Secret Bush Administration Plan to Suspend US Constitution

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By Tom Burghardt

"Continuity of Government" (COG) Provisions activated in 2001

Ten months before the September 11, 2001 terrorist attacks, Secretary of Defense Donald Rumsfeld approved an updated version of the U.S. Army’s secret operational Continuity of Government (COG) plans.

A draft document published by the whistleblowing website Wikileaks entitled, "Army Regulation 500-3, Emergency Employment of Army and Other Resources. Army Continuity of Operations (COOP) Program," dated 19 January 2001, spells out changes in Army doctrine.

Issued by Headquarters, Department of the Army and signed off by Secretary of Defense Donald Rumsfeld and the Secretary of the Army, the document is affixed with a warning: "Destruction Notice: Destroy by any method that will prevent disclosure of contents or reconstruction of the document." The restricted document as published by Wikileaks states:

History. This regulation is a revision of the original regulation that was effective on 10 July 1989. Since that time, no changes have been published to amend the original.

Summary. This regulation on the Army Continuity of Operations (COOP) Program has been revised to update Army COOP policy and extend the requirement for all-hazards COOP planning to all Army organizations. Classified information contained in the 1989 version of this AR has been removed and placed in a classified HQDA Operations Plan (OPLAN).

Applicability. This regulation applies to the Active Army, the U.S. Army Reserve (USAR), and when federalized to the Army National Guard (ARNG). In the event of conflict between this regulation and approved OSD or JCS publications, the provisions of the latter will apply. ("Army Regulation 500-3, Emergency Employment of Army and Other Resources. Army Continuity of Operations (COOP) Program," 19 January 2001, p. 3) [emphasis added]

"All-hazards COOP planning" is described as the means by which "the Army remains capable of continuing mission-essential operations during any situation, including military attack, terrorist activities, and natural or man-made disasters." While the Army stresses the updates described in AR 500-3 relate to chemical, biological, nuclear attacks, "natural disasters" and "technical or man-made disasters or accidents," current Army doctrine is also heavily weighted towards contingency planning for "civil disturbances."

Two national "civil disturbance" plans, Garden Plot and Cable Splicer have been operational since the 1960s. Researcher Frank Morales has detailed how,

Under the heading of "civil disturbance planning," the U.S. military is training troops and police to suppress democratic opposition in America. The master plan, Department of Defense Civil Disturbance Plan 55-2, is code-named, "Operation Garden Plot". Originated in 1968, the "operational plan" has been updated over the last three decades, most recently in 1991, and was activated during the Los Angeles "riots" of 1992, and more than likely during the recent anti-WTO "Battle in Seattle." ...

Equipped with flexible "military operations in urban terrain" and "operations other than war" doctrine, lethal and "less-than-lethal" high-tech weaponry, US "armed forces" and "elite" militarized police units are being trained to eradicate "disorder", "disturbance" and "civil disobedience" in America. Further, it may very well be that police/military "civil disturbance" planning is the animating force and the overarching logic behind the incredible nationwide growth of police paramilitary units, a growth which coincidentally mirrors rising levels of police violence directed at the American people, particularly "non-white" poor and working people. (Frank Morales, "U.S. Military Civil Disturbance Planning: The War at Home," in Police State America, ed. Tom Burghardt, Toronto/Montreal: Arm The Spirit/Solidarity, 2002, P. 59)

AR 500-3 should be viewed in this context. Plans for Continuity of Government have been in place since the 1950s. Originally conceived during the Cold War when fears of a nuclear strike envisaged by atomic war-gamers at the RAND Corporation, believed that an immobilization of government functions and a breakdown of civilian rule would follow a nuclear attack. But from their inception, COG planning has been shrouded in secrecy.

In addition to constructing nuclear-proof underground facilities where the civilian leadership could escape a decapitation strike, other COG provisions included a series of executive orders designating which officials would assume Cabinet-level posts and other Executive Branch positions. Officials so designated would constitute a "shadow government" should office holders be killed in an attack "or otherwise incapacitated."

However, when these and other Pentagon "civil disturbance" plans surfaced in the 1980s during the Iran-Contra hearings, they were roundly criticized by members of Congress, civil liberties groups and the media before disappearing once again, down Orwell’s "memory hole." The inherent dangers implicit in such plans are that unelected Executive Branch officers could assume the Presidency and other appointed offices subject neither to congressional scrutiny nor judicial oversight.

Exercising sweeping emergency powers buried within Presidential Decision Directives (PDDs), unelected officials could suspend the Constitution, declare martial law and create an Executive Branch dictatorship that rests solely on the power of the U.S. military.

Most troubling, Executive Branch officials under secret rules of a COG regime could suppress and usurp the lawful powers of Congress and the Judicial Branch (by force of arms if deemed necessary) as a means of ensuring "cooperation" under a "unitary executive."

As we have seen, the "unitary executive" theory has been a salient feature of Bushist rule since the December 2000 judicial coup d’état, when the Supreme Court’s Bush v. Gore decision handed a contested election to George W. Bush by stopping the vote count in Florida.

Since assuming office, the administration has ruthlessly wielded executive power in order to achieve their antidemocratic agenda: from the looting of the economy through "deregulation," massive deficit spending and tax cuts for their corporate "clients," to waging a preemptive war of conquest in Iraq, the "unitary executive" has systematically shredded America’s constitutional system of checks and balances.

The Bush administration put COG plans into operation for the first time in U.S. history in the hours directly following the September 11, 2001 terrorist attacks. They have never been rescinded.

Their implementation involves a rotating staff of 75-150 senior government officials and others from every Cabinet department in two "secure, undisclosed locations" on the East Coast. However, key congressional representatives have been kept out of the loop and House and Senate leaders have said they were not informed the "shadow government" had "gone live."

So secretive are Bush administration plans that Peter DeFazio (D-OR), a member of the House Committee on Homeland Security, was denied access in 2007 to the classified version of the COG plans contained in top secret Presidential Decision Directive annexes. This too, is unprecedented.

While the Bush administration admitted that COG was activated in 2001, their disclosure came only after The Washington Post broke the story based on confidential administration sources troubled by the scope of the program and its secretive implementation.

Since the late 1980s, Rumsfeld was a habitué of COG exercises along with Vice President Dick Cheney. Indeed early COG drills had been organized by the right-wing Center for Strategic and International Studies (CSIS). As investigative journalist Andrew Cockburn revealed in his definitive political biography of the former Defense Secretary:

This highly secret program was known as Project 908, and among the individuals earmarked to take power when disaster struck was Donald Rumsfeld. ... There, for several days, he would be immured in artificial caverns, staring at electronic displays streaming data of disaster and confusion, sleeping on cots and subsisting on the most austere rations. ...

Insofar as the COG games gave the illusion of reality, they taught Rumsfeld and his fellow players some dangerous lessons, particularly when the fall of the Soviet Union induced some changes in the usual scenarios. Although the exercises continued, still budgeted at over $200 million in the Clinton era, the vanished Soviets were now customarily replaced by terrorists. The terrorism envisaged however, was almost always state-sponsored. ...

There were other changes, too. In earlier times the specialists selected to run the "shadow government" had been drawn from across the political spectrum, Democrats and Republicans alike. But now, down in the bunkers, Rumsfeld found himself in politically congenial company, the players’ roster being filled almost exclusively with Republican hawks. (Andrew Cockburn, Rumsfeld: His Rise, Fall, and Catastrophic Legacy, New York: Scribner, 2007, pp. 85-86, 88)

As researcher Peter Dale Scott revealed, in early 2006 the Department of Homeland Security awarded a $385 million contract to a Halliburton subsidiary, KBR, to provide "temporary detention and processing facilities." Scott wrote,

The contract--announced Jan. 24 by the engineering and construction firm KBR--calls for preparing for "an emergency influx of immigrants, or to support the rapid development of new programs" in the event of other emergencies, such as "a natural disaster." The release offered no details about where Halliburton was to build these facilities, or when. ...

After 9/11, new martial law plans began to surface similar to those of FEMA in the 1980s. In January 2002 the Pentagon submitted a proposal for deploying troops on American streets. One month later John Brinkerhoff, the author of the 1982 FEMA memo, published an article arguing for the legality of using U.S. troops for purposes of domestic security. (Peter Dale Scott, "Homeland Security Contracts for Vast New Detention Camps," Pacific News Service, February 8, 2006)

The DHS contract to KBR had been preceded by the April 2002 creation of the Pentagon’s Northern Command (NORTHCOM), specifically empowered by the Bush administration for domestic U.S. military operations in direct violation of Posse Comitatus prohibitions forbidding the use of the military for domestic law enforcement. At the time, Defense Secretary Rumsfeld called NORTHCOM’s launch "the most sweeping set of changes since the unified command system was set up in 1946."

