Monday, September 8, 2008

Freddie and Fannie Bail-Out: Our Foreign Masters Have Spoken

Freddie and Fannie Bail-Out: Our Foreign Masters Have Spoken

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Obviously, the big news is the government bail-out of Freddie and Fannie. Over the weekend I wrote two articles on this. Here's a link to the first article which provides a history of how we got here and here's a link to the second article which outlines the plan and explains why it's happening now.

There's one point that I think is incredibly important right now. I touch on it in the second article, but I'm not the one who presented a detailed analysis of how it happened. That distinction goes to Angry Bear:

Update: Market Watch

Consider the description of the bailout from the: New York Times:

Investors who own the companies' common and preferred stock will suffer. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan. [italics mine]

Now consider the following from MarketWatch,

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities."

China alone holds $376 billion in bond holdings.

Unless I am misreading something, foreign central banks will be protected, including China's...and the America taxpayer will foot that bill.

Secretary Paulson has been busy of late reassuring foreign central banks that they will be protected.

In recent weeks, Treasury officials have been reaching out to foreign central banks and other overseas buyers of securities or debt sold by the two companies, to reassure them of the creditworthiness of these instruments.

In one such conversation, at the end of August, the Treasury sought to reassure the Bank of Mexico, according to a person familiar with the matter, of the soundness of agency securities held by the bank. Treasury officials have also had similar conversations with Japanese investors who are buyers and holders of agency debt.


The meaning and ramifications of this collapse cannot be unravelled in a single post--or a hundred posts. Mismanagement, corporate greed and excess need examining.

Once again, the U.S. taxpayer will be asked to shoulder another mountain of debt. Once again, the taxpayer has become the prop of last resort as poorly managed entities become too big to fail. How long this can continue is the question.

Everything seems broken. No one seems to be safely in charge. Instead, I imagine public officials--Bernanke and Paulson-- racing frantically from meeting to meeting, making assurances, looking for the next band-aid.

John McCain wants Fannie Mae and Freddie Mac to shrink so that their size no longer is a threat. Would he say the same thing about Bear Stearns, albeit it is far smaller? Should Bear Stearns not have been allowed to grow so large? How do we shrink such a massive entities? Remember, they hold over $5 trillion in mortgages. Do we hold a fire sale? And would he apply the lobbying rule to other large companies? After all, they now have a heavy hand in writing the regulations that govern them. (The Medicare Part D fiasco is evidence of just how influential the pharmaceuticals were in deciding just what regulations were best for them.) Is it big government that is the problem--or big corporations that run the government?

Obama wants Fannie and Freddie out of the profit-making business. Is America ready for nationalizing such institutions? Is Obama? And could we have afforded a total collapse of Bear Stearns? Can the government simply allow such things to happen if the consequence for the nation is dire?

And how does the next president reassure our foreign creditors that the U.S. will pay its bills?

While we may be dismayed that foreign central banks will receive "government backing," we do not have much choice.

Yu Yongding, former advisor to China's central bank, put the matter bluntly:

....If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ....If it is not the end of the world, it is the end of the current international financial system.''

Foreign central banks have been propping up the U.S. economy:

Foreign central banks have financed the United States to keep their export sectors -- heavily dependent on U.S. consumer spending -- humming. But they now must weigh the benefits of providing the United States with such "vendor financing" against the rising costs of keeping the current system going.

Yu Yongding is not making a threat; he is stating a fact.

If foreign central banks stop financing U.S. debt (there are no free rides), then the U.S. is in a world of hurt. As Brad Setser notes: fact, the economic and financial risks that arise from the U.S. current account deficit (and the resulting dependence on foreign financing) have not been exaggerated. If anything, they have received too little attention -- and are set to grow in the coming years.

Well, "the coming years" may be sooner, not later. For the U.S., the consequences may be immediate inflation as Treasury attempts to makes its offerings more palatable. The dollar will plunge. And these are just for starters.

The party is over. Sorry that most of you working stiffs missed it. Oh, by the way, here's the bill.

As Paul Krugman said:

I used to think that the major issues facing the next president would be how to get out of Iraq and what to do about health care. At this point, however, I suspect that the biggest problem for the next administration will be figuring out which parts of the financial system to bail out, how to pay the cleanup bills and how to explain what it's doing to an angry public.

Although the American public is not exactly happy with the economy, it has no idea of the depth of the problems. Most people think the government's check writing ability is infinite.

Well, the government is broke and broken.

This has everything to do with foreign central banks and investors (along with some incredibly large US investors like PIMCO) essentially detailing US policy. Note the following statement from today's WSJ:

Mr. Paulson noted that more than $5 trillion of debt and mortgage-backed securities issued by Fannie and Freddie is owned by central banks and other investors world-wide. "Failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Mr. Paulson said.

