Sunday, April 13, 2008

An Economy Built On Lies

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By Gary North

In this report, I am going to present an astounding document. You have not heard of it. It is at the heart of the current residential real estate crisis. It has to do with liar loans.

By now, the term "liar loans" is common. Prospective house buyers provided false information to representatives of loan-initiating firms.

The loan-initiating firms knew that there were people who did this, but they winked at the practice. Their well-compensated job was to pass on the paperwork to a government-created agency, either Fannie Mae or Freddie Mac, who then sold scientifically diversified packages of statistically safe mortgages to investors.

Some of these investors were hedge funds. They in turn borrowed money from investment banks at up to 32-to-1 leverage (Carlyle Capital) to buy even more packages of statistically safe mortgages.

Everyone was happy until reality caught up with the lying borrowers, whose meager incomes did not allow them to keep paying their monthly mortgages.

The dominoes started to topple in August, 2007. The experts were caught flat-footed.

The mortgage interest rate re-sets will continue through 2009. This process is barely half over. Meanwhile, a recession has appeared.

From start to finish, from top to bottom, the entire structure was based on lies. It began with this one: "I’m from the government, and I’m here to help you." This is the third most widely believed lie in history, right after this:

And the serpent said unto the woman, Ye shall not surely die: For God doth know that in the day ye eat thereof, then your eyes shall be opened, and ye shall be as gods, knowing good and evil.

And this:

Of course I will still respect you as a person in the morning.


We all remember the 1946 movie, It’s a Wonderful Life. It centers around one family’s funding of the great American dream: home ownership. We love the movie because it’s about a man who is shown by an angel that his life really mattered. So, our lives really matter, too. We all like to believe that we also have a guardian angel, though perhaps not so incompetent as Clarence.

Jimmy Stewart’s nemesis was the town’s banker, Mr. Potter. He was a liar and a thief, preying on sin-loving local citizens (as we see in the sequence about Pottersville) and the likes of the kindly but imbecilic Uncle Billy.

Potter used the fractional reserve banking system to borrow short and lend medium. The Bedford Falls Building and Loan borrowed short and lent long.

Potter was able to survive the bank run because his bank had liquid reserves and assets it could sell. The Building and Loan survived because George Bailey had liquid reserves – his honeymoon money – and a script writer who ended the bank run at 6 p.m. and did not let it extend to the next day, which it obviously would have done when word got out that Jimmy’s honeymoon money was gone.

Potter was a liar: he was lent medium. George Bailey was a much bigger liar: he was lent long.

The Federal Deposit Insurance Corporation was created in 1933 by the Roosevelt Administration as part of the Glass-Steagall Act. This bailed out the mini-liars: bankers. The Savings and Loan oligopoly then pressured Congress to provide something similar, which Congress delivered: the Federal Savings & Loan Corporation was created by the National Housing Act of 1934. This bailed out the bigger liars.

The American dream was extended to the masses by means of government insurance against runs by investors – who mistakenly thought they were depositors – in Savings & Loans. This did more to establish the economics of the carry trade – borrowing short to lend long – than anything in history. The investment world saw the profit potential. The carry trade has increased ever since.

But who will insure the middlemen who profit from the carry trade? Who has sufficient resources to bail out the profit-seeking, loss-avoiding hedge fund entrepreneurs who decided that the interest rate spread between short-term money paid to investment banks and long-term money paid by borrowers was just too tempting. In short, who will come to the rescue of our generation of George Baileys? Congress? It did in 1986 during the S&L collapse. But the on-budget Federal deficit is running at an estimated $410 billion this year. This deficit is accelerating. Then how about the Federal Reserve System? It can swap Treasury debt for not-statistically-safe-after-all mortgages, but only until it runs out of Treasury debt, about $800 billion to go. Then it will have to create money. Lots and lots of money.


We live in the FIRE economy: finance, insurance, and real estate.

The crucial insurance today is Federal insurance – explicit, implicit, and widely assumed even when legally absent. Big institutions are considered too big to fail, meaning too big for the government to allow to fail. Think Bear Stearns. So, promises made by the government serve as the ultimate back-up for the promises made by the largest carry traders.

The extent of the participation of the Federal government in the residential real estate markets can be seen in the law governing liar loans.

You need to read the following law. I realize that no one except lawyers reads a document like this one. It has two sentences. One of them is 291 words long. Only lawyers write sentences that are 291 words long. Nevertheless, I am asking you to read it.

Here is what you should understand after you have read it. There is hardly a nook or cranny left in the residential real estate market that is not covered by this law. The extent of government control, which derives from government insurance of real estate lending, is enormous. How enormous? Read for yourself.

Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of the Farm Credit Administration, Federal Crop Insurance Corporation or a company the Corporation reinsures, the Secretary of Agriculture acting through the Farmers Home Administration or successor agency, the Rural Development Administration or successor agency, any Farm Credit Bank, production credit association, agricultural credit association, bank for cooperatives, or any division, officer, or employee thereof, or of any regional agricultural credit corporation established pursuant to law, or a Federal land bank, a Federal land bank association, a Federal Reserve bank, a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or the Small Business Administration in connection with any provision of that Act, a Federal credit union, an insured State-chartered credit union, any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, any Federal home loan bank, the Federal Housing Finance Board, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Farm Credit System Insurance Corporation, or the National Credit Union Administration Board, a branch or agency of a foreign bank (as such terms are defined in paragraphs (1) and (3) of section 1(b) of the International Banking Act of 1978), or an organization operating under section 25 or section 25(a) [1] of the Federal Reserve Act, upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan, or any change or extension of any of the same, by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both. The term State-chartered credit union includes a credit union chartered under the laws of a State of the United States, the District of Columbia, or any commonwealth, territory, or possession of the United States.

Did you read it? If so, I hope you noticed this passage: ". . . shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both."

Here is the inescapable reality: the Federal government let the subprime disaster build up for many years. This law was never enforced. No one in the entire government-insured scam worried about it. The bureaucrats were in on the deal from day one.

All of the posturing by politicians about the exploited borrowers who lost their homes – liars – and the need for new laws to be passed by Congress to prevent unscrupulous mortgage brokers – liars – from ever exploiting the poor again, and also preventing them from endangering the solvency of the nation’s financial institutions – liars – is nothing but election-year politicking by the biggest liars of all: politicians.

Do we need more laws? Hardly. A law that imposes a million-dollar fine and 30 years in jail is more than sufficient. This law’s stiff penalties were supposed to make people take it seriously. But it was not taken seriously. No one ever intended to enforce the law. No one ever did. It was all posturing by the politicians.

The biggest housing bubble in American history, 1995–2005, took place under the watchful eyes of the entire Federal real estate bureaucracy, the bureaucracy listed by name in the law. No one in government issued a warning. No one in government saw the bubble coming. No one in government identified it as a bubble.

The appraisals were made, the loans were made, the mortgages were bought and re-packaged and sold again. The carry trade did its work. And now there is a line in front of the banks.

No, scratch that. There are no lines. There are instead collapsing prices in the scientifically packaged mortgage sector because investors now see that those mortgages, rated AAA by independent firms (it says here), are in fact packages of promises to pay made by liars.

Everyone knew. This is the famous bottom line. Everyone knew. Nobody cared.

We live in an economy built on lies. Everyone knows. Almost nobody cares.

Do you care? If so, what have you done to protect yourself?


The Federal Deposit Insurance Corporation insures bank accounts up to $100,000. It holds about a penny in reserve (in T-bills) for every dollar worth of insured deposits.

Who insures the T-bills? The Federal Reserve System. Who insures the Federal Reserve System? No one. It doesn’t need insurance. It can create money.

Then who insures the purchasing power of the dollar? The central banks of the world, which hold dollars as legal reserves for their own currencies.

What happens if they decide not to add to their holdings of dollars?

That is the ultimate default today. If the liars known as central bankers decide that our central bank’s liars are no longer to be trusted, there will be a great dumping of Treasury debt.

There will be no lines in front of American banks. There will instead be rising prices for imported goods. There will be rising domestic interest rates because foreign central banks are not buying Treasury debt any longer. There will be unemployment. There will be bankruptcies.

There will be defaults. Above all, there will be defaults. The lies will be exposed as lies. The promises will not be kept.

When the checks from Washington no longer buy much of anything, the great political transformation will begin.

The promises will not be fulfilled. I assume that you know this. The economy built on lies will fall. So will the political order.

When will this take place? I don’t know. But we have seen it happen in our lifetime. The Soviet Union fell in three days: August 19–21, 1991. No one predicted this. The best and the brightest in the West did not see it coming. One man suspected it and did what he could to accelerate it: John Paul II. But the politicians were universally caught flat-footed.

The USSR was $140 billion in debt to the West in 1991. The West is now in debt to Russia by $500 billion. No one predicted that, either.


The modern economy is built on debt. It is therefore built on promises to pay. It is therefore built on lies.

As investors, we must look at the dominoes and try to get out from under the next one to topple.

If all of them topple, the division of labor will collapse. Then most of us will die. Think of a world without digital money. The trains would stop rolling. The trucks would stop rolling. The government would intervene and force some deliveries, such as coal to power plants in large cities. But the government would also have a problem: how to pay the bureaucrats and troops.