Sweeping indeed! Last month Army Times reported that the Army’s "3rd Infantry Division’s 1st Brigade Combat Team [BCT] has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys. Now they’re training for the same mission--with a twist--at home." According to Army Times,

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks. ...

But this new mission marks 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 may be called upon 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. ...

The 1st BCT’s soldiers also will learn how to use "the first ever nonlethal package that the Army has fielded," 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.

"It’s a new modular package of nonlethal capabilities that they’re fielding. They’ve been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we’re undertaking we were the first to get it."

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets. (Gina Cavallaro, "Brigade Homeland Tours Start Oct. 1," Army Times, September 8, 2008)

While senior Pentagon brass have downplayed the significance of deploying a BCT that has taken part in aggressive occupation duties to suppress the Iraqi people’s resistance, Col. Lou Vogler, NORTHCOM’s chief of future operations said in an interview that the military "will integrate with law enforcement to understand the situation and make sure we’re aware of any threats." An article published by the Army News Service disclosed,

During the exercise, commanders and staff of the force will train, rehearse and exercise--from academic classes to making decisions and executing orders--all to help prepare them for the mission they will assume on Oct. 1, said Vogler.

"It’s an opportunity for network building in an unprecedented assignment of forces," said [Marine Corps Lt. Col.] Shores. "DOD always had allocated contingency sourced forces--but this is precedent-setting network building with the forces that we ultimately will go out and execute with. It’s an opportunity to get to know our forces, to see them in execution, to mission-orient them and be that much better--to be that much more responsive."

One goal of the exercise is to exercise with partners from the civilian agencies they would support. To that end, the Federal Emergency Management Agency (FEMA) and other interagency representatives are participating to ensure integration with civilian consequence managers who would lead a response, said Vogler.

"The overall federal response builds on the local and state response in accordance with the incident command system and existing plans and processes that are out there," said Vogler. "The response force would supplement local efforts." ("Consequence Management Response Force to join Army Northern Command," Army News Service, September 15, 2008)

Vogler and Shores were discussing an exercise code-named Vibrant Response, that took place September 8-19 at Fort Stewart in Georgia. Three brigades form the core of NORTHCOM’s Consequence Management Response Force: the 1st Brigade Combat Team, 3rd Army Division; the 1st Medical Brigade, Fort Hood, Texas, and the 82nd Combat Aviation Brigade, Fort Bragg, North Carolina. All three units participated in Vibrant Response.

As researcher and analyst Michel Chossudovsky comments:

The BCT is an army combat unit designed to confront an enemy within a war theater.

With US forces overstretched in Iraq, why would the Pentagon decide to undertake this redeployment within the USA, barely one month before the presidential elections?

The new mission of the 1st Brigade on US soil is to participate in "defense" efforts as well as provide "support to civilian authorities".

What is significant in this redeployment of a US infantry unit is the presumption that North America could, in the case of a national emergency, constitute a "war theater" thereby justifying the deployment of combat units.

The new skills to be imparted consist in training 1st BCT in repressing civil unrest, a task normally assumed by civilian law enforcement.

What we are dealing with is a militarization of civilian police activities in derogation of the Posse Comitatus Act. ("Pre-election Militarization of the North American Homeland. US Combat Troops in Iraq repatriated to ’help with civil unrest’," Global Research, September 26, 2008)

One scenario envisaged by Chossudovsky is that "civil unrest resulting from from the financial meltdown is a distinct possibility, given the broad impacts of financial collapse on lifelong savings, pension funds, homeownership, etc."

One might reasonably inquire, what "precedent-setting network" does the Army have in mind that would "ensure integration" with "civilian agencies" such as FEMA (a branch of Homeland Security)? As the World Socialist Web Site reports:

It is noteworthy that the deployment of US combat troops "as an on-call federal response force for natural or manmade emergencies and disasters"--in the words of the Army Times--coincides with the eruption of the greatest economic emergency and financial disaster since the Great Depression of the 1930s.

Justified as a response to terrorist threats, the real source of the growing preparations for the use of US military force within America’s borders lies not in the events of September 11, 2001 or the danger that they will be repeated. Rather, the domestic mobilization of the armed forces is a response by the US ruling establishment to the growing threat to political stability. (Bill Van Auken, "Army deploys combat unit in U.S. for possible civil unrest," World Socialist Web Site, 25 September 2008)

As the 2001 COOP planning document describes, a host of on-going Army plans and exercises have been revised by the Bush administration. In addition to Vibrant Response discussed above, they include: Plan EXCALIBUR, a COG Army training exercise; ADOBE, described by investigative journalist William M. Arkin as a "FEMA continuity of government special access program designation." Arkin describes special access programs or SAPs as,

Classified research and development, acquisition program, operation, intelligence activity, or plan that is so sensitive or critical that the value of the information warrants enhanced protection beyond that normally provided for access to Confidential, Secret, or Top Secret information. (William M. Arkin, Code Names: Deciphering U.S. Military Plans, Programs, and Operations in the 9/11 World, Hanover, NH: Steerforth Press, 2005, p. 598)

The impetus for revising Army COOP was, according to AR 500-3 primarily because,

The end of the Cold War and the breakup of the former Soviet Union significantly reduced the probability of a major nuclear attack on CONUS but the probability of other threats has increased. Army organizations must be prepared for any contingency with a potential for interruption of normal operations. To emphasize that Army continuity of operations planning is now focused on the full all-hazards threat spectrum, the name "ASRRS" has been replaced by the more generic title "Continuity of Operations (COOP) Program." (p. 13)

Towards this end, the Rumsfeld-era document states that the Army’s new "mission-critical" functions will be restructured so that, "Army COOP plans must ensure that the Army remains capable of continuing mission-essential operations during any situation, including military attack, terrorist activities, and natural or man-made disasters." (p. 13) The Army, following various contingencies analyzed in the document will "coordinate with mission-essential external organizations and agencies." (p. 14)

So sensitive are the political ramifications of these plans that under the heading, 3-12 Operational Security (OPSEC), the Army avers,

a. The success of COOP planning relies on denying access by unauthorized parties to information on COOP plans, procedures, capabilities and facilities.

b. Overhead imagery, signals intelligence, human sources, and exploitation of open literature during peacetime are threat capabilities used to gain knowledge of Army emergency plans, command and control systems, and facilities.

c. See Appendix B, Security Classification Guide, for guidance on the level of classification of COOP-related information. (COOP, op. cit., p. 20)

Appendix A of AR 500-3 lists relevant references for changes included in the COOP planning document. These include:

Section I

Required Publications

HQDA Operations Plan EXCALIBUR, 30 April 1999 (Being Revised)

HQDA Continuity of Operations Plan (cited in para 1-4.f)

Section II

Related Publications a related publication is merely a source of additional information. The user does not have to read it to understand this publication.

Executive Order 12656

National Security Emergency Preparedness (NSEP), 18 November 1988

DoD Directive (Dodd) 2000.12

DoD Antiterrorism/Force Protection (AT/FP) Program, 13 April 1999

CJCSM 3410.01

Continuity of Operations Plan for the Chairman of the Joint Chiefs of Staff (COOP-CJCS), 1 March 1999

Executive Order 12787

Prescribing the Order of Succession of Officers to Act as Secretary of Defense, 31 December 1991

DoDD 3020.26

Continuity of Operations (COOP) Policy and Planning, 26 May 1995

DoD 3020.26P

Continuity of Operations Plan, 21 June 2000 (Classified SECRET)

DoDD 3020.36

Assignment of National Security Emergency Preparedness (NSEP) Responsibilities to DoD Components, 2 November 1988

DoDD 3025.15

Military Support to Civil Authorities (MSCA), 18 February 1997

The Federal Response Plan, April 1999

Presidential Decision Directive (PDD) 67, (Top Secret) Enduring Constitutional Government (ECG) and Continuity of Government (COG) Operations, Oct 21, 1998

Federal Preparedness Circular 65, Federal Executive Branch Continuity of Operations, (COOP), July 26, 1999

As Peter Dale Scott reported in CounterPunch, apparently members of Congress are considered "unauthorized parties" to be denied access "to information on COOP plans, procedures, capabilities and facilities." Congressman DeFazio had been denied access to the classified annexes of National Security and Homeland Security Presidential Directive (NSPD 51/HSPD 20) Scott wrote,

NSPD 51 contains "classified Continuity Annexes" which shall "be protected from unauthorized disclosure." Congressman DeFazio twice requested to see these Annexes, the second time in a letter cosigned by House Homeland Security Committee Chairman Bennie Thompson and Oversight Subcommittee Chairman Christopher Carney. It was these requests that the White House denied. ...