Paulson has repeatedly cited foreign ownership as a reason for the intervention. But let's back up a bit to see how the current economy is really structured:


Above is a chart of the current account. All this means is the following: the US buys more stuff from abroad then we sell abroad. The problem is we don't have the money to pay for all of this. Why? Because the US savings rate is terrible:


Notice how the US is saving less and less. That means we have to borrow money to buy all of this great stuff.


Above is a chart of foreign ownership of US government debt. Notice how it has doubled over the last 8 years. In other words -- we're in debt to foreign central banks up to our eyeballs.

Treasury Secretary Paulson has continually stated that US paper is owned all over the globe. Remember -- Paulson was a big guy at Goldman Sachs. He has contacts all over the world. He knows, well, everybody. Frankly, he's one of the few appointments of the Bush administration that is qualified for his job. When he says "so and so talked to me about this" you can bet it was a conversation between people who have known each other for some time.

The point is all of the press indicates it's these conversations with foreign bankers that got Paulson's attention. That means there are some nervous people all over the globe. And that's what is driving this -- at least partially. And that should scare everyone to death. We are no longer in complete control of our sovereignty.

A long time ago (actually about three years ago) Paul Volcker wrote an editorial in the Washington Post called An Economy on Thin Ice. Consider the following as food for thought:

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

This editorial seems more and more accurate as time passes.

US jobless rate soars as foreclosures break new record

US jobless rate soars as foreclosures break new record

By Bill Van Auken
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In a stark indication that the crises gripping the US housing market and the financial sector are spreading throughout the economy, unemployment figures for August rose far more sharply than expected, hitting a five-year high.

The official unemployment rate rose to 6.1 percent last month, according to a report released Friday by the Bureau of Labor Statistics. In addition to the net loss of 84,000 jobs last month, the agency revised its figures for June and July, reporting the destruction of an additional 58,000 jobs, pointing to an entire summer dominated by layoffs and economic slump.

Meanwhile the so-called misery index, which adds the unemployment and inflation rates, hit 11.7 percent, the worst figure recorded since mid-1991, as high gas, food and utility prices continue to gouge workers’ paychecks even as layoffs mount.

Also on Friday, the Mortgage Bankers Association issued a report showing that the new foreclosure rate has risen to its highest point in nearly three decades, as falling home prices and tighter credit is forcing more and more people out of their homes. The total number of homes in foreclosure hit 2.75 percent, triple the rate recorded three years ago. Meanwhile, 6.41 percent of all home mortgages were one or more payments overdue, a record high since these figures were first recorded in 1979.

At the same time, existing home sales fell to a 10-year low in the second quarter, while the median price of a single-family house plummeted by another 7.6 percent, the National Association of Realtors reported.

The increase in unemployment and the rising number of foreclosures are clearly trends that are feeding into one another in a vicious downward spiral. Workers having lost their jobs are finding it impossible to meet monthly mortgage payments, and the collapse of home values has wiped out credit for many, leading to falling consumption and new layoffs.

The loss of jobs was spread throughout the economy, with health care, education and government employment virtually alone in resisting the surge of layoffs. Manufacturing companies cut 61,000 workers from their payrolls; business and professional companies eliminated 53,000 jobs, temporary employment—which generally is a leading indicator of future job trends—fell by 36,000 and the retail trade sector cut 19,900 jobs. Construction employment was down just 8,000, reflecting in part the massive bloodletting that has already taken place—558,000 jobs wiped out since the beginning of 2007.

Massive new layoffs are on the horizon. The Air Transport Association reported Friday that US airlines plan to cut at least 36,000 jobs by the end of the year.

Job cuts will continue throughout the auto industry as new vehicle sales slump. The DMAX engine plant in Dayton, Ohio announced this week that it is laying off another 330 workers, on top of 290 jobs cut in July. The plant makes engines for GM trucks. Daimler Trucks North America, meanwhile, has announced plans to cut one of the two shifts at its Mount Holly, North Carolina Freightliner plant, putting 675 workers on the unemployment lines.

The financial sector is also shedding large numbers of jobs. GMAC Financial Services announced this week it will lay off 5,000 workers, while Wachovia Corp. has indicated that it intends to eliminate the jobs of some 7,000 of its employees.

The official figures released Friday were substantially higher than those predicted by economists, who had projected only a 0.1 percent increase over July’s rate of 5.7 percent, with the loss of 75,000 jobs, rather than a 0.4 jump to 6.1 percent and the loss of 84,000 jobs.

The decisive issue in the unemployment figures is the sustained character of the assault on jobs, with unemployment rising for eight months straight—the most protracted such trend in the last 25 years. The result is that 2.2 million more workers have joined the unemployment lines over the past year, for a total of 9.4 million officially counted as out of work.

These figures drastically underestimate the real crisis confronting working people in the US. An alternative measure provided by the Bureau of Labor Statistics, which includes so-called “discouraged workers”—those who have given up actively looking for work—as well as those forced to eke out a living with part-time jobs because they are unable to get full-time work, rose by a tenth of a percentage point to account for fully 10.7 percent of the US workforce.

