Saturday, October 18, 2008

No More Investment Banks

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By Mike Whitney

Turn Them Into Public Utilities

"If you made it past the credit crisis, you are not making it past the economic carnage." Meredith A. Whitney, market analyst at Oppenheimer & Company

It worked. So far. The credit markets have begun to thaw. Overnight Libor (London Interbank Offered Rate) dropped 27 basis points to 1.67 percent, the lowest level since September 2004. Three month Libor shed 40 basis points this week to 4.42 percent. The Libor-OIS spread and TED spread are edging downward, too. The VIX, the Chicago Board Options Exchange Volatility Index---also known as the "fear index"--has skyrocketed to 80, a new record. But that is to be expected; after all, Wall Street is in a panic. The truth is, interbank lending is beginning to ease and the financial system has begun to function a bit more like it should.

That doesn't mean we're out of the woods by a long shot. The stock market will probably lose another 15 to 20 percent, unemployment will soar, real estate will continue to crash, and consumer spending will dry up. That's all part of the hard landing ahead. But at the end of the day, some part of the credit-distribution system will still continue to function. That wasn't always a certainty. Before the EU finance ministers announced their plan to recapitalize the banking system, by injecting capital and guaranteeing deposits and interbank lending, the world was on its way to a complete financial meltdown. The EU, led by British Prime Minister Gordon Brown, pulled the world back from the brink of annihilation. It may be the greatest story of our generation, and very few people even know what really happened. The system was completely frozen in place. Interbank lending had stopped, major corporations were unable to meet payroll because they couldn't roll over their short term debt. Cargo ships were stuck in ports around the world because buyers couldn't get Letters of Credit. As analyst John Mauldin said, "Just as the business world is dependent upon commercial paper as its life blood, the world of global trade depends on letters of credit (LOC). If you are a manufacturer of a product and want to sell to someone outside your borders, you typically require a letter of credit from the buyer before you load any cargo at a port. A letter of credit from a prime bank is considered to be proof of your ability to pay....There are buyer's and seller's agents who make sure these things happen seamlessly, and world commerce had grown because of it.... If you think the problems stemming from a meltdown with the commercial paper markets are threatening to the world economy, they are small potatoes when compared to a seizure in the letter of credit markets."

The European initiative forced Secretary of the Treasury Henry Paulson to do the right thing. It is 100 percent certain now that his plan to use the $700 billion bailout to buy-back the non-performing loans and bad mortgage-backed securities from the banks would have failed and led to disaster. Paulson stuck by his wacko plan even though more than 200 economists opposed him and the stock market tumbled 8 straight days in a row losing more than 15 percent of its value. The EU had to put a gun to his head to force him to do the right thing. Paulson's Wall Street bias is so great that he would have driven the country off the cliff just to reward his dodgy friends with lavish cash giveaways from the US taxpayer.

In fact, right after the European plan was announced, Paulson convened a meeting of the country's largest banks so he could hand out $125 billion of freshly-minted, taxpayer-generated loot to shore up their flimsy balance sheets. Citigroup got $25 Billion, as did JPMorgan Chase and Bank of America. Goldman Sachs and Morgan Stanley both netted $10 Billion each. None of these banks had to submit to any type of regulatory investigation to see how much of their asset-base was held in worthless mortgage-backed slop or other structured garbage. Paulson never even tried to find out if they are even solvent! On top of that, taxpayer gets no voting rights, no position on the board of directors, and no limits on executive compensation for the $125 billion contribution to Wall Street's biggest white-collar criminals. On Thursday, all of the aforementioned banks reported horrendous quarterly losses, multi-billion dollar write-downs, and more grim warnings on future profits. It's clear that Paulson wanted to deliver the bailout money before the public discovered the extent of the carnage.

There are no assurances that the newly-capitalized banks will use their windfall to increase lending to consumers and businesses as Paulson hopes. The banks know that they'll be facing some stiff headwinds in the near-future as the the economy contracts and as deleveraging continues. It is just as likely that they will hoard their reserves or buy distressed hard-assets rather than expand their dreary loan portfolio. That means credit will continue to tighten and the widely anticipated slowdown will only get worse.

Currently, the nation is in the grips of a deflationary downturn. Oil and gold have fallen precipitously as have the other commodities which are being dumped on the market in one massive firesale. The hedge funds are liquidating at an unprecedented pace which is causing steady price erosion while strengthening the dollar. This giant institutional margin call is what is at the heart of the recent wild gyrations in the stock market. Investors are withdrawing their money which is forcing the hedgies to sell their liquid assets to reinforce their balance sheets. It's all about "demand destruction".

Adding to the turmoil, is the fact that many of the hedge fund managers are "moving to cash" to avoid the equities crash ahead. In Susan Pullim's article in the Wall Street Journal, "Smart Money stays on the Sides", she says:

"Some hedge-fund titans have yanked most of their money out of the stock market, a bearish sign amid Monday's euphoria and an indication of how the hedge-fund business is changing amid chaos.
In recent days, Steven Cohen, the hedge-fund manager who runs the $14 billion SAC Capital Advisors, moved about half his funds, or about $7 billion, into money-market and other short-term securities, eliminating much of his fund's exposure to the stock market, says a person close to the fund. Mr. Cohen plans on sitting on the sidelines for the rest of the year -- trading a small portfolio himself but keeping shuttered most of the stock portfolios of his other managers.

Meanwhile, John Paulson, manager of $35 billion Paulson & Co. -- who made a spectacularly successful bet against the housing market last year -- has much of his fund in cash equivalents.
The retrenchment by Wall Street's "smart money" crowd is part of a larger effort by hedge funds that have put a total of as much as $400 billion into cash equivalents recently, according to David Kostin, an analyst at Goldman Sachs Group Inc." (Wall Street Journal)

The vultures are collecting on the telephone wires waiting for the first bloodied antelope to plop to the ground. As the stock market rout continues, they shouldn't have to wait too long. Many pundits are predicting the greatest slump since the 1930s. Already, manufacturing has slowed faster than anytime in the last 20 years, jobless claims jumped 461,000 to 3.7 million, housing starts are at a 17 year low, and consumer confidence fell through the floor. Even worse, Paulson's bailout does nothing to stop the hemorrhaging of foreclosures which is the source of the disequilibrium in the financial markets. Congress needs to pass emergency legislation to write down the face-value of distressed mortgages (and provide low interest "fixed rate" loans for the first 25 percent of the revised value) to create an incentive for homeowners to stay put. This massive relief effort will have the added benefit of stabilizing the financial markets by putting a floor under housing prices. Struggling homeowners should be given a helping-hand before the banks.

As the former chairman of Goldman Sachs, Henry Paulson's motives have been suspect from the very beginning of this fiasco. He made sure that the US taxpayer got a shellacking on the purchase of preferred shares in the banks. And, he even faked like he was forcing the banks to take the capital they needed to stay afloat. ("Please, don't make me take that $25 billion Mr. Secretary". What a complete farce!) These are his best buddies and he treats them well. He hasn't demanded that they bring their off-book operations back onto their balance sheets, or limit their derivatives exposure, or reduce their leverage to 12 to 1, or come clean with the amount they are holding in Level 3 assets (illiquid, complex mortgage-backed securities) Wall Street veteran Pam Marten summed it up like this:

"What most Americans do not understand, because mainstream media rarely explains it, is the incestuous relationship between the U.S. Treasury and this small band of financial marauders who busted the entire financial system with insane levels of leveraged derivative bets." Amen.

Author F. William Engdahl sees a more nefarious motive behind Paulson's maneuvering and he lays it out in his article, "Behind the Panic: Financial Warfare and the Future of Global Bank Power":

"It now would appear that the Paulson strategy was to use a crisis... to panic the more conservative European Union governments into rushing to the rescue of US toxic waste assets.
Were that to have happened, it would in the process destroy what was left of sound EU banking and financial institutions, bringing the world one step closer to a global money market controlled by Paulson’s cronies—US-style Crony Capitalism. Crony Capitalism is certainly appropriate here. Paulson’s predecessor at both Goldman Sachs and at Treasury, Robert Rubin, liked to accuse the Asian bankers of Thailand, Indonesia and other lands hit with the speculative attacks of US-financed hedge funds in 1997 of ‘crony capitalism,’ leaving the impression the crisis was home grown in Asia and not the result of a deliberate executed attack by US-financed financial institutions to eliminate the Asia Tiger model among other goals, and turn Asia into the funder of US debt.

Interesting to note is that Rubin is now a Director of Citigroup, obviously one of Paulson’s crony bank ‘survivors,’ and the bank which to date has had to write off the largest sum in toxic waste securitized assets.

