Tuesday, April 8, 2008

First Marblehead Tumbles, Guarantor Files Chapter 11

First Marblehead Tumbles, Guarantor Files Chapter 11

By Jody Shenn

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First Marblehead Corp., the third- largest U.S. arranger of securities backed by student loans, tumbled as much as 39 percent after the guarantor of its loans sought bankruptcy protection.

First Marblehead dropped $3 to $4.70 at 10:41 a.m. in New York Stock Exchange composite trading after Education Resources Institute Inc., or TERI, filed for Chapter 11 in Boston yesterday. First Marblehead declined 82 percent in the past 12 months before today.

The bankruptcy filing means Boston-based First Marblehead may incur losses from any defaults, Friedman Billings Ramsey analyst Matt Snowling said. TERI, the largest nonprofit guarantor of private student loans with $16 billion insured, cited added cash demands from a credit-rating downgrade and tumbling demand for student loan securities for its failing finances.

The filing ``now shifts credit risk back'' to First Marblehead, Snowling, who is based in Arlington, Virginia, said today in a research note. ``The risk to the company's capital likely restricts the company's access to funding even further,'' he said.

The slump in credit markets sparked by the collapse of U.S. subprime mortgages cut into demand for private and government- guaranteed student loans, prompting lenders including CIT Group Inc. and NorthStar Education Finance Inc. to quit the business. No new private student-loan securities have been issued in the asset-backed market this year and government-backed offerings have tumbled 65 percent.

`Working Diligently'

First Marblehead ``is working diligently on securing an alternative guarantor as well as structural solutions for loan default guarantees for future originations,'' according to a statement today.

The company is the third-largest arranger of securities backed by student loans, trailing Reston, Virginia-based SLM, or Sallie Mae, and New York-based Citigroup Inc.

Under the agreement with TERI, First Marblehead issues loans, usually on behalf of banks such as JPMorgan Chase & Co., and then has those loans guaranteed by TERI. The loans are then packaged into securities and sold to investors.

First Marblehead also holds onto the riskiest pieces of those securities, demonstrating why TERI's inability to make good on its guarantees may cause losses.

The private loan providers help students fill the funding gap between what's available with government-backed loans and the costs of college.

Private loans have been the fastest growing segment of the market, growing to $18.5 billion in the 2006-2007 academic year, or 19 percent, from $1.8 billion a decade earlier, according to First Marblehead.

Ratings Downgrade

Moody's Investors Service last month downgraded TERI to below investment grade, triggering a demand from a bank that the company set aside cash reserves to cover potential losses.

The ratings firms said defaults were particularly higher than it anticipated among First Marblehead loans to students who didn't work with financial-aid offices.

In response to growing financing costs and rising delinquencies, First Marblehead has raised rates, tightened guidelines and stiffened collection practices.

``We have adjusted our collection and underwriting strategies to adapt to the challenges presented by the turmoil in the capital markets and the current consumer credit cycle,'' First Marblehead said.

In December, Goldman Sachs Group Inc.'s private-equity arm agreed to inject $260.5 million of capital into the company, which reported a $117.7 million losses in a fiscal quarter ended Dec. 31.

Pending Home Resales Fell More Than Forecast

Pending Home Resales Fell More Than Forecast

By Bob Willis

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The number of Americans signing contracts to buy previously owned homes declined more than forecast in February, indicating no sign of a bottom in the U.S. real-estate recession that is entering its third year.

The National Association of Realtors' index of signed purchase agreements decreased 1.9 percent to 84.6, the lowest reading since records began in 2001, the group said today. The drop follows a revised 0.3 percent increase in January.

The continued slump in sales may spur further declines in property values, worsening the slide in mortgage securities that has already caused $232 billion of asset writedowns and credit losses. Traders anticipate the Federal Reserve will have to lower interest rates by at least a quarter point this month to cushion the economy's downturn.

``Looking for a bottom in housing is a little premature,'' Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York, said in a Bloomberg Television interview. ``Prices are likely to come down and we expect that to continue for some time.''

Economists had forecast the index would fall 1 percent from an unchanged reading previously reported for January, according to the median of 29 estimates in a Bloomberg News survey. Projections ranged from a decline of 1.5 percent to a 1.5 percent gain. Compared with a year earlier, the measure was down 21 percent.

Fed Minutes

The Fed is due to release minutes of its March 18 policy meeting at 2 p.m. In the first 11 weeks of this year, the central bank cut the benchmark lending rate 2 percentage points, the fastest drop in two decades. Analysts will be eager to see how officials viewed the unraveling of money markets that prompted them to pass new liquidity backstops.

Former Fed Chairman Alan Greenspan said today the drop in U.S. home prices will probably end ``well before'' early next year as the number of houses on the market diminishes, aiding an economic rebound.

The International Monetary Fund today said financial losses stemming from the mortgage crisis may approach $1 trillion, citing a ``collective failure'' to predict the breadth of the crisis.

The Realtors forecast existing-home sales in 2008 would fall to 5.39 million compared with 5.65 million last year. Purchases of new homes will decline to 576,000 from 775,000 in 2007, the group said today.

Regional Patterns

Pending resales dropped in three of four regions, led by a 9.8 percent decline in the West. Purchases fell 5.5 percent in the South and 3.7 percent in the Midwest. Pending sales increased 3.2 percent in the Northeast.

The pending figures are considered a leading indicator of resales because they track contract signings. The purchase data, due later this month, reflects closings, which typically occur one or two months later.

Sales of existing homes unexpectedly rose in February from a nine-year low, the Realtors group said March 24. Purchases increased 2.9 percent to an annual rate of 5.03 million. Sales of existing homes are down 31 percent from their September 2005 peak, while inventories are at a 9.6-month supply. The group has said a five- to six-month supply reflects a balanced market.

The housing slump has hurt the economy in various ways. Declines in residential construction have reduced gross domestic product since early 2006 and now falling home prices are curbing consumer spending. The drop in values reduces household wealth and limits the amount of equity owners can tap to boost spending.

Bernanke Comments

Spillover from the housing slump is affecting other parts of the economy, costing jobs and undermining output, wages and sales. Fed Chairman Ben S. Bernanke last week for the first time said the economy may be facing a recession.

The Fed chief, in testimony to Congress, reiterated a pledge to act ``as needed'' to cushion the slowdown. Investors are betting the central bank will lower the benchmark interest rate again later this month, adding to the 3 percentage points of reductions already carried out since September.

Demand for houses continues to languish as defaults on subprime mortgages and rising foreclosures push even more properties onto the market. Banks selling foreclosed homes and builders eager to get rid of inventories are slashing prices.

KB Home, the fifth-largest U.S. homebuilder, reported a first-quarter loss as sales plunged 43 percent.

``Many potential buyers either cannot or will not make a purchase commitment today,'' Chief Executive Officer Jeffrey Mezger said on a conference call with investors on March 28. ``Some are worried about losing their jobs, others believe prices have further to fall. Many are simply unable to qualify for financing, given the more restrictive lending environment.''

