Thursday, July 17, 2008
By Rep. Ron Paul, M.D.
Go To Original
Madam Speaker, I have, for the past 35 years, expressed my grave concern for the future of America . The course we have taken over the past century has threatened our liberties, security and prosperity. In spite of these long-held concerns, I have days--growing more frequent all the time--when I'm convinced the time is now upon us that some Big Events are about to occur. These fast-approaching events will not go unnoticed. They will affect all of us. They will not be limited to just some areas of our country. The world economy and political system will share in the chaos about to be unleashed.
Though the world has long suffered from the senselessness of wars that should have been avoided, my greatest fear is that the course on which we find ourselves will bring even greater conflict and economic suffering to the innocent people of the world--unless we quickly change our ways.
America , with her traditions of free markets and property rights, led the way toward great wealth and progress throughout the world as well as at home. Since we have lost our confidence in the principles of liberty, self reliance, hard work and frugality, and instead took on empire building, financed through inflation and debt, all this has changed. This is indeed frightening and an historic event.
The problem we face is not new in history. Authoritarianism has been around a long time. For centuries, inflation and debt have been used by tyrants to hold power, promote aggression, and provide “bread and circuses” for the people. The notion that a country can afford “guns and butter” with no significant penalty existed even before the 1960s when it became a popular slogan. It was then, though, we were told the Vietnam War and the massive expansion of the welfare state were not problems. The seventies proved that assumption wrong.
Today things are different from even ancient times or the 1970s. There is something to the argument that we are now a global economy. The world has more people and is more integrated due to modern technology, communications, and travel. If modern technology had been used to promote the ideas of liberty, free markets, sound money and trade, it would have ushered in a new golden age--a globalism we could accept.
Instead, the wealth and freedom we now enjoy are shrinking and rest upon a fragile philosophic infrastructure. It is not unlike the levies and bridges in our own country that our system of war and welfare has caused us to ignore.
I'm fearful that my concerns have been legitimate and may even be worse than I first thought. They are now at our doorstep. Time is short for making a course correction before this grand experiment in liberty goes into deep hibernation.
There are reasons to believe this coming crisis is different and bigger than the world has ever experienced. Instead of using globalism in a positive fashion, it's been used to globalize all of the mistakes of the politicians, bureaucrats and central bankers.
Being an unchallenged sole superpower was never accepted by us with a sense of humility and respect. Our arrogance and aggressiveness have been used to promote a world empire backed by the most powerful army of history. This type of globalist intervention creates problems for all citizens of the world and fails to contribute to the well-being of the world's populations. Just think how our personal liberties have been trashed here at home in the last decade.
The financial crisis, still in its early stages, is apparent to everyone: gasoline prices over $4 a gallon; skyrocketing education and medical-care costs; the collapse of the housing bubble; the bursting of the NASDAQ bubble; stock markets plunging; unemployment rising; massive underemployment; excessive government debt; and unmanageable personal debt. Little doubt exists as to whether we'll get stagflation. The question that will soon be asked is: When will the stagflation become an inflationary depression?
There are various reasons that the world economy has been globalized and the problems we face are worldwide. We cannot understand what we're facing without understanding fiat money and the long-developing dollar bubble.
There were several stages. From the inception of the Federal Reserve System in 1913 to 1933, the Central Bank established itself as the official dollar manager. By 1933, Americans could no longer own gold, thus removing restraint on the Federal Reserve to inflate for war and welfare.
By 1945, further restraints were removed by creating the Bretton-Woods Monetary System making the dollar the reserve currency of the world. This system lasted up until 1971. During the period between 1945 and 1971, some restraints on the Fed remained in place. Foreigners, but not Americans, could convert dollars to gold at $35 an ounce. Due to the excessive dollars being created, that system came to an end in 1971.
It's the post Bretton-Woods system that was responsible for globalizing inflation and markets and for generating a gigantic worldwide dollar bubble. That bubble is now bursting, and we're seeing what it's like to suffer the consequences of the many previous economic errors.
Ironically in these past 35 years, we have benefited from this very flawed system. Because the world accepted dollars as if they were gold, we only had to counterfeit more dollars, spend them overseas (indirectly encouraging our jobs to go overseas as well) and enjoy unearned prosperity. Those who took our dollars and gave us goods and services were only too anxious to loan those dollars back to us. This allowed us to export our inflation and delay the consequences we now are starting to see.
But it was never destined to last, and now we have to pay the piper. Our huge foreign debt must be paid or liquidated. Our entitlements are coming due just as the world has become more reluctant to hold dollars. The consequence of that decision is price inflation in this country--and that's what we are witnessing today. Already price inflation overseas is even higher than here at home as a consequence of foreign central banks' willingness to monetize our debt.
Printing dollars over long periods of time may not immediately push prices up--yet in time it always does. Now we're seeing catch-up for past inflating of the monetary supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning. It's a gross distraction to hound away at “drill, drill, drill” as a solution to the dollar crisis and high gasoline prices. Its okay to let the market increase supplies and drill, but that issue is a gross distraction from the sins of deficits and Federal Reserve monetary shenanigans.
This bubble is different and bigger for another reason. The central banks of the world secretly collude to centrally plan the world economy. I'm convinced that agreements among central banks to “monetize” U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone--especially the U.S. Congress that doesn't care, or just flat doesn't understand. As this “gift” to us comes to an end, our problems worsen. The central banks and the various governments are very powerful, but eventually the markets overwhelm when the people who get stuck holding the bag (of bad dollars) catch on and spend the dollars into the economy with emotional zeal, thus igniting inflationary fever.
This time--since there are so many dollars and so many countries involved--the Fed has been able to “paper” over every approaching crisis for the past 15 years, especially with Alan Greenspan as Chairman of the Federal Reserve Board, which has allowed the bubble to become history's greatest.
The mistakes made with excessive credit at artificially low rates are huge, and the market is demanding a correction. This involves excessive debt, misdirected investments, over-investments, and all the other problems caused by the government when spending the money they should never have had. Foreign militarism, welfare handouts and $80 trillion entitlement promises are all coming to an end. We don't have the money or the wealth-creating capacity to catch up and care for all the needs that now exist because we rejected the market economy, sound money, self reliance and the principles of liberty.
Since the correction of all this misallocation of resources is necessary and must come, one can look for some good that may come as this “Big Event” unfolds.
There are two choices that people can make. The one choice that is unavailable to us is to limp along with the status quo and prop up the system with more debt, inflation and lies. That won't happen.
One of the two choices, and the one chosen so often by government in the past is that of rejecting the principles of liberty and resorting to even bigger and more authoritarian government. Some argue that giving dictatorial powers to the President, just as we have allowed him to run the American empire, is what we should do. That's the great danger, and in this post-911 atmosphere, too many Americans are seeking safety over freedom. We have already lost too many of our personal liberties already. Real fear of economic collapse could prompt central planners to act to such a degree that the New Deal of the 30's might look like Jefferson 's Declaration of Independence.
The more the government is allowed to do in taking over and running the economy, the deeper the depression gets and the longer it lasts. That was the story of the 30s and the early 40s, and the same mistakes are likely to be made again if we do not wake up.
But the good news is that it need not be so bad if we do the right thing. I saw “Something Big” happening in the past 18 months on the campaign trail. I was encouraged that we are capable of waking up and doing the right thing. I have literally met thousands of high school and college kids who are quite willing to accept the challenge and responsibility of a free society and reject the cradle-to-grave welfare that is promised them by so many do-good politicians.
