Monday, August 18, 2008

The perfect storm leading to a global recession

The perfect storm leading to a global recession

The probability is growing that the global economy - not just the US - will experience a serious recession. Recent developments suggest that all G7 economies are already in recession or close to tipping into one. Other advanced economies or emerging markets (the rest of the eurozone; New Zealand, Iceland, Estonia, Latvia, and some Southeast European economies) are also nearing a recessionary hard landing. When they reach it, there will be a sharp slowdown in the BRICs (Brazil, Russia, India, and China) and other emerging markets.

This looming global recession is being fed by several factors: The collapse of housing bubbles in the US, UK, Spain, Ireland and other euro-zone members; punctured credit bubbles where money and credit was too easy for too long; the severe credit and liquidity crunch following the US mortgage crisis; the negative wealth and investment effects of falling stock markets (already down by more than 20 per cent globally); the global effects via trade links of the recession in the US (which still counts for about 30 per cent of global GDP); the US dollar's weakness, which reduces American trading partners' competitiveness; and the stagflationary effects of high oil and commodity prices, which are forcing central banks to increase interest rates to fight inflation at a time when there are severe downside risks to growth and financial stability.

Official data suggest that the US economy entered into a recession in the first quarter of this year. The economy rebounded - in a double-dip, W-shaped recession - in the second quarter, boosted by the temporary effects on consumption of $100 billion (€68 billion) in tax rebates. But those effects will fade by late summer.

The UK, Spain, and Ireland are experiencing similar developments, with housing bubbles deflating and excessive consumer debt undercutting retail sales, thus leading to recession. Even in Italy, France, Greece, Portugal, Iceland, and the Baltic states, frothy housing markets are starting to slacken. Small wonder, then, that production, sales, and consumer and business confidence are falling throughout the euro zone.

Elsewhere, Japan is contracting, too. Japan used to grow modestly for two reasons: Strong exports to the US and a weak yen. Now, exports to the US are falling while the yen has strengthened. Moreover, high oil prices in a country that imports all of its oil needs, together with falling business profitability and confidence, are pushing Japan into a recession.

The last of the G7 economies, Canada, should have benefited from high energy and commodity prices, but its GDP shrank in the first quarter, owing to the contracting US economy. Indeed, three quarters of Canada's exports go to the US, while foreign demand accounts for a quarter of its GDP.

So every G7 economy is now headed toward recession. Other smaller economies (mostly the new members of the EU, which all have large current-account deficits) risk a sudden reversal of capital inflows; this may already be occurring in Latvia and Estonia, as well as in Iceland and New Zealand.

This G7 recession will lead to a sharp growth slowdown in emerging markets and likely tip the overall global economy into a recession. Those economies that are dependent on exports to the US and Europe and that have large current-account surpluses (China, most of Asia, and most other emerging markets) will suffer from the G7 recession. Those with large current-account deficits (India, South Africa, and more than 20 economies in East Europe from the Baltics to Turkey) may suffer from the global credit crunch. Commodity exporters (Russia, Brazil, and others in the Middle East, Asia, Africa, and Latin America) will suffer as the G7 recession and global slowdown drive down energy and other commodity prices by as much as 30 per cent. Countries that allowed their currencies to appreciate relative to the dollar will experience a sharp slowdown in export growth. Those experiencing rising and now double-digit inflation will have to raise interest rates, while other high-inflation countries will lose export competitiveness.

Falling oil and commodity prices - already down 15 per cent from their peaks - will somewhat reduce stagflationary forces in the global economy, yet inflation is becoming more entrenched via a vicious circle of rising prices, wages, and costs. This will constrain the ability of central banks to respond to the downside risks to growth. In advanced economies, however, inflation will become less of a problem for central banks by the end of this year, as slack in product markets reduces firms' pricing power and higher unemployment constrains wage growth.

To be sure, all G7 central banks are worried about the temporary rise in headline inflation, and all are threatening to hike interest rates. Nevertheless, the risk of a severe recession - and of a serious banking and financial crisis - will ultimately force all G7 central banks to cut rates. The problem is that, especially outside the US, this monetary loosening will occur only when the G7 and global recession become entrenched.

Thus, the policy response will be too little, and will come too late, to prevent it.

Morgan Stanley Says Financial Crisis Will Last

Morgan Stanley Says Financial Crisis Will Last: Report

Go To Original

The financial crisis will probably not end until next year or even 2010, Germany's Handelsblatt newspaper quoted Morgan Stanley co-President Walid Chammah as saying in a preview of its Monday edition.

Chammah also expected more banks to fall victim to the crisis, the paper said.

"We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business," the paper quoted him as saying.

Chammah also said return-on-equity rates of 25 percent were a thing of the past for the investment banking industry, the paper reported.

"I estimate returns in the industry will be more like 15 to 20 percent as a rule," the paper quoted him as saying.

America on the Couch

America on the Couch

By Mike Whitney

Go To Original

America is a country badly in need of therapy. We don't know who we are anymore; everything is topsy-turvy. It's like we're suffering a national identity crisis and need a turn on the couch. There's just been too much change too fast and no one really knows what's going on. Even stanch conservatives are in a daze from the daily overload of bad news. Former basketball superstar Charles Barkley summed it up best when he was asked what political party he belonged to. He answered, "Well, I used to be a Republican, until they lost their minds." That's America in a nutshell; we've lost our minds.

The torture thing was the last straw. That's where good old American values really took a shellacking. Of course, it never mattered to Bohemian Grove dandies like Bush and Cheney. Why would they care? They just saw it as a way to increase their power and stick it to their enemies at the same time. It was a game, really. They'd just gouge out a few eyes and rip off a few fingernails no one would be the wiser. Besides, they thought, let the media soften up public attitudes; that's why they get paid for, right? Wrong. Attitudes really haven't changed that much about torture. Most people still think its wrong and think it should be illegal. More importantly, knowing that your country deliberately inflicts pain on people really matters; it's a game-changer. It's not possible to respect a country that uses torture. What people feel is disgust not respect. And, it's disturbing, too. It proves that something is rotten in America. We've become a nation of creeps.

Who ever dreamed that we'd see the day when pundits and politicians would be debating whether torture really "works" or not. How low can we go? That kind of hairsplitting just proves that the country is already in the toilet. Its a pretty straightforward proposition if you think about it; countries that torture people are the enemies of human rights, democratic values and conventional standards of acceptable behavior. That's the long-winded way of saying that they're sickos. Just take a look at the photos from Abu Ghraib again; men dressed up in women's panties or stacked up naked in human pyramids. Some fun, eh? It's sick! The pyramid picture tells you everything you need to know about modern-day America. It's like taking a look in the mirror and seeing Dick Cheney's wizened face staring back. That's what the world sees now, and that's why they're scared, real scared. America is on a rampage and our moral compass is on the Fritz. That's a frightening prospect for everyone.

Our national symbols have also taken a pasting since Bush took office; the American flag in particular. Old Glory used to embody our collective aspirations whether that meant "traditional values" or "liberty and justice". But no more. Now the flag has become proprietary; the property of a small gaggle of neo-fascists and right-wing loonies who display their shiny brass lapel-pin on their chest to identify themselves to other like-minded wackos. They might as well put lightening rods on their collars for all the difference it makes.