So, most of us cannot plan for a complete collapse of banking. That would bring down Western civilization. We have to assume that some lies will still be accepted, that some promises will be kept.

But which ones?

I think it is wise to have reserves that are not digital. You can’t eat digits. But if your neighbors are starving, reserves won’t help much. This is why you should not try to prepare for complete collapse today. You can’t afford it.

I hope you have the familiar six months’ of expenses in reserve. You could lose your job. If you don’t, what about your spouse?

Today, most American families have about 19 days’ worth of expenses. The chart on this decline since the year 2000 is shocking.

You must not follow the herd on this one.


The tissue of lies that held together the subprime market was believed by the best and the brightest. They were blind to what was coming. It has wiped out over $200 billion in assets.

We are assured that the worst is over. But who assures us of this? Salaried reporters in a dying field: newspapers and network TV.

The ill-informed tout the liars. We are assured that the liars know what went wrong and will not let it happen again.

Re-read the liars’ law. That will give you some indication of how serious the liars were. They are no more serious today.

When they tell you the worst is over, batten down the hatches.

More than three billion people in the world condemned to premature death from hunger and thirst

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THAT is not an exaggerated figure, but rather a cautious one. I have meditated a lot on that in the wake of President Bush’s meeting with U.S. automobile manufacturers.

The sinister idea of converting food into fuel was definitively established as an economic line in U.S. foreign policy last Monday, March 26.

A cable from the AP, the U.S. news agency that reaches all corners of the world, states verbatim:

“WASHINGTON, March 26 (AP). President Bush touted the benefits of ‘flexible fuel’ vehicles running on ethanol and biodiesel on Monday, meeting with automakers to boost support for his energy plans.

“Bush said a commitment by the leaders of the domestic auto industry to double their production of flex-fuel vehicles could help motorists shift away from gasoline and reduce the nation's reliance on imported oil.

‘“That's a major technological breakthrough for the country,’ Bush said after inspecting three alternative vehicles. If the nation wants to reduce gasoline use, he said “the consumer has got to be in a position to make a rational choice.”

“The president urged Congress to ‘move expeditiously’ on legislation the administration recently proposed to require the use of 35 billion gallons of alternative fuels by 2017 and seek higher fuel economy standards for automobiles.

“Bush met with General Motors Corp. chairman and chief executive Rick Wagoner, Ford Motor Co. chief executive Alan Mulally and DaimlerChrysler AG's Chrysler Group chief executive Tom LaSorda.

“They discussed support for flex-fuel vehicles, attempts to develop ethanol from alternative sources like switchgrass and wood chips and the administration's proposal to reduce gas consumption by 20 percent in 10 years.

“The discussions came amid rising gasoline prices. The latest Lundberg Survey found the nationwide average for gasoline has risen 6 cents per gallon in the past two weeks to $2.61.”

I believe that reducing and moreover recycling all motors that run on electricity and fuel is an elemental and urgent need for all humanity. The tragedy does not lie in reducing those energy costs but in the idea of converting food into fuel.

It is known very precisely today that one ton of corn can only produce 413 liters of ethanol on average, according to densities. That is equivalent to 109 gallons.

The average price of corn in U.S. ports has risen to $167 per ton. Thus, 320 million tons of corn would be required to produce 35 billion gallons of ethanol.

According to FAO figures, the U.S. corn harvest rose to 280.2 million tons in the year 2005.

Although the president is talking of producing fuel derived from grass or wood shavings, anyone can understand that these are phrases totally lacking in realism. Let’s be clear: 35 billion gallons translates into 35 followed by nine zeros!

Afterwards will come beautiful examples of what experienced and well-organized U.S. farmers can achieve in terms of human productivity by hectare: corn converted into ethanol; the chaff from that corn converted into animal feed containing 26% protein; cattle dung used as raw material for gas production. Of course, this is after voluminous investments only within the reach of the most powerful enterprises, in which everything has to be moved on the basis of electricity and fuel consumption. Apply that recipe to the countries of the Third World and you will see that people among the hungry masses of the Earth will no longer eat corn. Or something worse: lend funding to poor countries to produce corn ethanol based on corn or any other food and not a single tree will be left to defend humanity from climate change.

Other countries in the rich world are planning to use not only corn but also wheat, sunflower seeds, rapeseed and other foods for fuel production. For the Europeans, for example, it would become a business to import all of the world’s soybeans with the aim of reducing the fuel costs for their automobiles and feeding their animals with the chaff from that legume, particularly rich in all types of essential amino acids.

In Cuba, alcohol used to be produced as a byproduct of the sugar industry after having made three extractions of sugar from cane juice. Climate change is already affecting our sugar production. Lengthy periods of drought alternating with record rainfall, that barely make it possible to produce sugar with an adequate yield during the 100 days of our very moderate winter; hence, there is less sugar per ton of cane or less cane per hectare due to prolonged drought in the months of planting and cultivation.

I understand that in Venezuela they would be using alcohol not for export but to improve the environmental quality of their own fuel. For that reason, apart from the excellent Brazilian technology for producing alcohol, in Cuba the use of such a technology for the direct production of alcohol from sugar cane juice is no more than a dream or the whim of those carried away by that idea. In our country, land handed over to the direct production of alcohol could be much useful for food production for the people and for environmental protection.

All the countries of the world, rich and poor, without any exception, could save millions and millions of dollars in investment and fuel simply by changing all the incandescent light bulbs for fluorescent ones, an exercise that Cuba has carried out in all homes throughout the country. That would provide a breathing space to resist climate change without killing the poor masses through hunger.

As can be observed, I am not using adjectives to qualify the system and the lords of the earth. That task can be excellently undertaken by news experts and honest social, economic and political scientists abounding in the world who are constantly delving into to the present and future of our species. A computer and the growing number of Internet networks are sufficient for that.

Today, we are seeing for the first time a really globalized economy and a dominant power in the economic, political and military terrain that in no way resembles that of Imperial Rome.

Some people will be asking themselves why I am talking of hunger and thirst. My response to that: it is not about the other side of the coin, but about several sides of something else, like a die with six sides, or a polyhedron with many more sides.

I refer in this case to an official news agency, founded in 1945 and generally well-informed about economic and social questions in the world: TELAM. It said, and I quote:

“In just 18 years, close to 2 billion people will be living in countries and regions where water will be a distant memory. Two-thirds of the world’s population could be living in places where that scarcity produces social and economic tensions of such a magnitude that it could lead nations to wars for the precious ‘blue gold.’

“Over the last 100 years, the use of water has increased at a rate twice as fast as that of population growth.

“According to statistics from the World Water Council, it is estimated that by 2015, the number of inhabitants affected by this grave situation will rise by 3.5 billion people.

“The United Nations celebrated World Water Day on March 23, and called to begin confronting, that very day, the international scarcity of water, under the coordination of the UN Food and Agriculture Organization (FAO), with the goal of highlighting the increasing importance of water scarcity on a global scale, and the need for greater integration and cooperation that would make it possible to guarantee sustained and efficient management of water resources.

“Many regions on the planet are suffering from severe water shortages, living with less than 500 cubic meters per person per year. The number of regions suffering from chronic scarcity of this vital element is increasingly growing.

“The principal consequences of water scarcity are an insufficient amount of the precious liquid for producing food, the impossibility of industrial, urban and tourism development and health problems.”

That was the TELEAM cable.

In this case I will refrain from mentioning other important facts, like the melting ice in Greenland and the Antarctic, damage to the ozone layer and the growing volume of mercury in many species of fish for common consumption.

There are other issues that could be addressed, but with these lines I am just trying to comment on President Bush’s meeting with the principal executives of U.S. automakers.

Semantics can't mask Bush's chicanery

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By Robert Fisk

This goes beyond hollow laughter. Since when did armies go around 're-liberating'

After his latest shenanigans, I've come to the conclusion that George Bush is the first US president to march backwards. First we had weapons of mass destruction. Then, when they proved to be a myth, Bush told us we had stopped Saddam's "programmes" for weapons of mass destruction (which happened to be another lie).

Now he's gone a stage further. After announcing victory in Iraq in 2003 and "mission accomplished" and telling us how this enormous achievement would lead the 21st century into a "shining age of human liberty", George Bush told us this week that "thanks to the surge, we've renewed and revived the prospect of success".

Now let's take a look at this piece of chicanery and subject it to a little linguistic analysis. Five years ago, it was victory – ie success – but this has now been transmogrified into a mere "prospect" of success. And not a "prospect", mark you, that has even been glimpsed. No, we have "renewed" and "revived" this prospect. "Revived", as in "brought back from the dead". Am I the only one to be sickened by this obscene semantics? How on earth can you "renew" a "prospect", let alone a prospect that continues to be bathed in Iraqi blood, a subject Bush wisely chose to avoid?

Note, too, the constant use of words that begin with "re -". Renew. Revive. And – incredibly – Bush also told us that "we actually re-liberated certain communities". This, folks, goes beyond hollow laughter. Since when did armies go around "re-liberating" anything? And what does that credibility-sapping "actually" mean? I suspect it was an attempt by the White House speech writer to suggest – by sleight of hand, of course – that Bush was really – really – telling the truth this time. But by putting "actually" in front of "re-liberate" – as opposed to just "liberate" – the whole grammatical construction falls apart. Rather like Iraq.

