Monday, September 22, 2008

Consumers Cut Health Spending as Economic Downturn Takes Toll

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By Vanessa Fuhrmans

As the credit crunch threatens to throw the economy into a deep slump, Americans are already cutting back on health care, a sector once thought to be invulnerable to recession. Spending on everything from doctors' appointments to preventive tests to prescription drugs is under pressure.

The number of prescriptions filled in the U.S. fell 0.5% in the first quarter and a steeper 1.97% in the second, compared with the same periods in 2007 - the first negative quarters in at least a decade, according to data from market researcher IMS Health. Despite an aging and growing U.S. population, the number of physician office visits also has been declining since the end of 2006. Between July 2007 and 2008, the most recent month for which data are available, visits fell 1.2%, according to IMS.

As consumers cut back, spending on everything from doctors' appointments to preventive tests to prescription drugs is under pressure.

In a survey by the National Association of Insurance Commissioners last month, 22% of 686 consumers said that economy-related woes were causing them to go to the doctor less often. About 11% said they've scaled back on prescription drugs to save money. Some of the areas being hit include hip and knee replacements, mammograms, and visits to the emergency room, according to a survey conducted by D2Hawkeye Inc., a Waltham, Mass., medical data analytics firm, on behalf of The Wall Street Journal.

Since sales at the Sebring, Fla.-area car dealership where Christopher Pye works have dwindled, so have the commissions that were 40% of his income in good times. Barely able to afford his $850 monthly mortgage and pay for groceries, he says something had to give: his two young sons' annual medical checkups.

"It's just a little too expensive right now," says Mr. Pye, 32 years old, who says he can't afford to have his family on the company health plan or to pay up front for the visits. This month, Mr. Pye is canceling his own insurance, hoping the $56 he'll save in weekly premiums will pay for the exams of his boys, ages 3 and 4, later.

Health-policy experts say that patients' short-term care cutbacks could lead to more medical problems and higher spending down the road. As more people forgo screenings or wait until minor medical problems blow up into serious complications, hospital and emergency-room admissions could eventually spike.

"Once you've had that heart attack and end up in the hospital, that's when the expensive stuff begins," says Dana Goldman, director of health economics at the Rand Corp., a nonprofit research institute in Santa Monica, Calif.

Health-care companies say the current economic slump's impact on demand for medical services has been surprisingly swift. Laboratory Corp., the country's second-largest clinical lab-testing company by sales after Quest Diagnostics Inc., says the number of blood tests and other types of lab work it does for uninsured customers fell 8% in the second quarter, compared with the 1% quarterly growth it usually sees.

The company's analysis of outside market data also shows that obstetrician-gynecologist visits, the sole source of preventive care for many women, dropped 6% in the first quarter compared with the same period last year.

"That says to me that people are just deferring care if it's not acute," says Laboratory Corp.'s chief executive, David King.

Speaking at an investor conference this month, Walgreen Co. Chief Executive Jeffrey Rein said the U.S. is experiencing the "tightest prescription market" in his 27-year career, as more cash-strapped patients skip their pills or take half doses. He said the company has looked at different ways to get people to fill prescriptions. For example, pharmacists are reaching out to patients through phone calls and emotional appeals such as, "Do they want to be around when their kids grow up, or their grandkids?" Mr. Rein said.

Pricey Blood Test

Marianne Falacienski of Pensacola, Fla., had health coverage through her husband's land-surveyor job until he was laid off in April last year. Her husband, Brian, has since bought a policy for himself and their 2-year-old daughter on the individual market, but the family couldn't afford to include Ms. Falacienski, who has a chronic inflammatory bowel disease called Crohn's. The premiums charged by insurers for health plans purchased by individuals with pre-existing conditions can be prohibitive.

Ms. Falacienski, 33, has been putting off a pricey blood test to monitor her Crohn's-related anemia, which if it worsens, can indicate bleeding in the intestines. She says she already owes more than $3,000 for a blood transfusion she needed in January - the result, she says, of skipping the tests last year and thus failing to spot her worsening blood count in time.

"I'm just trying not to get sick again," she says. She found a receptionist job in July but won't be eligible for its health benefits until late fall.

A recent analysis of claims from 250,000 people in several dozen mid-Atlantic employer health plans suggests even people with coverage are cutting back on care. The study, conducted for The Wall Street Journal by research firm D2Hawkeye, found that a number of preventive or nonacute areas of care saw declines despite little change in benefits or employee cost-sharing. Knee replacements per 1,000 people fell 18.6% between March 2008 and March 2007, pap smears fell 6% and dispensed prescriptions for antidepressants dropped 29%, the D2Hawkeye analysis shows.

Jim King, a family physician in Selmer, Tenn., says patient visits at his practice this summer were down 10% to 15% compared with summers past, even though 90% of his patients have some form of insurance. A big problem, he says, is getting patients to come back for tests to check their diabetes or to act on referrals to specialists, many of whom are at least 40 miles away in Jackson, Tenn.

"It's hard to get people to follow up when they're having to decide between the gas bill, the electric bill or deciding to come in and see the doctor," Dr. King says.

Many insured Americans face much bigger out-of-pocket costs today than just a decade ago. The average family plan deductible at an employer last year ranged from $759 for health-maintenance organizations to $3,596 for a high-deductible plan with a savings-account option, according to the Kaiser Family Foundation. The cost of premiums to employees has nearly doubled to $3,281 a year since 2001.

People who buy health plans on their own often face even higher deductibles. Patricia Campbell of San Diego bought a $7,500 deductible plan after she took fewer freelance television production assignments to help care for her mother, who has Alzheimer's disease.

Her doctor has told her that the longer she waits to get a cataract in her left eye removed, the harder it will be. But she says she can't afford to pay for the surgery because she is still paying off her share of the costs of an appendectomy last year. "Since I don't work out of the home, it's not that crucial," she reasons. "And I can drive with one eye."

Gabrielle Kenna, 33, who suffers from debilitating rheumatoid arthritis, says she occasionally skips her weekly dose of methotrexate. The pills help with pain and inflammation, and require a $10 monthly co-pay. But Ms. Kenna says she has to balance that with the price of her main medication, a specialty drug called Remicade that costs her nearly $180 every six weeks. "When I'm not feeling so bad, I'll try to stretch [the methotrexate] out or wait until I have the money," she says.

That task is about to get tougher now that her job as a school social worker in Fort Wayne, Ind., has been cut to a part-time position. Beginning this month, she'll no longer have health benefits. To stay on the school district's plan for a temporary period under federal Consolidated Omnibus Budget Reconciliation Act, or Cobra, rules, she'll have to pay $570 a month in premiums.

Her mother, Edith Kenna, says she has been skipping her osteoporosis drug every other week and stopped taking her antidepressant, each of which require a $40 monthly co-pay, to help pay for her daughter's treatments. But, she worries about the day her daughter's Cobra benefits run out since Remicade can cost more than $12,000 a year.

Hitting the Coverage Gap

Medicare beneficiaries on fixed incomes say higher energy and food prices are making it tougher for them to pay for drugs as well, even those who have the government program's drug benefit. Some, like Joan Stroup of Butte, Mont., are starting to hit the drug plan's coverage gap, which is $3,215 this year. The gap in 2008 begins after beneficiaries and their plans pay $2,510 in drug costs, at which point plans aren't required to pay benefits until spending reaches $5,725. Then benefits kick in again.

For Ms. Stroup, a 73-year-old retired elementary-school principal, that means paying roughly $1,000 a month for various medications until she's bridged the gap. To make do, Mrs. Stroup says she's been skipping her asthma medication Advair, sometimes a week at a time, and switched to a cheaper but less effective pill for her acid reflux. "I don't always want to tell people I don't have the money for it," she says, "so I might wait a week or so to go to the drugstore to pick it up."

Taxpayers, Congress Push Back Against Bailout

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By Matt Renner

Washington, DC - Push back against the massive $700 billion Wall Street bailout proposal has come hard and fast from members of Congress on both sides of the aisle.

The bailout plan proposed by the Bush administration would give the Treasury Department and Treasury Secretary Henry Paulson - a former Wall Street CEO himself - the power to buy up extremely risky mortgages and other dangerous debt using taxpayer dollars. Because the US government continues to run a deficit, under the plan, the Treasury would have to borrow money to buy this private sector debt - essentially using the taxpayer's credit card to buy home loans that are currently weighing down Wall Street firms.

Members of Congress point to a severe lack of oversight in the proposed Bush administration plan. Section eight of the draft bailout plan states: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency," essentially stripping Congress of its responsibility to oversee the how these tax dollars could be spent.

Constituents have been blowing up the phone lines on Capitol Hill, calling House of Representatives members, Republicans and Democrats, objecting to the no-strings-attached bailout, and the representatives have responded. Democrats are currently crafting various proposals to help prop up Wall Street firms which have gotten themselves into trouble, but without simply throwing away taxpayer money and without letting CEOs of the affected firms off the hook with fat retirement packages.

Representative Dennis Kucinich (D-Ohio), spoke out against a bailout, calling the current proposal "cash for trash," and proposing a distribution of the assets back to the taxpayers.

"Since the bailout will cost each and every American about $2,300, tomorrow I will offer legislation to create a United States Mutual Trust Fund, which will take control of $700 billion in stock assets, at market value and not higher, convert those assets to shares, and distribute $2,300 worth of shares to new individual savings accounts in the name of each and every American," Kucinich said in a statement.

"The Wall Street financial disaster is an opportunity to create a genuine ownership society. If Congress invests $700 billion in the market, then the American people must get something of real value for their investment," Kucinich said.

"The seven and a half year march toward deregulation and unfettered greed in our financial markets has exacted a heavy toll on American taxpayers," Representative Jackie Speier (D-California) said in a statement, adding, "I am not comfortable allowing the same Wall Street insiders and manipulators who got us into this mess to get a free pass. At the very least, the Government Accountability Office should be camped out at Treasury and Congress must be continually updated on the status of the bailout." Speier sits on both the House Financial Services and Oversight and Government Reform Committees. She said she would be watching the situation closely.

Conservative Republican Representative Mike Pence of Indiana was the first to loudly oppose the bailout plan from within the Republican Party.

"The Administration's request amounts to the largest corporate bailout in American history. Congress should act, but should act in a way that protects the integrity of our free market and protects the American taxpayer from more debt and higher taxes," Pence said in a statement Saturday.

Pence makes his argument based on his belief in the Republican mantra of "free market" economics. "To have the freedom to succeed, we must preserve the freedom to fail. Any solution to our present crisis must preserve our essential economic freedom," Pence said.