The American flag flies over every school, government office and major business across the country. It has been carried into every battle in every war the US has ever fought. Now it is draped lifelessly over the new century's most dreaded gulags; Abu Ghraib, Bagram Airforce Base, and the uber-symbol of American barbarism, Guantanamo Bay. Am I the only one who's pissed off about it? What does the rest of the world think when they see the Stars and Stripes unfurled over an icon to human cruelty like Gitmo? Do they see a symbol of "freedom and the opportunity" or do they see the Butcher's Apron spreading war and fear across the planet?

America needs to spend a little time on the couch reassembling its shattered psyche and reconnecting with its inner-self. That means, sorting through the rubble of the Bush years and getting back to basics; a strong commitment to justice, human rights and personal liberty.

North American Army created without OK by Congress

North American Army created without OK by Congress

U.S., Canada military ink deal to fight domestic emergencies

By Jerome R. Corsi

Go To Original

In a ceremony that received virtually no attention in the American media, the United States and Canada signed a military agreement Feb. 14 allowing the armed forces from one nation to support the armed forces of the other nation during a domestic civil emergency, even one that does not involve a cross-border crisis.

The agreement, defined as a Civil Assistance Plan, was not submitted to Congress for approval, nor did Congress pass any law or treaty specifically authorizing this military agreement to combine the operations of the armed forces of the United States and Canada in the event of a wide range of domestic civil disturbances ranging from violent storms, to health epidemics, to civil riots or terrorist attacks.

In Canada, the agreement paving the way for the militaries of the U.S. and Canada to cross each other's borders to fight domestic emergencies was not announced either by the Harper government or the Canadian military, prompting sharp protest.

"It's kind of a trend when it comes to issues of Canada-U.S. relations and contentious issues like military integration," Stuart Trew, a researcher with the Council of Canadians told the Canwest News Service. "We see that this government is reluctant to disclose information to Canadians that is readily available on American and Mexican websites."

The military Civil Assistance Plan can be seen as a further incremental step being taken toward creating a North American armed forces available to be deployed in domestic North American emergency situations.

The agreement was signed at U.S. Army North headquarters, Fort Sam Houston, Texas, by U.S. Air Force Gen. Gene Renuart, commander of NORAD and U.S. Northern Command, or USNORTHCOM, and by Canadian Air Force Lt. Gen. Marc Dumais, commander of Canada Command.

"This document is a unique, bilateral military plan to align our respective national military plans to respond quickly to the other nation's requests for military support of civil authorities," Renuart said in a statement published on the USNORTHCOM website.

"In discussing the new bilateral Civil Assistance Plan established by USNORTHCOM and Canada Command, Renuart stressed, "Unity of effort during bilateral support for civil support operations such as floods, forest fires, hurricanes, earthquakes and effects of a terrorist attack, in order to save lives, prevent human suffering an mitigate damage to property, is of the highest importance, and we need to be able to have forces that are flexible and adaptive to support rapid decision-making in a collaborative environment."

Lt. Gen. Dumais seconded Renuart's sentiments, stating, "The signing of this plan is an important symbol of the already strong working relationship between Canada Command and U.S. Northern Command."

"Our commands were created by our respective governments to respond to the defense and security challenges of the twenty-first century," he stressed, "and we both realize that these and other challenges are best met through cooperation between friends."

The statement on the USNORTHCOM website emphasized the plan recognizes the role of each nation's lead federal agency for emergency preparedness, which in the United States is the Department of Homeland Security and in Canada is Public Safety Canada.

The statement then noted the newly signed plan was designed to facilitate the military-to-military support of civil authorities once government authorities have agreed on an appropriate response.

As WND has previously reported, U.S. Northern Command was established on Oct. 1, 2002, as a military command tasked with anticipating and conducting homeland defense and civil support operations where U.S. armed forces are used in domestic emergencies.

Similarly, Canada Command was established on Feb. 1, 2006, to focus on domestic operations and offer a single point of contact for all domestic and continental defense and securities partners.

In Nov. 2007, WND published a six-part exclusive series, detailing WND's on-site presence during the NORAD-USNORTHCOM Vigilant Shield 2008, an exercise which involved Canada Command as a participant.

In an exclusive interview with WND during Vigilant Shield 2008, Gen. Renuart affirmed USNORTHCOM would deploy U.S. troops on U.S. soil should the president declare a domestic emergency in which the Department of Defense ordered USNORTHCOM involvement.

In May 2007, WND reported President Bush, on his own authority, signed National Security Presidential Directive 51, also known as Homeland Security Presidential Directive 20, authorizing the president to declare a national emergency and take over all functions of federal, state, local, territorial and tribal governments, without necessarily obtaining the approval of Congress to do so.

Verizon contract cuts benefits and clears way for layoffs

Verizon contract cuts benefits and clears way for layoffs

Go To Original

The contract negotiated by the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers (IBEW) with the telecommunications company Verizon represents a betrayal of the 65,000 Verizon workers represented by the two unions. It cuts benefits and sets the stage for the company to eliminate thousands of jobs.

The joint aim of the union leadership and Verizon was to suppress any struggle by the workers and impose a contract that would strengthen the position of the company.

The agreement was reached one week after the August 2 expiration of the previous five-year contract. The unions refused to call a strike, despite a 91 percent vote to authorize a walkout. Instead, various protest stunts were organized while the membership was kept in the dark not only about the status of the negotiations, but even about the unions’ demands.

Workers and retirees will see a continued erosion of their living standards. The three-year pact calls for wage and pension increases of 3.25 percent, 3.5 percent and 3.75 percent, with a cost-of-living increase in only the final year. Already this year, the consumer price index has risen well beyond the wage increases in the contract. According to the US government, transportation costs have risen 13.4 percent since last year and energy costs are up a whopping 19.3 percent over just one year ago.

On health care, workers in New York and the New England states will be forced into a preferred providers organization, or PPO. Under the PPO, workers will be able to see only those doctors approved by the plan and will have to get referrals before seeing a specialist. Many services are not covered and there is a cap on benefits.

Both active and retired workers will see their prescription drug program cut and will be forced to pay a larger share of the cost of brand name medications.

Perhaps the most significant change is the dropping of a defined retiree health care benefit for new employees. Under the new contract, Verizon will no longer pay the health care costs for new employees when they retire. Instead, the company will contribute a fixed dollar amount per year of service towards health care premiums for the retirees.

The contract also sets the stage for Verizon to eliminate thousands of jobs. Since 2003, when the last contract was signed, Verizon has cut 13,000 union jobs and approximately 40,000 management jobs through attrition and layoffs. In addition, Verizon has forced thousands of other workers, mostly in management, to either move or be laid off and replaced by younger, lower-salary employees.

Over the past few years, Verizon has aggressively entered the cable television market and spent billions in building a fiber optic network that can deliver voice, high-speed internet and video to its customers’ homes. The company is classifying most work on the old landline network, which is performed by the bulk of the unionized work force, as “legacy.” Verizon wants to cut thousands more jobs, both union and management, from this area of the business.

In exchange for pushing through these concessions, the union bureaucracy obtained a few crumbs for itself. The company agreed to reclassify a number of non-union jobs so that the workers would become part of the union and begin paying union dues. The company put that number at 1,500, while the union’s statements put the number at 2,500.

Verizon is also contributing $2 million towards a union-company committee to promote health care reform, whose goal is to cut Verizon’s overall health care bill.

