Friday, September 19, 2008

Financial Bailout: America's Own Kleptocracy

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By Michael Hudson

The largest transformation of America's Financial System since the Great Depression

Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I'm afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.

What a two weeks!

On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud.

On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn't gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend "insured" winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American International Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud).

But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages - mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.

These billions of dollars were devoted to keeping a dream alive - the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. As Charles Prince of Citibank put it, "As long as they're playing music, you have to get up and dance." Even after markets collapsed, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy's largest financial asset - mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt - the cumulative deficits run up by the American Government since the nation won the Revolutionary War!

This gives an idea of just how large the bailout has been - and where the government's (or at least the Republicans') priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid - if not by the debtors themselves, then by the government - "taxpayers," as the euphemism goes.

Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d'Etat for the class that FDR called "banksters." What has happened in the past two weeks threatens to change the coming century - irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.

Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies - and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).

A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt's term "banksters" says it all in a nutshell. The economy has been captured - by an alien power, but not the usual suspects. Not socialism, workers or "big government," nor by industrial monopolists or even by the great banking families. Certainly not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power -not Communists, Russians, Asians or Arabs. Not humans at all. The group's cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world - at least, the White House's world.

Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company's bad gambles.) A.I.G.'s downfall came from the $450 billion - almost half a trillion - dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should "stumble" or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.

A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise - not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight - writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called "self-regulation." It is how the Invisible Hand is supposed to work.

It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles - usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise - couldn't pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.

Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle's observation that democracy is the political stage immediately preceding oligarchy.

The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices - and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.

The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some - and getting the government to bail out the non-payers. The twist in the past two weeks' turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.

One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.

A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or "straddles" on which way interest rates, currency exchange rates, stock or bond prices may move - or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn't matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation - volatility.

This kind of transaction may make fortunes, but it is not "wealth creation" in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the "innovation" of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.

So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America's Gilded Age in the years prior to World War I - years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn't even have to pay normal income tax on it. The government let them call it "capital gains," which meant that the money was taxed at only a fraction of the rate that incomes were taxed.

The pretense, of course, is that all this frenetic trading creates real "capital." It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much "capital" as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major "growth industry," muddying the language of capital, growth and wealth itself.

For the gaming tables to be closed and the money paid out, the losers must be bailed out - Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation's financial structuring).

This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.

What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress - and voters - right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to "save the system." (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America's financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America's national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer's spellchecker will not permit me to use the euphemism "conservatorship" that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)

Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices - and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. "We must act now to protect our nation's economic health from serious risk," intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party's largest group of campaign contributors whole - Wall Street, that is - by bailing out their bad gambles. "There will be ample opportunity to debate the origins of this problem. Now is the time to solve it." In other words, don't make this an election issue. "In our nation's history there have been moments that require us to come together across party lines to address major challenges. This is such a moment." Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: "Our economic health requires that we work together for prompt, bipartisan action." The broadcasters said that half a trillion dollars was discussed for this day's maneuverings.

Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.

But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with "exploding adjustable-rate mortgages" will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.

America has entered into a new war - a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions - to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called "weapons of mass financial destruction."

Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.

Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can't figure out how to pay, let's plow the program under right now.

Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the "magic of compound interest."

What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks' events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be "Gambling insurance, not health insurance."

This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society's brain, its steering mechanism to shape markets - and free them from income without playing a necessary role in production.

The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay - all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.

AG candidate backs prosecution of President Bush for murder

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Charlotte Dennett, the Progressive Party candidate for Vermont attorney general, said Thursday that if elected she would prosecute President Bush for murder.

Dennett, an attorney from Cambridge challenging incumbent Democrat William Sorrell, was joined by Vincent Bugliosi, a famed prosecutor who took on Charles Manson in the early 1970s, at a press conference in downtown Burlington.

As Vermont attorney general, Dennett said she would appoint Bugliosi, who published a book this year called "The Prosecution of George W. Bush for Murder," as a special prosecutor to hold Bush accountable for deaths stemming from the Iraq war.

Dennett said Vermont is the ideal state to bring murder charges against Bush, since the state has carried the country's highest per capita deaths of soldiers in the war. It is also home to nearly 40 communities that moved to impeach the president last year.

"Lots of Vermonters feel very frustrated that the impeachment efforts did not go anywhere," she said. "This is another avenue for us."

Bugliosi, a 74-year-old Los Angeles resident and author of the famed "Helter Skelter" book about his prosecution of Manson, called Dennett a "valiant and patriotic woman" willing to put her reputation on the line to bring to justice what he sees as one of the worst criminal acts in recent history.

He told a small crowd gathered in downtown Burlington on Thursday morning that his book clearly lays out evidence showing that Bush and his administration misled the American people and the U.S. Congress into war in 2003.

"George Bush and his people have gotten away with thousands and thousands of murders," Bugliosi said, citing both American and Iraqi deaths in the five-year-old war. "We, the American people, cannot let him get away with this."

Bugliosi said any state attorney general or local district attorney can bring criminal charges against Bush once he leaves office early next year. He said Vermont could take on the soon-to-be ex-president by bringing conspiracy to murder charges against him, using his own public statements during the build-up to the Iraq war as evidence.

"Bush and his administration deliberately told lies to deceive people and get the support of the country behind the war," he said. "That information went out through the media and was heard by residents of the state of Vermont."

Sorrell said Thursday that promises to prosecute Bush for murder makes "good political sound bites," but said he does not believe he — or any other local or state prosecutor — has that authority.

To bring about a murder or conspiracy to murder charge against Bush, the actual crime — the death of an individual — would need to take place within his jurisdiction, Sorrell said, which in this case is the Green Mountain State.

"And if I remember correctly, Vermont is still the only state George Bush has not visited while president," Sorrell said.

Dennett said she read "The Prosecution of George W. Bush for Murder" earlier this year and was interested in pursuing Bugliosi's notion that local prosecutors could bring criminal charges against the president.

She was put in touch with him through a friend who has a mutual publicist with Bugliosi. Within a half hour, the two were on the phone discussing the possibility of prosecuting Bush once he leaves office, she explained.

"Right away I felt a real rapport with him," she said.

But Dennett said she is not a single-issue candidate, adding that she is also interested in issues surrounding the Vermont Yankee nuclear power plant in Vernon and its proposal to extend its operating license beyond 2012.

When asked by a reporter if she thinks she has a chance against Sorrell, a well-entrenched incumbent, Dennett said she thinks the Democrat is a "nice man," but that her push to hold Bush accountable for the deaths in Iraq will "strike a chord" with Vermonters.

"I think I will have a groundswell of support," she said.

The general election is Tuesday, Nov. 4.

Citing Grave Financial Threats, Officials Ready Massive Rescue

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By Binyamin Appelbaum and Lori Montgomery

Lawmakers Work With Fed, Treasury To Try to Restore The Flow of Money

The Bush administration is urgently preparing a massive intervention to revive the U.S. financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.

Congressional leaders gave bipartisan support to the administration's efforts after a meeting last night with Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke.

Paulson and Bernanke presented a "chilling" picture of the state of the financial system, according to a participant in the meeting who spoke on condition of anonymity. Lawmakers were told that the consequences would be grave if they failed to pass legislation by the end of next week. Sen. Harry Reid (D-Nev.) and Rep. Nancy Pelosi (D-Calif.) committed to meeting that deadline.

The plan involves using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.

After the meeting, Paulson told reporters the proposal was "an expeditious solution that is aimed right at the heart of this problem."

Also last night, the Fed was considering offering backing for money-market mutual funds, which have had massive withdrawals in recent days, said a source familiar with the discussions.

And the Securities and Exchange Commission is considering further limits on short-selling, a practice that allows investors to bet on a decline in a company's stock price, according to a person familiar with the matter. Critics of the practice say short sellers are driving down the share prices of financial companies, thereby contributing to their destruction.

