Friday, June 6, 2008

Risk of a Raw Materials Bubble

Risk of a Raw Materials Bubble

by: Nicolas Madelaine, Les Échos

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Without necessarily denouncing, as some have done, the "vile speculators who starve millions of the poor," one may legitimately wonder: aren't financial investors making the prices of foodstuffs and oil climb artificially? In spite of the assurance from financial milieus - which maintain that speculators merely go along with increases essentially due to the progress of physical supply and demand - this question is justified. For the debate is far from being settled.

At the end of May, fascinating hearings organized around this theme in the American Senate rather left the impression that a new type of financial investor is playing a big role in the present raw materials price explosion. So it was interesting to note the defensive posture of the chief economist for the Commodity Futures Trading Commission (CFTC), the American regulator for derivatives products. If, according to him, "our studies do not support the thesis [of speculators' influence]," he peppered his testimony with appeals for proof of the opposite. Witness for the opposing view Michael Masters, a hedge fund manager no longer active in these markets, pulled no punches. "My answer to the question you ask is, yes, unequivocally," he declared before asking pardon from those in his profession who might feel "disappointed" by his positions.

What are the arguments of the two sides? The CFTC side emphasizes that speculators - non-commercial market participants in the regulator's typology - do not represent a more significant share of the total trades on the markets involved than they previously did. Along these lines, all the studies conducted by this authority show that speculators follow, rather than provoke, a trend: they generally invest just after a price rise has been set in motion. Moreover, the markets for certain foodstuffs in which speculators do not invest have also mounted. Finally, still according to the CFTC, funds betting on a price rise and funds anticipating a price drop are about equal in number, at least so far as oil and wheat are concerned.

The opposing side showcases the appearance of a new category of investors on these markets - sovereign funds, pension funds, university foundations and other types of institutional investors. In search of advantageous investments following the bursting of the Internet and real estate bubbles, as well as of protection against inflation, they are massively investing in raw materials. According to figures cited by Michael Masters, their allocations reserved for that category went from $13 billion in 2003 to ... $260 billion in March 2008. And, according to that hedge fund manager, their demand on the oil market has grown by around 848 million barrels a year over the course of the last five years, or the equivalent of the growth in Chinese demand. They also are supposedly holding enough wheat to make all the bread, pasta and baked goods that Americans will swallow over the course of the next two years. Their impact on the market will be all the greater for their very long-term investment practices and their coverage of their exposure through derivative instruments.

It is, in fact, quite difficult to imagine, when big investment banks like Morgan Stanley boast in their marketing materials for clients about the merits of raw materials in an asset allocation strategy, that there's no impact on prices. For Andrew Clare, professor at London's Cass Business School and former chief economist for asset management at Legal and General, the impact of speculation is obvious. His models show that it has increased the price of oil by 30 to 40 percent and there are no reasons, he believes, why foodstuff prices should not, on average, be affected to the same degree.

How, then, should the CFTC, which studies the participants in these markets and assures that manipulation does not disturb them, have failed to identify this new type of investor? Because investment banks are authorized to intervene in the futures markets for the account of investors with which they place transactions by mutual agreement. And they do so virtually without limits, since these position-takings have been counted since 1991 as emanating from "commercial" investors, notes the Michael Masters camp. So, not only are these transactions not identified as emanating from non-commercial investors, but they are also not subject to any ceiling.

It remains to be known whether speculation poses a real problem should it prove that it does have a major impact on raw materials prices. The negative connotation of the term "speculate" cannot make us forget that etymologically this term means "to see far." Now it seems obvious that as of now we must get used to much higher oil and food prices than those that obtained in the past, and for fundamental reasons: the growth of emerging countries, climate [change], the increase in ethanol production, etc. The subprime crisis illustrates the weakness of this line of reasoning by reminding us that bubbles form quickly. And that their bursting causes serious damage. After the Internet and risky American real estate loans, an irrational exuberance is perhaps now taking possession of the raw materials markets. Now, the markets for foodstuffs are among those most vulnerable to the hazards of finance. Already today, small farmers, for whom there is no doubt that the new financial market entrants have changed everything, complain about having to work three more hours a day to understand the erratic developments of the complex derivative products that affect their commodities. They are all the more boxed in, in that the transformers who want to buy their harvests want less and less to acquire them for the future, before seeding time, since the risks of a price drop are high. The balance between short-term speculators and actors in this business, which prevailed rather harmoniously on the markets for agricultural products, is now disturbed.

Another reason to deplore the disturbances linked to financial investors is that agricultural commodities are not stocks and bonds. They affect the survival of certain populations. Even if it is not obvious how to correct possible imbalances provoked by finance without provoking still worse ones, it is important to continue to look into the question of the impact of financial investors on the markets. At least for agricultural commodities. The CFTC, which has increased its declarations to this effect in recent days, tends to confirm this conclusion.

A Tale of Two Conservatives: Comparing Bush and Hoover on the Economy

A Tale of Two Conservatives

Comparing Bush and Hoover on the Economy

SOURCE: National Archives (Left), AP (Right)

An examination of President Bush and Herbert Hoover, the president who helped steer the economy into the Great Depression, shows interesting similarities.

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It may seem premature to compare President George W. Bush to Herbert Hoover, the president who helped steer the economy into the Great Depression in 1929, and then presided over steady economic deterioration until the end of his term in 1933. After all, the current economic downturn under President Bush's watch hasn't even officially been declared a recession, while under Hoover the United States experienced four straight years of severe economic decline.

Yet close inspection of the economic track records and ideology of these two presidents reveals that they are quite similar. Both presided over a suddenly deteriorating economy yet resisted taking action to prevent further economic losses. Both believed the market would naturally self-correct, and that government intervention would be harmful. And both took limited government action once it became clear that it was needed—to help businesses, rather than working families—to weather the storm.

There are certainly areas, of course, where the comparison does not fit. And any comparison will inevitably reveal that in some cases President Bush's record is much better and in others that Hoover's legacy is tarnished by such comparisons. We'll explore some of those policy differences and similarities, but first a straight-up comparison of broad economic trends under the two presidents is in order.

Economic Performance

The broadest of economic indicators, gross domestic product, fell dramatically under President Hoover, dropping to $643.7 billion (measured in 2000 dollars) in 1932, his last year in office, from $865.2 billion in 1929. President Bush's record on this score doesn't compare, with GDP growing at an average pace of 2.4 percent each year over the first seven years of his administration. This year, however, may well tell another story, with anemic GDP growth in the first quarter of 0.9 percent, and expectations of negative growth in the second quarter.

But if we look underneath the broad GDP figures at the housing and labor markets, and at average income and income inequality—the economic areas with the greatest effect on the standard of living of working families—we find notably poor performances under both presidents. Indeed, in some cases President Bush's legacy is already worse than Hoover's, which is something of a feat given the severity of the early Depression years.

Housing

Under both presidents, housing foreclosures rose rapidly—even more rapidly under Bush than Hoover. Housing starts also fell significantly, though to a much greater degree under Hoover than Bush.

Housing starts fell by 79 percent under President Hoover, declining from 105,000 in 1929 to just 22,500 in 1932, at the end of Hoover's term. Under President Bush, housing starts fell by 16 percent from 2001 to 2007, declining from 1,600,000 to 1,350,000, though from 2005 to 2007, a more severe decline of 35 percent occurred.