The union did not obtain its principal goal of gaining access to the thousands of workers at Verizon Wireless, which has become Verizon’s major source of profits.

Double Standards in the Global War on Terror

Double Standards in the Global War on Terror

Anthrax Department

By Tom Engelhardt

Oh, the spectacle of it all — and don’t think I’m referring to those opening ceremonies in Beijing, where North Korean-style synchronization seemed to fuse with smiley-faced Walt Disney, or Michael Phelp’s thrilling hunt for eight gold medals and Speedo’s one million dollar “bonus,” a modernized tribute to the ancient Greek tradition of amateurism in action. No, I’m thinking of the blitz of media coverage after Dr. Bruce Ivins, who worked at the U.S. Army Medical Research Institute of Infectious Diseases at Fort Detrick, Maryland, committed suicide by Tylenol on July 29th and the FBI promptly accused him of the anthrax attacks of September and October 2001.

You remember them: the powder that, innocuously enough, arrived by envelope — giving going postal a new meaning — accompanied by hair-raising letters ominously dated “09-11-01″ that said, “Death to America. Death to Israel. Allah is great.” Five Americans would die from anthrax inhalation and 17 would be injured. The Hart Senate Office Building, along with various postal facilities, would be shut down for months of clean-up, while media companies that received the envelopes were thrown into chaos.

For a nation already terrified by the attacks of September 11, 2001, the thought that a brutal dictator with weapons of mass destruction (who might even have turned the anthrax over to the terrorists) was ready to do us greater harm undoubtedly helped pave the way for an invasion of Iraq. The President would even claim that Saddam Hussein had the ability to send unmanned aerial vehicles to spray biological or chemical weapons over the east coast of the United States (drones that, like Saddam’s nuclear program, would turn out not to exist).

Today, it’s hard even to recall just how terrifying those anthrax attacks were. According to a LexisNexis search, between Oct. 4 and Dec. 4, 2001, 389 stories appeared in the New York Times with “anthrax” in the headline. In that same period, 238 such stories appeared in the Washington Post. That’s the news equivalent of an unending, high-pitched scream of horror — and from those attacks would emerge an American world of hysteria involving orange alerts and duct tape, smallpox vaccinations, and finally a war, lest any of this stuff, or anything faintly like it, fall into the hands of terrorists.

And yet, by the end of 2001, it had become clear that, despite the accompanying letters, the anthrax in those envelopes was from a domestically produced strain. It was neither from the backlands of Afghanistan nor from Baghdad, but — almost certainly — from our own military bio-weapons labs. At that point, the anthrax killings essentially vanished… Poof!… while 9/11 only gained traction as the singular event of our times.

Those deaths-by-anthrax ceased to be part of the administration’s developing Global War on Terror narrative, which was, of course, aimed at Islamist fanatics (and scads of countries that were said to provide them with “safe haven”), but certainly not military scientists here at home. No less quickly did those attacks drop from the front pages — in fact, simply from the pages — of the nation’s newspapers and off TV screens.

Unlike with 9/11, there would be no ritualistic reminders of the anniversaries of those attacks in years to come. No victims, or survivors, or relatives of victims would step to podiums and ring bells, or read names, or offer encomiums. There would be no billion-dollar (or even million-dollar) memorial to the anthrax dead for the survivors to argue over. There would be little but silence, while the FBI fumbled its misbegotten way through an investigative process largely focused on one U.S. bio-weapons scientist, Steven J. Hatfill, who also worked at Fort Detrick and just happened to be the wrong man. (Bruce Ivins, eerily enough, would work closely with, and aid, the FBI’s investigation for years until the spotlight of suspicion came to be directed at him.)

This essentially remained the state of the case until, as July ended, Ivins committed suicide. Then, what a field day! The details, the questions, the doubts, the disputed scientific evidence, the lists of kinds of drugs he was prescribed, the lurid quotes, the “rat’s nest” of an anthrax-contaminated lab he worked in, the strange emails and letters! (”I wish I could control the thoughts in my mind… I get incredible paranoid, delusional thoughts at times, and there’s nothing I can do until they go away, either by themselves or with drugs.”) Case solved! Or not… The “mad scientist” from the Army’s Fort Detrick bio-wars labs finally nabbed! Or not…

It was a dream of a story. And the mainstream media ran with it, knowledgeably, authoritatively, as if they had never let it go. Now, as the coverage fades and the story once again threatens to head for obscurity (despite doubts about Ivins’s role in the attacks), I thought it might be worth mentioning a few questions that came to my mind as I read through recent coverage — not on Ivins’s guilt or innocence, but on matters that are so much a part of our American landscape that normally no one even thinks to ask about them.

Here are my top six questions about the case:

1. Why wasn’t the Bush administration’s War on Terror modus operandi applied to the anthrax case?

On August 10th, William J. Broad and Scott Shane reported on some of the human costs of the FBI anthrax investigation in a front-page New York Times piece headlined, “For Suspects, Anthrax Case Had Big Costs, Scores of the Innocent in a Wide F.B.I. Net.” They did a fine job of establishing that those who serially came under suspicion had a tough time of it: “lost jobs, canceled visas, broken marriages, frayed friendships.” According to the Times (and others), under the pressure of FBI surveillance, several had their careers wrecked; most were interviewed and re-interviewed numerous times in a “heavy-handed” manner, as well as polygraphed; some were tailed and trailed, their homes searched, and their workplaces ransacked.

Under the pressure of FBI “interest,” anthrax specialist and “biodefense insider” Perry Mikesell evidently turned into an alcoholic and drank himself to death. Steven Hatfill, while his life was being turned inside out, had an agent trailing him in a car run over his foot, for which, Broad and Shane add, he, not the agent, was issued a ticket. And finally, of course, Dr. Ivins, growing ever more distressed and evidently ever less balanced, committed suicide on the day his lawyer was meeting with the FBI about a possible plea bargain that could have left him in jail for life, but would have taken the death penalty off the table.

Still, tough as life was for Mikesell, Hatfill, Ivins, and scores of others, here’s an observation that you’ll see nowhere else in a media that’s had a two-week romp through the case: In search of a confession, none of the suspects of these last years, including Ivins, ever had a lighted cigarette inserted in his ear; none of them were hit, spit on, kicked, and paraded naked; none were beaten to death while imprisoned but uncharged with a crime; none were doused with cold water and left naked in a cell on a freezing night; none were given electric shocks, hooded, shackled in painful “stress positions,” or sodomized; none were subjected to loud music, flashing lights, and denied sleep for days on end; none were smothered to death, or made to crawl naked across a jail floor in a dog collar, or menaced by guard dogs. None were ever waterboarded.

Whatever the pressure on Ivins or Hatfill, neither was kidnapped off a street near his house, stripped of his clothes, diapered, blindfolded, shackled, drugged, and “rendered” to the prisons of another country, possibly to be subjected to electric shocks or cut by scalpel by the torturers of a foreign regime. Even though each of the suspects in the anthrax murders was, at some point, believed to have been a terrorist who had committed a heinous crime with a weapon of mass destruction, none were ever declared “enemy combatants.” None were ever imprisoned without charges, or much hope of trial or release, in off-shore, secret, CIA-run “black sites.”

Why not?

