” Vantini, 59, said through a sign-language interpreter. “You couldn’t tell your parents because the priests would beat you.”¹

67 victims here, 200 victims there; this is industrial-scale sex abuse, a veritable pedophile conveyor belt!

Naturally, the Vatican has circled the wagons and is lashing out at the media. But it’s a hopeless cause. As the head of the Congregation for the Doctrine of the Faith, Cardinal Ratzinger (as Benedict was known at the time)  took steps to silence priests who wanted to reveal  what they knew. In a 2001 letter to the bishops, Benedict “ordered them to keep sexual abuse allegations secret under threat of excommunication — updating a noxious church policy… that both priests accused of sex crimes and their victims “observe the strictest secret” and be “restrained by a perpetual silence.”²

This is obstruction of justice, and Benedict should be prosecuted.. No man is above the law; not even the pope. Religious freedom isn’t license to rape children.

Benedict’s letter helps to illustrate a larger point too. It shows that the sex abuse scandal isn’t really about sex abuse at all. It’s about the people in positions of authority who violated the public’s trust. That’s the real story. It’s about people who pretend to be “spiritual advisers”, but don’t even do the right thing when a child is sexually molested. And these are the people who are giving advice on issues like homosexuality and birth control?

Benedict has also been implicated in a German case involving Father Peter Hullermann who was suspended from his duties but then allowed to return to work “without restrictions” as a priest in Munich, even though a psychiatrist described him as a potential danger.

According to the New York Times: “In September 1979, the chaplain (Hullermann) was removed from his congregation after three sets of parents told his superior, the Rev. Norbert Essink, that he had molested their sons, charges he did not deny, according to notes taken by the superior and still in Father Hullermann’s personnel file…“Reports from the congregation in which he was last active made us aware that Chaplain Hullermann presented a danger that caused us to immediately withdraw him from pastoral duties.”

Hullermann was allowed to return to his parish work on Feb. 1, 1980. He was finally convicted in 1986 of molesting boys in Bavaria.

Can you see a pattern here? These are more than isolated incidents. It’s like some gruesome papal crime-ring: Ratzinger’s Sopranos.

A few weeks ago, Benedict issued an apology to Catholics in Ireland for decades of cruelty and abuse. In the papal communique Benedict opined, “I can only share in the dismay and the sense of betrayal that so many of you have experienced on learning of these sinful and criminal acts and the way Church authorities in Ireland dealt with them.”

Benedict’s comments are predictably insincere. He knew exactly what was going on. As Catholic theologian, Hans Kueng points out:

There was not a single man in the whole Catholic Church who knew more about the sex-abuse cases than him, because it was ex officio (part of his official role)… He can’t wag his finger at the bishops and say, you didn’t do enough. He gave the instruction himself, as head of the Congregation of Doctrine of the Faith, and repeated it as Pope.

Sinead O’Connor, Irish musician and abuse-victim, was so incensed by Benedict’s fake empathy, she wrote a fiery article for the Washington Post where she said:

Irish Catholics are in a dysfunctional relationship with an abusive organization. The pope must take responsibility for the actions of his subordinates. If Catholic priests are abusing children, it is Rome, not Dublin, that must answer for it with a full confession and a criminal investigation. Until it does, all good Catholics… should avoid Mass. In Ireland, it is time we separated our God from our religion, and our faith from its alleged leaders.

 This case goes way beyond the sleazy details of one man’s repeated attempts to conceal the criminal activities of serial molesters and child rapists. The real issue is whether people in positions of power are to be held accountable  for their actions and whether the law really applies to everyone equally and without exception. That’s what’s at stake here.  Ratzinger needs to be indicted, prosecuted and — if found guilty — sentenced to prison.

1. “Sex abuse scandal in US, Italy taints papacy”, Nicole Winfield, AP.
2. Washington Post.

Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.

– John Maynard Keynes

There’s no denying that the economy is getting better, but will it last? Many economists don’t think so, including experts at opposite ends of the ideological spectrum, like Paul Krugman and Martin Feldstein. They think the economy will begin to fizzle sometime in the latter part of 2010 when Obama’s $787 billion fiscal stimulus runs out and consumers are forced to pick up the slack in demand. That’s a safe bet, too, considering that unemployment will still be somewhere in the neighborhood of 9 percent and households will still be digging out from the $13 trillion they lost during the crisis. And the fact that the Fed is planning to end its quantitative easing (QE) program in early April, doesn’t help either. That will just suck more liquidity out of the system and push long-term interest rates higher. When that happens, housing prices will fall, inventory will rise, and a surge in foreclosures will put more pressure on the banks balance sheets. That’s why the pros are so glum, because they know the economy needs a second dose of stimulus to stay on track, but the politicos are dead-set against it. Congress is afraid of the backlash from voters in the upcoming midterm elections. They’d rather drive the economy back into recession then risk losing their jobs.

Despite the propaganda in the media, stimulus works. In fact, Goldman Sachs attributes all of last quarter’s (positive) growth to Obama’s stimulus. Here’s how Nobel prize winning economist Joseph Stiglitz sums it up in his China Daily article “Harsh lessons we may need to learn again”:

Keynesian policies do work. Countries, like Australia, that implemented large, well-designed stimulus programs early emerged from the crisis faster. Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess in the first place.

Whenever an economy goes into recession, deficits appear, as tax revenues fall faster than expenditures. The old orthodoxy held that one had to cut the deficit — raise taxes or cut expenditures — to “restore confidence.” But those policies almost always reduced aggregate demand, pushed the economy into a deeper slump, and further undermined confidence.

When consumers are forced to cut back on spending, because they’re too far in debt or worried about their jobs, the government has to step in and make up the difference or the economy goes into a tailspin. The deficits need be big enough to maintain aggregate demand while the private sector regains its footing. Otherwise, consumer spending declines, which lowers earnings and forces businesses to lay off more workers. It’s a viscous circle. But if the stimulus is distributed wisely, multipliers kick in and help to lift the economy out of the doldrums. Here’s a good breakdown of how it works from an article in the New York Times:

Every dollar of additional infrastructure spending means $1.57 in economic activity, according to Moody’s, and general aid to states carries a $1.41 “bang” for each federal buck. Even more effective are increases for food stamps ($1.74) and unemployment checks ($1.61), because recipients quickly spend their benefits on goods and services.

By contrast, most temporary tax cuts cost more than the stimulus they provide, according to research by Moody’s. That is true of two tax breaks in the stimulus law that Congress, pressed by industry lobbyists, recently extended and sweetened — a tax credit for homebuyers (90 cents of stimulus for each dollar of tax subsidy) and extra deductions for businesses’ net operating losses (21 cents). ¹

So far, the stimulus has done exactly what it was designed to do; give the economy a big enough boost to get through a deflationary rough patch. Unemployment is flattening out, manufacturing is expanding again, the stock market keeps climbing higher, and a recent survey of individual investors shows the highest ratio of bulls-to-bears since 2007. That’s a good start, but the economy is still weak and needs more help. So why are policymakers so eager to take the patient off the ventilator before he can breathe on his own again?

Politics, that’s why.

The congress is worried about voter rage at the ballot-box, but that doesn’t explain why Obama has started moaning about slashing deficits in the middle of a severe slump. The administration’s agenda is entirely different than congress’s. The White House economics team is trying to garner support for policies that will strap the faltering economy into a fiscal straightjacket and pound the green shoots into mush. All the railing against deficits is just empty blather backed by junk economics.

Here’s ex-Treasury Secretary Robert Rubin–one of the chief architects of the global financial crisis–articulating the position of his proteges at 1600 Pennsylvania Ave.

Putting another major stimulus on top of already huge deficits and rising debt-to-GDP ratios would have risks. And further expansion of the Federal Reserve Board’s balance sheet could create significant problems…. Today’s economic conditions would ordinarily be met with expansionary policy, but our fiscal and monetary conditions are a serious constraint, and waiting too long to address them could cause a new crisis….

First, there must be sound fiscal and monetary policies. The United States faces projected 10-year federal budget deficits that seriously threaten its bond market, exchange rate, economy, and the economic future of every American worker and family. Those risks are exacerbated by the context of those deficits: a low household-savings rate, even after recent increases; large funding requirements for federal debt maturities every year; heavy overweighting of dollar-denominated assets in foreign portfolios; worsened fiscal prospects in the decades after the current 10-year budget period; and competing claims for capital to fund deficits in other countries.²

Interesting. Rubin admits that the recession “would ordinarily be met with expansionary policy”, but suggests that he has a better remedy than stimulus. Does that make sense? After all, it was Keynes counter-cyclical public spending (stimulus) that just produced positive GDP for the first time in 4 quarters, whereas, it was Rubin’s deregulation of the financial system that pushed the global economy to the brink of disaster. There’s no question of whose theory is more credible or likely to work. Even so, it’s worth considering what Rubin has to say, because it clarifies the views of Obama’s chief economics advisors Geithner and Summers. After all, the trio is joined at the hip.

Rubin again: “The American people are growing increasingly concerned about deficits, creating a public environment more conducive to political action. And the Obama administration, in my view, has a deep understanding of the critical importance of addressing this issue….. ”

Indeed. So, Obama has already joined the ranks of the deficit terrorists.

Rubin again: “As President Obama and the other G20 leaders warned, restrictive trade measures in response to the current crisis could lead to highly destructive trade wars. For the long run, we should continue pursuing the open markets that the Peterson Institute for International Economics, a Washington think tank, estimates have added $1 trillion to America’s current GDP.”

So Rubin is working for Peterson? That explains everything. Here’s an excerpt from a Dean Baker article which appeared in the UK Guardian this week:

Peter Peterson is a Wall Street billionaire and former Nixon administration cabinet member who has been trying to gut Social Security payments and Medicare for at least the last quarter of a century. He has written several books that warn of a demographic disaster when the baby boomers retire. These books often include nonsense arguments to make his case. For example, in one of the books making his pitch for cutting social security as matter of generational equity, Peterson proposes reducing the annual cost of living adjustment.³

Ah ha! So, the real goal is to slash spending to impose onerous austerity measures that will lay the groundwork for dismantling critical social programs, like Social Security, Medicaid and Medicare. That’s why Rubin is working hand-in-hand with his allies in and out of the White House. It has nothing to do with what’s best for the country. It’s another looting operation spearheaded by the same band of Wall Street pirates who just blew up the financial system.

Rubin again: “For American workers, sustained growth is the most powerful force for higher wages and greater personal economic security…. The dynamism of American society, its flexible labor and capital markets, its entrepreneurial spirit and the sheer size of its economy, are great strengths for succeeding in a rapidly transforming global economy…. Finally, in an increasingly interdependent world, transnational issues key to all of us can only be addressed through effective global governance.”

Yada, yada, yada. More free trade, more outsourcing, more off-shoring, more lost jobs, more structural adjustment (at home, this time) more privatization, more screwball globalist Utopianism. It’s all right out of the Neoliberal playbook, corporate America’s sacred text. And it looks President Moonbeam is marching in lockstep with the rest of the hucksters.

Face it; the Obama administration is less interested in engineering a strong recovery than they are with micromanaging a protracted downturn. That’s because a long drawn-out mini-Depression puts the Rubin troupe right where they want to be—with one hand choking the life out of the economy while the other steals whatever is left in the national vault.