The Paulson plan is now clearly part of a project to create three colossal global financial giants—Citigroup, JP Morgan Chase and, of course, Paulson’s own Goldman Sachs, now conveniently enough a bank. Having successfully used fear and panic to wrestle a $700 billion bailout from the US taxpayers, now the big three will try to use their unprecedented muscle to ravage European banks in the years ahead. So long as the world’s largest financial credit rating agencies—Moody’s and Standard & Poors—are untouched by the scandals and Congressional hearings, the reorganized US financial power of Goldman Sachs, Citigroup and JP Morgan Chase could potentially regroup and advance their global agenda over the coming several years, walking over the ashes of a bankrupt American economy made bankrupt by their follies.... This is a fight for the survival of the American Century which has been built since 1939 on the twin pillars of American financial dominance and American military dominance—Full Spectrum, Dominance." (F. William Engdahl, "Behind the Panic: Financial Warfare and the Future of Global Bank Power" Global Research)

Engdahl may be on to something here. Not only will the present crisis lead to further consolidation in the US by crushing local and regional banks which do not have an umbilical chord connecting them directly to the vault at the US Treasury; it could also throw the European financial system into an "every man for himself" frenzy ultimately leading to the breakup of the EU (a prospect that is now widely considered) which would allow the US banking cartel to extend its tentacles to the continent as it has with its equities markets.

The damage that the investment banks and their non-bank counterparts (Hedge funds, broker dealers, SIVs etc) have done to the broader economy and the lives of hundreds of millions of people around the world is incalculable. Still, the remedy is simple and straightforward. The banks in question should be forced to establish their solvency according to "mark to market" evaluations (Triple A MBS=$.22 on the dollar) and if they cannot meet minimal capital standards; they should be taken into receivership, their equity shareholders wiped out, their leading executives removed, and they should be transformed into public utilities under the supervision of the Congress of the United States. Once the banks are entrusted to our elected officials, we can move on to the Federal Reserve. The "price fixing" and manipulation of interest rates by privately-owned banks is a failed experiment. It's time to move on. Abolish the Fed.

Excerpts from draft U.S.-Iraqi security agreement

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By The Associated Press

Excerpts from the draft U.S.-Iraqi security agreement meant to replace the U.N. mandate for American-led forces in Iraq, which expires on Dec. 31. The Associated Press obtained a copy and translated the material from Arabic.

_ U.S. armed forces personnel and civilian elements commit to respect Iraqi laws, customs, traditions and charters during the execution of military operations under this agreement, and they refrain from any activity that does not agree with the spirit and text of this agreement, and the United States is obliged to take all the necessary measures in this respect.

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For the purpose of deterring internal and external threats against the Republic of Iraq and to cement cooperation to defeat al-Qaida in Iraq and other outlawed groups, the two parties agreed on a temporary basis on the following:

_ The Iraqi government requests the temporary assistance of U.S. forces for the purpose of supporting its effort to safeguard security and stability in Iraq including cooperation in carrying out operations against al-Qaida, other terror groups and outlawed groups, including remnants of the former regime.

_ All military operations under this agreement are carried out with the agreement of the Iraqi government and full coordination with Iraqi authorities. Supervising all these military operations will be a joint committee to coordinate military operations (JMOCC), which will be set up under this agreement. Issues related to the proposed military operations that the joint committee cannot resolve are referred to the joint ministerial committee.

_ All these operations must be executed with full respect to the Iraqi constitution and Iraqi laws and in line with Iraq's sovereignty and national interests as outlined by the Iraqi government. It is the duty of the U.S. forces to respect Iraq's laws, customs, traditions and international law.

_ The two sides agree to continue their efforts to cooperate on bolstering the security capabilities of Iraq according to what they agree on, including training, equipping, support, supply, building and modernizing logistical structures (transport, housing and supplying troops).

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_ The control and monitoring of Iraqi air space is handed over to Iraqi authorities once this agreement is in force.

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_ The United States has the primary right to exercise judicial jurisdiction over (U.S.) military personnel and civilians (contracted by the U.S. Defense Department) as far as incidents that take place inside the agreed facilities and areas and in the case of missions outside the agreed facilities and areas and under conditions not covered by the text of the second clause of this article.

_ Iraq has the primary right to exercise judicial jurisdiction over (U.S.) military personnel and civilians (contracted by the Defense Department) in respect of premeditated and gross felonies mentioned in clause 8 of this article and which are committed outside the agreed facilities and areas and when not on a mission.

_ Iraq has the primary right to exercise judicial jurisdiction over those contracted by the United States and their employees.

_ The two parties agree to offer assistance to each other at the request of one of the two in regard to investigations, gathering and sharing evidence to safeguard due process.

_ U.S. forces are not authorized to arrest or detain anyone (except when that person is a U.S. service member or from the civilian component) except with an Iraqi order issued under Iraqi law.

_ In the case that U.S. forces arrested or detained persons as authorized under this agreement or under Iraqi law, these persons must be handed over to Iraqi authorities within 24 hours of their detention or arrest.

_ U.S. forces are not authorized to search homes or other properties without a judicial order issued for this purpose except in cases when actual fighting is taking place under article 4 and in coordination with relevant Iraqi authorities.

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_ U.S. forces withdraw from Iraqi territory by Dec. 31, 2011, at the latest.

_ U.S. forces withdraw from Iraqi cities, villages, areas on a date that is not later than the date in which Iraqi security forces take full responsibility for security there, provided that U.S. forces pull out from the above mentioned areas by June 30, 2009, at the latest.

_ U.S. combat forces withdrawn under clause 2 are based in agreed facilities and areas outside the cities, villages and areas that will be designated by the joint committee for military operations before the date set in clause 2.

_ The two parties review progress made toward meeting the deadline mentioned in clause 2 and the conditions that could allow both parties to ask the other either to bring forward or extend the timeframe mentioned in clause 2. Accepting to extend or bring forward the timeframe is subject to the approval of both parties.

_ Before the expiry of the deadline mentioned in clause 1 and on the basis of Iraq's assessment of conditions on the ground, the Iraqi government can ask the U.S. government to keep forces for the purposes of training and supporting Iraqi security forces. In that case, a special agreement will be implemented and be negotiated and signed by both parties under laws and constitutional procedures applicable in both countries.

_ U.S. forces can withdraw by dates that are before the dates designated in this clause at the request of either party. The United States acknowledges the Iraqi government's sovereign right to request the departure of U.S. forces from Iraq at any time.

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_ This agreement is in force for three years unless terminated before that under clause 3 of this article or if the two parties have not agreed in writing to extend it under clause 2.

_ This agreement comes into force Jan. 1, 2009, after the two parties exchange diplomatic notes supporting the completion of the necessary measures to bring the agreement in to force under the constitutional provisions in each party.

America's National Strategy of Global Intervention

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By William Pfaff

Last June the U.S. Department of Defense unexpectedly issued a new version of its National Defense Strategy. It was unexpected because there will be a new administration in Washington in January which might be expected to issue a statement of its own ideas about military strategy.

Some in Washington speculated that Defense Secretary Robert M. Gates, only recently named to that office, a man who gets along with Democrats as well as Republications, might be bidding to keep his job under a new administration.

The new statement lacks the Bush administration’s unilateralism and triumphalism (as if there were anything left to be triumphal about), but it foresees a “Long War” of “promoting freedom, justice and human dignity by working to end tyranny, promote effective democracies and extend prosperity; and confronting the challenges of our time by leading a growing community of democracies.”

All that is straight Bush doctrine, drawn from his second inaugural address and Condoleezza Rice’s policy statement last summer predicting decades of a “new American realism” of “nation-building” to conquer “extremism.” By now the “Long War,” realistic or not, will have become orthodoxy for most of the Washington defense and strategic studies community.

The noteworthy thing about this National Defense Strategy statement is that it says nothing directly about American national defense. It is a strategy for intervening in other countries, and preventing others from blocking or resisting American interventions.

It states the responsibilities of America’s armed forces (summarizing the document’s introduction) as follows:

§ Conduct a global struggle against a violent extremist ideology that seeks to overturn the international system.

§ Deal with the threats of rogue-nation quests for nuclear weapons.

§ Confront the rising military power of other states.

These duties “[will require] the orchestration of national and international power over years or decades to come” to accomplish the following:

§ Long-term innovative approaches to counter al-Qaeda’s rejection of state sovereignty, violation of borders, and attempts to deny self-determination and human dignity.

§ Deal “with the inability of many states to police themselves effectively or work with their neighbors to ensure regional security.” Armed sub-national groups must be dealt with, “including but not limited to those inspired by violent extremism” which if left unchecked will threaten the stability and legitimacy of key states, and allow instability to spread “and threaten regions of interest to the United States, its allies and friends.”

§ Form local partnerships and creative approaches to deny extremists the opportunity to gain footholds in “ungoverned, under-governed, misgoverned, and contested areas” affecting local stability and regional stability.

§ Counter Iran’s pursuit of nuclear technology and enrichment capabilities, and deal with the ability of rogue states such as Iran and North Korea to threaten international order, sponsor terrorism, and disrupt fledgling democracies in Iraq and Afghanistan.

§ Meet possible challenges from (a) “more powerful states [that] might actively seek to counter the United States in some or all domains of traditional warfare or to gain an advantage in developing capabilities that offset our own,” as well as (b) nations that might “choose niche areas of military capability and competition in which they believe they can develop a strategic or operational advantage [even though] some of these potential competitors [may also be partners of the U.S. in] diplomatic, commercial or security efforts...”

§ For the foreseeable future, “hedge against China’s growing military modernization and the impact of its strategic choices on international security....The objective of this effort is to mitigate near-term challenges while preserving and enhancing U.S. national advantages over time.”