Democrats have begun to craft a counterproposal, the details of which are not yet set at the time of this publication. Congressman Barney Frank (D-Massachusetts) chairman of the House Financial Services Committee, has been pushing for a plan that includes more oversight and possibly direct financial help to indebted homeowners as well as to Wall Street.

Frank would also like to see compensation limited for Wall Street executives who have created the current situation.

"The notion that while they are getting this help from the federal government we can't tell them not to have golden parachutes, not to pay millions to some of the very people who made bad decisions, as a retirement gift, is unacceptable to us," Frank said to CNN.

CNBC is reporting that Frank and Senate Banking Committee Chairman Chris Dodd (D-Connecticut) are negotiating with the Bush administration. According to Frank, administration officials have agreed to take control of pieces of the companies that they are bailing out - equity stakes in the companies - equal to the amount of taxpayer money invested.

According to CNBC, the administration has agreed to creation of a Congressional oversight board of some kind, but details have not yet been released.

However, according to Frank, limiting pay for business executives is a key sticking point for the administration.

The rush to bail out financial institutions and the willingness to defend executive compensation comes as no surprise to campaign finance experts. Massie Ritsch, communications director for the money in politics watchdog group The Center for Responsive Politics, examines the effect of campaign contributions to politicians in Washington.

"Wall Street is one of the biggest campaign givers in American politics. When you combine donations from the finance, insurance and real estate sectors [all of which stand to gain from the bailout], they become the largest contributor, splitting roughly $311 million evenly between Republicans and Democrats," Ritsch said.

Can you trust a Wall Street veteran with a Wall Street bailout?

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By Kevin G. Hall

Making the rounds on the Sunday morning talk shows, Treasury Secretary Henry Paulson repeatedly said today's financial problems were long in the making. He should know. He was part of the Gold Rush that has brought the global financial system to the brink of collapse.

Paulson presided over one of the most profitable runs on Wall Street as chairman and chief executive officer of investment banking titan Goldman Sachs & Co. from 1999 until President Bush nominated him on May 30, 2006 to take over the Treasury Department.

Back then, Bush saw Paulson's Wall Street experience as a plus. "Hank will follow in the footsteps of Alexander Hamilton and other distinguished Treasury secretaries who used their talents and wisdom to strengthen our financial markets and expand the reach of the American Dream," Bush said at the time.

But with Paulson now seeking virtually unfettered authority to administer the largest bailout of the financial industry in U.S. history, many are wondering whether Paulson also doesn't come with enormous potential conflicts of interest.

That was one reason Democrats on Sunday expressed reluctance to approve the administration's draft legislation that would leave to Paulson virtually all authority over the proposed $700 billion bailout. The legislation would allow him to decide which securities to buy, from whom to buy them, and which outside companies and people to hire to help him do so.

"If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight," said Democratic presidential candidate Sen. Barrack Obama. "Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check."

In recent days, there've been few outward expressions of distrust of Paulson in particular. In fact, many said his long reign on Wall Street make him uniquely qualified to deal with today's problems.

"Hank is the right guy," New York Mayor Michael Bloomberg, who made his millions providing information to Wall Street traders, told NBC's Meet the Press. "If I had to have one person at the helm today I would pick Hank Paulson."

But the conflicts are also visible. Paulson has surrounded himself with former Goldman executives as he tries to navigate the domino-like collapse of several parts of the global financial market. And others have gone off to lead companies that could be among those that receive a bailout.

In late July, Paulson tapped Ken Wilson, one of Goldman's most senior executives, to join him as an adviser on what to about problems in the U.S. and global banking sector.

Paulson's former assistant secretary, Robert Steel, left in July to become head of Wachovia, the Charlotte-based bank that has hundreds of millions of troubled mortgage loans on its books.

The administration's draft law also would preclude court review of steps Paulson might take, something Joshua Rosner, managing director of economic researcher Graham Fisher & Co. in New York, said could be used to mask previous illegal activity.

"The Treasury's ability to, without oversight, determine (that) a financial institution (is) an agent of the government seems like it could be used to serve several purposes, including limiting the potential liabilities of an institution or its executives," he wrote in a note to investors late Sunday.

The Treasury proposal sent to Congress also offers no process to hire asset managers in an open and competitive process. That's particularly questionable given that Wall Street players are now hiring Wall Street players, Rosner said.

"This seems to invite a risk of collusion between sellers and buyers to the detriment of the taxpayer," he wrote.

At a minimum, there's irony in Paulson being in charge of so large a bailout.

In the last annual report at Goldman that Paulson signed off on in November 2005, a year in which he received $38 million in compensation, investors were clearly told that the federal government wouldn't be there to save them from bad investments.

"Goldman Sachs, as a participant in the securities and commodities and futures and options industries, is subject to extensive regulation in the United States and elsewhere," the report said.

But those regulations are designed to protect the interests of clients in the market, it said. "They are not ... charged with protecting the interest of Goldman Sachs shareholders or creditors," it said.

That's a different tune from the one Paulson was singing Sunday.

"Last week there were times when the capital markets or credit markets were frozen," Paulson said on NBC's Meet the press. "American companies weren't able to raise financing. That has very serious consequences. So what we need to do right now is stabilize the markets, and this is for the, for the benefit of the taxpayers we're doing this, the American public. Then, once we get behind this and get this stabilized, there's a lot we can talk about in terms of reform."

What Paulson didn't say is that the excesses that led to the frozen credit markets couldn't have happened without Wall Street. Lenders weakened their standards because loans were sold to investment banks, which didn't much care about the loan quality since they then pooled the loans with thousands of other loans and sold them as bonds to investors. If the whole thing collapsed, it would be the investors who lost out.

Those bonds, called mortgage-backed securities, are precisely the bad assets taxpayers will now be buying back from Paulson's colleagues on Wall Street.

During Paulson's tenure, Goldman was not as big a player in issuing mortgage bonds as two other investment banks that have gone under this year, Bear Stearns and Lehman Brothers.

But the 2005 annual report shows that Goldman was still a significant player. Its trading division, which included the mortgage bonds and complex financial instruments called derivatives, reported pre-tax earnings of more than $6.2 billion, up sharply from $3.5 billion in 2003.

The report also shows that Goldman benefited greatly from the wave that is now being deemed a wave of excess.

Goldman's pre-tax earnings rose from $4.4 billion in 2003 to almost $8.3 billion in 2005. Similarly, its investment banking division had pre-tax earnings leap from $207 million to $413 million.

Paulson's personal fortunes also zoomed in those years.

In 2002, Paulson received $12.1 million in compensation, including a $6.3 million bonus — an improvement over the previous three years when Wall Street accounting scandals unsettled investment banks, including a $1.5 billion settlement Goldman and other banks paid for issuing overly bullish research reports that promoted deals the banks themselves were involved in.

Published reports said Paulson received $30 million in compensation and salary in 2003.

After Paulson left Goldman and mortgage bonds began losing money, the investment bank erased those losses and then some by betting against the very products it had sold, Fortune magazine reported last year.

Row over Internet “war plans” highlights China-Vietnam tensions

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By John Chan

Relations between Vietnam and China deteriorated over the past fortnight after Hanoi formally protested at online discussions in China about a war with Vietnam. While only a small layer of Chinese nationalist fanatics made the web postings, the incident underscores the ongoing tensions between the two countries, which have conflicting strategic and economic interests, including in the South China Sea.

According to the South China Morning Post on September 5, Hanoi has twice summoned senior Chinese diplomats to express concerns about the “war plans” that have been appearing on Chinese web sites since August. The plans supposedly outline a full-scale invasion of Vietnam, starting with five days of missile strikes. Following a naval blockade and electronic jamming of Vietnam’s communications, 310,000 Chinese troops would sweep into northern Vietnam from the Chinese provinces of Yunnan and Guangxi and from the South China Sea.

The postings were made on, a major news portal in China, and several other sites. One declared: “Vietnam... is a major threat to the safety of Chinese territories, and the biggest obstacle to the peaceful emergence of China... Vietnam is the strategic hub of the whole of Southeast Asia. Vietnam has to be conquered first if Southeast Asia is to be under [China’s] control again.”

While these ultra nationalists have no direct influence in Beijing’s policy-making, the fact that such debates were published without any interference from China’s notorious Internet police indicated a degree of official approval. Beijing has been consciously promoting nationalism to create a new base of support among China’s emerging middle classes, which view their future as bound up with the rise of China as a major power.

Beijing and Hanoi moved quickly to dampen down the dispute. Le Dung, Vietnam’s foreign ministry spokesman, announced that China had promised to block “negative articles” that were harmful to bilateral relations between the two countries. A Chinese government spokesman said the postings were the individual opinions of a handful of people, “which by no means represented China’s stance”.

Speaking to the South China Morning Post, Song Xiaojun, a Chinese military expert, dismissed the “war plans” as a “joke”. However, while calling on the Chinese government to guide public opinion so as to avoid harmful conspiracy theories, Song admitted that tensions with Vietnam existed. “China and Vietnam have similar political systems and should unite to counter the US, which is the common enemy for both countries. Clearly the US tries to play Vietnam off against rising China,” he said.

Song’s comments reflect broader concerns in official circles that the US is developing ties with Vietnam, as part of its strategic encirclement of China. Tensions have been rising over the Spratly and Paracel Islands in the South China Sea. In July, Beijing protested an agreement signed by Hanoi with US oil giant Exxon Mobil to develop oil and gas reserves in disputed maritime areas of the South China Sea. Last year the Vietnamese foreign ministry declared sovereignty over the Spratly Islands, following by invitations to Western and Asian oil corporations to bid for gas field and pipeline projects.

Like Beijing, Hanoi has been encouraging patriotism. Hundreds of Vietnamese students staged anti-Chinese protests last December after Beijing officially incorporated the Spratly and Paracel Islands into the Chinese province of Hainan. The protesters demanded that Hanoi stand up to “Chinese aggression”.

History of bitterness

The history of relations between the two Stalinist regimes has been one of considerable bitterness.

Until the early 1960s, the Chinese and Vietnamese Communist Parties were formally within the Soviet bloc. However, like Moscow, Beijing treated the anti-colonial struggle in Vietnam as a pawn in their dealings with the imperialist powers, forcing Ho Chi Minh to accept the French-proposed partition of Vietnam in 1953. The deal paved the way for the US to displace France in propping up a corrupt South Vietnamese dictatorship, which ultimately led to direct US military intervention in 1965 and the death of millions of Vietnamese.

In the Sino-Soviet split in the 1960s, North Vietnam sided with Moscow, angering Beijing. Sharpening tensions with the Soviet Union, as well as economic problems at home, led to Mao Zedong’s rapprochement with the US in 1972. For the Nixon administration, a major factor in reaching the deal was to secure China’s support in containing the fallout in Asia from the defeat of the US military in Vietnam.

