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By Steve Light
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Teachers, parents, students and their supporters are rallying March 19 at City Hall in New York City under the slogan “keep the promises” in opposition to a new round of budget cuts to public education being imposed by state and city governments in an attempt to offset the effects of the mounting economic crisis.
An objective analysis of the source of these attacks on the city’s schools poses the necessity of a new political strategy to defend the right to quality public education.
A $528 million increase in New York State’s basic classroom operating aid to New York City was promised for the 2008-2009 school year as part of a court-ordered plan to overcome the longstanding underfunding of the schools by the state government. But the recently ousted Governor Elliot Spitzer proposed to reduce this amount to $193 million. The 2006 New York State commitment to increase building funds for New York City by $11.2 billion to complete its $13.1 billion capital plan faces proposed delays. The New York City Department of Education (DOE) commitment to increase school funding by $2.2 billion over four years is being cut $180 million this school year, with an additional $324 million reduction next year, the latter to be accomplished by hacking 5 percent out of each school’s budget. The City Budget Director, meanwhile, has demanded that all city agencies slash an additional 3 percent from their budgets, meaning another $200 million taken from the schools, and over half a billion dollars over two years.
Of the immediate mid-year cuts, $100 million was taken directly out of individual school budgets, averaging $70,000 per school and ranging from $9,000 to more than $400,000 at some of the larger high schools. A survey by the United Federation of Teachers (UFT) of 375 schools showed 49 percent of the schools reducing orders for textbooks and instructional supplies, 48 percent scrapping after-school and weekend classes and tutoring services, 36 percent eliminating student clubs and extracurricular activities, and 23 percent cutting teacher training programs. The union newspaper also reported a Manhattan principal telling staff that there will be no more substitute teachers hired for the rest of the school year in case of teacher absences.
Billionaire Mayor Michael Bloomberg told the media, “I’m sorry. You can always cut 1.3 percent. In fact, it’s healthy to go and say let’s cut a little bit and force the principals and the teachers and the administrators to say, ‘Is this program worth it?’’’
Particularly affected will be schools with large numbers of low-income students (well over half a million New York City children live below the poverty line), English-language-learner students or special education students. For example, shortages of teachers certified to teach special education in content areas in grades 7 to 12 require additional monies for team teaching and for developing incentives to assist general educators to become certified in special education and special education teachers to certify in content areas. There is little chance of this being funded now. Recently, the New York Times reported that only 4 percent of the city’s public schools meet the state requirement for arts education.
The new cuts come in the face of repeated denials of full funding for schools over the years. Expanded educational spending during the Wall Street boom of the 1990s was neither sufficient nor effectively utilized for solving the dire problems of the city’s schools. School programs faced cuts starting in 2002 with the decrease in tax revenue caused by the Wall Street slump that followed the bursting of the dot-com bubble. Budget surpluses after 2004 were eaten up by inflation that diverted money for education into pre-existing expenses like health costs and pensions.
Successive rounds of cuts and restorations by the Mayor, the City Council, and the State government allowed for the politicians of both business parties to claim apparent budget increases while specific programs were saved at the expense of others. Thus, according to the Mayor’s Management Report, the city decreased its annual creation of new school seats every year from 22,267 in fiscal year 2003, down to 4,903 in 2006. Any slight gains in the last few years now face being wiped out.
There has been a constant battle for the allocation of funds that were won through a 13-year fight in the courts by the Campaign for Fiscal Equity, a coalition of teacher, parent, and education advocate organizations. A decision by a lower state court ordered the New York State government to provide each year an additional $4.7 billion in operating expenses and $9.2 billion in the capital budget for additional classrooms, which the court agreed was necessary to provide a “sound basic education” from kindergarten to 12th grade. Leonie Haimson, Executive Director of Class Size Matters, has pointed out that the court decisions were in effect stating that there was no fat to cut from the city’s schools, and that underfunding had left the largest school system in the US—with over a million students and 80,000 teachers in more than 1,400 schools—unable to provide an adequate education.
On an appeal by Governor Pataki, the highest state court then allowed the increase to be limited to $1.93 billion per year, but nothing was forthcoming as the state legislature was divided over how to pay for it. The state was paying about $7 billion, almost half of New York City’s $13 billion budget.
In 2007, Governor Spitzer increased education funds statewide, with New York City to receive $1.03 billion in the first year, still substantially less than the amount mandated by the court. However, New York City Mayor Bloomberg balked at signing an agreement with the state detailing how $258 million of the money had to be spent, including on a reduction in class sizes. The Mayor finally agreed to spend about $152 million on reducing class size in 75 schools. Last October, it was reported on the NYC Public School Parents blog that the minimal class size reduction targets included in the city’s proposal (one-third of a student in Kindergarten to 3rd grade and four-fifths of a student in grades 4 to 8) were exactly what would have been predicted by enrollment decline alone - that is without adding a single additional class or classroom teacher in any of these grades.
New York City’s Education Department did not meet its requirement under the agreement with the state to provide a 5-year class size reduction plan with goals and benchmarks. The DOE has not tied its class size reduction plan to changes in its capital budget. In fact, while the DOE said it predicted its classroom needs based on a 23 percent decline in the school-age population by 2015, the Mayor has been promoting his long-term proposal for dealing with population growth—dubbed PlaNYC—which assumes a million more inhabitants of New York City by 2030. Either “they’re assuming that the million extra people coming to New York will not have kids,” commented Leonie Haimson, or, “they assume that we’re all rich enough to send our kids to private schools.”
The city’s public schools were also hit with a new re-organization plan at the beginning of 2007, the third major restructuring under Bloomberg and his schools Chancellor, Joel Klein. Mayoral control of the schools, won in 2002 with the elimination of the Board of Education, was increased by dissolving the 10 regions that had replaced the 32 community school districts, further distancing parents from participation in the school system. However, principals were given increased power over schools, setting them up as scapegoats to be blamed when schools failed under the Mayor’s plan.
A new formula to fund schools based on neediness of students set up a conflict with the need to use limited funding to retain higher-salaried, experienced teachers. At the same time, the turnover of new teachers can be expected to increase (one out of four teachers leave within four years), especially in low-performing schools, as granting of tenure becomes pegged to student test scores. One of the last acts of Governor Spitzer before being forced to resign was to sign a plan allowing teachers to retire with no penalty at 55 years of age with 25 years of teaching. This was done with the dual understanding that it would reduce salary payments to older teachers while the increasingly harsh conditions in a test-driven system would insure that few younger teachers would last 25 years.
All the schools are also required to buy into educational programs—both non-profit and for-profit—which serve to expand private business control over public school funds. State education funding increases had also been tied to an increase in the number of permits from the state for publicly-funded but privately-run charter schools from 100 to 250.
These maneuvers expose the real intentions of the political establishment regarding education. Increases in education funding have not been turned toward building the school facilities needed for smaller class sizes, lower teacher-pupil ratios to give students the necessary individualized attention (as opposed to a longer school day and year under the same, overcrowded conditions), or higher pay to attract and keep better teachers. Instead, the political efforts are to turn the schools and their funds to more high-stakes testing, more outsourcing for resources and personnel, and more charter schools - in other words, more privatization of the public school system.
Last May, Chancellor Klein announced the city would spend $80 million on a contract with the publishing company CTB/McGraw-Hill to hold “interim” standardized tests given students in grades 3 to 8 five times a year, and four tests a year in high school. $80 million is also being spent on a new ARIS computer system. The increased money for education-related corporations parallels the corporate-style salaries being paid to DOE executives. The number of DOE employees making more than $150,000 in 2006 was more than doubled from the year before, climbing from 97 to 229. Eighteen executives make more than $190,000 a year, while Klein is paid $250,000.
The cuts and the “reform” attacks on public schools are happening in school districts across the United States as the implosion of the housing market cuts into tax revenues and the spreading credit crunch threatens school funding. In the city of Baltimore on February 6, 25 of 150 high school student demonstrators were arrested on the steps of the State House. They demanded that Governor Martin O’Malley be arrested for not addressing what they called a “historic underfunding” of Maryland public schools. Maryland’s real estate transfer tax revenue has tumbled by 22 percent this fiscal year.
In California, Republican Governor Arnold Schwarzenegger has submitted a budget that slashes $4.4 billion from public education, a record cutback for the state. School districts are already preparing teacher and staff layoffs to cope with the reduced funding.
Democrat David Paterson, sworn in to replace Spitzer as governor on Monday, will immediately be confronted with demands for spending cuts to offset a projected $4.4 billion budget gap, which will inevitably translate into new cutbacks for public schools.
The budget cuts are the other side of the coin of an educational system that is being directed in the interests of the financial elite of American society. Mayor Bloomberg, like Chancellor Klein, are former corporate executives, as is Klein’s deputy, Chris Cerf, the former CEO of Edison Schools, Inc., one of the country’s biggest for-profit school management companies. They opened the school system to the restructuring plan for small schools, but not necessarily smaller classes, of Bill Gates, who has invested $100 million in New York City since 2002. Small schools, while having some advantages with proper funding and facilities, were often crammed—several at a time—into larger schools, and often with less resources and facilities, resulting in parent and student resentment. (In 2006, 10 of the 11 city school’s that failed to meet state minimum performance requirements were small schools.)
Another billionaire, Eli Broad, has directed millions from his foundation to finance principal training programs, systems to track student data and other projects tied to high-stakes testing and Bush’s No Child Left Behind (NCLB).
While the financial elite use their wealth to experiment with their favorite education reforms in the nation’s school districts, their money brings a common effect. Public schools are facing greater privatization and more shaping toward the corporate business model. This brings top-down changes and is moving public education to a tiered system in which schools either flourish or flounder on their own. When schools fail, they are closed. The effect is to drive struggling students out of the schools. In New York City, the four-year graduation rate was 50 percent in 2006 while the dropout rate increased from 15 to 20 percent.
The United Federation of Teachers and its bureaucratic leadership has sought to subordinate the critical struggle to defend the democratic right to an education to both the profit system’s business model for the schools and the political establishment that is implementing the cutbacks.
The UFT has set up two of its own charter schools, with a million dollars coming from Eli Broad, thus helping to legitimize steps towards privatization. Meanwhile, UFT President Randi Weingarten last year negotiated a “merit pay” deal with the DOE, tying bonuses to the raising of test scores on the city’s lowest performing schools.
At the same time, the UFT has sought to channel all opposition to the counter reforms and budget cuts into toothless protests and support for Democratic politicians who are responsible for these attacks. The UFT backed Eliot Spitzer and Hillary Clinton. They have done this even though the Democratic Party backed the Republican No Child Left Behind plan as well as the war in Iraq, which sucks billions of dollars daily from education and other vital social programs.