The government has already tried three times this month to keep money flowing through the financial system. It took over the two largest providers of funding for mortgage loans, Fannie Mae and Freddie Mac. It created a new source of funding for investment banks. And it took over the insurance giant American International Group.

Now the government is contemplating its broadest -- and perhaps most expensive -- intervention to date.

The urgency has only grown with each successive intervention because the first three tries have not worked. People are withdrawing money from money-market mutual funds. Banks are refusing to lend to one another. Several large financial companies need money to stay in business, including the bank Washington Mutual, which is seeking a buyer.

Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent. Financial executives have told government officials in recent conversations that the rising pace of withdrawals is the equivalent of a bank run and that if it continues, it will drain a massive and critical source of funding.

Money-market funds are particularly important because they buy short-term debt, which is used by financial companies and other corporations to finance day-to-day activities.

According to legislative aides, yesterday's meeting was arranged after Pelosi called Paulson's office mid-afternoon to discuss the state of the markets. During that call, Paulson asked to meet with Pelosi, Reid and key lawmakers from the banking committees. That meeting took place at 7 p.m. in Pelosi's office on the second floor of the Capitol.

Paulson and Bernanke did not present lawmakers with a written proposal but are expected to do so by tonight, congressional aides said.

During the meeting, one lawmaker worried aloud that Paulson was asking for "a blank check," according to a participant. There was also a "healthy debate" about whether this action would finally stabilize the markets.

"They couldn't answer yes to that question," the participant said.

Paulson and Bernanke generally have kept Congress at arm's length as they have sought to deal with the financial crisis. Yesterday, however, after meeting with congressional leaders, they exchanged awkward compliments with the lawmakers at a news conference. Lawmakers had been increasingly critical of the Fed and Treasury leaders for failing to consult with Capitol Hill. The administration will need congressional approval to commit taxpayer money to its new plan.

"We'll do this as quickly as we can. We're not talking about a month," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, which would probably review the plan before it went to the House floor.

A hearing on the topic that Frank had scheduled for next Wednesday could now become a legislative drafting session, he said.

Also yesterday, Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, suggested that the government create an entity that would operate much like the Depression-era Reconstruction Finance Corp. -- it would buy "equity and possibly secured debt," providing desperately needed cash to companies while permitting the government to share in any profit.

"The government would get repaid before the others in the financial chain," Schumer said.

If a plan does move forward, Democrats may try to demand concessions from the suddenly humbled industry, Schumer said, including support for a proposal to permit bankruptcy judges to modify mortgages for distressed borrowers. Currently, judges may set new terms for mortgages on second homes but not on primary residences.

That idea is contentious and has been fiercely opposed by the banking industry. Frank said he would instead demand that banks reduce the number of foreclosures.

Still, it's not clear that Democrats would insist on such concessions at the expense of passing the plan quickly.

"The costs of doing nothing are enormous," Frank said. He added that with the recent deterioration in the financial markets, "I think the timetable for something has been greatly sped up."

Hey U.S., welcome to the Third World!

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By Rosa Brooks

It's been a quick slide from economic superpower to economic basket case.

Dear United States, Welcome to the Third World!

It's not every day that a superpower makes a bid to transform itself into a Third World nation, and we here at the World Bank and the International Monetary Fund want to be among the first to welcome you to the community of states in desperate need of international economic assistance. As you spiral into a catastrophic financial meltdown, we are delighted to respond to your Treasury Department's request that we undertake a joint stability assessment of your financial sector. In these turbulent times, we can provide services ranging from subsidized loans to expert advisors willing to perform an emergency overhaul of your entire government.

As you know, some outside intervention in your economy is overdue. Last week -- even before Wall Street's latest collapse -- 13 former finance ministers convened at the University of Virginia and agreed that you must fix your "broken financial system." Australia's Peter Costello noted that lately you've been "exporting instability" in world markets, and Yashwant Sinha, former finance minister of India, concluded, "The time has come. The U.S. should accept some monitoring by the IMF."

We hope you won't feel embarrassed as we assess the stability of your economy and suggest needed changes. Remember, many other countries have been in your shoes. We've bailed out the economies of Argentina, Brazil, Indonesia and South Korea. But whether our work is in Sudan, Bangladesh or now the United States, our experts are committed to intervening in national economies with care and sensitivity.

We thus want to acknowledge the progress you have made in your evolution from economic superpower to economic basket case. Normally, such a process might take 100 years or more. With your oscillation between free-market extremism and nationalization of private companies, however, you have successfully achieved, in a few short years, many of the key hallmarks of Third World economies.

Your policies of irresponsible government deregulation in critical sectors allowed you to rapidly develop an energy crisis, a housing crisis, a credit crisis and a financial market crisis, all at once, and accompanied (and partly caused) by impressive levels of corruption and speculation. Meanwhile, those of your political leaders charged with oversight were either napping or in bed with corporate lobbyists.

Take John McCain, your Republican presidential nominee, whose senior staff includes half a dozen prominent former lobbyists. As he recently put it, "I was chairman of the [Senate] Commerce Committee that oversights every part of the economy." No question about it: Your leaders' failure to notice the damage done by irresponsible deregulation was indeed an oversight of epic proportions.

Now you are facing the consequences. Income inequality has increased, as the rich have gotten windfalls while the middle class has seen incomes stagnate. Fewer and fewer of your citizens have access to affordable housing, healthcare or security in retirement. Even life expectancy has dropped. And when your economic woes went from chronic to acute, you responded -- like so many Third World states have -- with an extensive program of nationalizing private companies and assets. Your mortgage giants Fannie Mae and Freddie Mac are now state owned and controlled, and this week your reinsurance giant AIG was effectively nationalized, with the Federal Reserve Board seizing an 80% equity stake in the flailing company.

Some might deride this as socialism. But desperate times call for desperate measures.

Admittedly, your transition to Third World status is far from over, and it won't be painless. At first, for instance, you may find it hard to get used to the shantytowns that will replace the exurban sprawl of McMansions that helped fuel the real estate speculation bubble. But in time, such shantytowns will simply become part of the landscape. Similarly, as unemployment rates continue to rise, you will initially struggle to find a use for the expanding pool of angry, jobless young men. But you will gradually realize that you can recruit them to fight in a ceaseless round of armed conflicts, a solution that has been utilized by many other Third World states before you. Indeed, with your wars in Iraq and Afghanistan, you are off to an excellent start.

Perhaps this letter comes as a surprise to you, and you feel you're not fully ready to join the Third World. Don't let this feeling concern you. Though you may never have realized it, you've been preparing for this moment for years.

Vice President Dick Cheney's Incredible and Deadly Lie

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By Deceiving a Congressional Leader, Cheney Sent Us to War on False Pretenses And Violated the Separation of Powers - as Well as the Criminal Law

This week, I agreed to deliver a "Constitution Day" talk on a college campus. My talk was not partisan. Yet the subject matter I selected was prompted by the most incredible - not to mention the most deadly - lie Dick Cheney has yet told, which was reported earlier this week.

Last year, Washington Post reporter Barton Gellman and Jo Baker, now of the New York Times, did an extensive series for the Post on Cheney. Now, Gellman has done some more digging, and published the result in a book he released this week: Angler: The Cheney Vice Presidency. The book reveals a lie told to a high-ranking fellow Republican, and the difference that lie made. In this column, I’ll explain how Cheney defied the separation of powers, and go back to the founding history to show why actions like his matter so profoundly.

Cheney’s Bold Face Lie To Congress

According to Gellman (and to paraphrase from the Post story on his finding), in the run-up to the war in Iraq, the White House was worried about the stance of Republican Majority Leader Richard Armey of Texas, who had deep concerns about going to war with Saddam Hussein. According to the Post, Armey met with Cheney for a highly classified, one-on-on briefing, in Room H-208, Cheney’s luxurious hideaway office on the House side of the Capitol.