2. Why wasn’t the U.S. military sent in?

Part of the reigning paradigm of the Bush years was this: police work was not enough when the homeland was threatened. The tracking down of terrorists who had killed or might someday kill Americans was a matter of “war.” Those who had attacked the American homeland and murdered U.S. citizens would, as our President put it, be “hunted down” by special ops forces and CIA agents who had been granted the right to assassinate and brought in “dead or alive.”

Why then, when acts of murderous bio-terror had been committed on American soil, was the military not called in? Why were no CIA “death squads” — the tellingly descriptive phrase used by Jane Mayer in her remarkable new book, The Dark Side — dispatched to assassinate likely suspects? Why were no Predator unmanned drones, armed with Hellfire missiles, launched to cruise the skies of Maryland and take out Ivins or other suspects “precisely” and “surgically” in their homes (whatever the “collateral damage”)? Why, in fact, weren’t their homes simply obliterated in the manner regularly employed in Afghanistan, Pakistan, Somalia, and elsewhere? (In fact, it seems to have taken the FBI two years after their first suspicions of Ivins simply to search his house and even longer finally to take away his high-level security clearance.)

Once U.S. weapons labs were identified as the sources of the anthrax, why were no special ops teams sent in to occupy the facilities, shut them down, and fly those found there, shackled and blindfolded, to Guantanamo or other more secret sites?

Why, when the administration went to great lengths to squeeze off funding for terrorists elsewhere, was funding for those labs significantly increased?

Why, when those swept up or simply kidnapped by the Bush administration and then discovered to be innocent, were — after secret imprisonment, abuse, and torture — regularly released without apology or reimbursement (if released at all), did the U.S. government pay Hatfill $4.6 million to settle a lawsuit he filed in response to his ordeal?

Why when, according to the Vice President’s “one percent doctrine,” no response was too extreme if even a minuscule chance of a catastrophic attack against the U.S. “homeland” existed, were no extreme acts taken with a WMD killer (or killers) on the loose, possibly in Maryland’s suburbs?

3. Once the anthrax threat was identified as coming from U.S. military labs, why did the administration, the FBI, and the media assume that only a single individual was responsible?

Read as much of the coverage of the anthrax killings as you want and you’ll discover that the FBI has long taken for blanket fact that a single “mad scientist” was the culprit — and, no less important, that that theory has been accepted as bedrock fact by the media as well. No alternative possibilities have been seriously considered for years.

For instance, it is known that a set of the anthrax letters was sent from a mailbox in Princeton, New Jersey, some hours from Ivins’s home and the Fort Detrick lab in Frederick, Maryland. The question the FBI puzzled over — and the media took up vigorously — was whether, on the day in question, Ivins had time to make it to Princeton and back, given what’s known of his schedule. The FBI suggests that he did; critics suggest otherwise. No one, however, seems to consider the possibility that the lone terrorist of the anthrax killings might have had one or more accomplices, which would have made the “problem” of mailing those letters into a piece of cake.

Is it that Americans, as opposed to foreigners bent on terrorism, are assumed to be unstoppable individualists, loners canny enough to carry out plots by themselves? Does no one recall that the last great act of American terrorism in the United States, the bombing of the Alfred P. Murrah Federal Building in Oklahoma City in 1995, was a crime committed by at least two American “loners”? (The earliest reports in that case, too, blamed Arab terrorists — plural.)

There seem to have been no serious al-Qaeda “sleeper cells” in this country, but how do we know that there isn’t a “sleeper cell” of American bio-killers lurking somewhere in the U.S. military lab community?

4. What of those military labs? Why does their history continue to play little or no part in the story of the anthrax attacks?

In reading through reams of coverage of Ivins’s suicide and the FBI case against him, I found only a single reference to the work his lab at Fort Detrick had been dedicated to throughout most of the Cold War era. Here is that sentence from the Washington Post: “As home to the Army Biological Warfare Laboratories, the facility ran a top-secret program producing offensive biological weapons from 1943 until 1969.” And yet, if you don’t grasp this fact, the real significance of the anthrax case remains in the shadows.

As with the continuing story of nuclear dangers on our planet, the terrors of our age are almost invariably portrayed as emerging from bands of fanatics, or lands like Iran said to be ruled by the same, in the backlands of our planet (some of which also just happen to be in the energy heartlands of the same planet). And yet, if we are terrified enough of loose or proliferating weapons of mass destruction to threaten or start wars over them, it’s important to understand that, from 1945 on, these dangers — and they are grim dangers — emerged from the heartland of the military-industrial machines of the two Cold War superpowers, the U.S. and the USSR.

Put another way, the most conceptually frightening attacks of 2001 came directly from the Cold War urge to develop offensive biological weapons. Until 1969, the Army’s biological-warfare laboratories at Fort Detrick were focused, in part, on that task. Plain and simple. After President Richard Nixon shut down the offensive bio-war program in 1969, the Army’s scientists switched to work on “defenses” against the same. As with defenses against nuclear attack, however, such work, by its nature, is often hard to separate from offensive work on such weaponry. In other words, looked at a certain way, one focus of the Fort Detrick lab, which fell under suspicion in the anthrax attacks by the winter of 2001, has long been putting bio-war on the global menu. In that, it was evidently successful in the end.

There is irony here, of course. In the post-Cold War era, our worries focused almost solely on the deteriorating, sometimes ill-guarded Russian Cold War labs and storehouses for biological, chemical, and nuclear war. It was long feared that, from them, such nightmares would drop into our world. But in this we were, it seems, wrong. The labs with the holes were ours and — what’s more terrifying — the possibilities for leakage and misuse are still expanding exponentially.

5. Were the anthrax attacks the less important ones of 2001?

If you compare the two sets of 2001 attacks in terms of death and destruction, 9/11 obviously leaves the anthrax attacks in the dust. Thought about a certain way, however, the attacks of 9/11, while bold, murderous, televisually spectacular, and apocalyptic looking, were conceptually old hat. It was the anthrax attacks that pointed the way to a new and frightening future.

After all, the World Trade Center had already been attacked, and one of its towers nearly toppled, by a rental-van bomb driven into an underground garage by Islamists back in 1993. The planes in the 2001 assaults were, as Mike Davis has written, simply car bombs with wings, and car bombs have a painfully long history. Even though in their targeting — the symbolic mega-buildings of an imperial power whose citizens previously preferred to believe themselves invulnerable — the 9/11 hijackers offered a new psychological reality to Americans, their most striking and unsettling feature was perhaps themselves. Those 19 men had pledged to commit suicide not for their country, as had thousands of Japanese kamikaze pilots at the end of World War II, or even for a potential country like hundreds of Tamil suicide bombers in Sri Lanka, but for a religious fantasy (behind which lay non-religious grievances). On the other hand, the 9/11 attacks were but a larger, more ambitious version of, for instance, the suicide-by-boat attack on the U.S.S. Cole in a Yemeni port in 2000.

On the other hand, the anthrax mailings represented something new. (The Japanese Aum Shinrikyo cult had attempted to make and use bio-weapons, including anthrax, back in 1990s, but failed.) If the al-Qaeda strike on 9/11 had only simulated a weapon-of-mass-destruction attack, with the anthrax killer, no imagination was necessary. An actual weapon of mass destruction — highly refined anthrax — had been used successfully, then used again, and the killer(s) remained at large, not in the Afghan backlands but somewhere in our midst, with no evidence that the supply of anthrax had been used up.