1. “New Consensus Sees Stimulus Package as Worthy Step,” Jackie Calmes and Michael Cooper, New York Times.
2. “Getting the Economy Back on Track,” Robert Rubin, Newsweek.
3. “Hard times at the Washington Post,” U K Guardian.

Biderman focuses his attention on the mystery surrounding the stock market’s 9-month rally and asks, “Where is the money coming from?” After all, the market cap has increased by more than $6 trillion since March 9. That amount of money should be fairly easy to trace; right?

Wrong.

Biderman: “The most positive economic development in 2009 was the stock market rally. (But) We cannot identify the source of the new money that pushed stock prices up so far so fast. For the most part, the money did not from the traditional players that provided money in the past.”

Huh? So, this vast infusion of liquidity–which helped the banks to avoid painful deleveraging–did not come from the usual suspects?

That’s right. According to Biderman, the money did not come from (a) companies (“which were a huge net seller”) (b) retail investor funds, (c) retail investors, (d) foreign investors, or (e) pension funds.

What about the hedge funds?

Biderman: “We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities. But we doubt their buying power was enormous because they posted an outflow of $12 billion from April through November.”

Okay; so we’re back to Square One. Where did the money come from?

Biderman again: “As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.”

Biderman is referring to the Plunge Protection Team. Here’s a clip from an article I wrote in 2007 which helps to clarify the PPT’s origins:

The Working Group on Financial Markets, also know as the Plunge Protection Team, was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown of October 1987. Its members include the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission. Recently, (2007) the team has been put on high alert because of increased market volatility and, what Hank Paulson calls, the systemic risk posed by hedge funds and derivatives….

Ambrose Evans-Pritchard of the UK Telegraph notes, “Secretary of the Treasury Hank Paulson has called for the PPT to meet with greater frequency and set up a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges.

This suggests that the PPT could, in fact, be the driving-force behind the ongoing stock market rally.

Biderman: “This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. For example, Tyler Durden of ZeroHedge has pointed out that virtually all of the market’s upside since mid-September has come from after-hours S&P 500 futures activity.”

True. The market has been behaving erratically for some time now. Could it be the “invisible hand” of Fed chair Ben Bernanke nudging equities ever-higher?

Consider the comments of former Clinton advisor George Stephanopoulos who verified the existence of the PPT in an appearance on Good Morning America on Sept 17, 2000. He said:

What I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets … perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally … I don’t know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall.

If there was ever a time that warranted government intervention, it was right after Lehman Bros blew up and global markets went into freefall. The whole system was teetering and about to collapse. It’s likely that the Fed recognized the danger and made a last-ditch effort to avoid another Great Depression. That means that Bernanke probably used his surrogates at the banks and brokerages to strategically purchase futures and equities that had the best chance of reversing the downward trend. What else could he do–sit on his hands and wait for Armageddon?

The problem is, no steps have been taken to prevent a similar catastrophe from occurring in the future. The same lethal debt-instruments that triggered the crisis are in play today; over $1 trillion in toxic assets still remain on the banks balance sheets, and nothing has been done to reduce financial sector debt. In fact, according to the Fed, total debt for the financial sector was $16.5 trillion in the second quarter 2009, the same as it was a year earlier. Nothing has changed.

Financial institutions are re-levering and taking on greater risks knowing that the government will bail them out if they get into trouble. At the same time, the Fed’s lending programs have kept markets from fully-correcting by keeping asset prices artificially high. This has helped the banks to conceal their losses and appear healthier than they really are. The question is; how long can the charade go on before something gives?

Policymakers seem to believe that blanket government guarantees and stock market manipulation are enough to forestall another disaster. But critics think that a day of reckoning is fast approaching.

Cindy Sheehan: I think Obama did this as a publicity stunt and used the dead troops (that he was responsible for killing) as props to show that he “cares” about the troops. This stunt was in the middle of the “discussions” about how many more troops to send to Afghanistan. (after he has already sent about 35,000)

It made me sick.

MW: On Thursday, on orders from President Obama, the US military launched cruise missile attacks on Yemen which were followed by raids by the Yemeni Security forces. An estimated 120 people were killed. Obama’s actions indicate that he accepts the Bush Doctrine, that he thinks the US has the right to assassinate people without due process on the mere suspicion they may be linked to a terrorist organization. Is Obama right? Does the US need to be more aggressive in the “post 9-11″ world?

CS: And Obama reiterated this doctrine during his Nobel acceptance speech–which some are calling the “Obama Doctrine” now.

No, I do not agree with these extra-legal executions. I do not agree that the CIA can be jury, judge and executioner in Pakistan and indiscriminately kill people with their drones.

I adamantly disagree with the doctrine of “pre-emptive” strikes or invasions and I don’t agree that they keep Americans “safer” and, even if they did, innocent people are getting caught in the crossfire and we are creating enemies that we will never be able to kill.

MW: Hugo Chavez has been demonized in the US media as anti-American and a dictator. You’ve met Chavez and seen first-hand what’s going on in Venezuela. What’s your take? Is Chavez a dictator or does he believe in democracy? Have his policies been helpful or harmful to the poor and illiterate?

CS: Well, statistically, illiteracy and poverty rates have improved since Chavez has been president of Venezuela–although, it is still a very poor country.

I think we should always take governments and politicians with a grain of salt, or with high suspicion. But for a politician, I do think that Chavez cares about the people of Venezuela and democracy movements in South America. His actions have proven that and he has been pretty courageous in trying to spread populism and socialism. He has supported other leaders, like Morales of Bolivia, who have been attacked and marginalized by the ruling class.

Is Chavez a dictator? He’s as much a dictator as Obama is. Chavez has put constitutional reforms before the public and has survived CIA coup and recall attempts. I am sure there is always hanky-panky in any election, but Jimmy Carter has certified [the Venezuelan] elections.

MW: Here’s a poem by an Iraqi blogger named Layla Anwar, which pretty well sums up the anger and anguish felt by many Iraqis:

   Come and see our overflowing morgues and find our little ones for us…
   You may find them in this corner or the other, a little hand poking out, pointing out at you…
   Come and search for them in the rubble of your “surgical” air raids, you may find a little leg or a little head…pleading for your attention.
   Come and see them amassed in the garbage dumps, scavenging morsels of food…

   Come and see, come…. (“Flying Kites” Layla Anwar)

How important to you is it that the people who are responsible for the destruction of Iraq and the slaughtering of over 1 million Iraqis be brought to justice?

MW: In my opinion, accountability for war crimes committed on the people of Iraq/Afghanistan and, now Pakistan, is imperative.

The US has been committing war crimes for at least the last 100 years (off the continent) and none of our leaders have ever been held accountable and that’s one of the reasons that the empire is able to keep rolling.

I also believe that the way to the rest of the world’s heart is for American leaders to be held accountable.

MW: The senate just passed the $636 billion Pentagon budget on Friday which extends the controversial US Patriot Act. Obama is expected to sign the bill sometime this week. Why is America trying to trying to “liberate” Iraq and Afghanistan, when it is spying on its people at home?

CS: First of all, “liberation” was not a goal of the invasions. We, the gullible, were told that we were going into Afghanistan to get Osama and Iraq because Saddam had WMD and a connection to al Qaeda. When those rationales were proven false, we were then told that it was to liberate the people. Now in Afghanistan, we are told we are “protecting the women.”

The phony war on terror has been used to steal our liberties in a full-frontal assault since 9-11 and Obama voted to reauthorize the USA PATRIOT ACT when he was a Senator, and voted for the FISA modernization act, which gave broad authority to the government to spy on our electronic communications and gave telecom companies immunity.

I not only see this as passive stealing of our liberties, but the United Police States of America is increasing in physical oppression, also. I’ll be interested to see how the Police State will handle my new action: Peace of the Action.

MW: You know a lot of people across the country. What’s the mood among Obama supporters? Have they thrown in the towel already or do they still think he’ll turn out to be the leader they hoped he would be?

CS: I lost a lot of friends when B.O. became president and it was a lonely 6 months after he was elected.

I wrote a new book called Myth America (short title) and I started to travel around the country in April doing book events. For the first time since my activism started, people walked out on my presentations because I was telling them that it was the system–not the person who infests the White House. However, by the end of my book tour in August, the crowds were growing and more enthusiastic and less gaga-eyed over Obama.

Then I started touring again in September and the discontent is growing. I am happy about that.

The ones that upset me the most are the so-called leaders of the “progressive” movement like Tom Hayden, CODEPINK and Michael Moore who very enthusiastically endorsed, worked for, voted for, and raised money for Obama, and NOW are beginning to speak out against his carnage, when in fact, Obama has always been very pro-war. Once the horse is out of the barn, it’s hard to get him back in. The movement should never have given him a “chance.” Things are so much worse in foreign policy almost a year into his regime.

MW: The media has had a tough time dealing with Cindy Sheehan. On the one hand, they’ve done everything in their power to glorify the wars and the men and women who serve in uniform. On the other hand, they’ve gone to great lengths to discredit the mother of a soldier who died fighting in America’s wars. Why is the media so afraid of Cindy Sheehan?

CS: Because I tell inconvenient truths. War is not pretty, ever, but unnecessary wars and needless carnage are even worse.

Also, I realized very early on that the problem didn’t rest with a particular political party, but it’s a systemic problem and the corporate media is part of it.

MW: Here is a very long question. It’s a quote from Obama’s Nobel acceptance speech in Oslo:

I come here with an acute sense of the cost of armed conflict — filled with difficult questions about the relationship between war and peace, and our effort to replace one with the other.

These questions are not new. War, in one form or another, appeared with the first man. At the dawn of history, its morality was not questioned; it was simply a fact, like drought or disease — the manner in which tribes and then civilizations sought power and settled their differences.

Over time, as codes of law sought to control violence within groups, so did philosophers, clerics and statesmen seek to regulate the destructive power of war. The concept of a “just war” emerged, suggesting that war is justified only when it meets certain preconditions: if it is waged as a last resort or in self-defense; if the forced used is proportional; and if, whenever possible, civilians are spared from violence…

For most of history, this concept of just war was rarely observed. The capacity of human beings to think up new ways to kill one another proved inexhaustible, as did our capacity to exempt from mercy those who look different or pray to a different God I do not bring with me today a definitive solution to the problems of war. What I do know is that meeting these challenges will require the same vision, hard work and persistence of those men and women who acted so boldly decades ago. And it will require us to think in new ways about the notions of just war and the imperatives of a just peace.

We must begin by acknowledging the hard truth that we will not eradicate violent conflict in our lifetimes. There will be times when nations — acting individually or in concert — will find the use of force not only necessary but morally justified. (Obama Nobel acceptance speech)

This is a very disturbing quote. What do you think Obama is trying to say here?

CS: Like I said in my speech in Oslo, the ruling class is telling us by giving Obama that award, and in his speech that “War is Peace” and the only conceivable way to peace is through war.

What is also disturbing is the kudos he got from the left-right establishment over that speech. Disturbing, yet predictable.

MW: Last question. This is an excerpt from an article you wrote more than a year ago:

The most devastating conclusion that I reached this morning, however, was that Casey did indeed die for nothing. His precious lifeblood drained out in a country far away from his family who loves him, killed by his own country which is beholden to and run by a war machine that even controls what we think. I have tried every since he died to make his sacrifice meaningful. Casey died for a country which cares more about who will be the next American Idol than how many people will be killed in the next few months while Democrats and Republicans play politics with human lives. It is so painful to me to know that I bought into this system for so many years and Casey paid the price for that allegiance. I failed my boy and that hurts the most….