If more hear the message of liberty, more will join in this effort. The failure of our foreign policy, welfare system, and monetary policies and virtually all government solutions are so readily apparent, it doesn't take that much convincing. But the positive message of how freedom works and why it's possible is what is urgently needed.
One of the best parts of accepting self reliance in a free society is that true personal satisfaction with one's own life can be achieved. This doesn't happen when the government assumes the role of guardian, parent or provider, because it eliminates a sense of pride. But the real problem is the government can't provide the safety and economic security that it claims. The so called good that government claims it can deliver is always achieved at the expense of someone else's freedom. It's a failed system and the young people know it.
Restoring a free society doesn't eliminate the need to get our house in order and to pay for the extravagant spending. But the pain would not be long-lasting if we did the right things, and best of all the empire would have to end for financial reasons. Our wars would stop, the attack on civil liberties would cease, and prosperity would return. The choices are clear: it shouldn't be difficult, but the big event now unfolding gives us a great opportunity to reverse the tide and resume the truly great American Revolution started in 1776. Opportunity knocks in spite of the urgency and the dangers we face.
Let's make “Something Big Is Happening” be the discovery that freedom works and is popular and the big economic and political event we're witnessing is a blessing in disguise.
Ron Paul is a Republican Congressman from Texas. He was the 1988 Libertarian Party candidate for President.
By Martin Hutchinson
Go To Original
The financial crisis in the United States and worldwide entered a new phase this week, as Fannie Mae and Freddie Mac, the two huge US home-loan institutions, began what appears to be a "death spiral" similar to that which claimed Bear Stearns four months ago. Fannie and Freddie are unique institutions and will almost certainly be bailed out by the long-suffering taxpayer. However, for the first time, the specter has been raised of a general financial meltdown, such as the US managed to avoid in 1933 but Sweden succumbed to in 1991.
Sweden's financial meltdown of 1991 involved the government guaranteeing the obligations of the entire Swedish banking system, and recapitalizing the major banks, with the sole major exception of Svenska Handelsbanken. The total cost of the rescue to Swedish taxpayers was around US$10 billion, equivalent to about $1 trillion in the context of today's US economy. The causes of the crisis would be familiar to most Americans today: misuse of off-balance sheet securitization vehicles to invest excessively in real estate and mortgage lending.
It is thus not impossible for the entire US banking system to implode. It didn't happen in 1933 (though about a quarter of US banks failed) because US banks in the 1920s had been relatively conservative in their lending, with many banks requiring a 50% down payment for home mortgage loans, for example. Stock margin lending got way out of control in 1928-29, but relatively few banks were involved significantly in that.
The main problem in 1932-33 was quite simply liquidity; the Fed failed to supply adequate reserves to the banking system, so crises of confidence in individual banks led to panic withdrawals of deposits that caused the banks themselves to fail.
This time around, the problem is the opposite. Whereas the Fed had been appropriately cautious in the late 1920s, so only in the area of stock margin lending did the banking system get out of control, this time around the Fed has been hopelessly profligate in monetary creation for over a decade. The initial result of this profligacy, the tech bubble of 1999-2000, caused only modest problems in the banking system through telecom losses. The more recent profligacy and the housing bubble it caused have had much more serious consequences, mirroring those in Sweden leading up to 1991. The additional loosening since September has distorted the financial system further, producing a commodity price bubble that itself seems likely to have substantial further adverse consequences.
Fannie and Freddie are probably toast, and about time too. Federal Reserve Board chairman Ben Bernanke's statement on Friday that the two companies can discount paper with the Fed may prolong the inevitable, but also increases its likely huge cost to taxpayers.
There can be no economic justification for the government guaranteeing the great majority of the nation's home mortgages, and the spurious "government-sponsored enterprise" structure of Fannie and Freddie merely hid the likely consequences of their default. Their senior employees have been paid as if they were counterparts of Wall Street high-flyers for performing a function that was economically entirely unnecessary, and they have survived for more than 50 years simply through their ability to offer lucrative consulting contracts to ex-congressmen and other politically well-connected people.
It is thus necessary that any "rescue" for Fannie and Freddie be a euthanasia not a lifeline. They have extracted their rents from the market for too long and have encouraged the growth of a securitized mortgage market that has proved entirely unsound because of its perverse incentives. Simply providing them with $100 billion or so of extra capital at taxpayer expense, probably structured as some economically unjustified form of subordinated debt so that the shareholders are left undiluted and allowing them to continue operating, doesn't solve the problem; it exacerbates it.
The simplest from of euthanasia for Fannie and Freddie would be a takeover by the Office of Federal Housing Oversight (OFHEO), their regulator, on the grounds that they were no longer able to operate independently. In Freddie's case that could be carried out at any time, since the company has failed to follow through on a promise to OFHEO to raise $5.5 billion in new capital - which at Thursday's closing share price would dilute existing shareholders by 55%. In any case, further declines in their share prices and withdrawal of funding by the bond markets are likely to cause a sufficient crisis in the next few weeks to make such a takeover inevitable if a rescue is not organized (which it shouldn't be.)
Following a takeover, Fannie and Freddie would need to continue performing their current functions of guaranteeing home mortgages, as without such guarantees home mortgages are currently impossible to obtain. However, changes must be made to recognize the revised nature of the business.
Since the new guarantees would be direct government obligations (OFHEO being an arm of the government) rather than simply implied obligations, the fees for obtaining them should be jerked sharply upwards, perhaps to 1.5% per annum on the outstanding amount of the mortgage. That would allow mortgage finance to remain available at a cost that is still reasonable in current markets (Fannie Mae paper already pays a 0.75% premium over the government for its borrowings), but as markets recovered it would make Fannie/Freddie guaranteed mortgages highly uncompetitive against direct home loans, by far the healthiest way for housing to be financed.
Together with the salary reductions outlined below, it would also begin to reimburse the unfortunate taxpayer for the gigantic costs of this non-rescue operation.
Treasury Secretary Hank Paulson has called for "covered bonds" similar to the German pfandbriefe to be used to finance housing. Since pfandbriefe, bonds issued by German banks to finance housing, remain on German bank balance sheets and retain the bank guarantee, allowing the banks only to escape the funding risk of lending for 30 years at a fixed rate, they avoid the moral hazards of the securitization markets, and are thus an attractive alternative.
To encourage their use, and to reduce the capital cost to banks of holding mortgages on balance sheet, the Basel 1 bank regulations, currently being phased out, should be retained; they allowed mortgages to carry only a 4% capital charge as against 8% for regular loans. By this and other means, the private banking sector would be encouraged to make sound home loans directly, without the unnecessary Fannie/Freddie guarantees.
The objective would be over a five-10 year period for Fannie and Freddie to become insignificant participants in the mortgage market, after which they could be closed altogether. Meanwhile, costs in Fannie and Freddie could be cut drastically, particularly on the staffing side.
Since Fannie and Freddie staff would now be government employees, they should be paid on the GS (government) payscale, with the chief executive, as a GS-15, receiving appropriate remuneration between $115,317 and $149,000, according to his years of service. Even if the chief executive officer was able to argue himself onto the SES (senior executive service) pay scale - after all, he has excellent congressional contacts - he would be limited to about $205,000 in the Washington area.
Naturally, many Fannie/Freddie employees would be outraged at this cut in their living standards and would attempt to find alternative better-paid employment; I venture to suggest that few would succeed in doing so. That way, redundancy payments would be avoided while salary costs were slashed.