DeFazio’s inability to get access to the NSPD Annexes is less than reassuring. If members of the Homeland Security Committee cannot enforce their right to read secret plans of the Executive Branch, then the systems of checks and balances established by the U.S. Constitution would seem to be failing.

To put it another way, if the White House is successful in frustrating DeFazio, then Continuity of Government planning has arguably already superseded the Constitution as a higher authority. (Peter Dale Scott, "The Showdown," CounterPunch, March 31, 2008)

With the stunning revelations published by Wikileaks, it is abundantly clear that top Bush administration officials were busily revising Continuity of Government plans, including "civil disturbance" contingencies for suspending the Constitution and imposing martial law, long before the 9/11 attacks.

Since that fatal and tragic day seven long years ago, we have been told repeatedly by the government and their media sycophants that 9/11 was the day "when everything changed."

We now know thanks to Wikileaks, that as with the invasion and occupation of Iraq, the unprecedented and lawless surveillance of Americans, the illegal detention and torture of prisoners of war, that Bush administration assertions are no more than a pack of murderous lies.

One fact is abundantly clear from the mass of conflicting evidence and assertions made by proponents of various theories surrounding the 9/11 events: AR 500-3 demonstrates that from the very first moments after being installed in office, the Bush regime was involved in a "controlled demolition" of the U.S. Constitution.

The End of American Capitalism? 5 Short Takes on Where the Financial Crisis Might Be Headed

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The past week has seen the US economy rocked by some of the worst global financial turmoil in decades, with venerable firms collapsing, global banks and governments pouring huge sums of money into financial markets in a bid to ease turmoil and thousands facing unemployment or financial ruin.

As US officials announce planned measures to tackle the crisis, Al Jazeera asked five prominent economists: Does the crisis signal the end of US-style capitalism? And if so, what are the lessons learned?

James Galbraith, economist, professor at University of Texas, Austin

This does not mean the end of the United States’ position in the world economy.

The US dollar has not moved, which does suggest that the position of the US government is still very much intact.

I think what it means is that in the future the big firms will have a smaller presence.

The years when the US government took the position that financial firms can run the country as they see fit and that regulation could be dismised is finished. There will be a major examination of how the financial markets are regulated.

Such financial events will have a lagged effect on everyone ... its most likely consequence is that the credit crisis will get more intense and the foreclosure crisis will get worse.

We will have to wait and see. But people do not learn from mistakes. How many times do we have to go through this?

’Enormous mess’

A well-functioning financial system has rules and it’s when the rules are relaxed that shady practices and get rich quick schemes abound, which is what happened in the [sub-prime] mortgage system in 2005 and 2006.

The banks’ behavior was conditioned by Bush. [He] sent a clear signal that they could get away with everything, [that there was] no more effective supervision so go ahead and make toxic loans, we won’t stop you, then everyone made a bundle and left an enormous mess.

The evolution of good conduct is defined by effective rules. John McCain [the Republican presidential candidate] lectures on the morals of Wall Street but they are no more or less corrupt than other humans.

A full recovery will only begin with a new administration with a different philosophy seriously committed to ... bringing in new people, giving them adequate resources and the legal authority.

I would argue it is impossible for McCain to do it. Even if he is a genuine convert to prudent regulation which he has opposed thoughout his career, who would believe it?

He has been an enabler of the most speculative elements of banking system.

I think Barack Obama [Democratic presidential candidate] appreciates the severity of the issue and has the judicious temperament.

This is not a job for zealots or revolutionaries, it’s for serious people to build institutions that can last for a long time.

Gerald Friedman, economics professor, University of Massachusetts

The end of US capitalism? I really doubt it.

This is a very serious financial crisis and if mishandled could become a serious recession even a depression, but it is unlikely to be as bad as the Great Depression of 1929-40 as the authorities have learned to co-operate in crises.

More importantly, a capitalist system - or any social system - can only be brought down by an opposing system supported by a rising economic class.

There is no such contender on the horizon right now to challenge capitalism. So, we’ll continue to muddle along.

Still, it will be bad all around unless we change direction. An effective anti-depression strategy would help those with bad mortgages so that they will be able to make payments on their mortgages and keep their houses; such a policy would help the banks by allowing for a "trickle-up" effect.

Instead, the Federal Reserve is trying to hold back the tide of defaults and foreclosures by helping the top.

At best, this will transfer the costs to average Americans, who lose their homes, watch their neighbours lose their homes, and will in many cases lose jobs when construction and other businesses fail.

Foreigners will be hurt too because many banks and other financial institutions outside the US have invested heavily in US securities including mortgages and stocks and bonds in US investment banks.

Helping the people

We need a trickle-up strategy: Help the financial barons by helping the people.

The US should provide major help to people holding mortgages to renegotiate these and to make some payments so that people can stay in their homes and banks will be able to continue to carry these mortgages on their books.

There should also be a major increase in unemployment benefits so laid-off workers are protected and can continue to buy things and make payments on their debts. This, too, will help the banks.

We should also have a major public works programme to employ laid-off construction workers in overdue infrastructure building and have strict new transparency requirements on banks and other financial institutions.

The Fed, the Treasury, and foreign central banks (especially the European Central Bank and the Bank of Japan) should announce that they will stand behind every major bank and financial institution so that average investors will be absolutely protected.

This will end panic selling and allow the markets to stabilise.

At the same time, the Fed and others should take an equity stake in these institutions to to pry open the accounting records and to enforce new regulations that would clearly separate normal business operations from the speculative activities of the last decade.

Mark Weisbrot, co-director, Centre for Economic and Policy Research (CEPR)

No, the US Federal Reserve has the capacity to provide enough liquidity so this crisis can be smoothed over.

But it’s not going to end the bankruptcies of institutions that are financially insolvent, including some major banks.

The problem is the real economy [ie. not the financial markets], which is on a downwards path because of the housing bubble, and it will continue even if banking crisis is resolved.

There have been a lot of crisis in the last 40 years and this happens to be the worst one since the US depression (in the 1930s) but I wouldn’t exaggerate it.

It is not like the 1930s, we have learned from that period. This time the Fed and banks have pumped hundreds of millions of dollars of liquidity into the market and as long as they are willing to do that we should be able to minimise the impact of the credit crunch on real economy.

’Serious recession’ fears

The economy will slow down because consumers are not borrowing against their homes as they did since 2001 when the last recession ended, that is what drove the last recovery - rising home equity. That process is now in reverse.

The solution is fiscal policy, the government can make up for slowing demand - it did some work with the stimulus package and if willing to do more the US can neutralise the effect of recession.

However, I don’t think they’ll be smart enough so there will be a serious recession.

The most affected are those who have lost jobs, people who have lost homes, millions losing equity or life savings - these are top the three negative impacts.

Should the US rethink its policies? No doubt. Even John MCain is acknowledging that, must be a change of policy?

The most important question not being asked is a simple one – why was this housing bubble allowed to grow to catastrophic portions? This shouldn’t have happened.

I think we can blame media irresponsibility to an extent, as the [journalists] that report should have looked at the numbers, but I think they were following Alan Greenspan [former chairman of the Federal Reserve] and he had to know there was a bubble.

John Berlau, Competitive Enterprise Institute (CEI)

Is this the end of US capitalism? No, because we haven’t had pure capitalism for a long time.

Our banking system is heavily regulated, but we have outdated rules for banks and we should be getting rid of these rules for banks so they can compete with hedge funds.

More competition is needed, everyone is bashing the short sellers but they are heroes - they were right and we should have been listening to them years ago.

Savings and mutual funds should be able to short bank funds as well. I think one way of lessening risk is letting common investment vehicles use those strategies, if more had been shorting we would not have a bull market now.

I think we need a modernisation of regulation and an updating of rules but that does not mean more.

’Moral hazard’

The Bush administration is hardly deregulatory – they put in rules after the Enron scandal which cost companies billions of dollars and also had accountants chasing after minutiae and not the big stuff.

We have had some regulation and it did not turn out to do much good. So examining what makes sense and doesn’t could be good.

The US housing crisis has not impacted as much as some might think. It is only if people were involved in real estate or had to sell now. Oil prices increasing and inflation would have much more effect on lives of everyday Americans than the failure of a big banking firm.