Washington Mutual Inc., the largest U.S. savings and loan, said today it will receive $7 billion from a group led by TPG Inc. to bolster its capital amid prospects for more losses tied to subprime mortgages. The company may post a $1.1 billion loss in the first quarter and plans to cut its quarterly dividend to 1 cent from 15 cents, preserving $490 million of capital annually.

IMF Says Financial Losses May Swell to $945 Billion

IMF Says Financial Losses May Swell to $945 Billion

By Christopher Swann

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The International Monetary Fund said financial losses stemming from the U.S. mortgage crisis may approach $1 trillion, citing a ``collective failure'' to predict the breadth of the crisis.

Falling U.S. house prices and rising delinquencies may lead to $565 billion in mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion, the fund said.

The forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses. Policy makers, concerned that lenders' deteriorating balance sheets will hobble economic growth, are pushing companies to raise capital.

``The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,'' the report said. The fund warned of the risk of ``a serious funding and confidence crisis that threatens to continue for a significant period.''

Morgan Stanley Chief Executive Officer John Mack told shareholders at the company's annual meeting in Purchase, New York, today that the credit crisis will last ``a couple of quarters'' longer.

G-7 Ministers Meeting

Today's report comes days before finance ministers and central bank governors from the IMF's 185 members gather in Washington for spring meetings of the fund and World Bank. Group of Seven policy makers meet April 11.

The fund, which predicted a year ago that any ripple effects from a subprime mortgage crisis would be limited, blamed lax regulations and a lack of understanding about the risks in structured financial products for the crisis.

``Everybody has learned a lot,'' Jaime Caruana, the IMF's director of monetary and capital markets, said at a press conference in Washington, when asked how the fund underestimated the fallout. ``We have all to be a little bit humble on the analysis of the crisis, because it has been a very, very complex crisis.''

Today's IMF estimate exceeds those by other economists, including analysts at UBS AG, who projected in February that financial firms may lose $600 billion.

`Contingency Plans'

While financial innovations have brought some benefits, ``the events of the past eight months have also shown that there are costs,'' the IMF said. At the same time, the fund urged governments against a rush to increase regulation, especially changes that ``unduly stifle innovation or that could exacerbate the effects of the current credit squeeze.''

Banks should improve disclosure and take writedowns ``as soon as reasonable estimates of their size can be established,'' the fund said. It also urged stronger supervision of capital adequacy, and said policy makers should prepare for further disruptions, the IMF said.

``Authorities may wish to prepare contingency plans for dealing with large stocks of impaired assets if writedowns lead to disruptive dynamics and significant negative effects on the real economy,'' the report said.

The fund added that policy makers should ``stand ready to promptly address strains within troubled financial institutions.''

Federal Reserve officials prevented a disorderly failure of Bear Stearns Cos. last month by agreeing to lend against $30 billion of the company's assets, as part of a takeover agreement with JPMorgan Chase & Co.

Elevated Risks

The fund noted in the report that while ``risks to financial stability remain elevated'' worldwide, emerging market economies ``have been broadly resilient.'' Still, the lender highlighted the risk of faster inflation should the subprime rout cause the dollar's slump to accelerate.

``Further downward pressure on the dollar, particularly if it'' comes ``from subprime or similar shocks, could boost liquidity and lead to an intensification of inflationary pressures in some emerging markets,'' the fund said.

IMF Managing Director Dominique Strauss-Kahn, who took office in November, has conceded that the fund wasn't as vocal as it could have been about the risks that a subprime collapse posed for the global financial system.

In April 2007, the fund said there was little risk of a ``serious systemic threat.'' It also said that ``stress-tests conducted by investment banks show that, even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitization will not face losses.''

14 Banks

At least 14 banks and securities firms have sought cash from outside investors in the past year.

Since credit markets seized up in the U.S. in August, the Standard & Poor's 500 stock index is down about 7 percent, the trade-weighted dollar index has dropped more than 9 percent and the yield on two-year U.S. Treasury notes has fallen to 1.88 percent. Home prices tracked by S&P Case-Shiller have slumped in every month.

``There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions -- banks, monoline insurers, government-sponsored entities, hedge funds -- and the associated risks of a disorderly unwinding,'' the IMF concluded in the report.

Foreclosures Come to McMansion Country

Foreclosures Come to McMansion Country

By Andy Sullivan

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Leesburg, Virginia - Million-dollar fixer-upper for sale: five bedrooms, four baths, three-car garage, cavernous living room. Big holes above fireplace where flat-screen TV used to hang.

The U.S. housing crisis has come to McMansion country.

Just as the foreclosure crisis has hollowed out poorer neighborhoods, "for sale" signs are sprouting in upscale developments so new they don't show up on GPS navigation screens.

Poor people weren't the only ones who took out risky, high-interest loans during the housing boom. The sharp increase in housing costs - and the desire to live in brand-new, spacious houses with modern features - led many affluent buyers to take out loans they couldn't afford.

"People had in their head, 'I need a mud room, I need giant columns, I need a media room, and I'm going to do anything to get it,'" said Robert Lang, co-director of Virginia Tech's Metropolitan Institute, a research organization that focuses on real estate and development.

The crisis has hit especially hard here in Loudoun County, Virginia, where upscale developments have supplanted horse farms over the past fifteen years.

About an hour's drive from Washington, Loudoun is one of the nation's most affluent counties, with a median household income of $98,000, more than double the national figure.

The county has also ranked as one of the nation's fastest growing in recent years as developers built thousands of super-sized, amenity-laden houses to keep pace with the booming high-tech economy.

These houses are sometimes nicknamed "McMansions," disparaging both their extravagance and their look of mass production - like hamburgers from a McDonald's restaurant.

Between 1990 and 2005, the county's population tripled to 272,000. Many of those moving here relied on risky, high-interest loans to buy the house of their dreams.

"People pushed the limits to be able to buy. They couldn't afford to buy there otherwise," said Virginia Tech consumer-affairs professor Irene Leach.

High-interest loans accounted for 16 percent of the total during the height of the mortgage boom in 2005, less than other outer-ring suburban counties in the region but more than neighboring counties closer to Washington.

Now the bill has come due. One out of every 69 households in the county was in foreclosure in the last three months of 2008, well above the national average of one filing for every 555 households, according to RealtyTrac.

Most of these have been concentrated in the county's poorer neighborhoods, but local realtor Danilo Bogdanovic says he is increasingly seeing more foreclosures on properties worth more than $800,000 as affluent borrowers burn through savings in a vain attempt to stay in houses they can't afford.

"They've just prolonged the pain," Bogdanovic said. "I don't think they're immune to it."

At the end of 2007, 20 of the 25 houses for sale for more than $850,000 in Loudoun County appeared to be foreclosures, according to Tony Arko, his partner. Find more here

These can take years to sell, as they must compete with brand-new developments still coming online.

Housing prices in the county plummeted 8 percent in 2007, the sharpest drop in the region, according to the Washington Post. New home starts plummeted by 50 percent.

Bogdanovic and Arko have sold many foreclosed properties to investors looking to rent them out. But there's no market for a million-dollar rental property, they say.

In the Beacon Hill development, a golf course snakes among large houses and gazebos set on rolling hills. Residents keep their horses at an equestrian center.