In February 1979, the Chinese regime launched war on Vietnam in response to its toppling of the pro-Beijing Pol Pot regime in Cambodia. More than 200,000 Chinese troops invaded northern Vietnam, leading to bitter fighting in which tens of thousands of soldiers and even more Vietnamese civilians died. Beijing launched the war just two months after Deng Xiaoping initiated his “market reforms” and just weeks after he visited Washington.

The scorched earth policy that accompanied the withdrawal of Chinese troops only compounded the acrimony between the two countries. Fear of a Chinese invasion is a major reason why Vietnam continues to maintain one of the largest standing armies in the world. Border skirmishes continued into the 1980s but subsided after Hanoi’s turn to market reform and the collapse of the Soviet Union.

In 1989, Hanoi was one of the few governments in the world to publicly back Beijing’s massacre of protestors in Tiananmen Square, out of fear that Vietnamese workers and students would follow the example. Relations between the two countries were normalised in 1991.

While bilateral trade between the two countries is booming, tensions have remained. Now that China has emerged as a new economic power, sections of the ruling elite in Beijing view Vietnam’s continued control of the Spratly Islands as a strategic obstacle. In January, China’s leading defence magazine, Ordnance Knowledge, which has close connections with the military, blamed the lack of a true Chinese “deep water” navy for the unresolved disputes in the South China Sea.

China controls 7 islets in the Spratly group, while Vietnam has the largest group of 29, with some 2,000 troops stationed to protect them. The Philippines controls 8 islands, Malaysia 5 and Taiwan 1. Brunei and Indonesia both have maritime claims in the area as well.

Rivalry in the South China Sea goes back decades. In 1974, China took the advantage of the imminent collapse of the South Vietnamese regime to occupy the Paracel Islands. In 1988, the Chinese and Vietnamese navies clashed after China took over the Johnson Reef in the Spratly archipelago. Vietnam has countered China through its membership of the Association of South East Asian Nations (ASEAN), which in 1995 ruled out bilateral negotiations in favour of a collective response to Beijing over disputes in the South China Sea.

Relations between Beijing and Hanoi have improved in recent years, as China has sought closer ties with ASEAN countries through free trade agreements and joint economic zones. In 2002, Beijing signed a deal with the ASEAN, agreeing not to complicate conflict in the region, including the South China Sea.

Deep suspicion remains, however. Ordnance Knowledge accused Vietnam, Malaysia and other countries of holding military exercises and purchasing new hardware such as frigates, fighters and patrol boats to strengthen their grip over the islets. China is also concerned about US influence following its normalisation of relations with Vietnam in 1995. Washington has been sending warships to visit Vietnam since 2003, raising fears in Beijing that the US is seeking closer military ties as part of its broader plans to encircle China.

Substantial economic and strategic interests are at stake in the South China Sea. More than 500 oil and gas wells have been developed by Vietnam, Malaysia, Philippines, Indonesia and Brunei around the Spratlys, including some 100 within waters claimed by China. Total annual output has reached 50 million tonnes and oil exports have become an important source of revenue for both Vietnam and Philippines. The South China Sea is estimated to have 35 billion tonnes of oil and natural gas, of which 22.5 billion tonnes are within Chinese-claimed areas.

Just as significantly, some of the world’s most important naval routes—especially from the Middle East to North East Asia—pass through the South China Sea. Ordnance Knowledge pointed out that the Spratly Islands are at the heart of China’s foreign trade and oil “lifelines”. Of China’s 39 sea lanes, the 21 passing through the Spratlys account for 60 percent of China’s foreign trade. Some 60 percent of ships passing through the Strait of Malacca are Chinese, accounting for 80 percent of China’s imported oil from the Middle East and Africa.

The magazine wrote: “As foreign trade and the sea-base economy develop, our national interests are rapidly expanding towards overseas. The navy, which bears the major responsibility of protecting maritime and overseas interests, must ensure smooth and efficient passages... Effectively controlling the Spratlys will be an important basis for our navy to break through the constraints of the island chains, moving east to the Pacific and west to the Indian Ocean.”

Ordnance Knowledge also viewed the islands as a weapon against potential rivals such as Japan. “Effective control of the Spratlys and the surrounding areas can enhance [China’s] deterrent power, taking the strategic initiative by directly constraining and influencing international oil lifelines. It can be a sharp blade to directly threaten hostile forces, further deterring the presence of the Western powers around the South China Sea,” the magazine wrote.

Several Western analysts noted in April that China was building a major naval base on the southern island of Hainan, adjacent to the South China Sea, that would allow for a large fleet, including 20 submarines and, in the future, an aircraft carrier or amphibious battle groups. In protecting its own trade routes and oil supplies, China is inevitably threatening those of its rivals.

While the “plans” of the Chinese bloggers to invade Vietnam may not be very serious or influential, disputes over control of the South China Sea and other tensions have the potential to trigger a conflict that could quickly draw in neighbouring countries and the major powers.

Germany: The international financial crisis and illusions in an enlightened capitalism

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By Peter Schwarz

A week following the collapse of the investment bank Lehman Brothers the extent and consequences of the international financial crisis still remain incalculable. Not a single country or continent is exempt from the crisis.

In Australia, the largest investment bank Macquarie is threatened with bankruptcy, Russia is experiencing its deepest financial crisis in 10 years, the Asian stock exchanges have registered huge losses and in Europe one piece of bad news follows the next. While government spokesmen seek to spread optimism, facts provide a different picture. The losses suffered by German and French banks following the collapse of Lehman Brothers is already estimated at several billion euros.

The German weekly paper Die Zeit has pointed out that the complex nature of modern financial instruments means that it could take weeks for the real extent of losses to emerge. “It is likely that the worst is still to come because many loss makers only make themselves known after a period of time,” it writes.

All serious economic commentators agree that an end of the crisis is not in sight. “The most frightening aspect of the past 24 hours is that any faith that central bankers and finance ministers could get a grip on the crisis has evaporated dramatically,” wrote the daily Die Welt last Thursday. And the British business paper, the Financial Times, wrote on the same day: “We are without question in the worst financial crisis since 1929. We still do not know how many banks and institutions will collapse.”

Last Thursday and Friday the stock markets moved upwards after the US central bank pumped $180 billion into the markets. But some analysts judged this enormous financial injection an “act of despair,” and one that says more about the extent of the crisis and the panic exerted by it than providing any sort of solution.

While the financial crisis continues to unwind its effects are making themselves increasingly felt on production, trade and consumption. Even if it does not come to a complete implosion of the financial markets, a profound recession of the entire world economy is now considered probable.

The shortage of liquidity and increase in interest rates will drive numerous companies into insolvency and in turn intensify the financial crisis. Increasing unemployment, rising prices, sinking wages and further bankruptcies will be the result—a vicious circle.

In addition, the three-figure billion sums pumped into the stock markets by governments and central banks must be financed by the taxpayer. The rapid increase in budget deficits will lead to further cuts in social and public expenditures.

The development of an enormous speculative bubble in recent years was accompanied by an unprecedented social polarisation between the wealthy and the masses of the population. Now this process will experience a further quantum leap with the collapse of this bubble.

The result will be a worldwide intensification of class struggle. The ideology of the free market, which was raised to the rank of a state religion after the collapse of the Soviet Union, has suffered irreparable damage in the wake of the collapse of major Wall Street banks. Under these conditions social opposition will invariably tend to take an anti-capitalist and left-wing form.

Shock and fear

It is against this background that one must understand the debate now taking place in the European media over the consequences of the financial crises. This debate is characterised on the one hand by a sense of shock at the collapse that has taken place, and on the other by fears that reaction to the crisis could assume revolutionary forms.

Even in the traditional conservative media, which has up to now praised the free market as the highest achievement of human civilisation, articles are appearing that read as if they were produced by the editorial boards of anti-globalisation movements.

Die Zeit poses the question: “Is finance-capitalism finished?” and predicts “the end of world domination by the Anglo-Saxon finance industry.”

Writing in the Frankfurter Allgemeine, Frank Schirrmacher declares: “There must be some madmen walking around who up until Monday had not been spotted because their madness was identical to the logic of the established system. They destroyed fortunes equivalent to entire national budgets...”

Die Welt complains: “Greed and stupidity have plunged the market into chaos—managers and financial supervisors have failed.” The paper continues: “Any economics student in his first semester could have concluded that the American economic model is not tenable.”

However, while these commentators blame responsibility for the crisis on “predatory capitalism,” “Anglo-Saxon finance capitalism” and the “greed and stupidity” of individuals, they spread the illusion that there could be a better, more regulated and reasonable form of capitalism.

Die Welt writes: “The current crisis is the product of a complete failure in many instances in the state and economy ... however to conclude that the market economy itself cannot function is mistaken. It is not the free-market economy that is responsible for the financial crisis, but rather the fact that important market players and those who supervise the market have failed to follow established economic laws or believed that such laws no longer applied.”

This form of reasoning is most clearly expressed in a commentary in the Süddeutsche Zeitung on Friday, titled “An enlightened capitalism.” The author, Heribert Prantl, proclaims the end of “turbo capitalism.” “The form of capitalism known as turbo capitalism has refuted, dissected and conquered itself. The turbo was greed,” he writes. “Turbo capitalism consumes its children, its clients and their share holdings.”

Prantl goes on to praise “the social market economy in the form in which it was developed in the federal republic after the Second World War” as “the most successful economic and social order in economic history.” Because he realises that the “regulating hand” of the nation state has lost its influence with the globalisation of the world economy, he proposes elevating the social market economy to an international level: “It must be regulated in such a way that the international economic and financial order is compatible with social requirements.”

And who is to undertake this “Herculean task”? According to Prantl: “the United Nations, the G-8—and thus the governments of the industrial nations.... The task is to establish a legal system that coordinates the anarchy of the markets and then to implement it step by step. Needed is a new contrat social.”

Prantl fails to explain to his readers why precisely those governments of leading industrial nations that made “turbo-capitalism” their programmatic and political trademark for the past 20 years should now undertake a different course. His remarks are an attempt to find a way out of the crisis that is not based on the living struggle of social forces. This, however, is an illusion, and a dangerous one at that.

In Germany the economic crisis of 1929, as is well known, led within the space of four years to the seizure of power by the Nazis. Hitler was able to succeed because of the abject failure of the workers’ parties. The SPD paralysed the working class by binding it to the impotent institutions of the Weimar Republic while supporting Brüning’s emergency laws; and the German Communist Party paralysed the working class by hiding its fatalism behind left-wing phraseology, rejecting a united front to oppose the Nazis. The bourgeois parties all capitulated to the Nazis, even agreeing to their own disempowerment by voting for Hitler’s Enabling Act.

