Wednesday, October 29, 2008

Gates Gives Rationale for Expanded Deterrence

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Defense Secretary Robert M. Gates said Tuesday that the United States would hold “fully accountable” any country or group that helped terrorists to acquire or use nuclear, chemical or biological weapons.

The statement was the Bush administration’s most expansive yet in trying to articulate a vision of deterrence for the post-Sept. 11 world. It went beyond the cold war notion that a president could respond with overwhelming force against a country that directly attacked the United States or its allies with unconventional weapons.

“Today we also make clear that the United States will hold any state, terrorist group or other nonstate actor or individual fully accountable for supporting or enabling terrorist efforts to obtain or use weapons of mass destruction — whether by facilitating, financing or providing expertise or safe haven for such efforts,” Mr. Gates said.

The comments came in an address in which he said it was important to modernize the nation’s nuclear arsenal as a hedge against what he described as “rising and resurgent powers” like Russia or China, as well as “rogue nations” like Iran or North Korea and international terrorists.

By declaring that those who facilitated a terrorist attack would be held “fully accountable,” Mr. Gates left the door open to diplomatic and economic responses as well as military ones. And, to be sure, the United States has acted forcefully before against those who sheltered terrorists, with the invasion of Afghanistan to oust Al Qaeda and its Taliban government supporters after the attacks of Sept. 11.

His speech here before the Carnegie Endowment for International Peace was the latest signal that the administration was moving in its closing months to embrace more far-reaching notions of deterrence and self-defense.

On Monday, senior officials justified a weekend attack against a suspected Iraqi insurgent leader in Syria by saying the administration was operating under an expansive new definition of self-defense. The policy, officials said, provided a rationale for conventional strikes on militant targets in a sovereign nation without its consent — if that nation were unable or unwilling to halt the threat on its own.

By law, the new president must conduct a review of the nation’s nuclear posture, and Mr. Gates’s address could be viewed as advocating a specific agenda for the next occupant of the White House.

The first public indication that the administration was expanding the traditional view of nuclear deterrence came in a statement by President Bush in October 2006 that followed a test detonation of a nuclear device by North Korea. Mr. Bush said North Korea would be held “fully accountable” for the transfer of nuclear weapons or materials to any nation or terrorist organization.

The president was not as explicit then as Mr. Gates was on Tuesday in saying that the administration would extend the threat of reprisals for the transfer of nuclear weapons or materials to all countries, not just North Korea. Mr. Gates also expanded the threat to nations or groups that provide a broader range of support to terrorists.

Early this year, in a little-noticed speech at Stanford University, Stephen J. Hadley, Mr. Bush’s national security adviser, also spoke of how the president had approved an expanded deterrence policy.

In his speech Tuesday, Mr. Gates argued for modernizing the nation’s nuclear arsenal because “as long as other states have or seek nuclear weapons — and potentially can threaten us, our allies and friends — then we must have a deterrent capacity.”

Although Mr. Gates earlier this year fired the Air Force secretary and chief of staff after the discovery of shortcomings in the service’s stewardship of nuclear weapons and components, he stressed that the nuclear arsenal was “safe, secure and reliable.”

“The problem is the long-term prognosis — which I would characterize as bleak,” he said.

Veteran weapons designers and technicians are retiring, and Congress has not voted for the money to build replacement warheads for an aging arsenal that can be produced without abandoning the nation’s unilateral moratorium on nuclear tests, he said.

To that end, he endorsed a comprehensive test ban treaty if adequate verification measures could be negotiated.

Mr. Gates praised efforts to reduce the number of warheads, and predicted that the United States and Russia would at some point conclude another agreement limiting their arsenals.

Sense of Unease in Some Black Voters

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For weeks now, James Jones has been extra courteous in traffic and at the gas station because he has an Obama sticker on the back of his truck. “Something like that might make a difference for Barack Obama,” Mr. Jones explained. “I’m not taking a chance.”

Mr. Jones, a black warehouse worker, bought campaign signs for his yard and made sure his family had valid voter registration cards. He and his wife cast their votes 10 days early to avoid last-minute problems at the polls.

So imagine Mr. Jones’s disappointment this week when he got word of a rumor making its way around his humble southeastern part of town — that early voting is nothing more than a new disenfranchisement scam, that early votes are likely to be lost and never counted.

“I went to the library where I voted and I said, ‘Ma’am, I heard rumors that early voting is dangerous, is that true?’ ” Mr. Jones, 47, said he had asked an election worker. “She said: ‘It’s pretty well safe. I wouldn’t worry about it.’ ”

But in conversations with about a dozen Jacksonville residents in cafes, outside churches and at their homes over three days, Mr. Jones and many of his black neighbors worry anyway, unable to put aside the nagging feeling that somehow their votes will not be counted.

Wounds have not healed here in Duval County since the mangled presidential election of 2000, when more than 26,000 ballots were discarded as invalid for being improperly punched. Nearly 40 percent of the votes were thrown out in the predominantly Democratic-leaning African-American communities around Jacksonville, a reality that has caused suspicions of racial bias to linger, even though intentional disenfranchisement was never proved.

Now, in a show of early election enthusiasm, more than 84,200 people have already voted in Duval County, surpassing the number of early votes cast in the last presidential election. Added to 33,800 absentee ballots collected so far, the numbers show that 22 percent of registered voters cast their ballots as of Oct. 27, county election officials said.

But amid excitement over Mr. Obama’s historic candidacy and the chance that the country might choose an African-American president within a matter of days, there is an unmistakable sense of anxiety among blacks here that something will go wrong, that victory will slip away.

“They’re going to throw out votes,” said Larone Wesley, a 53-year-old black Vietnam veteran. “I can’t say exactly how, but they are going to accomplish that quite naturally. I’m so afraid for my friend Obama. I look at this through the eyes of the ’60s, and I feel there ain’t no way they’re going to let him make it.”

Mr. Wesley refuses to vote early. “I don’t believe the machines work properly in general,” he said, “and they really don’t work properly when they think you’re voting for Obama.”

Mr. Wesley’s wife, Paris, disagrees and thinks the best thing she can do is get to her polling place before Nov. 4. “I want to go early so that if I see and hear anything that’s not in keeping with the rules and regulations, I can make a call,” she said. “As far as faith in the system, I don’t have faith in the system. I just pray we have people in the polls who will be honest and watchful.”