Foreclosures under Hoover increased by 84 percent between 1929 and 1932. Under Bush, foreclosures increased by 45 percent from 2001 to 2007. From 2005 to the end of 2007, however, foreclosures more than doubled under President Bush (see chart and table below). Foreclosures are expected to continue to grow in 2008. During the Great Depression, the displaced worker camps that resulted from mass unemployment were popularly referred to as Hoovervilles. President Bush's housing record may soon make "Bushvilles" the appropriate term for the suburban and exurban developments, formerly home to large concentrations of subprime borrowers who are now faced with an extremely high number of foreclosures.

Employment

The unemployment rate under Hoover rose dramatically, to 24.1 percent in 1932 from 3.2 percent in 1929. Under President Bush, unemployment has generally remained at a little bit under 5 percent, starting at 4.7 percent in 2001 and finishing 2007 at 4.6 percent, though it did rise to 6.0 percent in 2003. Under President Hoover, employment fell by 8 million jobs, while under President Bush employment fell by 1.8 million jobs between 2001 and 2003, then rebounded through the end of 2007, and created a total of 5.3 million jobs.

While President Bush's labor market record is generally much better than Hoover's, the employment comparison is relevant because President Bush has presided over the worst annual job creation record of any president since Hoover (see chart and graph below). Most presidents in the 20th century have created jobs at an annual rate of between 2 percent and 4 percent. Hoover lost jobs at an annual rate of 4.4 percent, making him the only president to preside over an economy that actually lost jobs. While President Bush has not lost jobs, he created jobs at an annual rate of only 0.7 percent through the end of 2007—a record slightly worse than his father, who previously held the second-worst record. When employment figures through April 2008 are included, Bush's record is even worse, creating jobs at an annual rate of 0.58 percent.

Income of Average Americans

The average income of most Americans—the bottom 90 percent—fell dramatically during the Hoover administration, to $6,688 in 1932 from $10,847 in 1929 (measures in consistent 2006 dollars), a drop of 38 percent. Under the Bush administration this same group of American wage earners saw their average income drop to $32,080 in 2006 from $32,371 in 2001, a drop of 0.9 percent (see table below).

While the drop in average income during the Bush administration has been obviously less severe than that of the Hoover era, it is one of only three instances since the end of the Great Depression in which average income for most Americans has decreased during a president's tenure. Average income also dropped during the presidencies of Jimmy Carter and George H. W. Bush.

But there is one key difference between the trends in average income under Presidents Hoover and Bush. In the Hoover years, people of all incomes experienced income declines, but in the Bush years the top 10 percent of income earners boosted their income while the rest of the country experienced a decline. Between 1929 and 1932 the average income of the top 10 percent of wage earners fell to $52,026 in 1932 from $76,625 in 1929, a decline of 32 percent, or roughly the same percentage decline experienced by all other Americans over the same period. In contrast, between 2001 and 2006, the average income of the top 10 percent of wage earners increased to $254,296 in 2006 from $221,115 in 2001, an increase of 15 percent. This makes President Bush the first president since 1917 (the first year for which data is available) under which the average income of the wealthiest Americans went up while the average income of everyone else went down.

Income Inequality

Income inequality in the Bush years has grown to levels above even those during the Depression era. The average income of the top 10 percent of America's wage earners today is now nearly eight times the bottom 90 percent. Under President Hoover, income inequality, as measured by the ratio of the average income of the top 10 percent compared to the average income of the bottom 90 percent, rose from 7.1 percent in 1929 to 7.8 percent in 1932. Under President Bush the rise in inequality has been even greater, with the ratio rising from 6.8 percent in 2001 to 7.9 percent in 2006, the most recent year the data is available. These periods of high-income inequality sharply contrast the period 1942–1987, when the ratio of top incomes to the incomes of most Americans never exceeded five.

The Presidents Respond to the Economy

A deteriorating economy under Hoover and now under Bush is due in large part to a lack of action by both presidents. In both cases, their refusal to act was motivated by a hands-off economic ideology and an unconditioned faith in the power of the market to self-correct. The little action taken by both leaders either lacked the force necessary to avert an economic downturn or was aimed at helping businesses rather than individuals.

President Hoover's economic policy took three basic forms:

  • Influencing the economy through voluntary coordination with businesses rather than ƒ direct government action
  • Opposition to direct assistance to individuals ƒ
  • Government aid to protect businesses from the effects of the Great Depression ƒ

All three policy positions and policy actions did little or nothing to help brake a falling economy throughout Hoover's term in office.

Hoover's preference for voluntary coordination resulted in a summit at the end of 1929 at which he asked industry to voluntarily maintain employment levels and asked labor not to ask for higher wages. This commitment to voluntary, market-based solutions also led Hoover to create the National Credit Corporation, a group of large banks which he asked to make emergency credit available to failing financial institutions. Both voluntary efforts were unsuccessful, largely because Hoover refused to mandate compliance.

Hoover's unwillingness to offer direct federal aid to workers displaced by the Depression was due to his belief that such assistance would destroy "American Character" and personal initiative. His intransigence culminated in his veto of the Garner-Wagner relief bill, which would have provided funds for the establishment of state unemployment services. Hoover also considered public works projects to be an unacceptable government handout if they involved direct expenditure by the U.S. Treasury.

While he supported such projects if funded by private, state, or local loans, he refused to offer federal grants when these sources of capital dried up. By the summer of 1932, however, Hoover relented a bit, signing the Emergency Relief Construction Act, which allowed a small amount of federal money to be spent on public works. Still, he never dropped his total opposition to direct relief to the unemployed.

Hoover's position on assisting business could not have been more different. Believing that the economic system of the day was fundamentally sound, Hoover thought that the only reform necessary was the creation of credit pools to shield banks and businesses from the downturn. This belief was behind the creation of the voluntary National Credit Corporation. When this venture failed, Hoover replaced it (despite his opposition to federal involvement in such matters) with a government entity, the Reconstruction Finance Corporation, which also supplied at-risk financial institutions with capital, but this time from a pool of federal rather than private funds.

That Hoover was willing to allow the federal government to step in when cooperation failed highlights his commitment to helping businesses, but not individuals, during the Great Depression.

These later decisions to help businesses directly and toss a little federal money into public works projects, however, were more than offset by Hoover's determination to cut government spending as the Depression accelerated late in his term. Committed to preserving the gold standard at all costs, Hoover offset falling government revenues with budget cuts. These spending cuts, along with Hoover's reluctance to provide federal funds for public works projects, deprived the economy of needed stimulus, increasing the length and severity of the Great Depression.

While President Bush in 2008 did sign into law an economic stimulus package that provided tax rebates to individuals—indicating his willingness to, on some occasions, provide direct assistance to individuals—his overall response to the current economic downturn follows the conservative logic employed by Hoover.

Bush's HOPE NOW Alliance program, under which private home mortgage lenders, investors, and mortgage service companies are asked to voluntarily work with borrowers to help them avoid foreclosure, is strikingly reminiscent of Hoover's voluntary policies. The fact that the HOPE NOW Alliance isn't working very well and yet President Bush continues to resist more direct government action is akin to Hoover's position as the economy in his era turned sharply south.

Another similarity: the Bush administration's successful opposition to the extension of unemployment insurance benefits during negotiations over this year's stimulus package, which is reminiscent of Hoover's opposition to direct relief for workers. And then there's the extension of a $29 billion line of credit by the Federal Reserve to JP Morgan Chase & Co. in March, 2008 to finance its emergency acquisition of failing Wall Street investment bank Bear Sterns Cos. This move, which was supported by Bush's Treasury Secretary Henry Paulson, was similar to Hoover's efforts to help businesses through the National Credit Corp. and later, the Reconstruction Finance Corp.