For by my reckoning, we have now "re-liberated" Fallujah twice. We have "re-liberated" Mosul three times and "re-liberated" Ramadi four times. The scorecard goes on. My files show that Sadr City may have been "re-liberated" five times, while Baghdad is "re-liberated" on an almost daily basis. General David Petraeus, in his pitiful appearance before the US Senate armed services committee, was bound to admit his disappointment at the military failure of the equally pitiful Iraqi Prime Minister Nouri al-Maliki in Basra. He had not followed Petraeus' advice; which was presumably to "re-liberate" the city (for the fourth time, by my calculation but with a bit more planning).

Indeed, Petraeus told senators that after his beloved "surge" goes home, the US will need a period of "consolidation and evaluation" – which is suspiciously close to saying that the US military will be, as the old adage goes, "redeployed to prepared positions". Ye gods! Where will this tomfoolery end?

In statistics, perhaps. By chance, as Bush was speaking this week, my mail bag flopped open to reveal a letter from my old American military analyst friend, George W Appenzeller. He gently (and rightly) corrects some recent comparative figures I used on US casualties in Korea, Vietnam and Iraq. "In previous wars," he writes, "the US army has not reported to the public the number of wounded who are treated and immediately released back to duty. They have reported these casualties in the Iraq and Afghanistan wars".

So here are a few Appenzeller factoids (glossed by Fisk, so the responsibility is mine!). The correct ratios for wounded in action vs killed in action for Iraq and Afghanistan is 8.13 to 1; for Korea, it's 7.38 to 1 and for Vietnam it's 6.43 to 1.

The true number of US wounded in Iraq until 18 March this year was 13,170, of whom 8,904 were so badly wounded that they required air evacuation to hospitals outside Iraq. The number of killed in action in Iraq is 3,251. (The other 750 died in accidents or of sickness.) But this does not include the kind of figure that the Pentagon and Bush always keep secret: an astonishing 1,000 or more Western-hired mercenaries, killed in Iraq while fighting or killing for "our" side.

But now I'll let George Appenzeller speak in his own words. "There are widely ranging estimates, but roughly 450,000 individuals ... fought on the ground in Vietnam ... At the height of the Vietnam war there were 67,000 ground combat troops there. That is roughly the number of ground combat troops the US presently has deployed in Iraq. Interestingly enough, that is also about the number of ground combat troops the US had fighting at any one time in the Korean war.

"The US army now has a much leaner and meaner organisation than in the past with a higher proportion of combat troops to total troops. All those American civilian truck drivers and Bangladeshi cooks have freed up troop slots that have gone to the combat arms."

No, Iraq has not yet reached Korea and Vietnam proportions. The three-year Korean war resulted in 33,686 US battle deaths and about 250,000 US wounds, an average of 94,562 casualties per year. The American phase of the Vietnam war lasted 14 years and resulted in 47,378 US battle deaths and 304,704 US wounds, an average of 25,149 casualties per year and an average of 66,792 during the four years of 1966-1969, the height of American fighting.

The Iraq war has lasted five years and has resulted in 3,251 battle deaths and 29,395 wounds, an average of 6,529 casualties per year. "Thus, the average number of killed and wounded during the Korean war was three times the total number of killed and wounded in the five years of the Iraq war. The average number of killed and wounded during each of the most difficult years of the Vietnam war was twice the total for the five years of the Iraq war."

Now for much more blood, the civilian variety. According to George, "About 1,600,000 were killed in the Korean war, 365,000 (according to American authorities) and four million (according to the Vietnamese government) during the American phase of the Vietnam war, and who knows how many in Iraq. No fewer than 250,000, certainly."

Not that long ago, Bush claimed that civilian fatalities in Iraq were "30,000 more or less" – again, note the "more or less" – but I can see why these statistics matter even less for him. It's not just that we don't care a damn about Iraqi lives. We are going to care even less about Iraqi civilian casualties when we walk backwards, when we are renewing and reviving and re-liberating all over again.

Al Qaeda to Iran

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LATEST movements in Washington’s war lobby indicate a reassessment of the Iraq policy with Iran slowly replacing Al Qaeda as the prime terrorism threat as officials juggle with justification for continued surge level troops.

General Petraeus and Ambassador Crocker spoke of Al Qaeda only in “retreat and disarray” terms in congressional hearings, leaning almost exclusively on Teheran’s role in fuelling the insurgency that jolted occupation forces in Baghdad and Basra recently. President Bush also squeezed Iran into his explanation for endorsing Gen Petraeus’ recommendation of maintaining the increased numbers which, seen in combination with increased US military hardware in the region, means America’s war noose is tightening around Iran’s neck.

Iran’s strong sectarian influence on Iraq’s dominant militias cannot be written down, but it is equally true that the United States itself bears the responsibility for Iran’s increasing clout in the region, especially inside Iraq. Washington’s war on terrorism quickly dismembered Iran’s two biggest cross-border concerns — Taleban’s Afghanistan and Saddam’s Iraq — and even the most feeble minded strategists would have expected Teheran to exploit post occupation Iraq.

Even though Washington has hinted at diplomatic engagement with Iran through a “multilateral forum”, the chronology of the last few years’ fallout between the two — especially with regard to Iran’s nuclear programme — shows a meaningful agreement is unlikely to develop. Ahmadinejad’s regime no doubt realises well that Washington’s latest ‘upping the rhetoric’ against his country owes in no small manner to attempts at diverting popular attention as the mess in Iraq has all but written off the neocons’ political credibility. Therefore, despite firm knowledge that its position in Iraq as well as the nuclear negotiations will continue to provoke America, it is unlikely to step off the front foot, banking on regional pressure preventing America from further military initiatives in the Middle East.

Yet Israel’s largest ever military exercises have pushed many an observer to fear more war is imminent once again, with good reason, especially since Tel Aviv has its own axe to grind. It was Iran’s client Hezbollah that embarrassed the Olmert dispensation and rubbished the myth of Israel’s fabled military might when the rag-tag militia stopped IDF tanks dead in their tracks, an insult that is crying for revenge in the Jewish state’s hierarchy. Should these fears be true, the Washington-Tel Aviv nexus is on the verge of displaying criminal disregard for ground reality, on a scale even its staunchest detractors would have doubted. The debacle in Iraq and summer ‘06’s botched skirmishes with Hezbollah have robbed them of the military alternative.

Unlike Iraq and Hezbollah, Iran has the capacity of striking against American and Israeli interests in the region, while leveraging its client outfits for targeted guerilla tactics. What can follow can only worsen the regional and indeed global situation.

Recession, Depression, Collapse: What's Fear Got To Do With It?

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By Carolyn Baker

Interesting, isn’t it, that mainstream economists need a so-called economic guru like Alan Greenspan to confirm that the U.S. economy is in recession? If the maestro says it is so, then it is. If he doesn’t, then the "downturn" has a silver lining. And now we have the Treasury Secretary, Hank Paulson, stating what the American public has known all too well during the past year: "The economy has taken a sharp downturn." Gee, Mr. Paulson, you get the understatement of the year award because what Americans have also discovered is that the middle class is now almost extinct after only a few decades of having one-thanks to you and your friends at Goldman Sachs.

No one walking away from a foreclosed home, no one declaring bankruptcy, no uninsured person staring in the face tens or hundreds of thousands of dollars in medical bills needs a maestro or any other member of the ruling elite to tell them that not only are we in a recession, but we are on a fast-track to a depression that is going to make 1929 look like living in the lap of luxury. It’s called the collapse of Western civilization, and it is well underway.

Oh, you don’t like my use of the word "collapse"? Then please listen up.

One of the most inspiring but also heart-wrenching stories I’ve seen this past week when Truth To Power was in the midst of its spring fundraiser and was not reporting much news was the CBS report on Tennessee-based Remote Area Medical’s efforts to bring health and dental care to the uninsured or underinsured not only throughout the world, but now more than ever, in the U.S. As I watched this must-see video clip, my heart soared, even as I wept. What was confirmed in every cell of my body was that the American healthcare system has already collapsed, and that every other institution in this nation is rapidly succumbing to the domino effect of empire’s unequivocal unraveling. Watch the CBS report for yourself, and I’m certain you will agree.

In looking honestly at these realities, it is impossible not to feel fearful, and some may once again accuse me of fear-mongering. However, I argue that fear is not necessarily a negative emotion or an unproductive waste of energy. I’m not talking about fear for the sake of fear, but rather, fear as a motivator-fear as a force that compels us to act.