Some things have not changed since 2000: Florida is still a battleground. Mr. Obama and Senator John McCain, the Republican nominee, are in hot pursuit of the state’s 27 electoral votes, which could prove crucial for victory.

Other important things have changed. In 2004, there were only minor glitches. Duval County has done away with its old confusing ballot and upgraded its scanning machinery. It also has a new elections supervisor, Jerry Holland, who has reached out to blacks and earned their respect.

The skepticism about early voting is confounding to many officials because it is intended to make voting easier and more accessible, and was recently promoted in Jacksonville by Mr. Obama’s wife, Michelle Obama.

Mr. Holland said that the number of people, including blacks, who had turned out to vote early showed that misgivings were not widespread. Of the 84,273 residents who had voted as of Sunday, more than 30,900 were black.

“Obviously, we’ve come a long way since 2000,” Mr. Holland said. “For some people, it may have taken eight years to rebuild confidence. For others, it might take another election cycle. The goal is to keep building confidence one voter at a time.”

He added: “We will have record numbers. It may be feasible to get 50 percent of our voters before the election.”

Still, suspicions linger that something — faulty machines, misread ballots, mysteriously lost votes — will deny Mr. Obama some of the support that he has.

“I vote in a predominantly minority area,” said Monica Albertie, 27, a health care executive. “I worry about getting there and all of a sudden the electricity doesn’t work. Anything can happen. I know that sounds silly, but these are real concerns. We have a record of getting excited, then being disappointed. You get paranoid. What if the bus system shuts down that day?”

Ms. Albertie said she was “on the fence” about early voting, because “I don’t want my early vote to get lost.”

Her friend Susan Burroughs, who is also a health care executive, said she planned to vote early but felt “queasy.”

“You know, you don’t want to get too excited because it could go in just the opposite direction,” Ms. Burroughs said. “You read the papers here, and you know, there was something wrong with the machine over here, they lost the votes over there, they had to recount votes. That makes a lot of people leery.”

“My queasiness is that we shouldn’t become too comfortable with the polls showing he’s ahead,” she said. “It means nothing until you cast your vote, and the tally is in.”

Mr. Jones also expressed a sense of queasiness.

“I feel good, and I don’t feel good,” he said. “I’m thankful to God that this is happening in my lifetime, that I get to see it. But I’m not ready to celebrate anything. This could be a very tricky time for us. I don’t trust the polls. And the state of Florida in the past has had a lot of crooked things going on.”

Uses for $700 billion bailout money ever shifting

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First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.

Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.

But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.

Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.

As the crisis worsens, the government's reaction keeps changing. Lawmakers in both parties are starting to gripe that the bailout is turning out to be far different from what the Bush administration sold to Congress.

In buying equity stakes in banks, the Treasury has "deviated significantly from its original course," says Alabama Sen. Richard Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee. "We need to examine closely the reason for this change," said Shelby, who opposed the bailout.

The centerpiece of the Emergency Economic Stabilization Act is the "troubled asset relief program," or TARP for short. Critics note that tarps are used to cover things up. The money was to be devoted to buying "toxic" mortgage-backed securities whose value has fallen in lockstep with home prices.

But once European governments said they were going into the banking business, Treasury Secretary Henry Paulson followed suit and diverted $250 billion to buy stock in healthy banks to spur lending.

Bank executives hinted they might instead use it for acquisitions. Sen. Christopher Dodd, chairman of the Senate banking committee, said this development was "beyond troubling."

Sure enough, a day after Dodd, D-Conn., made the comment, the government confirmed that PNC Financial Services Group Inc. was approved to receive $7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

"Although there will be some consolidation, that's not the driver behind this program," Paulson recently told PBS talk show host Charlie Rose. "The driver is to have our healthy banks be well-capitalized so that they can play the role they need to play for our country right now."

Other planned uses of the bailout money have lawmakers protesting, although it is only fair to note there is nothing in the law that they just wrote to prevent those uses.

Sen. Charles Schumer, D-N.Y. questioned allowing banks that accept bailout bucks to continue paying dividends on their common stock.

"There are far better uses of taxpayer dollars than continuing dividend payments to shareholders," he said.

Schumer, whose constituents include Wall Street bankers, said he also fears that they might stuff the money "under the proverbial mattress" rather than make loans.

Neel Kashkari, head of the Treasury's financial stability program, told Dodd's committee this past week that there are few strings attached to the capital-infusion program because too many rules would discourage financial institutions from participating.

As the bank plan has become a priority, the effort to buy troubled assets has receded from the headlines. Potential conflicts of interest pose all kinds of problems in finding qualified companies to manage that program.

"Firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP or represent clients who hold troubled assets," Kashkari said.

The challenge was made plain when the Treasury hired the Bank of New York Mellon Corp. as "custodian" of the troubled assets purchase program. The bank will conduct "reverse auctions" to buy the toxic securities on behalf of the Treasury. The lower the price they set, the better chance sellers have of getting rid of the devalued securities.

On the same day it hired Mellon, the Treasury also picked the company to receive a $3 billion investment as part of the capital-infusion program. The same bank hired to help manage part of the economic rescue plan became a beneficiary of it.

With the Nov. 4 election nearing, lawmakers decided it was important to remind the government officials running the bailout program about parts of the law aimed at helping distressed homeowners by offering federal guarantees to mortgages renegotiated down to lower monthly payments.

"The key to our nation's economic recovery is the recovery of the housing market," Dodd said. "And the key to recovery of the housing market is reducing foreclosures."

Sheila Bair, who heads the Federal Deposit Insurance Corp., responded that her agency is working "closely and creatively" with Treasury officials to "realize the potential benefits of this authority."

The “dirty little secret” of the US bank bailout

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In an unusually frank article published in Saturday's New York Times, the newspaper's economic columnist, Joe Nocera, reveals what he calls "the dirty little secret of the banking industry"--namely, that "it has no intention of using the [government bailout] money to make new loans."

As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.

Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.

Asked by one of the participants whether the $25 billion in federal funding will "change our strategic lending policy," the executive replies: "What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling."

Referring to JPMorgan's recent government-backed acquisition of two large competitors, the executive continues: "And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way, and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."

As Nocera notes: "Read that answer as many times as you want--you are not going to find a single word in there about making loans to help the American economy."

Later in the conference call the same executive states, "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side."

"It is starting to appear," the Times columnist writes, "as if one of the Treasury's key rationales for the recapitalization program--namely, that it will cause banks to start lending again--is a fig leaf.... In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation."

Early this month, he explains, "in a nearly unnoticed move," Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.

Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.

Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.

What the Wall Street Journal on Saturday called the "strong-arm sale" of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.

All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.

In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would "help American consumers and businessmen get credit to meet their daily needs and create jobs." If the bailout was not passed, he warned, "More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account.... More businesses would close their doors, and millions of Americans could lose their jobs ... ultimately, our country could experience a long and painful recession."

One month later, the bailout has been enacted, and all of the dire developments--banks and businesses disappearing, the stock market plunging, unemployment skyrocketing--which the American people were told it would prevent are unfolding with accelerating speed.

While Obama talks about the need for all Americans to "come together" in a spirit of "shared sacrifice"--meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs--and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.

As the World Socialist Web Site warned when it was first proposed in mid-September, the "economic rescue" plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.

The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.

While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.

Are credit cards the next collapse?

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By Christina Rexrode

First came trouble with mortgages, then home equity loans and commercial real estate. Now, banks are starting to worry about credit cards.

As the economy slows and unemployment rises, consumers are defaulting on credit-card payments more often. And though that trend is unlikely to create a crisis in line with the mortgage fallout, it's still a headache for banks that are already hurting.

U.S. banks charged off 5.47 percent of all credit card loans in the second quarter, according to the Federal Reserve, representing some $50 billion that they'll likely never collect. That's up from 3.85 percent the year before, and that is a movement that's on the radar of Ken Lewis, chief executive of Charlotte's Bank of America Corp.

Asked in a recent TV interview if credit-card debt would be “the next shoe to drop” for the banking industry, Lewis replied: "It, in some ways, already is," adding that such losses have risen "pretty substantially."

Laura Nishikawa, an analyst at the Innovest ratings agency, predicts that banks such as Bank of America and New York's Citigroup Inc. could be hit especially hard by credit-card defaults. That's because those banks, which offer both consumer and investment services, have been depending more heavily on money made on consumer services such as credit cards as the returns in investment banking grow increasingly unpredictable.

To be sure, credit cards don't represent a huge portion of assets for most banks. For example, they comprise about 14 percent of all consumer loans and leases at Bank of America, the country's largest credit-card issuer. The main problem, Nishikawa said, is that "everyone is so weak after what happened with mortgages that another blow to a consumer product would be hard to handle."

Consumer groups have long complained that credit-card issuers push cards onto people who don't need them or can't afford them. They say that rising credit-card defaults – just like mortgage defaults – are largely the fault of banks who lent to risky borrowers.

Innovest estimates that about 30 percent of Bank of America's credit card loans are to subprime borrowers – second only to the failed Washington Mutual Inc., which had almost half of its credit-card loans held by subprime borrowers.

Innovest also estimates that more than half of Bank of America's credit cards are high-limit cards – second only to American Express Co. (Innovest classifies high-limit cards as those with lines of more than $10,000.) Nishikawa says that combination could prove toxic for Bank of America, which may have "lent more than (borrowers) can be expected to pay back."

Bank of America's charge-offs, or loans it doesn't expect to collect on, increased to 6.14 percent of all credit-card loans, or $1.24 billion, in the third quarter. That's up from 4.61 percent the year before.

Executives of Wells Fargo & Co., which is buying Charlotte's Wachovia Corp., also noted credit-card troubles in their recent earnings call. The San Francisco bank, which is the country's eighth-largest credit-card issuer according to The Nilson Report, saw credit-card charge-offs increase to 7.2 percent, or $361 million, from 4.3 percent a year ago. Chief financial officer Howard Atkins blamed "higher bankruptcy rates, seasoning of the portfolio, and continuing economic pressure on consumers," though he said the losses were in line with the bank's expectations.

Innovest predicts that credit-card charge-offs across the industry will continue to rise, peaking around 10 percent by the first quarter of 2009. Some banks are also reporting that consumers are spending less with their credit cards, which hurts the banks because they collect fees from merchants every time a consumer uses a card.

Even so, credit card defaults probably won't wreak as much havoc as mortgage defaults already have, because they're on a much smaller scale.

"This won't be anything like the mortgage crisis," said James Early, an analyst at The Motley Fool. "Simply put, the average person owes a lot more on her house than on her credit cards."

U.S. consumers have less than $1 trillion in outstanding credit-card loans, but more than $10 trillion in outstanding mortgage loans. And the delinquency rate for mortgages is higher than that for credit-cards: 6.41 percent in the second quarter, up from 5.12 percent the year before, according to the Mortgage Bankers Association.

Indeed, no one is predicting that banks will abandon credit cards &mash; only that they'll get stingier with lending and perhaps lose money for a few quarters. Banks usually expect higher default rates on credit cards anyway, since those loans are not secured by a house, car or other type of collateral. That's one reason why banks charge such high interest rates on credit-card loans.

Guy Cecala, publisher of Inside Mortgage Finance, says that the most notable characteristic of the current cycle isn't the rising percentage of credit-card defaults, but the fact that people started defaulting on mortgages before credit cards. This time is different – the mortgage defaults are driven less by the slowing economy, Cecala said, and more by unwise lending and the declines in home prices. "The people going into default actually have jobs," he said.

As banks get squeezed on credit cards, they're sure to pass the pain along. That means they're lowering — sometimes even closing — customers' credit lines, increasing interest rates and declining more applications, which will especially hurt poor or unemployed consumers who use credit cards for basic living expenses. Early, the analyst, said it's hard to feel sorry for credit-card issuers even if they do encounter serious losses: "I don't think these guys will get much sympathy," he said.

It's Time for a Trillion-Dollar Tag Sale at the Pentagon

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By Nick Turse

Wars, bases, and money. The three are inextricably tied together.

In the 1980s, for example, American support for jihadis like Osama bin Laden waging war on (Soviet) infidels who invaded and constructed bases in Afghanistan, a Muslim land, led to rage by many of the same jihadis at the bases (U.S.) infidels built in the Muslim holy land of Saudi Arabia in the 1990s. That, in turn, led to jihadis like bin Laden declaring war on those infidels, which, after September 11, 2001, led the Bush administration to launch, and then prosecute, a Global War on Terror, often from newly built bases in Muslim lands. Over the last seven years, the results of that war have been particularly disastrous for Iraqis and Afghans. Sizable numbers of Americans, however, are now beginning to suffer as well. After all, their hard-earned taxpayer dollars have been poured into wars without end, leaving the country deeply in debt and in a state of economic turmoil.