Good-bye America … you are not the country that I love, and I finally realized no matter how much I sacrifice, I can’t make you be that country unless you want it.

Do you feel the same way now as when you wrote that, or do you see any glimmer of hope that the country is beginning to change directions?

CS: I wrote this in May of 2007 when I resigned from the movement; I still believe that the people have to wake up on their own, but we can give them some gentle shakes. I am still sacrificing for the enlightenment and am still trying. It was a short retirement.

Militarization is not the way to deal with Mexico’s political crisis.

– Laura Carlsen

Laura Carlsen, director of the Americas Policy Program in Mexico City, holds a B.A. in Social Thought and Institutions from Stanford University and a Masters degree in Latin American Studies, also from Stanford. In 1986, she received a Fulbright Scholarship to study the impact of the Mexican economic crisis on women and has lived in Mexico City since then. She has published numerous articles and chapters on social, economic and political aspects of Mexico and recently co-edited Confronting Globalization: Economic integration and popular resistance in Mexico, and co-authored El Café en Mexico, centroamerica y el caribe: Una salida sustentable a la crisis. Prior to joining the Americas Policy Program, where her most recent analysis can be found, Carlsen was a correspondent for Latin Trade magazine, editor of Business Mexico, freelance writer, and researcher. The Americas Policy Program is a program of the Center for International Policy in Washington DC.

Mike Whitney: Will you explain what Plan Mexico is and how it relates to the North American Free Trade Agreement? (NAFTA)

Laura Carlsen: Plan Mexico, also called the Merida Initiative, is a three-year regional security cooperation plan devised by the former Bush administration and presented in October of 2007. The plan grew out of the extension of NAFTA into security areas, known as the Security and Prosperity Partnership. Originally Plan Mexico was to be announced in the context of the SPP trinational summit but was delayed. It is presented as a petition of the Mexican president Felipe Calderon for US help in the war on drugs but in reality it was designed in Washington as a way to “push out the borders” of the US security perimeter, that is, that Mexico would take on US security priorities including policing its southern border and allowing US companies and agents into Mexico’s intelligence and security operations.

Plan Mexico proposed $1.4 billion in mostly foreign military financing. It is referred to as a “Counternarcotics, Counterterrorism and Border Security” proposal.

MW: Shortly after he was elected president, Felipe Calderon began using the military in the so-called War on Drugs. Since then, there has been a steady rise in troop deployments and an escalation in the violence. What is the Washington’s role in this ongoing counterinsurgency operation?

LC: The Obama administration has supported the plan and even requested, and received from Congress, additional funds beyond what the Bush administration requested. In the three years since Calderon launched the war on drugs in Mexico with the support of the US government drug related violence has shot up to over 15,000 executions and formal reports of violations of human rights have increased sixfold. More than 45,000 solders have been deployed in streets and communities throughout Mexico. Washington recognizes serious problems with the drug war model and yet continues to claim, absurdly, that the rise in violence in Mexico is a good sign–it means that the cartels are feeling the heat, the argument runs. the plan itself does not contain any real benchmarks of what citizens should expect as signs of progress so it can continue to be funded despite its failure.

The State Department was required to submit a human rights report to release 15% of some portions of the appropriations and finally did so last summer. But the report stated that even given a lack of progress in human rights (including reported use of torture with impunity, lack of civilian justice for military forces, killings of civilians and corruption) the mere fact of reporting constituted compliance and released the funds.

So far the effort is not described as a counterinsurgency effort, because Mexico does not have a formal widespread insurgency movement. However, the targeting of grassroots opposition leaders in recent years has raised fears that dissidents are and will be a target of the increasingly militarized society.

MW: In your article you say that the Merida Initiative is the direct outgrowth of the national security framework imposed on bilateral relations. Does that mean that the Bush Administration was using the War on Drugs and the War on Terrorism to conceal its real political goals? If so, what are those goals?

LC: The Bush administration used the counterterrorism paradigm to extend US presence in strategic areas. In Mexico, the idea was to open up lucrative defense and intelligence contracts while aiding the right-wing government, which still faced serious questions of legitimacy due to unresolved accusations of fraud in the 2006 elections.

MW: Are there US intelligence agents, special forces or mercenaries conducting counterinsurgency operations in Mexico? Is Mexico required to allow the US military to operate in Mexico due to security and/or trade agreements?

LC: Mexico does not allow US soldiers on its territory. However there is a growing presence of DEA and other types of US agents in the country, as well as a private security companies. We do not have a good system for tracking the presence and activities of the private firms contracted for security and training purposes. This is a major problem.

MW: What effect has militarization had on political expression? How has it affected grass roots organizations, unions, and indigenous groups? Has there been an uptick in military-related violence, such as rape, beatings, torture and homicide?

LC: There has been an increase in human rights violations by the armed forces. In some regions, dissident leaders have been targeted by the military. Women, indigenous people, migrants, dissidents and youth are particularly vulnerable.
¹

MW: More than 50 Mexican human rights organizations have petitioned Congress to withdraw support for the Merida Initiative. Their letter reads:

“We respectfully request that the U.S. Congress and Department of State, in both the Merida Initiative as in other programs to support public security in Mexico, does not allocate funds or direct programs to the armed forces … We urge the United States to consider ways to support a holistic response to security problems; based on tackling the root causes of violence and ensuring the full respect of human rights; not on the logic of combat.”

Have you seen any improvement or shift in policy since Barack Obama was elected?

LC: No. The administration has given its full support to the failed drug war. however, there are signs of drug policy reform in domestic policy that could eventually affect the way foreign counternarcotics efforts are viewed. The rhetoric of “ci-responsibility” is really nothing new and the efforts at reducing gunrunning and demand have not been followed up by new policies. the approach continues to be primarily military and violent, with no money whatsoever included in the Merida initiative for heath aspects such as addiction treatment or prevention.

1. “The militarization of Mexico has led to a steep increase in homicides related to the drug war. It has led to rape and abuse of women by soldiers in communities throughout the country. Human rights complaints against the armed forces have increased six-fold…. The Mexican Armed Forces are not subject to civilian justice systems, but to their own military tribunals. These very rarely terminate in convictions.” “The Perils of Plan Mexico,” Laura Carlsen, Counterpunch.

Mike Whitney: The US media is very critical of Venezuelan President Hugo Chavez. He’s frequently denounced as “anti-American”, a “leftist strongman”, and a dictator. Can you briefly summarize some of the positive social, economic and judicial changes for which Chavez is mainly responsible?

Eva Golinger: The first and foremost important achievement during the Chávez administration is the 1999 Constitution, which, although not written nor decreed by Chávez himself, was created through his vision of change for Venezuela. The 1999 Constitution was, in fact, drafted — written — by the people of Venezuela in one of the most participatory examples of nation building, and then was ratified through popular national referendum by 75% of Venezuelans. The 1999 Constitution is one of the most advanced in the world in the area of human rights. It guarantees the rights to housing, education, healthcare, food, indigenous lands, languages, women’s rights, worker’s rights, living wages and a whole host of other rights that few other countries recognize on a national level. My favorite right in the Venezuelan Constitution is the right to a dignified life. That pretty much sums up all the others. Laws to implement these rights began to surface in 2001, with land reform, oil industry redistribution, tax laws and the creation of more than a dozen social programs – called missions – dedicated to addressing the basic needs of Venezuela’s poor majority. In 2003, the first missions were directed at education and healthcare. Within two years, illiteracy was eradicated in the country and Venezuela was certified by UNESCO as a nation free of illiteracy. This was done with the help of a successful Cuban literacy program called “Yo si puedo” (Yes I can). Further educational missions were created to provide free universal education from primary to doctoral levels throughout the country. Today, Venezuela’s population is much more educated than before, and adults who previously had no high school education now are encouraged to not only go through a secondary school program, but also university and graduate school.

The healthcare program, called “Barrio Adentro”, has not only provided preventive healthcare to all Venezuelans – many who never had access to a doctor before – but also has guaranteed universal, free access to medical attention at the most advanced levels. MRIs, heart surgery, lab work, cancer treatments, are all provided free of cost to anyone (including foreigners) in need. Some of the most modern clinics, diagnostic treatment centers and hospitals have been built in the past five years under this program, placing Venezuela at the forefront of medical technology.

Other programs providing subsidized food and consumer products (Mercal, Pdval), job training (Mission Vuelvan Caras), subsidies to poor, single mothers (Madres del Barrio), attention to indigents and drug addicts (Mission Negra Hipolita) have reduced extreme poverty by 50% and raised Venezuelans standard of living and quality of life. While nothing is perfect, these changes are extraordinary and have transformed Venezuela into a nation far different from what it looked like 10 years ago. In fact, the most important achievement that Hugo Chávez himself is directly responsible for is the level of participation in the political process. Today, millions of Venezuelans previously invisible and excluded are visible and included. Those who were always marginalized and ignored in Venezuela by prior governments today have a voice, are seen and heard, and are actively participating in the building of a new economic, political and social model in their country.

MW: On Monday, President Chavez threw a Venezuelan judge in jail on charges of abuse of power for freeing a high-profile banker. Do you think he overstepped his authority as executive or violated the principle of separation of powers? What does this say about Chavez’s resolve to fight corruption?

EG: President Chávez did not put anyone in jail. Venezuela has an Attorney General and an independent branch of government in charge of public prosecutions. Chávez did publicly accuse the judge of corruption and violating the law because that judge overstepped her authority by releasing an individual charged with corruption and other criminal acts from detention, despite the fact that a previous court had not granted conditional freedom or bail to the suspect. And, the judge released the suspect in a very irregular way, without the presence of the prosecutor, and through a back door. The suspect then fled the country.

This is part of Venezuela’s fight against corruption. Unfortunately – as in a lot of countries – corruption is deeply rooted in the culture. The struggle to eradicate corruption is probably the most difficult of all and will probably not be achieved until new generations have grown up with different values and education. In the meantime, the Chávez administration is trying hard to ensure that corrupt public officials pay the consequences. That judge, for example, engaged in an act of corruption and abuse of authority by illegally releasing a suspect and therefore was charged by the Public Prosecutor’s office and will be tried. It has nothing to do with what Chávez said or didn’t say, it has to do with enforcing the law.

MW: Why is the United States building military bases in Colombia? Do they pose a threat to Chavez or the Bolivarian Revolution?

EG: On October 30th, the US formally entered into an agreement with the Colombian government to allow US access to seven military bases in Colombia and unlimited use of Colombian territory for military operations. The agreement itself is purported to be directed at counter-narcotics operations and counter-terrorism. But a US Air Force document released earlier this year discussing the need for a stronger US military presence in Colombia revealed the true intentions behind the military agreement. The document stated that the US military presence was necessary to combat the “constant threat from anti-US governments in the region”. Clearly, that is a reference to Venezuela, and probably Bolivia, maybe Ecuador. It’s no secret that Washington considers the Venezuelan government anti-US, though it’s not true. Venezuela is anti-imperialist, but not anti-US. The US Air Force document also stated that the Colombian bases would be used to engage in “full spectrum military operations” throughout South America, and even talked about surveillance, intelligence and reconnaissance missions, and improving the capacity of US forces to execute “expeditionary warfare” in Latin America.