Bush's concern for "Wall Street over your street" mirrors Hoover's policy of helping businesses rather than working families.

While more time and perspective are needed to judge the depth of the current economic downturn and the merits of President Bush's policy choices, comparisons between Bush and Hoover already indicate many similarities. Though Presidents Hoover and Bush are different men who faced different economic challenges, a review of their performance and ideology indicates that history is likely to link the two men.

Read the report with full graphs (pdf)

The Derivatives Market is Unwinding!

The Derivatives Market is Unwinding!

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A couple of months ago, a financial analyst who sells derivatives told me that fears about a meltdown in the derivatives market were unfounded.

Yesterday, he told me - with a very worried look - "THE DERIVATIVES MARKET IS UNWINDING!"

What does this mean? What are derivatives and why should you care if the market is unwinding?

Well, it turns out that the reason that Bear Stearns was about to go belly-up before JP Morgan bought it is that it had held trillions of dollars in derivatives, which were about to go south. (The reason that JP Morgan was so eager to buy Bear Stearns is that it was on the other side of these derivative contracts -- if Bear Stearns had gone under, JP Morgan would have taken a huge hit. But the way the derivative agreements were drafted, a purchase by JP Morgan canceled the derivative contracts, so that JP Morgan didn't experience huge losses. That is probably why the Fed was so eager to broker - and fund - the shotgun marriage. JP Morgan is a much larger player, and if Bear's failure had caused the derivatives hit to JP Morgan, it probably would have rippled out to the whole financial system and potentially caused an instant depression).

In addition, the subprime prime loan crisis is intimately connected to the unwinding of the derivatives market. Specifically, loans were repackaged into derivatives called collateralized debt obligations (or "CDO's") and sold to both big and regional banks and investment companies worldwide. The CDO's were highly-leveraged -- many times the amount of the actual loans. When the subprime loan crisis hit, the high leverage magnified the fallout, and huge sums of CDO derivatives became essentially worthless.

Do you remember when wealthy Orange County, California, went bankrupt in 1994? Yup, that was because it had invested in bad derivatives.

And, according to a recent article by one of the world's top derivative insiders, the market for credit default swap ("CDS") derivatives is also unraveling.

And reported just today, Lehman Brothers is now on the edge, due to exposure to derivatives.

Derivatives are the Elephant in the Living Room

The subprime mortgage crisis is bad, and is hurting many people, and slowing the economy. High oil and food prices are bad, and are hurting many people, and bringing down the economy. But -- according to top insiders -- derivatives are the elephant in the room . . . the single largest threat to the U.S. and world economy.

One reason is that, according to Paul Volcker, the former chairman of the Federal Reserve, the entire modern financial system is based upon derivatives, and the financial system today is entirely different from the traditional American or global financial system because derivatives - a relatively new concept - now underly the entire fabric of the financial system. In short, many of the people who know the most about derivatives say that the current system is a house of cards built upon derivatives.

Moreover, as mentioned above, the subprime and derivatives crises are closely linked. Similarly, Britian's New Statesman newspaper links derivatives and rising food and commodity prices:

"This latest food emergency has developed in an incredibly short space of time - essentially over the past 18 months. The reason for food "shortages" is speculation in commodity futures following the collapse of the financial derivatives markets. Desperate for quick returns, dealers are taking trillions of dollars out of equities and mortgage bonds and ploughing them into food and raw materials. It's called the "commodities super-cycle" on Wall Street, and it is likely to cause starvation on an epic scale.

The rocketing price of wheat, soybeans, sugar, coffee - you name it - is a direct result of debt defaults that have caused financial panic in the west and encouraged investors to seek "stores of value". These range from gold and oil at one end to corn, cocoa and cattle at the other; speculators are even placing bets on water prices."

Hiding the Ball

And yet banks and financial houses have hidden their derivatives exposure off the balance sheets. No wonder almost no one understands derivatives:

"Not only [world's richest man] Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't 'figure out'" the derivatives market.
Indeed, the government may have actively helped to hide the the derivatives mess since at least 2006. For example, according to Business Week:
"President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations."
Former fed chairman Alan Greenspan has been a huge booster for and defender of derivatives since 1999 or before (and see this). Did you know that the same guy that pushed subprime loans has also aggressively pushed derivatives for many years?

And the other regulatory agencies and Congress have taken a totally hands-off approach towards derivatives.

How Big a Problem?

How big is the derivatives market? Worldwide, it is $596 TRILLION dollars *. The derivatives market dwarfs the real market for goods and services, and acts likes an unregulated black market.

As one writer put it:
"It’s all smoke and mirrors. The financial system has decoupled from the productive elements of the economy and is now beginning to show disturbing signs of instability."
And its not just the U.S. Derivatives salesmen have sold these babies all over the world. Because banks, financial institutions and governments world-wide have bought significant derivatives, the fall out will not be limited solely to the U.S. See this and this.

If the derivatives market is truly unwinding, as my investment advisor friend and some of the top industry insiders say, we could be in for a very bumpy ride.

For further information on derivatives, see these articles:

http://www.global-derivatives.com/index.php?option=com_content&task=view&id=185
http://en.wikipedia.org/wiki/Derivative_%28finance%29
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/17/cnlibor117.xml

* This is the "notional value". The actual amount of potential losses from a meltdown in the derivatives market is smaller, although still very large.

Oil Surges More Than $9 a Barrel to Record

Oil Rises to Record on Weakening Dollar, Morgan Stanley Outlook

By Robert Tuttle

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Crude oil rose more than $9 to a record as the dollar weakened after the U.S. unemployment rate grew the most in two decades and Morgan Stanley said prices may reach $150 within a month.

Oil may ‘‘spike'' because ‘‘Asia is taking an unprecedented share'' of Middle East exports, Morgan Stanley analyst Ole Slorer wrote. The dollar weakened against the euro after the unemployment rose to 5.5 percent, signaling the Federal Reserve may be reluctant to increase interest rates. Oil also rose after an Israeli minister said an attack on Iran may be necessary.

Oil is ‘‘being used as a hedge by speculative buyers for the weakened dollar,'' said Gary Adams, vice chairman of oil and gas consulting at Deloitte & Touche LLP in Houston. ‘We are seeing that the price will continue to go up as investors look for alternatives.''

Crude oil for July delivery rose $9.54, or 7.5 percent, to $137.33 a barrel at 1:20 p.m. on the New York Mercantile Exchange after touching a record $137.70. Prices rose as much as 7.8 percent, the biggest one-day gain since Dec. 26, 1991. Oil has more than doubled in the past year.

Shaul Mofaz, Israel's transportation minister and a contender for the post of prime minister, told the Yediot Ahronot daily newspaper that Israel will have to attack Iran if it doesn't abandon its nuclear-development program.

‘‘The Iranian risk premium which had left the market for some time is likely to return and hover over the market in the next few weeks,'' said Antoine Halff, head of energy research at Newedge USA LLC in New York. ‘‘The knee jerk reaction to the comments by Mofaz will wear off quickly because Israel would not broadcast its intention in this fashion.''

Brent Oil

Brent crude oil for July settlement rose $8.27, or 6.5 percent, to $135.81 a barrel on London's ICE Futures Europe exchange after reaching a record $137.35.