§ Recognize that Russia’s [pre-Georgian crisis] “retreat from openness and democracy,” “bullying of its neighbors,” and “more active military stance... and signaled increase in reliance on nuclear weapons as a foundation for its security ...[are warnings of] a Russia exploring renewed influence” and a greater international role.

§ Prevent prospective adversaries, especially non-state actors and their state sponsors, from adopting “anti-access technology and weaponry [that can] restrict our future freedom of action,” and also from “making adversary use of traditional means of influence” such as by “manipulating global opinion using mass communications venues and exploiting international commitments and legal avenues.”

§ The global “commons [space, international waters, aerospace and cyberspace] must be secured and with them access to world markets and resources,” using military capabilities and alliances and coalitions, participating in international security and economic institutions, and employing “diplomacy and soft power to shape the behavior of individual states and the international system, using force when necessary.”

The principal preoccupation of the document is to protect American forces operating in foreign countries: to block measures by foreign states to “deny” American efforts to intervene in their countries, or to develop measures and technology to resist American intervention (or to send Americans to international criminal courts).

As for the United States itself, the document quotes the constitutional obligation of the government “to provide for the common defense,” but says that today, after more than 230 years, the U.S. “shoulders additional responsibilities on behalf of the world,...a beacon of light for those in dark places.” Yet the fear of those dark places that permeates the document compels the recommendation that American troops remain at home, where they will be safe from enemies and untrustworthy allies, and defend their own country.

Obama's legal team seeks special prosecutor for voter registration probe

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By TODD SPANGLER

Barack Obama’s legal team wants a special prosecutor to determine whether partisan politics is at play in a reported though unconfirmed Justice Department investigation of a voter registration effort which has been the target of numerous complaints of late, including one in Michigan.

With the election just over two weeks away, Bob Bauer, Obama’s chief lawyer, said in a conference call with reporters this afternoon that he is asking U.S. Attorney General Michael Mukasey to to hand over to special prosecutor Nora Dannehy any probe into what Bauer called “bogus claims of vote fraud” that mirror concerns raised by Republicans two years ago.

According to a recent Justice Department report, those issues played a role in the controversy over the forced resignations of nine former federal prosecutors.

That report – performed by the inspector general overseeing the Justice Department and others – found that David Iglesias, the former U.S. attorney in New Mexico, “was removed because of complaints to the Department of Justice and the White House … about Iglesias’ handling of voter fraud” cases. He had been pushed to bring a case against ACORN – the Association of Community Activists for Reform Now, the group at the center of the current controversy.

“Are we seeing a repeat now?” said Bauer. “It would seem that we are.”

Justice Department didn’t immediately have a comment about Bauer’s letter – though it was unclear they would given that no investigation has publicly been announced and would not be. In his letter, Bauer noted that in citing unnamed sources for the report, the Associated Press said “Justice Department regulations forbid discussing ongoing investigations particularly close to an election.”

Bauer said there appears to be an “unholy alliance” between law enforcement officials and Republican officials, including presidential nominee John McCain’s campaign. In his letter, Bauer said in a footnote that several of the nominee’s supporters in Congress have written to the Justice Department “pressuring them to investigate ACORN.”

Also, word of the investigation was leaked within a day of McCain’s saying at Wednesday’s final presidential debate that the group “is now on the verge of maybe perpetrating one of the greatest frauds in voter history in this country, maybe destroying the fabric of our democracy.”

Rep. Candice Miller, a Harrison Township Republican and former Michigan secretary of state, added her voice to the call for an investigation, saying today, “This rampant abuse must be stopped.” Earlier in the day, McCain campaign manager Rick Davis again questioned Obama’s links to the group and used much the same language, saying while Democrats believe Republicans are engaged in voter suppression, there is evidence of “rampant voter fraud” that must be addressed.

While there have been numerous reports linking ACORN workers to falsified voter registration cards, however, there has been little – if any – evidence of a vast voter-fraud conspiracy Most of the cases which have come to light so far have involved a relatively small number of bad registration cards – and while elections officials have said checking them means more work few for them, few have suggested publicly that false registration cards lead to fraudulent votes being cast.

Even Davis, in his call with reporters, noted that “we don’t know how big the problem is” and that outside of some state investigative reports, “I don’t think anybody at this stage has any sense of how widespread the fraud has been.” Bauer, in his letter to Mukasey, argued that McCain’s claim of widespread fraud are “entirely unsupported” while Republicans want to “harass” and “impede” voters by challenging them at the polls, an accusation GOP officials have denied, saying they only want to combat fraud.

At the center of the debate is ACORN, a community rights organization which – among other activities – works to register voters, particularly in low- and moderate-income areas. This year, they say they have registered some 1.3 million new voters nationwide, particularly in battleground states. In Michigan, the group says it has registered more than 200,0000 new voters.

In the past, some of ACORN’s workers – who are paid by the hour to register voters – have been convicted of falsifying voter registration cards. ACORN acknowledged that some workers skirt responsibilities by falsifying cards but the organization maintains that it double-checks cards before turning them in. When it finds suspicious ones, it flags them for election officials – though still turns them in – and fires workers caught falsifying cards.

“They’ve done a much better job of weeding out the stuff that shouldn’t be there,” said Lynnette Hagen, a deputy clerk in Saginaw, who said maybe as many as 5% of the 2,500 or so registrations ACORN has turned in there might be bad. They catch the ones that are bad, she said – and while it’s possible that a false one might get through, it’s unlikely someone is going to purposely show up at the polls and try to vote under it, especially when he or she is going to be asked to produce identification.

“There’s no perfect way to do it,” said Hagen.

As the election has gotten closer this year, meanwhile, the scorn heaped on ACORN has gotten much deeper. In Nevada, state authorities searched the group’s Las Vegas offices, saying they had evidence of cards being turned in with names of players for the Dallas Cowboys, for instance, and there have been concerns raised in various other states as well. The Republican National Committee, on its Web site, keeps a running list of stories about the group’s activities.

In Michigan, the Free Press reported last month that clerks were seeing numerous problems with registration cards turned in by ACORN, which led state Attorney General Mike Cox to look into the matter. This week, he announced the arrest of a man for allegedly falsifying six registration cards in Jackson, Mich. ACORN officials in Michigan argued that the timing – coming this week – appeared political, but an official in Cox’s office said that had nothing to do with it, that the investigation took time.

Fueling part of the ACORN controversy has been Obama’s links to the group and the McCain campaign’s demands that they be fully and publicly vetted.

Obama does have ties to the group, though he has repeatedly said they are straightforward. He was one of a group of lawyers – including Justice Department representatives – who represented ACORN, the League of Women Voters and other groups in a voter registration case against the state of Illinois in the 1990s, and he also sat on a foundation board which gave money to the community organizing group. Obama – a former community organizer – also attended training sessions for the group in the past but never worked for it.

His campaign also paid more than $800,000 to an ACORN subsidiary this year to help get out the vote – not register voters – during the primary season.

Meanwhile, in 2006, McCain spoke to several groups in Miami, including ACORN, though his campaign has downplayed the significance of that engagement, noting that it was an immigration forum at the local archdiocese and the SEIU were also taking part.

Wall Street banks in $70bn staff payout

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By Simon Bowers

Pay and bonus deals equivalent to 10% of US government bail-out package

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.

The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.

At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.

In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.

Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m.

None of the banks the Guardian contacted wished to comment on the record about their pay plans. But behind the scenes, one source said: "For a normal person the salaries are very high and the bonuses seem even higher. But in this world you get a top bonus for top performance, a medium bonus for mediocre performance and a much smaller bonus if you don't do so well."

Many critics of investment banks have questioned why firms continue to siphon off billions of dollars of bank earnings into bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions. One source said: "That's a fair question - and it may well be that by the end of the year the banks start review the situation."

Much of the anger about investment banking bonuses has focused on boardroom executives such as former Lehman boss Dick Fuld, who was paid $485m in salary, bonuses and options between 2000 and 2007.

Last year Merrill Lynch's chairman Stan O'Neal retired after announcing losses of $8bn, taking a final pay deal worth $161m. Citigroup boss Chuck Prince left last year with a $38m in bonuses, shares and options after multibillion-dollar write-downs. In Britain, Bob Diamond, Barclays president, is one of the few investment bankers whose pay is public. Last year he received a salary of £250,000, but his total pay, including bonuses, reached £36m.

Financial Meltdown: The Greatest Transfer of Wealth in History

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By Ellen Brown

How to Reverse the Tide and Democratize the US Monetary System



"Admit it, mes amis, the rugged individualism and cutthroat capitalism that made America the land of unlimited opportunity has been shrink-wrapped by half a dozen short sellers in Greenwich, Conn., and FedExed to Washington, D.C., to be spoon-fed back to life by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson. We’re now no different from any of those Western European semi-socialist welfare states that we love to deride."– Bill Saporito, "How We Became the United States of France," Time (September 21, 2008)


On October 15, the Presidential candidates had their last debate before the election. They talked of the baleful state of the economy and the stock market; but omitted from the discussion was what actually caused the credit freeze, and whether the banks should be nationalized as Treasury Secretary Hank Paulson is now proceeding to do. The omission was probably excusable, since the financial landscape has been changing so fast that it is hard to keep up. A year ago, the Dow Jones Industrial Average broke through 14,000 to make a new all-time high. Anyone predicting then that a year later the Dow would drop nearly by half and the Treasury would move to nationalize the banks would have been regarded with amused disbelief. But that is where we are today.1


Congress hastily voted to approve Treasury Secretary Hank Paulson’s $700 billion bank bailout plan on October 3, 2008, after a tumultuous week in which the Dow fell dangerously near the critical 10,000 level. The market, however, was not assuaged. The Dow proceeded to break through not only 10,000 but then 9,000 and 8,000, closing at 8,451 on Friday, October 10. The week was called the worst in U.S. stock market history.