In his 1988 State of the Union message, President Ronald Reagan called the jihadis in Afghanistan "freedom fighters." They were, of course, fighting the Soviet Union then. He, too, pledged eternal enmity against the Soviet Union, which he termed an "evil empire." For years, conservatives have claimed that Reagan not only won his Afghan War, but by launching an all-out arms race, which the economically weaker Soviet Union couldn’t match, bankrupted the Soviets and so brought their empire down.

While that version of history may be disputed, today, it is entirely possible that one of Reagan’s freedom fighters, Osama bin Laden, actually returned the favor by perfecting the art of financially felling a superpower. While Reagan ran up a superpower-sized tab to outspend the Soviets, bin Laden has done it on the cheap. Essentially for the cost of box cutters and flight training, he got the Bush administration to spend itself into penury, without a superpower in sight.

Since bin Laden’s supreme act of economic judo in 2001, the U.S. military has spent multi-billions of tax dollars on a string of bases in Iraq and Afghanistan, failed wars in both countries, and a failed effort to make good on George W. Bush’s promise to bring in bin Laden "dead or alive." Despite this record, the Pentagon still has a success option in its back pocket that might help bail out the American people in this perilous economic moment. It could immediately begin to auction off its overseas empire posthaste. To head down this road, however, U.S. military leaders would first have to take a brutally honest look at the real costs, and the real utility, of their massively expensive weapons systems and, above all, those bases.

Today, the Pentagon acknowledges 761 active military "sites" in foreign countries -- and that’s without bases in Iraq, Afghanistan, and certain other countries even being counted. This "empire of bases," as Chalmers Johnson has noted, "began as the leftover residue of World War II," later evolving into a Cold War and post-Cold War garrisoning of the planet.

With those bases came a series of costly wars in Korea in the 1950s, Vietnam in the 1960s and 1970s, and the Persian Gulf in the early 1990s. An extremely conservative estimate of their cost by the Congressional Research Service -- $1 trillion (in 2008 dollars) -- tops the present economic bailout. Add in brief cut-and-run flops like Lebanon in 1983 and Somalia, from 1992-1995, as well as now-forgotten hollow victories in places like the island of Grenada and Panama, and you tack on billions more with little to show for it.

Since 2001, the Bush administration’s Global War on Terror (including the wars in Afghanistan and Iraq) has cost taxpayers more than the recent bailout -- more than $800 billion and still climbing by at least $3.5 billion each week. And the full bill has yet to come due. According to Noble Prize-winning economist Joseph Stiglitz and Harvard University professor Linda Bilmes, the total costs of those two wars could top out between $3 trillion and $7 trillion.

While squandering money, the Global War on Terror has also acted as a production line for the creation of yet more military bases in the oil heartlands of the planet. Just how many is unknown -- the Pentagon keeps exact figures under wraps -- but, in 2005, according to the Washington Post, there were 106 American bases, from macro to micro, in Iraq alone.

If you were to begin the process of disentangling Americans from this world of war and the war economy that goes with it, those bases would be a good place to start. There is no way to estimate the true costs of our empire of bases, but it’s worth considering what an imperial tag sale could mean for America’s financial well-being. One thing is clear: in getting rid of those bases, the United States would be able to recoup, or save, hundreds of billions of dollars, despite the costs associated with shutting them down.

Tag Sales and Savings

If the Pentagon sold off just the buildings and structures on its officially acknowledged overseas bases at their current estimated replacement value, the country would stand to gain more than $119 billion. Think of this as but a down payment on a full-scale Pentagon bailout package.

In addition, while it leases the property on which most of its bases abroad are built, the Pentagon does own some lucrative lands that could be sold off. For instance, it is the proud owner of more than 11,000 acres in Abu Dhabi, "the richest and most powerful of the seven kingdoms of the United Arab Emirates." With land values there averaging $1,100 per square meter last year, this property alone is worth an estimated $48.9 billion. The Pentagon also owns several thousand acres spread across Oman, Japan, South Korea, Germany, and Belgium. Selling off these lands as well would net a sizeable sum.

Without those bases, billions of dollars in other Pentagon expenses would immediately disappear. For instance, during the years of the Global War on Terror, the Overseas Cost of Living Allowance, which equalizes the "purchasing power between members [of the military] overseas and their U.S.-based counterparts," has reached about $12 billion. Over the same period, the price tag for educating the children of U.S. military personnel abroad has clocked in at around $3.5 billion. By shutting down the 127 Department of Defense schools in Europe and the Pacific (as well as the 65 scattered across the U.S. mainland, Puerto Rico, and Cuba) and sending the children to public schools, the U.S. would realize modest long-term savings. Once no longer garrisoning the globe, the Pentagon would also be able to cease paying out the $1 billion or so that goes into the routine construction of housing and other base facilities each year, not to mention the multi-billions that have gone into the construction, and continual upgrading, of bases in Iraq and Afghanistan.

And that’s not the end of it either. Back in the 1990s, the Pentagon estimated that it was spending $30 billion each year on "base support activities" -- though the exact meaning of this phrase remains vague. Just take, for example, five bases being handed back to Germany: Buedingen, Gelnhausen, Darmstadt, Hanau and Turley Barracks in Mannheim. The annual cost of "operating" them is approximately $176 million. Imagine, then, what it has cost to run those 750+ bases during the Global War on Terror years.

Some recent Pentagon contracts for general operations and support functions overseas are instructive. In March, for instance, Bahrain Maritime and Mercantile International was awarded a one-year contract worth $2.8 billion to supply and distribute "food and non-food products" to "Army, Navy, Air Force, Marine Corps and other approved customers located in the Middle East countries of Bahrain, Qatar and Saudi Arabia."

In July, the French foodservices giant Sodexo received a one-year contract worth $180 million for "maintenance, repair and operations for the Korea Zone of the Pacific Region." These and other pricey support contracts for food, fuel, maintenance, transport, and other non-military expenses, paid to foreign firms, would disappear along with those U.S. garrisons, as would enormous sums spent on all sorts of military projects overseas. In 2007, for instance, the Army, Navy, and Air Force spent $2.5 billion in Germany, $1 billion in Japan, and $164 million in Qatar. And this year, the Pentagon paid a jaw-dropping $1 billion-plus for contracts carried out in South Korea alone.