And yet, even as the Bush administration, the two presidential candidates, all of Washington, and the media remain focused on terrorism in the Afghan-Pakistani border regions, few give serious thought — except when it comes to individual culpability — to the terror that emerged from the depths of the military-industrial complex, from our own Cold War weapons labs. To that, no aspect of the Global War on Terror seems to apply.

6. Who is winning the Global War on Terror?

The answer, obviously, is the terrorists. Just last week, Mike McConnell, the director of national intelligence, made this crystal clear when it came to al-Qaeda. He testified before Congress that the organization “is gaining in strength from its refuge in Pakistan and is steadily improving its ability to recruit, train and position operatives capable of carrying out attacks inside the United States.” In fact, it’s been clear enough for quite a while that the Bush administration’s Global War on Terror has mainly succeeded in creating ever more terrorists in ever more places. And yet, arguably, the anthrax killer or killers have, to date, gained far more than al-Qaeda. Looked at a certain way, whatever the role of Bruce Ivins, the anthrax killings proved to be a full-scale triumph of terrorism.

One theory has long been that whoever committed the anthrax outrages was intent on drawing attention (and probably funding) to further research and development of U.S. bio-war “defenses.” If so, then, what a remarkable success! In the years since the attacks occurred, funding has flooded into such labs, whose numbers have grown strikingly. On September 11, 2001, reports the Washington Post, “there were only five ‘biosafety level 4′ labs — places equipped to study highly lethal agents such as Ebola that have no human vaccine or treatment — a Government Accountability Office report stated last fall. Fifteen are in operation or under construction now, according to the report. There are hundreds more biosafety level 3 labs, which handle agents such as Bacillus anthracis, which does have a human vaccine.”

The few hundred people at work in the U.S. bio-defense program before 9/11 have swelled to perhaps 14,000 scientists who have “clearances to work with ‘select biological agents’ such as Bacillus anthracis — many of them civilians working at private universities” where, according to experts, “security regulations are remarkably lax.” And don’t forget the Army’s own billion-dollar plan to “build a larger laboratory complex as part of a proposed interagency biodefense campus at Fort Detrick.” We’re talking about the place where, as Ivins’s crew was evidently nicknamed, “Team Anthrax” worked and whose labs are reputedly “renowned for losing anthrax.” In these same years, according to the New York Times, “almost $50 billion in federal money has been spent to build new laboratories, develop vaccines and stockpile drugs.” Some of this money was pulled out of basic public health funds which once ensured that large numbers of people wouldn’t die of treatable diseases like tuberculosis and redirected into work on the Ebola virus, anthrax, and other exotic pathogens.

In these years, not to put too fine a point on it, the Bush administration has exponentially expanded our bio-war labs, increasing significantly the likelihood that a new “mad scientist” will have far more opportunity and far more deadly material available to work with. It has, in other words, increased the likelihood not just that terror will come to “the homeland,” but that it will come from the homeland. Thanks to this administration, the terrorists won this round and future terrorists can reap the fruits of that victory.

Bruce Ivins, whatever you did, or whatever was done to you, R.I.P. Your lab is in good hands. And the likelihood is that, almost seven years after the first anthrax envelope arrived, the world is more of a terror machine than ever.

Tom Engelhardt, co-founder of the American Empire Project, runs the Nation Institute’s He is the author of The End of Victory Culture, a history of the American Age of Denial. The World According to TomDispatch: America in the New Age of Empire (Verso, 2008), a collection of some of the best pieces from his site, has just been published. Focusing on what the mainstream media hasn’t covered, it is an alternative history of the mad Bush years.

[Note on readings: Oddly enough, back in December 2002, as this site was going public, the very first TomDispatch guest writer, public health expert David Rosner, took up the issue of smallpox hysteria, pointing out that the disease was saved from total eradication on the planet by a U.S./USSR agreement “to make sure that the virus that causes smallpox would remain in storage awaiting a new opportunity to terrorize the world. For decades, both countries stored it, distributed it to various research labs and otherwise ensured that this public health victory would be turned into a potential human tragedy.” He added: “Fear of smallpox has played nicely into the overall strategy of the Bush administration to militarize public health.” It’s a piece worth revisiting, as perhaps is “It Should Have Been Unforgettable,” a post I wrote back in 2005 when the anthrax case had long fallen off the American radar screen.

More recently, Glenn Greenwald of has done superb work on the anthrax story. In 2007, he wrote a striking column, “The unresolved story of ABC News’ false Saddam-anthrax reports,” on some crucially bad reporting by Brian Ross and ABC, and he followed up after Ivins’s suicide with a piece, (“Journalists, their lying sources, and the anthrax investigation,”) that has more unsettling questions about the anthrax case than any other 16 pieces I’ve seen. It’s a must read. Jay Rosen, at his always interesting PressThink blog, took up Greenwald’s challenge to Brian Ross and ABC on its reporting and pressed the point home in two recent posts, here and here.

Finally, Elisa D. Harris, a senior research scholar at the Center for International and Security Studies at the University of Maryland, had a fine, thoughtful op-ed last week in the New York Times, “The Killers in the Lab” (”Our efforts to fight biological weapons are making us less safe”), which laid out in an impressive way the expansion of U.S. bio-weapons research since 2001.]

This time, wage slaves can't revolt

This time, wage slaves can't revolt

The Fed is banking on a weak labor market to keep employees from demanding wage hikes that could boost inflation. But consumers are feeling pinched.

By Colin Barr

Go To Original

With the price of practically everything jumping, you probably wouldn't mind getting a bigger paycheck.

But your employer isn't the only one who's unenthusiastic about that idea. Fed chief Ben Bernanke is counting on a weak labor market to keep employees from demanding wage hikes, which could in turn boost inflation. With unemployment rising and jobs moving overseas, you're probably not in the mood to push it anyway.

So the good news is that the Fed's probably right when it says that we're not headed for a replay of the stagflation of the 1970s, replete with its so-called wage-price spiral. Unfortunately, that means Americans are going to be feeling poorer - with no end in sight.
Soaring costs

On Thursday, the government said consumer prices soared 5.6% from a year ago in July, the biggest year-over-year rise in 17 years. Much of that increase was driven by the soaring costs of food and energy, though Bank of America economist Lynn Reaser notes that prices were sharply higher across the board.

"This number was a shocker," Reaser says, adding that practically "the only benign increase was in health care," where prices - after years of strong growth - were a modest 3.5% above year-ago levels.

The textbook response to soaring inflation is for the Fed to raise interest rates. But Fed chief Ben Bernanke has spent the past year slashing rates in a bid to prop up the financial sector, which is laboring under a mountain of bad loans and broken credit markets. Where financial institutions used to borrow heavily in short-term markets such as the repo market, they now get much of their cash via various federal lending programs.
Fed's limited options

"They can't tighten credit now, because of where banks are getting their funding," says Howard Simons, a strategist at Bianco Research in Chicago.

Moreover, the Fed appears willing, for now, to accept a few months of big headline inflation numbers as long as there's no sign of the dreaded wage-price spiral - the 1970s phenomenon in which inflation took root as pinched workers demanded raises.

With the economy slowing, and wages stagnant for most of the past decade, a weak labor market is giving the Fed room to stand pat. Unemployment has risen by more than a percentage point, to 5.7%, since the housing boom peaked in the middle of this decade. The four-week seasonally adjusted moving average of new jobless claims was 440,500 last week - up 40% from a year ago.