A 7,300-square-foot mansion on Spectacular Bid Place features three chandeliers, a spiral staircase and a state-of-the-art kitchen. The owner offered it at $1.35 million in January 2006, before foreclosing in August 2007. The house found a buyer in January 2008 - for $963,000.

Several miles away, the million-dollar fixer-upper with the holes in the walls has been on the market since December. It is still unsold.

The Foreclosure Prevention Act (aka the Bank and Builder Bailout Act)

The Foreclosure Prevention Act (a k a the Bank and Builder Bailout Act)

By Dean Baker

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Conservatives used to complain liberals always wanted to throw money at problems. While there may have been some truth at times to this charge, Congress decided to literally take this path in its approach to the housing bubble last week.

There are many villains in the story of the housing bubble, but the homebuilders and the mortgage industry would go on almost everyone's list. The homebuilders rushed ahead with new developments under the delusion the bubble would last forever. The result is an unprecedented glut in housing.

The mortgage industry aggressively promoted adjustable rate mortgages to the most vulnerable segments of the population, giving us the subprime crisis. They didn't care mortgages couldn't be paid because they could dump them into the secondary market almost immediately after they were issued.

During their spring recess, members of Congress heard from angry constituents who feared the loss of their home or the loss of much of their home equity due to plunging house prices. This prompted Congress to rush into action when it came back into session last week.

The centerpiece of the "Foreclosure Prevention Act" approved by the Senate is a tax break for the homebuilders and the mortgage bankers - in effect throwing taxpayer dollars at two of the industries most responsible for the housing bubble. That should satisfy troubled homeowners.

But this may not be the end of it. There are plans for a large-scale buyout of bad mortgage debt. There are several different proposals being circulated, but the basic story is the same. The government would guarantee new mortgages that would be used to buy up existing mortgages of homes facing foreclosure. While the new mortgages would be issued at prices that are less than the value of the original mortgage, they will almost certainly give the banks far more money than if the market was left alone.

For example, a bank may have issued a mortgage for $220,000 on a home that is now worth $200,000. Under the various proposals, the government-guaranteed mortgage would give the bank a check for between $170,000 and $200,000. This means a loss for the bank, but, almost certainly, a much smaller loss than if it carried through the foreclosure.

The handout to the banks is justified as an effort to keep homeowners in their houses. This may be reasonable in depressed markets like Detroit or Cleveland, but simple arithmetic shows this plan provides no benefit to homeowners in bubble-inflated markets like Los Angeles and Boston.

In these markets, houses now sell for more than 20 times the annual rent on a comparable unit. This means, even with a low 6 percent mortgage, after adding in taxes, insurance and maintenance, homeowners will likely pay 60 percent to 80 percent more in housing costs than if they rented. The additional housing costs will come at the expense of health care, quality childcare, and other necessary expenses. Furthermore, since house prices are falling in these bubble markets, it is extremely unlikely these families will accumulate any equity. In short, just like the tax breaks approved last week, these bailout proposals are yet another way to put money in the pockets of bankers under the guise of helping homeowners.

There are real ways to help homeowners facing foreclosure. Amending the bankruptcy law to allow judges to rewrite the terms of home mortgages, so families can keep their home, would be a good start. We can also change the rules on foreclosure to allow homeowners the option to remain in their home as renters paying the fair market rent. This would provide security to homeowners, since they could not just be thrown out on the street. More importantly, it would provide lenders with a real incentive to negotiate terms that allow homeowners to stay in their homes as owners, since banks do not want to become landlords.

The Fed and Congress were incredibly negligent in allowing the housing bubble to grow to such enormous proportions. Acting on the advice of economists who couldn't see the bubble, Congress now seems determined to compound this failure. It is trying to hand as many taxpayer dollars as possible to the banks in a futile attempt to prop up the bubble and keep homes unaffordable for young people. Thankfully, it is an election year.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

The Already Big Thing on the Internet: Spying on Users

The Already Big Thing on the Internet: Spying on Users

In 1993, the dawn of the Internet age, the liberating anonymity of the online world was captured in a well-known New Yorker cartoon. One dog, sitting at a computer, tells another: “On the Internet, nobody knows you’re a dog.” Fifteen years later, that anonymity is gone.

It’s not paranoia: they really are spying on you.

Technology companies have long used “cookies,” little bits of tracking software slipped onto your computer, and other means, to record the Web sites you visit, the ads you click on, even the words you enter in search engines — information that some hold onto forever. They’re not telling you they’re doing it, and they’re not asking permission. Internet service providers are now getting into the act. Because they control your connection, they can keep track of everything you do online, and there have been reports that I.S.P.’s may have started to sell the information they collect.

The driving force behind this prying is commerce. The big growth area in online advertising right now is “behavioral targeting.” Web sites can charge a premium if they are able to tell the maker of an expensive sports car that its ads will appear on Web pages clicked on by upper-income, middle-aged men.

The information, however, gets a lot more specific than age and gender — and more sensitive. Tech companies can keep track of when a particular Internet user looks up Alcoholics Anonymous meetings, visits adult Web sites, buys cancer drugs online or participates in anti-government discussion groups.

Serving up ads based on behavioral targeting can itself be an invasion of privacy, especially when the information used is personal. (“Hmm ... I wonder why I always get those drug-rehab ads when I surf the Internet on Jane’s laptop?”)

The bigger issue is the digital dossiers that tech companies can compile. Some companies have promised to keep data confidential, or to obscure it so it cannot be traced back to individuals. But it’s hard to know what a particular company’s policy is, and there are too many to keep track of. And privacy policies can be changed at any time.

There is also no guarantee that the information will stay with the company that collected it. It can be sold to employers or insurance companies, which have financial motives for wanting to know if their workers and policyholders are alcoholics or have AIDS.

It could also end up with the government, which needs only to serve a subpoena to get it (and these days that formality might be ignored).

If George Orwell had lived in the Internet age, he could have painted a grim picture of how Web monitoring could be used to promote authoritarianism. There is no need for neighborhood informants and paper dossiers if the government can see citizens’ every Web site visit, e-mail and text message.

The public has been slow to express outrage — not, as tech companies like to claim, because they don’t care about privacy, but simply because few people know all that is going on. That is changing. “A lot of people are creeped-out by this,” says Ari Schwartz, a vice president of the Center for Democracy and Technology. He says the government is under increasing pressure to act.

The Federal Trade Commission has proposed self-regulatory guidelines for companies that do behavioral targeting. Anything that highlights the problem is good, but self-regulation is not enough. One idea starting to gain traction in Congress is a do-not-track list, similar to the federal do-not-call list, which would allow Internet users to opt out of being spied on. That would be a clear improvement over the status quo, but the operating principle should be “opt in” — companies should not be allowed to track Internet activities unless they get the user’s expressed consent.

The founders wrote the Fourth Amendment — guaranteeing protection against illegal search and seizure — at a time when people were most concerned about protecting the privacy of their homes and bodies. The amendment, and more recent federal laws, have been extended to cover telephone communications. Now work has to be done to give Internet activities the same level of privacy protection.