On Monday, October 13, the market staged a comeback the likes of which had not been seen since 1933, rising a full 11% in one day. This happened after the government announced a plan to buy equity interests in key banks, partially nationalizing them; and the Federal Reserve led a push to flood the global financial system with dollars.


The reversal was dramatic but short-lived. On October 15, the day of the Presidential debate, the Dow dropped 733 points, crash landing at 8,578. The reversal is looking more like a massive pump and dump scheme – artificially inflating the market so insiders can get out – than a true economic rescue. The real problem is not in the much-discussed subprime market but is in the credit market, which has dried up. The banking scheme itself has failed. As was learned by painful experience during the Great Depression, the economy cannot be rescued by simply propping up failed banks. The banking system itself needs to be overhauled.


A Litany of Failed Rescue Plans


Credit has dried up because many banks cannot meet the 8% capital requirement that limits their ability to lend. A bank’s capital – the money it gets from the sale of stock or from profits – can be fanned into more than 10 times its value in loans; but this leverage also works the other way. While $80 in capital can produce $1,000 in loans, an $80 loss from default wipes out $80 in capital, reducing the sum that can be lent by $1,000. Since the banks have been experiencing widespread loan defaults, their capital base has shrunk proportionately.


The bank bailout plan announced on October 3 involved using taxpayer money to buy up mortgage-related securities from troubled banks. This was supposed to reduce the need for new capital by reducing the amount of risky assets on the banks’ books. But the banks’ risky assets include derivatives – speculative bets on market changes – and derivative exposure for U.S. banks is now estimated at a breathtaking $180 trillion.2 The sum represents an impossible-to-fill black hole that is three times the gross domestic product of all the countries in the world combined. As one critic said of Paulson’s roundabout bailout plan, "this seems designed to help Hank’s friends offload trash, more than to clear a market blockage."3



By Thursday, October 9, Paulson himself evidently had doubts about his ability to sell the plan. He wasn’t abandoning his old cronies, but he soft-pedaled that plan in favor of another option buried in the voluminous rescue package – using a portion of the $700 billion to buy stock in the banks directly. Plan B represented a controversial move toward nationalization, but it was an improvement over Plan A, which would have reduced capital requirements only by the value of the bad debts shifted onto the government’s books. In Plan B, the money would be spent on bank stock, increasing the banks’ capital base, which could then be leveraged into ten times that sum in loans. The plan was an improvement but the market was evidently not convinced, since the Dow proceeded to drop another thousand points from Thursday’s opening to Friday’s close.


One problem with Plan B was that it did not really mean nationalization (public ownership and control of the participating banks). Rather, it came closer to what has been called "crony capitalism" or "corporate welfare." The bank stock being bought would be non-voting preferred stock, meaning the government would have no say in how the bank was run. The Treasury would just be feeding the bank money to do with as it would. Management could continue to collect enormous salaries while investing in wildly speculative ventures with the taxpayers’ money. The banks could not be forced to use the money to make much-needed loans but could just use it to clean up their derivative-infested balance sheets. In the end, the banks were still liable to go bankrupt, wiping out the taxpayers’ investment altogether. Even if $700 billion were fanned into $7 trillion, the sum would not come close to removing the $180 trillion in derivative liabilities from the banks’ books. Shifting those liabilities onto the public purse would just empty the purse without filling the derivative black hole.


Plan C, the plan du jour, does impose some limits on management compensation. But the more significant feature of this week’s plan is the Fed’s new "Commercial Paper Funding Facility," which is slated to be operational on October 27, 2008. The facility would open the Fed’s lending window for short-term commercial paper, the money corporations need to fund their day-to-day business operations. On October 14, the Federal Reserve Bank of New York justified this extraordinary expansion of its lending powers by stating:




"The CPFF is authorized under Section 13(3) of the Federal Reserve Act, which permits the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations that are unable to obtain adequate credit accommodations. . . .


"The U.S. Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the New York Fed in support of this facility."4


That means the government and the Fed are now committing even more public money and taking on even more public risk. The taxpayers are already tapped out, so the Treasury’s "special deposit" will no doubt come from U.S. bonds, meaning more debt on which the taxpayers have to pay interest. The federal debt could wind up running so high that the government loses its own triple-A rating. The U.S. could be reduced to Third World status, with "austerity measures" being imposed as a condition for further loans, and hyperinflation running the dollar into oblivion. Rather than solving the problem, these "rescue" plans seem destined to make it worse.


The Collapse of a 300 Year Ponzi Scheme


All the king’s men cannot put the private banking system together again, for the simple reason that it is a Ponzi scheme that has reached its mathematical limits. A Ponzi scheme is a form of pyramid scheme in which new investors must continually be sucked in at the bottom to support the investors at the top. In this case, new borrowers must continually be sucked in to support the creditors at the top. The Wall Street Ponzi scheme is built on "fractional reserve" lending, which allows banks to create "credit" (or "debt") with accounting entries. Banks are now allowed to lend from 10 to 30 times their "reserves," essentially counterfeiting the money they lend. Over 97 percent of the U.S. money supply (M3) has been created by banks in this way.5 The problem is that banks create only the principal and not the interest necessary to pay back their loans. Since bank lending is essentially the only source of new money in the system, someone somewhere must continually be taking out new loans just to create enough "money" (or "credit") to service the old loans composing the money supply. This spiraling interest problem and the need to find new debtors has gone on for over 300 years -- ever since the founding of the Bank of England in 1694 – until the whole world has now become mired in debt to the bankers’ private money monopoly. As British financial analyst Chris Cook observes:




"Exponential economic growth required by the mathematics of compound interest on a money supply based on money as debt must always run up eventually against the finite nature of Earth’s resources."6


The parasite has finally run out of its food source. But the crisis is not in the economy itself, which is fundamentally sound – or would be with a proper credit system to oil the wheels of production. The crisis is in the banking system, which can no longer cover up the shell game it has played for three centuries with other people’s money. Fortunately, we don’t need the credit of private banks. A sovereign government can create its own.


The New Deal Revisited


Today’s credit crisis is very similar to that facing Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s plan failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.


The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the private banks with which it was competing, the RFC had to have the money in hand before lending it. The RFC was funded by issuing government bonds (I.O.U.s or debt) and relending the proceeds. The result was to put the taxpayers further into debt. This problem could be avoided, however, by updating the RFC model. A system of public banks might be set up that had the power to create credit themselves, just as private banks do now. A public bank operating on the private bank model could fan $700 billion in capital reserves into $7 trillion in public credit that was derivative-free, liability-free, and readily available to fund all those things we think we don’t have the money for now, including the loans necessary to meet payrolls, fund mortgages, and underwrite public infrastructure.


Credit as a Public Utility


"Credit" can and should be a national utility, a public service provided by the government to the people it serves. Many people are opposed to getting the government involved in the banking system, but the fact is that the government is already involved. A modern-day RFC would actually mean less government involvement and a more efficient use of the already-earmarked $700 billion than policymakers are talking about now. The government would not need to interfere with the private banking system, which could carry on as before. The Treasury would not need to bail out the banks, which could be left to those same free market forces that have served them so well up to now. If banks went bankrupt, they could be put into FDIC receivership and nationalized. The government would then own a string of banks, which could be used to service the depository and credit needs of the community. There would be no need to change the personnel or procedures of these newly-nationalized banks. They could engage in "fractional reserve" lending just as they do now. The only difference would be that the interest on loans would return to the government, helping to defray the tax burden on the populace; and the banks would start out with a clean set of books, so their $700 billion in startup capital could be fanned into $7 trillion in new loans. This was the sort of banking scheme used in Benjamin Franklin’s colony of Pennsylvania, where it worked brilliantly well. The spiraling-interest problem was avoided by printing some extra money and spending it into the economy for public purposes. During the decades the provincial bank operated, the Pennsylvania colonists paid no taxes, there was no government debt, and inflation did not result.7


Like the Pennsylvania bank, a modern-day federal banking system would not actually need "reserves" at all. It is the sovereign right of a government to issue the currency of the realm. What backs our money today is simply "the full faith and credit of the United States," something the United States should be able to issue directly without having to draw on "reserves" of its own credit. But if Congress is not prepared to go that far, a more efficient use of the earmarked $700 billion than bailing out failing banks would be to designate the funds as the "reserves" for a newly-reconstituted RFC.


Rather than creating a separate public banking corporation called the RFC, the nation’s financial apparatus could be streamlined by simply nationalizing the privately-owned Federal Reserve; but again, Congress may not be prepared to go that far. Since there is already successful precedent for establishing an RFC in times like these, that model could serve as a non-controversial starting point for a new public credit facility. The G-7 nations’ financial planners, who met in Washington D.C. this past weekend, appear intent on supporting the banking system with enough government-debt-backed "liquidity" to produce what Jim Rogers calls "an inflationary holocaust." As the U.S. private banking system self-destructs, we need to ensure that a public credit system is in place and ready to serve the people’s needs in its stead.