Paterson, just like Spitzer and Pataki before him, will claim that there is no money to pay for substantially reduced class sizes, improved education and decent wages. With the steady deepening of the financial crisis, the diversion of social spending into the attempt to bail out wealthy investors and Wall Street banks will mean even deeper cutbacks.
It is impossible to defend public education today without confronting the essential issue of who controls the wealth of society—wealth created by labor but monopolized by the top 1 percent—and who decides how it is to be allocated. Only when working people organize a mass, independent political movement and assert their own social and class interests can the immense wealth of society be utilized to provide high quality public schools for all and meet other urgent needs, such as free healthcare, quality housing and full employment.
Tuesday, March 18, 2008
Supreme Court to Review FCC Ban on Profanity
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By Robert Barnes and Frank Ahrens
The Supreme Court announced yesterday that it will rule on the government's standards for policing the public airwaves for the first time since the court agreed 30 years ago that a midday radio broadcast of comedian George Carlin's "seven dirty words" monologue was indecent.
The court will review the Federal Communications Commission's policy that even a one-time utterance of an obscene word on radio and television broadcasts during daytime and early evening hours is subject to punishment.
The lawsuit by Fox Broadcasting arose after the commission reprimanded the broadcaster for incidents in 2002 and 2003, when singer Cher and celebrity Nicole Richie, during live award shows, used variations of a vulgar four-letter word.
The reprimand came after the FCC in 2004 reversed its position and said even "fleeting" expletives exposed the network to sanctions.
But in June, the U.S. Court of Appeals for the 2nd Circuit in New York concluded the policy was "arbitrary and capricious" under the Administrative Procedure Act because the commission had "failed to articulate a reasoned basis for its change in policy." It also raised questions about First Amendment protections and sent the policy back for more work.
The Bush administration urged the Supreme Court to take the case on appeal, saying the lower court's ruling had left the FCC in an "untenable" position between protecting children and protecting freedom of speech.
"The court of appeals appears to have put the FCC to a choice between allowing one free use of any expletive no matter how graphic or gratuitous, or else adopting a (likely unconstitutional) across-the-board prohibition against expletives," Solicitor General Paul D. Clement said in his brief to the court.
FCC Chairman Kevin J. Martin welcomed the court's intervention, saying, "I continue to believe we have an obligation . . . to enforce laws restricting indecent language on television and radio when children are in the audience."
Fox said it is looking forward to demonstrating the "arbitrary nature" of the FCC's indecency enforcement.
"FCC's expanded enforcement of the indecency law is unconstitutional in today's diverse media marketplace where parents have access to a variety of tools to monitor their children's television viewing," Fox Broadcasting spokesman Scott Grogin said in a statement.
Television and radio stations say the FCC's shifting standards have left them without guidance on what they can air without fear of an indecency fine.
For instance, in 2004, several ABC affiliates refused to air the World War II epic "Saving Private Ryan," for fear that the film's profanities would bring an FCC fine. After the movie aired, the FCC said it would not have fined the stations, saying the profanities were part of the context of the historical film.
The court's last substantial decision on broadcast indecency came in 1978, when justices in FCC v. Pacifica Foundation ruled against the broadcast of Carlin's monologue about words that he said could not be spoken on the airwaves. The ruling said the federal government has the authority to police over-the-air radio and television broadcasts for "patently offensive" material of a sexual or excretory nature from 6 a.m. to 10 p.m., when children are mostly likely to be in the audience. (The FCC has no authority over cable and satellite radio and TV.) But the opinion by Justice John Paul Stevens for the splintered court stressed the narrowness of the decision and added: "We have not decided that an occasional expletive in either setting would justify any sanction."
The FCC maintained the same policy until singer Janet Jackson's breast was exposed during halftime of the 2004 Super Bowl. The FCC was inundated with hundreds of thousands of complaints not just about that but also about declining standards of language on the airwaves, and the commission revised its policy.
In the incidents in the case, FCC v. Fox Television Stations, Cher delivered a retort to her critics during a Billboard Music Awards broadcast: "So, [expletive] 'em. I still have a job, and they don't." Similarly, U2 lead singer Bono used the word on a Golden Globes award show, describing his award as "really, really [expletive] brilliant."
The FCC says technology makes it easy for networks to avoid such gratuitous use of obscenity. The networks argue that the FCC has exceeded its authority when the word does not convey a sexual message, and the opinion from the appeals court noted NBC's argument that "even the top leaders of our government have used variants of these expletives in a manner that no reasonable person would believe referenced 'sexual or excretory organs or activities.' " It referred to a statement Vice President Cheney made on the Senate floor to Sen. Patrick J. Leahy (D-Vt.).
The broadcast world has also changed dramatically since the 1978 Pacifica decision. More than 85 percent of all U.S. television viewers pay for television, either cable or satellite, and critics of the FCC policy say regulation should be up to the parent, not the government.
But Tim Winter, president of the Parents Television Council, whose Web site has made it easy for parents to complain to the FCC, said in a statement that "broadcasting is every bit as pervasive today as it was at the time of the Pacifica decision."
"Broadcasters are only given a license to use the airwaves in the public interest and convenience," Winter continued. "The American people have a reasonable and time-honored expectation that the airwaves will be used in a manner that is beneficial to them."
The case will be argued in the fall.
By Robert Barnes and Frank Ahrens
The Supreme Court announced yesterday that it will rule on the government's standards for policing the public airwaves for the first time since the court agreed 30 years ago that a midday radio broadcast of comedian George Carlin's "seven dirty words" monologue was indecent.
The court will review the Federal Communications Commission's policy that even a one-time utterance of an obscene word on radio and television broadcasts during daytime and early evening hours is subject to punishment.
The lawsuit by Fox Broadcasting arose after the commission reprimanded the broadcaster for incidents in 2002 and 2003, when singer Cher and celebrity Nicole Richie, during live award shows, used variations of a vulgar four-letter word.
The reprimand came after the FCC in 2004 reversed its position and said even "fleeting" expletives exposed the network to sanctions.
But in June, the U.S. Court of Appeals for the 2nd Circuit in New York concluded the policy was "arbitrary and capricious" under the Administrative Procedure Act because the commission had "failed to articulate a reasoned basis for its change in policy." It also raised questions about First Amendment protections and sent the policy back for more work.
The Bush administration urged the Supreme Court to take the case on appeal, saying the lower court's ruling had left the FCC in an "untenable" position between protecting children and protecting freedom of speech.
"The court of appeals appears to have put the FCC to a choice between allowing one free use of any expletive no matter how graphic or gratuitous, or else adopting a (likely unconstitutional) across-the-board prohibition against expletives," Solicitor General Paul D. Clement said in his brief to the court.
FCC Chairman Kevin J. Martin welcomed the court's intervention, saying, "I continue to believe we have an obligation . . . to enforce laws restricting indecent language on television and radio when children are in the audience."
Fox said it is looking forward to demonstrating the "arbitrary nature" of the FCC's indecency enforcement.
"FCC's expanded enforcement of the indecency law is unconstitutional in today's diverse media marketplace where parents have access to a variety of tools to monitor their children's television viewing," Fox Broadcasting spokesman Scott Grogin said in a statement.
Television and radio stations say the FCC's shifting standards have left them without guidance on what they can air without fear of an indecency fine.
For instance, in 2004, several ABC affiliates refused to air the World War II epic "Saving Private Ryan," for fear that the film's profanities would bring an FCC fine. After the movie aired, the FCC said it would not have fined the stations, saying the profanities were part of the context of the historical film.
The court's last substantial decision on broadcast indecency came in 1978, when justices in FCC v. Pacifica Foundation ruled against the broadcast of Carlin's monologue about words that he said could not be spoken on the airwaves. The ruling said the federal government has the authority to police over-the-air radio and television broadcasts for "patently offensive" material of a sexual or excretory nature from 6 a.m. to 10 p.m., when children are mostly likely to be in the audience. (The FCC has no authority over cable and satellite radio and TV.) But the opinion by Justice John Paul Stevens for the splintered court stressed the narrowness of the decision and added: "We have not decided that an occasional expletive in either setting would justify any sanction."
The FCC maintained the same policy until singer Janet Jackson's breast was exposed during halftime of the 2004 Super Bowl. The FCC was inundated with hundreds of thousands of complaints not just about that but also about declining standards of language on the airwaves, and the commission revised its policy.
In the incidents in the case, FCC v. Fox Television Stations, Cher delivered a retort to her critics during a Billboard Music Awards broadcast: "So, [expletive] 'em. I still have a job, and they don't." Similarly, U2 lead singer Bono used the word on a Golden Globes award show, describing his award as "really, really [expletive] brilliant."
The FCC says technology makes it easy for networks to avoid such gratuitous use of obscenity. The networks argue that the FCC has exceeded its authority when the word does not convey a sexual message, and the opinion from the appeals court noted NBC's argument that "even the top leaders of our government have used variants of these expletives in a manner that no reasonable person would believe referenced 'sexual or excretory organs or activities.' " It referred to a statement Vice President Cheney made on the Senate floor to Sen. Patrick J. Leahy (D-Vt.).
The broadcast world has also changed dramatically since the 1978 Pacifica decision. More than 85 percent of all U.S. television viewers pay for television, either cable or satellite, and critics of the FCC policy say regulation should be up to the parent, not the government.
But Tim Winter, president of the Parents Television Council, whose Web site has made it easy for parents to complain to the FCC, said in a statement that "broadcasting is every bit as pervasive today as it was at the time of the Pacifica decision."
"Broadcasters are only given a license to use the airwaves in the public interest and convenience," Winter continued. "The American people have a reasonable and time-honored expectation that the airwaves will be used in a manner that is beneficial to them."
The case will be argued in the fall.
The Street on Welfare
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By E. J. Dionne Jr
Never do I want to hear again from my conservative friends about how brilliant capitalists are, how much they deserve their seven-figure salaries and how government should keep its hands off the private economy.
The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard. They have lost "confidence" in each other, you see, because none of these oh-so-wise captains of the universe have any idea what kinds of devalued securities sit in one another’s portfolios.
So they have stopped investing. The biggest, most respected investment firms threaten to come crashing down. You can’t have that. It’s just fine to make it harder for the average Joe to file for bankruptcy, as did that wretched bankruptcy bill passed by Congress in 2005 at the request of the credit card industry. But the big guys are "too big to fail," because they could bring us all down with them.