It was right to let Lehmans to let them go bankrupt and not right to bail out AIG, how is that aiding ordinary Americans? It’s a moral hazard if we bail out everyone out.

Failure is a part of capitalism but we also have to be responsible for the outcomes.

No ’scapegoats’

People who took risks and got big loans should learn their lesson. I have sympathy for those who were deceived and the government should punish fraud but the people who gambled should have live with the consequences and neither should a borrower be bailed out.

[We should look at] accounting rules and what makes regulatory sense, so if one bank sells a bad loan and others are spreading that contagion that should be looked at.

The government created Fannie Mae and Freddie Mac as implicitly government supported so they were not as careful as other firms, they inflated the bubble.

Polititians also pushed this idea that everyone should have a home, some of the laws they created encouraged banks to abandon underwriting standards and accusing them of discriminatign against the poor, it must be more transparent.

Everyone is looking for scapegoats but it is about the antiquated rules, not more or less regulation, and what makes sense for the 21st century.

James S Henry, economist, author of The Blood Bankers

This certainly changes the nature of US capitalism. It is not the the end of it, but it is the beginning for a new more carefully regulated financial and housing sector and I thnk with much more government oversight.

We have allowed basically a more or less hands off policy towards major financial institutions at the core of the economy. We’ve deregulated and now we must regulate.

The system as we know it exercises enormous political and economic power and we should have learned about the perils of this kind of "laissez-faire" approach.

Every time we act as if this has never happened before when actually lessons could have been learned much earlier.

Years of neglect

Is either political party ready to take a new approach? Many are ideologically beholden to the neo-liberal approach of financial capitalism.

But there is a whole new generation of younger ecomomists who will be more activists and less free market oriented.

Ironically, we’ve had all kinds of government intervention but it’s been on the side of the institutions - what’s the national interest there?

There are enormous ramifications for developing nationsas the US is a main trading economy. People from Mexico and the Philippines come here to send back billions in remittances but those flows are declining.

Trade will also suffer. We’re a big market for industrial countries such as China, Japan and Canada. Middle tier countries such as Brazil and India may also notice some immediate impact.

And from the standpoint of Europe, there has been a major loss of net worth to lots ordinary investors and homeowners, so it will have real impact on the main street economy in the first world,.

The sources of credit people have lived off for year are drying up and will have big impact on consumption.

I don’t think we need to worry about collapse, it’s more like stagnation, many years of trying to work off loans and bad debts.

We are suffering from years of neglect, we’ll learn that you need a market economy that is led and regulated intelligently, with strong government institutions with smart people not hostage to the institutions they are regulating.

If We Get Through This Crisis, We'll Face Another in 5 to 10 Years -- Here's Why

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By Joshua Holland

If the bailout passed last week were to have the desired outcome, kick-starting our ailing economy -- and there’s no reason to believe it will -- we can expect another painful economic crisis in five to 10 years. It may not be an American crisis, and it might get less attention for that reason, but it will happen.

In the meantime, an enormous bubble of paper wealth will grow -- nobody can say in what sector or which region it will occur -- and some people who get out at the right time will make fortunes. But many more will lose their shirts when it all comes crashing down, and crash down it will.

You don’t need prescience to predict this with confidence; those who don’t learn from history are doomed to repeat it. We haven’t learned a thing from recent history -- it would threaten our underlying economic culture to do so -- so we’ll repeat it all over again. Five to 10 years -- mark my words.

In the late 1980s and early 1990s, a huge asset bubble grew up in Asia, as "hot money" -- foreign investment looking to cash in on higher interest rates in those emerging markets -- flooded the region. Japanese housing prices flew through the roof, totally unmoored from the laws of supply and demand. Countries like Thailand, Malaysia, Singapore and South Korea saw growth rates of up to 12 percent, but it wasn’t real growth; as Paul Krugman noted in 1994, it was the effect of tons of new capital flowing in, not real increases in productivity, that created what was then known as the "Asian miracle." When it all came crashing down in 1997 -- the "Asian Financial Crisis" -- trillions of dollars in paper wealth were wiped out and poverty rates spiraled.

Between 1995 and 2000, tech stocks were the Next Big Thing -- the way to get rich in a heartbeat. By the end of the 1990s, the bubble was mammoth, and again, prices of IT sticks had little connection to the sector’s earnings. When the bubble burst, $7 trillion in paper wealth evaporated.

Similar (but not identical) crises have popped up in countries like Argentina, Sweden and Ecuador over the past two decades.

Now we’re facing the consequences of trillions of dollars in overvalued assets in the American real estate market, and we have no idea yet just how much pain that bubble’s deflation will ultimately bring to the global economy.

During the past few weeks, America’s economic and political elites have been running around like the house is on fire, and after quite a bit of arm-twisting, they passed a mammoth banking bailout in an attempt to stave off a complete crash. But nobody dares discuss why this cycle of growing and popping bubbles continues to happen. There’s been some discussion of deregulation, but the simple fact that this pattern is caused by imbalances inherent in our global economic structure has been completely obscured in our mainstream economic discourse.

Only by understanding that some fundamental economic changes that have occurred since the early 1970s have created this cycle of boom and bust can we even hope to prevent the next crisis.

Consider how the following factors play into the investor class’s repeated fits of "irrational exuberance":

• A long-term movement of "corporate globalization," beginning in the 1970s and accelerating through the 1990s, created a global economy in which the wealthy world held onto high-value "core" functions, and farmed out a great deal of nuts-and-bolts manufacturing to the developing world. The problem is that only a handful of people are able to earn a good living from those high-value activities, and the wages of working majorities in wealthy countries have stagnated (more so in the United States than in the social democracies where unions still have some clout). This has led to rising income inequality in the advanced economies.
  
  
  
  
  
• The share of the world’s income pulled in by a small elite has grown dramatically, while their share of the tax burden has declined, and those at the top of the economic pile now have more money than they know what to do with. At the same time, global inequality has risen as well, meaning that there’s still a huge portion of the world’s population that doesn’t have the means to be "good consumers."
  
  
  
  
  
• That has led to a "crisis of overproduction," with the world now awash in goods -- from microchips to steel to automobiles -- and not enough consumers to absorb all this stuff.
  
  
  
  
  
• As a result, the return on real, productive investments like manufacturing and agriculture has declined steadily since the early 1970s, and countries like China only make it work with an almost endless supply of cheap labor -- rural poverty in China is enormous, and as the country’s manufacturing base grows, peasants are simply grabbed from the countryside and stuck onto the factory lines to churn out more crap for Wal-Mart shoppers.
  
  
  
  
  
• Since the 1980s, the big multinationals, under the guise of "free trade," have obliterated most domestic regulations on investment capital in countries around the world.

Put all that together, and what we have is a small group of institutions and individuals fat with capital and looking around the world for a better return on their investments than they can get from the "nuts and bolts" economy. All that hungry and lightly regulated capital sloshing around the globe has, in turn, given rise to an enormous speculative economy, and that, in turn, has driven the cycle of boom and bust in recent decades.

The Cycle

All of this comes down to growing inequality, both within and between countries. According to World Bank economist Branko Milanovic, "the inequality between the world’s individuals is staggering," with the top 5 percent of the world’s population controlling the same amount of income as the bottom 80 percent.

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

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

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

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

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

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

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

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

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

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

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

The current crisis is a perfect example. Of late, real estate was the can’t-miss investment, and as an enormously overvalued housing bubble sprang up, Wall Street’s financial whizzes started offering newer and more "creative" investment vehicles, bundling mortgages and selling them off to investors from around the globe.

Without fear of a regulatory backlash, the banks pushed their new investments hard, and speculators seeking better returns than they could hope for in the real, productive economy gobbled them up with glee.

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

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

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

That was all well and good for them, if not for the rest of us, until the housing market started to tank. Despite assurances from the government earlier this year that the disaster had been "contained" to the subprime market, it began to spread. As those loans -- many of which were taken on investment properties by people expecting a nice, quick turnover -- started to go belly-up, a panic ensued. As the rot spread, banks started going down and investors essentially began a stampede on an already weakened financial sector. It was the modern-day equivalent of a bank run, but on a global scale.

All of this speculation was only possible because of Big Business’s decades-long assault on public interest regulation and economic nationalism under the guise of "free trade" and "limited government."

Here in the United States, the trend of deregulation culminated in 1999 with the death of the Glass-Steagall Act, the New Deal-era legislation that had forced financial institutions to choose between investment banking and commercial lending.