Dear Conservatives, Will You Help Save the Republic from Military Takeover?

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By Naomi Wolf

I am reaching out with a warning to you that is as heartfelt as the one I have been bringing my fellow citizens for months. But you are the most important audience of all for this, because you hold the key to whether or not we can save our republic in time.


I have been arguing that we are seeing the classic building blocks being laid for a police state: My thesis in The End of America: A Letter of Warning to a Young Patriot is that we are seeing the classic 10 steps being set in place that always underlie a violent police state. My argument in its sequel, Give Me Liberty, is that we must rise up as tactically and effectively as patriots to stop this suppression of freedom.


I hope to persuade you of the profound moral repugnance a true conservative should feel for the plans that are afoot in this nation.


What is the newest news? The Army Times declared that "beginning Oct. 1 for 12 months, the (1st Brigade Combat Team of the 3rd Infantry Division) will be under the day-to-day control of U.S. Army North" ... "the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities."


They are tasked to help with "civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack …"


What this means is that U.S. citizens can now be "controlled" by the military on our streets through technologies -- such as Tasers and rubber bullets -- that terrify and torment and stun but do not usually kill citizens the way that citizens in Iraq are terrified, tormented and stunned by U.S. military forces.


Who will be "subdued," according to the blueprint, if and when this military unit takes to our streets? The first group of Americans to be subdued is likely to be protesters; then, going by the blueprint, you will see the military using Tasers to subdue people who ask whether there is a warrant permitting agents to burst into their home, as happened at the RNC. People could be Tasered while protesting when voters are turned away by the wholesale purges of quarter-millions of voters from the rolls that Robert Kennedy Jr. has been documenting; or, there is likely to be Tasering and other kinds of subjugation of people protesting corrupted voting machines.


Why does this undermine American freedom? Federal laws, most notably the Posse Comitatus Act, have prohibited the military from being deployed within the United States for 200 years. Yet the Army Times reports that "expectations are that another, as yet unnamed, active-duty brigade will take over and that the mission will be a permanent one."


The founders sought to keep soldiers off our streets because they knew how easily a standing army could subdue a population. That’s why the National Guard is answerable primarily to the governors of states and hence to the people of the United States. But the military is answerable to the commander in chief. These are the president’s troops. The president now has a personal army. One definition of a police state is when the leader has seized control of the military to police citizens domestically.


Why listen to me? Not because I am a genius, but because this blueprint is so very predictive. Listen to me because everything that I warned would happen, according to the historical record, has happened, and I have documented the borne-out evidence of the crisis in Give Me Liberty.


I warned that the executive would soon simply start to subvert the rule of law. See what the administration has done in response to congressional subpoenas.


I warned that the torture we saw in U.S.-held prisons was certainly directed from the top -- a fact that Jane Mayer and others have fully documented since.


I warned that within six months we would see the definition of "terrorist" expanded so that the "terrorists" in the news would soon look like heartland, mainstream Americans. We now hear that mere protesters at the RNC in Minnesota have been charged as terrorists.


Another definition of a police state is when the leader seeks to seize control of big chunks of the national economy -- with no oversight or accountability. Sound familiar?


Consider this, conservative business leaders: What matters to a would-be dictator -- look at Latin America -- is that the leader is able to intervene in the economy and essentially use his clout and his cronies to intimidate competitors or manipulate the economic playing field. Dictators do not care if there is no middle class anymore in their countries, or no upper-middle class. Indeed, they are well served by the kinds of economies you see all over Latin America in which the cronies of the regime vacuum up wealth and intimidate their less-connected peers, in which the middle and upper-middle classes sink into misery while the poor simply suffer with little infrastructure to support them.


The coup has already taken place in terms of the laws that have been passed. With wiretapping, the mass arrests of protesters and the directive that allows the executive to seize control of all systems of government in the event of an emergency, the coup is in place, ready only for activation.


Is the Bush team seeking to calm or whip up fear in the face of the economic meltdown? Look at how many times Bush, McCain and Palin use the phrase "We’re in crisis mode." Then think of FDR, with nothing to fear but fear itself.


The only way to stop the Rove-Cheney cabal from moving ahead with this coup without the headlines will be a principled and patriotic Republican revolution against this plan. That is why resistance from Republicans to the Paulson "rescue" was so very heartening.


It will take Republicans to understand that criminals have seized control of the White House -- and I don’t use that term rhetorically: There are distinct crimes this regime has already committed, and deploying our military to police us is yet one more.


It will take Republicans across America to consider the lessons of history: In a police state, your politics do not protect you.


How will commerce proceed in such an America? How will capital flow? How will elections unfold? How will liberty be anything more than an echo of a fair and valiant recent past? This is not a liberal nightmare. This is the nightmare of any true conservative patriot.


Please speak to one another about this crisis. Please see it for what it is. And please join our transpartisan rebellion against the paper coup which is all too soon to materialize as boots hit the ground in the United States for the first time in a century. Please stand up for true conservatism, and stand up for a free America.

Dr. Paulson's Magic Potion Is Pure Poison for Us

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By William Greider

American capitalism is having a nervous breakdown, losing confidence and acting out in self-destructive ways. Let's try talk therapy. No, wait, it's more serious -- a case for high-powered drugs. No response? Maybe high finance has a brain tumor. Time for surgery! Cut out the bad parts and things will stabilize. Hold on. The patient is swooning now, gasping for air and trembling with seizures. Oxygen! Blood! We need a massive transfusion to rid the body of toxins. Doctor, the patient is flat-lining. What's next? Shock therapy?

My mordant medical metaphor sounds a trifle cruel, given the massive losses people are suffering, but it roughly describes the stages of diagnosis and cures with which the government has hesitantly attempted to heal the collapsing financial system. Each new cure revives hope that the worst is over -- at least until the symptoms start darkening again. The doctors in Washington changed their diagnosis once more when Treasury Secretary Henry Paulson announced his latest magical medicinal potion -- a $250 billion relief package to be invested directly in stock shares of the nine largest banks and spread more thinly among hundreds of smaller banks. The stock market cheered wildly with a 900-point rally in the Dow, as well it might have. Wall Street had just secured a fabulously well-heeled investor. Oops. Two days later, the magic wore off and share prices plunged again disastrously.

This time Paulson is much closer to a genuine solution, but hold the celebration and keep your eye on the patient. The government's new outline is deliberately vague about how exactly the Treasury and Federal Reserve intend to execute the details. The proposal implies but does not say that the government is taking charge of the banking system and will use its emergency powers to compel bankers to restart lending to restore the real economy of producers and consumers. Maybe that's what Paulson has in mind, but he made no promises. The public money gives a comforting tonic to the bad boys of Wall Street, but it's still packaged as a voluntary approach -- not to be confused with the genuine nationalization that Britain and other governments have undertaken.

Nationalization is the "shock therapy." We may yet see it before this turmoil is ended. Naturally, it is ideologically offensive to the Bush administration, and especially to Paulson's old colleagues and rivals on Wall Street. Taking control would impose on the government the daunting challenge of reshaping these large and overbearing institutions, winnowing out banks that deserve to die and instilling in the survivors formal obligations to serve the national interest they have willfully betrayed for a generation. That task will probably be left to Paulson's successors.

Without taking explicit control, the government is simply betting the bankers will cooperate in exchange for rescue. Maybe they will start lending again, but maybe not: banks are in a deep hole of their own making, having lost more than a trillion. Typically, they apply tightfisted lending tactics to heal balance sheets -- the opposite of what the country needs from them now. The $125 billion or so targeted for the nine biggest banks will not be enough to heal them all. Institutional Risk Analytics, a bank monitoring firm, says $250 billion in capital injections "will be just the down payment to get through the wave of loan losses headed for some of the larger players in the US banking sector."

Meanwhile, the money provides a feel-good tonic for the club -- the relatively small congregation of financial institutions that exert such oppressive influence over business and society, not to mention politics. Paulson is handing them cheap money (ours) that will initially earn only 5 percent, even as Warren Buffett gets 10 percent dividends on the capital he provided Goldman Sachs. Nor does the public get a controlling interest, or even seats on the board, for its generosity. The choices Paulson makes as he hands out the public money will effectively design the future -- making the big boys even bigger and more arrogant, since they know the government will not let them fail. Informed financiers already see the nine largest banks consolidating into four behemoths. The next president and treasury secretary (if they have the nerve) will have to confront this question of scale and cut the big banks down to size -- small enough to fail without damaging society.

Dr. Paulson's latest cure has once again left out something important -- American society at large. There's a lot of cheap talk about Main Street, but nothing in this plan helps the folks who are taking it in the neck through bankruptcy or unemployment. When Paulson met privately with the CEOs from the nine leading banks, he presumably asked them to be kind to the debtors. He ought to have commanded the bankers, one by one, to stop foreclosures, roll over debts and give people time to work their way out of their predicament, or else government would shut its lending window and dump the banks' stock.