Enter the federal government, the institution to which the wealthy are not supposed to pay capital gains or inheritance taxes. Good God, you don’t expect these people to trade in their BMWs for Saturns, do you?
In a deal that the New York Times described as "shocking," J.P. Morgan Chase agreed over the weekend to pay $2 a share to buy all of Bear Stearns, one of the brand names of finance capitalism. The Federal Reserve approved a $30 billion -- that’s with a "b" -- line of credit to make the deal work.
I don’t fault Ben Bernanke, the Fed chairman, for being so interventionist in trying to save the economy. On the contrary, Bernanke deserves credit for ignoring all the extreme free-market bloviation. He doesn’t want the economy to collapse on his watch, so he is willing to violate all the conservatives’ shibboleths about the dangers of government intervention. As a voter once told the legendary political journalist Richard Rovere: "Sometimes you have to forget your principles to do what’s right."
But if this near meltdown of capitalism doesn’t encourage a lot of people to question the principles they have carried in their heads for the past three decades or so, nothing will.
We had already learned the hard way -- in the crash of 1929 and the Depression that followed -- that capitalism is quite capable of running off the rails. Franklin Roosevelt’s New Deal was a response to the failure of the geniuses of finance (and their defenders in the economics profession) to realize what was happening or to fix it in time.
As the economist John Kenneth Galbraith noted of the era leading up to the Depression, "The threat to men of great dignity, privilege and pretense is not from the radicals they revile; it is from accepting their own myth. Exposure to reality remains the nemesis of the great -- a little understood thing."
But in the enthusiasm for deregulation that took root in the late 1970s, flowered in the Reagan era and reached its apogee in the second Bush years, we forgot the lesson that government needs to keep a careful watch on what capitalists do. Of course, some deregulation can be salutary, and the market system is, on balance, a wondrous instrument -- when it works. But the free market is just that: an instrument, not a principle.
In 1996, back when he was a Republican senator from Maine, William Cohen told me: "We have been saying for so long that government is the enemy. Government is the enemy until you need a friend."
So now the bailouts begin, and Wall Street usefully might feel a bit of gratitude, perhaps by being willing to have the wealthy foot some of the bill or to acknowledge that while its denizens were getting rich, a lot of Americans were losing jobs and health insurance. I’m waiting.
By E. J. Dionne Jr
Never do I want to hear again from my conservative friends about how brilliant capitalists are, how much they deserve their seven-figure salaries and how government should keep its hands off the private economy.
The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard. They have lost "confidence" in each other, you see, because none of these oh-so-wise captains of the universe have any idea what kinds of devalued securities sit in one another’s portfolios.
So they have stopped investing. The biggest, most respected investment firms threaten to come crashing down. You can’t have that. It’s just fine to make it harder for the average Joe to file for bankruptcy, as did that wretched bankruptcy bill passed by Congress in 2005 at the request of the credit card industry. But the big guys are "too big to fail," because they could bring us all down with them.
Enter the federal government, the institution to which the wealthy are not supposed to pay capital gains or inheritance taxes. Good God, you don’t expect these people to trade in their BMWs for Saturns, do you?
In a deal that the New York Times described as "shocking," J.P. Morgan Chase agreed over the weekend to pay $2 a share to buy all of Bear Stearns, one of the brand names of finance capitalism. The Federal Reserve approved a $30 billion -- that’s with a "b" -- line of credit to make the deal work.
I don’t fault Ben Bernanke, the Fed chairman, for being so interventionist in trying to save the economy. On the contrary, Bernanke deserves credit for ignoring all the extreme free-market bloviation. He doesn’t want the economy to collapse on his watch, so he is willing to violate all the conservatives’ shibboleths about the dangers of government intervention. As a voter once told the legendary political journalist Richard Rovere: "Sometimes you have to forget your principles to do what’s right."
But if this near meltdown of capitalism doesn’t encourage a lot of people to question the principles they have carried in their heads for the past three decades or so, nothing will.
We had already learned the hard way -- in the crash of 1929 and the Depression that followed -- that capitalism is quite capable of running off the rails. Franklin Roosevelt’s New Deal was a response to the failure of the geniuses of finance (and their defenders in the economics profession) to realize what was happening or to fix it in time.
As the economist John Kenneth Galbraith noted of the era leading up to the Depression, "The threat to men of great dignity, privilege and pretense is not from the radicals they revile; it is from accepting their own myth. Exposure to reality remains the nemesis of the great -- a little understood thing."
But in the enthusiasm for deregulation that took root in the late 1970s, flowered in the Reagan era and reached its apogee in the second Bush years, we forgot the lesson that government needs to keep a careful watch on what capitalists do. Of course, some deregulation can be salutary, and the market system is, on balance, a wondrous instrument -- when it works. But the free market is just that: an instrument, not a principle.
In 1996, back when he was a Republican senator from Maine, William Cohen told me: "We have been saying for so long that government is the enemy. Government is the enemy until you need a friend."
So now the bailouts begin, and Wall Street usefully might feel a bit of gratitude, perhaps by being willing to have the wealthy foot some of the bill or to acknowledge that while its denizens were getting rich, a lot of Americans were losing jobs and health insurance. I’m waiting.
The Fed Can't Do It Alone
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By Alan S. Blinder
Psychology has now overwhelmed economics. What started last summer as a serious problem in a little-known -- but not so little -- corner of the U.S. mortgage market has blossomed into a worldwide financial panic, the sort we read about in history books. Except within the Republican Party, laissez-fairy tales have been discarded, and government support is being both sought and given.
The financial markets live or die on confidence. If you sell a security, you must believe the other guy will pay. You must also believe that something worth $30 at Friday's close, such as shares of Bear Stearns, will not be worth $2 at Monday's open. Such confidence looks to be draining from the system.
Who can restore it? Once upon a time, it was J.P. Morgan -- the man, not the company. Today, it must be the world's leading central banks and treasuries, starting with our own.
Unfortunately, this past weekend was a bad one for Team USA. On Friday, President Bush gave a speech at the Economic Club of New York that left people wondering whether he was in touch. On Sunday, Treasury Secretary Henry Paulson, who has been eerily silent as this crisis unfolded, made the rounds of the morning talk shows. It was not reassuring to see this former titan of Wall Street recite his talking points. Wolf Blitzer asked him five times, "Why did you bail out Bear Stearns?" He never got an answer.
Actually, the Treasury didn't bail out Bear Stearns; the Federal Reserve did. Chairman Ben Bernanke and the Fed have been working overtime; they have slashed interest rates and lent or offered money to almost everyone potentially involved in this mess. On Sunday, the Fed even put its own balance sheet at risk to smooth the way for J.P. Morgan (the company, not the man) to "buy" Bear Stearns. But the stunningly low purchase price, far below even the value of Bear Stearns's Manhattan building, did not exactly inspire confidence.
Earth to the White House and Congress: The Fed cannot do this job alone.
But isn't the central bank the fabled "lender of last resort"? Yes, and the Fed is performing that role extensively. But central banks are designed to lend money to banks that are illiquid but not insolvent. It is not supposed to spend taxpayer money or even put much of it at risk. Those political decisions are properly made by elected leaders.
So what can be done now?
First, everyone should take a deep breath. To those living far from the canyons of Manhattan, the sky is not falling. If you don't want to sell your home, forget about falling house prices. Even on paper, it's unlikely that you've "lost" anything near what you "gained" in the run-up. Yes, the economy is limping, but it's not collapsing. And the effects of the Fed's interest rate cuts and the stimulus package that Congress enacted last month are still to come.
Second, it would be nice to see some patient capital step up to the plate. With so many assets on fire sale, buying opportunities abound. Highly leveraged public companies with mark-to-market accounting and daily liquidity drains are too petrified to buy. But patient investors who don't need liquidity and don't have to worry about mark-to-market accounting have a chance to be the J.P. Morgans of our day.
Third, our nation's great financial houses need to use the breathing space the Fed is providing to put themselves in order -- post haste. They need to come clean, book the losses and, in many cases, raise new capital. If the capital must come from abroad, Americans must set aside their pride and/or xenophobia. (By the way, why are some of these companies still paying large dividends and enormous bonuses to their top executives?)
Fourth, we need leadership from political Washington. Forget the president. We need the Treasury secretary to take charge, not just to "support the Fed." While Paulson repeats his "strong dollar" mantra, confidence in the dollar ebbs. How about doing something about it -- such as a dramatic currency market intervention in concert with other nations?
Fifth, I'd like to hear the Fed, which has the credibility the administration lacks, talk more -- and in plain English. For example, I'd like to hear it answer Wolf Blitzer's question -- and others. I'm sure Bernanke can do it better than Paulson.
But our best hope for leadership from Washington may now be in Congress. Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) are working on a fine bill that, by easing some of the stresses in the mortgage market, could do some real good. I urge Frank, Dodd and the Democratic leadership to expedite the process, and congressional Republicans should stop standing in the way.
In 1933, Franklin Roosevelt famously told Americans that "the only thing we have to fear is fear itself." Unbridled fear is gripping today's financial markets. We need some soothing words right now -- followed by actions, as FDR's words were. Who will step forward?
By Alan S. Blinder
Psychology has now overwhelmed economics. What started last summer as a serious problem in a little-known -- but not so little -- corner of the U.S. mortgage market has blossomed into a worldwide financial panic, the sort we read about in history books. Except within the Republican Party, laissez-fairy tales have been discarded, and government support is being both sought and given.
The financial markets live or die on confidence. If you sell a security, you must believe the other guy will pay. You must also believe that something worth $30 at Friday's close, such as shares of Bear Stearns, will not be worth $2 at Monday's open. Such confidence looks to be draining from the system.
Who can restore it? Once upon a time, it was J.P. Morgan -- the man, not the company. Today, it must be the world's leading central banks and treasuries, starting with our own.
Unfortunately, this past weekend was a bad one for Team USA. On Friday, President Bush gave a speech at the Economic Club of New York that left people wondering whether he was in touch. On Sunday, Treasury Secretary Henry Paulson, who has been eerily silent as this crisis unfolded, made the rounds of the morning talk shows. It was not reassuring to see this former titan of Wall Street recite his talking points. Wolf Blitzer asked him five times, "Why did you bail out Bear Stearns?" He never got an answer.
Actually, the Treasury didn't bail out Bear Stearns; the Federal Reserve did. Chairman Ben Bernanke and the Fed have been working overtime; they have slashed interest rates and lent or offered money to almost everyone potentially involved in this mess. On Sunday, the Fed even put its own balance sheet at risk to smooth the way for J.P. Morgan (the company, not the man) to "buy" Bear Stearns. But the stunningly low purchase price, far below even the value of Bear Stearns's Manhattan building, did not exactly inspire confidence.