Meanwhile, international bodies like the WTO and the IMF were pressuring the governments of all countries to drop their controls on the flow of cash and goods. Until the era of the World Trade Organization, developing countries often employed various policy tools that forced foreign investors to help boost their domestic economies. Taxes on profits being taken out of the country and "local content" rules that required investors to hire a certain number of citizens or buy a minimum number of locally manufactured parts were routine. But most of those limits have since evaporated in IMF "structural adjustment" agreements and the back rooms of the World Trade Organization, and that has diminished growth in much of the developed world and led to the increasingly speculative tendencies of global investors. Hence, these rising and falling asset bubbles that we see today.

This will continue until we rethink some of the fundamental assumptions of the global economy -- you can bank on it (but not at Washington Mutual).

What to Do?

Re-regulating the American financial system is an obvious response to the meltdown we’re seeing today, but will do nothing to prevent the next one.

It’ll take more than cleaning up the mess on Wall Street. Domestically, tinkering with the tax code could go a long way toward discouraging speculation. Capital gains on investments in productive and sustainable sectors might be slashed, while taxes on short-term investment gains by those looking to turn a quick buck could be raised significantly -- taxing behaviors you don’t want is a tried and tested policy tool. We should be using the tax code to encourage significant investment in new and sustainable energy technologies and to discourage the creation of new speculative asset bubbles.

One idea that’s been kicking around for many years on the international scene is known as the "Tobin tax," a tax on international cash transfers that would go a long way toward curbing the kind of currency speculation that led to the Asian financial crisis.

We can address income inequality at home by raising the minimum wage to a living wage and protecting workers’ right to organize and bargain collectively. In every country that’s seen a decline in unionization rates, it’s been accompanied by a rise in income inequality. An economy as skewed to the wealthy as ours has become completely negates Henry Ford’s idea of paying workers enough to afford to buy the products they create.

Internationally, it’s past time to scrap the one-size-fits-all orthodoxy promoted by institutions like the World Bank, IMF and WTO, and embrace the idea of economic pluralism. That means re-establishing national economies and allowing developing countries to protect their infant industries from foreign competition. The big multinationals have huge advantages in terms of economies of scale, technology and access to capital, and that leaves developing countries only comparative advantages in cheap labor, raw resources and lax environmental standards.

It also means taking economic development in poorer countries seriously -- as not just a moral imperative, but a matter of economic survival for wealthy countries. That would require sustainable, locally driven projects with an independent funding mechanism, as opposed to the kind of big, foreign-run projects favored by institutions like the World Bank and financed with the politically motivated crumbs the global North throws southward today (see, for example, the "Lula Fund" championed by Brazilian President Luiz Inacio Lula da Silva. It would create a global anti-poverty slush fund financed by taxes on weapons transfers).

Short of a massive depression, ideas like these will likely remain on the margins of our economic discourse. That means you can expect another bubble to rise, and burst, within the decade.

Parts of this column were adapted from an earlier piece I wrote, published on Sept. 22.

Iceland suspends trading in bank shares as financial crisis hits Scandinavia hard

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By Jordan Shilton

Iceland’s Financial Services Authority yesterday suspended all trading in the shares of all financial instruments issued by its major banks—Exista , Glitnir, Kaupthing, Landsbanki, Straumur-Burdaras and SPRON.

The move was made due to concerns that shares were massively overvalued and would collapse.

At a midnight press conference Sunday, Prime Minister Geir Haarde stated that the banks had collectively agreed to “sell their foreign assets and decrease their activity abroad” to facilitate a rescue plan by the government. There is talk of a merger between Kaupthing and Landsbanki and a requested loan from the European Central Bank.

After a weekend of frantic discussions between Iceland’s business, political and trade union leaders Haarde also announced that the trade unions are to be asked to repatriate some of the funds in pension funds in an effort to shore up the krona. Reports indicate that the unions have also been asked to sign up to wage restraints, under conditions of 14 percent inflation.

The package came just days after the announcement that Glitnir, the country’s third largest bank, was to be nationalised. The central bank (Sedlabanki) announced that it was purchasing a 75 percent stake in Glitnir for €600 million. The valuation of Glitnir at €800 million cut the value of the bank by more than half from its level at the end of the previous week.

Announcing the deal, Sedlabanki Chairman David Oddsson said, “Without this intervention Glitnir would have ceased to exist within the next few weeks. It’s as simple as that.”

The collapse of one of Iceland’s largest banks has been a concern for a number of months. While Iceland has enjoyed an unprecedented period of economic growth since 2003, the economy has been in freefall from the beginning of this year. In the second quarter alone, Iceland’s economy contracted by 3.7 percent. The Icelandic krona (ISK) has fallen by 38 percent against the US dollar this year. Following the announcement that Glitnir would be nationalised, the ISK fell almost 3 percent against the euro to its lowest level ever. With the sharp fall in the currency, it has become increasingly difficult for the Icelandic banks to fund their debts, a particular problem for Glitnir, where half of its debt of approximately €15.5 billion is due to be repaid in the coming three years.

Inflation in Iceland has been rampant and Sedlabanki has increased interest rates to 15.5 percent. In this environment, the central banks of three other Scandinavian countries—Denmark, Norway and Sweden—were compelled to make available €1.5 billion to the Icelandic government in May. This was to guard against fears that the government would have insufficient funds to back one of Iceland’s major banks should it collapse. In 2007, total bank assets had grown to over 900 percent of GDP.

The effects of the nationalisation will be felt beyond Iceland. With a population of barely 310,000, the only way for banks to expand was to seek foreign markets. Glitnir joined Kaupthing and Landsbanki in expanding its operation dramatically throughout Scandinavia and in to Britain. The UK retail industry has benefited from a large amount of investment from Icelandic banks, which could now threaten some firms as they find it increasingly difficult to obtain credit. Gavin George of Ernst & Young revealed the extent to which UK firms were reliant on funds from Icelandic banks: “The tentacles of Iceland stretch far and deep along the UK high street. Icelandic banks have backed UK retailers to the tune of £2 billion (€2.53 billion)—and that is just direct investments, not funding that they have lent via a consortium.”

The announcement by another Icelandic investment firm Stodir that it was filing for temporary protection from its debtors on the same day is significant in this regard. Stodir owned a 32 percent stake in Glitnir and is controlled by Jon Asgeir Johanneson, who is also the CEO of Baugur, a company which owns a number of retail outlets in the UK. Despite Baugur’s insistence that it had no exposure to the Icelandic economy and that it would continue with “business as usual,” the impact on its operations could be severe.

In addition to Britain, Icelandic banks expanded heavily in Scandinavia. In Norway, the bank was forced to reassure customers that their savings would not be affected and that services would continue. The Norwegian economy is itself facing a growing number of problems resulting from the global crisis. It is believed that the oil fund, which invests some of the country’s oil wealth to be spent in the future, has lost value as world markets have crashed. It was estimated that the oil fund held shares to the value of 168 million Norwegian kronor (approximately €20 million) in failed US bank Washington Mutual when it collapsed. Nordea bank also reported that the fund could have large debt obligations in Washington Mutual. At the start of 2008 it held seven different obligations totalling well in excess of $1 billion (€700 million).

While the Norwegian central bank held interest rates steady at 5.75 percent last week, the rate for inter-bank lending has continued to rise well above that figure. In response, Norges Bank has entered into a currency exchange agreement with the US Federal Reserve amounting to $5 billion. The central banks in both neighbouring Sweden and Denmark have entered similar deals.

Announcing the measure, Norges Bank stated, “There is now an unusually high degree of uncertainty linked to the turbulence in financial markets. The crisis in financial markets has deepened. In Norway there are also clear signs that economic growth is slowing.”

The announcement of the Icelandic government’s takeover of Glitnir came on the same day as three other European banks failed—Bradford & Bingley in Britain, Hypo Real Estate in Germany, and Fortis in Belgium. Big losses resulted on stock markets across the Nordic region.

Sweden saw large falls particularly in banking shares, amid fears that the full impact of the crisis in Europe may only just have started. Swedbank and Carnegie were the two worst hit, but shares in Nordea and Handelsbanken were also down significantly. Swedbank is one of the banks under the most pressure, since its market value has dropped by more than half since the beginning of 2008.

The Riksbank, Sweden’s central bank, was compelled to announce that it had increased the limit of its currency swap with the US Federal Reserve from $10 billion to $30 billion. This would allow it to make dollars available to any Swedish banks suffering from a shortage of funds, although it maintained that it did not consider any bank to be at immediate risk.

Earlier in September, two auctions of treasury bills had been issued by the Riksbank in a bid to free up the markets. But the outlook remains gloomy. Many of Sweden’s largest companies are seeing production fall dramatically, with Volvo laying off 8 percent of its workforce. Scandinavian Airlines is in severe trouble, with rumours that it may be taken over or face collapse.