Batten Down The Hatches: This Is The Big One

Batten Down The Hatches: This Is The Big One

The Bank has to change its low inflation mentality to address economic reality

By Ashley Seager
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"W
hole cities of pain. A continent of pain," said the great, if eccentric, Wall Street money dealer Jim Cramer recently. He was talking about the economic pain spreading across the United States, of course.

Until recently, the pain of the US housing market had not spread to our own fair land. Much of the economic data here has been, if anything, surprisingly healthy. But such figures are generally backward-looking and often look fine until suddenly they don't.

Last week we saw a dramatic escalation in pain levels as one mortgage lender after another either withdrew home loans or raised the interest rates. The chart shows the growing divergence between the Bank of England's official rate and interbank Libor rates that explains this.

This is the most concrete evidence to date that the esoteric "credit crunch" has moved out of the so-called "interbank money markets" and into the consciousness and pockets of the British people.

The Co-op Bank and First Direct said they had to shut their doors to new business because house buyers were deluging them with requests for favourable mortgage terms. Many who bought a two-bed flat in a city centre anywhere in Britain are now finding they can't afford the mortgage repayments and the value of the property is dropping fast.

Perhaps Cramer should take a trip across the Atlantic to see more cities groaning under the pain.

Britons are also carrying record levels of debt. Figures last week showed a surprise jump in unsecured lending in February, mostly overdrafts.

A sign of continued consumer confidence, you might say. But it looks more as if consumers faced with greater difficulty in raising mortgage finance have simply let their overdrafts take the strain: it is a sure sign of consumers under stress.

That makes sense when survey after survey has been showing consumer confidence is very weak and people's intentions of making a major purchase are vanishing. No wonder private car sales are dropping. Ernst & Young, the consultants, have warned that dealerships face a year of struggle.

The Bank of England's credit conditions survey last week showed banks expect lending conditions to get worse, signalling more trouble ahead.

The economy has sailed resiliently through many shocks over the past 15 years, from the Asian crisis in the late-1990s to the dotcom bust of the early noughties. But it has not been hit by anything like this credit calamity for a very long time, if ever. This is the big one.

The idea that we can escape the impact of what is happening in America is just wishful thinking. There was some optimism in financial markets last week that the worst of the credit crunch might be over. These are the same markets that failed to predict the credit crunch and are the root cause of this misery, so their opinion, frankly, is not worth much.

Housing bubble

The reality is that the economy has been pumped up and up in the past decade by the cheap and easy availability of credit. Now it is neither cheap nor plentiful and the fallout is hurting.

For one thing the housing market bubble - in a way we knew all along it was a bubble - has been pricked and is starting to deflate rapidly.

House prices are not going to drift quietly sideways over the next few years while average earnings catch up. They are going to fall sharply. I would be surprised if they don't fall by a quarter or more over the next two years.

It is not just about the supply of credit, it is about mentality - the fear and greed syndrome. Who would buy a property, even if they could get a mortgage, if they thought they could wait another year and pay, say, 10% less?

Estate agents report they have stacks of properties for sale but simply can't shift them. So supply is plentiful and demand has dried up. In most markets, that means prices fall. Why should the housing market be different?

Already, the construction sector has nose-dived, as witnessed by two surveys of the sector that came out last week. The much bigger services sector, too, looks as if it is running into trouble, according to a survey by the Chartered Institute of Purchasing and Supply last week.

The service sector is about two-thirds of the economy and has looked robust until now. Financial services employment has fallen sharply. The data is turning down.

All of which brings us to the policy response. What can the Bank of England do about interest rates? The growing risks to growth would normally call for sharp cuts in interest rates, following the Federal Reserve in the United States. The Fed has cut from 5.25% last autumn to just 2.25% now.

The Bank of England has been much more cautious, cutting from 5.75% to 5.25%. Part of the reason is that, until now at least, the British economy had held up well. But the other key element, as the Bank's executive director, Paul Tucker, said last week, is that the monetary policy committee is not prepared to let the "inflationary genie" out of the bottle.

He hinted that slow, gradual rate cuts were in the committee's mind rather than Fed-style emergency cuts.

Inflation

Inflation has been pushed up to 2.5% - above its 2% target - by rising food and energy prices and is likely to rise quite a bit further.

Tucker acknowledged that a sharp slowdown in the economy would also put the brakes on inflation but it was not clear by how much.

But these are strange times for the MPC. In the face of such a shock to the economy as this credit crunch, it has to be wondered whether any of its forecasting models are of any use.

Models often use past performance to predict what might happen. But the past 15 years have been so stable for British growth and inflation that most models are likely to forecast that it will simply carry on. That is very unlikely, which means in turn that interest rates could be left too high for too long, just as happened in the US.

The rate cuts implemented by the Bank of England have probably already been cancelled out by the rising market interest rates that have pushed mortgage costs up. So interest rates are likely to be slowing the economy down, rather than boosting it.

The MPC is also conscious that for years, inflation was steady around the 2% target as high domestic inflation was offset by very low foreign inflation thanks to the strong pound and cheap Chinese imports. But now, rising world food and energy prices, combined with a falling pound, mean imported inflation has risen.

The implication of that is that domestic inflation will have to be much lower in the coming years than in the past decade. In turn, that means the economy will have to be run more slowly to keep domestic inflation in check. That's why Tucker said last week that the MPC wanted to see some slack develop in the economy.

But the risk is that the economy might slow much more sharply than the MPC is expecting, possibly even follow the US into a recession.

In the face of such downside risks, which look to be much bigger than the upside risks to inflation, rates need to be cut, and fast, starting this week. There may not be much time. The pain is real, it is time to get the aspirin out.

U.S.-Russia row over Kosovo escalates with Moscow aid shipments

U.S.-Russia row over Kosovo escalates with Moscow aid shipments

Russia is sending humanitarian supplies worth $1.7 million directly to Kosovo Serbs, challenging the authority of the US-backed government in Pristina.

In the days following Kosovo's declaration of independence, a billboard was erected depicting a boxer in stars-and-stripes shorts knocking out his hammer-and-sickle opponent. The imagery may have been crude, but the message was clear: Kosovo's newly declared statehood represented a "victory" for the US over Russia.

Not so fast.

Two new developments have prompted concerns that what started as a disagreement between the two powers over international law could escalate into a proxy stand-off in the territory.

Moscow last week began sending humanitarian aid to Kosovo's Serbs, bypassing the US-backed government in Pristina. As cargo planes left Russia for Belgrade, a Russian news agency quoted an anonymous Kremlin source warning that the situation in Kosovo has not yet reached its "hottest phase." That followed Washington's announcement last month that it would begin arms shipments to Kosovo.

Until now, Russian solidarity with Kosovo Serbs in opposing Kosovo's independence has been limited to international forums – such as President Vladimir Putin's meeting with President Bush in Russia this weekend. But the arrival of Russian humanitarian aid in Kosovo last week marks Moscow's first direct challenge to the Kosovo government's authority on the ground, bolstering Serb opposition to the ethnic Albanian government.

Belgrade welcomed the aid from its biggest ally. On receiving the first consignment last week, Serbia's minister for Kosovo, Slobodan Samardzic, told reporters in Belgrade: "We are grateful to Russia for its material and moral support."