Earth to the White House and Congress: The Fed cannot do this job alone.
But isn't the central bank the fabled "lender of last resort"? Yes, and the Fed is performing that role extensively. But central banks are designed to lend money to banks that are illiquid but not insolvent. It is not supposed to spend taxpayer money or even put much of it at risk. Those political decisions are properly made by elected leaders.
So what can be done now?
First, everyone should take a deep breath. To those living far from the canyons of Manhattan, the sky is not falling. If you don't want to sell your home, forget about falling house prices. Even on paper, it's unlikely that you've "lost" anything near what you "gained" in the run-up. Yes, the economy is limping, but it's not collapsing. And the effects of the Fed's interest rate cuts and the stimulus package that Congress enacted last month are still to come.
Second, it would be nice to see some patient capital step up to the plate. With so many assets on fire sale, buying opportunities abound. Highly leveraged public companies with mark-to-market accounting and daily liquidity drains are too petrified to buy. But patient investors who don't need liquidity and don't have to worry about mark-to-market accounting have a chance to be the J.P. Morgans of our day.
Third, our nation's great financial houses need to use the breathing space the Fed is providing to put themselves in order -- post haste. They need to come clean, book the losses and, in many cases, raise new capital. If the capital must come from abroad, Americans must set aside their pride and/or xenophobia. (By the way, why are some of these companies still paying large dividends and enormous bonuses to their top executives?)
Fourth, we need leadership from political Washington. Forget the president. We need the Treasury secretary to take charge, not just to "support the Fed." While Paulson repeats his "strong dollar" mantra, confidence in the dollar ebbs. How about doing something about it -- such as a dramatic currency market intervention in concert with other nations?
Fifth, I'd like to hear the Fed, which has the credibility the administration lacks, talk more -- and in plain English. For example, I'd like to hear it answer Wolf Blitzer's question -- and others. I'm sure Bernanke can do it better than Paulson.
But our best hope for leadership from Washington may now be in Congress. Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) are working on a fine bill that, by easing some of the stresses in the mortgage market, could do some real good. I urge Frank, Dodd and the Democratic leadership to expedite the process, and congressional Republicans should stop standing in the way.
In 1933, Franklin Roosevelt famously told Americans that "the only thing we have to fear is fear itself." Unbridled fear is gripping today's financial markets. We need some soothing words right now -- followed by actions, as FDR's words were. Who will step forward?
Monday, March 17, 2008
China: Dalai Lama 'organised' riots
Go to Original
China has strong evidence that groups aligned with the Dalai Lama are responsible for violent protests against Chinese rule in Tibet, the Chinese premier has said.
"There is ample fact and plenty of evidence proving this incident was organised, premeditated, masterminded and incited by the Dalai clique," Wen Jiabao told a news conference on Tuesday, referring to followers of the exiled Tibetan spiritual leader.
Defending China's crackdown on protesters, he said the response of the security forces had been "extremely restrained" but he avoided giving any details on the situation on the ground in Tibet.
Speaking in Beijing, Wen's comments are the highest-level response so far to the violence in Tibet and the biggest protests against Chinese rule in almost two decades.
The protests have also spread from Tibet to Tibetan communities in neighbouring Chinese provinces - an issue the Chinese premier avoided comment on.
Wen said the protests - in which Chinese authorities say 16 people were killed - had shown that "consistent claims by the Dalai clique that they pursue not independence but peaceful dialogue are nothing but lies".
Some human rights groups have put the toll as high as 100.
'Nothing but lies'
Wen added that the Dalai Lama's accusations that China was committing "cultural genocide" in Tibet were "nothing but lies".
He said those who had protested against Chinese rule wanted to undermine the staging of the Beijing Olympics, which open on August 8.
Hinting at calls from some groups for a boycott of the Games, he said the Olympics should not be politicised.
The Dalai Lama, who fled into exile in India in 1959 following a failed uprising against Chinese rule, has denied Chinese accusations that he incited the rioting.
Wen's comments came hours after a deadline passed for protesters involved in the Lhasa uprising to give themselves up to Chinese authorities.
Qiangba Puncog, the Chinese-installed governor of Tibet, set the deadline for midnight on Monday, warning of "harsh" treatment for those who refused to surrender.
There was little indication of any protesters having surrendered after the deadline.
On Tuesday the US-funded Radio Free Asia reported that hundreds of people were being rounded up by security forces, in a possible sign of an intensified crackdown.
Tibet is largely cut off from the outside world, with foreign reporters barred from the territory.
Even activist groups with long-standing connections to contacts in Tibet have indicated they are having difficulty finding out what is happening in the region.
"It is a very, very tense and terrifying situation," Kate Saunders, from the International Campaign for Tibet, told the AFP news agency.
"It has become much more difficult to get information out."
Boycott calls
The uprising in Tibet and the response of the Chinese authorities have sparked protests outside Chinese diplomatic missions around the world, with several calling for a boycott of the Beijing Olympics which begin in less than five months time.
On Tuesday about 100 protesters clashed with Australian police outside the Chinese consulate in Sydney.
Several protesters burned Chinese flags, while others attempted to storm the consulate gates.
Earlier in New York, Ban Ki-moon, the UN secretary-general, said he was "increasingly concerned about the tensions and reports of violence and loss of life in Tibet".
"At this time I urge restraint on the part of the authorities and call on all concerned to avoid further confrontation and violence," he said.
Condoleezza Rice, the US secretary of state, also repeated US calls for China to exercise restraint, urging Chinese leaders to "engage the Dalai Lama".
China has strong evidence that groups aligned with the Dalai Lama are responsible for violent protests against Chinese rule in Tibet, the Chinese premier has said.
"There is ample fact and plenty of evidence proving this incident was organised, premeditated, masterminded and incited by the Dalai clique," Wen Jiabao told a news conference on Tuesday, referring to followers of the exiled Tibetan spiritual leader.
Defending China's crackdown on protesters, he said the response of the security forces had been "extremely restrained" but he avoided giving any details on the situation on the ground in Tibet.
Speaking in Beijing, Wen's comments are the highest-level response so far to the violence in Tibet and the biggest protests against Chinese rule in almost two decades.
The protests have also spread from Tibet to Tibetan communities in neighbouring Chinese provinces - an issue the Chinese premier avoided comment on.
Wen said the protests - in which Chinese authorities say 16 people were killed - had shown that "consistent claims by the Dalai clique that they pursue not independence but peaceful dialogue are nothing but lies".
Some human rights groups have put the toll as high as 100.
'Nothing but lies'
Wen added that the Dalai Lama's accusations that China was committing "cultural genocide" in Tibet were "nothing but lies".
He said those who had protested against Chinese rule wanted to undermine the staging of the Beijing Olympics, which open on August 8.
Hinting at calls from some groups for a boycott of the Games, he said the Olympics should not be politicised.
The Dalai Lama, who fled into exile in India in 1959 following a failed uprising against Chinese rule, has denied Chinese accusations that he incited the rioting.
Wen's comments came hours after a deadline passed for protesters involved in the Lhasa uprising to give themselves up to Chinese authorities.
Qiangba Puncog, the Chinese-installed governor of Tibet, set the deadline for midnight on Monday, warning of "harsh" treatment for those who refused to surrender.
There was little indication of any protesters having surrendered after the deadline.
On Tuesday the US-funded Radio Free Asia reported that hundreds of people were being rounded up by security forces, in a possible sign of an intensified crackdown.
Tibet is largely cut off from the outside world, with foreign reporters barred from the territory.
Even activist groups with long-standing connections to contacts in Tibet have indicated they are having difficulty finding out what is happening in the region.
"It is a very, very tense and terrifying situation," Kate Saunders, from the International Campaign for Tibet, told the AFP news agency.
"It has become much more difficult to get information out."
Boycott calls
The uprising in Tibet and the response of the Chinese authorities have sparked protests outside Chinese diplomatic missions around the world, with several calling for a boycott of the Beijing Olympics which begin in less than five months time.
On Tuesday about 100 protesters clashed with Australian police outside the Chinese consulate in Sydney.
Several protesters burned Chinese flags, while others attempted to storm the consulate gates.
Earlier in New York, Ban Ki-moon, the UN secretary-general, said he was "increasingly concerned about the tensions and reports of violence and loss of life in Tibet".
"At this time I urge restraint on the part of the authorities and call on all concerned to avoid further confrontation and violence," he said.
Condoleezza Rice, the US secretary of state, also repeated US calls for China to exercise restraint, urging Chinese leaders to "engage the Dalai Lama".
A Question of Arab Unity - Holy Unity
The collapse of Nasserism as a uniting force and the inability to regain the territories lost in wars with Israel led to the questioning of the secular ideologies that have dominated regional politics since WWII.
The Iraq experience has laid bare the limits of raw military power
The next US president must reject the juvenile Bush vision, reach out to Iran and seek justice for the Palestinian people
Go to Original
By Max Hastings
The Iraq war has shown how high is the pain threshold of the west. Five years after the 2003 invasion, the daily roll call of Iraqi suicide bombings, murders, firefights and body-bags has become as familiar a part of our landscape as traffic jams on the M1 and Los Angeles freeway.
The media class on both sides of the Atlantic is deeply engaged, indeed impassioned. The war is much discussed in the US presidential election campaign. But most Americans and Europeans display vastly less interest in the Middle East than in troubles closer to home - the global banking crisis foremost among them.
They have grown used to Iraq in the way they do to a chronic personal ailment. It is there. It is nasty. They wish that it would go away. But it does not inflict the sort of agonising pain that causes democracies to force urgent action upon their governments.
At this week's bleak anniversary, statisticians measure the cost. Joseph Stiglitz and Linda Bilmes tell us that the US faces a total bill of $3 trillion, and still counting. About 4,000 American soldiers, 171 British and anything between 200,000 and 600,000 Iraqis have died. It would be madness to describe these numbers as acceptable. But they have not proved so unacceptable that the US or British government, or even the Iraqi administration in Baghdad, has found it necessary to adopt any radical shift of policy.
The Shia-dominated government of Nouri al-Maliki still recoils from empowering Iraq's Sunnis. The Bush administration declines to make serious advances to Iran and Syria, vital players in any credible Iraqi outcome, or to qualify its unstinting support for Israel. Gordon Brown maintains a token British contingent outside Basra, which does little, but avoids an outright breach with Washington.