There would be a devastating effect on the Northern Virginia housing market, where many senior Fannie/Freddie employees have overextended themselves with giant home mortgages for vulgar McMansions, but that problem too is probably survivable. More important, the now-disgruntled employees would perform their job poorly, making applying for a Fannie/Freddie guarantee a bureaucratic and uncertain process, similar to negotiating with the Inland Revenue Service. That too should hasten the disappearance of the firms from the housing market.
Fannie and Freddie do not represent the entire US finance sector, far from it. Nevertheless their insolvency would further erode confidence in the rest of the sector, very likely leading to a cascade of death spirals among other institutions. After all, the best-run large non-global US bank, Wachovia, has itself got in trouble by its insanely foolish acquisition of the California mortgage lender Golden West Financial at the peak of the market in 2006, while Bank of America, the largest retail-oriented US bank, voluntarily took on more of the mess by its purchase of the diseased and probably criminal Countrywide Financial as recently as last January.
Citigroup is in deep trouble in a number of areas, particularly relating to its over-enthusiasm for the discredited technique of securitization, while JP Morgan Chase chief executive Jamie Dimon wrecked his credibility in May by announcing that the financial crisis was "mostly over" - presumably wishful thinking in the light of his huge holdings of dodgy Bear Stearns paper.
Only Goldman Sachs appears serenely above the fray, but don't forget that at May this year its "Level 3" assets were $78 billion, more than twice its capital. Level 3 assets, you may remember, are those for which there is no market, so can be valued only by the internal mathematical models of the institution concerned. Since this arcane highly illiquid paper is the most likely to suffer catastrophic erosion of "value" in a downturn, Goldman Sachs, like Jamie Dimon, must be keeping fingers crossed that somehow this nightmare must end soon.
It mustn't; from past experience of such follies it probably has at least another year to go. Thus a total collapse of the US financial system, while not inevitable, is a contingency which should now be planned for.
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com .
Amid surging prices, Fed raises specter of renewed class struggle
By Andre DamonGo To Original
The US Consumer Price Index jumped by an unexpected 1.1 percent last month amid spiraling energy prices, according to Labor Department figures released yesterday. June’s inflation spike—the sharpest since 1982—brought the annual inflation rate to 5 percent. Economists had been predicting a monthly increase of .7 percent, and June’s rise was significantly higher than the .6 percent increase seen in May.
Producer prices showed an even sharper increase of 1.8 percent, according to the Labor Department. The producer price index has increased by 9.2 percent in the past year in the sharpest increase since 1981. Energy prices led the increase, jumping by 6.6 percent, while transportation costs also shot up as airlines increased ticket prices by 4.5 percent.
Wage levels, meanwhile, decreased by .9 percent after adjusting for inflation. Real wages have fallen by a full 2.4 percent in the past year.
Such drastic cuts in real wages—representing a massive transfer of wealth from the working class to the very rich—are sending shockwaves through the whole of American society.
With this in mind, Federal Reserve Chairman Ben Bernanke warned Tuesday of the potential for renewed demands for higher wages by American workers if prices continue to increase. In his biannual monetary policy report, delivered to both houses of Congress, the Fed Chairman stressed the Fed’s continuing commitment to quelling any wages movement.
“[T]he currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation,” he said. “If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policy makers is to prevent that process from taking hold.”
In other words, the Fed intends—if it can—to tighten the money supply and deepen the US economic downturn to prevent any wages offensive by the working class. In case anyone missed the point, Bernanke reiterated the claim in the next paragraph, saying, “In light of the increase in upside inflation risk, we must be particularly alert to any indications, ... that the inflationary impulses from commodity prices are becoming embedded in the domestic wage and price-setting process.”
Despite the Bernanke’s overt warnings about inflation, analysts saw the Fed Chairman’s speech as shying away from rate increases in the short term. Bernanke emphasized that the US central bank would focus on preserving “financial stability.” Under conditions in which large sections of the US financial system appear set to implode, this can only imply a delay in raising rates and a retreat from the Fed’s emphasis on rate rises in June.
Bernanke delivered his speech in the context of what is rapidly emerging as the worst financial crisis since the Great Depression. This week brought the third-largest US bank failure ever, as well as the US Treasury’s announcement that it stands ready to absorb losses at mortgage lenders Fannie Mae and Freddie Mac, possibly doubling the US government’s debt overnight.
The US ruling elite is determined to do everything in its power to transfer its own enormous losses onto the backs of the American working class. The unlimited bailout power being called for by the Treasury and the Fed constitutes one part of this attempt. The systematic drive to slash real wages in order to finance the return to profitability constitutes another.
Bernanke’s testimony came amid a near-meltdown of nearly all measures of US economic stability. He warned of “numerous difficulties” facing the US economy. In his testimony before the House Financial Service Committee, he cited “significant downside risks to the outlook for growth,” while also acknowledging that “upside risks to the inflation outlook have intensified.”
Under these conditions, the Fed is effectively powerless to shift interest rates one way or the other, fearing either further financial destabilization or an inflationary spiral triggering a new wave of wage struggles by American workers.
The concerns expressed by Bernanke were also reflected in the minutes released Wednesday from the Federal Open Market Committee meeting held on June 24-25.
Given fears of the social consequences of spiraling inflation and the expectations it could generate, the Fed’s policymakers predicted that the central bank’s next move “could well be an increase in the funds rate,” the minutes said.
They continued: “Reports on the ability of firms to pass cost increases on to customers were mixed, but some participants commented that the global nature of inflationary pressures could make imports more expensive and give firms greater scope to raise prices. Some participants noted that wage growth had been quite moderate, reinforcing a view that longer-term inflation expectations and labor cost pressures had remained fairly well contained. However, others commented that wages might accelerate with a lag only after inflation expectations had moved higher, and that it would be very costly to subsequently bring those expectations back down.”
In essence, Bernanke and his fellow Fed members are warning that the sharp decreases in real incomes will inexorably lead millions of working people to an open struggle for livable wages. But under conditions where businesses—aided by the Fed—are seeking to pass on the full cost of the crisis to the masses of working people, such struggles will naturally turn into an open fight against the capitalist system itself. This is the nightmare of not only Bernanke, but of the entire financial oligarchy and its political establishment. Indeed, they see the suppression of such a movement as “very costly.”
House Financial Services Committee Chairman Barney Frank, in his comments on Bernanke’s testimony Wednesday, warned his corporate backers to this effect. After affirming that the existence of rising social inequality is “no longer a matter debate,” he noted that, “If the numbers of unemployment in the second half of this year are not better than that for the first half, we are on track to lose one million jobs this year.”
The congressman continued, “No one expects equality, equality is not a good thing, you can’t have an economy that works if everything’s equal. But too much inequality also has negative consequences.”
Frank highlighted one section of the Fed’s monetary policy report, which stated, “Broad measures of hourly labor compensation have not kept pace with the rapid increases in both overall consumer prices and labor productivity, despite a labor market that, until recently, had been generally tight.” He suggested that this situation was not sustainable.
“Those who wonder why we have resistance to globalization ... should note that working Americans are creating more wealth for this country than they are being allowed to share; and that is exacerbated by rising prices,” said the Massachusetts congressman. He summed up by warning, “The point to the business community is very clear: how can you understand this ... and then wonder why you can’t get trade bills through; wonder why there is resistance to outsourcing.”
Although Frank confounds the growing opposition to the capitalist system with anti-trade sentiment, his point is made clearly enough. What sort of legitimacy can a system that robs working people of 2.4 percent of their income in a single year have in the eyes of millions? Whereas Bernanke noted only the risk of a wages struggle, Frank makes clear that the deepening of the present crisis will put into question the political viability of the capitalist system itself.