Fortunately, Bush and Paulson are lame ducks. They will be replaced soon (we fervently hope) by Barack Obama, who is addressing the side of the crisis that Republicans always ignore -- what's happening to the people. Obama has revised and expanded his agenda, and he does not intend to wait until January. Many of his proposals can be undertaken right now by Treasury and the Fed. Others can be swiftly enacted by Congress in a lame-duck session right after the election. If bitter Republicans wish to filibuster or Bush wants to veto, that will simply deepen their party's shame.

John McCain responds to the crisis with grandly irrelevant ideas like cutting the capital gains tax in half, but also useful ones like reducing the tax rate on withdrawals from IRAs and a mortgage plan similar to the New Deal-era Home Owners' Loan Corporation that Hillary Clinton has led many Dems in proposing. Obama proposes smaller but concrete measures like a ninety-day moratorium on home foreclosures. Banks that receive government aid would be told not to act against families trying to make payments, even if they are behind. Bankruptcy judges would be authorized to modify mortgage terms. Families could withdraw money from retirement accounts to pay bills without being penalized. Obama would extend unemployment benefits and suspend taxes on that income. He would give small businesses a $3,000 tax credit for each new job they create, and distribute $50 billion to states and localities to finance roads and bridges and to make schools energy efficient. He would double the capital loan to the auto industry, to $50 billion.

These and other proposals are of course excellent fodder for the closing days of the campaign. But they also suggest the Democratic candidate is moving rapidly to adapt to the crisis that awaits the next president. Economic turmoil has instilled a dynamic process in politics, driving everyone, including voters, to new ground. We are likely to see even larger changes in the coming months. The treasury secretary seems out of breath. Obama appears to be getting his second wind.

How Wall Street's Scam Artists Turned Home Mortgages Into Economic WMDs

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By Joshua Holland

If the ABCs of the financial meltdown leave your head spinning -- if "default swaps" and "collateralized debt obligations" and "high-rated tranches" are all just so much gobbledygook -- don’t worry. You’re not alone.


The alphabet soup of exotic investments that represent the immediate cause of the banking mess is so complex that many of those "innovative" financiers responsible for bringing the global economy to the brink of collapse are now making a fortune in consulting fees explaining just what the hell it is that they created. According to the Financial Times, Robert Reoch, the London banker who may be responsible for creating the first of the now-infamous debt-based securities, is now "swamped by investors who want to extricate themselves from derivatives-linked messes, or simply to understand the products that came out of the past few years of intense financial innovation." The Washington Post reported that Joe Cassano, the financial products manager "whose complex investments led to (AIG’s) near collapse," is raking in $1 million per month in consulting fees from the ailing financial giant to help sort out the toxic sludge on (and off) the bank’s books.


But despite the dense jargon, it’s important to get a handle on this stuff. The global economy is at risk of a crash that would cause intense pain among millions of ordinary people, and not because of a few million homeowners overextending themselves, but rather as a result of a small number of savvy wheeler-dealers rigging an unregulated investment market in such a way that they’d always win no matter who else lost.


This is a story that’s easily lost in the mumbo-jumbo of market-speak, and the investment banking community -- and its political allies -- have been working feverishly to shift the blame for the mess onto the poor and people of color, Fannie Mae and Freddie Mac -- the large government-backed lenders -- community groups, "Congressional liberals" and even gay people.


Those charges don’t even rise to the level of an argument, but that only becomes clear when you have a grasp of what all these "toxic" securities that everyone’s talking about really are.


It’s certainly true that people got in over their heads during a frenzy of home-buying and refinancing, and it’s also true that lawmakers from across the political spectrum have long tried to increase American home ownership -- it’s a politically attractive antidote to inequality.


In 2002, George Bush announced an ambitious goal to increase "the number of minority homeowners by at least 5.5 million before the end of the decade," and in 2005, before the house of cards came tumbling down, he said, "I like the idea of home ownership. … What I want is more and more people from all walks of life, including our African-Americans, opening up the door where they live and saying, welcome to my home; welcome to my piece property [sic]."


But the focus on home mortgages misses a crucial point: Through mid-July, banks had written off about $435 billion in bad American mortgages, a drop in the bucket relative to the size of the global economy. There’s simply no way that even a major drop in the value of the U.S. housing market could possibly threaten the economic health of most of the planet.


That’s where "derivatives" come in. These instruments, which Warren Buffet called "the real Weapons of Mass Destruction," are "worth" about $500 trillion, or roughly 10 times the output of the global economy.


So just what is a derivative? A derivative is a piece of paper that can be bought and sold for real money but isn’t attached to a real asset. Its value is simply derived from something tangible -- hence the name. You hear a lot of talk these days about the "real" nuts-and-bolts economy, and derivatives are in essence the exact opposite: They represent an unreal economy, created by financiers in mahogany-paneled office suites in New York and London, and it’s this shadow economy that teeters on the edge of collapse today, threatening to bring down much of the real economy with it.


There are all sorts of derivatives. They are essentially bets -- you can bet that a market will go up, or down, or that a particular company will do well or poorly. You can bet on interest rates going up or down, or the value of a country’s currency, or you can make more exotic bets about just about anything in the world -- even what the weather will be like at some point in the future.


But the current meltdown was caused by debt-backed securities tied, at some point, to the U.S. housing market. When you buy a home, that’s an asset. Presuming you make your monthly payments, the mortgage held by the bank is an asset as well. When a number of mortgages are cut up and bundled together and then sold off as a security, that’s a derivative.


Writing in Salon, Andrew Leonard offered a useful metaphor. He suggested that we think of the real economy like a football game, with real flesh-and-blood players running around on a real field, hitting each other and moving a real ball toward a real goal post. All those guys, the field, the equipment -- they’re tangible, the same way that an asset like your house is tangible.


There are some people who have a direct stake in the game -- like the teams’ owners and the players’ families, agents, etc. But there are also millions of people who might bet on the outcome of the game but are in no way directly involved in the play. It’s these bets that parallel the trillions of dollars in debt-based derivatives that have become so "toxic" -- they were making some people rich when the housing market was flying, but now that it’s tanked, they’ve turned out to be bad bets, and the amount of money at stake is enormous -- far, far larger than the entire value of the U.S. housing market.


Now, we’ve also heard a lot about "credit default swaps," "collateralized debt obligations," "structured finance products" and a lot of other finance-speak in recent weeks. Collateralized debt obligations are collections of debt -- any kind of debt, but in this case bundles of mortgages -- that are sliced and diced and sold off to investors. Credit default swaps are like a form of insurance that allows those investors to hedge their bets, in case their guts prove wrong and the debt that they’re betting will be repaid turns bad on them.


All these exotic financial vehicles are essentially contracts between two parties -- like bets between two fans -- that lay largely outside of the regulatory system that governs most of the banking sector.


In theory, there’s nothing inherently wrong with any of this -- these are tools that allow sophisticated investors to control the amount of risk they’re taking on when they plunk down their money to buy into some sort of security. But in practice, these exotic financial instruments have the potential to devastate the world economy. And you don’t need an MBA and an intimate understanding of how "obligation acceleration derivatives" work to understand how.


You only need to understand a few central aspects of the huge market in debt-based securities that’s grown up over the past three decades. In large part, they exist in a shadowy world free of regulation or oversight, they allow investment bankers to repackage risky investments into something that appears to be relatively safe (or at least safer than they really are), and they allow investors to "leverage" their investments -- essentially buying securities that they don’t have the money to purchase -- to a far greater degree than traditional investments allow.


During the 1990s, when interest rates were low around the world, the demand for more exotic "structured" investments -- including various derivatives and swaps -- skyrocketed. And the investment bankers who were structuring these fancy new bets had little to lose in giving investors what they wanted, as long as the housing market -- the hard assets underpinning all this theoretical wealth -- held up.


In order to meet the demand, those financial gurus also put enormous pressure on the lending industry to lower its standards and pump out more and more loans for everything from houses to small businesses to consumers’ spending -- the raw materials for the new investment vehicles they were creating out of the ether.


By doing so, speculators in the "unreal" financial economy had an enormous amount of influence over events in the real economy.


Think about that last point. It’s the equivalent of people who are gambling on that football game paying off the ref, or bribing a player to fumble the ball on the five-yard line.

Britain: Brown government caves in to banks’ demands

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By Jean Shaoul

Within days of announcing an unprecedented £37 billion bailout of three high street lenders—the Royal Bank of Scotland (RBS), Lloyds TSB and HBOS—that will involve the British government taking shares in the banks, Chancellor of the Exchequer Alistair Darling has caved in to the City’s demands for the banks to make dividend payouts.

He did a U-turn and relaxed the terms of the agreement, part of a £500 billion rescue plan made at the expense of working people. Although the banks will receive billions of pounds from the Treasury to stave off a banking and credit collapse that is the result of their own reckless practices, the super-rich have refused to accept the slightest constraints on their right to be paid dividends. Headlines in the Financial Times were screaming, “Brown’s £37 billion rescue: did it go too far?”

The Treasury denied that there was ever a “blanket ban on dividends for five years.” The Chancellor indicated he would be flexible on paying dividends after one year, saying, “If someone comes up with a better way of running the scheme, of course we will listen.” A Guardian source confirmed that a compromise was possible.