It seems futile, five years on, to waste words rehearsing once more the folly of the invasion, launched under false pretences, on the basis of WMD evidence that some of us, including me, were foolish enough to swallow. Likewise, the blunders of the early occupation are common ground even in sentient zones of the White House. All that matters now are the present and future.
George Bush's troop surge has been a tactical military success. Though violence in February and March has increased from the low January level, with 10 US soldiers dying last week, far fewer Iraqi lives are being lost than at this time last year. Local ceasefires have made notable progress, with militias receiving American pay to refrain from attacks on either US forces or other factions.
Al-Qaida insurgents have suffered repeated military defeats, and political eclipse. Many Sunni communities have rejected al-Qaida's murderous hegemony, together with the cost of allowing their towns and villages to become battlefields.
The great unanswered question is whether this amounts to sustainable progress, or merely to a temporary hiatus which fails to address the fundamental issues that will decide Iraq's future. Dr Stephen Biddle of the US Council on Foreign Relations has acquired an intimate knowledge of Iraq, and offered an interesting assessment to the House armed services committee in January.
While accepting that all the options remain bleak, he suggested that there is today a better chance of salvaging something than seemed possible six months ago. He argued that a long-term US peacekeeping commitment - perhaps for 20 years - remains essential.
"We are the only plausible candidate for this role for now - no one else is lining up to don a blue helmet and serve in a UN mission to Iraq," he said. "We are not widely loved by Iraqis ... Yet we are the only party to today's conflict that no other party sees as a threat of genocide ... we are tolerated across Iraq today in a way that is unique among the parties."
Biddle cherishes no delusions about the weakness, approaching paralysis, of the national government in Baghdad. The Shia prime minister, Maliki, he says, can more readily live with continuing war than address the political challenges of reconciliation and compromises with the Sunnis, which peace would render inescapable.
Instead, he suggests that "a patchwork quilt of uneasy local ceasefires" may be attainable, with adjoining areas run by local Sunni and Shia militias, and essential services provided by trusted co-religionists. All this fits with the bottom-up rather than top-down approach that has been at the heart of General David Petraeus's strategy since he assumed command in Baghdad.
Yet massive uncertainties overhang the vision propounded by Biddle and others. Will the local ceasefires and reduction of violence be maintained, as US troop numbers on the ground inevitably decline ? Can intercommunal stresses, not least with the Kurds, be contained while the key issue of dividing oil revenues remains unresolved? And whoever becomes president in January, will the American people be willing to sacrifice the blood and treasure involved in a long-term troop commitment to Iraq?
Whether McCain, Obama or Clinton reaches the White House, each will face the same dilemma: would any of the three accept responsibility for presiding over a possible bloodbath, if he or she gives an order to bring the boys home?
A familiar tension will persist, between the visible cost of staying, and the huge unknown of getting out. If violence on the ground seems containable, if the present flickering candle-flames of optimism remain unextinguished, the next president seems likely to persevere in Iraq. If, on the other hand, pain increases, bloodshed worsens, then the American people will surely force the hand of the White House, and insist upon a closure.
No American general is likely to accomplish more than Petraeus. Current US political strategy in Iraq is probably as enlightened as it is going to get. The big, empty field is that of wider American policy in the Middle East, which is critical in determining the context in which Iraq's fate will be decided. Under Bush, this has been sterile. In theory at least, a big opportunity awaits a new president - that of making a new start with Iran, Syria, Saudi Arabia and Israel.
The British historian Professor Hew Strachan, one of my heroes among academics, has for years deplored the west's failure to act abroad in accordance with a plausible framework of strategy. We will dismiss the Washington neocons' claim, underpinning the 2003 Iraq invasion, that their campaign to bring democracy to the Middle East represented just such an overarching idea. What is needed is informed particularism in place of ignorant universalism.
The challenge for the next US administration is to create a new Middle East strategy that rejects the juvenile Bush vision of Iraq as a playing field against al-Qaida; which reaches out to moderate Iranians; and which accepts that until there is justice for the Palestinians, American mood music can never play right anywhere in the Muslim world.
The Iraq experience has laid bare the limits of raw military power. It would be naive to suggest that an abrupt American departure would now promise the country a happy future. But there seems no purpose in a continued US military presence, save within the context of new regional policies vastly different from those that prevail today.
Go to Original
By Max Hastings
The Iraq war has shown how high is the pain threshold of the west. Five years after the 2003 invasion, the daily roll call of Iraqi suicide bombings, murders, firefights and body-bags has become as familiar a part of our landscape as traffic jams on the M1 and Los Angeles freeway.
The media class on both sides of the Atlantic is deeply engaged, indeed impassioned. The war is much discussed in the US presidential election campaign. But most Americans and Europeans display vastly less interest in the Middle East than in troubles closer to home - the global banking crisis foremost among them.
They have grown used to Iraq in the way they do to a chronic personal ailment. It is there. It is nasty. They wish that it would go away. But it does not inflict the sort of agonising pain that causes democracies to force urgent action upon their governments.
At this week's bleak anniversary, statisticians measure the cost. Joseph Stiglitz and Linda Bilmes tell us that the US faces a total bill of $3 trillion, and still counting. About 4,000 American soldiers, 171 British and anything between 200,000 and 600,000 Iraqis have died. It would be madness to describe these numbers as acceptable. But they have not proved so unacceptable that the US or British government, or even the Iraqi administration in Baghdad, has found it necessary to adopt any radical shift of policy.
The Shia-dominated government of Nouri al-Maliki still recoils from empowering Iraq's Sunnis. The Bush administration declines to make serious advances to Iran and Syria, vital players in any credible Iraqi outcome, or to qualify its unstinting support for Israel. Gordon Brown maintains a token British contingent outside Basra, which does little, but avoids an outright breach with Washington.
It seems futile, five years on, to waste words rehearsing once more the folly of the invasion, launched under false pretences, on the basis of WMD evidence that some of us, including me, were foolish enough to swallow. Likewise, the blunders of the early occupation are common ground even in sentient zones of the White House. All that matters now are the present and future.
George Bush's troop surge has been a tactical military success. Though violence in February and March has increased from the low January level, with 10 US soldiers dying last week, far fewer Iraqi lives are being lost than at this time last year. Local ceasefires have made notable progress, with militias receiving American pay to refrain from attacks on either US forces or other factions.
Al-Qaida insurgents have suffered repeated military defeats, and political eclipse. Many Sunni communities have rejected al-Qaida's murderous hegemony, together with the cost of allowing their towns and villages to become battlefields.
The great unanswered question is whether this amounts to sustainable progress, or merely to a temporary hiatus which fails to address the fundamental issues that will decide Iraq's future. Dr Stephen Biddle of the US Council on Foreign Relations has acquired an intimate knowledge of Iraq, and offered an interesting assessment to the House armed services committee in January.
While accepting that all the options remain bleak, he suggested that there is today a better chance of salvaging something than seemed possible six months ago. He argued that a long-term US peacekeeping commitment - perhaps for 20 years - remains essential.
"We are the only plausible candidate for this role for now - no one else is lining up to don a blue helmet and serve in a UN mission to Iraq," he said. "We are not widely loved by Iraqis ... Yet we are the only party to today's conflict that no other party sees as a threat of genocide ... we are tolerated across Iraq today in a way that is unique among the parties."
Biddle cherishes no delusions about the weakness, approaching paralysis, of the national government in Baghdad. The Shia prime minister, Maliki, he says, can more readily live with continuing war than address the political challenges of reconciliation and compromises with the Sunnis, which peace would render inescapable.
Instead, he suggests that "a patchwork quilt of uneasy local ceasefires" may be attainable, with adjoining areas run by local Sunni and Shia militias, and essential services provided by trusted co-religionists. All this fits with the bottom-up rather than top-down approach that has been at the heart of General David Petraeus's strategy since he assumed command in Baghdad.
Yet massive uncertainties overhang the vision propounded by Biddle and others. Will the local ceasefires and reduction of violence be maintained, as US troop numbers on the ground inevitably decline ? Can intercommunal stresses, not least with the Kurds, be contained while the key issue of dividing oil revenues remains unresolved? And whoever becomes president in January, will the American people be willing to sacrifice the blood and treasure involved in a long-term troop commitment to Iraq?
Whether McCain, Obama or Clinton reaches the White House, each will face the same dilemma: would any of the three accept responsibility for presiding over a possible bloodbath, if he or she gives an order to bring the boys home?
A familiar tension will persist, between the visible cost of staying, and the huge unknown of getting out. If violence on the ground seems containable, if the present flickering candle-flames of optimism remain unextinguished, the next president seems likely to persevere in Iraq. If, on the other hand, pain increases, bloodshed worsens, then the American people will surely force the hand of the White House, and insist upon a closure.
No American general is likely to accomplish more than Petraeus. Current US political strategy in Iraq is probably as enlightened as it is going to get. The big, empty field is that of wider American policy in the Middle East, which is critical in determining the context in which Iraq's fate will be decided. Under Bush, this has been sterile. In theory at least, a big opportunity awaits a new president - that of making a new start with Iran, Syria, Saudi Arabia and Israel.
The British historian Professor Hew Strachan, one of my heroes among academics, has for years deplored the west's failure to act abroad in accordance with a plausible framework of strategy. We will dismiss the Washington neocons' claim, underpinning the 2003 Iraq invasion, that their campaign to bring democracy to the Middle East represented just such an overarching idea. What is needed is informed particularism in place of ignorant universalism.
The challenge for the next US administration is to create a new Middle East strategy that rejects the juvenile Bush vision of Iraq as a playing field against al-Qaida; which reaches out to moderate Iranians; and which accepts that until there is justice for the Palestinians, American mood music can never play right anywhere in the Muslim world.
The Iraq experience has laid bare the limits of raw military power. It would be naive to suggest that an abrupt American departure would now promise the country a happy future. But there seems no purpose in a continued US military presence, save within the context of new regional policies vastly different from those that prevail today.
The Fed's Wall Street Dilemma
Go to Original
Too Big to Bail
The Fed’s Wall Street Dilemma
By PAM MARTENS
Americans learned two new truths last week from the Bush Administration’s version of Life’s Little Instruction Book: if you’re a Wall Street miscreant you’re thrown a lifeline; if you’re a Wall Street crime fighter you’re thrown a land mine.