Clearly, this is a threat to the peoples of Latin America and particularly those nations targeted, such as Venezuela. Most people in the US don’t know about this military agreement, but it they did, they should question why their government, led by Nobel Peace Prize winner Barack Obama, is preparing for war in South America. And, in the midst of an economic crisis with millions of people in the US losing jobs and homes, why are millions of dollars being spent on military bases in Colombia? The US Congress already approved $46 million for one of the bases in Colombia. And surely more funds will be supplied in the future.

MW: What is ALBA? Is it a viable alternative to the “free trade” blocs promoted by the US?

EG: The Bolivarian Alliance of the Americas — Trade Agreement for the People, is a regional agreement created five years ago between Venezuela and Cuba, and now has 9 members: Bolivia, Cuba, Ecuador, Honduras, Nicaragua, Venezuela, Antigua and Barbuda, St. Vincent and the Grenadines, and Dominica. ALBA is a trade agreement based on integration, cooperation and solidarity, contrary to US trade agreements which are based on competition and exploitation. It promotes a way of trading between nations that assures mutual benefits. For example, Venezuela sells oil to Cuba and Cuba pays with services — doctors, educators and technological experts that help to improve Venezuela’s industries. Venezuela sells oil to Nicaragua and Nicaragua pays with food products, agricultural technology and aide to build Venezuela’s own agricultural industry, which long ago was abandoned by prior governments only interested in the rich oil industry. ALBA seeks to not just provide economic benefits to its member nations, but also social and cultural advances. The idea is to find ways to help members develop and progress in all aspects of society. ALBA recently created a new currency, the SUCRE, which will be used as a form of exchange between member nations, eliminating the US dollar as the standard for trade.

MW: Are US NGO’s and intelligence agents still trying to foment political instability in Venezuela or have those operations ceased since the failed coup?

EG: In fact, the funding of political groups in Venezuela, and others throughout Latin America that promote US agenda, has increased since the April 2002 coup against President Chávez. Through two principal Department of State agencies, USAID and the National Endowment for Democracy (NED), the US government has channeled more than $50 million to opposition groups in Venezuela since 2002. The USAID/NED budget to fund groups in Venezuela in 2010 is nearly $15 million, doubled from last year’s $7 million. This is a state policy of Washington, which the Obama Administration plans to amp up. They call it “democracy promotion”, but it’s really democracy subversion and destabilization. Funding political groups favorable to Empire, equipping them with resources, strategizing to help formulate political platforms and campaigns — all geared towards regime change — is a new form of invasion, a silent invasion. Through USAID and NED, and their “partner NGOs” and contractors, such as Freedom House, International Republican Institute, National Democratic Institute, Pan-American Development Foundation and Development Alternatives, Inc., hundreds of political groups, parties and programs are presently being funded in Venezuela to promote regime change against the Chávez government. US taxpayer dollars are being squandered on these efforts to overthrow a democratically elected government that simply isn’t convenient for Washington. Remember, Venezuela has 24% of world oil reserves. That’s a lot!

MW: How hard has Venezuela been hit by the economic crisis? Do the people understand Wall Street’s role in the meltdown?

EG: Actually, the Chávez government has taken important steps to shelter Venezuela from the financial crisis. People here in Venezuela absolutely understand Wall Street’s role in the crisis and know that the US capitalist-consumerist system is principally responsible for causing the financial crisis, but also the climate crisis that the world is facing. The Venezuelan government took preventive steps against the financial crisis, such as withdrawing Venezuela’s reserves from US banks two years ago, creating cushion funds to ensure social programs would not be cut and diversifying Venezuela’s oil clientele so as not to be dependent solely on US clients. Recently, several banks have been nationalized by the Venezuelan government and others have been liquidated. But this was more due to the mismanagement and internal corruption within those banks. The Venezuelan government reacted quickly to take over the banks and guarantee customers’ savings would not be lost. In fact, it’s the first time in Venezuela’s history that no customers have lost any of their money during a bank liquidation or takeover. This is part of the Chávez Administration’s policy of prioritizing social needs over economic gain.

MW: Here’s an excerpt from a special weekend report by Bloomberg News:

“Americans have grown gloomier about both the economy and the nation’s direction over the past three months even as the U.S. shows signs of moving from recession to recovery. Almost half the people now feel less financially secure than when President Barack Obama took office in January… Fewer than 1 in 3 Americans think the economy will improve in the next six months…. Only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September.”

The frustration and disillusionment with the US political/economic system has never been greater in my lifetime. Do you think people in the United States are ready for their own Bolivarian Revolution and steps towards a more progressive, socialistic model of government?

EG: The rise of Barack Obama neutralized a growing sentiment for profound change inside the US. Hopefully, the slowdown in US activism will only be temporary. South of the border, there is tremendous change taking place. New social, political and economic models are being built by popular grassroots movements in Venezuela, Bolivia and other Latin American nations that seek economic and social justice. I believe strongly that models in process, like the Bolivarian Revolution, provide inspiration and hope to those in the US and around the world that alternatives to US capitalism do exist and can be successful.

The US has a rich history of revolution. There are many groups inside the US dedicated to building a better, more humanist system. Unity and a collective vision are essential aspects of building a strong movement capable of moving forward. Every nation has its moment in history. This is the time of Latin America. But there is great hope that the people of the US will soon unite with their brothers and sisters south of the border to bring down Empire and help build a true world community based on social and economic justice for all.

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

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

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

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

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

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

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

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

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

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

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

Similarly…the Fed is anxious to unwind its massive policy intervention, not extend it, so monetary policy is unlikely to help much either. Since monetary and fiscal policy authorities are unwilling to provide further help, slow growth is the best outcome we’re likely to get.¹

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

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

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

1. Mark Thoma, “Will Consumption Growth Return to Its Pre-Recession Level?” moneywatch.com

A Woman Among the Warlords is an explosive narrative that takes a scalpel to many of the illusions surrounding the US invasion of Afghanistan. For example, most Americans have never heard about the “Warlord Strategy,” a term that is commonplace among Afghans. That’s because it doesn’t mesh with the media’s story about Afghan “liberation.” The truth is, US war-planners, led by Sec Def Donald Rumsfeld, settled on a plan to hand over entire regions of Afghanistan to the warlords even before the first shot was fired. The whole “liberation”-meme was just a ruse to elicit support for the war. How many Americans would support sending more troops if they knew that the original justification of the war was a bunch of baloney?

Here’s how Joya sums it up in her own words:

“The people of Afghanistan are fed up with the occupation of their country and with the corrupt, Mafia-state of Hamid Karzai and the warlords and drug lords backed by NATO…. It is clear now that the real motive of the U.S. and its allies, hidden behind the so-called “war on terror,” was to convert Afghanistan into a military base in Central Asia and the capital of the world’s opium drug trade. Ordinary Afghan people are being used in this chess game, and western taxpayers’ money and the blood of soldiers is being wasted on this agenda that will only further destabilize the region….Afghan and American lives are being needlessly lost.”

Joya is focused and uncompromising; a one-woman wrecking crew. She’s also an electrifying speaker who can bring an audience to their feet when she rails against the war. People can sense her intensity, her honesty, and her unwavering commitment to justice. Unlike Obama, she isn’t disposed to lofty-sounding platitudes that only serve to perpetuate war and suffering. Joya’s goal is peace; an end to 30 years of war, an end to US occupation and religious fanaticism. Regrettably, Obama’s military escalation ensures that the conflict will drag on for years to come bringing misery to even more people.

Malalai Joya: “As I write these words, Afghanistan is getting progressively worse. We are caught between two enemies: the Taliban on one side and US/NATO forces and their warlord hirelings on the other…. Obama’s military build up will only bring more suffering and death to innocent civilians…. I hope that the lessons in this book will reach President Obama and his policymakers in Washington, and warn them that the people of Afghanistan reject their brutal occupation and their support of the warlords and druglords.” (A Woman Among the Warlords, p5)

A Woman Among the Warlords gives readers a glimpse of the vast destruction brought on by the US invasion. Joya repeatedly denounces Rumsfeld’s strategy which replaced the fanatical Taliban with war criminals and human rights abusers. She also takes aim at the media which gave cover to the warlords by referring to them as the “Northern Alliance”–or the equally misleading–”United Islamic Front for the Salvation of Afghanistan”. As Joya points out, attitudes about the conflict have largely been shaped by disinformation, omissions and propaganda. Obama’s Noble speech proves that those same lies will now be delivered by a more competent spokesman.

Malalai Joya: “While the United States bombed from the sky, the CIA and special forces had already arrived in the northern provinces of Afghanistan to hand out millions of dollars in cash and weapons to Northern Alliance commanders. They were the same extremists whose militias had pillaged Afghanistan during the civil war: Dostum, Sayyaf, Khalili, Rhabbani, Fahim, General Arif, Dr. Abdullah, Haji Qadir, Ustad Atta, Mohammad, Daoud, and Hazrat Ali among others. … Fahim, another ruthless man with a dark past. The western media tried at the time to portray these warlords as “anti-Taliban resistance forces and liberators of Afghanistan,” but in fact Afghan people believed they were no better than the Taliban.” (Ibid, p 52)

As the Taliban fled across the Pakistan border amid heavy aerial bombardment, the warlords seized entire provinces reestablishing their iron-fisted rule over the local population. No attempt was ever made to establish democracy. Even today, many of the warlords are still on the US payroll, a point which Obama somehow failed to mention in his “Peace Prize” speech.

From the New York Times November 19, 2001: “The galaxy of warlords who tore Afghanistan apart in the early 1990s and who were vanquished by the Taliban because of their corruption and perfidy are back on their thrones, poised to exercise power in the ways they always have.”

Joya provides biographical sketches of many of the warlords, including Abdul Rasul Sayyaf, a rabid fundamentalist “who massacred thousands in Kabul during the 1990s.” In one Kabul purge he ordered his soldiers, “Don’t leave anyone alive–Kill them all.” Sayyaf was “the person who invited international terrorist Osama bin Laden to Afghanistan during the 1980s. He also trained and mentored Khalid Sheikh Mohammed , the man who the US claims was the mastermind of the 9-11 attacks.” (p 67)

How many people would continue to support the war if they knew they were protecting friends of bin Laden and Khalid Sheikh Mohammed?

Malalai Joya again: “Most people in the west have been led to believe that intolerance, brutality, and severe oppression of women in Afgahnistan began with the Taliban regime. But this is a lie, more dust in the eyes of the world from the warlords who dominate the American-backed, so-called democratic government of Hamid Karzai. In truth, some of the worst atrocities in our recent past were committed during the civil war by the men who are now in power.”

During the blackest days of the Afghan civil war in 1992, a group of warlords seized Kabul razing much of it to the ground. “The militias of Dostum, Sayyaf, Massoud, Mazari, and Hekmatyar pillaged the city, robbing families and slaughtering and raping women. Eventually, anywhere from 65,000 to 80,000 innocent people were killed in Kabul alone, though there are no official figures for the staggering death toll. According to the United Nations, more than 90 percent of the city was destroyed. (Eventually) “the country was split up into fiefdoms, ruled by the whims of rival thugs and warlords.” (p 26)

These are the monsters the US continues to support in Afghanistan today.