Gavin De Becker’s 1997 book The Gift Of Fear was written to assist readers in detecting violent behavior in the workplace, in the street, or in the home, for the purpose of protecting themselves. In contemplating collapse we are not dealing up close and personal with violence-at least not in this stage of collapse, as much as we are attempting to read the signals it is sending so that we may wisely prepare ourselves for navigating it. Among the author’s suggestions are:

  • Recognizing the survival signals that warn us of impending danger
  • Relying on our intuition
  • Separating real from imagined danger
  • Moving beyond denial so that one can tune in to one’s intuition

As we witness collapse and experience its impact on our lives, the fundamental concept of De Becker’s book may serve us well. He argues that fear is an evolutionary gift imbedded in our DNA for the purpose of assisting our survival. Becoming overwhelmed with it or wallowing in it is indeed not useful, but neither is attempting to hermetically seal ourselves off from it. In fact, as De Becker argues, fear helps us move out of denial so that we can really tune into our intuition which facilitates our becoming proactive on our own behalf. What we need is not exemption from fear but a way of integrating it into our current reality in balance with other emotions.

What I want the reader to understand is that collapse is already happening. Your resentment of the word doesn’t change the fact that it is occurring. Like Greenspan and Paulson, we all have the option of masking the realities of meltdown and continuing to wait for someone or something to "prove" to us that the world as we have known it is over.

Is talking about collapse scary? You bet. Does that mean we should avoid the word or "re-frame" it into something more "acceptable." Only if we insist on living in denial. If we feel fear about collapse, does that mean that we are "living in fear"? Only if we feel nothing else about it except fear and allow the fear to paralyze us.

OK, so collapse is happening, it’s real, and it’s going to get worse. So now what? How can I utilize that fear to take action? Keeping in mind that this is all scary to talk about, let’s feel the fear and keep talking.

The first step, in my opinion, is to take a long, hard look at what action, in the face of the collapse of Western civilization, is realistic and truly useful. I believe we must approach this on two levels. First, what will actually make a difference in the world at large? Will using cloth shopping bags, changing my light bulbs, or shopping locally make a difference in the macrocosm? Quite frankly, probably not, although these may facilitate one’s adaptation to a drastically new way of life and make that transition less traumatic. But then I must ask myself what my intention is. Am I trying to prevent the collapse that is already in progress? Am I trying to make it less severe than if I did nothing? Do I think I have some control over the collapse missile now that it has been launched and probably has a life of its own? If I don’t have control-if control of the macrocosmic outcome isn’t even possible, how does that feel? Even more scary? OK, so let’s step back from the macrocosm for a moment and make this more personal.

Let’s address the second level, my personal and immediate milieu. Who and what is in my personal world? Who do I love and trust and want to share my life with? What fears come up as I think about this? Fear that I can’t talk to them about collapse? Fear that I will lose them, and they will lose me? Fear of separation from loved ones? Fear of making major changes like relocation, scaling down, bankruptcy, losing insurance, quitting a job or losing it?

Ooops, I think we’ve hit the big one: Fear of death-well, maybe not literal death, maybe not the "big one" but fear of the "little deaths" of loss which may feel like the "big death" of our own extinction. OK, time to take several deep breaths.

As we hit this rock-bottom fear, we must now ask ourselves if our ultimate objective in facing, talking about, and preparing for collapse is pure survival, or if it’s larger than that. You see, this is the part that many people who are talking about "collapse preparation" fail to discuss. It’s much easier to talk about stockpiling food and water or where one is going to invest one’s money or how one is going to purchase precious metals or what skills one needs to learn for survival. It is far more risky and scary to talk about emotional and spiritual preparation for collapse. All of the other preparations are pretty much about making rational decisions based on adequate information. But when we begin preparing our souls for collapse, we’re in a completely different dimension, and I argue, the most frightening as well as the most replete with potential. Potential for what?

The moment we begin discussing collapse and the notion of preparing for or surviving it, we enter the territory of meaning and purpose. Like someone stranded on a desert island or trapped in a downed airplane miles from nowhere, we are faced with those troubling "Who am I?" and "Why am I here?" questions that civilization has so masterfully assisted us in escaping. It is because humans have evaded and avoided dealing with those questions that we have created cesspools of government and financial corruption, the depletion of virtually all of earth’s resources, the extinction of 200 species per day, oceanic dead zones the size of some states, the horror of genetically modified foods, and the destruction of our own and the earth’s immune systems.

In a recent teleseminar offered by Life After The Oil Crash, Dmitry Orlov, author of the forthcoming Re-Inventing Collapse and a series of articles highlighting the similarities between the collapse of the Soviet Union and the collapse of the U.S., stated that more important than figuring out where we’re going to put our money or deciding where we might relocate is our psychological preparation for collapse. If we are not working on that aspect of preparation, then we are likely to discover that other forms of preparation do not fortify us in the ways we had hoped.

If we continue to avoid dealing with the reality of collapse, we get to escape those troubling "Who am I and why am I here?" questions a little longer and thereby perpetuate the underlying cause of the nightmares we have created for ourselves and for succeeding generations. On the other hand, if we are willing to talk about collapse, live and work with it alongside all of the other aspects of our lives that bring us joy and meaning, we open ourselves to a stunning opportunity that we may never have discovered were it not for the end of the world as we have known it.

There is very little we can do about collapse, but there is much that we can do with it. That does not necessarily mean that we can create a clean, compassionate, just, humane planet in our lifetime. I believe that to presume we can do so without the demise of Western civilization is an illusion. Unfortunately, empire has set the earth community up for dissolution, and collapse will bring forth the "great sorting out" but hardly in ways we’d prefer.

Bearing in mind the poet’s political incorrectness around gender and possibly the reader’s sensitivity to the "G" (God) word, I offer the words of Rilke:

At once the winged energy of delight

Carried you over childhood’s dark abysses,

Now beyond your own life build the great

Arch of unimagined bridges.

Wonders happen if we can succeed

In passing through the harshest danger;

But only in a bright and purely granted

Achievement can we realize the wonder.

To work with Things in the indescribable

Relationship is not too hard for us;

The pattern grows more intricate and subtle.

And being swept along is not enough.

Take your practiced powers and stretch them out

Until they span the chasm between the two

Contradictions...For the god

Wants to know himself in you.

The world we wanted to have is not within our reach; the world we deeply dread is upon us. Meanwhile, the world we have known, ugly as it may be but nevertheless familiar, is vanishing before our eyes. Herein lies an opportunity to experience deeper layers of who we really are and what we are really made of. Collapse is compelling us to confront these issues, whether we want to or feel ready to do so or not. While I do not welcome the suffering this will entail, I do welcome the transformation of human consciousness and thus the evolutionary quantum leap it may offer us. For a deeper understanding of this metamorphosis, I highly recommend an article that Truth To Power sent to subscribers earlier this week by Sarah Edwards and Linda Buzell entitled, "The Waking Up Synrdome." It confirms that instead of being the enemy, fear may be a powerful ally. If we can face the fear and take action, we may be able to "build the great arch of unimagined bridges."

Carolyn Baker is an adjunct professor of history, a former psychotherapist, an author, and a student of mythology and ritual. Visit her web site.

Wanta Save the Economy? Give Workers a Raise

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By Mike Whitney

“The bright new financial system, with all its talented participants, with all its rich rewards, has failed the test of the marketplace." Former Fed Chief, Paul Volcker

A specter is haunting Wall Street---the specter of insolvency. One major player, Bear Stearns, has already gone under, and from the looks of it, another may be on the way. It's getting ugly out there. The so-called TED spread---which measures the willingness of banks to lend to each other---has begun to widen ominously suggesting that the money markets believe another body will be floating to the surface any day now.

The ongoing deleveraging of financial institutions and the persistent downgrading of assets has the Fed in a tizzy. Bernanke has backed himself into a corner by stretching the Fed's mandate to include anyone on Wall Street with a mailing address and a begging bowl. Now he's taken on the larger task of fixing the plumbing that keeps credit flowing between the various investment banks. Good luck. He's already burned through nearly half of the Fed's balance sheet of $900 billion and the banking meltdown has just begun. The IMF expects the final tally will be $945 billion, that means $3 trillion in lost loans for the banks. Bernanke better pace himself; this mess could last for years.

The US subprime fiasco has spiraled into what the IMF is calling “the largest financial shock since the Great Depression.” America's capital markets are on the fritz. The corporate bond market is frozen, the banks are buckling from their losses, and the housing market is in a shambles. No one is buying and no one is lending; that's a deadly combo. Private equity deals are off 75% from last year and no one will go near a mortgage-backed security (MBS) with a ten foot pole. The mighty wheel of modern finance is grinding to a standstill and no one's quite sure how to rev it up again.

The US consumer is feeling the pinch, too. His credit cards are maxed out, his student loans are overdue, his car payment is in arrears, his mortgage is entering foreclosure, and and the home-equity ATM has been shut down. Now that the credit spigot has been turned off; he's really hurting, but no one is offering him a bailout or a even helping hand; just a few table-scraps from Bush's “surplus package”. 500 bucks will just about fill the tank of a normal-sized SUV; that's it. A new survey from the Pew research Center “Inside the Middle Class—Bad Times Hit the Good Life”, shows that working families are in debt up to their ears and that fewer Americans “believe they are moving forward” than anytime in the last half century. The study also shows that most people believe “it's harder to maintain a middle class life style” and that “since 1999, they have not made economic gains.” Average families are struggling just to make ends meet.