However, Frank proposed no policies to ameliorate the conditions he described. Neither section of the ruling elite nor any faction within either of the big business parties can pose such measures. The US ruling class’s ability to shuffle off its mass of fictitiously-valued debt is based on its ability to regain profitability, which under the current circumstances can only be boosted via the destruction of jobs and a reduction of domestic wage levels. The US ruling class is forced into a vicious attack on the working class, even while recoiling in horror at the prospect that its policies will spark a social explosion.
Lies, Damn Lies and Government Inflation Statistics
Describing the decade that began in 2000 as the "naughties" or "oughties" offers a useful shorthand -- and particularly for people interested in discussing the U.S. economy's perilous dual pathway of rising commodity inflation coupled with financial assets deflation.
Ought and naught, of course, are two old-fashioned ways of saying "nothing" or "zero," appropriate for a painful decade that stretches from ought-one and ought-two to ought-nine.
But the term's negativism is also appropriate. As financial economists have begun to point out, between 2000 and mid-July 2008, the leading stock market yardstick, the Dow-Jones Industrial Average, dropped from a 2000 peak of 11,700 to a level 500-700 points lower. Moreover, allowing for eight years worth of inflation, by official data, the decline was nearer 25%, making the real return much worse than "naught." This is what people have to watch in a stagflationary economy, which the new Consumer Price Index numbers (June's one-month increase of 1.1 percent) have finally started to admit.
The possibility that inflation could even reach double digits should start to resolve today's central debate: whether this decade's unhappy U.S. economy is more like that of the depression 1930s or that of the stagflationary 1970s. Alas, there are elements of both.
To begin with, even the national media agree that home prices are in their biggest nationwide decline since the 1930s. Also, last month's slump in the Dow-Jones Industrial Average was the biggest June slide since the early depression year of 1930. And depending on who you talk to, the financial crisis is either the biggest since World War Two or the biggest since the 1930s.
Yet there is also escalating resemblance to the 1970s, when a global food and energy price surge followed the loose fiscal policy and boom of the Vietnam war era. No such trend existed in the 1930s. However, especially since 9/11 and then the invasion of Iraq, our decade has also seen has that kind of easy money and loose fiscal policy. As a result, global food and energy prices have been soaring.
The just-released inflation numbers suggest a gruesome possibility. Our own decade, like the years from 1966 to 1982, could see another severe economic downturn and stock market slump, but one partially camouflaged by fast-rising prices. Here is the precedent: between a Dow-Jones (intra-day) peak of 1000 in early 1966 and an August 1982 bottom of some 780, the Dow declined a nominal 22%. However, a truer calculation, adjusting for soaring inflation, put the real decline close to 70 percent -- a disguised disaster.
Could it happen again? Maybe. It is possible to imagine somewhat similar economic terrain. In 2010 or 2012, the Dow-Jones could easily be at 10,500 or 11,500, for a seemingly small ten-year or twelve year decline. But if simultaneous inflation has totaled some 30 percent, then the real decline would be 30-40% -- major league erosion, in other words.
And there is a worse possibility -- that the changed Consumer Price Index measurements in place since the 1990s have significantly underestimated inflation, and the true damage has already been much deeper. Why would Washington allow this, you might ask. The answer: that because a large chunk of the federal budget rises with inflation, the savings from understating it are enormous, however unfair to retirees and workers.
We are not talking small numbers. With global inflation heating up, the investment firm of Morgan Stanley recently noted that "The percentage of the world's population living under double-digit inflation is 42 percent. Six out of the ten most populous countries have inflation running at more than 10 percent."
Bill Gross of California-based PIMCO, the world's biggest bond manager, tells investors that interest rates on U.S. Treasury notes are inadequate. Inflation around the globe has averaged nearly 7 percent over the past decade, but the official U.S. inflation rate has averaged 2.6 percent. "Does it make any sense," says Gross, "that we have a 3 percent to 4 percent lower rate of inflation than the rest of the world?" And if Washington understates inflation by one percent, he adds, then gross domestic product has been overstated by that same amount. ("U.S. Inflation understated, Pimco's Gross says," MarketWatch, May 22, 2008)
Nor is Gross alone. In May, former Federal Reserve Chairman Paul Volcker told the Congressional Joint Economic Committee that "I think there's a lot more inflation than in those [CPI] figures." He said that the sharp run-up in housing before the recent implosion wasn't reflected in CPI data, adding that food and energy prices should not be excluded in gauging long-term trends. And when prices do go up, he said, government calculators are "much more inclined to say that there are improvements in quality" rather than an increase in inflation.
At Charles Schwab & Company, one of the nation's biggest money managers, chief economist Liz Ann Sonders wrote in June that "Over the past 30 years, major changes have been made to the calculation of the CPI due to "re-selection and reclassification of areas, items and outlets, [and] to the development of new systems for data collection and processing," according to the Bureau of Labor Statistics. If you eliminate those adjustments and calculate CPI as it would have been calculated in 1980, it would be nearly 12 percent today...No wonder clients constantly tell me they distrust government inflation data." ("Back to the 1970s?" Charles Schwab Investing Insights, June 19, 2008)
Cynics will point out that rigged data and sneaky book-keeping are par for the course in American finance. However, the accusations implicit in the Volcker, Gross and Sanders comments suggest a government scandal of the first magnitude. Maybe our presidential candidates should take a break from discussing how many troops to move from Iraq to Afghanistan or vice versa and start publicly discussing the extent to which a fundamental mismanagement of the U.S. economy rests on a framework of what can bluntly be described as lies, damn lies and statistics.
Home Construction Hits 17-Year Low
By Timothy R. Homan and Courtney Schlisserman
Builders started work in June on the fewest single-family U.S. homes since 1991 and manufacturing in the Philadelphia region contracted for an eighth straight month, signaling the economic slowdown is worsening.
Construction starts fell to an annual pace of 647,000, the Commerce Department said today in
The figures underscore the housing recession was already deepening before the financial turmoil this month at Fannie Mae and Freddie Mac threatened to further curb mortgage financing. Today's drop in the Philadelphia Federal Reserve's factory gauge showed manufacturers cut orders and employment in July as confidence in the economic outlook deteriorated.
‘‘Hopes for a bottom'' this year in home construction ‘‘are rapidly fading,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. The housing recession ‘‘has been spilling over to manufacturing for months,'' contributing to ‘‘recessionary conditions,'' he said.
Housing starts in the Northeast, which includes
‘‘Anyone planning to build had a strong incentive to get started before the deadline,'' Lindsey Piegza, a market analyst at FTN Financial in New York, wrote in a note to clients.
Stocks advanced and Treasuries dropped after JPMorgan Chase & Co. joined Wells
The Philadelphia Fed's general economic index was minus 16.3 in July, lower than forecast, compared with minus 17.1 in June. Negative readings signal a decline, and the measure averaged 5.1 last year. The index of prices paid climbed to 75.6, the highest level since 1980, from 69.3.
‘‘As manufacturers see the final demand for their products go down and inventories go up, they have to slow production and that means less employment,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York in an interview with Bloomberg Television. ‘‘The pricing numbers are important too because it indicates that we're in a period of stagflation.''
Total housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May. Economists forecast a 960,000 reading in June, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey.
A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said.
Building permits rose 11.6 percent to a 1.091 million rate in June. Excluding multifamily applications in the Northeast, permits would have risen 0.7 percent.