The latest report on the growth in unemployment elicited widespread acknowledgment that the US economy is gripped by recession.

“The economy has clearly slipped into a jobs recession because the housing meltdown and credit market turmoil has spread to the broader economy,” Steven Wood, chief economist at Insight Economics, wrote after the new figures were released.

Bank of America economist Peter Kretzmer, in a note to investors, wrote, “The rapid rise in the unemployment rate points to a US recession, as such an increase has never occurred outside of one.” The economist said that household surveys have produced data indicating that 1.75 million jobs have been wiped out since April alone.

William Poole, former president of the Federal Reserve Bank of St. Louis, told Bloomberg Television, “It certainly increases the probability that we really are in a recession. It is a weak number, including the [June, July] revisions.”

Friday’s dismal unemployment and foreclosure figures came at the end of the worst week for the world financial markets since the aftermath of the terrorist attacks on New York City and Washington seven years ago.

The Dow Jones Industrial average eked out a 32-point advance Friday after falling nearly 350 points, or 3 percent, the day before—the worst losses in two months. The sell-off was attributed to the release of the initial projection of a 5.7 percent unemployment rate, combined with dismal retail sales figures and rampant rumors that a major hedge fund, Atticus Capital, with $14 billion in investments, was on the brink of collapse.

While the Atticus executives insisted that the rumors were false and that the fund had substantial cash reserves, the fears that major hedge funds will go under are well founded. Many of them had invested heavily in the commodity bubble, which has been rapidly deflating with the recent fall in oil and food prices.

Asian stock markets, which fell every day this week, suffered sharp losses Friday, with the Hang Seng index in Hong Kong falling 2.2 percent, Tokyo’s Nikei down 2.75 percent, the Shanghai A-share market dropping 3.3 percent and Australia’s market down 2.1 percent. Similar percentage losses were recorded on all of the major European markets.

Meanwhile, the manager of the world’s largest bond fund warned Friday that the US economy faced a “financial tsunami” unless the government intervenes to buy up assets being dumped by banks and finance houses.

“Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,” Bill Gross of California-based Pacific Investment Management Co. wrote in a statement on the company’s web site. “If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the US Treasury.” Specifically, he called for the federal government to stem the foreclosure tide by issuing subsidized loans and buying up properties.

Gross’s statement reflects growing fears within financial circles that the worst of the credit crisis is still to come and could produce a catastrophic global collapse.

In the face of the rapidly deepening economic crisis, the White House issued a sanguine statement that simply ignored the job losses and rise in foreclosures, pointing instead to earlier figures showing an increase in the gross domestic product. “The level of growth demonstrates the resilience of the economy in the face of high energy prices, a weak housing market and difficulties in the financial markets,” the White House said.

While this is obviously cold comfort to the millions forced onto the unemployment lines or facing the loss of their homes, the attempt by the candidates of the two major parties to turn the latest figures into political hay offered little more.

Republican candidate John McCain acknowledged that “Americans are hurting and we must act to create jobs.” He vowed to enact a “Jobs for America” program, which appeared to involve little more than job training schemes, tax cuts for business and advocacy of free trade.

Democratic candidate Barack Obama issued a predictable statement accusing his rival McCain of preparing “more of the same” and continuing the Bush administration’s tax cuts for the rich. He pledged instead to institute an exceedingly modest tax cut for “middle-class families” plus a $50 billion fund to aid state budgets.

There is no reason to believe such paltry promises will be realized. Even they were, they would prove entirely inadequate to stem the tide of layoffs or stabilize the crisis-ridden financial system. The Democratic Party is incapable of advancing any serious alternative to the policies of the Bush administration, tied as it is to the interests of Wall Street and corporate America.

US government takes over mortgage giants to stave off financial meltdown

US government takes over mortgage giants to stave off financial meltdown

By Bill Van Auken
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In the biggest government intervention in the American economy since the Great Depression of the 1930s, the US Treasury Department announced Sunday that it is effectively nationalizing the two mortgage giants Fannie Mae and Freddie Mac.

Timed to precede the opening of the stock markets in Asia, the announcement that the two firms are being placed in “conservatorship” left no doubt about the depth of the economic crisis confronting American and world capitalism.

“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” said Treasury Secretary Henry Paulson Jr., at a Washington press conference. “A failure would be harmful to economic growth and job creation. That is why we have taken these actions today.”

Indeed, the bankruptcy of these two companies points to the bankruptcy of American capitalism. Between them they are responsible for funding more than two thirds of all home mortgages in the US.

While politicians from both parties as well as most media reports have tried to portray the plan as assistance to beleaguered homeowners, it is clear that the intervention will do nothing to ameliorate the crisis confronting millions of average working people.