That's why so many people bought homes when they should have opened savings accounts. They thought that speculating on housing would get them a piece of the American dream. What's wrong with that? It looked like a good way to make up for the stagnant wages and crappy hours. The cheer-leading TV pundits offered assurances that “housing prices never go down”, but it was all baloney. Now 15 million homeowners are upside-down on their mortgages and the very same experts are scolding them for fudging the facts on their income. It's all backwards.

No wonder consumer confidence has dropped to record lows. The trust is gone. Working people have been hoodwinked one too many times. They don't need lectures on saving money; they need a raise. The big-wigs who scuttled Bear Stearns are still dining on crab-cakes at the Four Seasons while the working slob is just trying to make his way through Greenspan's nuclear winter living on beef jerky and Big Gulps. Where's the justice?

Volumes have been written about the current crisis; subprime-this, subprime that. Everything that can be said about collateralized debt obligations (CDOs) credit default swaps(CDS) and mortgage-backed securities (MBS) has already been said. Yes, they are exotic “financial innovations” and, no, they are not regulated. But what difference does that make? There's always been snake oil and there's always been snake oil salesmen. Greenspan simply raised the bar a notch, but he's not the first huckster and he won't be the last. What really matters is underlying ideology; that's the root from which this economy-busting hydra sprung. 30 years of trickle down, supply-side gibberish; 30 years of idol worship for the waxy-haired reactionary, Ronald Raygun; 30 years of unrelenting anti-labor, free market, deregulated orthodoxy which inflated the biggest equity-Zeppelin in history. Now the bubble has sprung a leak and the escaping gas is wreaking havoc across the planet. There's food riots in Haiti, Egypt, and Kuwait. Wherever the local currency is pegged to the falling dollar, inflation is soaring and trouble is brewing. Also, European banks are listing from the mortgage-backed garbage they bought from trusted brokerages in the US and need central bank bailouts to stay afloat. It's just more fallout from the subprime swindle. Finance ministers in every capital in every country are getting ready for a 1930's-type typhoon that could send equities crashing and food and energy prices rocketing into the stratosphere. And it can all be traced back to the wacko doctrine of unlimited personal accumulation and its evil-spawn, neoliberalism. These are the theories that guide America's “bugger-thy-neighbor” monetary policies and spread financial turmoil to every city and hamlet around the world.

The present stewards of the system, Paulson and Bernanke, are incapable of fixing the problem because they represent the interests of the people who benefit most from the disruptions. Paulson's latest “blueprint” for the financial markets just proves the point; a more pro-business, self-serving scheme has never been put to paper. Gary North sums it up in his article “Really Stupid Loans”:

“With the Federal Reserve System's latest proposal, presented to the public by Secretary of the Treasury Henry "Goldman Sachs" Paulson, the FED is asking the United States government to make it the Great Protector of Capital....The new proposals will centralize power over finance in the hands of an agency that is officially run by the government but in fact is run by agents of the largest fractional reserve banks. ...Regulation by tenured staff economists will not make the system less fragile. It will make it more top-heavy and less flexible..

Some version of this plan will probably pass in the next Congress. No matter whether it does or does not, the direction is the same: toward an economy controlled by the federal government in conjunction with titular private ownership of the means of production, that is, toward fascism. (Gary North, “Really Stupid loans”

That's right; Paulson and his flock of investment bank alchemists, who cooked up the poisonous stew of derivatives that paralyzed the bond market, now want congress to put the whole kit and kabootle under their authority. Right.
Michael S. Rozeff sums it all up his article “ The American Form of Government and the Paulson Plan”:

“The main result of the Paulson Plan will be increased government power over capital markets and their institutions. Certain large players will be cartelized under the enhanced regulatory umbrella. They will be under the government’s thumb. In subsequent crises, the government will move further toward capital controls and find it easier to do so.

To be totalitarian, a State needs to control investment, that is, the allocation of capital. Controlling the direction of finance is a means to control investment. That is the ultimate stopping point of government control over capital markets.” (The American Form of Government and the Paulson Plan, Michael S. Rozeff,

And that's the whole point, to put the markets in the Fed's control so when the next financial crisis arises the Fed can bailout the bankers and hedge fund managers without consulting Congress.

Paulson's plan is a power-play pure and simple. The investment Mafia wants to control the financial system lock, stock and barrel. They want to liquidate the SEC and any other government watchdog agency and put the investment banks, hedge funds and brokerages on the honor system. It's the end of transparency and accountability which, of course, are in short supply already.

Comrade Paulson's blueprint fixes nothing. It's just another freebie for the parasite class. What the country really need is a few honest men who'll ride-herd on the Ken Lays and Jeffrey Skillings who presently run Wall Street. That doesn't require centralized power; just a rule book and a bullwhip.

Currently, Paulson and Bernanke are expanding the balance sheets of the GSEs so that Fannie Mae and Freddie Mac will underwrite 85% of all mortgages while FHA will cover 10% more. The mortgage industry is being nationalized to save banking fellowship while the taxpayer is on the hook for another $4.4 trillion of dodgy loans. It's a risky business and, once again, it's all ideologically driven. Paulson doesn't care if the taxpayer gets stuck with the bill. It's no skin off his nose. What bothers him is the prospect that, somewhere along the line, workers will demand higher wages to keep pace with inflation. Then all hell will break loose. Paulson and Co. would rather see the economy perish in a deflationary holocaust than add another farthing to a poor man's salary. He and his ilk take class warfare seriously; that's why they are winning. But their strategy also creates problems. When wages don't keep pace with production, demand decreases and the economy falters. That's what's happening now and Paulson knows it. Workers are over-extended and can't buy the things they make. They barely have enough to feed the kids and fill the tank for work. All the fat has been trimmed from the bone; there's nothing left. The only thing that's kept us from sliding into recession so far, has been the kookie banker's scam to maintain growth by easing lending standards and expanding credit. That turned out to be a real doozie; the whole thing blew up and left the banks' balance sheets ravaged and workers deeper in debt than anytime in history. Now consumer spending is nosediving at the same time the Fed's equity bubble is plummeting to earth. It looks like the plan to eliminate the standard criteria for lending money wasn't such a great idea after all. The global financial system has never been under greater strain.

Was it all part of a “vast right-wing conspiracy?”

Maybe or maybe not; it's hard to say. But neoliberalism does have a twenty-year record of producing the very same economic calamities. That's more than just a coincidence. What makes this crisis so different? The bankster globalists aren't bound by any silly feelings of patriotism. They would just as soon march the good old USA to the chopping block as any other unsuspecting nation; it makes no difference to them. It's just business as usual. After the equity bubble bursts and asset prices fall, the corporate vultures will swoop down and buy up vital resources and industries for pennies on the dollar. Its the same everywhere; Darwinian capitalism. Leave nothing but the bones behind.

Economist Michael Hudson anticipated many of the present-day developments in the financial markets in an amazingly prescient interview in counterpunch in 2003 called “The Coming Financial Reality”:
Michael Hudson: “Free enterprise under today's financial conditions threatens to bring about an unprecedented centralization of planning, not in the hands of government but by the financial conglomerates and money managers. Whatever government planning power is destroyed becomes available for them to appropriate, with plenty of vigorish left for the politicians whose campaigns they back and who will "descend from heaven" into high-paying private-sector jobs, Japanese style, after having performed their service for the new regime.

Question; Standard Schaefer: The financial regime is nothing but parasites?

Michael Hudson: “The problem with parasites is not merely that they siphon off the food and nourishment of their host, crippling its reproductive power, but that they take over the host's brain as well. The parasite tricks the host into thinking that it is feeding itself.
Something like this is happening today as the financial sector is devouring the industrial sector. Finance capital pretends that its growth is that of industrial capital formation. That is why the financial bubble is called "wealth creation," as if it were what progressive economic reformers envisioned a century ago. They condemned rent and monopoly profit, but never dreamed that the financiers would end up devouring landlord and industrialist alike. Emperors of Finance have trumped Barons of Property and Captains of Industry.” (Michael Hudson, “The Coming Financial Reality”, counterpunch)

Bingo. Hudson not only explains how finance capitalism is inserting itself into the governmental power structure but, also, predicts that “industrial capital formation”--which is the production of things that people can really use to improve their lives---will be replaced with complex debt-instruments and derivatives that add no tangible value to people's lives and merely serve to expand the wealth of an entrenched and increasingly powerful investor class.

Finance capitalism has “devoured landlord and industrialist alike” and created a galaxy of seductive liabilities which masquerade as assets. Derivatives contracts, for example, represent over $500 trillion of unregulated counterparty transactions; a “shadow banking system” completely disconnected from the underlying “real” economy, but large enough to send the world into a agonizing depression for years to come.

The goal of liberals should be to dismantle this corrupt Ponzi-system, which merely wraps debt in a ribbon, and rebuild the economy on a solid foundation of productive labor, worker solidarity and the making of tradable goods. That will restore competitiveness and reallign the political system.

Political power has to be taken from the financial mandarins or the disparity of wealth will continue to grow and democracy will wither. We've already seen our main institutions--- the courts, the congress, the media, and the presidency---polluted by the steady flow of corporate contributions which only serve the narrow interests of elites.