Work on single-family homes decreased 5.3 percent, bringing it to the lowest level since January 1991, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, jumped 43 percent to an annual rate of 419,000 in June, led by a 242 percent surge in the Northeast.
Starts fell in two of four regions, led by an 11 percent drop in the
Influence on Growth
Declines in construction probably will limit economic growth, even as tax rebates boost consumer spending. Residential building dropped at a 24.6 percent pace in the first quarter and subtracted 1.1 percentage points from growth.
Fed Chairman Ben S. Bernanke this week abandoned his June assessment that the threat of an economic downturn had diminished. During testimony before
After stabilizing over the last nine months, builders' confidence slumped again in July. The National Association of Home Builders/Wells Fargo sentiment index dropped to 16, the lowest level since records began in 1985, from 18 in June, the group said yesterday.
As property values have fallen, some homeowners are stuck with mortgages they can't afford, and that is leading to an increase in foreclosures. Bank seizures increased a record 171 percent from a year ago and foreclosure filings rose 53 percent in June, RealtyTrac Inc., a seller of default data, said last week in a statement.
One in 500
The Irvine, California-based company began collecting statistics on default notices, warnings of scheduled auction and repossessions in January 2005. One in every 500
Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to withstand the subprime lending meltdown has also heightened the credit crisis and may further limit access to loans.
M/I Homes inc., a homebuilder concentrating in the Midwest, Florida and the Mid-Atlantic states, said July 10 it delivered 478 homes in the second quarter, down from 755 in the same period in 2007. The Columbus, Ohio-based company said the number of new contracts fell to 530, from 688.
The slump in housing has caused job losses in construction as well as in manufacturing. Payrolls at builders declined by 43,000 in June after a drop of 37,000 the prior month, the Labor Department said this month. The total loss of construction jobs since September 2006 has swelled to 528,000.
Merrill Lynch Posts Fourth Straight Quarterly Loss
By Josh Fineman and Bradley Keoun
Merrill Lynch & Co., the third- biggest U.S. securities firm, reported a wider-than-forecast quarterly loss as the credit contraction saddled the company with $9.7 billion of writedowns.
Moody's Investors Service cut Merrill's credit rating and the firm's shares fell after it posted the second-quarter net loss of $4.65 billion, or $4.97 a share. The results, which compared with earnings of $2.14 billion a year earlier, were worse than the most pessimistic analyst forecast in a survey by Bloomberg.
Chief Executive Officer John Thain cut about 4,200 jobs in the first half of the year and is divesting assets to stem record losses and a 43 percent drop in Merrill's share price during the past 12 months. The company said it completed a $4.43 billion sale of its stake in Bloomberg LP and plans to sell a controlling interest in Financial Data Services Inc. Merrill's charges from the credit crisis now exceed $46 billion.
The quarterly loss was ‘‘inexplicably larger than what people expected,'' Michael Holland, chairman of Holland & Co., which oversees more than $4 billion, said in a Bloomberg Television interview.
Merrill shares fell as much as 7 percent after the close of regular trading in New York, after gaining almost 10 percent today. Analysts at Citigroup Inc., Oppenheimer &
Merrill failed to keep pace with its rivals. Goldman Sachs Group Inc., the biggest
Merrill today confirmed the sale of its 20 percent stake in Bloomberg LP, the parent of Bloomberg News. Merrill said it is financing the sale to Bloomberg Inc., the parent of Bloomberg LP. The investment bank said it also signed a letter of intent to sell a controlling share of mutual fund administrator Financial Data Services based on an enterprise value of more than $3.5 billion.
Thain, 53, abandoned an effort to sell Merrill's 49.8 percent share of fund manager BlackRock Inc. In a statement today, BlackRock said the two firms ‘‘agreed to extend and strengthen our global distribution agreement.''
Merrill had negative revenue of $2.12 billion in the second quarter, compared to $9.46 billion of income a year earlier, after markdowns on assets devalued by the credit crisis.
Writedowns included $3.5 billion to account for the plummeting value of collateralized debt obligations, or securities backed by other bonds. Another $1.3 billion of charges were taken on residential mortgages. The firm also reduced the value of bond insurance contracts by $2.9 billion, and lowered the value of leveraged loans by $348 million.
The company lost $1.7 billion on securities held in its
Revenue at the company's brokerage, the world's biggest with 16,690 financial advisers, fell 3 percent to $3.2 billion.
Thain, who joined Merrill in December, has sold about $18 billion of common and preferred shares to bolster capital, and overhauled risk-management as the company booked more than $37 billion of credit-market losses in the previous three quarters. The company's stock has fallen 57 percent since Thain became CEO Dec. 1.
Banks and brokers have taken more than $435 billion of writedowns and credit losses since the beginning of last year as mortgage-backed securities, CDOs, leveraged loans and other fixed-income assets lost value. Merrill's charges now top those at Citigroup Inc., the largest U.S. bank. Citigroup reports its quarterly results tomorrow.
Merrill's CDO holdings dropped to $19.9 billion at the end of June from $26.3 billion at the end of March, according to the firm's statement, mostly because of writedowns.
Moody's downgraded Merrill's long-term credit rating one level to A2, the sixth-highest available, and gave the debt a stable outlook. Standard & Poor's, which cut Merrill's rating on June 2 to A, the sixth-highest, today affirmed that assessment and said the outlook remains negative.
Second-quarter fixed-income trading revenue was negative $8.07 billion and equity-trading revenue was $1.73 billion, down from $2.15 billion a year earlier. Debt underwriting generated $367 million in revenue, down 22 percent, while stock underwriting revenue fell 38 percent to $338 million.
The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession.
Thain today also broke off talks with Silverstein Properties Inc. about relocating the investment bank's headquarters to a skyscraper under construction at the World Trade Center site in downtown Manhattan. Discussions between Merrill, Silverstein and the Port Authority of New York and New Jersey, which owns the site, ‘‘ended over economic terms,'' Port spokesman Steve Coleman said today in a statement.
The Pentagon Fuels Up
It's summer and gassing up your car is like emptying your wallet directly into that fuel pump. So you think you have it bad? You think you're feeling the pain? Well, stop your whining! Other oil "addicts" have it so much worse! Have you no pity? Take an obvious example -- the Pentagon. Once upon a time, powering your way to a little oil war was essentially a freebie. Lately, though, all you have to do is roll that Humvee off base, send that jet down the nearest runway, or launch that Hellfire missile-armed Predator drone over Afghanistan -- let's not even consider moving a whole carrier task force into the Arabian Sea -- and, let's face it, you're talking an arm and a leg.
Why, the cost of refined fuel for troop use is officially about to leap from $127.68 a barrel to $170.94. That's a 34% rise in the last six months, sucker! Feeling a little less sorry for yourself now? According to Time, "Pentagon spokesman Lt. Col. Brian Maka said Friday that the price hike is needed to cover an anticipated $1.2 billion rise in fuel costs in the next three months." Add that to the nearly $12 billion a month being spent for the wars in Afghanistan and Iraq and, come on, it puts your own problems at the pump in perspective, doesn't it? Even if it is your very own tax dollars the Pentagon's spending to fuel its wars. So, peace may be hell, but war? It's murder!