As the New York Times acknowledged Sunday, “The plan to bail out the firms will probably do little to stop home prices from falling further. And foreclosures are almost certain to rise.

“The bailout will give the mortgage industry a stability that we haven’t had in a couple of years,” Rich Cosner, president of Prudential California Realty told the Associated Press. “But frankly no, it won’t help (struggling borrowers) to refinance.”

Its real aim is to bail out the banks which bought Fannie’s and Freddie’s unsecured debts as investments with the understanding that the US treasury ultimately stood behind these so-called “government-secured enterprises.”

The immediate cost of the bailout will be borne by taxpayers as well as shareholders, who will see their investments wiped out. Part of the plan announced Sunday authorizes the government to buy up existing assets at a nominal price of less than a $1 a share. A significant portion of these investments are held by mutual funds handling 401K plans that constitute the sole retirement savings for large sections of the American workforce.

Moreover, the terms of the takeover is expected to precipitate at least some new bank failures. The FDIC (Federal Deposit Insurance Corporation) issued a statement Sunday affirming that “while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital.” How “limited” this number was, the agency did not say.

The plan announced by Paulson calls for the investment of up to $200 billion in government funds to prop up the two mortgage giants.

The real cost, however, could prove significantly higher. William Poole, the former president of the Federal Reserve Bank of St. Louis, said Sunday that the government could be compelled to spend as much as $300 billion to rescue the two companies.

The action marks the third time since the beginning of the year that the US government has been force to bail out a major financial institution in order to stave off a threat of imminent collapse of the US and global banking system.

Last March, the injection of $29 billion from the US Federal Reserve was used to subsidize the takeover of Bear Stearns by JPMorgan Chase. And in July, the government was granted authority to inject cash into the Fannie Mae and Freddie Mac, while the two government-backed private companies were allowed to borrow money directly from the Fed.

Together, the two companies had recorded $14.9 billion in net losses over the past four quarters as a result of rising foreclosures and plummeting home prices.

In selling the plan last July to the Senate Bank Committee, Paulson argued, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” The idea was that by creating this safety net, private investors would be reassured and would lend money to the two companies, which together own or back more than $5 trillion in home mortgage debt.

As it turned out, the “bazooka” had the opposite effect, convincing investors that Fannie and Freddie were headed for bankruptcy and federal takeover. As a result, their share prices continued to plummet, having lost 80 percent of their value this year.

In after-hours trading Friday, after rumors of an imminent takeover began circulating on Wall Street, Fannie Mae stocks fell by another 21.9 per cent and Freddie Mac’s by 20.9 per cent.

One of the triggering factors in the government intervention was apparently the dumping of Fannie-Freddie holdings by Asian and other foreign investors. Bank of China, the country’s third-largest bank, announced at the end of August that it had shed some $3.14 billion in debt holdings from the two companies over the previous two months. Other central banks were apparently following suit.

Russia’s central bank, meanwhile, reportedly dumped some $40 billion in Fannie Mae, Freddie Mac and Federal Home Loan Bank securities over the course of this year and further cuts were expected.

The flight from investment in these government-backed companies clearly raises the specter that a similar pull-out could be threatened from US government securities. At present, the US economy is dependent upon foreign investors, principally in Asia, purchasing up to $20 billion in US agency debt monthly.

Implicitly threatening just such a pullout, China’s leading economist, Yu Yongding, a former senior advisor to the central bank, commented last month: “If the US government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic. If it is not the end of the world, it is the end of the current international financial system.”

Significantly the bond rating agency, Standard & Poors, felt compelled to issue a statement Sunday affirming that the takeovers—adding $5 trillion in debt to Washington’s balance sheets—would not result in the downgrading of the US government’s sovereign credit rating.

The depth of the crisis and the scope of the government intervention was underscored by the fact that Paulson briefed not only President Bush before announcing the plan, but also Democratic and Republican candidates Barack Obama and John McCain, as well as senior congressional leaders.

Both candidates voiced their backing for the intervention, while criticizing the government’s past handling of the two mortgage companies.

“These entities are so big and they are so tied into the housing market that it is probably true that we have to take steps to make sure they don’t just collapse,” Obama told an audience in Terre Haute, Indiana.

“I think that we’ve got to keep people in their homes,” McCain declared in an interview aired Sunday on the CBS news program “Face the Nation.” He continued: “There’s got to be restructuring, there’s got to be reorganization, and there’s got to be some confidence that we’ve stopped this downward spiral.”

Obama proclaimed that the takeover should not be used to “protect investors and speculators who relied on the government to reap massive profits,” while McCain denounced “executives were making hundreds of—some billion dollars a year while things were going downhill.” The Republican candidate acknowledged, “This is the kind of cronyism, corruption, that’s made people so justifiably angry.”

All of this is empty demagogy. The speculation, cronyism and corruption that pervaded the operations of Fannie Mae and Freddie Mac are emblematic of the parasitism and criminality of the America’s ruling financial elite as a whole.