But in Kosovo, some Serbs are less emphatic in their praise for Russian aid. Although a Russian flag hangs in the main square of Serb-dominated north Mitrovica, not far from a mock gravestone for Mr. Bush, among the community there is suspicion of Russian motives. "It's a stunt to boost the Radicals in the [May 11 Serbian elections]," says one man, who refused to give his name.

Miki Dasic is a prime recipient for the Russian aid. The Serbian farmer lives with his family in the ramshackle village of Brestovic in western Kosovo, enduring months without running water and reliable electricity. He eats only what he can produce, and his children are educated at home. But he fears that help from Russia could be more trouble than it is worth.

"Personally, I am against this Russian aid," he says. "We need proper economic help, not presents. But it's time America respected the Russians; they are not weak anymore. The Albanian people are slaves of America. If the Russians provoke the US, it's possible something very bad will start here."

His fears are mirrored in Kosovo's Albanian community. Gezim Ajupi sells flags from a small stall in central Pristina. He offers three designs – the Albanian national flag, the new Kosovo flag, and the Stars and Stripes.

"America is very good for Kosovo, and it's better to be with the USA," he says. "They have helped us with weapons. Maybe Russia will give weapons to the Serbs. Anyway, whatever happens, the USA will have the last word."

Analysts believe that as long as Kosovo's Serbs feel that they have the support of a major world power behind them, their opposition to the ethnic Albanian government will intensify. The result, they warn, will be a protracted conflict that could explode into violence if Pristina tries to impose its will in Serbian areas.

"To integrate the Serbian areas will require a robust military presence, and the international community is not willing to do this," says James Lyon of the International Crisis Group, which advocates broader international recognition of Kosovo's independence. "Russia has nothing to lose in the Balkans, and can only win. Putin has clawed his way back to the top, and can now throw his weight about. On issue after issue, Moscow has shown it is not adverse to conflict with the West."

Russia is showing no signs of abandoning its campaign to undermine Kosovo's fledgling independence. Moscow has pledged to send more consignments of aid before the end of this week, bringing to the total value of the relief shipment to $1.7 million. It has also warned that it will block Kosovo's bid to join the UN.

"We have done all we can to derail the plans of the rapid and broad recognition of Kosovo's independence," Russian foreign minister Sergey Lavrov told the parliament last week.

Tax Policy Favors Investors Over Wage Earners

Tax Policy Favors Investors Over Wage Earners

By Gerald E. Scorse

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Over the last ten years, nobody has gotten more love from Washington than investors. It’s time to stop and ask if the love is misplaced.

Investor-love settled in on the Potomac in 1997, when President Clinton cut the tax on long-term capital gains from 28% to 20%. In 2003, President Bush kept the love coming from the GOP side. He took another 5% off the capital gains rate and slashed the levy on corporate dividends as well.

Just recently, some Republicans proposed adding a dollop of investor-love to the economic stimulus bill. Their idea didn’t fly, but it showed that the flame is still burning.

All this love has worked splendidly for the loved. The tax on long-term gains and qualified dividends has been driven down to 15%. That’s a 70-year low, and it’s less than the rate on the wages of average Americans. As the multi-billionaire Warren Buffett abashedly confessed, the secretaries in his office now pay taxes at a higher rate than he does.

Buffett was quickly called out for coming up short on investor-love. Maria Bartiromo, an anchor on the business channel CNBC, labeled his remark “misleading”.

Misleading? Hardly, compared to the claim that buyers of stocks drive the U.S. economy by growing jobs and new businesses. If so, investor-love might be deserved. Let’s look in on the market and analyze what takes place.

Billions of shares change hands daily on the major exchanges. On any given day, only a minute fraction of those shares grows anything. Days can pass without a bona fide investment; the sounds you hear are aftermarket noise and the closing bell.

In short, “investors” do not grow jobs (except in the financial sector). The seed money that nourishes start-ups and expansions comes from a tiny subset of real investors; the rest of us merely place our bets at the tables down on Wall Street.

What’s the problem with investor-love? First, Warren Buffett has it right: it’s wrong for income from work to be taxed at a higher rate than income from wealth. Second, investor-love has no reason for being; it’s a tax policy shaped by propaganda.

Lawmakers might better follow the policy shaped by Ronald Reagan.

Reagan’s 1981 tax cuts tilted toward the wealthy and made him a supply-side icon. But Reagan could also be fair, and fairness would permeate his last fiscal legacy. In the landmark Tax Reform Act of 1986, nearly three years in the drafting, Reagan again cut marginal rates but raised taxes sharply on investors.

The reform ended preferential tax treatment of capital gains. The tax rate on long-term gains leapt from 20% to 28%, nearly double the current levy. Higher-income taxpayers could pay as much as 31% on their gains.

Reagan hailed the bill as “the dream of America’s fair-share tax plan.” He also called it “the best job creation program ever to come out of the Congress”; hyperbole, but evidence that he expected no growth falloff from higher capital gains taxes. The new 28% rate held until ’97, when a GOP-controlled Congress and a Democratic president fell under the spell of investor-love.

Republican presidential candidate John McCain stays miles away from the fact that Reagan equalized taxes on income from wages and income from wealth. But Barack Obama (and John Edwards, before dropping out) have pointed to it with relish.

In their bones they know what’s fair, just like The Gipper did.

Breaking Through the News Filter

Breaking Through the News Filter

By: Peter Chamberlin

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If it is true that the power belongs to the people in America, and Congress still answers to the people, then what force prevents the people from rising up to demand that Congress answer to the people's will? The answer to that question is that the "silent majority" is only silent because they have been kept in the dark; they do not know the truth about the dire predicament we are in.

The American mainstream media has allowed itself to serve as a disinformation service for the promotion of neoconservative (Likud) propaganda to the American people, under the guise of the "free press." American media dispenses misinformation which promotes the idea of world war against the Muslims, while systematically censoring international news content to propagate the idea of "bad Muslims." This effectively insulates Americans from any truth that might leak out of the wire services, guaranteeing that graphic images of Iraqi or Palestinian children being pulled out of the American-made rubble or lying stacked-up like cordwood in a local morgue are not seen by many people. It is the powerful censored images of what is being done that will get ordinary, big-hearted Americans to pay attention to our own war crimes.

This is the real unseen war being fought mostly in population centers, where powerful bombs and armor rip through communities to flush-out all the proud patriotic young men who would dare to harbor ideas of self-defense or resistance. This is the cold reality of the war, that we are fighting a war against ideas with heavy bombers and tanks. This is what the self-anointed saints (neocons) describe as a "clash of civilizations." That is the official story line that is fed to the American people by the nightly news, as they create an illusory vision of the war, in order to mislead.

News about the real war that leaks through the media filter undermines the fake publicity war. The revealed contradictions that seem to undermine "the mission" are written off as "mistakes" by reporters (which politicians immediately deny), even though they showed the real war unfolding according as planned. The war planners counted on chaos and sectarian violence to erupt after the overthrow of regimes. The plan had always been to trigger a series of wars of manageable size, by using local gangsters and mercenaries to foment divisive insurrections. The purpose of this strategy was to target local "extremists," the official designation of those who would take up arms against the American proxies.