The dollar weakened against the Euro today after the Labor Department said U.S. payrolls fell by 49,000 after a 28,000 drop in April. The jobless rate increased by half a point to 5.5 percent, the biggest increase since 1986 and higher than every forecast in a Bloomberg News survey.

The dollar decreased 0.9 percent to $1.5728 per euro at 12:08 p.m. in New York, from $1.5593 yesterday.

Unemployment Increase

Rising unemployment ‘‘is going to lead to a drop in the dollar and higher commodity prices,'' said Phil Flynn, a commodities trader for Chicago-based Alaron Trading. The Fed will be ‘‘less aggressive in raising interest rates.''

The dollar fell against the euro yesterday after European Central Bank President Jean-Claude Trichet said the bank may raise rates next month.

Oil has risen to records this year partly because investors have turned to commodities as a hedge against the weakening dollar.

Current shipping patterns suggested that U.S. benchmark West Texas Intermediate crude oil may reach $150 a barrel by July 4, Morgan Stanley's Slorer said in his report.

BNP Paribas SA, France's biggest bank, boosted its 2008 oil outlook by 19 percent to $124 on climbing Asian demand for diesel fuel and kerosene to generate electricity and run buses and trucks.

The market ‘‘is underpinned by demand, which is totally different than 1973 and 1979'' when supply cuts caused prices to surge, said Ray Carbone, president of Paramount Options Inc. in New York. Oil's rise is linked to ‘‘supply and demand. Nobody wants to admit it, too bad.''

Chevron in Nigeria

Workers at Chevron Corp. in Nigeria may strike, a union official said. Chevron has yet to respond to worker demands that the head of the Nigerian unit be replaced, said Ethelbert Uka, treasurer of the Petroleum and Natural Gas Senior Staff Association of Nigeria. Daily production of about 450,000 barrels of crude oil may be threatened, the Lagos-based newspaper Vanguard reported earlier.

Rising oil prices prompted Congress to hold hearings this week on possible energy price manipulation. Congressional leaders are pushing the Commodity Futures Trading Commission, the futures-market regulator, and other agencies to step up efforts to oversee the markets as gasoline as pump prices touch records.

Billionaire investor George Soros told Congress an oil price ‘‘bubble'' is working with fundamentals in the market that may lead to a recession in the world's largest economy.

Federal Reserve Holds Iraq's $50bn Hostage With Military Deal

US issues threat to Iraq's $50bn foreign reserves in military deal

By Patrick Cockburn

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The US is holding hostage some $50bn (£25bn) of Iraq's money in the Federal Reserve Bank of New York to pressure the Iraqi government into signing an agreement seen by many Iraqis as prolonging the US occupation indefinitely, according to information leaked to The Independent.

US negotiators are using the existence of $20bn in outstanding court judgments against Iraq in the US, to pressure their Iraqi counterparts into accepting the terms of the military deal, details of which were reported for the first time in this newspaper yesterday.

Iraq's foreign reserves are currently protected by a presidential order giving them immunity from judicial attachment but the US side in the talks has suggested that if the UN mandate, under which the money is held, lapses and is not replaced by the new agreement, then Iraq's funds would lose this immunity. The cost to Iraq of this happening would be the immediate loss of $20bn. The US is able to threaten Iraq with the loss of 40 per cent of its foreign exchange reserves because Iraq's independence is still limited by the legacy of UN sanctions and restrictions imposed on Iraq since Saddam Hussein invaded Kuwait in the 1990s. This means that Iraq is still considered a threat to international security and stability under Chapter Seven of the UN charter. The US negotiators say the price of Iraq escaping Chapter Seven is to sign up to a new "strategic alliance" with the United States.

The threat by the American side underlines the personal commitment of President George Bush to pushing the new pact through by 31 July. Although it is in reality a treaty between Iraq and the US, Mr Bush is describing it as an alliance so he does not have to submit it for approval to the US Senate.

Iraqi critics of the agreement say that it means Iraq will be a client state in which the US will keep more than 50 military bases. American forces will be able to carry out arrests of Iraqi citizens and conduct military campaigns without consultation with the Iraqi government. American soldiers and contractors will enjoy legal immunity.

The US had previously denied it wanted permanent bases in Iraq, but American negotiators argue that so long as there is an Iraqi perimeter fence, even if it is manned by only one Iraqi soldier, around a US installation, then Iraq and not the US is in charge.

The US has security agreements with many countries, but none are occupied by 151,000 US soldiers as is Iraq. The US is not even willing to tell the government in Baghdad what American forces are entering or leaving Iraq, apparently because it fears the government will inform the Iranians, said an Iraqi source.

The fact that Iraq's financial reserves, increasing rapidly because of the high price of oil, continue to be held in the Federal Reserve Bank of New York is another legacy of international sanctions against Saddam Hussein. Under the UN mandate, oil revenues must be placed in the Development Fund for Iraq which is in the bank.

The funds are under the control of the Iraqi government, though the US Treasury has strong influence on the form in which the reserves are held.

Iraqi officials say that, last year, they wanted to diversify their holdings out of the dollar, as it depreciated, into other assets, such as the euro, more likely to hold their value. This was vetoed by the US Treasury because American officials feared it would show lack of confidence in the dollar.

Iraqi officials say the consequence of the American action was to lose Iraq the equivalent of $5bn. Given intense American pressure on a weak Iraqi government very dependent on US support, it is still probable that the agreement will go through with only cosmetic changes. Grand Ayatollah Ali al-Sistani, the immensely influential Shia cleric, could prevent the pact by issuing a fatwa against it but has so far failed to do so.

The Grand Ayatollah met Abdul Aziz al-Hakim, the leader of the Islamic Supreme Council of Iraq (ISCI), which is the main supporter of the Iraqi government, earlier this week and did not condemn the agreement or call for a referendum. He said, according to Mr Hakim, that it must guarantee Iraqi national sovereignty, be transparent, command a national consensus and be approved by the Iraqi parliament. Critics of the deal fear that the government will sign the agreement, and parliament approve it, in return for marginal concessions.

Soaring diesel hurts truckers

Soaring diesel hurts truckers

Many are parking their rigs - or going bankrupt

BY MIKE BOYER

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Lance Weaver has been a trucker for more than a decade.

"It's a pretty good way to make money," said Weaver, 30, an owner-operator for Ace Doran Hauling & Rigging Co. in Northside. "You have your independence, and you've always got a change of scenery."

Lately, that independence is a lot more expensive as diesel fuel prices, driven by rising crude oil prices and growing worldwide diesel demand, have soared nearly 70 percent in the last year, outpacing even the sharp run-up in gasoline prices.

As painful as a fill-up is for motorists, it's even more bracing for truckers like Weaver.

His 2006 Mack Vision has twin 130- gallon tanks. At today's diesel prices, it costs more than $1,200 for a fill-up, about $500 more than this time last year. Weaver said his rig has been averaging under 5.5 miles to the gallon.

"Rates and fuel surcharges have gone up (in the last year), but not enough to offset the increase in fuel costs," he said.

Because trucks haul about three-fourths of all freight, rising diesel prices "have the potential to increase the cost of everything Americans consume," said Tiffany Wlazlowski, spokeswoman for the American Trucking Associations in Washington. The industry spent $112 billion on fuel in 2007 and is on a pace to spend $154 billion this year, she said.

"It's brutal out there," said Kerry Byrne, executive vice president of Total Quality Logistics, the fast-growing freight brokerage firm in Union Township.