Prantl, who is thoroughly versed in historical questions, evokes Jean-Jacques Rousseau’s contrat social (social contract). But he forgets that it was the French Revolution, one of the greatest revolutions in world history, which led to its realisation.

“Turbo-capitalism,” if one accepts this category, cannot be explained as a product merely of individual greed. It is based on class interests, which are embodied in the private ownership of the means of production.

Already at the beginning of the 1980s, the opening and liberalisation of the financial markets was a reaction to the economic recession and the violent class struggle of preceding years. It was bound up with an international offensive against the working class, which culminated in the smashing of the US air traffic controllers union PATCO and the defeat of the yearlong British miners’ strike. Since then wages and social benefits have stagnated while profits and fortunes have soared.

The notion that the financial oligarchy will voluntarily yield up its booty and conclude a contrat social is ludicrous. Prantl interprets the intervention of the US government in the financial crisis as a step in this direction. In fact the opposite is the case. It has plundered the treasury in order to cover the risks of speculators, while workers, homeowners and the socially weak will be required to foot the bill.

The Paulson-Bernanke Bank Bailout: Will the Cure be Worse than the Disease?

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By Michael Hudson

Saturday’s $700 billion junk mortgage bailout is the largest and worst giveaway since a corrupt Congress gave land grants to the railroad barons a century and a half ago. If it goes through, it will shape the coming century by giving finance unprecedented power over debtors - homebuyers, industry, state and local government, and the federal government as well.

But what threatens to be even worse is the government’s move to let the financial sector make even higher, unprecedented gains by working its way out of negative equity to "make taxpayers whole" by repaying the government’s bailout by bleeding the economy at large. Anticipating congressional capitulation in this license to engage in predatory credit, the latest Sunday evening surprise is that Treasury Secretary Henry Paulson’s own firm, Morgan Stanley, is to become bank holding company picking up the financial wreckage now that the government is covering the bad loans and investment gambles Wall Street has made.

What did Mr. Paulson not say in his weekend TV interviews, organized as what he hoped would be a series of victory laps. Neither he nor Fed Chairman Ben Bernanke nor any other Wall Street spokesman has acknowledged that the government has helped promote today’s $46 trillion debt bomb. This enormous overhead consists of the product that banks are selling - interest-bearing debt that is being added to real estate, corporate industry and personal income to price the U.S. economy out of world markets.

We have heard nothing about how Wall Street lobbyists have succeeded in killing the financial cops on Wall Street - and done the same with the consumer cops on Main Street. There is no public recognition of the fact that more money in tax cuts went to the top 1% than the bottom 80% combined.

So how much credence should we give the newest proposals for the United States to commit economic suicide by turning over the powers of government in effect to Wall Street? When they talk about "making taxpayers whole," what really is their game?

At first glance it may sound appealing to taxpayers for banks to be told to use their future earnings to pay back the $700 billion dollars in junk mortgages, bad hedge-fund bets and other gambles that the Treasury promised on September 20 to pick up at face value, no loss incurred. To provide a sense of proportion, this money could have funded the next forty or fifty years of Social Security. It could have funded health care for all Americans. It could have made a big step toward rebuilding the nation’s crumbling infrastructure. But that is another story. For now the major question is just how the banks, insurance companies and financial conglomerates are to raise the money to pay off this bailout.

The last time the government let banks earn their way out of negative equity was in 1980. Interest rates to bank customers topped 20 percent, driving down prices for real estate, stocks and bonds so low that the leading U.S. banks saw their net worth wiped out. Their debts to depositors and bondholders exceeded the collateral they held in their reserves to back these deposit obligations. But as soon as Ronald Reagan led the Republicans back into office, the Federal Reserve began to flood the economy with free credit, driving down the interest rates that banks had to pay. They were allowed to act as a monopoly and keep credit-card interest rates high, at 20 percent, and above 30 percent with penalties, thanks to the fact that America’s high post-Vietnam interest rates led state after state to repeal anti-usury laws to keep credit flowing.

So the banks did "earn their way out of debt." But if you were a taxpayer who needed to use a credit card, you paid through the nose. The banks earned their way out of debt at your expense. And by the way, if you really did pay an income tax, you probably did not own commercial real estate or significant financial assets. The Internal Revenue Service made commercial real estate and a large swath of finance (at least for the wealthiest investors) income-tax free by generating tax credits that could be applied against income across the board. The capital-gains tax was lowered to a fraction of the income tax, leading investors to pay out whatever income their investments generated as interest on loans to buy property they expected to sell at a markup. And with Alan Greenspan appointed the head the Federal Reserve Board in 1987, the age of asset-price inflation had arrived.

Cities and states vied with each other to slash property taxes, replacing them with income and sales taxes that fall mainly on labor and consumers. The upshot is that wealth has polarized to an unprecedented degree. According to statistics collected by the Congressional Budget Office, the wealthiest 1% now own 57% of the nation’s returns to wealth (interest, dividends and capital gains) and the richest 10% own no less than 77%.

With this background in mind, it looks like the Paulson-Bernanke plan for the Wall Street investment banks and other predatory lenders - and insurers such as A.I.G. - to "earn their way out of debt" will be at the economy’s expense. The bailout is to be achieved by letting Wall Street’s post-Glass-Steagall financial conglomerates charge their customers exorbitant financial charges. As Britain’s Conservative Party leader Margaret Thatcher put it in her favorite phrase, TINA: There is no alternative. And as Lady Macbeth said, if the deed is to be done, let it be done fast. After all, it is a once-in-a-lifetime chance for every financial institution in America to cash out with a fortune!

For Mr. Paulson this means not giving Congress a chance to represent the public interest in designing the terms of this giant bailout. Sec. 8 of the Treasury plan bans any Congressional review, giving him unprecedented power by: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Under cover of emergency force majeur conditions, the plan is to take the money and run, preferably without permitting any Congressional debate.

It is bad enough for the government to buy $700 billion of bad bank investments at prices that no private-sector investor has been willing to approach. This itself is an undeserved giveaway to the financial institutions that caused the problem by living recklessly in the short run. But making them - and indeed, helping them - pay back this gift with the aid of favorable tax and deregulatory policies will simply shift the cost off their shoulders onto those of bank depositors, credit-card users, mortgage borrowers and hapless pension-fund contributors to the money managers who have taken most of the current income in the form of commissions, salaries and bonuses to themselves. This will sharply add to the price of doing business in the United States, and specifically to the economy’s debt overhead by the banks making even more predatory loans.

It gets worse. In order for the existing junk mortgages to be "made good," real estate prices must be raised further above the ability to pay for this year’s five million homeowners in arrears and facing default. Is this a good thing? Is it good to raise access prices for housing even more, forcing new homebuyers to go further into debt than ever before to gain access to housing? Mr. Paulson has directed the Federal Reserve, Fannie Mae, Freddie Mac and the FHA (Federal Housing Authority) to re-inflate the real estate market. They are to pump nearly a trillion dollars into the mortgage market.

Fiscal policy is also to be brought to bear to turn the real estate market around by pressuring cities and states to "help homeowners pay their mortgage debts" by cutting property taxes. The idea is to leave more revenue available for property owners to pay mortgage bankers. Unfortunately, this will oblige cities to make up these cuts by taxing labor and sales, running deeper into debt than they already are, or cutting back their spending on basic infrastructure, education and public services and continue shortchanging their pension funds. This is the price to be exacted to "protect the taxpayer’s interest" by bailing out irresponsible banks. The solution is to let them make even more money by acting in a yet more predatory way.

This is not industrial capitalism; it is asset stripping. The closest analogy I can think of would be to give the Mafia free reign to start a new crime wave "in the taxpayers’ interest" so as to raise enough money to pay its fines to the Justice Department. Imagine how our world would look like if the economy had been turned over to Al Capone as head political capo and to Mafia financial manager Meyer Lansky as Treasury Secretary in the 1930s, with the pyramid schemer Carlo Ponzi heading the Federal Reserve and bank robber Willie Sutton as Attorney General.

The last thing the economy needs is a new real estate bubble. To prevent it, local property taxes need to be raised, not lowered. But this is not the Treasury’s plan. Instead of representing the national interest, it is representing the banking sector whose profits come from making more and bigger loans. This is just the opposite from what a well-run economy needs to recover its growth and competitive power. It needs debt write-downs to what homeowners can pay.

But Mr. Paulson has made it clear that aid for homeowners is not part of the Treasury’s plan. On Sunday, September 21, he resisted suggestions that his program be amended to include further relief for homeowners facing mortgage foreclosures. Because financial markets remain under severe stress, he claimed, there is an urgent need for Congress to act quickly without adding other measures that could slow down passage. "We need this to be clean and to be quick," he said in an interview on ABC’s "This Week." He expressed concern that debate over adding all of those proposals would slow the economy down, delaying the rescue effort that is so urgently needed to get financial markets moving again. "The biggest help we can give the American people right now is to stabilize the financial system," Mr. Paulson said.

If you doubt that this is the government’s ideal plan, just look at what it is rejecting. You hear no talk from Mr. Paulson or Mr. Bernanke about bailing out homeowners by writing down their debts to match their ability to pay. This is what economies have done from time immemorial. Instead, the Republicans - along with their allied Wall Street Democrats - have chosen to bail out investors in junk mortgages presently far exceeding the debtor’s ability to pay, and far in excess of the current (or reasonable) market price. The Treasury and Fed have opted to keep fictitious capital claims alive, forgetting the living debtors saddled with exploding adjustable-rate mortgages (ARMs) and toxic "negative amortization" mortgages that keep adding on the interest (and penalties) to the existing above-market balance.

The question to be asked is just how much will the economy’s debt overhead grow, and what will it cost debtors (a.k.a. "taxpayers")? And how will the economy look when the dust settles?

Economically the act gives a new meaning to the classical concept of circular flow. The traditional textbook meaning has referred to the circulation between producers and consumers, from wage payments by industrial companies to their employees, who use their wages to buy what they produce. This is why Henry Ford famously paid his workers the then-towering $5 a day. This was Say’s law: Income paid for production is finds its counterpart in consumption to maintain equilibrium in a way that enables the economy to keep on growing. The new circular flow runs from the Fed and Treasury to Wall Street in the form of bailouts, and then back to Republicans in Washington in the form of campaign contributions. The money circulates without having to go through the "real" economy of production and consumption at all.

The Treasury Department issued a fact sheet on the proposal on Saturday evening: "Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth." In everyday language the euphemism "removing troubled assets" means buying junk mortgages at way above current market price, as if the banks didn’t know all along that they were junk but hoped to pawn them off on their clients. The problem is that the banks have not been financing growth in the form of tangible capital investment, but have found their quickest profits to lie in a combination of asset stripping and asset-price inflation.