Men and Materiel

With most or all of those 761 foreign bases off the books, and a much reduced global military "footprint," the U.S. could downsize its armed forces. As Andrew Bacevich notes in his book The Limits of Power, it already costs the Pentagon a bailout-sized $700 billion a year to "train, equip, and sustain the current active-duty force and to defray the costs of on-going operations." Even if current U.S. forces were simply brought home, there would still be significant savings (including, of course, the $10 billion a month going into the Iraq and Afghan wars).

The very opposite, however, is happening. Facing manpower demands on an overstretched military, the Pentagon is planning to ramp up the size of the armed forces by 92,000 over the next several years. That expansion comes with a sure-to-rise price tag of $108 billion. This step has the support of large majorities in Congress and both presidential candidates. John McCain has denounced the notion of "roll[ing] back our overseas commitments" and instead proposes "to increase the size of the Army and Marine Corps." Barack Obama agrees, but has been more specific. He has long touted plans, echoing the Pentagon’s desires, to "increase the size of the Army by 65,000 troops and the Marines by 27,000 troops."

Just attracting this many recruits would cost a small fortune. This year, the Army had to spend $240 million on advertising alone to help meet its recruiting goals. On top of that, it paid out $547 million in bonuses to recruits -- a 164% increase since 2005. And this is to say nothing of how much it costs to train, equip, feed, and pay these future troops.

Capping, if not decreasing, the size of the military and bringing troops home would be the foundation for a new foreign policy based on non-aggression and fiscal responsibility. This would, of course, be a major departure for the military. In the 120 years between 1888 and 2008, according to a study by the Congressional Research Service, only seven -- using generous criteria -- were without "notable deployments of U.S. military forces overseas." Beginning in 2009, U.S. forces could aim for a complete reversal of this trend for the next 120 years, enabling the slashing of budgets for force-projection weapons systems.

Take the F-22A Raptor, a fighter plane designed to counter advanced Soviet aircraft that were never built. Pentagon budget documents released earlier this year put the estimated cost of the program, 2007 to 2013, at almost $3.7 billion. With no advanced Soviet fighters around to dogfight -- Russian aircraft had trouble enough in their recent Georgian encounters -- and no need for its "global strike" capabilities, the program could be scrapped. Such a step is not without precedent. As Wired magazine’s Danger Room blog reported last month, Congress "all-but-eliminated funding for the so-called ‘Blackswift’ program," a prototype hypersonic aircraft for which the Pentagon had requested almost $800 million in 2009 start-up funding. If the project remains stillborn, that alone will mean billions in future savings.

This year, for example, the Air Force is spending nearly $65 billion on new weapons systems. By shutting current and future weapons programs not meant for actual defense of the United States, Americans would be looking at hundreds of billions of dollars in savings in the near term. If the Pentagon demilitarized and sold off existing equipment as well, including, for instance, some of its 120,000 Humvees, at least 280 ships, and 14,000 aircraft, you’re talking about another significant infusion of cash.

Bases Gone Bust

If history suggests anything, it’s that one way or another, on a long enough timeline, all imperial garrisons fall. Some, of course, go bust sooner than others. As one Army publication noted in the 1970s, "[t]he ravages of rot, jungle, and weather have left only memories of the once-mighty World War II bases of the South Pacific." The fate of many bases built since has been no less inglorious.

While it would be difficult to total up just how many firebases, camps, airbases, port facilities, and base camps the U.S. had in Indochina during the Vietnam War, or what it cost to build and upgrade them, the numbers would surely be staggering. What we do know is instructive. For instance, the U.S. Army-Vietnam headquarters complex at Long Binh, about 16 miles from Saigon, had a value of more than $100 million in 1972 -- the year the U.S. gave it away to its South Vietnamese allies. They, in turn, lost it when the Saigon regime collapsed in 1975. Today, it’s an industrial park. Similarly, the U.S. poured huge sums into its naval base at Cam Ranh Bay. By 1979, the Soviet Navy was using it and, after abandoning it earlier this decade, may do so again.

Similarly, in the 1990s, the U.S. got kicked out of its massive bases in the Philippines. A volcano laid waste to Clark Air Base and the Philippine Senate rejected U.S. efforts to extend the lease on its massive installation at Subic Bay. Just moving out personnel and equipment afterwards cost billions. More recently, the same process played out on fast forward in Central Asia. As adjunct professor at the Air Force’s Air Command and Staff College Stephen Schwalbe pointed out in an article in Air & Space Power Journal, after the U.S. negotiated the right to use Uzbekistan’s Karshi-Khanabad Air Base in 2001, as part of its Afghan War plans, it pumped millions of dollars into the base to improve infrastructure and facilities -- from increased aircraft parking space to a movie theater. It also ponied up a $15 million fee for its use.

In 2005, however, Uzbek security forces perpetrated a massacre of domestic protesters, leading to a Bush administration demand for an investigation. In the end, all the money spent on the base was wasted. Not long after the American request, Uzbekistan gave the U.S. military 180 days to leave the base and the country -- and promptly signed friendship pacts with Russia and China.

The buildings and structures at the U.S. base at Ecuador’s Manta Air Field are valued at over $176 million and are also soon to move into the Pentagon’s loss column. Last year, Ecuadorian president Rafael Correa offered the following terms for continued use of Manta after 2009: "We’ll renew the base on one condition: that they let us put a base in Miami -- an Ecuadorian base." The U.S. did not take him up on the proposal. Correa has since offered to lease the base to China for commercial use.

The Pentagon stands to lose billions more when it finally withdraws from Iraq and Afghanistan. The cost of manning, maintaining, and regularly upgrading the mega-bases in Iraq, in particular, is already a significant financial burden on American taxpayers, but it would be dwarfed by the losses incurred if they had to be abandoned. As such, getting out, even in today’s depressed real-estate market, would be the financially prudent thing to do.

Similarly, closing down the Bush administration’s notorious torture bases might yield significant financial savings (while enhancing global opinion of the U.S.). Selling off the Pentagon’s facilities on the British-owned island of Diego Garcia in the Indian Ocean, for instance, where Global War on Terror "ghost prisoners" have been held (and U.S. air raids on Iraq and Afghanistan have been regularly launched), could yield $2.6 billion. Saying goodbye to the facilities at Guantanamo Bay in Cuba could net another $2.2 billion -- and some global cheers.

The Pentagon Comes Home

While we may never know if it was bin Laden’s knowledge of America’s "expeditionary" history that drove him to plan out the 9/11 attacks, he certainly goaded the Bush administration into a Soviet-style military spending spree, complete with a Soviet-style ruinous war in Afghanistan. With some caves for bases, he managed to sink Americans into a multi-trillion dollar financial quagmire.