Freight volumes are down with the slowing economy, but that's more than offset by rising fuel prices that are forcing some trucking companies out of business and some independent truckers to park their rigs. The only upshot is "nobody's winning," said Byrne.

"Whoever is paying at the pump is getting squeezed," said Dan Doran, president of family-owned Ace Doran, which has more than 400 owner-operators like Weaver under contract and also operates a brokerage service.

"Fuel used to be our second-biggest expense after payroll, now it's the largest," said Sandra Ambrose, CEO of ESJ Enterprises, a Finneytown-based brokerage and motor carrier. "Our cash outlay for fuel has almost doubled in the last few months.''

At the same time, a slowing economy has many shippers taking longer to pay their bills.

"Instead of paying in 30 or 33 days, it's now more like 45 to 47 days," she said. "It creates cash-flow issues for us. You can't put receivables in the fuel tank."

In the first quarter of this year 935 trucking companies, about 2 percent of the nation's total, filed for bankruptcy, the highest level since 2000-2001, according to Donald Broughton, trucking analyst with St. Louis-based Avondale Partners. Last month, Jevic Transportation Inc., a less-than-truckload carrier, which operated a terminal in West Chester, closed and filed for bankruptcy.

"Trucking companies are dropping like flies," said Ambrose, "because they need so much cash."

LESS FREIGHT TO MOVE

The status of independent owner-operators like Weaver is harder to pin down. Norita Taylor, spokeswoman for the Kansas City-based Owner-Operator Independent Drivers Association, estimates as many as 10 percent of her association's 162,000 members have parked their trucks, sold them or taken other off-road jobs.

"There's no shortage of trucks,'' she said. "With the economy slowing down, there's less freight to move."

It's also affecting drivers such as Clarence "Junior" Angel, 42, of Middletown, who are paid by the hour. Angel, who picks up and delivers storage containers for Benedict Enterprises in Middletown, said his hours are down because the company is making fewer deliveries.

"I used to work until 6 or 7 p.m., but now I'm off at 3:30 p.m.," he said after fueling his truck in Franklin last week. "I figure it's costing me $200 a week."

With trucking industry deregulation about a decade ago, fuel surcharges - to cover increasing fuel costs on top of regular line haul rates - have become accepted industry practice. But there's no legal requirement for trucker brokers, who arrange hauls between truckers and shippers, to pass the full surcharge on to the trucker.

"It puts a disproportionate burden on independent owner-operators," said Taylor. "They need cash flow to make truck payments and pay their bills, even though they're losing money."

PASSING THE SURCHARGE ON

Many brokerages such as Doran and ESJ make a point of passing the full surcharge on to the trucker.

"We make sure our trucks get from Point A to Point B," said Doran, who said he's heard of cases where shipments are stranded short of their destination because the independent trucker has maxed out his electronic advance or credit card and can't buy more fuel.

Charlie Roberts, 51, who's been a trucker since he got out of the Navy in 1980, said Doran's policy of paying the full surcharge to the driver has kept him on the road.

"Without the surcharge, I'd be out of business now," he said after making a delivery in Lebanon last week.

It's not just fuel, said Roberts, there's the monthly payment on his truck and trailer and operating expenses: Tires cost $440 each, insurance is $375 a month, plus annual license and permit fees.

"I like the independence," he said. "But there's a cost that comes with it."

Currently single, Roberts has been married three times. Why?

"Because I wasn't home. There's no family life," said Roberts, who was on the road 25 of the first 28 days in May. "I've been in every state, in every season, several times. It's a beautiful country. But if I had it to do over, I would do something else."

Weaver, who's worked for Doran for five years, hauling steel and heavy equipment from Alabama to Wisconsin and everywhere in between, said, "I've been offered other jobs in the last few months.

"I'm not too interested," said Weaver, who also is single. "I figure I'll tough it out. There will always be a need for truckers because stuff has always got to be moved."

Record numbers using food stamps in Ohio, Michigan

Record numbers using food stamps in Ohio, Michigan

By Charles Bogle

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Nationally, the number of people using food stamps is due to reach 28 million by next year, tying a record for the program set in 1994. As one might expect, the number of people using food stamps in economically devastated Michigan and Ohio is particularly high; more than 1.25 million—a record number—of Michigan residents now receive food assistance, while the 1.1 million Ohio residents using food stamps represent a doubling of the number since 2001. The latter figure does not include the estimated 500,000 people who are eligible for food stamps but have not signed up.

These numbers are truly appalling, especially when one discovers that many of those who are either receiving or eligible to receive food stamps are employed. For example, the poverty threshold for a two-adult, two-children family is the grossly inaccurate figure of $20,444; to be eligible for food stamps, a person’s gross income must be less than 130 percent of that figure, or $26,250. According to “The Real Bottom Line,” an Ohio study on poverty, the majority of that state’s families meeting this requirement are employed. While current figures for Michigan are unavailable, one can safely assume a similar finding.

Between 2000 and 2007, Ohio lost more than 209,000 non-farm jobs—the largest proportionate decline in employment since the end of the Great Depression, according to an analysis by the American Manufacturing Trade Action Coalition reported earlier this year in the Cleveland Plain Dealer.

Employment in the state dropped by 3.7 percent, the biggest seven-year drop since the period starting in 1939, near the end of the Depression and including the years the US military absorbed millions of American workers to fight World War II.

Only Michigan lost a greater proportion of its employment during the period—9.1 percent or 431,000 jobs. This included more than 150,000 jobs in the auto industry.

Rapidly rising food prices, gas and other living expenses exacerbate the problems for those who do have work; but as the figures on the growth of food stamp usage demonstrate, many jobs simply are not paying enough. In 2007, about a quarter of Ohio’s workforce, or 1.1 million people over 18, earned less than $10 an hour. Nationally, almost 33 million workers—almost one fourth of the workforce—make less than $10 an hour.

As Roberta Garber, executive director of Ohio’s Community Research Partners, told the Toledo Blade, “It is a misconception that people who are poor don’t work. Somebody can be in a job making $10 an hour, and if they work full-time, they will still be below the poverty level.”

A case in point is 32-year-old Antoinette Robinson of Toledo, Ohio. Although she works full time at Rite-Aid, she makes only $7 an hour, and the $503 she receives for food stamps represent the majority of the food budget for her and her four children, according to the Blade.

Hovering over these chilling facts is the bleak promise of poverty- or near-poverty-level wages spreading to jobs that have traditionally offered good pay and benefits. The contract signed by the United Auto Workers union after its betrayal of the recently concluded three-month American Axle strike makes this clear. The wages of those who remain at American Axle (more than half will lose their jobs) will be cut from $28.00 an hour to between $14.00 and $18.00 an hour, while starting pay for new hires will be dropped to $11.50 an hour.

The automobile industry has traditionally established the wage and benefit pattern for other occupations, private as well as public. During the post-World War II boom, American industry faced little competition and ruled the markets. As a result, industrial workers were able to win decent wages and benefits, establishing a similar pattern for other occupations, both private and public.

The increasing challenge to US industrial dominance from Japan and Europe resulted in lower profit margins for American industry, leading to the financial interests’ policy of deindustrialization as a means of increasing capital for financial speculation. At the same time, the auto companies increasingly shifted production to low-wage regions. Consequently, the working class has experienced the loss of millions of good-paying jobs and a devastating attack on their standard of living.

Now, even the remaining industrial jobs will offer little better than poverty-level wages, and other occupations—e.g., healthcare positions, education, the airlines—can once again expect the auto industry contracts to set the pattern for the rest of the economy.