Henry Liu expands on this idea in his excellent article “A Panic-stricken Federal Reserve”:

“In the 1920s, the wide disparity of wealth between the rich and the average wage earner increased the vulnerability of the economy. For an economy to function with stability on a macro scale, total demand needs to equal total supply. Disparity of income eventually will result in demand deficiency, causing over supply. The extension of credit to consumers can extend the supply/demand imbalance but if credit is extended beyond the ability of income to sustain, a debt bubble will result that will inevitably burst with economic pain that can only be relieved by inflation.....More investment normally increases productivity. However, if the rewards of the increased productivity are not distributed fairly to workers, production will soon outpace demand. The search for high returns in a low demand market will lead to consumer debt bubbles with wide-spread speculation....Today, outstanding consumer credit besides home mortgages adds up to about $14 trillion, about the same as the annual GDP. ”

Voila. A strong economy requires a strong workforce and an equitable distribution of wealth. Otherwise, demand decreases and growth slows to a crawl. When money is concentrated in too few hands, the political system atrophies and becomes unresponsive to the needs of its people. That's when the nation's laws and institutions are reshaped to reflect the ambitions of rich and powerful.

Liu continues:

“A 2002 study released by Citizens for Tax Justice and the Children's Defense Fund reveals that under the Bush tax cut, over the next 10 years, the top 1% income recipients are slated to receive tax cuts totaling almost half a trillion dollars. The $477 billion in tax breaks the Bush administration has targeted to this elite group will average $342,000 each over the decade. By 2010, when (and if) the Bush tax reductions are fully in place, an astonishing 52% of the total tax cuts will go to the richest 1% whose average 2010 income will be $1.5 million.” And, this; “In 2006, the chief executives of the 500 biggest US companies averaged $15.2 million in total annual compensation, according to Forbes business magazine’s annual executive pay survey. The top eight CEOs on the Forbes list each pocketed over $100 million.” “A Panic-stricken Federal Reserve; The shape of US Populism” Henry C. K. Liu, Asia Times)

The financial system is doing exactly what it was designed to do, it is crumbling from the decades-long trickle-down experiment. Social programs have been gutted, civil infrastructure is in tatters, legal protections have been savaged, and workers rights have been trounced. Is it any wonder why we're embroiled in an unwinnable war and the financial system is on its last legs?

None of this is accidental; it is the inevitable decline of a fatally flawed ideology; the Golden Calf of neoliberalism. But what will take its place? Where are the leaders who will fill the vacuum?

Here's an excerpt from Bernard Chazelle's article “Saving the American Left; A New Progressive Creed”:

“By virtually any measure, the United States is the least progressive nation in the developed world. It trails most of Western Europe in poverty rates, life expectancy, health care, child care, infant mortality, maternity leaves, paid vacations, public infrastructure, incarceration rates, and environmental laws. The wealth gap in the US has not been so wide since 1929. The Wal-Mart founders' family owns as much as the bottom 120 million Americans combined. Contrary to received opinion, there is now less social mobility in the US than in Canada, France, Germany, and most Scandinavian countries. The European Union attracts more foreign students than the US, including twice as many from China. Its consensus-driven polity, studies indicate, has replaced the American version as the societal model to which the developing world aspires.”

America has lost its luster; it no longer attracts freedom-loving young people seeking openness and a brighter future. There are better opportunities elsewhere and less hassle. The country needs a major face-lift. Restoring liberal values is pointless without a strong commitment to economic justice; the two are inseparable. The only way to break the stranglehold of Wall Street's financial Politburo is to level the playing field through greater wealth distribution. That's the best way to rekindle democracy and make America the land of opportunity again. And it all starts with giving America's workers a raise.

Castro and Chávez Attack US Backing For Biofuels

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By Rory Carroll

Leaders say diverting crops for fuel starves poor

Cuba and Venezuela have launched an offensive against biofuels, warning that the US-backed rush towards ethanol will worsen global hunger and poverty.

Fidel Castro has written two newspaper articles in a week voicing alarm at the prospect of countries boosting sugar and corn crops to make ethanol, a fuel that can be used an additive or a substitute for petrol.

By diverting crops to feed cars rather than people, the price of food would rise and the world's poor would go hungry, Mr Castro wrote in the Communist party's official newspaper, Granma.

The columns marked an unexpected return to international policy debate after an eight-month convalescence that forced the 80-year-old president to cede day-to-day control to his brother, Raul.

Mr Castro's ally, the Venezuelan president Hugo Chávez, also attacked biofuels in a sharp U-turn that put the two leaders shoulder to shoulder against Brazil and the US, the two big ethanol champions.

Until recently, Cuba and Venezuela were enthusiastic about the fuel and with Brazil's help planned to jointly build sugar mills and ethanol plants, hitching the Caribbean to the "green" fuel bandwagon.

That changed after the US president, George Bush, touted his support for ethanol during a tour of Latin America last month that clinched an ethanol deal with Brazil's president, Luiz Inacio Lula da Silva. The men followed up last week with a meeting at Camp David.

Washington, a foe of Mr Chávez and Mr Castro, has promoted home-grown corn-based ethanol as well as the sugar-based variety produced in Brazil and tropical countries as a way to reduce US dependency on oil. Biofuels are also perceived to be less environmentally damaging.

However critics say the fuel, especially the corn-based variety, is far less green than it appears and that converting swaths of land to provide fuel for cars would push up prices of food crops and meat, since animals eat corn. In the wake of Mr Bush's tour, Mr Castro echoed those arguments. A recent column said 3 billion people would die prematurely of hunger and thirst. "Where are the poor countries of the third world going to get the minimum resources to survive? This isn't an exaggerated number; it is actually cautious." He made a polite but pointed criticism of Brazil.

Mr Chávez also expressed dismay. "When you fill a vehicle's tank with ethanol, you are filling it with energy for which land and water enough to feed seven people have been used." It was unclear whether Venezuela's mooted sugar mills and ethanol plants would go ahead.

Brazil brushed aside the criticism and on Wednesday its state oil firm, Petrobras, signed a biofuel deal with Ecuador's state oil firm, Petroecuador. The issue may cloud a meeting scheduled next week between Mr da Silva and Mr Chávez.

Cuba and Venezuela are joining an unlikely alliance including anti-poverty campaigners, environmentalists, economists and scientists. The Economist, offended by Washington's ethanol subsidies, said it seldom found itself agreeing with Mr Castro. "But when he roused himself from his sickbed last week to write an article criticising George Bush's unhealthy enthusiasm for ethanol, he had a point."

Despite spreading recession, US CEOs rake in huge pay raises

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By Alex Lantier

Amid the onset of a recession sparked by the ongoing collapse of the mortgage bubble, and calls for massive wage and benefits concessions from workers, US corporate management is continuing to award itself immense salaries and golden parachutes.

On April 6 the New York Times reported on a survey by research firm Equilar of chief executive officer (CEO) pay at 200 companies with yearly revenues over $6.5 billion. Equilar found that average pay for CEOs with two years’ experience or more in 2007 was $11.2 million, up 5 percent from 2006. Including newly hired CEOs, average pay was $11.7 million. By comparison, US median household income in 2006 was $48,000.

CEOs in larger firms typically rake in far larger salaries, even when they have presided over financial catastrophes for their firms. Equilar’s report found that the CEOs of the 10 largest financial firms in the survey were collectively paid $320 million, while their firms reported mortgage-related losses of $55 billion and the market price of their stock fell by over $200 billion.

On March 19 Business Week reported on the compensation of top executives at Bear Stearns, the major Wall Street investment bank that failed in March due to a collapse in the value of its mortgage-backed securities. The Federal Reserve intervened to take Bear Stearns’ obligations onto its books, organizing a bailout with JPMorgan Chase. Tens of thousands of workers have lost their jobs and, with the collapse in the value of Bear Stearns stock, their retirement.

From 2002 to 2006, Bear Stearns Chairman James Cayne, CEO Alan Schwartz, and former Co-President Warren Spector received total compensation—in salary, bonuses, restricted stock, and stock options—of $156 million, $141 million, and $168 million, respectively. Their bonuses between 2002 and 2005 ranged between $9 million and $12 million.

Business Week writes: “Then came the fattest year of all, 2006. Bear’s mortgage origination and other credit products grew at a 27 percent clip, and the company’s expansion into these areas really paid off, at least for those at the top of the pay pyramid.... Cash bonuses jumped to more than $16 million for Cayne, Schwartz, and Spector.” Less than 18 months later, the “credit products” underlying these bonuses were worthless.

Payoffs to CEOs when they accept or resign a position are often even larger. Citigroup, which wrote off over $20 billion in losses in 2007 and whose shares fell 47 percent, paid $216 million to hire its new CEO, Vikram Pandit. This included $165.2 million in connection with Citigroup’s $800 million acquisition of Pandit’s former firm (“alternative investment” specialists Old Lane Partners), $2.7 million salary for Pandit’s six months as head of Citigroup’s alternative investments division, and $48 million in stock options.

In recent months, the pay packages of a number of financial executives have gained public attention, especially in the light of the collapse of mortgage-backed “alternative” or “exotic” investments. Despite Citigroup’s disastrous performance, its former CEO Charles Prince retired in November 2007 with a $68 million retirement package. In October 2007, after investment bank Merrill Lynch had written down over $12 billion in bad mortgage debt, its CEO Stanley O’Neal left with a severance package of $161 million, on top of his $48 million salary.