Along with the recent decline in energy prices and a rally in the value of the dollar, the soft labor market numbers should ease the pressure on wage growth, Reaser says. She adds that next month's inflation numbers should look better, given the 20% drop in the price of crude oil since mid-July.

But what's good for the Fed, in this case, is bad for consumers. Combine a slack labor market with falling prices for stocks and houses, and it's clear that Americans' finances are getting stretched by the month - with no end in sight.

"The American worker does not have a whole lot of bargaining power right now," says Simons. "We're looking at the impoverishment of the American wage earner.

New Signs Of A Middle-Class Collapse

Bernanke Tries to Define What Institutions Fed Could Let Fail

Bernanke Tries to Define What Institutions Fed Could Let Fail

By Craig Torres

Go To Original

Ben S. Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes.

In the year since credit markets seized up, the 54-year- old Federal Reserve chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac.

The lack of clearly defined limits may put the Fed's independence at risk as Congress discovers that its $900 billion portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes.

''There is some hard thinking that needs to be done,'' Philadelphia Federal Reserve Bank President Charles Plosser said in an interview last week. ''The Fed has a terrific reputation as a credible institution. We have to be cautious not to undertake things that put that credibility at risk.''

The expanding role of central banks will be the hottest topic in the room when Bernanke addresses his counterparts from around the world at the Kansas City Fed's Jackson Hole, Wyoming, symposium Aug. 22.

Since taking on $29 billion in Bear Stearns Cos. assets to facilitate the failing firm's takeover by JPMorgan Chase & Co., Bernanke has made several moves that imply further expansion of the central bank's mission.

Student-Loan Collateral

He granted a congressional request to accept bonds backed by student loans as collateral for Fed securities loans. And he didn't object when Congress inserted a provision into the housing bill signed into law last month that makes it easier for the Fed to lend to failed banks under government control.

''They want to placate the Congress and the financial markets,'' says Fed historian Allan Meltzer; doing so sets a ''terrible precedent.''

Policy makers are aware of the concern. The Federal Open Market Committee has ordered a formal study of the implications of the Fed's broader role in fostering financial stability, drawing on research from throughout the Fed system.

Under Bernanke's predecessor Alan Greenspan, the Fed drew a clear line against using its portfolio to influence specific markets. An internal study published in 2002 warned that ''the favoring of specific entities'' might ''invite pressure from special-interest groups.''

Refusing a Request

Just three days after the Fed approved a loan against Bear Stearns securities, Pennsylvania Democratic Representative Paul Kanjorski and 31 other lawmakers sent Bernanke a letter asking him to open the discount window to nonbank education-loan companies. Bernanke refused.

The 2002 study said such pressures ''could pull the Fed into fiscal debates'' and ''compromise its objectives'' for monetary policy: keeping employment high and inflation low.

''How can you be independent on one score and dependent on another?'' asks Vincent Reinhart, former director of the Fed's Monetary Affairs Division, who advised both Bernanke and Greenspan. Officials ''are overburdening the Federal Reserve, and that sets up the potential for multiple conflicts,'' he says. ''They use up their credibility on nonmonetary issues, they lose their independence and they dilute their expertise.''

Reinhart, now a resident scholar at the American Enterprise Institute in Washington, is one of several Fed alumni who say they are concerned the central bank will next face requests to rescue hedge funds or insurance companies whose failure might damage the financial system.

Hard to Say No

''It is much harder to say no when you have the precedent,'' says J. Alfred Broaddus Jr., former president of the Richmond Fed. ''Congress needs to find a way to structure something else to take the Fed out of this.''

The Fed chairman's decisions are a decisive break with Greenspan's aversion to government interference in markets, a conviction that even permeated the central bank's day-to-day operations.

On Aug. 10, 2005, when Greenspan was chairman, 94 percent of the Fed's $24 billion in outstanding repurchase agreements with Wall Street were in U.S. Treasury notes. On Aug. 10, 2008, only 14 percent were in Treasuries, with the rest in mortgage bonds and agency securities, according to Wrightson ICAP LLC in Jersey City, New Jersey. The New York Fed says agency and mortgage-backed securities ''became more attractive.''

Abandoning Principles

''They have had to abandon all principles that guided their earlier debates,'' says Lou Crandall, chief economist at Wrightson. The objective now is ''how you get the most market impact.''

To Bernanke, the decisions of the past 12 months may well have protected the Fed's independence from far greater erosion that might have occurred if the central bank had stood aloof while financial markets melted down.

The former Princeton University scholar views the Great Depression as a fiasco that compromised the Fed's credibility, bringing an onslaught of regulation and a congressional review of the Federal Reserve Act. If the Fed had walked away from Bear Stearns, it would have led to higher unemployment, a deeper downturn and a longer recovery, all of which would have brought even greater political pressure on the Fed, the chairman's defenders argue.

''It is not an easy sell,'' Bernanke told Senator Evan Bayh, an Indiana Democrat, during an April 3 hearing on the Bear Stearns rescue. ''But the truth is that the beneficiaries of our actions were not Bear Stearns and were not even principally Wall Street. It was Main Street.''

Under Stress

Bernanke added that ''the financial system has been under a lot of stress and that has affected our ability to grow. It's affected employment. It's affected credit availability.''

Bernanke's actions have been informed by his own research with New York University's Mark Gertler showing that damaged banks accelerate economic downturns.

That threat has multiplied in a new financial system where mortgage lenders may not even be banks, and mortgages are warehoused in funds off the books of banks.

''We are in a new environment, and the Fed had to do something different,'' Gertler says. ''Moving forward, the regulatory structure has to adjust.''

Fed officials have been cautious about suggesting what new supervisory powers they would like or how their lender-of-last- resort powers should function in the future.

Expanding Authority

Bernanke said in a July 8 speech that a ''strong case can be made'' for expanding the Fed's authority over the U.S. payment system, the complex network of financial plumbing that handles the exchange of money from such transactions as options trades in Chicago and stock sales in New York. The Fed also is pushing for better settlement and trading systems for securities that aren't bought and sold on exchanges.

Beyond that, the Fed chairman has expressed wariness over the U.S. Treasury's recommendation that the Fed become the ''market-stability regulator.''

''Attention should be paid to the risk that market participants might incorrectly view the Fed as a source of unconditional support,'' he said in the July 8 speech.

Even so, the Fed has already expanded its supervisory reach. It has become a temporary consulting regulator of Fannie Mae and Freddie Mac, working with the Office of Federal Housing Enterprise Oversight. An agreement with the Securities and Exchange Commission allows the Fed to make recommendations on the capital and liquidity positions of investment banks. The Fed is also more actively using its authority to supervise nonbank consumer-finance subsidiaries of bank holding companies, such as the CitiFinancial unit of Citigroup Inc.

'A Major Regulator'

To ''a large degree,'' it appears the Fed '' is going to become a major regulator of financial institutions,'' says Ross Levine, a Brown University economist who has written a book on bank regulation.

With that comes the danger that measures the Fed has to take to enhance stability may end up restraining economic growth, Levine says. ''That can come at a very big cost to innovation and the welfare of the country,'' he says.

Plosser, the Philadelphia Fed president, says the central bank is struggling internally with such concerns.