If the United States had never wasted the better part of a trillion dollars fighting a war in Vietnam and, following defeat there, embarked on a scheme to saddle the Soviets with a similarly ignominious loss -- which has now led to wars with a multi-trillion dollar price tag -- the United States might not be in such dire financial straits today. And yet, despite the worst economic downturn since the Great Depression, the U.S. continues to sink money into costly wars fought from expensive bases overseas with no end in sight. The result is sheer waste in every sense of the word.

When Americans want to get serious about a long-term bailout strategy that brings genuine financial and national security, they’ll look to real cost-cutting options like stopping America’s string of costly wars and getting rid of the Pentagon’s vast network of overseas bases. Until then, they are simply helping Ronald Reagan’s freedom fighter, Osama bin Laden, be a better Reagan than Reagan ever was.

Will the Economic Crash Take Down Our Hopes for Clean Energy?

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By David Morris

A century ago French philosopher and writer Paul Valery observed, "The central problem with our times is that the future is not what it used to be." He could have been commenting on current events.

In August, Alternet invited me to write a series of articles on energy policy leading up to the election. At the time the invitation was extended, the price of oil was about $135 a barrel. Gasoline prices had eclipsed $4 a gallon. Natural gas prices hovered around $11 per million BTUs. SUVs sales were down, but car companies were having some trouble keeping up with the demand for smaller cars.

Renewable energy was expanding rapidly. The most important energy issue was whether the renewable electricity credits, bottled up by Senate Republicans for the previous 12 months, would be extended before they expired at the end of 2008. The renewable fuel everyone loves to hate, ethanol, was blamed not only for the rapid rise in food prices but also for food riots around the world.

In August, the economy was still expanding at a rate near its historical average. The stock market, down from the beginning of the year, was holding steady. By all accounts, the Iraq War was going to be the dominant issue in the presidential election.

What a difference 60 days make! The price of oil has now dropped by more than 50 percent to just over $60 a barrel. The price of natural gas has declined in similar fashion. Nationally, gasoline prices have plummeted by about $1.30 a gallon. In Pittsburg, Kan., one can buy gasoline for under $2 a gallon. The relationship between ethanol and food prices has proven tenuous because ethanol production continues to expand while the price of corn drops by more than 50 percent and food prices don't decline at all.

The economy is contracting at a terrifying pace. The stock market has plunged by more than 35 percent. The Iraq War has all but disappeared from the presidential campaigns. Sales of SUVs continue to dive, but now sales of all cars are declining as well.

The context for energy policy has changed dramatically. This happened once before, in 1981. I discuss those changes in a new foreword to my 1982 book Self-Reliant Cities, available at the Institute for Local Self-Reliance next month.

Self-Reliant Cities: Energy and the Transformation of Urban America was published just as the first wave of local, state and national energy activism peaked and crashed. Two factors caused the crash. One was political: the election of Ronald Reagan, a man who saw government as the problem, never the solution. He shut down as many alternative energy programs as he could and made his position crystal clear on the issue when he dismantled the White House solar collector array Jimmy Carter had had installed.

The second factor was the collapse of the economy. In 1981, world trade contracted for the first time since 1931. From 1981 to 1985, the price of oil plunged by 75 percent, falling from $36 a barrel ($93 in today's prices) to about $12.

Will energy history repeat itself in 2009? The economic conditions are eerily similar. We may now be witnessing the first worldwide economic contraction since 1981. We're already deep into the worst financial collapse since the early 1930s. The renewable energy tax credits have been extended, one of the few welcome outcomes of the financial meltdown since the energy bill was tacked onto the second bailout bill, but even with that long-sought passage, renewable energy expansion is stalling because of the credit crunch.

Federal energy incentives and mandates appear safe, although they may be reduced or their timelines may be pushed back. At the state and local level, painful budget crunches may result in significant cutbacks in energy programs. And in the marketplace, will consumers still be willing to pay a premium for green electricity or green fuels?

The biggest difference between 1981 and 2008 is that in 1981 the renewable energy industry was embryonic. National sales were probably below $500 million for all renewable energy technologies. This year investments in wind, solar and biofuels alone may exceed $15 billion. The economic and credit crisis will undoubtedly weaken these industries; research and development will slow, but it will not cease, and sales will probably increase, although at a much slower pace.

If John McCain is elected president, these renewable and energy efficiency industries will face a man whose philosophy of government is similar to Reagan's, but they now possess sufficient political clout to defend themselves. And if Obama wins, we will see an activist government that could, and should, view renewable energy and energy efficiency as an important activity. If unemployment continues to rise, as many expect, approaching the 10 percent level, Obama could take a page from FDR's playbook and institute a massive public works program focusing on infrastructure that lends itself to a green orientation.

There is an important reason investments in alternative energy and energy efficiency may prove attractive in a time of economic hardship: Many if not most of these investments save money by reducing operating costs. In other words, the investment pays itself back. The additional cost of an energy-efficient building pays itself back several times over during the life of the building, as does the cost of a geothermal system.

This fundamental feature of energy investments could lead the next president to mandate maximum efficiency wherever he has the authority to do so (e.g. large appliances, cars), and to work with states and cities to maximize efficiency wherever they have authority (e.g. buildings). The next president could, for example, insist that car companies taking advantage of the newly available $25 billion in federal loans retool their assembly lines to produce very high efficiency electrified vehicles whose additional investment repays itself within the life of the vehicle.

Even where an initial energy investment does not fully repay itself from reducing operating cost, it often is an attractive investment from a national perspective because of its indirect impacts. Wind energy pays itself back from a regional and national perspective by reducing the need for, and therefore the price of, natural gas. Electric vehicles repay the initial additional cost from a national perspective by reducing the dollars exported to pay for oil.

Starting the day after the election, the president-elect must involve himself directly in shaping policy that rights the listing financial ship of state. He can't wait until he takes office. A part of that task must involve resurrecting the New Deal restraints on greed and speculation that were systematically dismantled by the Clinton and Bush administrations.

One goal of that task, aside from achieving financial stability, must be to dramatically reduce the financial sector's share of the economy. Twenty-five years ago the manufacturing sector was about twice the size of the financial sector. Today the financial sector is about a third larger than the manufacturing sector. Over the last 15 years, our primary job engines have been symbolized by the growth of Wal-Mart and Lehman Brothers.