Last week, Nick Turse offered some tips to mainstream reporters who finally -- only five years late -- made it to the Bush administration's role in Iraq's oil story. Now, in part two of his series on what the mainstream media misses when it comes to our oil wars and the energy story, he turns to Washington and that gas guzzler par excellence, the Pentagon. The ties that the Complex -- the term Turse gives the old military-industrial complex in his superb book on how our everyday lives have been militarized -- has developed with an allied petro-industrial complex are so taken for granted that mainstream reporters seldom think they add up to a story. It's like being on the science beat and filing stories about how we breathe. As a war-making society, though, our breathing's been a little labored lately and Turse suggests that perhaps it's time to take another look at everyday energy activities in the Pentagon. Tom
The Pentagon and the Hunt for Black GoldThe Oil Deal Nobody Wants to Talk About
by Nick Turse
For years, "oil" and "Iraq" couldn't make it into the same sentence in mainstream coverage of the invasion and occupation of that country. Recently, that's begun to change, but "oil" and "the Pentagon" still seldom make the news together.
Last year, for instance, according to Department of Defense (DoD) documents, the Pentagon paid more than $70 million to Hunt Refining, an oil company whose corporate affiliate, Hunt Oil, undermined U.S. policy in Iraq. Not that anyone would know it. While the hunt for oil in Iraq is now being increasingly well covered in the mainstream, the Pentagon's hunt for oil remains a subject missing in action. Despite the staggering levels at which the Pentagon guzzles fuel, it's a chronic blind spot in media energy coverage.
Let's consider the Hunt Oil story in a little more detail, since it offers a striking example of the larger problem. On July 3, 2008, according to the New York Times, the House Committee on Oversight and Government Reform found that Hunt Oil had pursued "an oil deal with the regional Kurdistan government that ran counter to American policy and undercut Iraq's central government." Despite its officially stated policy of warning companies like Hunt Oil "that they incur risks in signing contracts until Iraq passes an oil law," the State Department in some cases actually encouraged a deal between the "Texas oil company with close ties to President Bush" and Kurdistan that "undercut" Prime Minister Nouri al-Maliki's government in Baghdad.
Asked if the White House was aware of Hunt Oil's negotiations with Kurdistan's largely autonomous regional government, President Bush's press secretary Dana Perino replied, "I don't know of anybody who was aware of it."
It turns out that wasn't exactly the truth of the matter. The Times noted that the company's chief executive, "Ray L. Hunt, a close political ally of President Bush, briefed [the President's Foreign Intelligence Advisory Board, of which he was a member] on his contacts with Kurdish officials before the deal was signed." In fact, in a July 2nd letter, Committee Chairman Henry A. Waxman told Secretary of State Condoleezza Rice: "Documents obtained by the Committee indicate that contrary to the denials of Administration officials, advisors to the President and officials in the State and Commerce Departments knew about Hunt Oil's interest in the Kurdish region months before the contract was executed."
For the Times, however, the hunt for the story ended with Hunt Oil. No attention was paid to its corporate twin, Hunt Refining, with its own major financial ties to the Pentagon, the President, and the U.S. occupation forces in Iraq. This despite the fact that the company proudly promotes itself as "a significant supplier of jet fuel to the U.S. Department of Defense" in the Southeastern United States.
And why not be proud? Ever since the President's Global War on Terror revved up and Iraq was invaded, Hunt Refining has quietly reaped major rewards. While the company was a defense contractor back in the 1990s, according to DoD documents, Hunt did not receive any funds from the Pentagon in 2000 or 2001. From 2002-2004, however, the company began garnering contracts and collected an average of just over $15.5 million a year. And only then did the good times begin to roll. In the last three years, records show that Hunt has taken in increasingly larger sums of taxpayer dollars from the Pentagon -- $39.6 million in 2005, $52.2 million in 2006, and, in 2007, a whopping $70 million. (Hunt Refining did not return telephone or email messages seeking comment for this article.)
Hunt's largest 2007 Pentagon contract was for the deliverydocuments, "to pay a $400,000 civil penalty and spend more than $48.5 million for new and upgraded pollution controls at three refineries" as part of a settlement to resolve "alleged violations of the Clean Air Act." of both aviation turbine fuel and JP-8 jet fuel -- the latter a product used by the Army and Air Force that is very similar to commercial jet fuel. That deal was awarded just months before Hunt Refining and its affiliate Hunt Southland Refining agreed, according to Department of Justice
In addition to its Pentagon connections, Hunt Refining, too, has tight ties to President Bush. Ray Hunt's son Hunter Hunt, the senior vice president of Hunt Oil Company, is, according to his corporate biography, "also involved in special projects that occur at Hunt Refining Company." The younger Hunt, however, took a leave of absence from the family businesses, from 1999-2001, to work for the Bush presidential campaign "as the primary Policy Advisor responsible for energy issues" and chief architect of Bush's national energy policy.
While Hunt Oil is finally making headlines and garneringattention for its Bush administration connections and dealings in occupied Iraq, just as it should, Hunt Refining's complex ties to the force in charge of occupying that country aren't considered news at all. Despite the obvious financial relationship and network of curious ties that extend from the White House and the Pentagon to Texas, Alabama, and Iraq, this part of the story is just considered business as usual. press
Flush with regularly increasing taxpayer dollars from the DoD, Hunt Refining is now embarking on an ambitious expansion program to increase its output. Currently, Hunt's Tuscaloosa, Alabama refinery processes 52,000 barrels of crude oil per day, according to a recent article in the trade magazine South Central Construction. The company aims, however, to increase its production to 65,000 barrels per day, resulting in "an approximate doubling of gasoline and diesel fuel production." According to a report in the April issue of Hydrocarbon Processing, the first of Hunt's new processing units will "come online in late 2009. The revamp is scheduled for completion in 2010." All of this is, of course, occurring as the Pentagon needs increasing quantities of fuel to carry on its wars.
In 2008, Hunt Refining has already received a $65.4 million aviation-fuel deal from the Pentagon that has a "performance completion" deadline of April 30, 2009. If recent contracts are any guide, this is an indication that it stands to take in record amounts from the U.S. military before year's end.
The DoD is, as national security expert Noah Shachtman notes, "the world's largest energy consumer." With no end in sight for its current wars and occupations, which have drivenoil companies its fuel consumption sky-high, and ever increasing oil prices (undoubtedly, in turn, affected at least modestly by the Pentagon's ravenous need for fuel), ever more taxpayer dollars are going to be funneled to the many on its -- and so America's -- payroll.
This is how the government now works and it should be a story -- and Hunt Refining should be part of it. But don't count on that. It's taken the mainstream media five years to make it to the oil story in Iraq. How many more before it notices that everyday oil operations in Washington are worth a look?
With its increasing contracts from the DoD, its soon to be ramped up capacity, and the toe-hold its corporate partner possesses in Pentagon-occupied Iraq, Hunt Refining is likely to be a player in Washington and a major beneficiary of DoD dollars long after George W. Bush has gone back to Texas. But until the mainstream media begins to tease out the close-knit relationships among Hunt, other energy corporations, and the Pentagon that enable our military to function on a daily basis, key aspects not just of major scandals but of how our world works will remain hidden, even if in plain sight.
Nick Turse is the associate editor and research director of Tomdispatch.com. He has written for the Los Angeles Times, the San Francisco Chronicle, Adbusters, the Nation, and regularly for Tomdispatch.com. His first book, The Complex: How the Military Invades Our Everyday Lives, an exploration of the new military-corporate complex in America, was recently published by Metropolitan Books. His website is Nick Turse.com.
One million names on US government “terrorist” watch list
By Jerry WhiteGo To Original
One million people—including large numbers of American citizens—are on the US government’s so-called terrorist watch list, according to the American Civil Liberties Union, which held a Washington, D.C. press conference earlier this week to mark the ominous milestone.