The IMF has warned Sweden of the dangers of its investments in the Baltic, where both Estonia and Latvia are in recession. It stated that the problems in the Baltic could threaten to “cause a credit crunch in Sweden itself.” It singled out Swedbank and SEB as particularly exposed.

Vast losses have also hit Finland. In the days following the collapse of Lehman brothers, shares on the OMX stock market in Helsinki fell rapidly, resulting in a loss of €14 billion in total investments. An estimated €2 billion in Finnish household wealth was wiped out.

As Iceland announced its emergency package, Denmark stated that it would guarantee all bank deposits.

In July, Denmark’s National Bank was forced to bail out Roskilde bank following higher than expected write-downs on its loans amounting to €500 million. On September 22 it was announced that EBH bank would be taken over by the national bank following a sharp fall in its share prices. It has also been forced to facilitate the merger of two troubled banks, Lokalbanken and Forstaedernes. So far this year, excluding the failed Roskilde bank, Danish banks have written off almost 2 billion kroner (DKK, €270 million) in bad loans.

The Danish economy has contracted in the early part of 2008 and house prices are believed to have fallen by as much as 20 percent. The level of household debt in Denmark was pushed during the years of economic boom to a staggering 260 percent of GDP, the highest level anywhere in the world.

European stock markets in freefall following Paris financial summit

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By Peter Schwarz

The response of European stock markets to the crisis summit held in Paris on Saturday could have not been clearer. On Monday, share prices across Europe plummeted.

The Dax (Frankfurt) lost 7 percent, the TecDax 11 percent, the FTSE 100 (London) 8 percent and the CAC 40 (Paris) 9 percent. In Iceland, share trading was halted altogether. Following the nationalisation of the country’s third biggest bank, the government itself was threatened with bankruptcy.

The government heads of the four European members of the G8—France, Germany, Great Britain and Italy—met on Saturday in Paris to discuss common action to combat the financial crisis. The results of the summit were negligible.

The assembled leaders agreed—in the words of French President Nicolas Sarkozy, who called the summit—that “every country would resort to its own measures.” A proposal to set up a common fund to bail out ailing banks along the lines of the American Paulson plan failed to appear on the summit agenda following opposition from Germany.

Over the weekend, a series of events made clear the extent to which Europe, and especially Germany, has been hit by the international financial turbulence.

On Saturday, the plan drawn up a week ago by the German government and a number of banks to rescue Hypo Real Estate (HRE), Germany’s second biggest mortgage lender, collapsed. The German central bank (Bundesbank) and private banks had planned to make €35 billion available to prop up HRE, a DAX company with total assets of €400 billion. For its part, the German government issued a surety loan of €26.5 billion in taxpayer money.

On Saturday, the private banks withdrew from the bailout plan after it emerged that the financial problems at HRE were much greater than originally presented. Losses by the bank are estimated at between €50 and €60 billion this year, and could climb to over €100 billion next year.

The banks neither informed the German government of their new estimate of HRE’s financial problems, nor of their intention to quit the rescue package. Angry government leaders first learned of the situation from a press statement issued by HRE.

HRE attempted to blame German Finance Minister Peer Steinbrück (Social Democratic Party—SPD) for its new problems because Steinbrück had spoken of a “liquidation” of the bank. Evidently, the banks are attempting to pressure the government to make more funds available for bailouts.

On Sunday, further crisis talks were held to draw up a new bailout plan for HRE. The government took the situation so seriously that on the same afternoon Chancellor Angela Merkel (Christian Democratic Union—CDU) and Finance Minister Steinbrück held a joint press conference to announce a government guarantee for all private savings in Germany. “The deposits of savers are safe, the government gives its assurance” Merkel declared.

The declaration of a guarantee had two aims: To appease public anger over the government’s decision to make billions of euros available to cover the banks’ speculative losses, under conditions where ordinary savers faced the loss of their savings, and to avert a panic run on the banks similar to that which took place in Germany in 1931.

The seriousness with which the situation is regarded by ruling circles was reflected in comments made by Interior Minister Wolfgang Schäuble (CDU). In the latest edition of Der Spiegel magazine, Schäuble drew direct parallels to the economic crisis of the 1920s and 1930s and warned: “Such an economic crisis can result in an incredible threat to all of society. The consequences of that depression was Adolf Hitler and, indirectly, World War II and Auschwitz

Instead of calming the situation, the government’s promise to guarantee deposits has heightened fears by revealing the scale of the crisis. The German government has committed itself to cover an almost unlimited amount. According to government data, the guarantee will include private bank assets worth some €568 billion—twice as much as the entire annual federal budget. By some calculations, the various forms of savings total €4.5 trillion.

Spiegel Online commented: “Merkel and Co. have nothing more to increase their promises to savers. There are no reserves should the German financial system collapse... if the state really does have to compensate for lost deposits beyond the legal guarantee of €20,000 and the private banks’ deposit guarantee fund the state debt will rise for years, capital spending will fall, social welfare systems will be additionally burdened.”

The guarantee issued by the German government met with harsh criticism from other European capitals, particularly London. At the Paris summit, the Irish government was criticised for giving similar assurances for its six leading banks. Now the German government was doing the same thing.

The Guardian described the “anger” in Downing Street over Merkel’s moves. The newspaper said: “British officials were furious with Merkel. They said she gave no indication of the move at a summit in Paris on Saturday designed to coordinate a European response to the economic crisis.” The newspaper cited a financial expert who declared, “It’s every man for himself in a united Europe.”

The Daily Mail quoted an “angry British official” who declared: “Merkel agreed that we should all work together, then got on a plane, flew home and did her own thing.”

On Sunday evening, the German government and banks finally agreed on a new rescue package for HRE. In addition to the already agreed €35 billion, the financial sector said it would provide further liquidity of €15 billion, without increasing the federal guarantee of €26.5 billion.

The government justified the rescue package with reference to the “unforeseen consequences” that would result from a collapse of HRE. Merkel said it was necessary to use taxpayer money to rescue the bank because otherwise the damage “would hit not only Germany, but would be huge for many in financial services throughout Europe.”

Despite the new bailout plan, HRE shares plunged 37 percent on Monday. The banks demanded more public money.

The Deutsche Sparkassen und Giroverband (Association of German Savings Banks and Clearing Houses) demanded that the government “put up an umbrella to cover the risks of the entire banking industry.” Spiegel Online quoted one banker as saying piecemeal solutions would not solve the problem. “We have never looked into such a deep abyss,” he said.

The near-collapse of HRE is only the tip of the iceberg. The mortgage provider was plunged into crisis through its subsidiary Depfa, which it had purchased only last year for €5.7 billion. The Depfa boss at the time, Gerhard Bruckermann, was sent into retirement with a golden handshake of €100 million, not an unusual figure for the sector.

Depfa, which emerged from the Deutschen Pfandbriefanstalt (German Institute for Mortgage Bonds), has its headquarters in Dublin, where it enjoys a far lower tax burden than in Germany. It specializes in financing public bonds, which are usually considered to be without risk. It was thrown into crisis because it made long-term loans and financed them with short-term credit raised on the interbank market, where banks lend one another money.

Since the collapse of Lehman Brothers, however, the interbank market has virtually run dry, since banks are no longer willing to lend each other money. Depfa could no longer find short-term credit at favourable rates, and HRE now has to dig into its pockets to come up with the missing billions.

HRE is one of the most important players in the €900 billion German mortgage bond market, which provides financing to many other banks and insurance companies. It is feared that bankruptcy for HRE will lead to the collapse of the entire mortgage bond market and set off a chain reaction that would hit pension funds and mutual associations, as well as the länder (states) and municipalities.

Depfa is not an isolated case. According to an analysis by Der Spiegel, other German banks have made even bigger long-term loans that are financed with short-term credit. According to the magazine, Landesbank Baden-Württemberg will have to “refinance some 100 billion euros by December 2009,” more than twice as much as HRE. At Nord/LB, the figure is €42 billion, at WestLB and Eurohypo the figure is approximately €30 billion each, while the Landesbank Rhineland-Pfalz must find €10 billion and Saxonia LB needs €3.5 billion.

The financial meltdown is far from reaching its nadir. What is taking place is the bursting of an enormous bubble of fictitious capital that was accumulated over recent decades at the expense of the working class.

Panic grips global financial markets

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By Barry Grey

The financial crisis, used to justify the $700 billion Wall Street bailout approved by Congress and signed into law by President Bush on Friday, deepened dramatically Monday, as stock markets around the world registered massive losses in panic selling.