In the first effort, the Feds effectively handed a Federal Reserve ATM card to JPMorgan to funnel your tax dollars to the teetering Bear Stearns brokerage firm to address counterparty risks that have been building for at least 4 years as the Feds snoozed. Counterparty risk is the trillions of dollars of insurance contracts (credit default swaps and other derivatives) taken out by Wall Street firms on each others (counterparty) bonds, bundled mortgage and commercial debt (collateralized debt obligations). The firms have used unregulated over-the-counter contracts to perform this risk transfer alchemy and funded their own company, Markit Group Ltd., to take the place of a regulated exchange for price discovery.
In the second effort, the Feds tapped the Department of Justice, Internal Revenue Service, U.S. Attorney’s office in New York, FBI, five federal judges and a busy federal court to root out that Code Red threat to our national security: consensual sex. The sex involved a prostitution ring and Democratic New York State Governor, Eliot Spitzer, who was savaged and forced to step down by an avenging media mob abundantly fed with well placed leaks from a suspiciously homogenous group called "anonymous law enforcement officials." Governor Spitzer, in his former role as New York State Attorney General, had taken the lead in rooting out Wall Street crimes against small investors because the Federal Reserve was preoccupied with lobbying to remove regulations on Wall Street’s crime factory.
As usual, the Feds handed the bill to the governed with no thought to the will of the governed.
While mainstream media called the Bear Stearns bailout the first brokerage bailout since the Great Depression, in truth it was the second in seven months.
The first brokerage bailout came without all the media fanfare because it arrived not on the wings of a public announcement but in five pages of indecipherable Fed jargon addressed to the General Counsel of Citigroup.
Here is the effective message sent by the Federal Reserve to Citigroup in its letter of August 20, 2007: now that we have allowed you to become both too big to fail and too big to bail by repealing the depression era investor-protection law known as the Glass-Steagall Act at your mere beckoning, we have to bend more rules to keep you afloat. So, for example, the rule that says the Federal Reserve is not allowed to lend to brokerages, just banks, from its discount window can be tweaked for you by lending up to $25 billion to you and then we’ll let you lend it to your brokerage arm. The Federal Reserve Act rule that says a bank can’t loan more than 10% of its capital stock and surplus to its brokerage affiliate, we’ll let you go as high as about 30% and say it’s in the public interest.
By giving Citigroup an exemption from Rule 23A of the Federal Reserve Act, by allowing it to funnel up to $25 Billion from the Fed’s discount window to its brokerage clients who were getting hit with margin calls, the Federal Reserve and Chairman Ben Bernanke telegraphed an incredibly dangerous message to global markets: we’re just as unaccountable as Wall Street. The Federal Reserve as enabler under Alan Greenspan created today’s problem and today’s Crony Fed under Ben Bernanke is killing off what’s left of U.S. financial credibility. (I had barely finished typing these words on Monday, March 17, 2008, when a news alert came across my screen advising that the Federal Reserve was taking the breathtaking step of making direct loans to all brokerage firms which are primary dealers for Treasury securities.)
The Federal Reserve is stumbling around in the dark and regularly bumping into the next bailout because it stopped being an independent monetary force and started taking its marching orders from Wall Street quite some time ago.
Here’s what Nancy Millar, President at the time of the National Organization for Women in New York City, presciently testified in writing to the Securities and Exchange Commission in August 2001. (Ms. Millar edited and signed this testimony while I and other Wall Street activists provided input. This testimony is available in full on the SEC’s web site.)
We thank the Securities and Exchange Commission for extending the comment period to September 4, 2001 in the critical area of bank oversight now that the lines between banks and brokerage firms have been blurred with the repeal of the Glass-Steagall Act.
We believe that the comments made in the letter dated June 29, 2001 from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency should be disregarded in their totality. The banks of America have enough lobbyists and trade associations to argue their case before the SEC. It is not the charter or mandate of these three regulatory bodies to lobby on behalf of banks.
The body of evidence that should dictate how the SEC must now proceed since Congress saw fit to eliminate the critical protections afforded the investing public in the Glass-Steagall Act, resides in the tens of thousands of pages of transcripts of the Pujo Committee hearings held in 1913 and the Pecora Committee hearings of 1933 and 1934. Fancy promises from regulators that banks functioning in the dual role as brokerage firms can and will be self-policing is not what the SEC or Congress should rely on. The well-developed history of egregious abuses bestowed on the investing public prior to the enactment of Glass-Steagall, and since its recent repeal, is what the SEC and Congress must look to. To believe that the dynamics of power and greed have been materially altered in nine decades is to engage in naiveté at the public’s peril.
Our Nation’s prosperity, democracy and the productivity of its citizens demand a level playing field to acquire and safeguard financial assets. Society crumbles when assets achieved through years of honest hard work can be fleeced by brokerage firms masquerading as insured-deposit banks. It is the role of federal regulators to maintain a level playing field through stringent regulation.
We ask that the SEC immediately impose the same regulations that govern outside broker-dealers to securities’ operations within banks. And, we herewith ask Congress to reconsider the repeal of the Glass-Steagall Act or be held accountable for the peril that unfolds from this unwise and inadequately deliberated decision.
If ever there was evidence that America is now facing that peril, it was the most recent news that the Bush administration’s much touted "free and efficient market" had priced Bear Stearns at $30 a share at the close of trading on Friday, March 14, 2008 but on further examination of its books over the weekend, it was valued at $2 a share and absorbed by JPMorgan at that price.
Equally troubling is the growing awareness among Wall Street veterans that neither the Federal Reserve nor the U.S. Treasury comprehend was has happened here, much less how to contain it. Here’s what we heard from Hank Paulson, the Treasury Secretary, last week:
"regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it."
Innovation? Less efficient? Is there anything at all that looks innovative or efficient about Wall Street today? It is a seized up house of cards built on a toxic formula of hubris, corruption and free market madness.
Before there is a complete breakdown, Congress must quickly address the five key reasons we have today’s mess on our hands:
(1) Incentive: from mortgage brokers paid higher fees to sell subprime loans rather than prime loans, to stockbrokers paid dramatically higher fees to sell mortgage-backed securities rather than U.S. Treasury securities, to investment bankers paid dramatically higher fees to package Collateralized Debt Obligations rather than issue plain vanilla corporate bonds, Wall Street has been incentivized to greed rather than honest service to investors.
(2) Artificial Demand: The above outsized incentive produced a glut of unwanted and unneeded product that had to be eventually hidden off Wall Street’s balance sheet in Structured Investment Vehicles (SIVs) or dressed up to look like Commercial Paper and buried in mom and pop money market funds. It is this glut and the lack of transparency as to where else this toxic paper is hiding that is creating the fear and panic on Wall Street.
(3) Counterparty Risk: The regulators allowed Wall Street firms/banks to balloon their asset base and pretend they were meeting capital adequacy tests by buying "insurance" in the form of derivative contracts. There was only one problem with these "hedging" techniques; the counterparty in many cases was just another Wall Street firm or an inadequately capitalized municipal bond insurer. Instead of spreading risk, the risk was concentrated among the same players.
(4) Glass-Steagall Act: Congress was incentivized through Wall Street campaign financing to throw reason and judgment out the window and repeal the only law that stood between the country and another 1929. Glass-Steagall must be restored; and public financing of federal campaigns is the only means of restoring the will of the governed to Washington.
Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
Bear Stearns Fire-sale sends Global Markets Plunging; Dollar Routed
Go to Original
By Mike Whitney
"It’s a snowball and it keeps getting bigger," Peggy Furusaka, credit specialist at BNP Paribas SA in Tokyo.
Last night, while America slept, investors and dollar-holders around the world held an impromptu election on US stewardship of the global economy. It was a spontaneous referendum triggered by the sudden collapse of Bear Stearns, but it covered many of the issues that have worried investors for the last seven years: the unfunded Bush tax cuts, the $2 trillion war in Iraq, the Federal Reserves low-interest bubble-making policies, the reckless gutting of US industrial base, the $4 trillion increase to the national debt, the multi-billion dollar "no bid" contracts, the opaque deregulated financial system, and the systematic destruction of the world’s reserve currency. The ballots are still being counted, but the outcome is certain. The Bush administration lost in a landslide. Investors have had enough Bush’s failed leadership and the Fed’s reckless, globally-destabilizing monetary policies. A dollar-rout has already begun in earnest and stock markets around the world are plummeting. The Hang Seng index (Hong Kong) fell 4.3 percent to 21,279.40. Japan’s benchmark Nikkei index slumped 3.7 percent to finish at 11,787.51, falling below 12,000 for the first time since August 2005. Shares throughout Europe tumbled overnight, shaving tens of billions off market capitalization. The Fed’s panicky bailout of Bear Stearns and its surprise quarter-point rate cut has ignited a global equities sell-off and sent the cost of protecting corporate bonds through the roof. The economic tsunami is presently right outside New York ready to touch-down on Wall Street at the opening bell. The futures markets are already gyrating wildly. It should be a raucous St Patrick’s day in the Big Apple.
Bernanke’s 11th Hour Bailout of Bear Sparks Market Freefall
In the end, it was a race with the clock. The Federal Reserve wanted to get a deal done before the Asia markets opened hoping to soothe jittery investors and stop a full-blown stock market crash. It was right down to the wire, too. Less than an hour before trading began on Japan’s Nikkei Index, the sale of beleaguered Investment giant, Bear Stearns was announced on Bloomberg News. Backed by a $30 billion line of credit from the Fed, JP Morgan reluctantly purchased Bear for the bargain-basement price of $240 million or $2 per share. Less than a year ago, Bear was riding high at $170 per share, but that was before the credit python had wrapped itself around US financial markets. That seems like ancient history now. Without the Fed’s intervention the nearly-century old investment warhorse would have been dragged from Wall Street feet first. If the deal with JPM had flipped, Bear would have been forced into bankruptcy.
But Bear’s travails are just the beginning of Wall Street’s woes. Now there’s talk of Lehman Brothers going under. According to the Wall Street Journal:
"Worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns’s troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say." ("JP Morgan Rescues Bear Stearns", WSJ)
Mr. Fuld has good reason to be concerned, too. Economics professor Nouriel Roubini says that, "Lehman’s exposure to toxic ABS/MBS securities is as bad as that of Bear: according to Fitch at the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally smaller at 53.3%; that of Goldman Sachs was only 21%. And guess what? Today Lehman received a $2 billion unsecured credit line from 40 lenders. Here is another massively leveraged broker dealer that mismanaged its liquidity risk, had massive amount of toxic waste on its books and is now in trouble. Again here we have not only a situation of illiquidity but serious credit problems and losses given the reckless exposure of this second broker dealer to toxic investments." (Nouriel Roubini’s Global EconoMonitor)
So, it looks like Bear will be just the first of many over-leveraged investment banks on their way to the chopping block. As credit gets tighter, banks will have to call in their loans to pare down their debts and increase their capital. That’s easier said than done in an environment where consumer’s are cutting back on borrowing and traditional revenue streams have dried up. The banks are facing some stiff headwinds in the near future.