Since February of this year the ACLU has maintained an online “watch list counter” to track the size of the government’s watch list. A September 2007 report by the inspector general of the Justice Department reported that the list contained 700,000 names and was growing by 20,000 per month. As of this writing, the counter has passed the 1,001,500 mark.
The Terrorist Screening Center (TSC) was set up in December 2003 through a Homeland Security directive signed by President George W. Bush, who ordered the agency to consolidate more than a dozen separate terrorist watch lists maintained by different federal agencies.
The resulting Terrorist Screening Database (TSDB) has been used to detain thousands of people during airport security checks or bar them from flying. Foreign nationals have been held up at US border crossings and prevented from obtaining visas based on the list. Local law enforcement agencies have also accessed the database during routine traffic stops.
Thousands of innocent people have been caught up in the government’s arbitrary dragnet and “no-fly” lists; many held for hours in interrogation rooms, threatened and denied due process. Those on the list have no right to access and challenge the data in which the list is based.
“Members of Congress, nuns, war heroes and other ‘suspicious characters,’ with names like Robert Johnson and Gary Smith, have become trapped in the Kafkaesque clutches of this list, with little hope of escape,” said Caroline Fredrickson, director of the ACLU Washington Legislative Office.
The ACLU said those on the list included South African leader Nelson Mandela; Evo Morales, president of Bolivia; and US Senator Edward Kennedy, Democrat from Massachusetts.
Appearing at the press conference was Akif Rahman, a computer consulting company founder from suburban Chicago, who was detained and questioned for more than two hours by US customs officials on four separate occasions when crossing the Canadian border. On one occasion, he was held for 5 ½ hours, shackled to a chair, and physically searched. He was also separated from his wife and children who were forced to wait in a small dirty public area without food or telephones. A US citizen born in Springfield Illinois, Rahman is being represented by the ACLU of Illinois in a lawsuit over this treatment.
A flight from London carrying Yusuf Islam, the pop star formerly known as Cat Stevens, was diverted and forced to land in Maine once the government realized he was aboard. The singer was barred from entering the United States.
Attorney David C. Nelson is one of many men named David Nelson around the US who has been caught up on the list, including a former star of the television show “Ozzie and Harriet.”
The ACLU reported that the list even contained Saddam Hussein’s name, although he was imprisoned in Baghdad and in US custody at the time. It also contained the names of several 9/11 hijackers long after they were killed.
Barry Steinhardt, director of the ACLU’s Technology and Liberty Program, said, “America’s new million record watch list is a perfect symbol for what’s wrong with this administration’s approach to security: it’s unfair, out-of-control, a waste of resources, treats the rights of the innocent as an afterthought, and is a very real impediment in the lives of millions of travelers in this country. It must be fixed without delay.
“Putting a million names on a watch list is a guarantee that the list will do more harm than good by interfering with the travel of innocent people and wasting huge amounts of our limited security resources on bureaucratic wheel-spinning,” said Steinhardt. “I doubt this thing would even be effective at catching a real terrorist.”
In the name of the “war on terror”, the Bush Administration has gone a long way in setting up the structure of a police state. The state surveillance being conducted against more than one million people is not aimed at protecting the American people from terror attacks. It will ultimately be used to track political opponents, particularly as popular opposition grows to the worsening social conditions confronting tens of millions of working people, to the attacks on democratic rights, and the war
The ACLU concluded its press conference by expressing hope that the “next president” would move quickly to fix the excesses carried out by the Bush administration. Any confidence that a Barack Obama White House will dismantle the repressive measures put in place by Bush is an illusion.
Obama has fully embraced the war on terror—both in regards to foreign and domestic policy. He signaled his support for the attack on democratic rights through his Senate vote last week backing the Bush administration’s illegal program of widespread electronic surveillance and wiretapping.
US court upholds president’s power to detain Americans as “enemy combatants”
By Bill Van AukenGo To Original
The Bush administration’s contention that the president has the power to detain anyone, including US citizens, indefinitely without charges or trial by declaring them “enemy combatants” received judicial backing from a sharply divided appellate court in Richmond, Virginia Tuesday.
The 5-to-4 decision by the US Court of Appeals for the 4th Circuit made it nearly certain that this assertion of dictatorial powers by the presidency will be part of the Bush administration’s dark legacy handed on to a future administration.
The ruling by the full appellate court effectively overturned a decision reached by a three-judge panel of the same court issued in June of last year, which held that the Bush administration did not have the legal authority to detain people without charges and compared its assumption of such sweeping powers to military rule and the oppression of the American colonies by King George III.
That panel had itself reversed a lower court’s denial of habeas corpus for Ali Saleh Kahlah al-Marri. A Qatari national, al-Marri was a legal resident of the US and a graduate student in Peoria, Illinois, before the Bush White House declared him an enemy combatant in 2003 and ordered the military to throw him into a Navy brig in Charleston, South Carolina, where he has been held for the last five years.
While the three-judge panel ordered the military to release him into civilian custody to be either tried or deported, the full court ruling means that al-Marri will remain imprisoned without charges in the Charleston brig.
In a companion ruling, the same full court, also by a 5-to-4 decision, held that al-Marri has the right to a limited appeal of his designation as an enemy combatant based on a civilian court’s review of the evidence against him. It found that a previous court proceeding, in which a defense intelligence agent issued a sworn statement asserting Marri’s alleged ties to al-Qaeda, supposedly based on second and third-hand sources, did not provide an adequate review of the government’s contention that he was not entitled to further due process.
This meager concession notwithstanding, the Justice Department hailed the ruling as a victory, declaring that it upheld “a vital tool in protecting the nation” and recognized “the president’s authority to capture and detain al-Qaeda agents who, like the 9/11 hijackers, come to this country to commit or facilitate warlike acts.”
Al-Marri arrived in the US on September 10, 2001 to pursue a master’s degree in computer science at Peoria’s Bradley University, where he had earned an undergraduate degree 10 years earlier. He was seized from his home by the FBI and dragged away in front of his wife and five children to be held as a material witness in the September 11 terrorist attacks.
He was subsequently charged with credit card fraud and other offenses, accusations that he vehemently denied. Eighteen months after he was detained and on the eve of an evidentiary hearing in which he was going to challenge evidence to be used against him in an upcoming trial on the grounds that it was extracted through torture, President Bush signed a statement declaring al-Marri an “enemy combatant.” He ordered the military to seize him from civilian authorities and imprison him in the Navy brig. While the government claimed that he is an Al Qaeda “sleeper agent,” not a shred of evidence has ever been presented to substantiate this allegation.
He was held in the brig incommunicado for over a year and subjected to torture. He has been denied the right to see his family for five years, most of which have been spent in solitary confinement. Al-Marri’s lawyers report that this cruel and inhumane treatment has left him mentally unstable.
The government has claimed that the Authorization to Use Military Force (AUMF) resolution passed by Congress in 2002 gives the president the power to carry out such detentions. Alternately, it has asserted that the “commander in chief” has unchallengeable authority to imprison anyone without charges for the duration of a global war on terror, which the administration itself asserts will last for generations. These unconstitutional and dictatorial claims were essentially upheld by the appellate court majority.
Al-Marri is the sole remaining person detained on US soil who is being held as an enemy combatant. It had previously held Jose Padilla, a US citizen detained at Chicago’s O’Hare International Airport in May 2008, under the same conditions, but then charged him criminally in late 2005 to preempt a Supreme Court review of his case. Another US citizen detained in Afghanistan, Yasser Esam Hamdi, was also held as an enemy combatant until 2004, when he was released to Saudi Arabia on condition of giving up his US citizenship.