It is the job of the "news"/propaganda organ to build on this idea of self-defense=terrorism, as the foundation for waging the propaganda war against the American people. The American mercenaries become "linked to al Qaida" in the official deception, as they begin to assassinate the targeted leaders of those who resist the coming occupation. Once begun, any one of these local conflicts could be pumped-up into a real war. Eventually, one of these small wars would explode into the desired regional conflict, which would enable America to use of all the weapons in its arsenal, in a massive campaign to seize all the oil fields and potential supply routes.

In their pursuit of the imperial agenda, the mainstream media has used the campaign for president in a masterful stroke of misdirection, to distract the people with the "shiny object" (the false hope of our first "people's president" since JFK). The false hope of our first independent president obfuscated the fact that today all political candidates are beholden to a foreign power (Israel), because of the power accumulated by the agents of that foreign government (AIPAC, the Israel lobby), as demonstrated in the "bi-partisan support" for an attack upon Iran.

It is because of this illusory national unity for expanding the war, which directly contradicts the common will among the people for shutting-down the war, that the people are becoming aware of the lies. As people begin to awaken to the truth about the war they start to understand that the "war" being described on television by reporters, politicians and military types is not the real war that is unfolding behind the curtain. When enough people awaken to this truth they will represent an irresistible force to the unwanted expansion. Once this new national consensus is created we will demonstrate to Cheney that we really do oppose his war, even though his opinion will once again be "So?"

Even though the American majority clearly wants this war ended now, that is not the intention of the ruling elite. Cheney's minions have already set tripwires, beyond our reach in the countries that border Israel, for triggering a larger "defensive" conflict. That is the nature of trip wires; once some careless fool sets such a trap, he has no say about when it is who tripped, or by whom. Our fate has been placed in Israel's paranoid hands, even though Israel is the only country in the world that has consistently pushed our government to attack Iran or its allies on their behalf.

This intolerable situation presents us with an overwhelming problem that must be dealt with immediately, if we are to avoid the accompanying military disruption of our lives that will come with it. How do we inspire the dazed American people to rise-up and stop this new aggression from happening in their name, against their will? How can you convince a nation that has buried its own conscience that it is in its own interest to take a stand against state genocide?

The sleeping sheeple are blissfully unaware that world war may be imminent. They do not know that the day after Cheney visited the royal house, the Saudi Shura Council announced "national plans to deal with any sudden nuclear and radioactive hazards," because of credible threats to Iran's Bushehr reactor. Americans will not hear this from the national news, but they will hear every word of Petraeus' upcoming testimony before Congress, where he will blame everything on Iran once again. This time he may provide the missing catalyst for igniting the war on Iran, since the government has not yet been able to provoke an Iranian misstep to their provocations in Iraq. Somebody has to be forced into fighting back, somewhere, before we can label them "al Qaida" and the use of the really big guns is authorized.

The forbidden reaction of self-defense (which we define as "terrorism") is more likely to come from one of Israel's ongoing military provocations against the feisty freedom-loving Arabs, than from Iran. Our government is deeply involved in supporting these Israeli attacks upon the Palestinians and their neighbors, in the hopes that one of these attacks will bring sufficient Muslim retaliation upon Israel to justify our waging a larger genocidal war against Islam, in defense of Israel. The centerpiece of this strategy is guaranteeing Israel's security. That is the central rationalization for utilizing nuclear weapons to disarm Iran.

The fulfillment of the Likud plans of Ariel Sharon for the land of Palestine remains the central foreign policy goal of the Bush Administration. We are the primary diplomatic force pushing the other nations to support the medieval Israeli seige and strangulation of Gaza, as well as the illegal partitioning of the West Bank (Ariel Sharon called it making a "pastrami sandwich" of the territories). Our government has also intervened militarily, by parking the Fifth Fleet off Lebanon's coast to support the next Israeli attempt to annex southern Lebanon and to eliminate Hezbollah and Syria along with it.

There is a third world war coming, with consequences for all living things. We have the legal authority under our Constitution to prevent our elected proxies from carrying-out this next planned war in support of Israel, yet the feeble American resistance movement cannot even agree on a common purpose. We all must decide whether we are in this volunteer freedom militia to stop the war machine before it becomes unstoppable, or just to validate our own pet theories and vindicate our own biases. The more time we waste fighting over the divisive questions that keep us apart (and keep us isolated from the American majority), the easier we make it for the enemy to bide their time, until their big opportunity arises.

For now, we must put aside all other divisive issues which separate us and make our message undeliverable to the American sheeple. This means that all issues that do not directly contribute to blocking the attack should be considered secondary issues. We cannot question our current course, which leads to the destruction of American democracy to save Israeli democracy, if we cannot get past distracting questions concerning 911.

Identifying the prominence of Israel in our war upon the world, will automatically repel many heavily-indoctrinated Americans, before they ever hear our arguments for opposing this war. It is true that American media is dominated by pro-Israeli interests who regularly censor pro-Palestinian, or pro-Muslim news. This is the nature of our national news filter, the obstacle that must be overcome. We will not be able to get questions out that cross the "red lines," or use words like "Zionism, ethnic cleansing," or "Israeli aggression."

We cannot deal with the Israeli connections to the "mistakes" we have made in our own war on terrorism if we cannot separate the historical record of Israeli actions from ongoing speculation about Israeli connections made in 911 investigations. Going off on these diversionary tangents merely disrupts the debate about Israeli manipulation of American foreign policy, which is a hostile act that must not go unpunished. The temptation is to go off on side issues such as the "holocaust" or "Jewish supremacy" that are unrelated to stopping Israel's war, only helps to validate charges of "anti-Semitism."

The neocon war plan which flowed outward from the Vice President's office, becoming American foreign policy, began in Israel's Likud Party. Israel's war on terror became the template followed in America's terror war, from the Islamaphobic strategy at its core, to its indiscriminate policy of assassinations using large missiles on crowded streets. The placement of hundreds of neocon ideologues, many of them citizens of both the US and Israel, brought the Likud war plans for America directly into the heart of American government. This amounted to the wholesale infiltration of our government by elements of the Israeli government. This infiltration was by the aggressive party of the expansionist Zionists, the soldier-settlers who are at the center of the current settlement land grab controversy.

If Congress can be pressured into ignoring calls from the White House to attack Iran, because of the deterioration of Iraq, can the people then produce more pressure than the political pressure generated by the Israel lobby? We don't have to produce a revolution to take back our country, we just have to be able to generate irresistible political pressure to wrestle control our Congress from the lobby's hands. You see, they've all got it turned all around. It is we the people who control our government, not the other way around.

Questions like these are all over the Internet, but the answers given to them can only be enacted outside the Web, within the mainstream media. Our small minority cannot affect change of this magnitude without help from the silent majority (sheeple). The fact remains that we will never reach this mute/deaf majority until we get some of these questions into that controlled media. I believe that we will begin to successfully penetrate that media filter whenever we learn how to simplify our questions so that they fit within the boundaries that have been set by political correctness. If we focus on one all-important line of questioning, carefully choosing the words that we use (aimed at stopping the planned escalation of the war), we may avoid causing reactionary responses.