On Sunday a BBC World Service reporter asked me to list three things that the financial sector would like to see. Taking the open-ended question on the highest philosophical plane, I said, first of all, the banks would love to free themselves of all deposit liabilities - simply to keep the money for themselves. That is their objective when they see a client, after all: How much of the client’s earnings and money can they shift into their own pockets. Second, they would like to see politicians elected directly by the amount of money they could raise, thereby doing away with the actual problem of elections. If politics is going to be privatized, this is the way to do it. Rome’s voting system was organized along these lines. Third, the financial sector prefers not to have to report any data at all or pay any taxes. It has lobbied Congress to block collection of statistics, on the premise that what is not seen will not be taxed. And at present, banks and brokerage houses are still screaming to repeal Sarbanes-Oxley bill calling for full and honest accounting. For financial ideologues this is an equivalent watershed dragon to Rowe vs. Wade, now that they have repealed the Glass-Steagall Act that had separated banks from casinos.

Somewhat taken aback by the rawness of these principles, the reporter asked what outcome was most likely. If Congress does what it is supposed to do, there should be quite a showdown. But how unlikely to be achieved is the above scenario? A few hours earlier on Sunday my friend Eric Janszen of sent me a note he had received from a fund manager attesting to the lack of care for clients of financial institutions, giving a flavor of the predatory spirit guiding the bailout’s planners and its beneficiaries:


This is so important a topic, that it deserves top billing!!! Hidden inside the AIG bailout funding package, surely hastily cobbled together, but carefully enough to include a totally corrupt clause, was a handy dandy clause that permits raids. The conglomerate financial firms are permitted at this point to use private individual brokerage account funds to relieve their own liquidity pressures. This represents unauthorized loans of your stock account assets. So next, if the conglomerate fails, your stock account is part of the bankruptcy process. ...

The actual evidence for legalized stock account raids by the financial firms can be found in recent articles in Financial Times and Wall Street Journal. So this is not a wild claim. The September 14th article on the Wall Street Journal entitled "Wall Street Crisis Hits Stocks" was the first exposure.

The runs on US banks are in progress. See Washington Mutual, where private email messages have been shared by WaMu bank officers. WaMu alone could deplete the entire Federal Deposit Insurance Corp fund for bank deposit coverage. Eventually the FDIC will compete for USGovt federal money for bailouts and nationalizations, which would be funded by the US Govt because they will not let FDIC run dry.

My Kucinich-campaign colleague David Kelley and I agree on how Wall Street’s action plan ideally would work. The Republicans will take the $800 billion of U.S. Treasury securities presently earmarked for the Social Security Administration accounts, and achieve the privatization that Pres. Bush and his backers have been pressing for so hard for the past eight years. Under emergency conditions - today’s 9/21 as the modern analogue to 9/11 just seven years ago (the well-known natural lifespan of locusts) - will swap these Treasury bonds for junk mortgages, at face value of course. Then, a few months from now (after the new president takes office in February, or perhaps a few days before to achieve the usual political clean slate) the government will tell prospective retirees and workers who have been suffering FICA withholding all these years, "Oops, the government has just lost all your money. Well, that just shows how government planning is the road to serfdom. Next time save yourself by handling your own accounts - or at least choosing whether to consign your forced retirement savings to Lehman Brothers, Bear Stearns or kindred predatory money managers. If only we could have done this a few months ago, there would have been no meltdown and Wall Street would have been doing just fine."

If you are going to take such a step, you of course say you are doing it to "save" the economy. You even proclaim yourself to be a hero. This is how the nation’s newspaper and TV media responded after news of the bailout of AIG and, more to the point, the Wall Street gamblers and derivatives traders whose gains and losses - that is, the ability of trillions of dollars worth of computer-driven trading gambles - to collect their winnings and avoid losses.

Today’s financial markets are well personified in the classic Hollywood westerns. They typically are about towns taken over and run by a banker ("Wall Street" in miniature), for whom a retinue of outlaws and their gangs work (the boys in the back room). The banker runs the town, usually doing business from its biggest building, the local saloon or casino where most of the action occurs. It has a brothel upstairs (the usual Hollywood simile for Congress). The good-hearted prostitute (sometimes the madam) with a heart of gold usually is the movie’s only honest secondary character (a stand-in for one of the bleeding-heart Congressmen on the finance or mortgage-credit committees lisping well-scripted lines promising that all new legislation will benefit homeowners, not predatory mortgage lenders).

There also is a good-hearted investigative newspaper publisher-journalist. He almost always gets killed and his printing press destroyed. (Today his paper is simply bought out by a conglomerate and merged into the pro-Wall Street mass media.) The banker’s gang appoints the sheriff (on today’s larger scale, the Federal Reserve and Justice Department), and also the mayor (who rarely is seen except to sign papers). The sheriff’s job is the same as in today’s world: to evict debtors from homes and properties on which the land-greedy banker is foreclosing. This is the common theme of westerns, after all: They are all about the great American land grab - situated out West so as to protect the identities of the guilty here in the East on Wall Street.

Attentive readers will notice that I have left out of this script the hero. His role is to fight the banker/land grabber and the gang he has brought into town. Wearing a white hat, he rides into town to clean it up, and in the final showdown shoots the head gunslinger (or perhaps the banker himself, who is done for in any event). This is the position that Mr. Paulson portrays himself. But what the audience doesn’t see (at first) is that the bullets he is shooting are merely blanks. It is in fact only a movie after all! The showdown is staged! He works for the banker himself!

Goldman Sachs turns itself into a big-fish bank and gobbles up all the little fish in a great financial squeeze.

An alien class of financial mock-heroic poseurs has taken over - land grabbers and banksters of various stripes. Almost unnoticed, an invasion of government snatchers, bank snatchers, money snatchers pretending to be Main Street, pretending to be "the economy" and now claiming to need to be rescued - at the cost of saying goodbye to public finance as we have known it, goodbye to Social Security, to peoples’ hope for upward economic mobility.

It looks like Wall Street will receive government support at Main Street’s expense. This is hardly surprising when you look at who the major campaign contributors are - to both parties. Understandably, Mr. Paulson and Mr. Bernanke are trying to muddy the issue for their financial constituency. Hedge fund traders and kindred banksters have metamorphosized into "the financial system to be saved" and hence "the economy" itself. As if it is necessary to save peoples’ savings deposits and bank accounts by rescuing the casino companies with which the banks have merged - the predatory mortgage brokers, the insurance companies with their fraudulent accounting, the crooked asset-management firms, all of which have merged into conglomerates "too large to fail." If they are too large, simply un-merge them. Restore Glass-Steagall, which worked for 65 years to prevent this kind of problem from erupting.

The most egregious pretense is that the problem is only temporary, not structural. We are merely "freeing up" the market for new loans. This is precisely the opposite of what the classical economists meant by "free markets." What America has is a bad debt problem, not a "liquidity" problem. There is no "illiquidity" when people refuse to buy a junk mortgage on a property worth only a fraction of the mortgage’s face value. Many of these bad mortgage loans are fraudulent. The Treasury bailout seeks to make $700 billion of fictitious financial claims "real" - that is, way overvalued as compared to their actual worth(lessness).

What is reducing real estate and corporate stocks and bonds to junk is the exponential growth in the economy’s debt overhead. Debts that cannot be paid have little market value at any price. The nation must make a choice: If the government bails out the large financial institutions for having made bad loans - or to be more precise, for not being able to pawn off these bad loans on foreigners or other financial prey in a timely fashion - then the only way in which the government (or other new creditors) can be paid back is by not forgiving the debts owed by strapped homeowners. This would tighten the debt terms on debtors at the bottom of the food chain - those against whom the bank-sponsored new bankruptcy has been aimed. This is why I deplore the government bailout of Fannie Mae and Freddie Mac for the junk mortgages it has been packaging from predatory lenders such as Countrywide Financial, Washington Mutual and other deceptive lenders. The wrong parties have been gifted.

I should add that the solution does not lie simply in creating a new regulatory system, much less a single regulatory agency. After all, it was at Wall Street’s command that the Bush Administration installed deregulators in all the key regulatory positions. This meant that regulations didn’t matter at the Environmental Protection Agency (EPA), at the Fed under Alan Greenspan, at the Securities and Exchange Commission (SEC) under Mr. Cox (after William H. Donaldson resigned when the White House would not let him regulate as much as he thought necessary) or at the Department of Justice under Bush yes-men such as Alberto Gonzales. Politics and people have turned out to be more important than the law. We have seen the Supreme Court scrap the Constitution in the 2000 election - with acquiescence from the Democrats, starting with Mr. Gore’s refusal to contest Florida.

To appoint a single regulator would prevent all other regulators - and law enforcement officers, attorneys general, the SEC and so forth - from enforcing honest financial policies in the event that an incoming president should appoint another Greenspan, Gonzales or other ideological extremist averse to the idea of applying existing regulations and honest laws. Under these conditions "consolidated regulation" would mean a free ride for crooks much like J. Edgar Hoover gave the Mafia under his tenure.

My alternative solutions are as simple as Mr. Paulson’s, but of course are quite different. The public interest does indeed call for maintaining the economy’s basic credit, money-transfer, credit card and depository checking and savings functions. But not under the current venal and predatory management practices. It is this management that has lobbied so hard for deregulation, and whose industry representatives have insisted so strongly to place extremist ideological deregulators into the economy’s major positions. Therefore, the Treasury only should buy junk mortgages at current market price. The losses should be taken in order to re-even out the wealth pyramid that has become so much steeper under the Greenspan-Bernanke ploys. The banks knew full well that these mortgages lacked underlying value. The price of making use of this borrowing facility is to forfeit all equity stock to the government. The Treasury should prohibit any financial institution that sells or swaps securities to the Fed from paying any dividends to shareholders or stock options and bonuses to managers. It also should give the government priority over other creditors. Otherwise, firms that have negative equity will benefit purely at public expense, using the money to pay dividends, bonuses and exorbitant salaries.

Second, we need to restore the Glass-Steagall separation of commercial banks from risk-taking investment banks, mortgage brokers and other financial-sector flotsam and jetsam. Break up the mergers between banks and casino sell-side financial and real estate institutions. Just the opposite is occurring: On Monday, Sept. 22, the financial universe was transformed by the announcement that Mr. Paulson’s Wall Street firm, Goldman Sachs, was transforming itself into a bank holding company. The casinos are to take over the banking system as big fish eat little fish in the present financial emergency. It looks like new giants are emerging, already larger than the government in terms of the magnitude of the debts they have run up - and certainly in their earning power. Indeed, who is to say that extracting interest from the U.S. economy will not emerge as the new form of taxation?