Moreover, this bipartisan unity in support of the bailout is the clearest expression of the unconditional subordination of both major political parties to the fundamental interests of America’s financial oligarchy.

One of the deciding factors in the government’s intervention Sunday was an audit of the two companies performed by advisers hired from Morgan Stanley. While initial reports are sketchy, it appears that the auditors found that the two firms were employing Enron-style accounting methods to hide the real depth of their crisis, failing to write down the value of securities backed by subprime loans.

As a result, the amount of capital that the companies had to protect themselves from losses—extremely limited by any standards—was in actuality far less than had been presented. Their ability to raise new capital had clearly dried up with the dizzying drop in share prices in recent months.

“Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009,” the New York Times reported. “Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.”

Both of the mortgage giants had been involved in previous accounting scandals. Freddie Mac underwent a shakeup in 2003 after it was revealed that earnings figures had been falsified to the tune of $5 billion, while at Fannie Mae, the company was accused of “accounting errors” totaling $6.3 billion. Both Freddie and Fannie were forced to pay fines and replace their chief executives, but no criminal investigations were initiated and no substantive change was initiated in the companies’ operations.

As the New York Times described these operations, the two firms used the implicit government commitment to bail them out “to borrow money at below-market rates and lend money at above-market returns,” turning them into “what amounted to gigantic hedge funds operating with only a sliver of capital to protect them from unexpected surprises.”

Fannie Mae was set up by the federal government in 1938 as part of the New Deal to inject capital into a mortgage market mired in the Great Depression. It was a public agency with the explicit mission of providing government credit so that average families could buy homes.

In 1968, it was turned into a private but government-sponsored corporation with the aim of getting mortgage debt off of the government’s books under conditions in which the Vietnam War was creating growing fiscal pressures. Freddie Mac was created in 1970 as a similar “government sponsored enterprise.” By the 1990s, the two agencies became central to the speculative housing bubble that underlay the profit boom on Wall Street that preceded the current crisis of the world financial system.

The government’s choice of new chief executives to head the two firms it has taken over makes clear whose interests it intends to defend. Placed at the helm of Fannie Mae was Herbert Allison, a former vice-chairman at Merrill Lynch, and to head Freddie Mac, it tapped David Moffett, a former CEO at US Bancorp and current senor advisor to the Carlyle Group.

The Continuity in Government Project

The Continuity in Government Project

Bruce Tanner

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Donald Rumsfeld, Gerald Ford and Dick Cheney

The Real Truth Blog

The political infrastructure for martial law in the U.S. is already in place. Apparently unsure that the USAPATRIOT Act(s) and the Military Commissions Act weren’t strong enough, on May 9, 2007, Bush issued a document doubly titled “National Security Presidential Directive/NSPD 51″ and “Homeland Security Presidential Directive/HSPD-20.” This document supposedly outlines the federal government’s plan for maintaining continuity in the face of a “catastrophic emergency.”

“Catastrophic emergency” is defined as “any incident, regardless of location, that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the U.S. population, infrastructure, environment, economy, or government function.” So, pretty much anything…

In the event of this improbable catastrophe, this unconstitutional legislation by the executive grants itself supreme power to ensure the continuity of Constitutional government. Good one.

In other words, NSPD 51/HSPD-20 would impose martial law under the authority of the White House through DHS. It would suspend constitutional government under the provisions of Continuity in Government (COG).

Since 2003, following the invasion of Iraq, Homeland Security (DHS) has contemplated time and again the possibility of a so-called code red alert “scenario” — using a potential or possible Al Qaeda terrorist attack on American soil — as a pretext for implementing martial law. At one time, Tommy Thompson Former Health and Human Services Secretary said that if we “went to” Code Red the entire civilian government would “shut down.” There are no known provisions for returning America from Code Red status, once it is invoked.

Michel Chosudovsky in “Bush Directive for a “Catastrophic Emergency” in America” writes:

“This Combined Directive NSPD /51 HSPD 20 grants unprecedented powers to the Presidency and the Department of Homeland Security, overriding the foundations of Constitutional government. NSPD 51 allows the sitting president to declare a “national emergency” without Congressional approval The adoption of NSPD 51 would lead to the de facto closing down of the Legislature and the militarization of justice and law enforcement:

The President shall lead the activities of the Federal Government for ensuring constitutional government. In order to advise and assist the President in that function, the Assistant to the President for Homeland Security and Counter terrorism (APHS/CT) is hereby designated as the National Continuity Coordinator. The National Continuity Coordinator, in coordination with the Assistant to the President for National Security Affairs (APNSA), without exercising directive authority, shall coordinate the development and implementation of continuity policy for executive departments and agencies. The Continuity Policy Coordination Committee (CPCC), chaired by a Senior Director from the Homeland Security Council staff, designated by the National Continuity Coordinator, shall be the main day-to-day forum for such policy coordination. (National Security and Homeland Security Presidential Directive NSPD 51/HSPD 20, emphasis added)

NSPD 51 grants extraordinary Police State powers to the White House and Homeland Security (DHS), in the event of a “Catastrophic Emergency”. The Assistant to the President for Homeland Security and Counter terrorism (APHS/CT), who is slated to play a key role in the eventuality of Martial law, is a key White House adviser, Frances Fragos Townsend.”