Find the right questions and hammer away at people like Brzezenski,

http://www.youtube.com/watch?v=q9pDY_ny6Qo

or search for the last real newsman, one with a conscience. The point is, the hammering must not stop. There can be no let-up, no peace for the enablers of our dysfunctional government, until they stop their war upon the world.

Cost of Occupation in Iraq: $3 Trillion Estimate Was Too Low

Cost of Occupation in Iraq: $3 Trillion Estimate Was Too Low

By Joseph Stiglitz and Linda Bilmes

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President Bush has tried to give the impression that the $3 trillion dollar estimate of the total cost of the war that we provide in our new book may be exaggerated.

We believe that it is, in fact, conservative. Even the president would have to admit that the $50 to $60 billion estimate given by the administration before the war was wildly off the mark; there is little reason to have confidence in their arithmetic. They admit to a cost so far of $600 billion.

Our numbers differ from theirs for three reasons: first, we are estimating the total cost of the war, under alternative conservative scenarios, derived from the defense department and congressional budget office. We are not looking at McCain's 100-year scenario - we assume that we are there, in diminished strength, only through to 2017. But neither are we looking at a scenario that sees our troops pulled out within six months. With operational spending going on at $12 billion a month, and with every year costing more than the last, it is easy to come to a total operational cost that is double the $600 billion already spent.

Second, we include war expenditures hidden elsewhere in the budget, and budgetary expenditures that we would have to incur in the future even if we left tomorrow. Most important of these are future costs of caring for the 40 percent of returning veterans that are likely to suffer from disabilities (in excess of $600 billion; second world war veterans' costs didn't peak until 1993), and restoring the military to its prewar strength. If you include interest, and interest on the interest - with all of the war debt financed - the budgetary costs quickly mount.

Finally, our $3 trillion dollars estimate also includes costs to the economy that go beyond the budget, for instance the cost of caring for the huge number of returning disabled veterans that go beyond the costs borne by the federal government -- in one out of five families with a serious disability, someone has to give up a job. The macro-economic costs are even larger. Almost every expert we have talked to agrees that the war has had something to do with the rise in the price of oil; it was not just an accident that oil prices began to soar at the same time as the war began.

We have been criticized, but for being excessively conservative, for including only $5 to $10 of the $75 to $85 increase in the price of oil since then. Money spent on the war -- on a Nepalese contractor working in Iraq -- does not stimulate the economy as much as money spent on hospitals or research or schools at home. These contractionary effects were temporarily covered up, hidden, by the flood of liquidity and lax regulations that led to a housing bubble and a consumption boom - with household savings plummeting to zero. But this simply postponed paying these costs - and increased them.

With the exception of a few lonely surviving supply-siders, most economists believe that deficits matter, and the huge deficits to finance the war will have their toll in the long run. Deficits matter in both the short run and the long. They help crowd out private investment that would have stimulated the economy far more than the war expenditures; and the reduced investments reduce long-run productivity. With 40 percent of the funds borrowed from abroad, Americans will be sending interest payments abroad -- lowering living standards at home. Finally, even Fed Chair Bernanke (formerly the president's economic adviser) admits that the deficits have reduced the room to manoeuvre -- the ability of the government to respond to the looming economic crisis.

Spending so much on the war has economic consequences, even if you don't think there is any connection between the war and the economy's current woes.

In adding up the quantifiable costs of the war, it is hard not to come up with a number in excess of $3 trillion. In putting a $3 trillion price tag on the war, we believe we have been excessively conservative - a $4 or $5 trillion tag would be more reasonable. And remember - this is just the cost for America.

Don't Betray Us, General: Admit That Iraq Keeps Getting Worse, And That The Surge Failed

Don't Betray Us, General: Admit That Iraq Keeps Getting Worse, And That The Surge Failed

By Tom Engelhardt

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They came, they saw, they deserted.

That, in short form, is the story of the recent Iraqi government "offensive" in Basra (and Baghdad). It took a few days, but the headlines on stories out of Iraq ("Can Iraq's Soldiers Fight?") now tell a grim tale and the information in them is worse yet. Stephen Farrell and James Glanz of the New York Times estimate that at least 1,000 Iraqi soldiers and policemen, or more than 4% of the force sent into Basra, "abandoned their posts" during the fighting, including "dozens of officers" and "at least two senior field commanders."

Other pieces offer even more devastating numbers. For instance, Sudarsan Raghavan and Ernesto Londoo of the Washington Postsuggest that 30% of government troops had "abandoned the fight before a cease-fire was reached." Tina Susman of the Los Angeles Times offers 50% as an estimate for police desertions in the midst of battle in Baghdad's vast Sadr City slum, a stronghold of cleric Muqtada al-Sadr's Mahdi Army militia.

In other words, after years of intensive training by American advisors and an investment of $22 billion dollars, US military spokesmen are once again left trying to put the best face on a strategic disaster (from which they were rescued thanks to negotiations between Muqtada al-Sadr and advisors to Prime Minister Nouri al-Maliki, brokered in Iran by General Qassem Suleimani, a man on the U.S. Treasury Department's terrorist watch list). Think irony. "From what we understand," goes the lame American explanation, "the bulk of these [deserters] were from fairly fresh troops who had only just gotten out of basic training and were probably pushed into the fight too soon."

This week, with surge commander General David Petraeus back from Baghdad's ever redder, ever more dangerous "Green Zone," here are a few realities to keep in mind as he testifies before Congress:

1. The situation in Iraq is getting worse: Don't believe anyone who says otherwise. The surge-ified, "less violent" Iraq the general has presided over so confidently is, in fact, a chaotic, violent tinderbox of city states, proliferating militias armed to the teeth, competing regions armed to the teeth, and competing religious factions armed to the teeth. Worse yet, under Petraeus and Ambassador Ryan Crocker, the U.S. has been the great proliferator. It has armed and funded close to 100,000 Sunnis organized into militias reportedly intent on someday destroying "the Iranians" (i.e. the Maliki government). It has also supported Shiite militias (aka the Iraqi army). In Basra, it took sides in a churning Shiite civil war. As Nir Rosen summed matters up in a typically brilliant piece in the Nation, Baghdad today is but a set of "fiefdoms run by warlords and militiamen," a pattern the rest of the country emulates. "The Bush administration," he adds, "and the U.S. military have stopped talking of Iraq as a grand project of nation-building, and the U.S. media have dutifully done the same." Meanwhile, in the little noticed north, an Arab/Kurdish civil war over the oil-rich city of Kirkuk, and possibly Mosul as well, is brewing. This, reports Pepe Escobar of Asia Times, could be explosive. Think nightmare.

2. The Bush administration has no learning curve. Its top officials are unable to absorb the realities of Iraq (or the region) and so, like the generals of World War I, simply send their soldiers surging "over the top" again and again, with minor changes in tactics, to the same dismal end. Time.com's Tony Karon, at his Rootless Cosmopolitan blog, caught this phenomenon strikingly, writing that Maliki's failed offensive "shared the fate of pretty much every similar initiative by the Bush Administration and its allies and proxies since the onset of the 'war on terror.'"