During this meeting, the Post reports, Cheney turned Armey around on the war issue. Cheney did so by telling the House Majority Leader that he was giving him information that the Administration could not tell the public -- namely (according to Armey), that Iraq had the "’ability to miniaturize weapons of mass destruction, particularly nuclear,’ which had been ’substantially refined since the first Gulf War,’ and would soon result in ’packages that could be moved even by ground personnel.’ In addition, Cheney linked that threat to Saddam’s alleged personal ties to al Qaeda, explaining that ’we now know they have the ability to develop these weapons in a very portable fashion, and they have a delivery system in their relationship with organizations such as al Qaeda.’"

The Post story continues, "Armey has asked: "Did Dick Cheney ... purposely tell me things he knew to be untrue?" His answer: "I seriously feel that may be the case...Had I known or believed then what I believe now, I would have publicly opposed [the war] resolution right to the bitter end, and I believe I might have stopped it from happening."

In short, it was this lie that sealed the nation’s fate, and sent us to war in Iraq. By lying to such an influential figure in Congress, Cheney not only may have changed the course of history, but also corrupted the separation of powers with their inherent checks and balances.

Cheney’s monumental dishonesty, the news of which has been buried under the current meltdown of the nation’s economy, did not strike me as a topic for a Constitution Day speech. But a realistic discussion of the working of the separations of powers did seem a fitting topic, for college students need to understand the basics of our system. After we remind ourselves of those basics, Cheney’s great lie can be viewed not only as a great immorality and violation of the criminal code, but also and more fundamentally as the significant breach of his oath of office to protect and defend the Constitution that it is.

Our Constitutional Separation of Powers

Historians, not to mention contemporary historical documents, establish that no issue was more important to the founders of our national government than that of what its structure should be. Accordingly, in anticipation of the Constitutional Convention in Philadelphia during the summer of 1787, James Madison of Virginia plowed through historical accounts of governments and concluded that there are three basic forms of government: monarchy (the one), oligarchy (an elite few) and democracy (the many). Each form, however, had serious drawbacks.

As a result, Madison sought to take the best of each to create a "republic" - as had been done in varying degrees with many of the American colonies. Republics, of course, had been around a long time, for they were the forms employed by the Greeks and Romans. Thus, the republic was a form of government those who were meeting in Philadelphia well understood, in which sovereignty resides with the people who elect agents to represent them in the political decision-making process.

Madison’s republic combined elements of each type of government, in a mixing of forms. It featured an executive who incorporated the strength of monarchy without the evils of a King; a Senate that embodied the wisdom of an oligarchy; and a House that balanced the self-interest of such elites with a throng of representatives who spoke for the people of the nation.

Many delegates at the founding convention were mistrustful of a pure democracy since none had worked well in the past; moreover, the country was too large and diverse to directly involve everyone. Later, Madison nicely explained the differences in Federalist No. 14: "[I]n a democracy, the people meet and exercise the government in person; in a republic they assemble and administer it by their representatives and agents. A democracy consequently will be confined to a small spot. A republic may be extended over a large region."

Most importantly, Madison’s structure had three separate branches of the government - legislative, executive and judicial -- and each branch was empowered to check and balance the others, and thereby diffuse power.

Madison’s system, however, has not worked as designed even in the best of times, not to mention when there is an all-powerful Vice President hell-bent on gaming the system.

The Reality of Separation of Powers

An article in the June 2006 Harvard Law Journal -- Daryl J. Levinson and Richard H. Pildes, "Separation of Parties, Not Powers," Harvard Law Journal (Jun. 2006) 2311 -- provides one of the better analyses out there of the real-world workings of the separation of powers, and their accompanying checks and balances. Professors Levinson and Pildes argue that Madison’s vision of separation of powers has, in fact, been trumped in America by political parties. Their point is well taken, but as I see it their conclusion is far more applicable to the Republicans than the Democrats.

"The success of American democracy overwhelmed the Madisonian conception of separation of powers almost from the outset, preempting the political dynamics that were supposed to provide each branch with a ’will of its own’ that would propel departmental ’[a]mbition … to counteract ambition’," Levinson and Pildes explain. This, in turn, they argue, made the underlying theory of the government - separation of powers - largely "anachronistic."

When they looked at government, however, they found that when different political parties control the different branches - creating a divided government - then the parties working through those branches still do operate as Madison had hoped. Why? By sifting through the work of noted political scientists, Levinson and Pildes have concluded that it is not on behalf of protecting the institutional powers that the checking and balancing occurs; rather, it is through the influence of party politics operating through that divided branch.

I believe, based on the record (and as someone who worked on the Hill when Democrats controlled both ends of Pennsylvania Avenue) that Levinson and Pildes have it half right.

Democrats under unified government (i.e., when Democrats control both Congress and the White House) have been remarkably institutionally-minded, and the separation of powers has remained viable. On the other hand, conservative Republicans - as I have explained in my book Broken Government (just out in paperback too) - easily place party loyalty before the responsibilities of the governmental institution in which they serve. The first six years of the Bush/Cheney Administration, for example, were a travesty in Republican denial of institutional responsibilities. In contrast, there is a long list of Democratic House and Senate Chairmen who have a on-going history of refusing to be the rubber-stamps of Democratic Presidents.

For instance, unlike in the situation where Cheney lied to former Majority Leader Armey, when both the Democratic House and Senate suspected that President Lyndon Johnson had lied to them about the incident(s) in the Gulf of Tonkin that provoked Congress to authorize the war in Viet Nam, they took action. In contrast, Republicans have not acted on Cheney’s lie to Armey - and surely Washington Post reporter Barton Gellman is not the first person to learn about this lie.

Why Cheney Is Not Likely To Be Held Accountable

Those of us who follow these matters have long known - and I have written before - that it is Dick Cheney who is molding his hapless and naive president to his will, by effecting endless expansions of Presidential powers, and acting upon Cheney’s total disregard of the separation of powers.

Cheney does not seem to believe the Constitution applies to "real leaders," who do whatever they believe they must do. Nor does he believe in the separation of powers. Indeed, Cheney absurdly claims he is himself part of the Legislative Branch because he is the presiding officer of the Senate - though, in practice, that position exists only to break tie votes. It has long been clear that Cheney has been corruptly bridging the constitutional separation of powers throughout the Bush/Cheney presidency.

If Armey is right, Dick Cheney has not only behaved improperly, but also criminally: In addition, when lying to Armey, Cheney clearly committed a "high crime or misdemeanor" in his blocking the Constitution’s checks and balances from stopping our march into Iraq. During the debates that took place during the Constitution’s ratification conventions, it was specifically stated that lying to Congress about matters of war would be an impeachable offense. Congress has also made it a crime.

Nonetheless, nothing is likely to happen to Cheney, for Congress is too busy dealing with the disastrous economy that he and Bush are leaving behind as they head for the door. No one seems inclined to hold Cheney responsible, and he appears totally unconcerned about the wrath of history. Yet in lying even to those in his own party, about reasons to go to war, he has sunk to a low level few have reached, and it is no hyperbole to call his actions treasonous to the structure and spirit of the Republic.

The financial crisis and the comeback of Gerhard Schröder

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By Ulrich Rippert

At the start of this week, the German weekly news magazine Die Spiegel appeared with the lead story titled “Schröder’s Comeback.” The article dealt with the “creeping putsch” with which the Social Democratic Party has “reorganised” its leadership in the course of the last week and notes: “Suddenly ex-chancellor Gerhard Schröder is once again part of the game.”

On the same day, the Berliner Morgenpost wrote of the “the return of the power broker Schröder” and Die Welt commented on the “amazing transformation of Frank Walter Schröder.”