''What has been put on the plate is the broader role of central banks in their effort to promote or ensure financial stability,'' he says. ''We have to face up to the potential risks to the conduct of sound monetary policy from acquiring these other responsibilities.''

Subprime pain sweeps the world

Subprime pain sweeps the world

Go To Original

MORE than 100 local councils, charities, churches, hospitals and nursing homes across Australia are sitting on a $2 billion black hole after buying subprime investments structured by Wall Street banks during the bull market but which are now potentially worthless.

Melbourne's Metropolitan Ambulance Service and local councils are among those facing losses of hundreds of millions of dollars in the subprime meltdown because of bad debt they bought through a global investment bank.

A document leaked to BusinessDay revealed that Lehman Brothers is managing tens of millions of dollars in funds for Victoria's community, education and health sectors, much of it invested in high-risk financial instruments now potentially worthless.

Other Victorian entities with millions in subprime exposure are not-for-profit defence personnel insurer Defence Health, which has $39 million managed by Lehman Brothers, and $17 million for the Victoria Teachers Credit Union.

BusinessDay has identified more than 150 government, private and charitable institutions that bought complex financial instruments such as collateralised debt obligations (CDOs). There have been few buyers for CDOs and similar structured finance products since the subprime meltdown this time last year that sent global financial markets into a tailspin.

These toxic investments will wreck the finances of many local government and charitable organisations for years.

Twenty-three local councils are preparing a class action lawsuit against Wall Street bank Lehman Brothers to recover their losses.

Among those that bought the products are four universities, dozens of super funds, ambulance services, the St Vincent de Paul Society, the Starlight Children's Foundation, the Boystown charity for underprivileged children, and the Anglican, Baptist, Uniting and Catholic churches.

While not revealing the councils' latest subprime exposure, the document showed East Gippsland Shire Council had $9 million managed by Lehman Brothers after the meltdown in banking markets and $6.5 million for Greater Shepparton.

Gosford Council, on the NSW mid-north coast, is sitting on a $74 million portfolio of CDOs and similar "structured finance" products, Newcastle Council $39 million, Coffs Harbour $39 million and Sutherland $55 million.

NSW and Western Australia are the states most affected, followed by Victoria, South Australia and, to a lesser extent, Queensland, whose investment rules require local councils to invest via Queensland Treasury.

National Australia Bank announced last month it was writing down the value of its CDO portfolio by $1 billion, or 90%, having deemed there was a high probability of a loss on the investments. Most of the charities and councils that hold CDOs are yet to make write-downs, and thereby concede that they will incur losses. Their problem is that the market for CDOs no longer exists. There are no buyers, although many councils claim their CDOs are still producing income and therefore remain a viable investment.

While the exposure of NSW councils has been the subject of an inquiry earlier this year by Platinum Asset Management chairman Michael Cole, the extent of the exposure held by other state and local governments, and charities, super funds, churches and other organisations has until now been unknown.

The list is long and includes co-operatives, teachers' unions, credit unions, nursing homes, retirement villages, hospitals, listed public companies and state agencies.

Documents seen by BusinessDay confirm the exposure to CDOs is nationwide. The organisations in the table show Charles Sturt and Griffiths universities, Australian National University, Open University and the University of Western Australia are all exposed.

The CDOs were created by investment banks, which bundled thousands of US subprime home mortgages and sometimes even car and credit card debts into a complicated "derivative" security.

They were marketed as a safe investment, akin to a bond. The mix of the underlying home mortgage assets - "bricks and mortar" - was designed to minimise risk to the investor.

In most cases the banks that structured them acquired AA and AAA credit ratings from Standard & Poor's or rival credit ratings agency Moody's Investor Services by paying a fee.

When the US credit markets iced over last year and property prices plunged, investors were no longer willing to buy CDOs. The instruments' very diversity worked against investors as no one could disentangle the product and its component parts: thousands of underlying mortgages packaged together.

The $2 billion in investments identified by BusinessDay pertains only to funds under Lehman Brothers management. Lehman acquired boutique local bank Grange Securities two years ago and Grange had been the biggest player in the CDO market, having undertaken a strategy of selling the product to local government, charity and semi-government agencies.

As Lehman was acting as "agent" to most of its council and charitable clients, it not only sold the products, it also managed them for clients, and in some cases "churned" the CDO portfolios by 200%, 300% and 500%.

In other words, the bank bought and sold the products between its clients and earned commissions on the sales, according to sources close to the councils.

It was able to charge higher fees as the CDOs were considered high-risk products although the councils claim they were not properly advised of the risk involved in the investments, nor of the prospect that there would be no "liquidity" or "secondary market" to sell them.

The CDOs were marketed with traditional Australian names such as Federation, Tasman, Parkes, Flinders, Kokoda, Kiama and Torquay. Some councils even took out loans to buy the CDOs, or sought "leverage" to magnify their returns. In these cases the losses would be deeper.

These Lehman portfolios, or "funds under management", contained not only CDOs but other structured finance products such as capital protected notes and floating rate notes (FRNs) whose value is also difficult to establish.

Gosford Council, for instance, has $135.5 million in investments, most of which Lehman managed, but the face value of the CDOs and notes is $74 million. The CDO and note exposure of Hastings Council is $45 million from total investments of $82 million, Wingecarribee $32 million of $59 million and Sutherland $55 million from $123 million.

These figures are from late last year. They are not believed to have changed substantially.

Although Lehman Brothers is the biggest player in this CDO market, other banks also had a significant presence (our accompanying table represents only the Lehman funds under management post-credit meltdown - the figures may have changed in recent months).

While the collective exposure to Lehman may be less than $2 billion, there are hundreds of millions of dollars in CDOs and other structured finance products sold by other investment banks and promoters.

Even if 50% of the face value of these derivative investments could be recovered - and remember NAB recently wrote down the value of its CDO holdings by 90% - losses across the country from structured finance products may reach $2 billion.

Most of the holders can hardly afford any losses, particularly in the present economic climate where their income is coming under pressure.

The Cole report into local government exposure to CDOs and related instruments in NSW found that the book value of highly structured credit products in NSW alone was $590 million and the exposure to "capital guaranteed" products (also considered to be riskier than they sound) was $450 million from $5.64 billion in investments among 152 councils in NSW.

Further to the Cole findings, the Federation CDO series sold by Lehman/Grange had already fallen 85% in face value as of January this year.

The report found that NSW councils were down collectively $320 million on book value. Many held more than 45% of their assets in CDOs and FRNs.

That was January and globally investment product write-downs have more than doubled since then. Moreover, the valuations are considered conservative as they were in many cases guided by the product promoters.

Nor did the inquiry examine the exposure of other states and other bodies such as semi-government agencies and charities.

The first NSW council to take legal action has been Wingecarribee in the Southern Highlands. Piper Alderman, the law company acting in the matter, has now signed up 20 councils including Armidale, Blaney, Deniliquin, Gilgandra, Kiama, Narrabri, Parkes, Walcha, Wingecarribee, Port Macquarie and Carbonne.

Lehman Brothers declined to answer specific questions, but said it did not know about the class action and was defending a single action from Wingecarribee Council.

"Lehman Brothers will vigorously defend any legal proceedings commenced where we do not feel there is merit," Lehman said.

"Lehman Brothers denies the claims Wingecarribee Council has made in its statement of claim filed with the Federal Court."