Recently, Daniel Howes, business columnist for the Detroit News, referred to Michigan workers as having “won the 20th Century lottery”—i.e., they were lucky to have been “given” the auto industry, which resulted in an increased standard of living. What the American Axle contract (and other auto-related contracts) tells us, according to Howes, is that workers in Michigan and other industrial states can no longer expect this so-called middle class living standard. Public employees—and Howes pointedly referenced educators—will have to follow the auto employees’ suit.

There is little doubt that Howes was speaking for the financial interests, just as there is little doubt that these same interests see their own “lottery” in the creation of poverty or near-poverty level conditions for the working class.

Unemployment rate jumps to 5.5 percent in May; largest rise since 1986

Unemployment rate jumps to 5.5 percent in May

By JEANNINE AVERSA

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The nation's unemployment rate jumped to 5.5 percent in May — the biggest monthly rise since 1986 — as nervous employers cut 49,000 jobs.

The latest snapshot of business conditions showed a deeply troubled economy, with dwindling job opportunities in a time of continuing hardship in the housing, credit and financial sectors.

"It was ugly," said Richard Yamarone, economist at Argus Research.

With employers worried about a sharp slowdown and their own prospects, they clamped down on hiring in May, said Friday's report from the Labor Department. The unemployment rate soared from 5 percent in April to 5.5 percent in May. That was the biggest one-month jump in the rate since February 1986. The increase left the jobless rate at its highest since October 2004.

On Wall Street, stocks slid. The Dow Jones industrials tumbled more than 200 points in morning trading.

The big jump in the unemployment rate surprised economists who were forecasting a tick-up to 5.1 percent. Payroll losses, however, weren't as deep as the 60,000 that analysts were bracing for. Still, job losses in both March and April turned out to be larger than the government previously reported. Employers now have cut payrolls for five straight months.

The White House expressed disappointment, too.

"Certainly this isn't a report that we wanted to see today," White House deputy press secretary Scott Stanzel said. He acknowledged that the increase was higher than experts expected. "It is a number that is too high in our view but it is lower than the average of the last three decades."

The 5.5 percent rate is relatively moderate judged by historical standards. Yet, there was no question that employers last month sharply cut jobs in manufacturing, construction, retailing and professional and businesses services. Those losses swamped gains elsewhere, including in the education and health fields, government, and leisure and hospitality.

The government said the number of unemployed people grew by 861,000 in May — rising to 8.5 million. The over-the-month jump in unemployment reflected more workers losing their jobs as well as an increase in those coming into the job market — especially younger people — to look for work, the Bureau of Labor Statistics said.

A year ago, the number of unemployed stood at 6.9 million and the jobless rate was 4.5 percent.

A trio of crises — housing, credit and financial — have rocked the economy. That's caused economic growth to slow to a crawl as businesses and consumers have tightened their belts. Spiraling energy costs are another negative force.

The country's economic problems are a top concern for voters — and thus for President Bush, lawmakers on Capitol Hill and those vying to win the White House this fall.

And, there's been a lot of talk about whether the economy is on the brink of, or fallen into, its first recession since 2001. That determination, made by a panel of academics, is usually made well after the fact.

"For the average American there is not debate that the economy is in a recession," said Mark Zandi, chief economist at Moody's Economy.com. "That's because their net worth is lower, their purchasing power is lower and it is tough to find a job. If you lose a job, it is tough to get back in," he said.

So far this year, the government said, job losses have totaled 324,000.

Workers with jobs, however, saw modest gains.

Average hourly earnings for jobholders rose to $17.94 in May, up 0.3 percent from the previous month. Economists were forecasting a 0.2 percent gain. Over the last 12 months, wages have grown by 3.5 percent..

With food and energy prices marching upward, paychecks aren't stretching as far. Although tax rebates helped to energize shoppers and give major retailers better sales in May, analysts still believe that anxious consumers will be keeping a close watch on their purchases and their budgets in the months ahead. A weakening job market could make people feel less inclined to spend, which would put a damper on overall economic growth.

Worried about inflation, Federal Reserve Chairman Ben Bernanke has signaled that the central bank's rate-cutting campaign, which commenced last September to help bolster the economy, is probably over for now.

Fed officials and the Bush administration are hoping that the Fed's powerful doses of rate reductions and the government's $168 billion stimulus package, including tax rebates for people and tax breaks for businesses, will pull the economy out of its deep funk in the second half of this year.

Even if that happens, the unemployment rate is expected to climb to 6 percent or higher early next year. Employers won't want to ramp up hiring until they feel more sure that an economic recovery has strong legs.

___

On the Net:

Employment report: http://www.bls.gov/home.htm

Bankruptcy toll increases

Bankruptcy toll increases

Credit freeze, housing woes blamed for surge

By Becky Yerak

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More than 12,500 individuals and businesses filed for bankruptcy in Illinois in the first quarter of this year, a 27.2 percent jump over the year-earlier period that mirrors a national trend.

Consumer filings in the state increased 27.5 percent, to 12,248, while business bankruptcies rose 14.5 percent, to 260.

"The increase in business bankruptcies over the past year reflects the turmoil persisting in the credit markets, which makes it far more difficult for businesses to manage through periods of slowed activity that threaten their liquidity," said Stuart Rozen, partner in the restructuring, bankruptcy and insolvency practice for law firm Mayer Brown LLP in Chicago.

Rapidly rising food and commodity prices have increased the cost of doing business for certain industries, particularly restaurant and food services, trucking, airlines and construction and housing related businesses, he said.

"The increase in consumer filings is generally being driven by the same factors and particularly the rapid declines in the housing markets," he said.

Nationally, the total number of bankruptcies filed in the first quarter rose 26.9 percent, to 245,695, compared with the year-ago period, according to data released Tuesday by the Administrative Office of the U.S. Courts.

"This ninth consecutive quarterly increase in filings since Congress attempted to restrict access to bankruptcy relief demonstrates again the influence of rising household debt," Samuel Gerdano, executive director of American Bankruptcy Institute, said in a statement. The average American adult is carrying $4,246 in revolving debt and the average American household is carrying $8,218 in revolving debt, according to a study released Tuesday by IndexCreditCards.com, which analyzed government debt and census data. Revolving debt is mainly debt from credit cards.

That's a 19 percent and 13 percent increase, respectively, over the averages calculated by the credit card watcher in January 2006.

Nationally, consumer filings increased 26.5 percent, to 236,982, for the three-month period ended March 31, from the year-earlier period.

Business filings for the three months ended March 31 totaled 8,713, a 38.7 percent increase over the first quarter of 2007.

Mortgaging America

Mortgaging America

Investment funds run by foreign governments are keeping the U.S. afloat.

By Eric J. Weiner

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America's for sale. Just ask Treasury Secretary Henry Paulson.

With the U.S. economy in shambles, Paulson just spent four days touring the Middle East, hat in hand, looking for investors to bail us out. Specifically, on Monday, Paulson met with heads of the Abu Dhabi Investment Authority, the world's largest "sovereign wealth fund" with roughly $875 billion in assets, and encouraged them to buy American businesses.

Of course, it's nothing new for U.S. officials to reach out to the deepest pockets in the world in times of crisis. Just a century ago, J.P. Morgan became an American icon by single-handedly rescuing the financial markets during the stock market panic of 1907.

What is new, however, is that our economic problems have become so big that they no longer can be remedied by a few affluent individuals or investment firms. Only extremely wealthy countries have the resources to clean up this mess. So Paulson is forced to visit flush, oil-slicked Arabian emirates from Qatar to Abu Dhabi and beg for help.