It is a well-known fact that German Foreign Minister Frank Walter Steinmeier is a political protégé of the ex-chancellor and headed Schröder’s own state chancellery in Hanover before taking over the federal chancellery during the period of the Social Democratic Party-Green government (1998-2003). It has also been confirmed that the SPD putsch and the imposition of Steinmeier as the party’s candidate for the post of chancellor, as well as Franz Müntefering’s elevation to the post of chairman of the SPD, was carried out in close consultation with Gerhard Schröder and leading business associations.

It was no accident that top representatives of the German economy welcomed the abrupt change in the party leadership presidency and the nomination of Steinmeier as candidate for the chancellorship as an “encouraging indication of a course change by the SPD.” The president of the German Employers Association (BDA), Dieter Hundt, and the president of the German Committee for Industry and Commerce, George Ludwig Braun, explained they now saw “good chances for a continuation of Gerhard Schröder’s Agenda politics.”

Schröder’s return to the political stage must be seen in connection with the dramatic intensification of the international financial crisis. For months, German politicians and business representatives have been warning that the US mortgage crisis was “by no means over.” Alarm bells began to ring in Berlin in March when the US government moved in to bail out Bear Stearns. However, when Lehman Brothers finally collapsed last weekend and Merrill Lynch was hastily sold off, political and economic circles in Berlin were taken by surprise.

In just six months, three of the world’s five largest investment banks have collapsed. In its lead article Tuesday headlined “The Crash,” the Süddeutsche Zeitung wrote a virtual obituary for Wall Street: “Wall Street: that was the pride of America. The heart of capitalism. The place that determines the rules of the world economy. Wall Street, as we knew it: now it is no longer.”

With its heavy dependence on its export sector, the German economy is directly affected by the international banking crisis. In addition, the country has not forgotten the political consequences of the banking crash and economic collapse that took place 80 years ago. Following the collapse of Wall Street in October 1929 and the withdrawal of funds by American banks from Europe, mass unemployment in Germany soared overnight to 6 million. The German government reacted by shifting the burden of the crisis onto the backs of the working class. Existing democratic structures were abolished, parliament suspended, and the government ruled via emergency decrees. At the time, the SPD supported such measures by the Brüning government and therefore prepared the way for the Nazis to take power.

Once again, the ruling elite is determined to shift the burden of billions of losses onto the shoulders of the working population, and the SPD is again lining up to play a leading role. Schröder’s return to the centre of the political stage is directly bound up with an intensification of his Agenda 2010 policies and a fresh round of social attacks. There are already loud calls for the abolition of existing forms of sick pay and further weakening of the legal protection against dismissal.

Schröder’s return is also significant in another respect. While Chancellor Schröder pursued a foreign policy that was expressly critical of the Bush administration, his opposition to the US invasion of Iraq was by no means an expression of a principled opposition to war. The SPD-Green government was quite willing to support the NATO war against Serbia in 1999. And with regard to Iraq, the Schröder government cooperated on a number of levels with the US military.

Nevertheless, Schröder refused to send German troops to Iraq and made clear that Germany had its own economic and geo-strategic interests that differed from those of the US. Unlike Washington, which sought to put pressure on Russia alongside Iraq and Iran, Schröder developed forms of close cooperation with Moscow.

His decision to take over as head of the supervisory board of the North European Gas Pipeline (NEGP) after his narrow election defeat in 2005 was a political decision. The NEGP consortium is a joint venture involving the Russian energy company Gazprom (51 percent), and German companies E.ON Ruhrgas AG and BASF subsidiary Wintershall AG, with 20 percent, respectively. The remaining 9 percent of NEGP ownership rests with the Dutch company Gasunie.

This purpose of this project is to strengthen energy ties between Europe and Russia by means of an 1,200-kilometre-long pipeline from Wyborg to the west of St. Petersburg to the German coast via the Baltic Sea. The project is to consist of two pipelines with a combined capacity of 55 billion cubic metres gas per year.

While there has been no let-up in the campaign to warn of the economic and political consequences of increased energy dependence on Moscow, the ongoing crisis of the US financial system has strengthened the hand of those in the German foreign ministry arguing in favour of more self-sufficiency and more independence from Washington.

It was already notable how representatives of German big business vehemently argued against sanctions to be imposed on Russia in the wake of the recent Georgia crisis.

Following the European Union special summit on Georgia, the president of the Federal Association for German Industry, Jürgen Thumann, told the news channel N-TV that Germany and Russia depended on good relations. “Considerations to pressurise Russia with sanctions or stop negotiations regarding [Russia’s] admission to the World Trade Organisation and its partnership and cooperation agreement with the European Union Russia lead in the wrong direction.” A speaker for the eastern committee of the German economy declared on the same programme: “We hope that the peak of the escalation has now been reached.”

While the orientation towards the East on the part of Germany remains a subject of controversy it is growing in significance as US influence wanes.

This also finds a reflection in the growing orientation within established political circles towards the Left Party. In its latest edition, the weekly Die Zeit, which has close links to the SPD, writes that the change in the SPD leadership could “soon mean that the taboo rituals regarding the Left at a national level could be a thing of the past.... It is already difficult to explain why a party that is a reliable partner in state governments (e.g., Berlin) is disregarded as a coalition partner at a federal level.”

The chairman of the Left Party, Oskar Lafontaine, began his political career at the federal level three decades ago when he led protests against the stationing of NATO missile systems in Germany. At the end of the 1970s, NATO offered to discuss the limiting of middle-range missile systems with Warsaw Pact countries while at the same time introducing a new generation of US Pershing II and cruise missiles in Western Europe.

At the same time, the majority of Left Party members belonged to the former Party of Democratic Socialism, which has its roots in the ruling Stalinist party of East Germany—i.e., on the other side of the former “Iron Curtain.”

In an alliance with the SPD, Lafontaine and the Left Party could soon play a key role in the reorientation of German foreign policy on behalf of the interests of an important wing of German imperialism.

Global financial storm hits Australian economy

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By Mike Head

The deepening financial turmoil in the United States and worldwide is sending tremors through the Australian banking system and share market, and shattering what remains of the claims that the local capitalist economy would be protected by booming exports to China and other Asian markets.

Billions of dollars are being wiped off share prices, particularly those of the banks, and the Australian dollar has nose-dived, reflecting the Australian economy’s vulnerability to a global downturn, precisely because of its dependence on raw material exports and current high commodity prices.

Perplexed financial commentators have described the events of the past two weeks as “earthquakes”, “tectonic shocks” and “unimaginable”. As the New York stock exchange staggered from one crisis to another, prices on the Australian markets followed suit, falling to their lowest levels in three years. This week alone, nearly $A80 billion has been wiped off. Over the past year, prices have dropped even further than in the US—the leading indexes have lost more than a third since their peak last November.

Less than two months ago, the Australian dollar was riding high, climbing almost to parity with the US greenback, largely because of soaring coal, natural gas and iron ore prices agreed to by Chinese, Japanese, South Korean and Indian buyers. Since then, the dollar has lost more than 20 percent of its value against the US currency and even more against the Euro and yen, as every major economy has headed toward recession and growth has slowed in China and India.

Australian authorities are anxiously making soothing noises, insisting that the “fundamentals” of the economy remain strong. In a major speech this week, Reserve Bank of Australia (RBA) governor Glenn Stevens claimed that the local banks were weathering the turmoil well. He asserted that the banking system was in sound shape and “light years away from what’s happening in other banking systems around the world”.

Prime Minister Kevin Rudd and Treasurer Wayne Swan defended Stevens’s comments. They told parliament that while the global crisis had a long way to run yet, local banks’ exposure to the collapses of Lehman Brothers, Merrill Lynch and the American Insurance Group (AIG) was modest. Behind the scenes, however, Rudd and Swan held crisis meetings with the RBA, Treasury and financial regulators, while the RBA joined other central banks around the world in pumping billions of dollars into the financial markets to try to prevent a disastrous drying up of credit.