JOYA’S SOLUTION: “Withdraw All Foreign Troops”

Malalai Joya: “Some people say that when the troops withdraw, a civil war will break out. Often this prospect is raised by people who ignore the vicious conflict and humanitarian disaster that is already occurring in Afghanistan. The longer the foreign troops stay in Afghanistan, the worse the eventual civil war will be for the Afghan people. The terrible civil war that followed the Soviet withdrawal certainly could never justify… the destruction and death caused by that decade-long occupation.” (p 217)…Today we live under the shadow of the gun with the most corrupt and unpopular government in the world. (p 211)

The war that one reads about in the media is not the real war. It’s a fiction created to justify occupation. A Woman Among the Warlords shreds many of the myths surrounding the war and reveals the truth behind the hype; that the United States deliberately handed over Afghanistan to a group of genocidal maniacs. The same policy persists to today, which is why it’s time to bring the troops now.

Greece’s problems began to snowball on Monday when Fitch Ratings cut their debt rating from A- to to BBB+. That means it will cost the government more to refinance its debt in the future, and that the ECB may not accept Greek government bonds as collateral when they return to the pre-crisis rules in 2011. The news put global shares into a tailspin and the volatility has continued through midweek. The ratings flap has rekindled fears of a sovereign default within the EU, which is why the markets are so jittery.

Quoted in Bloomberg: “The European Commission stands ready to assist the Greek government in setting out the comprehensive consolidation and reform program, in the framework of the treaty provisions for euro-area member states,” said Joaquin Almunia, who is in charge of economic and monetary affairs, in a statement late yesterday. He didn’t say what form any assistance could take.

Almunia’s comments come as investors debate whether EU governments would bail out Greece if it was unable to pay its bills. Former German Finance Minister Peer Steinbrueck said in February that euro members would “in reality” rescue states in difficulty. Almunia said yesterday Greece “is a matter of common concern” for euro nations, echoing language he has used since November. He didn’t elaborate further.

“The situation in Greece is very difficult,” European Central Bank President Jean-Claude Trichet said Dec. 7. “We all know the figures, and we all know the very important, courageous decisions that have to be taken to put the situation back on track.”¹

Greece has been particularly hard-hit by the recession, which is why its budget deficits have ballooned. Unemployment is over 9 percent and rising, and tax revenues are down sharply. Now the ECB wants Athens to show its commitment to “fiscal responsibility” by slashing public spending, ending all subsidies, and laying off government workers. It’s the same remedy the IMF imposes on countries throughout the developing world. Unfortunately, the cure is worse than the disease, which is why the patient usually gets sicker. Papaconstantinou has already agreed in principle with the ECB’s demands for “fiscal consolidation” (the latest variation on “structural adjustment”) saying, “We will do all that’s needed to bring the deficit down in the medium-term. We will submit a supplementary budget if needed.”

The problem is, that budget deficits should expand during an economic downturn, that’s how stabilizers work. They keep spending fairly constant which maintains aggregate demand. If Papaconstantinou follows Brussels’ directive, he will further weaken the economy and deepen the recession. This is the fundamental issue with neoliberal solutions; they only make matters worse.

Papaconstantinou’s Socialist government was elected promising higher spending and wages. They should stick with their programs and let the chips fall where they may. The ECB has no cards to play. If the European Commission doesn’t come up with a rescue package fast, global stock markets will tank, the dollar carry trade will reverse, and all the mini-bubbles in commodities, stocks and housing will violently burst.

There’s no excuse for the Finance Minister not knowing what to do. The path has already been cleared by trailblazing investment banks in the US which have used the Too Big To Fail meme to extort trillions of dollars of public funds. No one has imposed “austerity measures” at Goldman Sachs or Citigroup, nor will they. If Papaconstantinou plays hardball, he’ll get the same treatment which will help his people dig out of the current slump. It just takes a bit of political moxie. Here’s how economist Bill Mitchell sums it up on Billy Blog:

Is the Greek government close to default? Answer: not even near it. The ECB will not allow that to happen. It would destabilize the Euromonetary system. The financial crisis has exposed the cracks in the arrangement. But as long as the citizens do not revolt as the real sector is squeezed the ECB will keep funding the Greek government.

The alternative is to leave the EMU and restore currency sovereignty. Even though this would be a difficult transition back to the Drachma it would be a path worth taking in my assessment.

I would also relieve all voluntary constraints which force debt-issuance and restore domestic demand and employment. But that will not be an option the Greek government takes. Their northern neighbours will make it very difficult for them to do that even if it means compromising the rules of the EMU.

They know that if Greece leaves, the next cab on the ranks looks like being Portugal.²

Greece’s problems are just the tip of the iceberg. Portugal is next in line. All of the so-called Club Med countries (Portugal, Spain, Italy and Greece) have serious debt-overhang problems that could lead to default if the right policies are not put in place. The magnitude of the crisis has exposed the vulnerability of the Eurozone system. Critics have begun to question the feasibility of the EMU (European Monetary Union) where the needs of the individual members are so dramatically different. Perhaps a “one currency” system is not the best way to go, after all.

Here’s economist William Buiter getting to the heart of the matter in a recent Financial Times article:

The massive build-up of sovereign debt as a result of the financial crisis and especially as a result of the severe contraction that followed the crisis, makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral….

From Dubai to Iceland, Ireland, Greece, Hungary, Italy, Portugal, Spain, Japan, France, the UK and the USA, the sovereign debt burdens have been at current levels during peacetime only on the way down from even higher public debt burdens incurred during wars.³

Buiter is overly pessimistic. Greece’s problems can be fixed and so can the EU’s. But Papaconstantinou is not doing anyone a favor by caving in to the ECB’s demands to slash public spending. He’d be better off standing firm and waiting for concessions from Brussels. Sure, Greece can go the way of Ireland and push the country into a full-blown depression to satisfy the EU deficit hawks, but whatever for? If there’s no policy accommodation for the smaller states that don’t have mammoth export industries, like Germany, then they’d be better off leaving the EMU altogether and restoring their former currencies. No country should be shoved into a fiscal straitjacket if they don’t have to be.

EU powerbrokers have big plans for the region, which is why the Lisbon Treaty was recently ratified despite its widespread unpopularity. The bankers and business tycoons are not going to let Greece wreck their dream of a Corporate Uberstate by defaulting on their debt. That means Papaconstantinou is in an excellent position to set the agenda and insist on a multi-billion rescue package. If he plays his cards right, he’ll get whatever he wants.

1. John Fraher and Kevin Costelloe, “Almunia Says EU Ready to Assist Greece in Budget Plan (Update1),” Bloomberg, 9 Dec 2009.
2. Bill Mitchell, “A Greek tragedy …,” Billy Blog.
3. William Buiter, “The intrinsic unimportance of Dubai World and the important wider message it conveys,” Financial Times, 29 Nov 2009.

The movie begins in downtown Manhattan, the camera shifting impulsively from one looming skyscraper to the next. This is Wall Street, the epicenter of the financial universe. With the edgy wail of bebop in the background, Cockburn fixes his lens on Senator Phil Gramm and Fed chairman Alan Greenspan, the two policymakers most responsible for the market blowup. In testimony before a congressional committee, “Maestro” Greenspan reluctantly admits that he discovered a “flaw” in his theory of how markets work. Director Cockburn contrasts Greenspan’s feeble defense with sweeping visuals of the endless rows of boarded up homes in downtown Baltimore where the foreclosure epidemic has turned large parts of the city into a ghost-town. This is the Greenspan-Gramm legacy, the triumph of deregulation.

American Casino explains the most complex aspects of the financial collapse in terms that everyone can understand. The movie is an informal tutorial on Wall Street’s “innovations”, including a brief rundown on collateralized debt obligations (CDOs), mortgage-backed securities (MBSs) and credit default swaps (CDSs). These are the notorious debt-instruments which clogged the credit markets and sent stocks into a nosedive. The Cockburn’s also interview a number of people who played a part in the market crash. We get a glimpse of the ratings agency executive who caved in to the investment banks and gave them the triple A ratings they wanted, but didn’t deserve. There’s a brief segment with a mortgage lender who routinely filed false income statements which allowed unqualified loan applicants to be approved. There’s also a clip of a financial technician who packed B-rated junk into CDOs that were offloaded to gullible Korean investors. What’s most disturbing about American Casino, is that it shows how normal people eagerly participated in a profit-skimming operation that was based on repackaging and peddling dodgy loans to credulous investors. These people knew what they were doing was wrong, but did it anyway.

American Casino transitions seamlessly from Wall Street to intercity Baltimore, and then onto the abandoned housing developments in California’s Central Valley. Here, we see the true cost of deregulation measured in terms of the lives it has ruined. The Cockburns allow a few articulate African Americans, who were trapped in predatory lending scams, to relay the story of an entire Baltimore community. Not surprisingly, these mortgage ripoffs were engineered by some of the most highly-respected banks in the country. Wells Fargo is one name that pops up repeatedly. African Americans were four times more likely to be given subprime loans even though the vast majority of applicants met the standards for conventional prime mortgages. To their credit, the Cockburns stand alone in showing the role that racial discrimination played in the housing crisis. This is clearly the civil rights issue of our time.

American Casino is not your typical dispassionate documentary. The Cockburn’s sympathies are never in doubt as they stitch together a number of gut-wrenching stories which help to illustrate how the trading of financial exotica in an “anything goes” market, ended up destroying the lives of millions of ordinary working people. This is what separates the movie from the desensitized version of events we read in the mainstream press. It’s not enough to know who was responsible or what crimes they may have committed. We need to see the faces of the victims and hear their stories first-hand. These are the people whose lives will be forever marred by the reckless, high-stakes gambling of Wall Street speculators.

But there are troubling signs that Obama has joined the ranks of the deficit hawks and is planning a policy-reversal that will pitch the economy into a nosedive. Here’s what he said on his tour through Asia:

“I think it is important to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.”

So it’s true. Obama has aligned himself with the faux-prophets and dollar demagogues who think that the end is nigh. But trimming the deficits now (when they should be expanding) will lead to a viscous cycle of debt deflation that will push-down asset prices, increase defaults, force more layoffs, slow consumer spending, lower earnings and send the economy into a downward spiral. The president is paving the way to a double-dip recession, a slump that could be worse than the first.

Has Obama perused the jobless figures lately? Has he noticed the Fed shoving more than a $1 trillion under the collapsing housing market with no sign of improvement? Has anyone told our blinkered accountant-in-chief that the entire financial system is propped-up with $11.4 trillion of dodgy scaffolding that could buckle in the first big gust?

Obama has either taken leave of his senses or he’s spending too much time listening to the cheerless Jeremiahs on the Internet. He needs break their spell and seek the counsel of the experts who get paid to crunch the numbers—real economists. Cutting government spending and raising taxes–the two ways that deficits are paid off–is the fast-track to disaster. Don’t go there.

If Obama needs more proof that the economy is still flatlining, he should thumb through Fed chair Ben Bernanke’s speech to the Economic Club of New York which was delivered on Tuesday. The presentation was a sobering snapshot of lingering depression with precious few glimmers of light. Here’s an excerpt:

The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible….How the economy will evolve in 2010 and beyond is less certain….

Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve’s Senior Loan Officers Opinion Survey shows that banks continue to tighten the terms on which they extend credit for most kinds of loans…

Household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms. The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

The demand for credit also has fallen significantly…. Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt. Also, write-downs of bad debt show up on bank balance sheets as reductions in credit outstanding. Nevertheless, it appears that, since the outbreak of the financial crisis, banks have tightened lending standards by more than would have been predicted by the decline in economic activity alone.

Many securitization markets remain impaired, reducing an important source of funding for bank loans. In addition, changes to accounting rules at the beginning of next year will require banks to move a large volume of securitized assets back onto their balance sheets. Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations.

The best thing we can say about the labor market right now is that it may be getting worse more slowly.¹

Is this really Bernanke speaking, or is the Fed chief channeling Roubini?

Okay, so credit is tight. Consumers aren’t borrowing and banks aren’t lending. Unemployment is rising and deflation is pushing down asset prices while the burden of personal debt is rising in real terms. Bleak, bleak, bleak. The only sign of improvement is that “things are getting worse more slowly”. Now that’s encouraging.

What the economy needs is a hefty dose of stimulus aimed at job creation and strengthening demand. Only the government can provide sufficient resources to rev up economic activity and put people back to work. Unfortunately, the TARP bailout soured the public on deficit spending due to the shabby (and possibly criminal) way it was handled. That will make it harder to do what is necessary. The political support for more stimulus on Capital Hill has vanished. But, without it, another hard landing is certain.

Despite rumors in the media, stimulus works. It speeds up recovery, minimizes unemployment and stops asset prices from overshooting on the downside. Here’s an excerpt from a scholarly analysis of stimulus:

Where tried, fiscal policy was effective in the 1930s…. The details of the results differ, but the overall conclusions do not. They show that where fiscal policy was tried, it was effective.

Our estimates of its short-run effects are at the upper end of those estimated recently with modern data….This is, in fact, what one should expect if one believes that the effectiveness of fiscal policy is greatest when interest rates are at the zero bound, leading to little crowding out of private spending. It is what one should expect when households are credit constrained by a dysfunctional banking system. Given similar circumstances in 2008, this underscores the advantages of using 1930s data as a source of evidence on the effects of current policy.²

Stimulus works in multiple ways. It also helps increase inflation expectations which is necessary to get people spending again. In a deflationary environment, consumers shut-down and stop spending. The Fed tries to spur economic activity by convincing people that the dollars they hold will be worth less tomorrow. That’s why Bernanke keeps pointing out that the Fed will keep rates at zero indefinitely. Regrettably, only the goldbugs take him seriously, which is why gold prices have zoomed to the stratosphere. Personal savings rates are still rising. There’s been a sharp drop-off in consumption. Bernanke’s psychological experiment has flopped. The masses still believe we’re in recession. Without a gigantic fiscal expansion to jolt the economy out of its lethargy, the severe contraction could drag on for a decade or more. We’re becoming Japan.

Obama’s deficit cutting plan is madness. It offers no hope at all. It draws from the half-baked theories of amateur economists on the Net who think that massive liquidation and years of bitter retrenchment and high-unemployment are the path to recovery. They’re wrong.

1. Fed Chairman Ben Bernanke Speech Before Economic Club of New York.
2. Miguel Almunia, Agustin S. Bénétrix, Barry Eichengreen, Kevin O’ Rourke, and Gisela Rua, “The effectiveness of fiscal and monetary stimulus in depressions,” 18 November 2009, Vox.

President Barack Obama plans to announce in next year’s State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning.

The president’s plan, which the officials said was under discussion before this month’s Democratic election setbacks, represents both a practical and a political calculation by this White House.¹

Er, now who exactly is telling Obama that raising taxes or cutting spending in the middle of a severe economic contraction is a good idea?

This clip from Politico tells us more about the people surrounding Obama, than it tells us about Obama himself. Clearly, his chief lieutenants are just as committed to savaging Medicare, Medicaid and Social Security as their GOP counterparts. This is obvious by the way they’ve handled the fiscal stimulus. Where are the jobs programs, the boost to Green Technology, the massive infrastructure rebuild?

Nowhere. Because the industry-reps and bank lobbyists who fill out the Obama roster adhere to the same pro-business credo as the members of Team Bush, that is, that all public assets and resources should be strip-mined from their rightful owners and transferred to the robber barons at the top of the economic food-chain. There’s no way that Geithner, Summers and the rest of the Wall Street insiders would ever dream of rebuilding the public safety net they’ve been trying to destroy for the last decade or more. That’s not in their interests at all.

The administration’s announcement is tantamount to a stealth-attack on Social Security in the name of “fiscal responsibility”. It’s another public relations ploy intended to enrich the parasite class by stealing crusts of bread from penniless retirees. Surely, there must have been a quid pro quo between the two-year Illinois senator and his political backers about how they planned to deal with “entitlements problem”. In other words, Obama must have given the green light to the party bosses who wanted to purloin the last few farthings in the Social Security trust fund.

So, how will Obama’a attack on Social Security etc. effect the so-called “jobless recovery”?

For one thing, it makes a double-dip recession unavoidable. After all, (according to Goldman Sachs) last quarter’s surge in GDP to 3.5% was entirely a result of government stimulus. Take away the stimulus, and the economy slips right back into to recession. Is that what Obama wants, another stretch of negative growth, plunging economic activity, lower demand and higher unemployment? Why? To satisfy the GOP “deficit hawks”?

All the hand-wringing over deficits is just more gibberish from the same people who brought us the Iraq War. The deficits are about as big a problem as the fictional WMD, maybe less. Here’s a clip from an article by Marshall Auerback which sheds a bit of light on the deficit fiasco:

Large deficits are not the problem…. Let’s all take a deep breath here: Whilst the dollar index has fallen some 15% from the high sustained earlier this year, it is still above the lows sustained at the height of the credit crisis reached about a year ago. Secondly, there seems to be a fear that the current fall in the dollar could well engender inflation, and create a panicked response from policy makers where the Fed actually does raise rates and the Treasury begins to reduce government spending. Given high prevailing debt levels and the weak state of the consumer’s personal balance sheet, this would be an unmitigated disaster.

It is true that excessive government deficit spending can be inflationary, and could therefore cause some impact on exchange value of dollar. But this can’t be viewed in some sort of vacuum. The size of the deficit is irrelevant in itself. There is no meaning in the terms ‘large deficit’ or ’small deficit.’ You have to relate them to the extent of labor and capital underutilization, which is a human measure of the aggregate demand deficiency. The fact that labor underutilization is now in excess of 16 per cent in the US (combined unemployment, underemployment and hidden unemployment) and capacity utilization is in the 60-65 per cent range rather than 90 per cent range sends one very clear message — the deficit is not large enough.

So the correct policy response is to spend until we get to full employment. That is the only consequence of excessive deficits — insolvency is not possible. Your social security check will never bounce in a country issuing debt in its own freely floating non-convertible currency.²

The best way to restore economic well-being is to increase the fiscal stimulus, expand the deficits and put the country back to work. There’s no chance of inflation until unemployment drops to roughly 5%, which could be a decade away. And don’t believe the doomsayers about the dollar either. It’s a bunch of malarkey. Check this out:

As I have shown in two recent papers, even very large currency depreciations in developed economies have no effect on inflation unless they are caused by policies that attempt to hold an economy’s unemployment rate below its equilibrium level. With US unemployment currently at 10 percent, there is no chance that inflation will rise in the near term. Whether inflation rises in the longer run will depend on whether US monetary and fiscal policy stimulus is withdrawn appropriately as the economy recovers (and tighter macroeconomic policies would tend to support the dollar).³

The dollar is dropping because the Fed is doing everything in its power to push it downwards. “It’s the policy, stupid.” A falling dollar increases exports and speeds up recovery. But once the Fed stops printing money via quantitative easing, (which is set for the end of 1st Q 2010) watch out. The dollar will rebound. Here’s an excerpt from an article in the Economist:

This dollar declinism is overblown. It exaggerates the scale of the slide and misunderstands its cause. Much of the recent weakness simply reverses the earlier safe-haven flight to dollars, a sign of investors’ optimism about riskier assets rather than their fears about America’s currency. On a trade-weighted basis the dollar today is close to where it was before Lehman failed. Yields on Treasuries have not risen and spreads on riskier dollar assets continue to shrink. If investors were growing leerier of dollars, the opposite should have occurred.⁴

When the financial crisis broke out two years ago, investors around the world flocked to the dollar for safety. Now that the crisis has (somewhat) abated, those same investors are less risk-adverse, which means they are putting that money in other assets (stocks, bonds, commodities). Naturally, that is weakening the dollar, but it is not a sign of impending collapse. And while it is true that the greenback faces stiff headwinds in the long-term–due to the US’s deteriorating fiscal situation–the dollar is in no immediate danger of losing its position as the world’s reserve currency. That will take a decade or more.

The growing fear about the dollar and the deficits is understandable given the amount of money that is being hurled at the financial system. But that shouldn’t dissuade reasonable people from doing what needs to be done. The dollar and the deficits are NOT the issue. The issue is jobs, jobs, jobs. Here’s an excerpt from an article by Henry Liu which sums it up perfectly:

An economy that has collapsed under the burden of excessive debt cannot recover until such debt has been extinguished. And debt can only be extinguished by wealth creation, not by creating more debt with easy credit. And wealth can only be created by employment and not by financial manipulation.⁵

Bingo. The Fed is bailing out unproductive speculators, while tossing the “creators of the nation’s wealth,” the workers, a few table scraps. That’s why we need a different policy which focuses on jobs programs, fiscal stimulus, and more deficit spending so households can rebuild their tattered balance sheets and the “engine of global growth” (the US middle class) can be re-energized. We don’t need more belt-tightening, as Obama seems to think. That is precisely the wrong approach.

Henry Liu again: “Thus we have financial profit inflation with price deflation in a shrinking economy. What we will have going forward is not Weimar Republic type price hyperinflation, but a financial profit inflation in which zombie financial institutions turning nominally profitable in a collapsing economy.”

Right again. The soaring stocks and commodities prices prove that central bank policies can create asset bubbles even during periods of severe deflation. (like now) Fed chair Ben Bernanke’s policies have had no material effect on households, consumers or workers. This is why credit contraction is in its 8th straight month and jobless claims continue to mushroom.

Bernanke–a disciple of Milton Friedman–has taken the monetarist “trickle down” approach throughout, which is why stocks are surging even though the broader economy is still flat on its back. The Fed chief is doing what he’s always done, stimulate demand by creating more bubbles. Only this time it’s not working because liquidity is unable to flow through the clogged credit system. The administration needs to bypass the credit system altogether and provide direct relief via state aid, tax cuts and jobs programs to jump-start the economy and reduce the widening output gap. What’s needed is more stimulus and an aggressive reform agenda aimed at putting the country back to work. Here’s Paul Krugman:

“It’s truly amazing, and depressing, how completely deficit-phobia has swept the field in Washington. The economy remains in deeply dire straits… Yet the respectable thing, all of a sudden, is to claim that we can’t possibly afford to spend any more money on job creation.

History says differently… Other advanced countries have been substantially deeper in debt without either defaulting or having runaway inflation…

I’d be a little more forgiving of the nonsense if all the people screaming about the deficit were sincere. And some are. But many, if not most, are perfectly happy to incur huge unfunded liabilities for the wars they want to fight, and/or to eliminate inheritance taxes for the heirs of multimillionaires. It’s only deficits incurred to help working Americans that get them all moralistic.