This is economic globalization in its most raw form -- and a dramatic change in the way the worldwide economy operates. Today, the real power in international finance is held by rich countries, not wealthy institutions, corporations or private investors. And these countries are flexing their increasingly bulging muscles through investment vehicles known as sovereign wealth funds.

Sovereign wealth funds, or SWFs, basically are mutual funds that invest the excess capital generated by a region or country. The first one was established by Kuwait when it still was a British territory. After World War II, as Kuwait was negotiating independence, its leader, Sheik Abdullah al Salem al Sabah, asked the British to help him create a fund that would invest the nation's oil profits. The Kuwait Investment Board, which eventually became the Kuwait Investment Authority, today has about $250 billion in assets and is one of the largest sovereign wealth funds in the world.

As the British Empire crumbled, the government created similar funds for many of its territories and colonies (including the islands of Kiribati, which profitably exported guano for fertilizer). Meanwhile, other countries with growing wealth started setting up similar funds, such as the oil-rich nations of Saudi Arabia, the United Arab Emirates, Norway and Russia, as well as China, Singapore and South Korea, which had highly productive economies that also generated lots of excess capital.

Still, it's only recently that SWFs have become major players on the financial stage.

In 1990, the funds held just $500 billion in assets combined. Today, that figure is about $3.5 trillion. For comparison purposes, that's more than all of the assets controlled by all of the hedge funds in the world. And by 2012, the figure will be at least $10 trillion, according to estimates by the International Monetary Fund.

The primary reason for this explosion is, in a word, oil. As its price has soared from less than $25 a barrel in 2002 to more than $125 a barrel today, the value of sovereign wealth funds held by oil-rich nations has skyrocketed. And this trend isn't expected to change any time soon.

The new power of SWFs has been on graphic display during our recent mortgage crisis. They've essentially rescued the international financial system by injecting tens of billions of dollars into troubled banks. Citigroup, for instance, raised about $20 billion from a consortium of SWFs from Abu Dhabi, Kuwait and Singapore. UBS secured nearly $10 billion from a Singapore fund that now controls 9% of the bank. Merrill Lynch took in about $11 billion from SWFs from Kuwait, Singapore and South Korea. And even august Morgan Stanley got $5 billion from China's SWF.

These investments are steadying global financial markets by ensuring that none of these key banks goes under. But there are important questions to ask about the increasing influence that sovereign wealth funds have over our economy. As SWFs grow in size, they will be in a position to control large swaths of the global business world. That means foreign governments, which control the funds, will increasingly own sizable stakes in companies in such important industries as computer technology, aerospace and biotechnology.

These kinds of investments raise "profound questions" of geopolitical power, as former Treasury Secretary Lawrence Summers pointed out a few months ago at the World Economic Forum in Davos, Switzerland. Summers' essential complaint is that there is no way of knowing if there is a political agenda behind a country's investment in these essential industries.

To that end, the International Monetary Fund is trying to draft a code of "best practices" that SWFs can adopt voluntarily. The funds generally have been resistant to the idea, although Abu Dhabi and Singapore have signed an agreement with the Treasury Department that lays out principles for the countries' funds to be more transparent and not politicize their investments.

But on a practical level, the growing influence of SWFs really brings up much more basic concerns. What does it mean for Americans to have decisions about our jobs, our home loans, our school loans and so on to ultimately rest with foreign governments? What does it mean to surrender this level of control over our own economy?

The trouble is, we don't know. And that raises perhaps the most important question of all: What if the cure to our mortgage crisis is more deadly than the disease itself?

Eric J. Weiner is the author of "What Goes Up: The Uncensored History of Modern Wall Street as Told by the Bankers, CEOs, and Scoundrels Who Made it Happen."

Equity in Americans’ homes falls to historic low

Equity in Americans’ homes falls to historic low

Drops to 46.2 percent in first quarter — level not seen since end of WWII

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The equity Americans have in their most important asset — their homes — has dropped to its lowest level since the end of World War II.

Homeowners’ portion of equity slipped to 46.2 percent in the first quarter from a revised 47.5 percent in the previous quarter. That was the fifth quarter in a row below the 50 percent mark, the Federal Reserve said Thursday.

The total dollar value of equity also fell for the fourth straight quarter to $9.12 trillion from $9.52 trillion in the fourth quarter, while Americans’ total mortgage debt rose to $10.6 trillion from $10.53 trillion.

A homeowner’s equity is the market value of a property minus the mortgage debt. And homeowners’ percentage of equity has declined steadily even as home values surged during the housing boom due to a jump in cash-out refinancing, home equity loans and an increase in 100 percent financing.

Experts expect equity to decline further as falling home prices erode the value of Americans’ largest asset, dragging more homeowners “upside down” on their mortgages.

At the end of March, nearly 8.5 million homeowners had negative or no equity in their homes, representing more than 16 percent of all homeowners with a mortgage, according to Moody’s Economy.com Chief Economist Mark Zandi. By June 2009, he estimates that will increase to 12.2 million, or almost one out of every four homeowners with a mortgage.

But to put that number in perspective, one out of every three homeowners own their properties free and clear, with no mortgage at all.

Still, Zandi said, “For most, their home is their key asset. If they have no equity in their home, likely their net worth is negative too. Their entire balance sheet will be underwater.”

The report also showed that Americans’ total net worth dropped to $55.97 trillion in the first quarter from $57.67 trillion.

Zandi expects prices to fall 24 percent from peak to trough. Last week, Standard & Poor’s/Case-Shiller said its national home price index fell about 14 percent in the first quarter compared with a year earlier, the lowest since its inception in 1988.

Prices nationwide are at levels not seen since the third quarter of 2004.

Homeowners with no or negative equity are more likely to fall behind on their mortgage payments or, in frustration, mail the keys to the lender and walk away from their mortgages, a phenomenon more lenders are seeing. This will only increase foreclosures, which have been surging the last two years, and further exacerbate the housing downturn.

The Mortgage Bankers Association said Thursday the rate of new foreclosures and late payments in the first three months of this year were the highest on record going back to 1979.

Almost 1 percent of mortgages fell into foreclosure, surpassing the previous high of 0.83 percent in the last quarter of 2007. The percentage of Americans who have missed at least one mortgage payment jumped to 6.35 percent, up from 5.82 percent in the prior quarter.

Jay Brinkmann, the association’s vice president of research and economics, told The Associated Press he anticipates foreclosures and late payments to continue increasing in the months ahead as prices keep dropping as expected.

Chicago youth violence: An indictment of the US Democratic Party

Chicago youth violence: An indictment of the US Democratic Party

By Alexander Fangmann and Jerry White

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In recent months there has been a string of violence, mostly gang-related, which has claimed the lives of dozens of youth in Chicago, Illinois. In a single weekend in April, 36 people were shot, and nine died of their injuries. Since last September, 24 Chicago public school students have been killed in such shootings.

The victims of these tragedies have been working class and minority youth, including many who were innocent bystanders.

Last March, for example, Chavez Clarke became the 20th Chicago public school student killed up to that point. Chavez was 18 years old and a student at the Simeon Career Academy. He had hoped either to attend an apprentice school for drafting and architecture or train as a truck driver. He was caught in gang crossfire as he walked down the street with his twin brother, Travez. Two students from Dunbar Career Academy, aged 17 and 19, were ultimately charged by police in Chavez’s murder.