3. The "success" of the surge was always an expensive illusion, essentially a Ponzi scheme, for which payment will someday come due. To buy time for its war at home, the Bush administration put out IOUs in Iraq to be paid in future chaos and violence. It now hopes to slip out of office before these fully come due.

4. A second hidden surge, not likely to be discussed in the hearings this week, is now under way. U.S. air reinforcements, sent into Iraq over the last year, are increasingly being brought to bear. There will be hell to pay for this, too, in the future.

5. A reasonably undertaken but speedy total withdrawal from Iraq is the only way out of this morass (and, at this late date, it won't be pretty); yet such a proposal isn't even on the table in Washington. In fact, as McClatchy's Warren Strobel and Nancy Youssef report, disaster in Basra has "silenced talk at the Pentagon of further U.S. troop withdrawals any time soon."

Since April 2003, each administration misstep in Iraq has only led to worse missteps. Unfortunately, little of this will be apparent in this week's shadowboxing among Washington's "best and brightest," who will again plunge into a "debate" filled with coded words, peppered with absurd fantasies, and rife with American symbolism that only an expert like professor of religion Ira Chernus is likely to decipher. "It's time," he writes, while considering the upcoming Petraeus testimony, "to insist that war should be seen not through the lens of myth and symbol, but as the brutal, self-defeating reality it is."

Rice shortages heighten political crisis in the Philippines

Rice shortages heighten political crisis in the Philippines

By Oscar Grenfell

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Rice prices have soared to a 34-year high in the Philippines, exacerbating social and political tensions, and creating more problems for the crisis-ridden regime of President Gloria Macapagal Arroyo amid claims that her government had known of the shortages for more than a month.

Globally, stocks of rice and other foods have plummeted, resulting in a steep rise in prices. Rice has been one of the worst hit with prices jumping 50 percent in the two months to the end of March and at least doubling since 2004. An Associated Press article late last month pointed to concerns that “prices could rise a further 40 percent in coming months”.

An unprecedented cold snap as well as pests and diseases affecting crops in China and South East Asia have had an immediate impact on rice availability, as has recent flooding in the Philippines and Vietnam. Increasing urbanisation, changing land use and shifting patterns of agriculture, including the growing of crops for bio-fuels, are among the underlying reasons for shortages of staples such as rice. Rising prices also have their own dynamic, leading to speculation and the hoarding of rice supplies in the hope of future windfall profits.

Some of the largest rice exporters have limited sales. Vietnam has recently decided to reduce exports by almost a quarter and Cambodia has announced a two-month ban on rice exports. The world’s leading exporter, Thailand, has also begun to control foreign rice sales. India has raised the minimum export price by more than 50 percent and China has begun to import rice.

As the world’s largest importer of rice, the Philippines has been among the hardest hit. Rising prices for rice, along with other food items and oil, led to a sharp jump in the official inflation rate from 2.6 percent in March 2007 to 6.4 percent in March this year. Radio Australia reported late last month that “rice prices in Manila have soared to as high as $1.15 a kilo from as low as 50 cents a kilo a week ago.”

Accusations of incompetence in dealing with the shortages have compounded the political crisis facing President Arroyo. She is already facing allegations of corruption over a national broadband deal and of betraying national interests by signing a deal with Vietnam and China to conduct a joint survey of the disputed Spratly Islands. Her approval rating has slumped to a record low of 23 percent.

Initially, Arroyo tried to deny there was any rice crisis at all, saying it was “a physical phenomenon where people line up on the streets to buy rice. Do you see lines today?”

The leftist peasant organisation, Kilusang Magbubukid ng Pilipinas (KMP), claimed last month, that two secret internal government memoranda dated February 11 and February 27 demonstrate that the Arroyo administration knew of the impending rice crisis since February.

One of the reports cited in an ABS-CBN article included a request for the National Food Authority (NFA) to import an additional 500,000 tonnes of rice. “The registered growth in palay [paddy rice] production is not enough to meet the combined effect of an increase in demand and the need to maintain the required buffer stock by July 1, the start of the traditional lean supply months of July to September of each year,” it stated.

KMP chairman Rafael Mariano told ABS CBN: “As can be seen from the memos Gloria and her regime know that a rice crisis is imminent but it is still fooling the people because she is afraid of her political future, but by doing so she is toying with the lives of at least 68 million Filipinos who earn less than $2 a day.”

Desperate to minimise the political impact, Arroyo has scrambled to secure supplies and to find scapegoats to deflect attention from her administration. Her officials have immediately blamed rice hoarders and unscrupulous traders who have been repackaging low-quality, government-subsidised rice to sell as high quality commercial rice at inflated prices.

Lower house speaker Prospero Nograles declared on April 4 that “smuggling and hoarding by rice cartels should be curbed effectively” and called for tougher legal penalties for illegal price manipulation under the country’s Price Act. Currently penalties of 5 to 15 years prison and fines of 5,000 to 2 million pesos can be imposed. Raids by the NFA and National Bureau of Investigation have taken place across the country over the past week.

Cebu City councillor Sylvan Jakosalem has warned, however, that such actions may be counterproductive. After meeting with rice traders last Friday, Jakosalem pointed out that wholesalers stock up at this time of the year and usually hold back stock to tide them over the lean months from July to August. Without a distinction between stocking and hoarding, traders are reluctant to buy large stocks for fear of prosecution.

Arroyo has also frantically sought to find sources of rice imports, recently securing an agreement from Vietnam to supply around 1.5 million tonnes. In all, the Philippines plans to import around 2.2 million tonnes including from Thailand and the United States. Most imports are currently handled by the NFA, which then provides subsidised rice for the local market. Arroyo called on the finance ministry to draw up a plan to cut tariffs and has announced a doubling of import quotas to encourage private importers—proposals that has already been criticised by local farmers.

Arroyo has also called for cuts to consumption. Agriculture Secretary Arthur Yap announced a plan late last month to encourage restaurants to serve less rice. “We are inviting them to participate in the rice conservation program,” he said. “I’m asking fast food-restaurants to give their customer an option to order a half cup of rice.”

Opposition senator Aquilino Pimentel bitingly remarked: “It reminds me of Marie Antoinette, who shortly before the French Revolution famously said if people had no bread to eat, they should eat cake.”

Millions of working people face food insecurity and hunger. A World Bank update this month found that the proportion of the population living below the poverty line rose between 2003 and 2006 from 30 percent to 32.9 percent despite higher levels of growth. Falling real incomes, compounded by cutbacks in social spending, were the main factors. Other estimates put the poverty rates as high as 40 percent of the population of more than 90 million people.

Rodolfo de Lima, a parking lot attendant, told the Associated Press that if rice prices continued to rise “my family will go hungry.” He added: “If your family misses a meal you really don’t know what you can do....” Another worker Domingo Casarte said: “When people get trapped, I can’t say what they will do.”

Commenting in the Philippine Daily Inquirer, Senator Loren Legarda warned: “Rice is an extremely sensitive political commodity. There is no question a surge in the staple’s price is bound to spur social unrest and political instability.” Already under siege over other scandals, Arroyo is desperately implementing stopgap measures to try to avert an eruption of popular anger.