The point is that the economy desperately needs more help — and yes, we can afford to provide it.”⁶

Yes, we can afford it. We just need to shrug off the deficit hawks and the dollar demagogues and provide the necessary resources to get the job done. It’s that simple.

Here’s more from Marshall Auerback:

The Administration … must free themselves from the discredited dogmas of neo-liberalism and channel the spirit of FDR’s bold experimentation. We need less deficit terrorism. Fiscal policy must be much more oriented to personal balance sheets, not bank balance sheets. We need to turn around the private sector and begin to produce more tax revenue, so that the large deficits would be short-lived.

If we continue down the current path, we slow recovery and court large budget deficits for many years to come. Far better to spend now to create jobs and get the private sector growing again.⁷

Economists know what it will take to put the country back to work; debt relief, loan modifications, wage growth and full employment. But it will require a fundamental shift in ideology; a rejection of neoliberalism and a strong commitment to rebuild the middle class. Obama can either help in that process or follow the beggarly path to early retirement. So far, there’s no reason to be hopeful.

1. politico.com.
2. Marshall Auerback, “The US Dollar – Don’t just do something, stand there!” newdeal2.0.
3. Joseph Gagnon, “Who’s Afraid of a Falling Dollar,” Baseline Scenario.
4. “The Diminishing Dollar,” The Economist.
5. Federal Reserve Power Unsupported by Credibility; part 1 “No Exit” Henry Liu.
6. Paul Krugman, “Fiscal Perspective,” New York Times.
7. Marshall Auerback, “New Agenda for America: How to Start Anew,” newdeal 2.0.

There’s little chance that the financial system will suddenly implode or that the country will be overtaken by Zimbabwe-type hyperinflation. But the economy will undergo a low-grade depression, a period of sluggishness and retrenchment that drags on for, what seems like, an eternity. This is what typically happens when crises are extended by keeping terminally-ill banks on life-support instead of putting them out of their misery. Capital that could have been used for jobs and productive activity, ends up vanishing down a rathole.

Regrettably, the post-Lehman economy can’t be explained simply in terms of the extremes. Neither “robust recovery” nor “economic Armageddon” accurately describe present conditions. The truth lies somewhere in between, in that vast gray-area where economic indicators conflict with each other and where the best compass is an analyst who knows how to interpret the data. Edward Harrison is a banking and finance specialist who runs the Credit Writedowns website. He posts articles daily and has a solid grip on some very difficult topics. Here’s a recent entry on consumer credit which, paradoxically, appears to be expanding and shrinking at the same time. Here’s how Edward Harrison sums it up:

Nonrevolving credit is now increasing along with GDP…. On the other hand, revolving credit is getting crushed…. Bottom line: “In Q3, banks are lending again (think cash for clunkers) because nonrevolving debt is up. That’s also why GDP is up. But, revolving credit lines (credit card lines) are being cut.¹

See how subtle distinctions can make a big difference? In this case, it looks like government programs (cash for clunkers) have actually helped to keep credit flowing into the economy through even though the banks are still cutting back in other areas. That means that Obama’s stimulus has helped to slow the pace of household deleveraging making a crash in personal consumption is less likely. Although some will argue that this merely kicks the can down the road–since households will eventually have to reduce their red ink by either paying off their debts or defaulting–it does make a short-term recovery more probable, which is the objective. Whether that’s enough to keep the economy from tipping back into recession, is left to be seen.

In another article, Harrison demonstrates his talent as a capable and insightful analyst. He focuses on the root of our economic problem (debt) and presents a likely scenario of how things will play out. Here’s an excerpt:

The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem–debt… specifically an overly indebted private sector….”

When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades.

This is what a modern-day depression looks like–a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity. Recessions can be overcome with the help of automatic stabilzers like unemployment insurance to cushion the blow. Depression is another event entirely.²

Harrison describes an economy that is set to bounce along the bottom for years to come. He cites Gluskin Sheff’s David Rosenberg, who adds that “Depressions are marked by balance sheet compression” whereas “Recessions are typically characterized by inventory cycles.” And, since, “Depressions often are marked by… debt elimination, asset liquidation and rising savings rates” stimulus is not as effective.

This is razor-sharp analysis. By explaining exactly what’s going on, it’s possible to anticipate what will happen in the future. As Harrison points out, the Fed has already revealed how it plans to fight deflation, by opening up the liquidity faucet and pumping up asset prices. This is the rationale behind Bernanke’s zero-percent interest rates, multi-trillion dollar lending facilities, and quantitative easing (QE) programs. Increase asset prices; that’s the whole ball-o-wax.

Edward Harrison again:

As for the recent asset-based economic reflation, be under no illusion that these measures ‘solve’ the problem. The toxic assets are still impaired and banks are still under-capitalized. But the increased asset value and the end of huge writedowns has underpinned the banks and led to a rise in the broader market in a feedback loop that has been far greater than I could have imagined at this stage in the economic cycle.

Okay, so what’s next?

This is where Harrison separates himself from the pack and shows his ability to grasp the complexity of the economy-policy dynamic. His prediction is less-satisfying, but more realistic than many others:

A lot of the economic cycle is self-reinforcing …. So it is not completely out of the question that we see a multi-year economic boom. Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.

So, could a momentum-shift and boatloads of liquidity produce a “multi-year recovery” in spite of nagging structural problems and the massive build-up of personal debt?

Yes. But even though a rebound is economically feasible, Harrison does not think it is probable. He believes that “the government prop for the economy” is going to be removed. In other words, the Congress will not approve a second round of stimulus; the opposition to deficit-spending is just too great. Without more stimulus to maintain the current level of activity, the economy will slide back into recession.

So, get ready for the next leg down; rising unemployment, soaring foreclosures, tumbling stock markets, and growing political unrest. Liquidate, liquidate, liquidate. The Bluedogs and Republican obstructionists are determined to drag the economy back into depression. Onward!

1. Edward Harrison, “Consumer Credit Down, but does it show deleveraging?” Credit Writedowns.
2. Edward Harrison, “The Recession is over, but the Depression has just begun,” Credit Writedowns.

Mike Whitney: November marks the 10th anniversary of the WTO demonstrations in Seattle. Can you explain why you went even though you knew you might be harassed, gassed, beaten or arrested?

Jeffrey St. Clair: I had no intention of being harassed, gassed, beaten, shot at or arrested. This was Seattle after all. The police don’t act that way in the Emerald City. I didn’t particularly want to go, but Cockburn couldn’t be budged from Petrolia. The Turtles and Teamsters theme turned me off. Many of the groups behind the “official” protest had prostrated themselves at the feet of the Clinton Administration for seven years as they hacked away at the foundations of the environmental, labor and human rights policies that had been in place since the Great Society without so much as a whimper of protest. It had all the hallmarks of another Potemkin protest by the politically neutered progressive bloc. But there were rumblings from the underground that a more impolite demonstration might erupt on the streets. I wanted to show up just in case. Besides, there was an exhibition of paintings by my favorite American artist Morris Graves showing in town. In the end, Graves had to wait.

MW: What groups participated in the demonstrations and was there a common-thread that tied them together?

JSC: The French philosopher Michel Foucault quipped, “It’s resistance that unites us.” So it was in Seattle. If there was a common thread that united Earth Firsters, anarchists, Longshoremen and even wheat farmers from the Great Plains it was resistance against the machinery of government, from the WTO to the Clinton administration to the Seattle Police Department. In the end, this strange melange included even the people of Seattle as they were indiscriminately brutalized by their own cops. The street protests were organized (if you can call it organized) by the Direct Action Network and the Ruckus Society, along with some independent operators such as the Black Bloc. But the over-reaction of the Seattle cops did more to swell the size and intensity of the protests than any of those groups. It was a unique convergence of forces and circumstances that created a one-of-a-kind spectacle that even the Situationists might have enjoyed.

MW: Most people have only heard the media’s version of the events (along with the endless footage of the attack on the Starbuck’s store) Can you explain what the media “got wrong” in their coverage?

JSC: You can’t expect the corporate media to critique global capitalism, can you? In the end, I didn’t think the media coverage of the Seattle demonstrations was that terrible. Of course, the media made no attempt to understand what was driving the protests, but that would have required them to get out on the streets and interview people as concussion grenades were exploding overhead–not something the business press, assembled for the WTO, was comfortable doing. The media certainly globalized the protests and made those street battles an inspiration to activists around the world. I don’t mind seeing those images of Starbucks and Niketown getting whacked. In the end, I think the media, particularly the Seattle media, turned against the cops–at least what I was able to watch in my cramped motel room at the King’s Inn. Give the Black Bloc their due. By smashing a few windows in advance of the WTO, they largely preempted any coverage of the phony labor/green parade and rally and got the cameras out on the streets where they belonged.

MW: 5 Days that Shook the World, the book that you co-authored with Alexander Cockburn and photographer Allan Sekula, is a classic of radical journalism. But I’m afraid it hasn’t gotten the attention it deserves. Apart from the riveting storyline and the high-octane prose, there’s quite a bit of information here that would interest antiwar protesters and civil libertarians. It looks like many of the repressive measures that people associate with the Bush era, actually had took root during the Clinton administration; extralegal surveillance, preemptive arrest, and the rise of paramilitary-type law enforcement. What did Seattle teach you about repression in America?

JSC: The WTO protests exposed what many of us had been writing about for years: the militarization of policing in America. The images of cops dressed in black storm-trooper gear, firing concussion grenades, plastic bullets and tear gas at protesters, business people and shoppers on the streets of America’s most self-consciously progressive (and white) city revealed how thoroughly infected the nation’s police forces had become with these brutal tactics and anti-constitutional measures. Of course, none of this would have come as a surprise to the residents of South Central Los Angeles, where these tactics had been a daily fact of life since at least the tenure of Darryl Gates in the 1980s. But now the traumas of black America had shown up on the streets of one of America’s whitest cities. The Clinton administration had proved with lethal force it was more than willing to trample basic constitutional guarantees at Waco in the horrific and totally unjustified raid on the Branch Davidians, where more than 100 people were burned to death. Of course, at the time few progressives sympathized with Koresh and his followers and many of them defended the actions of the FBI and ATF, even after watching those women and kids go up in flames. It’s also worth noting that the Waco raid saw the Clinton administration trample the Posse Comitatus Act, which prohibited domestic operations by the US military.

It’s now been proved that the Delta Force had a hand in the Waco catastrophe. Again liberals were mute on this constitutional incursion by Clinton. Then after the bombing of the Murrah Federal Building in Oklahoma City, Clinton pushed congress to pass the Counterterrorism and Effective Death Penalty Act, which was a precursor of the Patriot Act. This law widely expanding policing powers, set up the noxious Joint Terrorism Task Forces, where the FBI set up shop with local cops, and became to criminalize various kinds of dissent and protest. Seattle revealed the maturation of these tactics to middle-class and liberal America.

MW: The book takes a few jabs at liberals (like Medea Benjamin) and Big Labor who didn’t really lift a finger to disrupt the WTO meetings. How do explain the willingness of liberals and labor to roll over and let the corporations decide how they think the world should be divided up? Do you think the Iraq war protests would have been more successful had they used the tactics of WTO demonstrators rather than ambling sheep-like through city-centers waving signs and mooning for the cameras?