Another youth, 16-year-old John Mendoza, was found bludgeoned to death in an alley. Although his family insisted he wasn’t in a gang—and had recently changed schools to avoid gang conflict—two funeral homes, fearing retaliation, refused to provide arrangements suitable for the family. Another would only hold an abbreviated morning wake if an additional charge of $2,000 for security was paid. Only after Jose Mendoza, the boy’s father, contacted a friend in the funeral business was the family able to arrange a service.

The tragic loss of these young people has provoked shock and anger. Families who have lost loved ones have made sincere appeals to end the violence, while others have volunteered to escort children to school.

The political establishment in the city, however, has been unable to offer any serious solution. Instead, its only answer has been greater law-and-order repression including proposals—backed by Mayor Richard Daley—to arm the entire 13,500-strong Chicago Police Department with military-style assault weapons.

At a City Hall news conference, Police Department Superintendent Jody Weis proposed flooding south and west side neighborhoods known for gang activity with SWAT and Targeted Response Units in full battle dress, with aerial support from police helicopters.

The local media have already dubbed such a show of force as a “surge,” in reference to the troop surge in Iraq.

Chicago is not the only city in which the methods of the Iraq war are being brought home. In Washington, DC, police chief Cathy Lanier announced Wednesday that in order to stop violent crime and drugs a checkpoint would be set up in the city’s Trinidad neighborhood to stop cars, check identifications and exclude people the police decided did not have a “legitimate purpose” in the area. “Welcome to Baghdad, DC,” the local head of the American Civil Liberties Union said of the so-called “Neighborhood Safety Zone” plan.

The conditions for implementing such antidemocratic measures in Chicago have been prepared by sensationalist media coverage. Nowhere, however, can one find any serious discussion in the media or the political establishment of the social roots of the problem.

In an oblique reference to the desperate conditions confronting the youth involved in such violence, Mayor Daley, said, “When the killing is done, you still don’t have a job, in fact, it greatly decreases the chances that you ever ... will have a job.”

Needless to say, the mayor offered nothing to alleviate such conditions. This summer the city is only offering 18,000 summer jobs to the hundreds of thousands who will be searching for one. Last summer teen unemployment reached 34.5 percent, the worst on record since World War II, according to the Center for Labor Market Studies at Northeastern University. The situation will be worse this summer, the center says.

Youth violence cannot be separated from the miserable prospects young people face in America’s third largest city, and the unprecedented social polarization that has taken place there.

Like Detroit and other Midwest “rustbelt” cities, Chicago has been decimated by decades of deindustrialization, losing hundreds of thousands of steel, trucking, railroad, meatpacking and other relatively decent-paying jobs since 1979. From 2000 to 2005 alone, the region lost 22.2 percent of its manufacturing jobs. The official jobless rate, which grossly underestimates the real situation, rose to 5.4 percent in April, up from 4.7 percent last year.

Nearly 600,000 people—or one out of every six residents—live in poverty. The poverty rate for children is one out of three. Most poor residents live in extreme poverty, according to the Heartland Alliance, with an annual income less than half the government’s official poverty line.

An astounding 85 percent of Chicago public school students live in poverty, according to federal statistics. The graduation rate from these under-funded and overcrowded schools is only 51.5 percent, according to the Editorial Projects in Education Research Center.

These conditions are an indictment of the capitalist system and the Democratic Party, which has controlled City Hall in Chicago since 1931. The pro-business policies of Daley, who has been mayor since 1989, are the culmination of a long shift to the right by big city mayors from the Democratic Party, which abandoned liberal social policies in the late 1970s and fully embraced the “free market.”

A recent study on the city’s gangs by the Justice Policy Institute noted that violence had “exacerbated in Chicago during the mid-1990s when the public housing authority shifted millions of dollars from needed maintenance and renovation of the city’s high-rise projects to finance a drug enforcement campaign involving massive gang sweeps.”

“When that strategy proved largely fruitless,” the institute noted, “the city began to demolish the projects, forcing more than a hundred thousand tenants to move. Instead of building new housing for them, the housing authority gave displaced tenants rent vouchers. Scattered relocation to other segregated, high-crime areas of the city dislocated people from long-established social networks and increased friction and violence among Chicago gangs.”

The leveling of huge public housing projects like the Robert Taylor Homes and Cabrini-Green was carried out under the Clinton administration. The administration claimed that public housing, welfare programs and the “cycle of dependency”—not the lack of decent jobs, decaying schools and other forms of social neglect—were the driving forces for crime and drugs. On this basis, the Democrats and Republicans gutted federal welfare programs, privatized large sections of public housing and, at the same time, increased police repression and incarceration rates.

The highly publicized plans to provide successful “mentors” to displaced public housing residents in “mixed income” neighborhoods—which include condominiums selling at the market rate of $500,000 or more—have proven a farce. Only one-third of the affordable housing units at Cabrini-Green were replaced, and the housing agency used tightened restrictions—including the legal records of family members—to exclude even more from public housing.

Much of this was designed to push poor people out of the city center to make way for the housing boom and the gentrification of working class neighborhoods. In addition to reserving the most exclusive reserves for the rich, better housing went to relatively well-paid professional workers, while poorly paid service, entertainment and retail workers—in many cases disproportionately African-American and Hispanic—were squeezed into poorer and poorer areas.

Participation in gang violence is an expression of alienation and demoralization of layers of youth who are responding to a sense that there is no longer any room for them in the city. This sentiment is reinforced by massive police presence aimed at excluding them from better-off areas of the city and the destruction of recreation, education and other vitally needed social programs.

That some young people engage in self-destructive activity, however, is also function of the failure of the trade union and civil rights establishment, which offers youth no perspective for struggle and improvement of their conditions. The trade union bureaucracy has overseen the shutdown of basic industry and the decimation of workers’ living standards, while enriching itself through labor-management collaboration. Sections of minority workers who, along with the working class as a whole, had in an earlier period won improved living standards through trade union struggles, have seen virtually all of it disappear, while their sons and daughters are faring even worse.

Then there is the civil rights establishment, including such figures as Jesse Jackson, which long ago abandoned any struggle to seriously improve the conditions of the working class. Instead, in the name of “racial equality,” they have concentrated on integrating themselves into the ranks of the corporate and political elite.

In this regard, mention must be made of Democratic presidential nominee Barack Obama, who has pointed to the 1984 election of Harold Washington, the city’s first black mayor, as a key motivating factor for his entry into political life. Washington, like his white counterparts in the Democratic Party, was a loyal defender of the capitalist system who carried out regressive policies that contributed to the social catastrophe confronting young people and workers in the city.

Obama himself was elected state senator from Chicago and then US Senator from Illinois during a period when tens of thousands lost their jobs and social programs were being cut. He is deeply integrated into the Cook County Democratic Party, the corrupt political machine that has long dominated Chicago politics.

Obama used the recent media attention on violence in the city to bolster his “law and order” credentials, claiming that the shooting could be curtailed by restoring funding for community policing. “Additional police improves public safety,” he said. “We’ve got to help local communities put more police on the streets.” He also suggested that lack of parental guidance and moral upbringing could be responsible, saying, “Children have to be taught right and wrong and violence isn’t a way to resolve problems.”

Obama made a perfunctory reference to poor conditions facing young people in the city. However, he has made it clear that, if elected, urban policy would not involve any sharp increases in taxation on corporations and the wealthy or a massive public expenditure to eradicate poverty and provide a decent future to working class youth.