We need to get back to creating domestic high-paying design and manufacturing jobs. The good news is that today, unlike in 1981, such an effort may be bolstered by a government that believes in public action. And today, unlike in 1981, our renewable energy and energy efficiency industries are big enough and capable enough to shoulder the responsibility of strengthening the economy by massively reducing our energy operating costs and equally massively displacing imported fuels with domestic and sustainable energy sources.

The New Deal didn't pull America out of a deep recession. But New Deal investments did benefit succeeding generations. Publicly funded workers planted millions of acres of new forests, farmers were paid to reduce soil erosion, federally assisted cooperatives brought electricity to rural areas, and public works projects like water systems were built all over the country.

The next president and Congress will spend hundreds of billions of dollars to revive the economy. We should insist that they be invested in a way that enriches the common wealth and builds a new physical foundation that can benefit generations to come.

Oil price drop undermines stability of Iranian regime

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By James Cogan

With the price of oil plummeting on world markets, the Iranian government of President Mahmoud Ahmadinejad is confronting a financial crisis that will inevitably bring it into sharp conflict with substantial sections of the population.

The collapse in oil prices from a high of $US147 a barrel in July to less than $65 in trading mid-week is blowing a massive hole in the state budget, 50 percent of which is derived from oil revenues. Oil prices have continued to fall despite an agreement on October 24 by the Organisation of Petroleum Exporting Countries (OPEC) to slash production by 1.5 million barrels.

The projected Iranian budget of $307 billion for the year to March 2009 will have to be financed by a deficit. Estimates of how much the Iranian state will have to borrow range from $7 billion to as high as $50 billion.

Under conditions of continuing turmoil on world financial markets and the freezing up of credit, it is unclear how such a deficit will be financed. Few major international institutions will risk lending to Iran, as it is subjected to economic sanctions designed by the US to punish the regime over its nuclear programs. The operations of major Iranian banks and firms have been curtailed and, in some cases, their assets frozen.

Iran’s foreign currency reserves are believed to amount to $100 billion. If they are drawn upon to finance a budget deficit, they will rapidly be exhausted, especially if the country also begins to run trade deficits.

The sharp decline in oil revenues coincides with rapidly rising imports and a decline in non-oil exports, particularly agricultural goods. Drought has devastated this year’s pistachio crop—the main export apart from oil and a commodity upon which hundreds of thousands of rural Iranians depend upon for their livelihoods.

Ahmadinejad faces the prospect of having to carry out drastic cutbacks to social spending and/or higher taxation, under conditions where there is already mass disaffection with the regime. Even by official estimates, 14 million live in poverty. Unemployment is at least 15 percent and may be as high as 30 percent. Inflation is out of control, with prices rising by an average of 25 percent per year. Food prices have gone up by 40 percent this year alone. A speculative property market has sent house prices and rents soaring.

In this political climate, Ahmadinejad’s introduction of a 3 percent consumption tax in late September provoked outrage among the bazaaris—the small business owners and traders who have been one of the most reliable bases of support for the Islamist regime since it took power. For the first time since the 1979 overthrow of the Shah, the bazaaris declared an indefinite strike on October 8, shutting down market places in Tehran and other major cities.

The government caved in the following day and announced that it was suspending the introduction of the proposed tax. The bazaaris nevertheless continued their strike for six days in Tehran, demanding that Ahmadinejad cancel, rather than just suspend, the new tax. According to the BBC, large numbers of police have been deployed into the main bazaars to intimidate the business owners.

The next policy looming as a trigger for social conflict is the government’s plan to abolish subsidies which keep down the price of petroleum products and cost of water. Under a rationing system that has been in place for over a year, Iranian consumers can purchase 100 litres of petrol each month at a price of just 10 US cents per litre. The Iranian state has to import close to 40 percent of the country’s fuel at world prices as it does not have sufficient refining capacity to process domestic production.

The subsidies had been scheduled to end by 2011. During the transitional period, Ahmadinejad promised that all middle and low income households would receive a cash payment of between $44 and $70 per person as compensation. The populist gesture was widely viewed as a cynical attempt to buy voter support for his re-election in next June’s presidential election. The budget crisis means that the petrol subsidies will most likely have to be cut sooner and the cash handouts will have to be cancelled.

Desperate to boost the price of gas exports, the Iranian government announced this month that it had held talks with Russia and Qatar over the possibility of forming a natural gas producers’ equivalent of OPEC.

Iran possesses the world’s second largest reserves of gas and is strategically positioned to supply energy markets in Europe and Asia. The reality, though, is that Iran has to import as much gas as it exports. As is the case with petroleum products, it does not have the processing capacity and pipeline networks to meet its own domestic demand. Iran’s gas sector needs tens of billions of dollars in investment, which has not materialised due to the sanctions regime and concerns over the prospect of a war with either Israel or the US.

Iran would therefore gain little financial benefit from an OPEC-style gas cartel that forced up prices. The collapse in oil revenues has even provoked concerns that the country will face gas shortages this winter as the government may not be able to afford the necessary volume of gas imports.

Recriminations against Ahmadinejad, who took office in 2005, are on the rise within the Iranian establishment. His administration is being condemned for failing to slash the budget earlier and to save additional revenue from oil exports while prices were high. The savings in Iran’s “future fund” may amount to as little as $7 billion, compared with Russia’s $157 billion. Ahmadinejad has been using the extra revenue to finance public works programs and subsidies.

A campaign to discredit Ahmadinejad or pressure him into leaving office appears to be underway. Last week, the parliament accepted an impeachment motion against Ahmadinejad’s interior minister and close ally, Ali Kordon, on charges of “dishonesty”. Kordon incorrectly claimed to hold a degree from Oxford University when Ahmadinejad offered him a cabinet position in August. The vote to remove him will take place on November 4.

Over the weekend, the Iranian media gave considerable attention to claims that the president had missed several engagements because he was in poor health. The extent of the rumours compelled Ahmadinejad’s aides to publicly announce that he may have recently been suffering from “exhaustion”, caused by long working hours, but was not ill.

To this point, Ahmadinejad has not come in for open criticism from the clerical elite, headed by Ayatollah Ali Khamenei, which holds most of the real levers of power in Iran. The clergy’s stance indicates that the economic dilemmas that have emerged make the entire regime vulnerable to social discontent, not simply Ahmadinejad and the current government.