None of the reassuring words—dismissed by one commentator as “mood music”—has had the desired impact. According to the Australian Financial Review on Thursday: “The deepening financial crisis gripping the northern hemisphere has sent panic through global debt markets, prompting a blow-out in spreads and dashing what slim hope there was of a near-term recovery in credit conditions.”

Commenting on the AIG collapse, Joshua Williamson, a senior strategist at TD Securities, said it had “taken the financial crisis from being the worst in a generation to the worst since the Great Depression... Looking one step ahead, the real risk now is that global liquidity dries up further, adversely affecting the real global macro-economy.”

Another barometer of the underlying crisis was the rout at Australia’s largest merchant bank, the Macquarie Group. Last May, its shares peaked at nearly $100; this week they fell below $30, slashing its market value from $25 billion to less than $10 billion.

For two decades, Macquarie has been a free-market icon, dubbed the “millionaire’s factory” because of the multi-million dollar remuneration packages it generated for its top executives. In 2006-07, Macquarie’s then chief executive, Allan Moss, took home $33.5 million in salary, bonuses and share options, or the equivalent of $92,000 a day, setting a new Australian record for executive salaries.

Moss and his associates made their money through what became known as the “Macquarie model”—a complex Ponzi-like scheme in which they bought up assets around the world, continually revalued them upward and then borrowed against the inflated asset values to fund payments to investors and themselves. The group also spun the assets off into satellite funds and trusts, and collected fees from them along the way.

All this was conducted with the full approval of the corporate regulators. In fact, Macquarie set the benchmarks for generating profits through the ever-greater leverage of debt. Just three years ago, the Sydney Morning Herald’s business pages said the bank “has mesmerised the sharemarket with financial origami and investors have rejoiced in the apparently endless stream of money it generates. It is admired by analysts, investors and executives who praise its originality and its agility.”

Over the past 12 months, falling global stock and asset prices, combined with soaring credit costs, have seen the Macquarie model unravel. This week, Standard and Poor’s put the bank on a negative outlook and cast doubt on its structure after reports that the group would have difficulty with $5 billion of the $45 billion in debt that it must refinance by March 2009. Another outfit that adopted the Macquarie model, Babcock & Brown, has sunk even lower—its share price has collapsed from $31 last November to around 80 cents.

The fallout has not stopped there. Australia’s four largest banks are far from immune to the global shockwaves. Despite issuing statements that they had relatively small exposures (totalling about $400 million) to Lehman Brothers’ collapse, their shares have led the stockmarket down, with the National Australia Bank tumbling to its lowest level since 2000.

The international credit crunch triggered by the US sub-prime crisis in August last year has already produced a trail of high-profile collapses by heavily-leveraged companies, including ABC Learning Centres, Centro Properties, finance companies RAMS, Allco and MFS, and stockbrokers Opes and Lift.

Now mining shares are being hit, indicating fears for the very sector that has been held up as the saviour of Australian capitalism. A few months ago, Andrew Forrest was proclaimed by Business Review Weekly as Australia’s richest man, topping its rich list at just under $10 billion because of soaring prices for the iron ore from his Fortescue Metal Group’s mine. Since then, Fortescue’s share price has plummeted nearly 40 percent, sending Forrest’s wealth ranking tumbling.

Retirement incomes wiped out

As elsewhere around the world, it is ordinary people, not the wealthy elite, who will be forced to bear the economic burden for the failure of the financial system. Working class households, already severely stressed by soaring debt levels, high mortgage and credit card interest rates and rising prices, now face a sharp further decline in living standards.

In his speech this week, RBA governor Stevens spoke bluntly of a “new phase” in which households would have to “consolidate their debt, grow their consumption spending at a pace closer to income and perhaps look to save more of their current income”. This is under conditions where household debt has risen to an historic high of about 175 percent of disposable income (up from 75 percent a decade ago), because working people have increasingly had to borrow to cover living costs.

Governments at every level, federal, state and local, are warning of severe cuts to spending on social programs, basic services and infrastructure. In New South Wales, the most populous state, it has been revealed that local councils have lost hundreds of millions of dollars by sinking funds into complicated, high-risk investment products, and are preparing to slash spending on essential projects, including roads. A recent report found that NSW councils had a combined exposure to collateralised debt obligations and capital-guaranteed products of $1 billion. Before Lehman Brothers collapsed, some 24 councils had been considering a class action against the corporation.

At the same time, millions of people are seeing their retirement funds decimated. Over the past two decades, ordinary working people have been compelled by the compulsory superannuation scheme introduced by the previous federal Labor government to take cuts in real wages and divert money into giant superannuation funds, all of which have been caught up in speculating on the financial markets.

So far this calendar year, according to Jeff Bresnahan, managing director of SuperRatings, balanced superannuation funds have lost about 11 percent. Losses on the local and international sharemarkets, where the majority of funds were invested, had worsened since June 30, the end of the last financial year, during which the funds lost an average of 6.4 percent. Bresnahan said “some people are going to have to stay in the workforce for one or two years longer” and “hundreds of thousands of Australians ... really have to clearly rethink their retirement strategies”.

Over recent years, ordinary people have been increasingly convinced, and enticed via tax concessions, to pour extra money, including their life savings, into superannuation funds, which mushroomed in size from about $80 billion in 1992 to some $1.2 trillion in January this year. Individual investors poured $22.4 billion into the funds in the June 2007 quarter alone—three times the previous record—to take advantage of extra tax concessions granted by the Howard government. Many people borrowed money to benefit from this tax handout and have lost heavily.

The exponential growth of superannuation funds has been part of the growing financial parasitism of the Australian corporate elite, which has sent the value of funds under financial management to unprecedented levels—from 50 percent of gross domestic product in 1990 to 160 percent, or $1.7 trillion, by the beginning of this year—while large sections of industry have been restructured, downsized or shut down.

The devastation of superannuation funds is an indictment of the Labor and trade union leadership, which forced workers into these funds as a means of making them pay for their own retirement while old age pensions fell below the poverty line. Many of the largest funds are owned and run by union-employer partnerships, giving the unions a vested interest in driving up profit rates at the expense of their own members, and making them complicit in the disaster now unfolding.

The Financial Meltdown Continues

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By Dean Baker

Virtually the only certainty in the current financial situation is there will be more problems ahead. Those who controlled the levers of economic and financial policy neglected their greatest responsibility, which was to ensure an orderly financial market and prevent exactly the sort of collapse that we are now seeing. This was a policy failure of massive proportions, not a natural disaster.

The central problem remains the collapsing housing market. The Case-Shiller 20-City Index shows a nominal price decline of almost 20 percent over the last two years, an event that few in the financial sector apparently considered to be a serious possibility. This price decline has led to an unprecedented rate of defaults on mortgages and derivative instruments.

These defaults, in turn, have raised questions about the solvency of a large number of financial institutions. This has led to an increase in the price of risk more generally and the crisis of confidence that is currently shaking financial markets worldwide.

While there is no simple path out of this crisis, it was a crisis that could have been easily avoided. If the Federal Reserve Board had acted to stem the growth of the housing bubble before it grew to such dangerous proportions, the country would not currently be facing a recession and the prospect of a financial collapse.

Alan Greenspan had the tools necessary to rein in the bubble had he been so inclined. First, he could have imposed tighter restrictions on mortgages, as the Fed has recently done. This would have prevented many of the worst mortgages that led to the subprime crisis and helped inflate housing prices.

More importantly, he could have used his platform as Fed chairman to explicitly warn of the dangers of the housing bubble. In his Congressional testimonies and other public appearances, he could have carefully explained how house prices had diverged from a 100-year-long trend in the mid-90s.