Third, re-write the bankruptcy laws to favor debtors once again, not creditors. This means reversing the current bankruptcy code sponsored by lobbies from the credit-card companies. The interests of the five million mortgage debtors faced with foreclosure and expropriation this year should rightly be placed above the interest (literally) of predatory creditors.

Fourth, sharply increase property taxes, shifting them back off labor and sales. We need to return to the classical idea of taxing unearned and unproductive income instead of adding to the price of labor and industry. What has been freed from the tax collector by the shift of taxes off property has not lowered the cost of housing and other real estate, or corporate costs of doing business. The income "freed" has ended up being paid to the banks as interest. The government still has had to raise money - but in the form of taxes that fall on labor’s wages and industry’s profits. So labor and industry now pay twice for what they formerly paid only once. They still pay the same overall amount of taxes, but also pay an equivalent amount of interest. The financial system is crowding out the government.

In the fifth place, we need to start discussing whether we really need a banking system that behaves in the way the present one does. In recent decades banks have made loans mainly to inflate asset prices by loading real estate and industry with interest-bearing debt. What if all banks were to be organized along the lines of savings banks, with 100% reserves. This is the Chicago Plan from the 1930s (currently revived by the American Monetary Institute, which holds its annual meeting this week in Chicago, by the way). This at least would go back to basics to provide a foundation from which to re-begin to discuss just what kind of credit the economy needs and what would be the best terms on which to structure financial markets.

Any solution does indeed need to be radical. But it can be much less radical than Mr. Paulson’s power grab for his Morgan Stanley firm and the rest of Wall Street in the closing days of the Bush administration just before the Republicans look like losing power. The indicated solution is to reverse predatory finance, not bail it out at permanent taxpayer expense. Government funds are not unlimited. Is it worth wiping out hopes for Social Security and public health care, for renewed national infrastructure spending and industrial restructuring in order to bail out a banking and financial system that has not contributed to economic growth but has weighed it down with reckless debt regardless of the economy’s ability to pay?

Is it right to blame the five million homeowners now in arrears and facing foreclosure, but rewarding the irresponsible bankers and outright fraudulent institutions who have used Enron accounting to make a once-in-a-lifetime rip-off? That is what Mr. Paulson would do in insisting that Congress pass his legislation without taking time to discuss the issue and above all without "assigning blame." But without such assignation, how do we know where to go from the current mess caused by financial deregulation, repeal of Glass-Steagall, the financial system’s Enron-style accounting and predatory mortgage lending?

Before leaving from his post as Federal Reserve Chairman, Alan Greenspan’s speeches sounded like "Apres moi, le deluge." We are living in a world whose economic and political pressures are much like those in the interregnum between Louis XIV and the French Revolution. Where are the revolutionists today?

Bush Brings WMD Line to Wall Street

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By Dean Baker

Remember how President Bush got Condoleezza Rice and Colin Powell to run around warning about Saddam Hussein's nuclear bombs? This phony scare tactic got Congress to give him the authorization he needed to start the Iraq war.

Even though his credibility has vanished, in large part because of the Iraq war, President Bush is again using a lie to cow Congress into giving him a huge blank check. This time, the check is for $700 billion, to be handed over to Treasury Secretary Henry Paulson, to spend pretty much as he wants.

Also see below:
Dean Baker | Progressive Conditions for a Bailout •

The lie in this case is that if Congress doesn't cough up the money immediately, the banking system will collapse and the economy will fall into depression. To be fair, there is more truth to this story than the Iraq WMD line.

The policies of President Bush and the recklessness of the Wall Street crew really have brought the financial system to the edge of an abyss. There was a near meltdown last week as Lehman Brothers, the huge investment bank, collapsed; and AIG, the nation's largest insurer, followed suit. Banks stopped lending to each other, creating a situation in which our system of payments (e.g. checks and electronic transfers) stopped functioning.

The Federal Reserve Board and the Treasury then took a variety of extraordinary measures to patch things together and get the financial system working again. Nonetheless, there is no doubt that the system really is on edge at the moment and that the collapse of another giant financial institution can set off another panic. Still, Congress has some time in this story to deliberate about how a bailout should be structured rather than just handing over a blank $700 billion check to Henry Paulson, as the administration requested.

Just to be clear, we are in this mess for two reasons. First, the financial regulators, both in the Bush administration and more importantly at the Fed, were completely asleep for most of the decade. As the housing bubble grew to ever more dangerous proportions, and lenders adopted increasingly questionable lending practices, the regulators did nothing.

The other reason we are in this mess is that the Wall Street banks got themselves hugely leveraged in real estate and other assets. In many cases they had no appreciation of the value of the underlying assets. They also apparently did not understand the complex financial derivatives that they had themselves created.

Now this situation has exploded in their faces, sinking several of the country's largest financial firms and bringing dozens of others near the cliff. As a result of the recklessness of the Wall Street gang, the economy is now facing a recession, with the unemployment rate rising rapidly. Millions of families are losing their homes.

So what is President Bush proposing? He is telling Congress that everything can be put back in order if they just give $700 billion to Henry Paulson, with no strings attached.

Keep in mind that Henry Paulson is himself one of the Wall Street gang, a former head of Goldman Sachs who pocketed hundreds of millions from the sort of deals that have wrecked the economy. He also managed to get just about everything wrong in his assessment of the economy. He missed the housing bubble altogether and then underestimated the seriousness of the financial crisis at every turn.

We cannot afford to give Paulson a blank check. Congress must first insist on some serious accountability in the bailout process: that means a board that involves Congressional appointees and a high level of transparency.

Congress should also insist that the Wall Street crew pays for its incompetence. An absolute cap of $2 million in annual compensation for any executive of any firm taking part in the bailout seems fair. The taxpayers should also be compensated for their support. The government should acquire an ownership stake in the companies that it bails out. For example, for every $10 billion in bad debts it buys, the government should get $2 billion in stock. That way, the taxpayers stand to get back some of their money.

There are more conditions that should be imposed as part of the bailout, but the key point is that Congress has time to structure the bailout to serve the country's interest. It should not allow itself it to be bullied into again giving the Bush administration a huge blank check.

Mushroom Cloud over Wall Street

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By Mike Whitney

These are dark times. While you were sleeping the cockroaches were busy about their work, rummaging through the US Constitution, and putting the finishing touches on a scheme to assert absolute power over the nation's financial markets and the country's economic future. Industry representative Henry Paulson has submitted legislation to congress that will finally end the pretense that Bush controls anything more than reading the lines from a 4' by 6' teleprompter situated just inches from his lifeless pupils. Paulson is in charge now, and the coronation is set for sometime early next week. He rose to power in a stealthily-executed Bankster's Coup in which he, and his coterie of dodgy friends, declared martial law on the US economy while elevating himself to supreme leader.

"All Hail Caesar!" The days of the republic are over.

Section 8 of the proposed legislation says it all:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Right; "non-reviewable" supremacy.

Congress, of course, is more than eager to abdicate whatever little authority they have left. They're infinitely grateful for their purely ceremonial role, the equivalent of Caligula's horse, albeit, with considerably less dignity. Has even one senator spoken out against this madness, which--according to informal internet polls--is resoundingly rejected by the voters? Does it concern the members of congress at all, that the present financial crisis was brought on by the proliferation and sale of trillions of dollars of mortgage-banked garbage which were fraudulently represented as Triple A rated bonds by the very same people who now claim to need unprecedented and dictatorial powers to fix the problem? Or are they more worried that the steady torrent of contributions which flows from Wall Street to congressional campaign coffers will be inconveniently disrupted if they fail to ratify this latest assault on democratic governance? The House of Representatives is one big steaming dungheap that should be leveled and turned into an amusement park instead of a taxpayer-funded knocking shop. What a pathetic collection of cowards and scumbags.

Bloomberg News: "

"The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets. Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.

"He's asking for a huge amount of power,'' said Nouriel Roubini an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy." (Bloomberg)

The banksters own this country, always have; only now they've decided to strip away the curtain and reveal the ghoulish visage of the puppet-master. It ain't pretty.

Paulson decided that the financial markets needed an emergency trillion dollar face-lift just weeks before his former business partners at G-Sax were dragged off to the chopping block. Was that the reason? Everyone on Wall Street knew that the bulls-eye had already been ripped from Lehman's bloody back and was about to be fastened on Goldman's. Now, it looks like they will escape their day of reckoning due to Paulson's eleventh-hour reprieve. Nice touch, eh?


"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them."

Market Ticker's Karl Denninger summed this up best:

"This is the de facto nationalization of the entire banking, insurance and related financial system..That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act.....The bill gives Paulson the ability to nationalize unlimited amount of private debt and force you and your children to pay for it."

Denninger again:

"The claim is that this is intended to 'promote confidence and stability' in the financial markets.
It will do no such thing. It will instead strike terror into the hearts of investors worldwide who hold any sort of paper, whether it be preferred stock, common stock or debt, in any financial entity that happens to be domiciled in the United States, never mind the potential impact on Treasury yields and the United States sovereign credit rating.

I predict that if this passes it will precipitate the mother and father of all financial panics." (Market Ticker)

Amen. The transformation from a free market to a centralized, Soviet-style economy run by men whose judgment and credibility is already greatly in doubt; does not auger well for the markets or the country. Anyone with a lick of sense would cash in their chips first thing Monday and look for capital's Elysium Fields overseas or as far as possible from the circus sideshow now run by G-Sax ringleader, Colonel Klink.

Paulson's Chicken Little routine might might have soiled a few senatorial undergarments, but let's hope the American people are made of sterner stuff and will reject this charade. The conversation should be shifted from conceding more authority to hucksters in pin-stripes to indictments for securities fraud. Even the most economically-challenged nation ought to be able to afford a few sets of leg-irons and a couple hundred jail cells. That's all it will take. That, and a couple brisk dunks on the waterboard. Glub, glub.

Paulson's plan to revive the banking system by buying up hundreds of billions of dollars of illiquid mortgage-backed securities (MBS) and other equally poisonous debt-instruments; ignores the fact these complex bonds have already been "marked to market" in the recent firesale by Merrill Lynch. Just weeks ago, Merrill sold $31 billion of these CDOs for roughly $.20 on the dollar and provided 75 percent of the financing, which means that the CDOs were really worth approximately $.06 on the dollar. If this is the settlement that Paulson has in mind, than the taxpayer will be well served. But this will not recapitalize the banks balance sheets or mop up the ocean of red ink which is flooding the financial system. No, Paulson intends to hand out lavish treats to his banker buddies, while interest rates soar, pension funds collapse, the housing market crashes, and the dollar does a last, looping swan-dive into a pool of molten lava. Thanks, Hank.

Economist and author Henry Liu summarized the current maneuvering like this: "The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep price of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy."