Exorbitant CEO pay demands are prevalent throughout the entire economy, going far beyond financial firms. In January 2007 retailer Home Depot ousted its CEO, Bob Nardelli, for poor stock performance and an abrasive personality. Nardelli, who went on to become CEO of automaker Chrysler, took a $210 million severance package. When pharmaceutical firm Pfizer fired its CEO, Hank McKinnell, in July 2007—amid layoffs of thousands of workers and $4 billion in losses—McKinnell took a severance package of over $180 million.

Such stories demolish commonly repeated claims that CEOs’ exorbitant pay is justified by the value they add to their companies, or by the enormous cost of hiring an executive capable of expert stewardship of a major corporation.

Instead, top executives are each looting tens or hundreds of millions of dollars from their companies, as their irresponsible management—perhaps best symbolized by the failed gambling on large-scale issuing of subprime mortgages, which are by definition very risky investments—decimates their companies’ bottom line and stock value.

To the extent that companies cannot find replacements for such executives who do not demand similar compensation and behave in similar ways, this simply points to a broader social problem: all major decisions at large corporations are taken by representatives of an elite class whose immense wealth effectively shelters them from the consequences of their actions.

The cynicism and complacency of this layer were highlighted in an April 6 column in the New York Times by Ben Stein, titled “In the Boardroom, Every Back Gets Scratched.” In the essay, Stein noted that CEOs’ salaries are approved by corporate boards, which are periodically nominated by CEOs and approved by shareholders. This effectively gives CEOs huge power over board members who will set their salaries.

Stein gives a remarkable description of the life of the members of a corporate board—often members of top management at other corporations. He writes: “To be a member of the board of a large company is a little example of paradise. You get good pay for just sitting in a meeting and listening to summary presentations. You get insurance and a pension. You can go to luxurious resorts and play golf. What the heck are [airport] security lines? You fly in private jets. Sometimes you get stock options, and these can be meaningful. In other words, it’s nice to be the director of a public company. How do you keep your job? You are really nice to the person who put you in that job.”

Even having observed, however, that “the nation has become, to some at the top, far more of a looting opportunity than a family,” Stein cannot bring himself to condemn the situation. Instead, he blandly concludes: “Your basic human is not such a hot item—and the structure of the joint stock company does not bring out the best in us.”

Though Stein is unquestionably correct regarding the behavior of the CEOs of today’s joint stock companies, as to his toxic pessimism about humanity one can only reply: speak for yourself. To masses of people who work for or depend on the decisions of major corporations, the looting carried out by top executives is not the inevitable reflection of human nature, but a direct threat to their jobs and living standards. For them, the behavior of CEOs and boards at joint stock companies will reveal above all the destructiveness of placing private profit above the needs of society.

Israeli minister threatens “destruction of the Iranian nation”

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By Peter Symonds

Amid a massive five-day civil defence drill, a senior Israeli cabinet minister has provocatively threatened Iran with complete destruction in retaliation for any attack. The chilling threat was made amid rising tensions with Syria and continuing hints of a preemptive Israeli military strike against Iranian nuclear facilities.

Speaking at the newly-opened Government War Room Headquarters on Monday, National Infrastructure Minister Benjamin Ben-Eliezer warned that the drill was not just “a meaningless spectacle or a fictional scenario. The future reality is likely to be a number of times harsher than that which we recognise now. We are confronted with a situation where the home front becomes the front line.”

Ben-Eliezer singled out Tehran, declaring: “An Iranian attack will lead to a harsh retaliation by Israel, which will lead to the destruction of the Iranian nation.” While saying that Iran “will not attack Israel so quickly because they understand the ramifications”, he added: “Nevertheless, the Iranians are provoking us through their allies Syria and Hezbollah, [providing] them with much weaponry, and with that we have to contend.”

Ben-Eliezer is a longstanding Labour Party figure, who previously served as defence minister and deputy prime minister. His remark about Iran “provoking us” is an ominous indication that Israel is preparing its justifications for a new preemptive attack. Last September, Israeli war planes carried out an unprovoked strike on a Syrian site, which, according to leaks in the British and US press, was allegedly a nuclear reactor under construction. The Israeli government provided no explanation and banned any media coverage. Its purpose, however, was clear. In the wake of the failure of its 2006 war against Hezbollah militia in Lebanon, Israel was demonstrating—to Iran in particular—that it could strike anywhere in the region.

Tensions with Syria were heightened in mid-February by the murder of top Hezbollah military commander Imad Mughniyeh, who was killed in Damascus by a car bomb blast. While Israeli officials denied any involvement, it is widely believed in the region that Israeli intelligence orchestrated the assassination to provoke a response from Hezbollah and set the stage for another war in the Lebanon. In late February, the Bush administration inflamed the situation by stationing the US navy’s Nassau battle group off the Lebanese coast in a show of support for the Lebanese regime of Prime Minister Fouad Siniora.

Israel’s civil defence mobilisation, dubbed “Turning Point 2”, took place in this context. It is the second such exercise since the 2006 invasion of Lebanon and the first under the National Emergency Authority established last September. The exercise began on Sunday, is running over five days and involves the entire security apparatus, from the cabinet security committee down.

Israeli Prime Minister Ehud Olmert was at pains to emphasise on Sunday that the mobilisation was “only a drill, with nothing behind it. We have no secret plans.” The scenario that his cabinet had to consider, however, was an air and missile assault from Lebanon and Syria on Israeli cities, involving the use of non-conventional weapons. An article in the Jerusalem Post explained that the exercise was not just “drawing from the lessons of the Second Lebanese war” but “in preparation for Iranian nuclear bombs as well as possible chemical and biological attacks”.

According to the newspaper, the country’s largest ever drill involves the Israel Police, the Israeli Defence Force Home Front Command, other military branches, all the country’s hospitals, the Fire and Rescue Services, and other emergency services. Rescue services are simulating mass evacuations from populated areas, and hospitals are practising treating thousands of casualties. Yesterday, an estimated 1.7 million schoolchildren were involved in an evacuation drill.

Defence Minister Ehud Barak bluntly explained that the exercise was directly linked to preparations for a new conflict. “The Second Lebanon War created a reality in which the home front is part of the front during a conflict and its resistance is a condition of victory,” he said. The scale of the mobilisation indicates that the government and military are not simply planning for rocket attacks from the Gaza Strip or by the Hezbollah militia in southern Lebanon, but a full-scale war. The most obvious targets are Syria and Iran.

Ben-Eliezer’s inflammatory remarks point to the latter. Olmert and other Israeli ministers have repeatedly said they will not tolerate Tehran having the capacity to build a bomb. Articles in the British press over the past year provided details of Israeli training for air strikes on Iran’s enrichment plant at Natanz and other nuclear facilities.

The Israeli government was bitterly critical of the US National Intelligence Estimate (NIE) released in December, which found that the Iranian regime had ended any nuclear weapons program in 2003. Defence Minister Barak rejected the assessment and called for action in the diplomatic sphere and “in other spheres as well”. Last November, Barak told a Labour Party meeting that “we cannot take any option off the table [that is, including the military one] and we need to study operational aspects.”

Any Israeli strike on Iran would require a green light from Washington. It is significant therefore that over the past month President Bush, Vice President Dick Cheney and CIA chief Michael Hayden have all rejected the NIE findings. Speaking to ABC News in Jerusalem last month during his Middle East tour, Cheney declared: “Obviously, they’re [Iran] also heavily involved in trying to develop nuclear weapons enrichment, the enrichment of uranium to weapons grade levels.”

Cheney’s unsubstantiated remark is not supported by International Atomic Energy Agency inspections, which have consistently found that the Natanz plant is only enriching uranium to the low levels required for nuclear fuel—as Tehran has always insisted. The lie does point, however, to the fact that significant sections of the Bush administration, together with bulk of the Israeli political establishment, are prepared to use any uranium enrichment capacity—even that permitted under the Nuclear Non Proliferation Treaty—as the pretext for an attack on Iran.

While the US vice-president was relatively cautious in his comments, his Israeli interlocutors were not. President Shimon Peres told the media that “Iran’s only intentions in developing missiles with nuclear warheads are to destroy Israel and threaten the entire world”. Opposition leader Benjamin Netanyahu said he had told Cheney “about the need to remove the Iranian threat before [Tehran] arms itself with a nuclear bomb”.

Ben-Eliezer’s threat and the home front exercise are two more signs that Israel and the US are actively considering a war against Iran.

HUD Chief Inattentive to Crisis, Critics Say

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By Carol D. Leonnig

Jackson's tenure ending.

In late 2006, as economists warned of an imminent housing market collapse, housing Secretary Alphonso Jackson repeatedly insisted that the mounting wave of mortgage failures was a short-term "correction."

He pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down. He issued a rule that was criticized by law enforcement authorities because it could increase the difficulty of detecting and proving mortgage fraud.

As Jackson leaves office this week, much of the attention on his tenure has been focused on investigations into whether his agency directed housing contracts to his friends and political allies. But critics say an equally significant legacy of his four years as the nation's top housing officer was gross inattention to the looming housing crisis.