He could have pointed out that after just increasing at the same pace as overall inflation for a century, house prices suddenly jumped by more than 70 percent, after adjusting for inflation, in the decade from 1996 to 2006. He could have shown this increase was not supported by any changes in the fundamentals of supply and demand in the housing market, nor was it matched by any remotely comparable increase in rents.

If Chairman Greenspan had pointedly made the case for the existence of a housing bubble and explicitly warned of the losses likely to be suffered by individual homeowners and the huge risks being taken by financial institutions that were heavily invested in mortgages and mortgage derivatives, it almost certainly would have been sufficient to take the air out of the bubble. As a last recourse, he could have raised rates with the explicit purpose of bringing down house prices.

Instead, Greenspan repeatedly denied the existence of a housing bubble, dismissing the warnings of the small group of economists who tried to call attention to the potential dangers posed by a housing bubble. Greenspan's denials helped create a false confidence that allowed the bubble to continue to expand. It also helped to fuel the complacency in financial markets that led the country's largest financial institutions to ignore potential risks and to become very highly leveraged against their capital.

There are no easy solutions to a financial crisis of the sort the economy currently faces. It is not possible to change history, and we must work with the crisis the collapse of the bubble has created. However, it is important to recognize this crisis was entirely foreseeable and preventable.

Global Financial Meltdown

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By Michel Chossudovsky

Bloody Monday September 15, 2008

Bloody Monday, September 15, 2008. The Dow Jones industrial average (DJIA) declined by 504 points (4.4%), its largest drop since Sept. 17, 2001, when trading resumed after the 9/11 attacks.

The financial slide proceeded unabated, leading to an 800 point decline of the Dow Jones in less than a week. The World’s stock markets are interconnected "around the clock" through instant computer link-up. Volatile trading on Wall Street immediately "spills over" into the European and Asian stock markets thereby rapidly permeating the entire financial system.

The Most Serious Financial Crisis since the 1929 Wall Street Crash

When viewed in a global context, taking into account the instability generated by speculative trade, the implications of this crisis are far-reaching.

The crisis, however, has by no means reached its climax. It could potentially disrupt the very foundations of the international monetary system. The repercussions on people’s lives in America and around the world are dramatic.

The crisis is not limited to the meltdown of financial markets, the real economy at the national and international levels, its institutions, its productive structures are also in jeopardy.

As stock values collapse, lifelong household savings are eroded, not to mention pension funds.

The financial meltdown inevitably backlashes on consumer markets, the housing market, and more broadly on the process of investment in the production of goods and services.

War and the Economic Crisis

What is of utmost significance is that this plunge in stock market values occurs at the crossroads of a major military adventure. The global financial crisis is intimately related to the war.

A spiraling defense budget backlashes on the civilian sectors of economic activity. The war economy has a direct bearing on fiscal and monetary policy. Defense expenditure is in excess of $500 billion. A separate $70 billion is earmarked "to cover war costs into the early months of a new administration. Those amounts combined would represent the highest level of military spending since the end of World War II (adjusted for inflation)." ( February 06, 2008).

"War is Good for Business": The powerful financial groups which routinely manipulate stock markets, currency and commodity markets, are also promoting the continuation and escalation of the Middle East war. The financial crisis is related to the structure of US public investment in the war economy versus the funding, through tax dollars, of civilian social programs. "More broadly, this also raises the issue of the role of the US Treasury and the US monetary system, in relentlessly financing the military industrial complex and the Middle East war at the expense of most sectors of civilian economic activity." (See Michel Chossudovsky, The Democrats endorse the "Global War on Terrorism": Obama "goes after" Osama, Global Research, August 29, 2008)

The war is profit driven, financed through the massive Worldwide expansion of dollar denominated debt. War and Globalization go hand in hand. Wall Street, the oil companies and the defense contractors have concurrent and overlapping interests. The oil companies are behind the speculative surge in crude oil prices on the London energy market.

In turn, resulting from the military agenda, the US civilian economy is in crisis as the nation’s resources including tax dollars are diverted into funding a multibillion Middle East war.

The Speculative Onslaught

The Worldwide scramble to appropriate wealth through "financial manipulation" is the driving force behind this crisis. It is the source of economic turmoil and social devastation.

What are the underlying causes? What prevails is a totally deregulated financial environment characterized by extensive speculative trade.

The history of deregulation goes back to the beginnings of the Reagan administration.

In the wake of the 1987 stock market meltdown, the US Treasury was advised by Wall Street not to meddle in financial markets. Free of government encroachment, the New York and Chicago exchanges were invited to establish their own regulatory procedures.

The authority to regulate the market no longer rests with the State but with stock market officials who directly serve the interests of the institutional speculators.

The crisis on Wall Street is part of a process of financial warfare.

Since the 1987 crisis, a new era of intense financial rivalry has unfolded.

Financial deregulation in the US has created an environment which favors an unprecedented concentration of global financial power.

What we are dealing with is a major clash between competing financial conglomerates.

The financial meltdown is intimately related to the unregulated growth of highly leveraged speculative operations.

The Hedge Funds

The hedge funds play a key role in this process of restructuring. These speculative transactions (the panoply of derivatives, options, futures, index funds, etc) often transacted through hedge funds overshadow the workings of stock market transactions, and their relationship to real economic activity.

The hedge funds are private investment funds, which manage the pooled funds of wealthy investors. While they are often linked to major financial institutions, they are totally unregulated. They operate with a large pool of money capital, which is used to undertake highly leveraged speculative transactions. The latter have the characteristic that profits can be reaped when the market goes up, but also when the market goes down.

Short Selling

A stock market meltdown can be highly profitable operation
. With foreknowledge and inside information, a collapse in market values constitutes (through short-selling) a lucrative and money-spinning opportunity, for a select category of powerful speculators who have the ability to manipulate the market in the appropriate direction at the appropriate time.

There are indications of a carefully engineered conspiracy to trigger the collapse of several major financial institutions through outright manipulation.

"Short selling" as well as the spreading of false rumors were used as a strategy to trigger the collapse of selected stocks on Wall Street including Lehman, Morgan Stanley and Goldman Sachs.

"Short sellers aim to profit from share declines, usually by borrowing a stock, selling it and buying it back after its price has decreased. In abusive “naked” short selling, the seller does not borrow the stock and fails to deliver it to the buyer.

Some market participants say abusive short sellers have contributed to the fall of companies such as Lehman Brothers by forcing down share prices

John Mack, chief executive of Morgan Stanley, told employees in an internal memo Wednesday: “What’s happening out there? It’s very clear to me – we’re in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down.”’ (
Financial Times, September 17, 2008)

Regulators have acknowledged that the collapse of Bear Stearns last March was attributable to short selling. "Regulators have been looking into a combination of short-sales and false rumors are part of the problem." (Wall Street Journal, September 18, 2008)

Merrill Lynch is bought, Lehman Brothers is pushed into bankruptcy. These are not haphazard occurrences. They are the result of manipulation by powerful rival financial institutions, using highly leveraged speculative operations to achieve their objective, which consists in either displacing or acquiring control over a rival financial institution.
The current financial meltdown has nothing to do with market forces: it is characterized by financial warfare between competing institutional speculators.

The Market for Crude Oil

Leveraged speculative trade has pushed the price of crude oil to exceedingly high levels, reaching a peak in July 2008. A turning point was reached and the direction of speculative trade was rapidly reversed, leading to a dramatic plunge in prices of crude oil (See Chart below)

Those financial institutions and/or investors who have the ability to manipulate the movement of crude oil prices, and had prior knowledge and the ability to determine the timeline of the speculative surge and subsequent collapse, were able to reap large money profits both during the upward and downward movement of the price of crude oil.