Indeed. The Fed and Treasury have decided to backstop the entire global financial system (foreign banks can access the Fed's facilities, too!) with paper money which is rapidly losing its value. Watch the greenback tumble tomorrow in currency trading.

Congress is getting steamrolled and the American people are getting snookered. Consumer confidence--already at historic lows--is headed for the wood-chipper feet-first. Something has got to give.

One minute everything is hunky-dory; the subprime meltdown is "contained" and "the fundamentals of our economy are strong".(Paulson) And, less than a week later, congress is forced to surrender their constitutionally-mandated right to oversee spending in order to forestall economic Armageddon. Which is it? Or is the real objective just to keep the country on an emotional teeter-totter long enough for all state-power to be subsumed by the Wall Street Politburo?

No one knows what will happen next. We are in uncharted waters. And no one knows what the political landscape will look like after the dust settles from this outrageous power grab. According to Paulson, things are so dire, the entire nation will be reduced to smoldering rubble and twisted iron. But can we trust him this time after his long litany of lies?

Isn't it about time to send the cockroaches scuttling back to their hideouts and bring in the cleaning crew to hose the whole place down? It sounds like a job for Ralph Nader, a man of vision and unshakable integrity. Give Ralph a badge and let him deploy his Raiders to Wall Street armed with bullwhips and tasers. Let them post a guard in every CEOs and CFOs office and every boardroom on the Street---and if even one decimal is accidentally moved to the right or left on the corporate ledger; clap them in leg-irons and drag them off squealing to Guantanamo. That's how you clean up Wall Street!

Don't let the prospect of a national crisis trick you into giving up your freedom, America. The people behind this scam are the same landsharks and flim-flam men who polluted the global marketplace with their snake oil and toxic sludge. These are the fraudsters who manufactured the crisis to begin with. This is just the latest installment of the Shock Doctrine; engineer a crisis, and then, steal whatever is left behind. Same sh**, different day. Be resolute. Don't budge. Our economic foundations may be crumbling, but or determination is not. This is our country, not Goldman Sach's. The people who destroyed America must be held to account. Their time is coming. Justice first.

The $700 Billion Bailout: One More Weapon of Mass Deception

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By Richard W. Behan

Not since the Bush administration’s lies about Iraq’s "weapons of mass destruction" have the American people been so despicably misled.

The Bush administration’s proposal to buy, with taxpayers’ money, $700 billion of toxic liabilities from the corporate financial titans of Wall Street is a fraud. It is by no means necessary, as Treasury Secretary Henry Paulson claims in the agency’s Fact Sheet, "to promote market stability, and help protect American families and the U.S. economy."

It is necessary only to assure the financial survival of Wall Street banks and brokerages, the administration’s most loyal supporters and its greatest political contributors -- and in large measure the cause of the financial meltdown the country is facing.

These financial corporations lobbied ferociously to be free of government regulation. Had they not succeeded, they could not have done what they did next: They created and leveraged trillions of dollars of complex "derivatives" -- mortgage-backed securities, collateralized debt obligations and credit default swaps -- all riding on an unprecedented real estate bubble stimulated by their frenzy of creative finance. When the bubble burst, as bubbles do, many of these financial titans faced bankruptcy, their obligations far exceeding their assets.

The $700 billion of taxpayers’ money, in the plan suggested by Paulson, will buy enough of the toxic obligations to allow the companies to avoid bankruptcy. Not coincidentally, a major beneficiary of the scheme will be the investment bank Goldman Sachs. Paulson resigned as CEO of Goldman Sachs to become the Treasury secretary in 2006, having amassed a personal net worth of $700 million during his 32-year tenure at the bank (on average, $21.9 million per year).

We need to "remove the distressed assets from the financial system," Paulson suggests. Relieved of the burden, the great Wall Street banks can then regain, presumably, its folksy function: assuring that "money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs."

For the good of the American economy, Paulson is correct that credit needs to flow and the distressed assets need to be removed. He is not correct that credit needs to flow from Goldman Sachs and other Wall Street financial houses. And the distressed assets do not have to be assumed by the taxpayers.

There are other, far more equitable and justified ways to accomplish both.

The distressed assets -- that is, the losses -- can and should be absorbed by the executives, directors and stockholders of the corporate banks and other institutions that propagated the financial firestorm. They can and should, as the dictates of the free market insist, stand accountable for their actions and accept bankruptcy. It is not the responsibility of the American taxpayers to shield them.

Paulson wants to rescue Wall Street so Wall Street, he assures us, can get back to lending. That is certain to save Paulson’s former firm and the others, but it is by no means certain that credit will then flow to "home loans, school loans and investments that create jobs." The Wall Street firms are far more likely to revive their lucrative trade in complex and esoteric financial "products."

Seven hundred billion dollars is a lot of money. It is more than we’ve spent so far on the administration’s fraudulent "war on terror" (See "The Mega-Lie Called the ’War on Terror’: A Masterpiece of Propaganda".) Is it not better public policy to channel the money to "households and businesses" in some other, more direct, more effective and far more reliable way?

There are hundreds, if not thousands, of Main Street banks and thrift institutions that played no part in the real estate securitization/derivatives game. Certainly the $700 billion could be made available to them instead, at low but positive interest. Or, special publicly held banks could be set up in statute and capitalized with the $700 billion.

The crisis is real, but there are ways to serve the nation’s interests at large and even to earn a modest return on its assets. We do not need to subsidize the failure of Wall Street and hope thereafter for better days.

The welfare of the Wall Street financiers should not be the focus of public policy, and this clever attempt by the Bush administration is a perversion of decent governance. We should not be stampeded into the greatest corporate theft of public assets, arguably, in the nation’s history. Instead, to paraphrase one of our presidential campaigns, we need to put our country first and stop Paulson dead in his tracks.

Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse

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By Joshua Holland

The immediate cause of our financial meltdown is unchecked, unbridled greed. Mainstream newspapers and the business press are doing a fairly good job of explaining how the lack of regulatory oversight led us into this nightmare.

But you have to dig down one layer to find the cause of that situation. Under cover of the ideological euphemism known as the "free market" and with enormous cash investments over the past four decades, business elites have captured the regulatory organs of powerful democratic states -- nowhere more so than the United States -- and promoted their own narrow economic agendas for short-term gain.

There’s an enormous amount of discussion about that in the independent media. But to drill down a layer deeper, to the bedrock of the crisis, you have to go to some deep thinkers who don’t get much play in our mainstream economic discourse.

As foreign policy analyst Mark Engler notes in his new book, How to Rule the World, declining returns on traditional investments in manufacturing and industry since the 1970s go a long way toward explaining today’s highly speculative economy -- pushing capital into developing countries and into bubble after speculative bubble in search of a better profit margin.

It’s important to understand what’s going on at all three levels, because we may have come to a fork in the road, a point at which the decisions made now may determine the future of the global economy.

We may or may not also be on the verge of another Great Depression.

The Bush Bailout: Privatizing Gains and Socializing Risk

On Saturday, hoping to stave off that dark possibility, the Bush administration proposed an unprecedented bailout for investors, a scheme that would authorize the Treasury Department to spend as much as $700 billion in tax dollars over the next two years to buy up bad securities, with little Congressional oversight save for a semiannual report on the process.

The move came after the federal government had already sunk a total of $900 billion into America’s financial institutions this year, potentially bringing the total value of the Fed’s tinkering to $1.6 trillion over three years.

The White House, Congressional leaders and Treasury officials are haggling over the details. Things are moving quickly, with a mammoth intervention that was unspeakable in economic circles a month ago now looking more and more inevitable.

The structure of the proposed bailout may change during those negotiations -- Democrats in Congress are pushing to save more homeowners and tie the package to some sort of limits on CEO pay for institutions that get a lifesaver -- but the deal outlined in the brief document released on Sept. 20 epitomizes the principle of privatizing gains while socializing risk. In other words, we’re splitting an oil well with the Big Boys on Wall Street: They get the oil, we get the shaft.

It is, in short, a draft of what could be one of the greatest rip-offs in history. Bush, on the way out of power, is trying to create a publicly financed honeypot for the private sector on a scale never before imagined.

Those who played fast and loose with newer, ever shakier investment instruments in order to squeeze a few more bucks out of the markets’ "irrational exuberance" about the housing sector would get a payday that would save their bacon. According to the New York Times, this huge pile of taxpayers’ cash may even be available to foreign investors.

Home prices would continue to tank, though, as banks shed their bad loans at discounted prices to the government. Those subsidized assets would then be liquidated -- on the cheap because they’re so overvalued -- to resuscitate the financial system. Rick Sharga, a senior officer with RealtyTrac, which monitors the housing market, told Reuters, "We’ve seen fewer and fewer properties go through the auction process because there’s either little equity in them or even negative equity. So there’s no incentive for people to buy them at the auctions."

Sharga added that "bank repossessions continue to grow at a pretty rapid clip," but an analyst told me recently that he knew of banks that simply weren’t taking possession of foreclosed properties because they didn’t want them on their balance sheets.

As those assets are disposed of, the value of all Americans’ homes will continue to fall, because sales of comparable properties determine their worth. That would, in turn, leave a greater number of Americans with mortgages worth more than the amount of equity in their homes, and the cycle would continue. Things are already bleak on that front; the rate of U.S. foreclosures increased 75 percent in 2007 and 55 percent in the year ending this June. The Associated Press reported, "More than four million American homeowners with a mortgage, a record nine per cent, were either behind on their payments or in foreclosure at the end of June."

Many more will lose their homes, and all of us will get the tab: higher taxes, swelling deficits, higher interest rates and a moribund economy.

The plan doesn’t specify what, if anything, U.S. taxpayers will get in return for their largesse. The government isn’t spending more than a trillion dollars to nationalize failed institutions in order to protect stakeholders and liquidate those overvalued assets in an orderly manner. That might make a lot of sense, and it would essentially make Joe and Jane taxpayer owners of something that might rebound in value down the road.

Instead, Bush’s proposal would take bad paper off the books of institutions that are ailing but haven’t yet gone belly-up, and we wouldn’t necessarily get a stake in those institutions; they’d only become "financial agents of the government," according to the draft released Saturday.

As Paul Krugman notes, "historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets."

The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the (Resolution Trust Corporation, founded in the wake of that crisis). The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system -- that is, convince creditors of troubled institutions that everything’s OK -- simply by buying assets off these institutions.

Making matters even worse is the fact that it’s almost impossible to put a fair market value on this massive pile of bad debt. As Peter Goodman of the New York Times notes, "no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday."

There will be a fight in Washington, and much debate, about which ideological direction the bailout should lean, and the version offered up by the Bush administration is -- no surprise here -- tilted heavily in favor of those at the top of the economic pile.