While in both the Padilla and Hamdi cases, the government claimed that they could be designated as enemy combatants because they had supposedly fought alongside the Taliban in Afghanistan, in al-Marri’s case there was no such allegation. In his case, the assertion of unrestrained power of executive detention was extended further, to encompass anyone, including citizens and legal residents in the US itself, on the sole say-so of the US president that they are terrorist conspirators.
The decision of the 4th District—considered the most right-wing federal appeals court in the country—tracks closely a September 2005 ruling by another three-judge panel from the same court in the Padilla case, which also upheld the power of the president to arrest and indefinitely detain US citizens arrested on American soil without charges or a trial. Because the US Supreme Court refused to review the decision after the Bush administration charged Padilla criminally, that ruling still stands.
The majority opinion written by Judge William Traxler, who was appointed to the bench by President Clinton, acknowledged that the US Constitution “affords all persons detained by the government the right to be charged and tried in a criminal proceeding” and bars “the government from subjecting individuals arrested inside the United States to military detention unless they fall within certain narrow exceptions.” Such an exception exists, Traxler contended, if an individual is “properly designated an enemy combatant pursuant to legal authority of the President.”
Traxler’s decision further spelled out that such power extends not just to foreign residents of the US, but to US citizens as well. He wrote, “The constitutional rights our court determines exist, or do not exist, for al-Marri will apply equally to our own citizens under like circumstances. This means simply protections we declare to be unavailable under the Constitution to al-Marri might likewise be unavailable to American citizens.”
In other words, all a US president has to do is sign his name to a sheet of paper and any American citizen can be thrown into a military prison and detained indefinitely without being charged with a crime or given the right to a trial.
Denying the obvious, the decision claimed that upholding al-Marri’s detention as an enemy combatant did not constitute part of “some pattern of surrender by a co-equal Congress and judiciary to a rampaging executive branch.” To support this contention, it pointed to the congressional approval of various pieces of legislation that embodied capitulation to the Bush White House, including the AUMF blank check resolution for war, the US Patriot Act and the Protect America Act of 2007.
“Those who think these acts ceded too much power to the executive may be right or they may be wrong,” the decision states. Whatever the case, it contends, they were produced by votes in Congress.
Finally, the majority essentially threw up their hands in the face of a secretive government and a supposedly omnipotent terrorist threat. “We may never know whether we have struck the proper balance between liberty and security, because we do not know every action the executive is taking and we do not know every threat global terror networks have in store,” the decision states.
The four justices voting in the minority supported a dissent by Judge Diana Gribbon Motz, another Clinton appointee who authored the three-judge panel decision last year upholding al-Marri’s right to habeas corpus.
Beginning by affirming that the US Constitution has provided a guarantee for over two centuries that “in the United States, no one will be deprived of liberty without due process of law,” Motz’s opinion spells out the gross violation of basic rights in the case of al-Marri since he was seized by the military more than five years ago:
“He has been held by the military ever since—without criminal charge or process. He has been so held, despite the fact that he was initially taken from his home in Peoria, Illinois, by civilian authorities and imprisoned awaiting trial for purported domestic crimes. He has been so held, although the Government has never alleged that he is a member of any nation’s military, has fought alongside any nation’s armed forces, or has borne arms against the United States anywhere in the world. And he has been so held, without acknowledgment of the protection afforded by the Constitution, solely because the Executive believes that his indefinite military detention—or even the indefinite military detention of a similarly situated American citizen—is proper.”
Motz insists: “No existing law permits this extraordinary exercise of executive power. Even in times of national peril, we must follow the law, lest this country cease to be a nation of laws.
Continuing with an implicit warning that the government’s actions and their validation by the appeals court decision pose the threat of a dictatorship in the United States, Motz writes:
“To sanction such presidential authority to order the military to seize and indefinitely detain civilians, even if the President calls them ‘enemy combatants,’ would have disastrous consequences for the Constitution—and the country. For a court to uphold a claim to such extraordinary power would do more than render lifeless the Suspension Clause, the Due Process Clause, and the rights to criminal process in the Fourth, Fifth, Sixth, and Eighth Amendments; it would effectively undermine all of the freedoms guaranteed by the Constitution.
“It is that power—were a court to recognize it—that could lead all our laws ‘to go unexecuted, and the government itself to go to pieces.’ We refuse to recognize a claim to power that would so alter the constitutional foundations of our Republic.”
The lawyer representing al-Marri, Jonathan Hafetz, said that the court’s decision “effectively allows the president to seize any person in the United States, a citizen or noncitizen, and detain them indefinitely without trial.” The court’s action, he continued, “cripples the most important constitutional right of all, the right to be charged and tried if suspected of wrongdoing.” He said he was considering an appeal of the ruling.
By ordering a new hearing on the evidence supporting al-Marri’s detention as an enemy combatant, Hafetz said, the court’s majority had rejected “the president’s most sweeping claims of unchecked and unreviewable executive detention power.”
However, the rights granted al-Marri by the decision are extremely circumscribed and far less than those enjoyed by any criminal defendant in the US. The court found that he is entitled under the so-called burden-shifting scheme laid out in the Supreme Court decision in the Hamdi decision to contest the government’s contention that “the balance of the competing interests weighs on the side of lessened due process protections.” The appeals court majority found that al-Marri had been denied the right to contest these diminished protections, which were imposed by a lower court as a matter of course.
Kucinich Denounces Bush Policy on GazaCongressman Dennis Kucinich (D-OH) sent the following letter to President Bush yesterday:
The Honorable George W. Bush
1600 Pennsylvania Ave NW
Washington, DC 20500
Dear President Bush:
Thank you for requesting that the Department of State respond to my letter of May 14, 2008 regarding the ongoing crisis in Gaza and Israel.
Your letter states that “it is Hamas’ behavior that is responsible for the current crisis, and any meaningful improvements on the ground will require Hamas to end its attacks against Israel.” This response is very troubling.
The responsibility to care for the civilian population in Gaza is Israel’s, pursuant to the Fourth Geneva Convention (FGC) which defines the protection afforded civilians in times of war and military occupation. Israel’s right to national security indeed affords it the right to take action against Hamas. However that action should not and cannot amount to collective punishment as it does today. The current crisis may be exacerbated, instigated, even perpetuated by Hamas, but the responsibility for beginning and ending the humanitarian crisis is certainly not Hamas’s.
As an occupying power, only Israel has the ability to resume the flow of basic goods and humanitarian supplies into, and out of, the Gaza Strip. To make the resumption of such goods contingent on Hamas’s behavior is to endorse the collective punishment of Gaza’s 1.5 million population in contravention of Article 33 of the FGC. Moreover, by supporting Israel’s practice of collective punishment in response to Hamas’s abominable attacks, the U.S. State Department effectively abdicates its diplomatic principles and its role as a “honest broker”.
The Gaza-Israel ceasefire, enacted on June 19, 2008, has done little to mitigate the humanitarian crisis wrought by the Israeli-imposed blockade of Gaza. The United States can and should use its influence to urge Israel to continue to ease restrictions on goods, economic activity and movement into and out of the Gaza Strip.
Additionally, the United States can help to improve conditions in Gaza by supporting United Nations programming. At present, the United Nations Relief and Works Agency (UNRWA) is able to provide an additional 12,500 jobs in Gaza as part of their sponsorship of The Summer Games. To create these jobs, UNRWA needs an additional $30 million in funding. The U.S. should work with the international community to fill this funding gap.
I look forward to your prompt response regarding the above concerns. Thank you for your attention to this matter.
Dennis J. Kucinich
Member of Congress