"The movement in global prices on the New York and Chicago mercantile exchanges bears no relationship to the costs of producing oil. The spiraling price of crude oil is not the result of a shortage of oil. It is estimated that the cost of a barrel of oil in the Middle East does not exceed 15 dollars. The costs of a barrel of oil extracted from the tar sands of Alberta, Canada, is of the order of $30." (For further details see, Michel Chossudovsky, The Global Crisis: Food, Water and Fuel. Three Fundamental Necessities of Life in Jeopardy, Global Research, July 2008)

Global Economic Restructuring

This economic crisis is the outcome of a process of macroeconomic and financial restructuring initiated in the early 1980s. It is the result of a policy framework: trade and financial sector reforms under WTO auspices not to mention the imposition of the IMF deadly macroeconomic reforms, commonly referred to as the structural adjustment program. It is accompanied by the concurrent impoverishment of large sectors of the world population.

The debt crisis of the early 1980s unleashed a wave of corporate mergers, buy-outs and bankruptcies. These changes in turn paved the way for the consolidation of a new generation of financiers clustered around the large merchant banks, the institutional investors, stock brokerage firms, large insurance companies, etc. In this process, commercial banking functions have coalesced with those of the investment banks and stock brokers leading to the consolidation of a handful of global financial conglomerates.

The unregulated use of complex speculative instruments has provided Wall Street with the means to extend its global financial empire. The main thrust of this process does not consist in overseeing the stock market per se. Rather it resides in controlling the lucrative markets for speculative instruments --derivatives, options, futures, hedges, etc.-- where the scope for manipulation and insider trade is far greater.

Wall Street’s financial dominance was to be achieved through its institutional control over the channels of speculative trade. This control also provided, as in the case of the Asian crisis, the basis for weakening the role of central banks, taking control over the reigns of monetary policy, stock markets and currency markets. In the 1997 Asian crisis alone, more than 100 billion dollars were confiscated in a matter of months from the vaults of Asia’s central banks; similar speculative assaults were carried out in Russia in 1998 and in Brazil in 1999.

These events were followed by the dramatic bubble and bust of the stocks, when the NASDAQ Composite index peaked at more than 5,000 in March 2000 and subsequently collapsed, triggering a chain of panic selling. (see below)

NASDAQ (1994-2008). peak in March 2000

The 1999 Financial Services Modernization Act. [1]

In 1999, The Financial Services Modernization Act (Gramm-Leach Bliley Act), was adopted by the US Congress. In the wake of lengthy negotiations, all regulatory restraints on Wall Street’s powerful banking conglomerates were revoked "with a stroke of the pen".

Under the new rules ratified by the US Senate and approved by President Clinton, commercial banks, brokerage firms, institutional investors and insurance companies could freely invest in each others businesses as well as fully integrate their financial operations. The legislation repealed the Glass-Steagall Act of 1933, a pillar of President Roosevelt’s "New Deal" which was put in place in response to the climate of corruption, financial manipulation and "insider trading" which resulted in more than 5,000 bank failures in the years following the 1929 Wall Street crash. (See Martin McLaughlin, Clinton Republicans agree to deregulation of US banking system, World Socialist Website, 1 November 1999).

The Merger Frenzy

Several mammoth bank mergers (including NationalBank Corp with Bank America and Citibank with Travelers Group) were carried out and approved by the Federal Reserve Board (in blatant violation of the existing legislation) prior to the passage of the 1999 Financial Modernization Act..

In the years prior to the inauguration of the Bush administration, a process of intense financial rivalry had unfolded. The New World Order largely under the dominion of American finance capital was intent on dwarfing rival banking conglomerates in Western Europe and Japan as well as sealing strategic alliances with a "select club" of German and British banking giants.

The Shape of Things to Come

The bank mergers (carried out prior to the 1999 legislation in violation of the Glass Steagall Act) were but "the tip of the iceberg", the shape of things to come. The repeal of the Glass-Steagall Act had created an environment which favored an unprecedented concentration of global financial power.

Effective control over the entire US financial services industry had been transferred to a handful of financial conglomerates.

What prevails today is a de facto system of private regulation. The evolving "global financial supermarket" is to be overseen by the Wall Street giants. State level banks across America were displaced or swallowed up by the financial giants, leading to a deadly string of bank failures.

In turn, the supervisory powers of the Federal Reserve Board, increasingly under the direct dominion of Wall Street, were significantly weakened. The financial giants have the ability to strangle local level businesses in the US and overshadow the real economy. In fact, due to the lack of competition, the 1999 legislation, which was an initiative of Senator Phil Gramm, also entitled the financial services giants (bypassing the Federal Reserve Board and acting in tacit collusion with one another) to set the structure of interest rates as they please:

"Despite impending danger signals, the 1999 legislation seems to totally disregard the history of stock market failures since the onset of the "Asian crisis" in mid-1997. The economic and social repercussions in an integrated Worldwide financial system, --not to mention the risks of a global financial meltdown resulting from the absence of financial regulation-- are far more serious today [1999] than during the years following the 1929 Wall Street crash. (Michel Chossudovsky, unpublished notes on the 1999 Financial Services Modernization Act, Legislation, November 1999).

Global Financial Architecture

The Financial Services Modernization Act should not be viewed in isolation as a domestic procedure, limited to the US financial landscape.

The impacts of the legislation extended well beyond the borders of the US financial system. The institutional changes which it brought about, including the concentration and centralization of power in the hands of a small number of financial giants, largely contributed to Wall Street’s unswerving quest for global financial domination.

The Worldwide scramble to appropriate wealth through "financial manipulation" was the driving force behind this restructuring of the global financial architecture of which the 1999 US legislation was an integral part, setting the pattern of financial reform in different parts of the World.

While the 1999 Legislation does not in itself break down the barriers to capital movements, in practice it empowers Wall Street’s key players to enter the financial services markets of developing countries and consolidate a hegemonic position in global banking, overshadowing and ultimately destabilizing financial systems in Asia, Latin America and Eastern Europe...

The International Monetary Fund (IMF) and The World Trade Organization (WTO).

Financial deregulation in the US exerted a decisive influence in "setting the pace" of global financial reform under the auspices of the IMF and the World Trade Organization (WTO). The 1999 Legislation was part of a global financial agenda, consisting in deregulating capital movements, liberalizing domestic banking and capital markets Worldwide under WTO auspices and opening up national financial services markets to the global financial conglomerates

The legislation was implemented alongside the concurrent reshaping of the global trade and financial architecture under the WTO agenda. Under the GATS, developing countries have committed themselves to full liberalization of financial services. In other words, national governments, which are already controlled by their external creditors, would be unable to deflect the Wall Street giants from entering and swallowing up national banks and financial institutions. .

In conjunction with the provisions of the Financial Services Agreement and the GATS, the 1999 banking legislation adopted in the US empowered a handful of banking conglomerates with the ability of destabilizing the domestic financial landscape of developing countries.

The sweeping deregulation of US banking imparted unprecedented powers to Wall Street’s financial conglomerates to acquire and take over banking institutions all over the World.

The tendency was towards a Worldwide financial supermarket controlled by a handful of global financial institutions which penetrate and permeate the fabric of national economies.

Two major agreements (negotiated under the WTO) contributed to "entrenching the rights" of the global banks" in international law, tantamount (according to critics) to granting "fundamental rights" to the banks which override those contained in national constitutions. The provisions of both the General Agreement on Trade in Services (GATS) and the Financial Services Agreement (FTA) formally break down remaining impediments to the movement of capital meaning that Bank of America or Citigroup can go wherever they please, triggering the bankruptcy of national banks and financial institutions.

Moreover, with the support of the IMF, the Wall Street conglomerates and their European and Japanese partners reinforced and consolidated their role as the World’s major creditor institutions, routinely underwriting the public debt, overseeing the conduct of State budgetary policy, issuing syndicated loans to troubled industrial corporations, overseeing the privatization of State corporations which have been put on the auction block in the context of an IMF bailout agreement, etc.