Darling’s aides denied any U-turn and sought to justify this humiliating climb-down in the face of the City’s demands with the pathetic claim that the bankers had not understood the terms of the deal or explained it properly to their shareholders.

In reality, Darling himself had previously told the BBC’s current affairs Newsnight programme, “All the banks knew what was on offer. They knew the terms and conditions and they had signed up to them.”

The chancellor was a pushover because the government had never wanted to impose any conditions on the banks in the first place. It only banned the banks from paying dividends for five years in order not to fall foul of European Union rules on state aid and competition. The EU believed this would ensure that the banks were returned to private ownership, since it would force the banks to repay the government as soon as possible. It was one of 10 conditions imposed by the EU on the government’s £500 billion capital injection, debt guarantees and liquidity-funding scheme announced last week.

The City of London and financial commentators are up in arms over the terms of the agreement, which they denounce as punitive. Under the agreement, negotiated with teams of top legal advisors, the government will buy £9 billion of preference shares in the banks. This will entail a 12 percent annual payout to the government, with no dividend payouts to other shareholders, including ordinary shares to be bought by the government, until the government’s preference stake is repaid in five years’ time.

The banks are demanding the right to pay dividends to other shareholders and repay the government for its preference stake earlier by selling off assets or raising additional capital from other investors.

The financial institutions are also outraged that the British government is demanding a 12 percent dividend, when the US government, in a similar deal, is requiring only a 5 percent dividend. They want the British government’s dividend also cut to 5 percent. The insurance and pension funds that hold many of the banks’ shares backed up the banks’ demands for a government retreat.

The banks are holding the government to ransom. They are threatening that without dividend payouts to shareholders, they will be unable to raise new money from shareholders to shore up their capital reserves as the government has demanded. This in turn will mean that the government will have to dig even deeper to bail out the banks. It is, of course, far from clear that with or without dividends they will be able to either sell their assets or raise additional capital in the prevailing economic conditions.

Labour MPs fell in behind the government. John McFall, the Labour chairman of the treasury select committee, said dividends should be paid because otherwise the banks would not attract private investors. “The government wants the first cut for the taxpayers, but if we are to have confidence in financial companies we have to ensure that dividends are paid to make it attractive for investors to come in.”

The banks also protested at the government’s requirement that they lend at 2007 levels, particularly to small businesses and homebuyers. On this, they were immediately reassured. Baroness Shriti Vadera, the minister for business, was at pains to stress that the reference to 2007 meant simply “the availability of lending” and did not mean that the banks had to match last year’s total lending.

The bailout means that the government will hold 60 percent of RBS’s shares and 43.5 percent of Lloyds TSB and HBOS, which are to merge early next year under a rescue deal, personally brokered by Gordon Brown, the prime minister. Banks’ share prices have fallen sharply since the weekend bailout was announced. While the government has agreed to buy shares in Lloyds TSB at 173.7 pence, its price has fallen to 150 pence. HBOS’s shares have fallen from the agreed price of 113.6 pence to 84.1 pence and RBS’s shares fell from 65.5 pence to 65 pence.

The banks have also protested against any attempts to limit top management’s pay and bonuses. The Financial Times’s Lombard column threatened the government with the headline, “It will be bloody if regulators take an axe to bonuses.” The government and the regulatory authorities have all but admitted that such limits would be unworkable.

While the financial journalists called the bailout a humiliating defeat for the banks, the financial elite have simply seen it as a down payment. The super-rich will brook no curb on their prerogatives. Far from dividends being the reward for taking risks, with the possibility of no payouts in lean years, as every first year finance student is taught, the financial elite now see it as their right however the banks perform.

As far as the financial institutions are concerned, now that they have access to taxpayers’ funds, there can be no reason for dividend payouts not to continue. Furthermore, such payouts come first—before the requirement to provide credit to business and homebuyers, supposedly the essential business of banks.

In turn, Labour will do “whatever it takes” to defend the wealth and privileges of the ruling class. It will plunder the assets of the state built up by generations of taxpayers, pledge the future earnings of taxpayers and launch a ruthless assault on working people, resorting to illegal and dictatorial measures as it sees fit. And it has the support of all the main political parties in doing so.

US Republicans target ACORN: the great “voter fraud” fraud

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A community activist group called ACORN (Association of Community Organizations for Reform Now) has become a lighting rod for Republican attacks as the US presidential election approaches.


In Wednesday night’s presidential debate, John McCain warned that ACORN “is now on the verge of maybe perpetrating one of the greatest frauds in voter history in this country, maybe destroying the fabric of democracy.” He demanded to “know the full extent of Senator Obama’s relationship” to this purportedly criminal organization.


In a recent fundraising email, vice presidential candidate Sarah Palin warned that “far-left groups in this country will do anything to help the Obama-Biden Democrats win the White House and maintain their majorities in Congress. The left-wing activist group, ACORN, is now under investigation for voter registration fraud in a number of battleground states.... We can’t allow leftist groups like ACORN to steal this election.”


ACORN is now at the center of a media controversy fueled by Republican accusations. The FBI has announced an investigation, as have a number of states, counties and municipalities.


What is this group that is allegedly responsible for “destroying the fabric of democracy”?


ACORN describes itself as an organization of “low- and moderate-income people with over 400,000 member families” which focuses on such goals as raising the minimum wage and expanding access to affordable housing. It unreservedly supports the Democratic Party and has endorsed Barack Obama for the presidency. In the lead-up to the 2008 election, ACORN has launched a major voter registration campaign to bring poor and minority people—who tend to vote Democratic—to the polls in the upcoming election. It claims to have registered over 1.3 million voters, largely in critical “battleground” states.


There is no evidence that ACORN has committed fraud, a charge that implies intent. As is typical of registration and petition drives, ACORN has hired low-paid workers to carry out registrations. Some of these workers, in an effort to take home more pay, have invented the names of registrants. However, ACORN claims that it examines all registration material and flags forgeries in an attempt to assist state officials in prosecuting cases of fraud. In fact, ACORN claims that Republican officials have used the same registration cards ACORN has flagged for attention as a means of discrediting the group’s operations.


In any event, the Republicans have yet to explain the mechanics of how the supposedly false voting cards would actually result in thousands of false votes. The hue and cry over finding names like “Mickey Mouse” on a registration form begs the question: How could anyone cast a ballot under such a name? If the voters are fictional, as the Republicans claim, presumably they will not show up at the polls.


The Republican charge of “voter fraud” is itself a fraud. Through sensational accusations the Republicans hope to resuscitate their faltering presidential and Congressional campaigns. These charges could also be used to cast doubt over the legitimacy of the electoral outcome.


More fundamentally, however, the aim is to suppress the vote among sections of the working class and youth in an attempt to manipulate the outcome of the election. This is the real “voter fraud”—and there is a history to it.


The current charges against ACORN are only the latest chapter in this right-wing campaign to suppress voting rights. The campaign to restrict the franchise, found its most anti-democratic expression in the US Supreme Court’s intervention in the 2000 presidential election to hand victory to Bush by means of invalidating legally cast ballots, ruling that there was no inherent right among citizens to vote for the president. (Purchase online: “The Crisis of American Democracy: The Presidential Elections of 2000 and 2004”).


Since 2000, the Republican Party has taken steps to impede the vote not seen since the days of the Jim Crow voting restrictions targeting blacks in the South. Republican strategists sense that as the most rapidly growing sections of the electorate—youth, minorities, naturalized immigrants, and workers—punish their candidates at the polls, survival will depend on limiting these groups’ access to the ballot.


On October 9, the New York Times ran an exposé revealing that tens of thousands of voters in the “swing states” that will ultimately decide the presidential election had been purged from the election rolls, perhaps illegally.


In Ohio, the Republican Party sued the secretary of state in an effort to toss out the names of 200,000 legally registered voters for discrepancies—most likely clerical errors—in their registration data. On Thursday, the Supreme Court ruled that the Republican Party did not have the right to bring the case.


In other states, new restrictions on the right to vote are aimed at those whose homes have been foreclosed and those who lack photo identification, such as drivers’ licenses.


The mainstream media conveniently forgets that the US attorneys scandal that led to the resignation of Attorney General Alberto Gonzales also arose from a Republican attempt to suppress the vote. A number of the attorneys were sacked because they did not comply with Republican pressure to expedite the prosecution of voter fraud cases, so that they would take place before the 2006 elections. For example, the US Department of Justice has found that US Attorney David Iglesias was dismissed for failing to investigate a local ACORN chapter in New Mexico. (See “Special prosecutor appointed to investigate US attorney firings”)


More craven than the Republican attacks on ACORN has been the cowardly response of Barack Obama and the Democratic Party. In response to McCain’s attack on ACORN, Obama disowned any relationship to the organization, which has worked feverishly on his behalf for months. Moments earlier he had disowned Bill Ayers, the former radical routinely condemned by Republicans as a terrorist. (See “In defense of Bill Ayers”) Shortly afterward he listed those he considers his true associates. These include the world’s richest man, Warren Buffett, and former Federal Reserve Board head Paul Volcker, whose high interest rate “shock therapy” in 1979 was responsible for devastating many of the communities where ACORN now seeks to register impoverished voters.