They contend that Jackson ignored warnings from within his agency, the Department of Housing and Urban Development, whose inspector general told Congress that some of the secretary's efforts were "ill-advised policy" and likely to put more families at risk of losing their homes.

During Jackson's years on the job, foreclosures for loans insured by HUD's Federal Housing Administration (FHA) have risen and default rates have hit a record high.

All the while, Jackson enjoyed a chef and a full-time security detail that trailed him to Washington social events. His office launched a new $7 million auditorium and cafeteria at HUD's headquarters, money that some within the agency believed should have been directed toward housing for the poor. His office solicited an emergency bid to obtain oil portraits of Jackson and four other HUD secretaries at a cost to taxpayers of $100,000.

Jackson, who declined to be interviewed, will be remembered as a Cabinet secretary so committed to carrying out President Bush's goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis, according to interviews with more than 30 current and former HUD officials and housing experts, and a review of numerous HUD documents and audits.

In speeches, he urged loosening some rules to spur more home buying and borrowing. "I'm convinced this spring we will see the market again begin to soar," Jackson said in a June 2007 speech at the National Press Club to kick off what HUD dubbed "National Homeownership Month." He also told the audience that he had no specific laws to recommend to prevent a repeat of the lending abuses that caused the mortgage crisis.

"When Congress calls up and asks us, we'll give them advice," he said. "You have 534 massive egos up there, so unless they ask you, you don't volunteer anything."

HUD spokesperson D.J. Nordquist defended Jackson's record in pushing for more flexibility in government-backed loans. "Secretary Jackson is a big believer in the U.S. housing market and won't apologize for saying so," Nordquist said in a written response to questions. She said Jackson hoped that FHA loans could provide a safe alternative for borrowers about to default on subprime loans from the private sector.

A former director of three housing authorities, Jackson came to HUD as a deputy secretary in 2001. He and Bush had been friends since their days as neighbors in Dallas. When Secretary Mel Martinez stepped down to run for the Senate in 2004, Bush promoted Jackson.

A lead smelter's son and the youngest of 12 children, Jackson, 62, has said he "never imagined" he would one day serve in the Cabinet. From his 10th-floor office, he seemed to revel in the entree his new job offered to Washington's elite, according to current and former associates.

At shrimp-cocktail buffets and receiving lines, Jackson and his wife became ubiquitous, making a 2005 list of the "100 most invited" people on Washington's social circuit.

Jackson made a show of having a cook on HUD's staff, visitors said, a perk normally associated with Cabinet members who have international travel schedules. Nordquist said the cook is an assistant who helps with receptions and banquets, and also answers phones and helps with attendance reports.

Though all Cabinet members are entitled to security, some have eschewed the expense. Jackson sought a full-time detail.

He launched the renovation of a larger HUD auditorium and cafeteria to replace what his spokesperson said was a "deplorable" 40-year-old facility. The oil portraits were commissioned by Jackson's office in an emergency contract last fall so that they would be ready in time for a scheduled opening, which was later postponed. Nordquist said HUD is updating the portraits of agency secretaries as part of the American tradition of "commemorating the contributions of our public servants."

"How can you spend that much money on building a shrine to yourself?" asked Peter Sepp, vice president of the National Taxpayers Union, a fiscally conservative watchdog group. Sepp said that "99 percent of Americans would probably not agree with that kind of extravagance."

Cabinet members historically have enjoyed perks, but their spending of taxpayer funds is limited to "legally authorized purposes." The Office of Management and Budget says those can vary from agency to agency.

In the policy arena, Jackson quickly made known his loyalty to Bush and his determination to help increase the number of U.S. homeowners by at least 5 million. Loans by FHA-approved lenders accounted for less than 10 percent of the overall market in the past five years, but its loan programs were supposed to be targeted to low- and moderate-income individuals, many of them first-time buyers.

In 2006, Jackson proposed plans to modernize the FHA lending process. Backed by the White House, his proposal would allow FHA lenders to offer loans with no down payment, eliminating the long-standing 3 percent minimum. Lenders also could increase the size of the loan to cover the median home price in high-cost areas. High-risk borrowers could qualify by agreeing to pay higher premiums.

Jackson said the goals were to encourage first-time home buyers and to help the FHA compete with the booming subprime market. In an online White House forum in 2007, he said the FHA "is undergoing a historic transformation to give homebuyers who do not qualify for prime financing a better alternative to high-cost, high-risk loan products."

But Inspector General Kenneth Donohue chided Jackson and FHA Commissioner Brian Montgomery, a former White House political aide with no previous housing experience. Testifying on Capitol Hill in March 2007, Donohue agreed that the FHA needed changes to help working families, but not to mimic subprime lenders. He said some of the changes could distract the FHA from its affordable-housing mission while helping government-backed lenders reach high-end buyers.

He also expressed concern that Jackson's proposals would do nothing to detect abuse and fraud. At the time, the FHA monitored 6 to 7 percent of the loans in its portfolio.

"Aggressive oversight and enforcement is crucial to prevent a recurrence of what we are witnessing in the subprime market today and the savings and loan industry in years past," Donohue said.

Nordquist said committing fraud in FHA loans is "infinitely more difficult" than in private mortgages and that FHA reform efforts included several steps to manage risks. For example, she said, Jackson objected to waiving required audits for new FHA lenders. In an interview, Montgomery said, "It is beyond outrageous for anyone to suggest we would do anything to put FHA at unnecessary risk."

Members of Congress who oversee HUD said Jackson's emphasis on pushing homeownership - without many brakes - ignored the root of the mortgage crisis.

"Homeownership appears to be a bigger priority in the administration than affordability and foreclosure," Sen. Christopher S. Bond (R-Mo.) told Jackson at a recent hearing. He added: "I'll tell you quite frankly, I think the emphasis on homeownership helped to drive the foreclosure crisis we're now in... . All these wonderful ideas ... didn't do them any good when we put them in housing they couldn't afford."

Jackson also issued a rule allowing FHA lenders more self-policing. Under the lender insurance rule that HUD implemented in 2006, lenders could endorse FHA loans without prior review and no longer had to submit loan paperwork to HUD. The agency's inspector general and the FBI objected, and HUD's office of general counsel registered concern because detecting fraud would be more difficult without lenders' paperwork.

Donohue warned the Senate that the rule "permits those with the potential to perpetrate fraud upon the insurance fund" to keep the evidence of a crime.

Nordquist defended the change as removing "mountains of paperwork that increasingly became unmanageable."

Inside HUD, numerous staffers said, Jackson made clear that he believed overregulating and investigating mortgage lenders could harm the president's homeownership goals.

On Jan. 4, 2006, the U.S. attorney in Detroit announced what was then the largest mortgage fraud case ever filed. Based on a HUD audit, law enforcement officers found a pattern of falsified mortgage documents by ABN Amro, one of the largest FHA-approved mortgage lenders. The company agreed to pay $41 million in a civil settlement.

Jackson and Montgomery, according to three current and former government officials familiar with the matter, reacted coolly to the historic settlement. Both complained to their staffs that punishing FHA lenders could backfire if they wanted those lenders' help in increasing homeownership.

But Nordquist said Jackson and Montgomery completely supported the settlement. Montgomery said he remembers only debating concerns with staff members about how strongly HUD should criticize the alleged fraud. The lender, he said, fully investigated the matter when alerted to a probe and self-reported the bulk of the case.

Enforcement seemed to be a low priority for HUD in both staffing and budget, according to agency observers. David Berenbaum, executive vice president at the National Community Reinvestment Coalition, an association working to prevent foreclosures and abusive lending, said HUD is supposed to be the government's lead enforcer of fair-lending laws. The laws prohibit financial discrimination and exploitation of minority borrowers, who took out a disproportionate share of the subprime loans. Berenbaum said HUD largely paid nonprofits to monitor compliance with fair-lending laws.

Nordquist said HUD opened a fair-lending division last summer, hiring a senior economist and advertising to hire five staffers, to help focus on those problems.

HUD has a standing agreement to refer cases to its inspector general when it suspects mortgage fraud. But an audit by that office of one sample of recent records found that HUD did not refer more than two-thirds of the potentially fraudulent FHA mortgage loans it identified.

"If all of the regulators, including HUD, had looked specifically at mortgage fraud, looking at fair lending and fair housing in a more proactive way, the crisis might have not been as bad," Berenbaum said.

Jackson had insisted he would stay in office until the end of Bush's term. But last month, several Democratic senators who hold HUD's purse strings called for his resignation. He had refused to answer their questions about allegations that he was engaged in political favoritism and cronyism. A federal grand jury is investigating whether Jackson lied to Congress about his involvement in contracts and whether he steered millions of dollars in government work at the Virgin Islands and New Orleans housing authorities to his friends.

Sen. Patty Murray (D-Wash.), head of the Senate Appropriations subcommittee that oversees HUD, said March 21 that Jackson had become unfit to lead the agency.

"We are in the midst of a national housing crisis," she said. "The allegations of cronyism and favoritism against Secretary Jackson are a worsening distraction at HUD at a time when we must have a credible housing secretary that is beyond suspicion."