Financial Warfare: The Powers of Deception

The weapons used on Wall Street are prior knowledge and inside information, the ability to manipulate with the capacity to predict results, the spreading of misleading or false information on economic occurrences and market trends. These various procedures are best described as the "powers of deception", which financial institutions routinely use to mislead investors.

The art of deception is also directed against their banking competitors, who are betting in the derivatives and futures markets, in stocks, currencies and commodities.

Those who have access to privileged information (political, intelligence, military, scientific, etc.) will invariably have the upper hand in the conduct of these highly leveraged speculative transactions, which are the source of tremendous financial gains. The CIA has its own financial institutions on Wall Street.

In turn the corridors of private banking and offshore banking, enable financial institutions to transfer their profits at ease, from one location to another. This procedure is also used as a safety net which protects the interests of key financial actors including CEOs, major shareholders, etc of troubled financial institutions. Large amounts of money can be moved out at an opportune moment, prior to the company’s demise on the stock market. (e.g. Lehman, Merrill Lynch and AIG).

The Federal Reserve Bank of New York and its powerful stakeholders have "inside information" on the conduct of US monetary policy. They are thereby in a position to predict outcomes and hedge their bets in highly leveraged operations on the futures and derivatives markets. They are in an obvious conflict of interest because their prior knowledge of particular decisions by the Federal Reserve Board enables them as private banking institutions to make multibillion dollar profits.

Links to US intelligence, to the CIA, Homeland Security, to the Pentagon are crucial in the conduct of speculative trade, since it allows the speculators to predict events, through prior knowledge of foreign policy and/or national security decisions which directly affect financial markets. An example: the put options on airline stocks in the days preceding the 9/11 attacks.

An internal war within the financial system is unfolding.

Lehman Bros goes bankrupt, Merrill Lynch is bought up...

Mortgage giants Fannie Mae and Freddie Mac are taken over by the government.

Bear Stearns collapses, America’s largest insurance company AIG’s share collapse from $22.19 on September 9, to less than $4.00 at the close of trading on September 16, a decline of more than 80 percent of its value.

Goldman Sachs together with JP Morgan Chase are negotiating with the Treasury to arrange for a $85 billion secured loan to AIG, which would be financed by the Federal Reserve Bank of New York.

Who picks up the pieces? What lies ahead?

The process of mergers and acquisitions is likely to proceed to new heights leading to an unprecedented centralization of financial power, with Bank of America, JP Morgan Chase and the Federal Reserve Bank of New York playing a dominant role.

The meltdown will be conducive to the demise of numerous banking and financial institutions, which will either be driven out of the financial landscape altogether or acquired by the financial giants.

Bank of America is slated to purchase Merrill Lynch, leading to the formation of the world’s largest financial institution, clashing with Citigroup and JP Morgan Chase. It should be noted that while Citigroup and JP Morgan Chase are competing institutions, they are nonetheless entwined through intermarriage between the Rockefeller and Stillman families.

Bank of America in the last two decades has developed into a financial giant through a series of mergers and acquisitions. In 2004, Bank of America acquired FleetBoston Financial, in 2005 it purchases credit card giant MBNA and in 2007 it acquires LaSalle Bank Corporation and Corporate Finance from the Dutch bank ABN AMRO. And on September 14, 2008, Bank of America announced its intention to acquire Merrill Lynch for $50 billion.

What we are dealing with is a clash between a handful of major financial institutions, which have developed through mergers and acquisitions into Worldwide financial giants.

The financial meltdown on Wall Street largely benefits Bank of America and JP Morgan Chase, which is part of the Rockefeller empire, at the expense of Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley. Lehman Brothers filed for Chapter 11 bankruptcy on Bloody Monday, September 15. Lehman’s assets are of the order of $639 billion.

Potential Losers

Citigroup Inc., declined 15 percent to $15.24 for the steepest drop since July 2002. [Sept 15]

American Express Co., the biggest U.S. credit card company by purchases, fell 8.9 percent to $35.48. [Sept 15]

Goldman Sachs fell 12 percent, the most since April 2000, to $135.50. The decline was the result of short selling.[Sept 15]

Morgan Stanley, the biggest U.S. securities firm other than Goldman Sachs, fell 14 percent to $32.19." The decline was the result of short selling. [Sept 15]

(See Bloomberg, Sept 16, 2008)

In 2000, J.P. Morgan merged with Chase Manhattan, leading to the integration of J.P. Morgan, Chase, Chemical and Manufacturers Hanover into a single financial entity. Bear Stearns was acquired in 2008 by JP Morgan Chase following its collapse. This banking empire controlled by the Rockefeller family has assets of more than 1.6 trillion dollars.

With assets of $1.7 trillion, Citigroup’s future remains undecided. It is facing serious financial difficulties which could lead it into bankruptcy. Citigroup share prices have in recent months collapsed alongside those of Fannie Mae. The Lehman debacle has precipitated a further decline of Citigroup stock prices.

It is the trustee "for unsecured creditors who are owed some $155 billion by Lehman Brothers", but according to Citgroup statements they "have little or no exposure to the failed investment bank."

What this means is that the collapse of Lehman will lead to massive loan default in relation to the portfolios of Citigroup and NY Mellon clients, namely client banking institutions as well as individual investors.


1. This section relied on a series of unpublished notes, on the 1999 Financial Services Modernization Act, Legislation, which I wrote in November 1999.

United States’ Largest Banks

(in millions of U.S. dollars)

Rank Name (city, state) Consolidated
1. Citigroup (New York, N.Y.) $2,199,848
2. Bank of America Corp. (Charlotte, N.C.) 1,743,478
3. J. P. Morgan Chase & Company (Columbus, Ohio) 1,642,862
4. Wachovia Corp. (Charlotte, N.C.) 808,575
5. Taunus Corp. (New York, N.Y.) 750,323
6. Wells Fargo & Company (San Fransisco, Calif.) 595,221
7. HSBC North America Inc. (Prospect Heights, Ill.) 493,010
8. U.S. Bancorp (Minneapolis, Minn.) 241,781
9. Bank of the New York Mellon Corp. (New York, N.Y.) 205,151
10. Suntrust, Inc. (Atlanta, Ga.) 178,986
11. Citizens Financial Group, Inc. (Providence, R.I.) 161,759
12. National City Bank (Cleveland, Ohio) 155,046
13. State Street Corp. (Boston, MA) 154,478
14. Capital One Financial Corp. (McLean, Va.) 150,608
15. Regions Financial Corp. (Birmingham, Ala.) 144,251
16. PNC Financial Services Group, Inc. (Pittsburg, Pa.) 140,026
17. BB&T Corp. (Winston-Salem, N.C.) $136,417
18. TD Bank North, INC. (Portland, Maine) 118,171
19. Fifth Third Bankcorp (Cincinatti, Ohio) 111,396
20. Keycorp (Cleveland, Ohio) 101,596
21. Northern Trust Corp. (Chicago, Ill.) 77,480
22. Bancwest Corp. (Honolulu, Hawaii) 74,808
23. Harris Financial Corp. (Wilmington, Del.) 69,172
24. Comerica Incorporated (Dallas, Tex.) 67,167
25. M&T Bank Corp. (Buffalo, N.Y.) 66,085
26. Marshall & Ilsley Corp. (Milwaukee, Wis.) 63,432
27. BBVA USA Bancshares, Inc. (The Woodlands, Tex.) 59,953
28. Unionbancal Corporation (San Fransisco, Calif.) 57,933
29. Huntington Bancshares, Inc. (Columbus, Ohio) 55,985
30. Zions Bancorporation (Salt Lake City, Utah) 53,597

NOTE: As of May 30, 2008.

Source: Federal Reserve System, National Information Center.