What’s clear is that there is going to be a massive transfer of public wealth to the private sector, and at least the lion’s share of that cash, if not all of it, will end up in the hands of an investor class whose recklessness got us into this mess in the first place.


This bailout is a desperate attempt to save the modern economic system from falling under the weight of its deep structural imbalances. As such, it’s unlikely to work over the medium and long terms, even if it has the desired immediate effect of propping up creaky markets and restoring their (largely unjustified) sense of security.

The proximate cause of the financial system’s meltdown is not all that hard to grasp. The decades-long supremacy of the ideology euphemistically called "free trade" resulted in capital being unmoored from national economies and freed to move around the world with few limitations (under the imperative of government not "intervening" in markets). Unconstrained by borders and investment rules, those dollars, yen, euros and what have you roamed the planet seeking a better rate of return. Investors moved in packs, rushing lemming-like to whatever hot up-and-coming market the Economist was writing about in a given month, and a series of bubbles resulted.

Those bubbles made some people incredibly rich, and hurt others badly.

Of late, real estate was the can’t-miss investment, and as enormously overvalued housing bubbles sprang up, notably in the United States, Wall Street’s financial whizzes started offering newer and more "creative" investment vehicles, bundling mortgages and selling them off to investors from around the globe.

That was driven by an era of relentless deregulation, both at home and abroad. Here in the United States, the trend of deregulation culminated in 1999 with the death of the Glass-Steagall Act, the New Deal-era legislation that had forced financial institutions to choose between investment banking and commercial lending. Meanwhile, international bodies like the WTO and the IMF were pressuring the governments of all countries to drop their controls on the flow of cash and goods.

Without fear of a regulatory backlash, the banks pushed their new investments hard, and investors gobbled them up with glee. Writing in the Columbia Journalism Review, Dean Starkman cited reports from the business press about loan agents at Ameriquest being ordered to watch "Boiler Room," the film about sleazy financial brokers pushing bad investments on gullible retirees (Ameriquest was a predatory subprime lender that went down last year). Starkman quoted an executive with Morgan Stanley’s mortgage unit as saying, "It was unbelievable. We almost couldn’t produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce."

In the end, investors were basically buying up paper that had only a distant relationship with anything concrete. The link that had long existed between homeowners and lenders was broken, and debt -- in this case debt tied to housing, but also commercial and consumer debt -- became a hot investment vehicle.

Convinced that the market would continue to grow indefinitely -- or maybe that they’d get bailed out if things headed south -- investors leveraged their assets further and further, in effect buying on margin just like the bad old days before the Crash.

The banks and investment houses worked hard to find new ways to make their own pounds or rubles, creating not only new types of debt-based securities, but also coming up with new forms of insurance to (supposedly) shield investors against the risk those loans represented.

That was all well and good for them, if not for the rest of us, until the housing market started to tank. Despite assurances from the government earlier this year that the disaster had been "contained" to the subprime market, it began to spread. As the Associated Press reported, the tanking real estate market "shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments." Bloomberg reported that 3 million American homeowners are holding prime (or, actually, semi-prime) "alt-A" loans (don’t ask) worth about $1 trillion, or $150 billion more than the entire outstanding subprime market.

As those loans -- many of which were taken on investment properties by people expecting a nice, quick turnover -- started to go belly-up, a panic ensued. As the rot spread, banks started going down and investors essentially began a stampede on an already weakened financial sector. It was the modern-day equivalent of a bank run, but on a global scale.

That posed a risk to the mammoth and wholly unregulated market in insurance on bad loans that had grown up around these new kinds of investments. The market in what are known as "credit default swaps" is of unknown size, but it’s estimated to be worth as much as $60 trillion, most of it essentially paper backed by too little in the way of hard assets.

The government knew that if that market tanked, it could take down the global economy. That threat was, in large part, the thinking behind the $85 billion dollar bailout of AIG less than a week ago -- AIG was a key player in this huge but hazy market, and it did business with banks around the world.

At that point, a feeling of panic was spreading, and lawmakers in Washington felt that they had to do something, anything, to stop the meltdown. The banking sector’s crisis threatens the entire economy, as the capital needed for new investment and expansion has begun to dry up. Jared Bernstein of the Economic Policy Institute told the New York Times that "Wall Street isn’t this island to itself" and warned that if the finance sector "gets worse, we’re going to be stuck in the doldrums for a very long time, because that directly blocks healthy economic activity."

Global Capitalism’s Crises of Poverty and Overproduction

The financial meltdown in the United States is huge, but it isn’t unique. Think of the Asian financial crisis, Mexico’s "peso crisis" or the dot com crash. All had one thing in common: an investor class that at one time valued thrift, limited risk and steady growth plunged trillions with almost suicidal abandon into one bubble after the next.

All of which begs the question of what it is about our modern economic system that creates this cycle of inflating and bursting bubbles.

The answer, in large part, comes down to a decline in profitability in investments in concrete things, which has sent investors scurrying for abstract financial instruments in search of a fat return.

That shift, in turn, results from a simple aberration: a small fraction of the planet’s population is tied to an economic system in which productivity is effectively an end unto itself. It makes tons and tons of widgets, always seeking new widget markets (and sucking up most of the planet’s raw materials). At the same time, the powerhouses of the global economy -- the United States, Europe, Japan and the "Asian Tigers" -- have given woefully low priority to economic development in the rest of the world. They’ve essentially relegated it to NGOs and an underfunded United Nations, and in their own development funding they’ve prioritized geopolitics -- their "national interests" -- over poverty relief.

That’s left much of the rest of the world’s population (and this includes people in the wealthiest countries as well as the poorest) with barely enough money to feed their families, much less buy all those widgets. According to the UN, 80 percent of the people on the planet live on $10 dollars a day or less, and they’re not going to take many flights on Boeing’s shiny new airplane, buy GE’s dishwashers or use Nortel’s broadband. Over just the past two years, the number of people living on the "edge of emergency" -- in imminent danger of starvation or death from disease epidemics -- has doubled, zooming from 110 million people to 220 million, according to CARE International.

In other words, at the heart of the current crisis, like those that preceded it in recent years, is a massive imbalance inherent in the modern system of capitalism. It is caused by twin crises inherent in the structure of our global economy: a crisis of overproduction in the "core" states with advanced economies, and soul-crushing poverty in much of the "periphery."

In the booming years after World War II, the wealthy countries, led by the United States, did very well manufacturing goods for the entire planet. But as Europe and Japan rose from the ashes, and later, as production in countries like Taiwan, South Korea and Singapore increased, the industrial world simply started making more crap than there were consumers to purchase it.

Capitalism’s tendency toward overproduction has been something with which thinkers dating back to Karl Marx have wrestled. If, as one definition holds, capitalism is all about maximizing efficiency, what happens when meaningful production becomes so efficient that the system ends up cranking out more goods than the population needs -- more than it can absorb?

The answer is simple. Since the middle of the last century, investors’ returns on real production -- manufacturing -- has been in steady decline. Economist Robert Brenner described it as a "long downturn" in the world’s most advanced economies. He noted that the seven leading industrial economies grew by a steady rate of 5 percent or more annually from the end of World War II through the 1960s, but in the 1970s that fell to 3.6 percent, and it has averaged around 3 percent since 1980.

The social critic Walden Bello has arguably been the clearest voice connecting the problem of overproduction to the rush of speculation that has led to today’s financial crash. Bello noted that in the 1990s, the heyday of corporate globalization, the "U.S. computer industry’s capacity was rising at 40 percent annually, far above projected increases in demand."

The world auto industry was selling just 74% of the 70.1 million cars it built each year. So much investment took place in global telecommunications infrastructure that traffic carried over fiber-optic networks was reported to be only 2.5 percent of capacity. Retailers suffered as well, with giants like K-Mart and Wal-Mart hit with a tremendous surfeit of floor capacity. There was, as economist Gary Shilling put it, an "oversupply of nearly everything."

A report in the Economist, cited by Bello, found that the world of Clinton’s "New Economy" was "awash with excess capacity in computer chips, steel, cars, textiles and chemicals," and noted that "the gap between capacity and output was the largest since the Great Depression."

An inevitable result of that imbalance was a massive migration of capital from real, productive industry to the "speculative sector" run by financial giants like AIG and Lehman Brothers. As Bello noted:

So profitable was speculation that in addition to traditional activities like lending and dealing in equities and bonds, the ’80s and ’90s witnessed the development of ever more sophisticated financial instruments such as futures, swaps and options -- the so-called trade in derivatives, where profits came not from trading assets but from speculation on the expectations of the risk of underlying assets.

Exacerbated by a relentless assault on public interest regulation and economic nationalism under the guise of "free trade," the increasingly speculative tendencies of global investors created fertile ground for the growth of that pile of bad paper to which the Bush administration is reacting with its trademark brand of top-down reverse socialism.

In a nutshell, our modern economic system has become divorced from what an "economy" is supposed to do in human terms. It was anthropologist Karl Polanyi who argued that the term "economics" has both a formal meaning -- a system of exchange of goods and services designed to maximize efficiency -- and a "substantive" one: the survival strategy of humans in their natural environment. It’s a concept that transcends conventional economic concepts of supply and demand, markets and states, and it’s one that we’ve ignored for too long.

As the financial sector threatens to fall apart around us, it’s important to understand the crisis on all of these levels, or we run the risk of losing sight of the forest for the trees. One has to keep in mind that this is all happening during the era of the $100-plus barrel of oil, with the global economy integrated more than ever before and during a period of deep environmental peril due to global climate change and related problems of drought and desertification.

With the Bush administration pumping more than a trillion dollars into the private sector, Jim Bunning, the junior senator from Kentucky, lamented that the "free market for all intents and purposes is dead in America." As more mainstream economists talk about the possibility of sliding into a full-blown depression, we may well be in the grip of a kind of economic "Grotian Moment." The term, named for the 17th century Dutch legal philosopher Hugo Grotius, describes an event that has such a great impact that it results in fundamental changes to the prevailing system.

Slavoj Zizek wrote that "One of the clearest lessons of the last few decades is that capitalism is indestructible. Marx compared it to a vampire, and one of the salient points of comparison now appears to be that vampires always rise up again after being stabbed to death." That’s true; for a generation, we’ve been constrained from even discussing the fundamental structures of the prevailing system -- its excesses and shortfalls. This may be a moment in which we can do so, and should.

If we are at such a juncture, then we as a society have a serious question to answer: Will we bail out the speculator class so that it can regroup and move on to the next bubble, precipitating the next crisis of capitalism, or will we address the underlying problems of underdevelopment and overproduction in a way that’s adequately sustainable in an era of serious environmental peril?

So far, Bush and the Congress appear to have the wrong answer.