U.S. Is Leading the Economies of Other Countries Over a Cliff

Global Goldilocks?

Go To Original

The new narrative forming among the Goldilocks crowd is that US economic supremacy reigns once again, as manifest in a reawakened "King Dollar". The US dollar will continue to strengthen, commodity prices will plummet, and the stock market can only rally from here since all of the bad news has already been discounted. The Global Goldilocks view is that the rest of the world slows just enough to dampen commodity pressures and prices, but the world does not slow too much to wreck the American economy. The dollar strengthens resulting in capital flows into the US. And voila-- we have a return to the glory days of the 1990s.

As I have written countless time in the past, unwarranted optimism is a necessary human trait-it allows us to persevere through tough times when alternatives may be dire. This characteristic, however, is treacherous when it comes to investing in bear markets. As Nobel Laureate Joseph Stiglitz said in CNBC's Squawk Box last Friday American investors are afflicted with "wishful thinking". We have a "built in bias for excess optimism." This occurred in the 2001-2002 bear market. The only thing different this time is that this decline is going to be much worse. We are going to have the bear market we should have add earlier in the decade. Because we didn't, it is going to be much more painful having it now. We are finally going to have the purging of the excesses for all of the debt we racked up and all of the stupid leveraged over-valued securitized products we created.

The dollar is strengthening because the US is leading the economies of other countries over a cliff. Both in terms of easy monetary policies and the continued vendor financing arrangement where we buy their goods financed by their buying our treasuries and keeping our interest rates artificially low. Their currencies are now reflecting their deteriorating fundamentals. To be sure, the long commodities/ short US dollar trade was very crowded and is also playing a part as it unwinds. Marc Faber, author of the GloomBoomDoom Report, identifies what is really going on:

I need to make one more comment with respect to oil prices and commodities. It is not a strong US dollar that will lead to declining oil prices, as some commentators argue. What will bring about lower oil prices is a collapse of consumer spending in the US and elsewhere in the world. If US consumption collapses, the US trade and current account deficit will be halved and will lead to a drying up of global liquidity. I have discussed this relationship many times in the past and have clearly shown the relationship between the growth rate in Foreign Official US Dollar Reserves and the US dollar. Declining US consumption will be positive for the US dollar and will certainly bring down commodity prices because of lower demand (at least temporarily). But if you really think that such an outcome will be good for stocks, then dream on!

Meredith Whitney, the Oppenheimer banking sector analyst who dared to separate herself from the comfort of her community herd and boldly predicted the financial disaster a year ago, thinks that, according to a Fortune article where she is the feature cover story, investors should still avoid banking stocks because they will be forced to report even bigger credit losses in the future. The article reads, "Whitney is convinced the economy is about to slip into an ‘early 1980s style' recession that will devastate the 10% of the population that became overextended during the housing boom."

Now who do you trust? Someone who has been dead on in predicting this mess from the beginning, or someone from the pack of pathological pollayanas who mindlessly continues to call one false bottom after the other? You know who I'm talking about. Whitney warns, "What's ahead is much more severe than what we've seen so far." Furthermore, according to Whitney, the banks need to more drastically reduce headcount (from a reduction of 7% so far to 25%--see my commentary "Escape From New York") and "get real" about how their valuing their mortgage-related debt. Banks are only under-estimating housing price declines. They see drops limited to 20-25% where Whitney sees declines around 40%.

If all of that weren't enough, the coup de grace for the consumer is a new credit law (well-intentioned as it may be) that will go into effect this fall that will, as the Fortune article citing Whitney's view writes, "force banks to reduce the amount of credit they extend to consumers." This of course will force consumers to cut back even further on spending. Whitney says that this is "basically going to amount to a pay cut for the average American consumer."

Highly-respected historian and author Niall Ferguson wrote an editorial in Friday's Financial Times titled "How a locals squall might become a global tempest" where he posited a confluence of economic conditions could portend a "real perfect storm [that] may still lie ahead." He writes that 1970s stagflation might be preferable to what might be forming on the horizon:

One year after the onset of the financial crisis we are still calling the "credit crunch", could we be witnessing a similar catastrophic convergence, as the slow-moving hurricane of a US banking crisis hits first a commodity price rise and then a global slowdown?...The question is whether or not this American hurricane is about to run into two other macroeconomic weather systems. Up until now the global impact of the crisis has been limited. Indeed, strong global growth has been the main reason the US recession did not start sooner. With the dollar weakened as an indirect consequence of the Fed's open-handed lending policy, US exports have surged.

This is where Global Goldilocks fantasy falls apart. The world economy may not be too hot; but is almost certainly is shaping up to be too cold. Of course the perma-bulls will never acknowledge this. And anything is possible. A continuation of dollar strengthening could take the it back to the 80-level, a level of support which held until earlier this year since they began the trade-weighted index almost three decades ago. And, given, the interventions and machinations of our compromised policy-makers, anything is possible. Problem is the system is becoming a joke of sorts, where participants need to increasingly "factor in" actions make exchanges less and less of a free market. Such actions were once viewed as bold and celebrated for avoiding to systemic collapse. For all their hubris, they succeeded in creating excess money and moral hazard, and the false expectation that catastrophe could always be avoided if the monkeys were clever enough to prevent the meltdown. Fannie Mae says that "the worst housing slump since the Great Depression is deepening" and our financial market policy heroes are able to engineer a stock market rally that possibly takes us to new highs with all of the bullish pundits going through all their charting contortions to show us how the rally is justified.

This might happen, but it will be unsustainable and result in an even more painful disaster. It baffles me how financial professionals can continue to take markets seriously after the SEC, the Treasury, and the Fed's ad hoc, ‘fly-by-the-seat-your-pants', ‘make ‘em up as you go' interventionist actions are all that have stood between propping up markets and systemic collapse. They don't care as long as it appears to work. This is the danger of placing your trust in a performance-based system rather than one that is process-based. And this is what happens when you are continually forced to treat the symptoms of the disease rather than the disease itself (excess debt and money). And each time the treatment is a little more unconventional and extreme as the symptoms become ever harder to treat. Just once they are going to reach for a rabbit and they are going to find nothing at the bottom of the hat.

Along these lines Doug Noland, who writes a weekly column for The Prudent Bear, observes in his latest piece ("Burst Bubble: Energy or Speculator"):

Recent extreme global market volatility is part and parcel to the Heightened Monetary Disorder I have been addressing for months now. The Massive Global Pool of Speculative Finance has Run Amuck. The bulls will celebrate the rally, yet markets this unstable are prone to "melt-ups" that lead to breakdowns... Yet if the key dynamic is instead a Bursting Leveraged Speculating Community Bubble, entirely different dynamics are now in play. Enormous short positions have built up, the vast majority as part of "market neutral," "quant" and myriad risk hedging strategies. If today's dislocation develops into a significant unwind of these positions, the market immediately then becomes vulnerable to a disorderly "melt-up" followed almost inevitably by a sharp reversal and disorderly decline. The unwind of bearish speculations and hedges would be a most problematic market development, unleashing a final bout of speculative excess and disorder that would set the stage for a major market crisis.

My question for the bulls is can you not admit that our financial market system has been irreparably harmed and that it is only a matter of time before a real crisis occurs? But I suppose you will accept such market interventions as long as you are chasing the Global Goldilocks economic fantasy.