Global economic crisis hits Japanese banks, exporters

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By Peter Symonds

Japan's stock market has been hit by extraordinary volatility over the past few days, hitting a 26-year low on Monday before recovering its losses yesterday after the government stepped in to announce a series of emergency measures. Despite claims that Japan was well positioned to weather the crisis, the world's second largest economy is rapidly being dragged into the financial and economic maelstrom sweeping the globe.

Amid growing signs of global recession, the Nikkei 225 Stock Average fell 6.4 percent on Monday to 7,163—its lowest level since October 1982. Up to the end of Monday, the stock market had lost half its value this year. The stocks of the major exporters all suffered after a series of company reports announcing falling profits.

Prime Minister Taro Aso warned on Monday: "Unless appropriate measures are adopted, the market's free fall will have a huge impact on the real economy." The Financial Services Agency has announced a ban from early next month on naked short-selling—a means of betting on a falling market. The government is also preparing to announce a second major stimulus package this week in a bid to boost economic growth. On Tuesday, the Nikkei rose by 6.4 percent.

Japan's deepening crisis is a product of the international financial storms and economic slowdown. As Shinichi Ichikawa, chief equity strategist at Credit Suisse in Tokyo, told the Wall Street Journal: "The factors hurting the market are beyond Japan's control." The Japanese government alone can't fix exporters' woes or the slowing global economy, he declared.

Last week Sony sharply cut back its profit outlook for the current fiscal year and Nissan announced plans to wind back production in the US, Japan, the UK and Spain. Yesterday Honda announced a 41 percent drop in its September quarter profits and warned of lower profits for the full fiscal year. Panasonic also reported a fall in profits.

Japan is heavily dependent on exports, particularly to the US and Europe, where the economies are slowing rapidly. In 2007, export earnings accounted for two thirds of Japan's economic growth. Falling exports have already led to a second quarter contraction in the economy and many analysts are predicting worse to come.

Hiromichi Shirakawa, an economist for Credit Suisse and UBS, predicted that the economy could shrink by as much as 1 percent next year—potentially the largest contraction among the major industrialised nations. The Royal Bank of Scotland stated last week that it did not expect the Japanese economy to regain its potential growth rate until at least the latter half of 2010.

A major factor hitting Japanese exports is the strength of the yen against all major currencies including the US dollar. Last Friday, the yen hit 90.89 to the US dollar—its highest value since August 1995. In the past three months, it has appreciated by 19 percent against the dollar, 32 percent against the euro and 33 percent against the British pound.

The G-7 financial ministers issued an emergency statement on Monday, partly in response to Japanese appeals for assistance. The G-7 warned that "recent excessive volatility in the exchange rate of the yen" had "possible adverse implications for economic and financial stability." The statement failed to halt a further appreciation of the yen on Tuesday.

A significant component in the rise of the yen is the unravelling of the so-called carry trade. Following the collapse of the share and property bubbles in Japan in the early 1990s, the country's central bank has maintained interest rates at record lows—at zero for five years—as part of efforts to end the economy's protracted stagnation.

The carry trade involves borrowing in Japan where the interest rate is currently 0.5 percent and investing in countries where the returns are far higher. One effect has been to depress the value of the yen against other currencies, which in turn benefitted Japanese exporters. Hedge funds in particular have invested heavily in the carry trade, which, according to the Stratfor website, involves massive investments—estimates range from $1.5 trillion to more than $6 trillion.

Now, amid global investor panic and uncertainties, investors are getting out of riskier countries, particularly the so-called emerging economies and looking for safe havens. As a result, the carry trade is "unwinding". As money floods back into the yen, it drives the currency higher. This in turn encourages investors to avoid even higher payments by paying off their yen debts, causing the yen to rise even further.

Many of the emerging economies that once offered high returns are in a state of economic turmoil, if not complete collapse. A growing number of countries have either agreed to a deal or are in talks with the IMF to avert bankruptcy, including Iceland, Hungary, Pakistan and the Ukraine.

The collapse of the carry trade is one of the main reasons behind the plunge of global currencies against the yen. The Australian dollar, for instance, which was a favourite among investors, has plummetted by nearly half against the yen since July.

As international credit markets have frozen up, countries heavily dependent on foreign borrowings have been caught out by the lack of finance, as well as having to make higher payments on existing loans due to falling currencies. In Latin America, Argentina is once again on the brink of default. In Eastern Europe, Romania, Hungary and Bulgaria are heavily exposed to foreign-denominated debt. On Monday, international ratings agency Standard & Poors lowered Romania's foreign currency debt rating to BB+ or "junk" status.

The steadily rising yen has been one of the indicators prompting a sell off of Japanese shares, particularly of the major exporters. The collapse of share values has opened up the first cracks in Japan's banking system, which previously appeared to be rock solid. Over the past two decades, Japan's major banks have purged their balance sheets of huge quantities of bad debt. They also had little exposure to the US subprime crisis.

Over the past month, Japanese banks have exploited the financial crisis in the US to make some major acquisitions. The largest—Mitsubishi UFJ Financial Group—paid $9 billion to purchase a 21 percent stake in Morgan Stanley and also bought a 35 percent stake in Union BanCal Corp for about $3.5 billion. Nomura Holdings bought up the Asian and European components of failed Lehman Brothers Holdings.

On Monday, however, Mitsubishi UFJ Financial Group announced plans to raise as much as $10.7 billion in new capital. Ms Li of KBC Securities told the Wall Street Journal that the decision was "a big blow for the confidence of investors in Japan and abroad. They previously assumed Japanese banks were relatively safe and didn't have the immediate need to raise capital."

Sumitomo Mitsui Financial Group and Mizuho Financial Group are expected to follow suit. Shares in Mitsubishi UFJ and Mizuho plunged by 15 percent on Monday and Sumitomo Mitsui fell by 11 percent. Economy Minister Kaoru Yosano indicated on Sunday that the government would increase its planned injection of funds to strengthen the country's financial institutions from two to ten trillion yen. While originally intended for smaller banks, it may now include Japan's top banks.

The major Japanese banks may not be vulnerable to American toxic debt, but their large share holdings have been badly hit by the downward plunge of the Nikkei 225. Mitsubishi UFJ held a portfolio of Japanese stocks valued at 6.1 trillion yen as of June. Since then the share market has collapsed by 40 percent wiping an estimated 2.4 trillion yen off the value of the bank's holdings. As a result, Mitsubishi UFJ has been forced to raise new capital to shore up its financial base.

The volatility on the Tokyo stock market and the rapid change in outlook for the Japanese banks makes clear that the international economic crisis is making itself felt in every corner of the globe.