It was the biggest global stock market crash since “Black Monday,” October 19, 1987, when exchanges around the world collapsed and the Dow Jones Industrial Average registered a loss of 22.6 percent, its largest ever single-day decline in percentage terms.

On Monday, Europe suffered its worst-ever one-day drop in share prices, with the pan-European Stoxx 600 index falling 7.6 percent. (See: “European stock markets in freefall following Paris financial summit”). Trading was halted either completely or partially in Iceland and Russia. The latter saw a 20 percent decline in share values.

European bank stocks suffered massive losses. Britain’s HBOS dropped 19.8 percent, Lloyds lost 10.8 percent, the Royal Bank of Scotland plummeted by 20.5 percent, Switzerland’s UBS fell 12 percent, Belgium’s Dexia declined 20 percent, Germany’s Commerzbank lost 12.5 percent, Deutsche Bank was off 8.4 percent, France’s Societe Generale gave up 9.5 percent and Italy’s UniCredit shares plunged 9 percent before trading in its stock was suspended.

Shares of European industrial firms were also hammered. EADS, the parent of Airbus, fell 7.5 percent, ArcelorMittal, the world’s biggest steel maker, dropped 8.6 percent, German auto maker Daimler was down 5.8 percent and British Airways slid 10.3 percent.

The sense of panic was reflected in gallows humor, such as the quip from a senior trader at ETX Capital, who said, “Black Mondays used to be a once-in-a-lifetime event. Now they’re coming along more regularly than a London bus.”

Peter Dixon, a strategist at Commerzbank, said, “This is markets in pure panic mode. The financial system is seizing up...”

“The banking system doesn’t work any more,” said Robert Quinn, European stock analyst at Standard & Poor’s. “It’s just broken.”

Share prices also fell heavily across Asia. China’s benchmark Shanghai Composite Index dropped 5.2 percent, Hong Kong’s Hang Seng Index fell 5 percent and Tokyo’s Nikkei Stock Average declined 4.3 percent to its lowest level since February 2004. Benchmark indexes in Singapore, Seoul and Mumbai fell, respectively, 5.6 percent, 4.3 percent and 5.8 percent. Shares in Indonesia plunged 10 percent.

In South America, exchanges were shut down in Brazil and Peru because of massive selling.

The Toronto Stock Exchange’s principal index fell more than 1,000 points, or 11 per cent, then recovered about half of its losses to close down by 573 points, or 5.3 percent.

In the US, panic selling at one point dropped the Dow by 800 points and brought the index below the 10,000 mark for the first time since 2004. By the end of trading, the market had recovered some of its losses, with the Dow closing with a 370 point (3.6 percent) loss. The Nasdaq Composite Index ended down 84 points (minus 4.3 percent) and the Standard & Poor’s 500 Index closed down 42 points (minus 3.9 percent).

The losses added to declines on Friday, when all three indexes fell in the aftermath of the House of Representatives’ vote approving the bailout plan for US banks drawn up by Treasury Secretary Henry Paulson. For all of last week, the Dow lost 7.4 percent, the Nasdaq fell 10.8 percent and the S&P 500 declined 9.4 percent.

The plunge on Wall Street came despite new steps by the Federal Reserve Board to unfreeze credit markets by flooding the banks with cheap loans. The Fed announced Monday that it would immediately double the amount of cash available to US banks under a so-called “auction facility” it launched last December. Under this program, the Fed extends low-cost credit to the banks and accepts as collateral virtually worthless assets such as mortgage-backed securities.

The Fed increased its credit line under the program from $150 billion to $300 billion, said it would soon raise that amount to $600 billion, and would bring the total of such loans to $900 billion by the end of the year.

The Fed also announced it would begin paying the banks interest on reserves they keep in the Federal Reserve system, another windfall that will eventually be paid with taxpayer funds. This change is one of the provisions, previously unreported in the media, contained in the bailout package signed into law on Friday.

Another is even more far-reaching. It authorizes the US Treasury to guarantee the Federal Reserve against any losses it incurs in pumping liquidity into the banking system. This could potentially cost US taxpayers hundreds of billions of dollars beyond the purported $700 billion cost of the bailout passed on Friday.

Paulson rushed to put in place the machinery to begin buying securities from the banks with public funds. The Treasury named a high-ranking official, Neel Kashkari, to head a new Office of Financial Stability and began soliciting for Wall Street asset managers to oversee the program.

Bush, attempting to calm the markets, made an appearance in Texas and said getting the bailout program up and running would “take time.” This only heightened the panic in financial markets, which are facing a lockdown of virtually all forms of credit.

Notwithstanding the claims of the bailout’s backers, particularly Democratic congressional leaders and presidential candidate Barack Obama, that the process would have “transparency” and “oversight” safeguards to prevent conflicts of interest, the appointment of Kashkari already points to a program rife with insider influence, self-dealing and corruption. Kashkari is a former executive at Goldman Sachs and worked under Paulson when Paulson was CEO of the Wall Street firm.

The global market panic has already demonstrated that the bailout, while covering the losses of the most powerful sections of the financial elite, will do little, if anything, to stem the deepening financial crisis and recession. The scale of worthless paper assets within the global banking system is so immense that the banks themselves have no confidence in the credit-worthiness of their counterparts and are refusing to lend.

Monday’s sell-off was precipitated by a number of factors. The US jobless report issued Friday showed a large increase in the net job loss in September, increasing fears of a deep and protracted recession. A series of bank failures destabilized the entire banking system in Europe. And the European financial summit held Saturday produced no coordinated plan to head off more bank failures.

All of the financial indices on Monday pointed to a general collapse of confidence in the world credit system, which is increasingly undermining the broader economy. Oil prices continued to fall sharply, gold futures soared, yields on US government bonds fell to nearly zero and inter-bank lending rates rose even higher.

The Conference Board in the US reported that its employment trends index fell 0.8 percent in September, leaving it almost 10 percent below the level a year ago. Many economists are now predicting that unemployment in the US will rise sharply, exceeding 7 percent in early 2009.

The investment bank Morgan Stanley warned: “The recession now threatens to go global, with industrial economies on the brink, and trade and financial shocks threatening the developing world.”

Chaotic Day Ends With Stocks Off 3.8%

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By MICHAEL M. GRYNBAUM

Panic came to Wall Street on Monday morning, but its stay was brief, at least for one day.

The Dow Jones industrials finished more than 360 points lower, dropping below the 10,000 mark for the first time in five years, as markets around the world spiraled downward in the face of a banking crisis that has tightened its grip on the global economy.

But the outcome could have been worse. After 2 p.m., the Dow was on track for an ignominious record — 800 points lower in a single session, worse than the 777-point drop a week ago.

At one point, the broader stock market had fallen about 8 percent.

Instead, investors appeared to have a small change of heart. The Dow marched back to the 10,000 milestone and even topped that number in the closing minutes of the session. When the final trades were counted, the index was off 363.35 points, or 3.5 percent, at 9,962.03.

The broader American stock market fell 3.8 percent, as measured by the Standard & Poor’s 500-stock index.

“Today is watching the sky fall,” said T.J. Marta, a fixed income strategist at the Royal Bank of Canada.

Selling intensified throughout the morning as investors reeled from a series of high-profile bank bailouts in Europe, where governments scrambled to save several major lenders from collapse.

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The Dow has lost more than 1,100 points — or about 10 percent — in slightly more than a week. The S.&P. has lost more than 15 percent in the same period.

The sharp slides came despite more reassurances from President Bush and a morning announcement from the Federal Reserve that it would significantly expand the amount of money it made available to major banks. The Fed will now lend up to $900 billion in credit, an enormous sum that officials hope will reassure banks that the government will provide them with adequate capital.

The moves were aimed at resolving a problem at the center of the current credit crisis: the reluctance of banks to lend. The healthy functioning of the world’s economy is dependent on the easy flow of short-term loans among banks, businesses and consumers, a stream that has been cut off as banks become more fearful of giving out cash.

Those fears have persisted despite a $700 billion bailout package passed by Congress last week. The package was supposed to help restore some liquidity to the credit markets.

Borrowing rates remained very high on Monday despite last week’s Congressional approval of the $700 billion bailout package, although proponents of that package argue that its longer-term benefits will take time to carry out.

“That’s a longer-term solution; it will help once things have calmed down,” Mr. Marta said.

“But right now, things aren’t calm. Right now, the fire’s kind of burning out of control.”