Of course, preparations for emergency management of the U.S. Government has by this time become a tradition here in the Homeland.

According to William M. Arkin in “Shadow Government” in the Case of a “Second 9/11:”

“Continuity programs began in the early 1950s, when the threat of nuclear war moved the administration of President Harry S. Truman to begin planning for emergency government functions and civil defense. Evacuation bunkers were built, and an incredibly complex and secretive shadow government program was created.

At its height, the grand era of continuity boasted the fully operational Mount Weather, a civilian bunker built along the crest of Virginia’s Blue Ridge, to which most agency heads would evacuate; the Greenbrier hotel complex and bunker in West Virginia, where Congress would shelter; and Raven Rock, or Site R, a national security bunker bored into granite along the Pennsylvania-Maryland border near Camp David, where the Joint Chiefs of Staff would command a protracted nuclear war. Special communications networks were built, and evacuation and succession procedures were practiced continually.

When the Soviet Union crumbled, the program became a Cold War curiosity: Then-Defense Secretary Dick Cheney ordered Raven Rock into caretaker status in 1991. The Greenbrier bunker was shuttered and a 30-year-old special access program was declassified three years later.

Then came the terrorist attacks of the mid-1990s and the looming Y2K rollover, and suddenly continuity wasn’t only for nuclear war anymore. On Oct. 21, 1998, President Bill Clinton signed Presidential Decision Directive 67, “Enduring Constitutional Government and Continuity of Government Operations.” No longer would only the very few elite leaders responsible for national security be covered. Instead, every single government department and agency was directed to see to it that they could resume critical functions within 12 hours of a warning, and keep their operations running at emergency facilities for up to 30 days. FEMA was put in charge of this broad new program.

On 9/11, the program was put to the test — and failed. Not on the national security side: Vice President Cheney and others in the national security leadership were smoothly whisked away from the capital following procedures overseen by the Pentagon and the White House Military Office. But like the mass of Washingtonians, officials from other agencies found themselves virtually on their own, unsure of where to go or what to do, or whom to contact for the answers.”

Continuity in Government programs have been one edge of the wedge to wrest control of the U.S. government away from Constitutional authority and put it in the hands of the secret teams under the direction of hidden interests. The elite decision-makers behind this crypto-fascist coup obviously include big finance, military corporations, elements of intelligence, and interlocking corporations, and also have curious deep ties to the creation and sustenance of the State of Israel.

It’s commonplace humor to refer to Dick Cheney’s being in a “secure location,” but he and Donald Rumsfeld have been intimately involved in Continuity in Government (COG) since their days in Congress. I’ve read several articles on this connection, but was interested to find that I could find no reference to this, or to much at all about the ongoing development of COG programs since the onset of the cold war.

It’s also interesting to note that in Arkin’s excerpt above he notes that for most of Official Washington the COG measures in place failed to take account for them, serving instead only some short list of insiders. This begins to make obvious just who this government serves.

Why We're Planning to Prosecute Cheney and Bush

Why We're Planning to Prosecute Cheney and Bush

By David Swanson

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Next weekend in Andover, Mass., a group of attorneys, academics, and activists will gather to plan the prosecution of Dick Cheney, George Bush, and the lawyers and advisors who, together with them, are responsible for war crimes. The conference is open to the public and expected to be well attended:

I can't speak for everyone involved, but I can tell you why I'll be there. If I thought we could deter future presidents and vice presidents from abusing power by giving Cheney and Bush immunity for life, billion dollar pensions, and royal crowns, then that is exactly what I would propose we do. In fact, if there were just about anything that we could do that I thought would have that deterrent effect, I would advocate for it. I would give my life for it. I take the matter this seriously because we are preparing to hand what Michael Goldfarb, Deputy Communications Director for presidential candidate John McCain, approvingly calls "near dictatorial power" to every future president and vice president at a moment in history in which the twin dangers of global warming and nuclear war threaten us far more seriously than has any nation with which ours has ever clashed.

I am adamantly opposed to the possibility of imposing the death penalty on anyone, no matter what they are convicted of, because it has been shown to encourage violence rather than to deter it. Future presidents are not more likely to refrain from abusing power if they might be executed than if they might be imprisoned for life. If they are imprisoned for life, they can express their regrets in ways that their successors can understand. If they are killed, we will be the ones killing them, and we will thereby send a message to everyone that violence and vengeance are appropriate and admirable. Vengeance disgusts me. Bush and Cheney bore me. What interests me and inflames me is the desire to establish the rule of law, not for its own sake but in order to promote peace, fairness, human rights, and human survival.