The Democrats are not opposed to voter suppression in either principle or practice. They engage in it when it suits their purposes, regularly purging the nominating petitions of left-wing, and especially socialist, opponents. Barack Obama’s benefactors in the Illinois state Democratic Party have twice attempted to invalidate thousands of signatures of registered voters from third party nominating petitions in order to remove Socialist Equality Party legislative candidates from the ballot—Tom Mackaman (in 2004) and Joe Parnarauskis (in 2006). Obama personally came to Danville, Illinois, to campaign against Parnarauskis. (See “Democrats conspire against voters in bid to remove SEP from ballot” and “Judge orders election board to certify Illinois SEP candidate”).


The notion, pedaled by the Republicans—that the great threat to American democracy is that ineligible voters might somehow cast ballots—is absurd. The US is a country where only half of the eligible population votes and where the great majority of the electorate is politically disenfranchised by the two-party duopoly of big business.


In fact, the greatest threat “to the fabric of democracy” is the capitalist class, which cannot maintain democratic norms under conditions of growing social inequality in which the vast majority of the population is increasingly impoverished.

Australian government props up banks as signs of a deep global recession emerge

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By Mike Head

Amid a deepening global financial crisis and ominous signs of recession, the Australian government joined its counterparts around the world this week in announcing unprecedented measures to provide a lifeline to the banks and financial elite, while claiming to be protecting ordinary people.

For weeks Prime Minister Kevin Rudd and Treasurer Wayne Swan have been insisting that local banks are among the safest in the world and Australia is insulated from any global slowdown. Only last week, the government stridently opposed calls to lift its proposed $20,000 limit on bank deposit guarantees.

All that changed dramatically over the weekend following last week’s crash on world share markets. In Washington for meetings with the finance leaders of the G20, Swan declared that the world was facing “a financial upheaval the likes of which has not been seen since the Great Depression”.

After closed-door crisis meetings with senior ministers and officials all weekend, Rudd put the country on what the media called a “war footing”. He declared on Sunday: “We are in the economic equivalent of a rolling national security crisis and the challenges are great.”

The prime minister unveiled a finance industry package that guarantees all bank and finance house deposits and overseas borrowings to the tune of more than $2 trillion. Two days later, he announced a $10 billion economic stimulus plan, allocating half the budget surplus, in a desperate bid to resuscitate consumer spending and prevent the economy sliding toward recession.

Rudd’s invocation of “a national security crisis” was no accident. Like the bogus “war on terror,” an atmosphere of emergency is being cultivated in order to ram through measures to shore up the wealth of a tiny layer of the financial elite. The real implications for the vast majority of the population are being deliberately obscured, not only by the government but by the opposition parties and the media.

The extraordinary degree of bipartisanship, with which the government’s plans have been met inside and outside parliament, reflects a recognition in ruling circles that they are staring into the precipice. The onset of a deep and protracted global recession, which is already impacting on commodity prices and Australian markets in Asia, will inevitably unleash a social tsunami with devastating consequences for working people. The political establishment is closing ranks to deal with the social and class struggles ahead.

The vulnerability of the Australian economy has been underscored this week by the collapse of share prices for Australia’s two mining giants—BHP Billiton and Rio Tinto. BHP shares fell 13 percent this Thursday, taking the price down to almost half its peak, just five months ago. Rio was hit even harder—down 16 percent, taking its loss to nearly 60 percent since May. In its quarterly report this week, Rio admitted for the first time that it was facing a “marked reduction in Chinese commodity demand,” forcing it to lower production, delay projects and defer plans to sell assets to reduce its debt burden.

Over the past three months, the currency and commodity markets have delivered their verdict on the prospects of the Australian economy—the $A has fallen to below 70 US cents, more than a third from its peak, and commodity indexes have dropped more than 40 percent, with signs of worse to come. Spot iron ore prices have declined by more than 60 percent.


Labor’s measures

The first and overriding priority of the packages announced by the Labor government has been to prevent a banking meltdown and prop up the financial system. Details of the bank rescue scheme are still being thrashed out—behind the backs of the public—between the government and the bankers. But in addition to guaranteeing the estimated $A1.2 trillion currently deposited in banks, merchant banks, building societies and general insurance companies, the plan covers the predicted $850 billion that these institutions must raise on the international markets over coming months.

Taken together, these amounts could literally bankrupt the national Treasury. No one in the mass media has dared ask the question: what happens if a major bank collapses? Where will the money come from? For all the assurances that no such collapse could happen, the legislation introduced into parliament gives the government, through the Australian Prudential Regulation Authority, powers to take over and liquidate failed banks, or to recapitalise them by issuing shares to new investors.

Rudd insisted that the government had been forced to act, not because the banks were in trouble, but because other governments were offering similar guarantees to their own weaker financial institutions and local banks would be hurt if Australia did not follow suit. “I will not stand idly by while Australian banks are disadvantaged in the credit marketplaces because of the actions of foreign governments,” he said.

His remarks underscore the nationalist beggar-thy-neighbour conflicts wracking capitalism worldwide, as each government scrambles to shore up its own corporate elite. In reality, no banking system is immune from the collapse of billions of dollars worth of debt-swaps, derivatives and other forms of fictitious capital that have been created by finance houses in the past several decades. In return for a fee, the government is providing private banks with an unlimited guarantee that the public purse will be used to bail them out.

The liabilities assumed by the government dwarf the $10 billion “emergency economic security” package that was announced on Tuesday. As commentators have pointed out, the figure represents about 1 percent of GDP and therefore gives a gauge as to its potential economic impact. Yet, economic growth for next year has already been revised down by double that amount, from above 4 percent to around 2 percent, and will fall far further as the impact of the global recession takes hold.

Nothing in the package addresses either the existing rundown of social infrastructure or the impending social disaster. None of the measures will actually create jobs, help the jobless, rescue the tens of thousands losing their homes, assist those whose superannuation funds are being wiped out or boost public housing, education and health care.

For all of the government’s expressions of concern for the needy, the package consists entirely of one-off payments designed to give an immediate boost to particular sections of business. Retirees, including those who do not qualify for a pension, will receive $1,400 and lower-income families $1,000 per child on December 8, a move timed to bolster retailers for Christmas. First-home buyers’ grants will be boosted to $14,000 for existing homes and $21,000 for newly-built homes, a measure aimed at reviving the building industry.

The measures are cynically targeted at those the government calculates will have little choice but to spend the cash as quickly as possible—the elderly, families with children and young homebuyers. The handouts are similar to those formerly provided by the Howard government in its regular pump-priming operations to buy votes and bolster sections of business, always at the expense of social services, welfare and public infrastructure.


A social disaster

The social cost of the present economic crisis is only beginning to be felt. Yet already the impact goes far beyond the $10 billion that the government is doling out in one-off payments.

The superannuation funds of older and retired workers have been decimated. A report this week by the Mercer group estimated that average balances fell by 25 percent in the nine months to September 30—even before this month’s heavy share market plunges. With the funds holding just under $1.2 trillion, these losses total some $300 billion. Increasingly, workers are being forced to delay their retirement or go back to work if they have already retired.

More broadly, the Reserve Bank estimates that household net worth shrank by almost 5 percent in the first six months of this year, a loss of $245 billion. These staggering losses, largely produced by falling property and share prices, are in turn leading to sharp drops in consumer spending and lending for housing.

These falls, combined with the emerging losses of export revenue, mean that the next stage of the economic crisis will inevitably produce severe unemployment in Australia, as well as in the US and Europe. Ford’s announcement this week that it will axe a further 450 jobs in Melbourne, and warnings of 7,000 jobs under threat in the car components sector, are early indicators of what is to come.

Goldman Sachs is forecasting that the unemployment rate will climb from 4.3 percent to 6.5 percent by the end of next year, despite Rudd’s handout measures. This would send the official jobless total to near 700,000, but the real levels of unemployment and under-employment are about double the official statistics.

Casual, part-time and temporary workers are already having their hours cut, as are sub-contractors and other self-employed workers. Losses of jobs and even hours will financially cripple many working class families. Because of soaring house prices, rising living costs and falling real wages, Australian households have become among the most heavily indebted in the world, with debt levels running at an 165 percent of income—about three times higher than before the 1929 crash.

To disguise the class character of the government’s plans, Rudd indulged in a little populist rhetoric, blaming “greed” and “extreme capitalism” overseas for the crisis, and suggesting controls over executive pay levels. What the world is witnessing is not the product of individual excesses or policy failures but flows inexorably from the logic of the profit system itself. The present crisis is the outcome of protracted processes centred above all on the decline of American capitalism. As for controlling executive pay, the government is locked in closed-door talks over its rescue plan with bank CEOs who are paid millions of dollars a year in salaries and bonuses.

The further stock market falls this week mean that the government’s measures have been already overtaken by global economic events. Rudd has refused to release any revised Treasury economic forecasts, but growing numbers of analysts are now predicting that Australia will soon officially be in recession. At a luncheon yesterday, Rudd told top business leaders that he would do “whatever it takes” to deal with the worsening economic crisis. It is an open-end commitment to bail out big business at the expense of the vast majority of working people who confront an avalanche of job destruction, the decimation of social services and infrastructure and a precipitous decline in living standards.