Events over the weekend in Europe only intensified investors’ anxieties. European stocks fell by the biggest amounts in decades. Major indexes in London and Frankfurt lost more than 7 percent; stocks in Paris fell by 9 percent.

On Wall Street, energy stocks dropped by more than 10 percent as a whole after oil prices dropped below $90 a barrel, reaching their lowest levels since February. Crude oil was trading just over $89 a barrel in New York after 2 p.m.

Shares of financial firms, manufacturing outfits, and industrial companies all fell sharply. Only six companies in the entire S.&P. 500 were up for the day, including Wrigley, the chewing gum giant, and Monster, the parent company of job-seeking Web site Monster.com

Some gauges of anxiety in the market again reached record highs as the week began, and a benchmark overnight borrowing rate, the Libor rate, moved higher. A measure of volatility, the VIX index, jumped to its highest intraday level ever.

“It’s not just a question clearing problem assets,” said Bob McKee, chief economist for Independent Strategy, a research consultancy. “If banks don’t have enough capital they will be paralyzed.”

President Bush made an unscheduled stop on Monday morning to speak about the crisis with owners of small businesses in San Antonio — and the television cameras that follow him there.

“It’s going to take a while to restore confidence in the financial system,” the president said at Olmos Pharmacy, an old-fashioned soda shop and lunch counter.

“We don’t want to rush into this situation and have the program not be effective,” Mr. Bush said, calling the package “a big step” toward fixing the economy.

Falling oil prices provoked a decline of just over 1,000 points, or nearly 9.9 percent, on the Toronto Stock Market. The drop brought the S.& P./TSX index below 10,000 points for the first time since May 2004.

Energy stocks drove the decline, falling 13 percent. Financial industry shares were down 7 percent in midmorning trading, with the Royal Bank of Canada, the country’s largest bank, down 8.43 percent. That drop came despite the fact that the Royal Bank, like most of Canada’s major banks, has relatively little exposure to troubled debt in the United States.

Strong prices for oil and gas as well as commodities like metals have allowed most of Canada to escape the economic downturn in the United States. But the Bank of Nova Scotia report released on Monday said that weakness in the manufacturing sector, which relies heavily on exports to the United States, would most likely push Canada into a recession.

In Europe, governments worked over the weekend to prevent the collapse of two lenders, Hypo Real Estate in Germany and the Belgian operations of Fortis. The German government also said it would guarantee all private bank deposits as it sought to avert the spread of the financial contagion.

The FTSE 100 index in London fell 7.8 percent; the Frankfurt DAX was down 7 percent and the CAC-40 in Paris lost 9 percent.

A similar sell-off occurred in Asia, the Nikkei 225 stock average in Tokyo fell 4.3 percent, while the Kospi index in Seoul fell 4.3 percent. The Standard & Poor’s/ASX 200 index in Sydney fell 3.3 percent, while the Hang Seng index in Hong Kong was down 5 percent.

“People are really disappointed by the inability of Europe to react on a concerted basis,” said Andrew Popper, a fund manager at SG Hambros in London. “It’s still very much a country-by-country approach. There is also a realization that we haven’t seen any effects on economic growth so far but that now is starting and that’s having an effect on nonfinancial shares.”

Steps by some European governments over the weekend to guarantee deposits may avoid a panic among consumers but will not help banks cope with their financing problems, said Adrian Darley, a fund manager at Resolution Asset Management in London.

“There are still a lot of issues out there,” Mr. Darley said. “Deposit guarantees are just a short-term solution. It does not necessarily help with interbank loans or if you have bad loans on your books. It will take a lot more than that.”

In Iceland and Russia, trading on banking shares was halted after indexes fell more than 14 percent.

Shares of industrial companies were hammered in Europe with EADS, the parent of Airbus, falling 7.5 percent. ArcelorMittal, the world’s biggest steel maker, dropped 8.6 percent, and the German automaker Daimler was down 5.8 percent. British Airways slid 10.3 percent.

Nicholas Bibby, an economist in the Singapore office of Barclays Capital, said that falling share prices showed that many investors were still worried that banking difficulties might spread even after the passage of the financial bailout plan in Washington. “It’s a fear of contagion,” he said, while adding that Asian banks were better positioned than most to withstand the current problems because the region’s high savings rate tends to mean that Asian banks are net lenders in international money markets.

Concerns about Asian exports have also been rising for months, because the region’s high savings rate means that its spending on consumption is weak and it remains heavily dependent on overseas demand.

CFC Seymour, a Hong Kong securities firm, pointed out in an investment newsletter on Monday that even before recent problems in financial markets, the combined trade balance of Japan, South Korea, Taiwan, Thailand, Indonesia and the Philippines had gone from a surplus of $19 billion as recently as last October to a deficit of $2 billion in July. Only China is still running consistently large trade surpluses.

The realignment in the currency markets that has lifted the dollar and yen against the euro continued, as investors worried about Europe’s banks and economic health and continued their flight to the apparent stability of Japan’s financial system.

The euro fell to $1.3609 in Paris morning trading, from $1.3772 in New York late Friday. The dollar fell to 103.42 yen, from 105.32, and the euro declined to 140.74 yen, from 145.07.

The Shanghai stock exchange, closed for the last week for China’s National Day holiday, reopened on Monday with the Shanghai A-share market down 3.5 percent. The China Securities Regulatory Commission announced on Sunday that it would experiment with the introduction of short-selling and trading on margin on a limited basis, but did not say when the trial would begin.

Wall Street Follows the Path of the Steel Industry in Pittsburgh

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By Dean Baker

There is a joke circulating on the Hill these days. "What is the technical term for a Wall Street investment banker who supports free trade?" The answer, of course, is "liar."

In spite of the $700 billion bailout package, Wall Street is going the way of the steel industry in Pittsburgh. The financial industry in the United States is hugely bloated and hopelessly uncompetitive in international markets. In this way, it shares similarities to the US steel industry in the late 70s, except Wall Street is much more poorly situated.

While workers in the steel industry may have been somewhat more highly paid than their counterparts in Europe, Japan and South Korea, the differences were comparatively small. By contrast, nowhere else in the world do bankers get paid annual salaries in the tens or hundreds of millions of dollars. Until these salaries are pushed down closer to the pay scales in other financial markets, Wall Street will have a very difficult time competing.

The $700 billion bailout package slows Wall Streets day of reckoning. The Wall Street gang, with its huge campaign contributions and friends in high places, such as Treasury Secretary Henry Paulson, is better positioned to get protection than steelworkers or textile workers. But, as we all know, you can't just build walls around the country.

Perhaps, our trading partners will protest the subsidies to Wall Street, which may violate our commitments under various trade agreements, but even if they don't, the days of the Wall Street crew are numbered. Their conduct over the last 15 years has shattered their reputation both nationally and internationally.

The fact that so much junk was passed along to international investors as top-quality debt means, in the future, foreign investors will no longer trust the assets that Wall Street firms are marketing. Similarly, the fact that so many small towns and cities were ripped off on auction rate securities and other financial instruments probably means that the investment bankers will not be welcomed in large parts of the country for many years into the future.

While innocent people will undoubtedly be hurt as Wall Street adjusts to the modern global economy, there will be important gains to the country. In fact, the principles economists cite when extolling the benefits of "free trade" may actually apply to some extent to Wall Street.

The resources tied up in Wall Street will find better uses in other areas. Specifically, the tens of thousands of highly educated workers who made huge salaries on Wall Street may find something more productive to do with their lives than shuffling complex derivative instruments. Some might become doctors, engineers or research scientists - areas where they could make important contributions to society.

And, if it is not plausible for many of the people who are currently losing their job to pursue these alternative career paths, certainly it will be possible for the people who are now in college or grad school in the hopes of pursuing a high-paying Wall Street career. By eliminating the Wall Street path, other relatively high-paying jobs will look much better.

In other words, we will be less likely to have doctors who think that they are making huge sacrifices by earning $200,000 a year. Without Wall Street as a basis of comparison, doctors' salaries would look very good even to doctors.

The public has every right to be outraged over the bailout. It gives taxpayers dollars to some of the richest people in the country, precisely because they messed up on their jobs. That means money is flowing from schoolteachers and firefighters to the top executives at Citigroup, Goldman Sachs, and other well-connected financial behemoths.

But, this is just a stopgap measure. In the longer term, the financial sector will contract and salaries will be brought back down to earth. Protectionist policies can buy the Wall Street crew some time, but in the longer run, the market will win out, forcing large cuts in pay and employment. At last, Wall Street will feel the sort of job loss and pressure on wages that it so eagerly sought to impose on workers in other sectors of the economy.