The Federal Reserve announced two initiatives on Sunday designed to "bolster market liquidity and promote orderly market functioning."The Fed is "creating a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York."
This is an incredible move and way beyond the Fed’s mandate to insure price stability. Bernanke is now offering to accept dodgy mortgage-backed bonds from NON-BANK institutions. Outrageous. We can be 100% certain now, that Congress’s closed door meeting on Friday had nothing to do with Bush’s spying on American citizens. Most likely, the Fed convened the meeting to present their extraordinary strategy to save the financial system from a Chernobyl-like meltdown.
The Fed also announced a "decrease in the primary credit rate from 3-1/2 percent to 3-1/4 percent (and) an increase in the maximum maturity of primary credit loans to 90 days from 30 days." (Fed statement)
So Bernanke has not only decided to bailout the banks but everyone else who is even remotely connected to the subprime/securitization swindle. Great. But the rest of the world is not so convinced that this is prudent economic theory, in fact, foreign investors are already shedding US debt instruments faster than any time in history. Let’s hope that Bernanke realizes that foreign Central Banks and investors presently hold $6 trillion dollars of US Treasuries and dollars and can dump it on our shores whenever they choose. That’s enough greenbacks to start a Wiemar-type blizzard that will last until Resurrection Day.
Roubini on the Fed’s plan to provide loans to non-bank institutions:
"By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification."(Nouriel Roubini’s Global EconoMonitor)
It’s clear that Bernanke is just making it up as he goes along. His actions are unprecedented and, yes, counterproductive. He’s just generating more panic among investors. That doesn’t help. Just a few months ago, Bernanke was reiterating his belief that markets should operate with as little government intervention as possible. What a transformation. Now he has nationalized the banking system and is providing a backstop for privately owned brokerages. What’s next; a bailout for the hedge funds?
There’s still a great deal that we don’t know about the Bear buyout. Like why was it so important to save a bank that had invested its shareholders money so poorly in toxic bonds that were virtually untested in stressful market conditions?
It is complicated, but the real reason for the bailout is that the entire financial industry is now inextricably bound together through multi-billion dollar counterparty transactions called credit default swaps and other unregulated derivatives. When one major player is stricken, the whole system can violently unwind.
According to the Wall Street Journal: "With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable. ...For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices." ("Fed Races to Rescue Bear Stearns In Bid to Steady Financial System", Wall Street Journal)
So Bernanke felt like he had no choice. He could either bailout Bear or sit back and watch a daisy-chain of defaults take down one bank after another. Of course, there was another option. The Fed and the SEC could have fulfilled their responsibilities as regulators and insisted that derivatives trading come under the purvue of government officials. But, apparently, that was never a serious consideration among the non-interventionist free market cheerleaders at the Federal Reserve. They saw their job as simply enabling their obscenely rich constituents to get even richer while putting the public at risk. Now it has all ended badly.
Saint Patrick’s Day Financial Chainsaw Massacre
In less than an hour, the stock market will open and investors will get a chance to vote on the Fed’s latest plan to rescue the US financial system. Good luck. The dollar has already sunk to $1.59 per euro, gold is up to $1017 per ounce, and oil topped out at $111 per barrel; all record highs. At the same time, foreign investors have begun an informal boycott of US debt. Last week’s auction of US Treasuries was the worst in a decade. Thus, the anemic greenback has continued its steady decline as the fundamentals get weaker and weaker.
This afternoon, at 2PM, President Bush will meet with the Working Group on Financial Markets (aka; the Plunge Protection Team) at private White House meeting. The group includes the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC, and the Chairman of the Commodity and Futures Trading Commission. The group of financial heavyweights will update the President on developments in the equities markets and explain in greater detail what Henry Paulson calls "the systemic risk posed by hedge funds and derivatives." Of course, by then, the blood could be running knee-deep down Wall Street.
(Note; "Bernankerupted" invented by Mish blogger named skeptic)
By Mike Whitney
"It’s a snowball and it keeps getting bigger," Peggy Furusaka, credit specialist at BNP Paribas SA in Tokyo.
Last night, while America slept, investors and dollar-holders around the world held an impromptu election on US stewardship of the global economy. It was a spontaneous referendum triggered by the sudden collapse of Bear Stearns, but it covered many of the issues that have worried investors for the last seven years: the unfunded Bush tax cuts, the $2 trillion war in Iraq, the Federal Reserves low-interest bubble-making policies, the reckless gutting of US industrial base, the $4 trillion increase to the national debt, the multi-billion dollar "no bid" contracts, the opaque deregulated financial system, and the systematic destruction of the world’s reserve currency. The ballots are still being counted, but the outcome is certain. The Bush administration lost in a landslide. Investors have had enough Bush’s failed leadership and the Fed’s reckless, globally-destabilizing monetary policies. A dollar-rout has already begun in earnest and stock markets around the world are plummeting. The Hang Seng index (Hong Kong) fell 4.3 percent to 21,279.40. Japan’s benchmark Nikkei index slumped 3.7 percent to finish at 11,787.51, falling below 12,000 for the first time since August 2005. Shares throughout Europe tumbled overnight, shaving tens of billions off market capitalization. The Fed’s panicky bailout of Bear Stearns and its surprise quarter-point rate cut has ignited a global equities sell-off and sent the cost of protecting corporate bonds through the roof. The economic tsunami is presently right outside New York ready to touch-down on Wall Street at the opening bell. The futures markets are already gyrating wildly. It should be a raucous St Patrick’s day in the Big Apple.
Bernanke’s 11th Hour Bailout of Bear Sparks Market Freefall
In the end, it was a race with the clock. The Federal Reserve wanted to get a deal done before the Asia markets opened hoping to soothe jittery investors and stop a full-blown stock market crash. It was right down to the wire, too. Less than an hour before trading began on Japan’s Nikkei Index, the sale of beleaguered Investment giant, Bear Stearns was announced on Bloomberg News. Backed by a $30 billion line of credit from the Fed, JP Morgan reluctantly purchased Bear for the bargain-basement price of $240 million or $2 per share. Less than a year ago, Bear was riding high at $170 per share, but that was before the credit python had wrapped itself around US financial markets. That seems like ancient history now. Without the Fed’s intervention the nearly-century old investment warhorse would have been dragged from Wall Street feet first. If the deal with JPM had flipped, Bear would have been forced into bankruptcy.
But Bear’s travails are just the beginning of Wall Street’s woes. Now there’s talk of Lehman Brothers going under. According to the Wall Street Journal:
"Worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns’s troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say." ("JP Morgan Rescues Bear Stearns", WSJ)
Mr. Fuld has good reason to be concerned, too. Economics professor Nouriel Roubini says that, "Lehman’s exposure to toxic ABS/MBS securities is as bad as that of Bear: according to Fitch at the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally smaller at 53.3%; that of Goldman Sachs was only 21%. And guess what? Today Lehman received a $2 billion unsecured credit line from 40 lenders. Here is another massively leveraged broker dealer that mismanaged its liquidity risk, had massive amount of toxic waste on its books and is now in trouble. Again here we have not only a situation of illiquidity but serious credit problems and losses given the reckless exposure of this second broker dealer to toxic investments." (Nouriel Roubini’s Global EconoMonitor)
So, it looks like Bear will be just the first of many over-leveraged investment banks on their way to the chopping block. As credit gets tighter, banks will have to call in their loans to pare down their debts and increase their capital. That’s easier said than done in an environment where consumer’s are cutting back on borrowing and traditional revenue streams have dried up. The banks are facing some stiff headwinds in the near future.
The Federal Reserve announced two initiatives on Sunday designed to "bolster market liquidity and promote orderly market functioning."The Fed is "creating a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York."
This is an incredible move and way beyond the Fed’s mandate to insure price stability. Bernanke is now offering to accept dodgy mortgage-backed bonds from NON-BANK institutions. Outrageous. We can be 100% certain now, that Congress’s closed door meeting on Friday had nothing to do with Bush’s spying on American citizens. Most likely, the Fed convened the meeting to present their extraordinary strategy to save the financial system from a Chernobyl-like meltdown.
The Fed also announced a "decrease in the primary credit rate from 3-1/2 percent to 3-1/4 percent (and) an increase in the maximum maturity of primary credit loans to 90 days from 30 days." (Fed statement)
So Bernanke has not only decided to bailout the banks but everyone else who is even remotely connected to the subprime/securitization swindle. Great. But the rest of the world is not so convinced that this is prudent economic theory, in fact, foreign investors are already shedding US debt instruments faster than any time in history. Let’s hope that Bernanke realizes that foreign Central Banks and investors presently hold $6 trillion dollars of US Treasuries and dollars and can dump it on our shores whenever they choose. That’s enough greenbacks to start a Wiemar-type blizzard that will last until Resurrection Day.
Roubini on the Fed’s plan to provide loans to non-bank institutions:
"By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification."(Nouriel Roubini’s Global EconoMonitor)
It’s clear that Bernanke is just making it up as he goes along. His actions are unprecedented and, yes, counterproductive. He’s just generating more panic among investors. That doesn’t help. Just a few months ago, Bernanke was reiterating his belief that markets should operate with as little government intervention as possible. What a transformation. Now he has nationalized the banking system and is providing a backstop for privately owned brokerages. What’s next; a bailout for the hedge funds?
There’s still a great deal that we don’t know about the Bear buyout. Like why was it so important to save a bank that had invested its shareholders money so poorly in toxic bonds that were virtually untested in stressful market conditions?
It is complicated, but the real reason for the bailout is that the entire financial industry is now inextricably bound together through multi-billion dollar counterparty transactions called credit default swaps and other unregulated derivatives. When one major player is stricken, the whole system can violently unwind.
According to the Wall Street Journal: "With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable. ...For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices." ("Fed Races to Rescue Bear Stearns In Bid to Steady Financial System", Wall Street Journal)
So Bernanke felt like he had no choice. He could either bailout Bear or sit back and watch a daisy-chain of defaults take down one bank after another. Of course, there was another option. The Fed and the SEC could have fulfilled their responsibilities as regulators and insisted that derivatives trading come under the purvue of government officials. But, apparently, that was never a serious consideration among the non-interventionist free market cheerleaders at the Federal Reserve. They saw their job as simply enabling their obscenely rich constituents to get even richer while putting the public at risk. Now it has all ended badly.