Now, we may have an honest and verifiable election in November, although I can't see how. And we may elect a president and vice president who abide fully by the Constitution, the treaties our nation has ratified, and the laws that are on the books, although that seems highly unlikely. We might even see unconstitutional laws repealed, tyrannical executive orders torn up, and the Constitution amended to strengthen checks on power and expand the democratic influence of the people, although if you believe all that I've got a quick little cakewalk of a war to sell you. But think for a minute what message all those successes would send to future presidents and vice presidents and their subordinates: If you break the law, the punishment shall be that the duumvirate immediately following yours will not break the law. Oh, the horror! I can almost feel the terror gripping the spine of every future Dick Cheney and George W. Bush who will claim the throne throughout the remaining short life of our dying republic. "Nooooooo! Don't say that the next chump who comes after us won't get to be a war president! We can't stand such agony!"

In a December 31, 2007, editorial, the New York Times faulted the current president and vice president of the United States for kidnapping innocent people, denying justice to prisoners, torturing, murdering, circumventing U.S. and international law, spying in violation of the Fourth Amendment, and basing their actions on "imperial fantasies." If the editorial had been about Bush and Cheney robbing a liquor store or killing a small number of people or robbing a small amount of money or torturing a single child, then the writers at the New York Times would have demanded immediate prosecution and incarceration. Can you guess what they actually demanded? They demanded that we sit back and hope the next president and vice president will be better. Well, what if they are? The next guy who walked into the liquor store or played with the child would be better too. But how does that fact deter future crimes?

Well, we can announce new policies, pass new legislation, amend the Constitution. We can shift power to the Congress, and clean up our electoral system to allow real representation of the people in the Congress. We can shift our resources from the military to peaceful enterprises. We can eliminate secret government and create total transparency. We can perfect the brilliant cutting-edge democratic system that our nation created over two centuries ago and has done little to update since. We can put an end to plutocracy, reclaim our airwaves, ban war propaganda, and develop wholly different public attitudes toward those 95.5 percent of people in the world who are not Americans. And so we should. But even if we could do all of those things instantly, it would not be sufficient to chain the dogs of war. Exquisite laws and enlightened public attitudes are of no use at all as long as presidents and vice presidents suffer no penalty for disobeying them, and in fact benefit politically and financially.

Of course, in reality, we cannot reform our war government instantly, and we will be hard pressed to prevent even greater damage to our representative system as long as wars are going on. We are as likely to see President John McCain cheering for more wars in January as we are to see President Obama mumbling about moving wars from one country to another. If Obama loses or has his victory stolen, the Democrats will take everything they did wrong these past several years and redouble their commitment to screwing up even worse next time. Ending wars and impeaching criminal presidents will be even further "off the table," while patriotism, religion, and militarism will be on the rise. If, on the other hand, the Democrats win in November, they'll react exactly the same way. Their primary interest as soon as any election is won is winning the next one, and their only focus outside of the White House is on controlling the partisan re-gerrymandering of districts in 2012. I wish that this focus on each subsequent election could be seen as a sign of health in our democracy, but in the corrupt, money-laden, media-mangled, party-powered system we have, voters' choices are minimal, and the total focus on elections amounts to a total abandonment of governing in between elections.

During the Democratic primaries, Senator Obama said he'd have his attorney general look into the possibility that Bush and Cheney had committed crimes, but that as far as he knew they hadn't committed any. At the same time, Obama promised not to commit some of the same crimes himself. He later voted to give telecom companies immunity for cooperating with some of the crimes. This past week Obama's vice-presidential running-mate Joe Biden said that he, too, didn't know of any crimes that had been committed, but that an Obama-Biden administration would look into the question. He also promised a justice department that would no longer commit crimes. The day after Biden made these nonsensical remarks, he went on TV to insist that an Obama-Biden administration has no intention of prosecuting Bush and Cheney.

There's a much more serious potential road block to domestic criminal prosecution than Barack Obama's belief that Bush and Cheney's crimes should be hushed up, namely the possibility that Bush will issue blanket pardons of anyone who engaged in crimes he authorized, including himself. If such a pardon strikes you as a sick joke, I'm with you. But signing statements and military tribunals and pentagon pundits and a partisan justice department and ATM companies building election machines without the safeguards that ATMs have would have all sounded like sick jokes if they weren't real. Without admitting that Bush or anyone else has committed any crimes, Obama or McCain could take a position against any president, himself included, ever pardoning anyone for a crime that the president authorizes. Congress, or at least the House of Representatives, could stop vacationing and pass legislation forbidding such pardons. Lawyers and Constitutional experts could publish op-eds in major newspapers on the unacceptability of such pardons. A massive movement in the coming months to raise public pressure against pardons makes at least as much sense as continuing to ask Congress to pretty please "end the war," as if Congress will ever do anything about wars other than what the president tells it to do. A focus on pardons at least begins to limit the power of the individual holding all the power. Congress, unless it is restored to power, serves -- at best -- as just more people lobbying the president.