JSC: It’s no surprise that the big environmental groups and big labor didn’t try to disrupt the WTO meetings or even come to the aid of the street protesters as they were being brutalized by the cops. All they really wanted was a seat at the negotiating table, even if they knew they were going to get creamed in the negotiations. These groups barely stood up to Reagan and Bush I. They were silly putty in Clinton’s hands, willing to swallow, and at times, even defend every betrayal, from NAFTA and the destruction of welfare to logging in ancient forests. Medea Benjamin is a different story. She wanted to claim ownership of street protests but didn’t want to be tarred by elements that made her funders and friends in the media uncomfortable. Her defense of Niketown was outrageous, but entirely predictable. Witness her recent statements urging a limited, modified pull-out from Afghanistan. She thrives on media stunts, and in order to continue to be a quotable source (even by Bill O.) she needs to distance herself from the more radical elements, in this case, a few black kids helping themselves to some overpriced, sweatshop produced Nike footware liberated by the Black Bloc. It was a pathetic performance.

I don’t think the Seattle experience can or will be repeated. You can only take the ruling class off guard once every few decades. The greatest protest against the Iraq war was done by a single person: Cindy Sheehan and her lonely vigil outside Crawford, Texas. The failure was in the anti-war movement’s inability to capitalize on Cindy’s courageous stand. This illustrates–along with the failure to run the Bush crowd out of town after Katrina–of the deep institutional impotence of the American left, a paralysis that has become even more pronounced in the age of Obama.

MW: “Jeffrey St. Clair’s Seattle Diary” (chapter 2) is just a great read. Can you explain the mood of the crowd and the fear you must have felt when the helicopters were buzzing overhead and the small army of truncheon-wielding robocops were clearing the streets and dragging hundreds of protesters off to jail?

JSC: I wasn’t frightened. It was an altogether exhilarating experience. But then again I didn’t get hit in the head with a plastic bullet or locked up in a stifling bus for 20 hours. A little tear gas now and then is good for the soul.

MW: Here’s the final entry to your “Seattle Diary”:

I walked out on the street one last time. The acrid stench of CN gas still soured the morning air. As I turned to get into my car for the drive back to Portland, a black teenager grabbed my arm. “Hey, man, does this WTO deal come to town every year?” I knew how the kid felt. Along with the poison, the flash bombs and rubber bullets, there was an optimism, energy and camaraderie that I hadn’t felt in a long time.

What was achieved in Seattle that week in 1999?

JSC: It was an inspirational week. Seattle proved that after swallowing seven years of crap from a Democratic regime it was possible for some progressives to awaken from their hibernation and express in a direct and confrontational way their anger with their political masters. It showed that resistance is not only possible, but that it can also be fun. The movement is in repose once again. But, who knows, it make reawaken any time in the next seven years….

Notes on WTO demonstrations by Alexander Cockburn:

“As we wrote at the time, You can take state power by surprise over twenty or thirty years, and state power spends the next two or three decades making sure it won’t happen again. See May/June ’68 in Paris. The next big anti-WTO rally after Seattle was in Washington DC and as JoAnn Wypijewski reported for CounterPunch after that rally, the Maryland/DC cops had orders to shoot to kill if necessary. You can chart the fanatic vigilance of the state by the near impossibility of demonstrating within eyeshot of Bush or Cheney. There were several instances of people in wheel chairs and a sign, awaiting the Royal Progress of W or C, being hauled off to distant wire pens, there to exercise their First Amendment rights. Jeffrey and I were at the Democratic convention in Los Angeles in the summer of 2000 and the armed police presence was beyond belief, with squads of motor bike cops regularly roaring along the sidewalks. It took the arrival of a black president in the White House to persuade the police that it was okay to have a man with a revolver strapped to his leg to demonstrate at an Obama town hall meeting with a sign quoting Jefferson on the need to water the tree of liberty with the blood of tyrants.

Of course one’s tendency is to think that a hugely exciting event like the Seattle Days is the beginning of something — but alas, Seattle was more epilogue than overture. The organized left fell apart in the Clinton years and hasn’t effectively reconstituted itself since. In fact in the US the left as an energetic intellectual and political force is nearly dead, engorged by the Democratic Party. Of course there are those who fight on – like us here at CounterPunch, and the fact that we have a large and loyal audience across the world for our stuff encourages us to believe there’s life in the Old Mole still.”

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

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

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

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

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

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

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

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

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

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

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

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

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

But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate… the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.¹

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

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

1. Nouriel Roubini, “The Mother of all Carry Trades Faces an Inevitable Bust,” Financial Times.

The Senate is pressing ahead with the bill despite overwhelming disapproval from liberal and conservative economists. Their main objection? It’s a waste of money. The Brookings Institute estimates that the $8,000 credit costs taxpayers $43,000 per home. This is based on the fact that 85% of the nearly 2 million buyers were planning to buy a home anyway. The new add-ons to the bill mean that its final costs will be much greater than originally anticipated.

The senate bill is nothing but a $6,500 bribe to keep people in their homes and out of foreclosure. It’s another giveaway to the banks so they don’t have to face the mountain of debt they generated through fraudulent loans. The banks aren’t satisfied with merely blowing up the financial system and extracting trillions of dollars from taxpayers to fix the mess they left behind. Now they want to ensure that they’re a constant drain on public resources, by diverting dollars earmarked for healthcare or state aid into broken institutions run by high-stakes gamblers. The Congress has played a critical role in this fiasco.

The Senate has also shrugged off the many reports of fraud related to the home-buyer credit. Here’s an excerpt from the Wall Street Journal which summarizes hundreds of similar stories:

News of the latest taxpayer-funded mortgage scam has traveled fast. The Treasury’s inspector general for tax administration, J. Russell George, recently told Congress that at least 19,000 filers hadn’t purchased a home when they claimed the credit. For another 74,000 filers, claiming a total of $500 million in credits, evidence suggests that they weren’t first-time buyers.

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old. This pre-K housing whiz likely bought because mom and dad make too much to qualify for the full credit…

As a “refundable” tax credit, it guarantees the claimants will get cash back even if they paid no taxes. A lack of documentation requirements also makes this program a slow pitch in the middle of the strike zone for scammers. The Internal Revenue Service and the Justice Department are pursuing more than 100 criminal investigations related to the credit, and the IRS is reportedly trying to audit almost everyone who claims it this year.¹

Does it bother senators that the public is being plucked like a Thanksgiving turkey, once again?

Everything that has been done to prop up the ailing housing market, has really been aimed at helping the banks. The Fed has launched the biggest government intervention in history– purchasing more than $900 billion in mortgage-backed securities, $200 billion in agency debt, and another $300 billion in long-term US Treasuries–all to stabilize a market which was sabotaged by the Fed’s low interest rates and the banks abyssal lending standards. Private label “securitized” mortgages have defaulted at 5-times the rate of conventional loans, clear proof of fraud.

The Fed’s capital injections will eventually add $2 trillion to the aggregate value of the residential real estate market. The Fed is doing its best to prevent the market from clearing by keeping home prices artificially high. That’s the only way to avoid more bank failures.

The Fed’s intervention is a sign of desperation. In the long-run, the action is unlikely to have any bearing on prices which will be determined by incomes and supply. Housing inventory is still unusually high, which is putting downward pressure on prices. Distress sales (short sales, foreclosures etc) represent 45 percent of all home sales, which reduces the number of creditworthy buyers for organic sales.

So, what has the Fed’s multi-trillion dollar intervention achieved aside from creating a fake market with fake interest rates, fake financing, fake down-payment ($8,000 first-time home buyer giveaway) and fake media coverage of a fake rebound. Not much, really. The Wall Street Journal‘s James Hagerty sums it up like this:

Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday…

But these artificial props won’t last forever and may have created a false bottom in the market.

“The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”²

Over $1 trillion has been committed so far, and prices have budged a mere 5%. Does Fed chair Ben Bernanke really believe this is an affordable plan?

The Administration’s Making Home Affordable Modification Program (HAMP) will have only a marginal effect on the rate of foreclosures when the next wave of pay-option adjustable-rate mortgages and other oddball loans come due. And, when the loans reset, more banks will default pushing even more inventory onto the market at firesale prices. Foreclosures have exceeded 300,000 for the last 3 months and the inventory-backlog suggests the worst is still to come.

This is from Diana Golobay at housingwire.com:

Recent analysis by the Amherst Securities Group indicates the housing industry will not only worsen as a delayed pipeline of foreclosed loans begins to liquidate, but that the Administration’s Making Home Affordable Modification Program (HAMP) will have no lasting effect on keeping delinquent loans current…

Amherst estimates this “shadow inventory” at around 7m housing units, or 135% of a full year of existing home sales, compared with 1.27m units in this bucket in early 2005. The backlog is due to high transition rates, low cure rates and a longer timeline for loan liquidation — in other words, loans continue to transition into the delinquency/foreclosure pipeline at a rapid pace, but are moving out at a very slow pace.

The loans, however, are “destined to liquidate” and will impact the signs of recovery seen in recent months by pulling down house prices through distressed sales.³

So, what can Bernanke do to head-off a bigger meltdown in housing?

The Fed revealed its long-term strategy in the minutes of its September 22-23 FOMC meeting. Here’s an except from the Fed’s statement:

The Committee agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated.

In other words, the Fed is planning to continue its quantitative easing (QE) program (monetisation) which pumps liquidity into the system and puts more downward pressure on the dollar. Bernanke is trying to inflate-away the problems in housing, but with little success. In fact, according to Robert Shiller, who created the index for measuring house prices in 20 major cities, the Fed may have generated another bubble. This is from the UK Telegraph:

The S&P Case-Shiller index… showed that house prices were up 1 percent from the previous month, following a 1.2 percent increase in July. However, August’s prices were still down 11.3 percent year-on-year, highlighting the continued problems in the market as a whole. Professor Shiller, who is credited with calling both the late 1990′s tech market bubble and the bubble that led to the US property market crash three years ago, pointed to price increases in areas including San Francisco and Minneapolis, which have seen double-digit gains in the last four months. He said that if these rises are viewed on an annualised basis they could be seen as “bubble territory.’⁴

Housing prices will continue to tumble through 2010 no matter what the Fed does. In fact, on Wednesday the Commerce Dept reported that sales of new one-family houses in September dropped to a rate of 402,000, down 3.8 percent from August. That’s 7.8 percent below 2008, well below economists worst predictions. The news sent stocks plummeting.

The sense that the economy is returning to normal, is an illusion nurtured by the financial media. This week’s dismal consumer confidence data, shows that the public “isn’t buying it.” And, neither are investors, who continue to avoid equities despite a seven-month, 68 percent rally in global stocks. According to Bloomberg, “Almost 40 percent of investors and analysts in the latest quarterly survey… say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.” The mood is grim. The public has lost faith in the media, in the Fed, and in public institutions. The “cheery predictions” are no longer having any effect. No doubt, this will make it even harder to stabilize the teetering housing market.

1. “First Time Fraudsters,” Wall Street Journal
2. James Hagerty, “Uncle Sam Adds 5% to Prices of Homes, Goldman Says,” Wall Street Journal
3. Diana Golobay, “Amherst Sees 7m Foreclosures Poised to Distress House Prices,” housingwire.com
4. UK Telegraph