Saint Patrick’s Day Financial Chainsaw Massacre
In less than an hour, the stock market will open and investors will get a chance to vote on the Fed’s latest plan to rescue the US financial system. Good luck. The dollar has already sunk to $1.59 per euro, gold is up to $1017 per ounce, and oil topped out at $111 per barrel; all record highs. At the same time, foreign investors have begun an informal boycott of US debt. Last week’s auction of US Treasuries was the worst in a decade. Thus, the anemic greenback has continued its steady decline as the fundamentals get weaker and weaker.
This afternoon, at 2PM, President Bush will meet with the Working Group on Financial Markets (aka; the Plunge Protection Team) at private White House meeting. The group includes the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the SEC, and the Chairman of the Commodity and Futures Trading Commission. The group of financial heavyweights will update the President on developments in the equities markets and explain in greater detail what Henry Paulson calls "the systemic risk posed by hedge funds and derivatives." Of course, by then, the blood could be running knee-deep down Wall Street.
(Note; "Bernankerupted" invented by Mish blogger named skeptic)
Tainted Drugs Put Focus on the FDA
Go to Original
By Gardiner Harris
Washington - After a contaminated medicine from China was linked to as many as 17 deaths in the United States, members of Congress clamored for changes while regulators defended their actions.
The drug was a common antibiotic, and the year was 1999. But in recent weeks, the Food and Drug Administration has faced an almost identical crisis.
Nineteen deaths have been linked to contaminated heparin, a crucial blood thinner manufactured in China. Again the drug agency became aware of the problem only after hundreds were sickened. Again Congress is investigating.
The FDA admitted that it violated its own policies by failing to inspect the China plant, and on Friday it said it had alerted border agents to detain suspect heparin shipments.
"This heparin problem has happened before with other drugs," said William Hubbard, a former FDA deputy commissioner, "and it's going to keep happening until Congress fixes this problem."
The Institute of Medicine, the Government Accountability Office and the FDA's own Science Board have all issued reports saying poor management and scientific inadequacies make the agency incapable of protecting the country against unsafe drugs, medical devices and food.
Indeed, in the years since the last China drug scandal, the share of drugs coming from that country has soared while the FDA's inspections of overseas drug plants have dropped. There are 566 plants in China that export drugs to the United States, but the agency inspected just 13 of them last year.
The agency does not have the money to inspect many more, and the Bush administration has no plans to fix this most basic of problems. The administration's budget calls for a 3 percent increase in allocated funds next year, not enough even to keep up with rising costs.
Congress, though, may finally heed the calls of Mr. Hubbard and others and allocate far more money. The Senate passed a budget resolution on Friday to give the FDA an additional $375 million, a 20 percent increase over this year.
"Congress has a responsibility to close the glaring gaps in food and drug safety that have begun to overwhelm the FDA," said Senator Edward M. Kennedy, Democrat of Massachusetts, who pushed for the new financing.
Several top legislators in the Senate and House said they supported the increase.
"FDA needs a serious infusion of resources and strong leadership dedicated to reforming the agency," said Representative Henry A. Waxman, Democrat of California, who is chairman of the House oversight committee.
Representatives John D. Dingell and Bart Stupak, powerful Democrats from Michigan, said they would fight to support the increase in the agency's budget.
But the new money is far from assured. President Bush has threatened to veto appropriations that go beyond his requests, and there are powerful interests in Congress that are skeptical of increased agency financing.
Among the skeptics is Representative Rosa DeLauro, Democrat of Connecticut, who leads the House appropriations subcommittee with authority over the agency. Ms. DeLauro said that although the FDA was in crisis, "I don't want to throw money at an agency that doesn't have the infrastructure to carry out its mission."
Some top agency officials are simply "incompetent," she added, and real change can occur only with a new administration.
An FDA spokeswoman, Julie Zawisza, said the agency was "looking at a number of options in addition to more foreign inspections to increase our presence abroad and our ability to detect problems." For instance, the agency is opening an office in China to conduct audits and inspections.
The uncertain prospects of the increased financing have led many in Congress to consider a user-fee system to pay for foreign inspections. The agency already relies heavily on user fees to pay for new drug reviews. Mr. Stupak said such a system might be the only way to pay for the necessary inspections of an industry rapidly moving to places like China.
"Why should the taxpayer pay for these inspections so that you can close a plant here and open it over there to ship it back?" Mr. Stupak said. "It will be sustainable income so that we don't have to get into these budget battles every year."
Eighty percent of the active pharmaceutical ingredients of drugs consumed in the United States are manufactured abroad; 40 percent are made in China and India. Meanwhile, the FDA has cut back on its foreign drug inspections, which declined to 341 in 2006 from 391 in 2000.
Among the only foreign inspections that the FDA still conducts are those done before a drug's approval. Spot foreign inspections are rare. For logistical reasons, the agency warns foreign plants when its inspectors intend to visit, something not done domestically. All of this needs to change, said Mr. Stupak, who wants the oversight of foreign plants to be as strict as those governing domestic ones.
Dr. Sidney Wolfe, director of Public Citizen's health research group, said a fee-based inspection system was "a terrible idea" because it would lead the agency to become more lax with those who pay their salaries.
"The FDA is too important to be left to the industry to fund it," Dr. Wolfe said.
Manufacturers would support a user-fee system in hopes of making medicines safer and competition fairer, said Guy Villax, chief executive of Hovione, a drug maker based in Portugal with plants in Europe, the United States, China and Macao.
Plants in China and India are rarely inspected by Western governments, which can reduce costs dramatically, Mr. Villax said. Even the Chinese did not inspect the plant making contaminated heparin because, regulators there said, everything made at the plant was shipped overseas.
"The globalization of active pharmaceutical ingredients has happened very quickly," Mr. Villax said, "and the government agencies are very slow at adapting to changing circumstances."
By Gardiner Harris
Washington - After a contaminated medicine from China was linked to as many as 17 deaths in the United States, members of Congress clamored for changes while regulators defended their actions.
The drug was a common antibiotic, and the year was 1999. But in recent weeks, the Food and Drug Administration has faced an almost identical crisis.
Nineteen deaths have been linked to contaminated heparin, a crucial blood thinner manufactured in China. Again the drug agency became aware of the problem only after hundreds were sickened. Again Congress is investigating.
The FDA admitted that it violated its own policies by failing to inspect the China plant, and on Friday it said it had alerted border agents to detain suspect heparin shipments.
"This heparin problem has happened before with other drugs," said William Hubbard, a former FDA deputy commissioner, "and it's going to keep happening until Congress fixes this problem."
The Institute of Medicine, the Government Accountability Office and the FDA's own Science Board have all issued reports saying poor management and scientific inadequacies make the agency incapable of protecting the country against unsafe drugs, medical devices and food.
Indeed, in the years since the last China drug scandal, the share of drugs coming from that country has soared while the FDA's inspections of overseas drug plants have dropped. There are 566 plants in China that export drugs to the United States, but the agency inspected just 13 of them last year.
The agency does not have the money to inspect many more, and the Bush administration has no plans to fix this most basic of problems. The administration's budget calls for a 3 percent increase in allocated funds next year, not enough even to keep up with rising costs.
Congress, though, may finally heed the calls of Mr. Hubbard and others and allocate far more money. The Senate passed a budget resolution on Friday to give the FDA an additional $375 million, a 20 percent increase over this year.
"Congress has a responsibility to close the glaring gaps in food and drug safety that have begun to overwhelm the FDA," said Senator Edward M. Kennedy, Democrat of Massachusetts, who pushed for the new financing.
Several top legislators in the Senate and House said they supported the increase.
"FDA needs a serious infusion of resources and strong leadership dedicated to reforming the agency," said Representative Henry A. Waxman, Democrat of California, who is chairman of the House oversight committee.
Representatives John D. Dingell and Bart Stupak, powerful Democrats from Michigan, said they would fight to support the increase in the agency's budget.
But the new money is far from assured. President Bush has threatened to veto appropriations that go beyond his requests, and there are powerful interests in Congress that are skeptical of increased agency financing.
Among the skeptics is Representative Rosa DeLauro, Democrat of Connecticut, who leads the House appropriations subcommittee with authority over the agency. Ms. DeLauro said that although the FDA was in crisis, "I don't want to throw money at an agency that doesn't have the infrastructure to carry out its mission."
Some top agency officials are simply "incompetent," she added, and real change can occur only with a new administration.
An FDA spokeswoman, Julie Zawisza, said the agency was "looking at a number of options in addition to more foreign inspections to increase our presence abroad and our ability to detect problems." For instance, the agency is opening an office in China to conduct audits and inspections.
The uncertain prospects of the increased financing have led many in Congress to consider a user-fee system to pay for foreign inspections. The agency already relies heavily on user fees to pay for new drug reviews. Mr. Stupak said such a system might be the only way to pay for the necessary inspections of an industry rapidly moving to places like China.
"Why should the taxpayer pay for these inspections so that you can close a plant here and open it over there to ship it back?" Mr. Stupak said. "It will be sustainable income so that we don't have to get into these budget battles every year."
Eighty percent of the active pharmaceutical ingredients of drugs consumed in the United States are manufactured abroad; 40 percent are made in China and India. Meanwhile, the FDA has cut back on its foreign drug inspections, which declined to 341 in 2006 from 391 in 2000.
Among the only foreign inspections that the FDA still conducts are those done before a drug's approval. Spot foreign inspections are rare. For logistical reasons, the agency warns foreign plants when its inspectors intend to visit, something not done domestically. All of this needs to change, said Mr. Stupak, who wants the oversight of foreign plants to be as strict as those governing domestic ones.
Dr. Sidney Wolfe, director of Public Citizen's health research group, said a fee-based inspection system was "a terrible idea" because it would lead the agency to become more lax with those who pay their salaries.
"The FDA is too important to be left to the industry to fund it," Dr. Wolfe said.
Manufacturers would support a user-fee system in hopes of making medicines safer and competition fairer, said Guy Villax, chief executive of Hovione, a drug maker based in Portugal with plants in Europe, the United States, China and Macao.
Plants in China and India are rarely inspected by Western governments, which can reduce costs dramatically, Mr. Villax said. Even the Chinese did not inspect the plant making contaminated heparin because, regulators there said, everything made at the plant was shipped overseas.
"The globalization of active pharmaceutical ingredients has happened very quickly," Mr. Villax said, "and the government agencies are very slow at adapting to changing circumstances."
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