Now, blanket pardons or self-pardons could be challenged. There may be local and state and civil prosecutions possible despite pardons and strengthened by pardons. And prosecution by a foreign country or the International Criminal Court (ICC) is a possibility as well. With Obama and Biden suggesting they will "investigate" whether any crimes have been committed, there is no reason that they could not, without even joining the ICC or admitting that they know about the crimes, publicly commit to NOT vetoing at the United Nations any investigations that the ICC might choose to pursue. That commitment is a second demand that we can make of the candidates for emperor.

Some have expressed concern that when Cheney and Bush leave office they will destroy lots of evidence of their crimes. I do not share this concern, because they already have destroyed lots of such evidence, and nonetheless more than enough such evidence is in the public realm. We do not need any more, but do badly need to shake off the myth that we need any more. And there is something that cannot be destroyed: the many potential whistleblowers who have been keeping their mouths shut. We should not be relying on Congress. We should not be funneling our money through electoral campaigns and into TV ads on television networks that are destroying our country. We should be establishing a whistleblower protection fund that can guarantee financial security and legal defense to those considering blowing the whistle on their superiors.

As far as Congress goes, we should be demanding a commitment that the endless charades they have gone through with subpoenas and contempt citations for the past two years, while conscientiously avoiding impeachment, will not be dropped along with the ball in Times Square on New Year's Eve. "Executive privilege" loses even the slightest aura of respectability once the executive is guzzling beers on golf courses for a living. The committee chairmen and the House and Senate leaders who have authorized subpoenas and contempt citations only to be mocked and laughed at by the gang of pirates who will set sail in January must be compelled to publicly commit to re-issuing the same once the new justice department is in place.

There are also a variety of ways in which citizens can file suit. My friend John Bonifaz served as attorney on a law suit against the President before the invasion of Iraq on behalf of Congress members and military families claiming an invasion would be unconstitutional without a proper congressional declaration of war. John consulted in 2007 with a professor at Rutgers University, who worked up a case with his students for a full year, and in 2008 filed it in Federal District Court in Newark, New Jersey. The Complaint, filed on behalf of a number of peace groups, seeks a Declaratory Judgment that the President’s decision to launch a preemptive war against a sovereign nation in 2003 violated Article I, Section 8 of the United States Constitution, which assigns to Congress the power to Declare War. Every peace and justice group in the country should be working with lawyers, choosing their favorite Cheney-Bush crime, and filing a suit, the point being to change the public conversation until we reach the point that a prosecutor will act.

There is also a procedure called Qui Tam found in the Federal False Claims Act that allows individual citizens to sue if the government spends money fraudulently, and to receive a percentage of any funds recovered. Such a suit could conceivable be filed, or perhaps hundreds of such suits could be filed, against government officials, including Dick Cheney, who set up illegal contracts with Halliburton and other corporations, including contracts to spend in Iraq funding that had been legally appropriated for Afghanistan.

Prosecution is also possible in foreign nations. In May 2008 in Milano, Italy, 25 CIA agents and an Air Force colonel went on trial in absentia for kidnapping a man on an Italian street and renditioning him to Egypt to be tortured. The victim's wife testified for over six hours. A newspaper report read:

"Nabila at first rebuffed prosecutors' requests to describe the torture her husband had recounted, saying she didn't want to talk about it. Advised by prosecutors that she had no choice, she tearfully proceeded: 'He was tied up like he was being crucified. He was beaten up, especially around his ears. He was subject to electroshocks to many body parts.'
"'To his genitals?' the prosecutors asked.
"'Yes,' she replied."

The judge said that the current and immediate past prime ministers of Italy would be required to testify during the trial.

Foreign victims can also sue in U.S. courts. Also in May 2008, an Iraqi sued U.S. contractors for torture. Emad al-Janabi's federal lawsuit was filed in Los Angeles and claimed that employees of CACI International Inc. and L-3 Communications punched him, slammed him into walls, hung him from a bed frame and kept him naked and handcuffed in his cell. In July, three more Iraqis and a Jordanian who had been held and tortured in Abu Ghraib for years before being released without charges filed similar suits. Alleged methods of torture by the U.S. contractors included: electric shock, beatings, depriving of food and sleep, threatening with dogs, stripping naked, forcibly shaving, choking, being forced to witness murder, pouring feces on, holding down and sodomizing (a 14-year-old boy) with a toothbrush, being paraded naked before other prisoners, forcing to consume so much water that you vomit blood and faint, and tying a plastic line around your penis to prevent urination.

And on August 15, 2008, the Second Circuit Court of Appeals in New York announced that it would hear the case against the United States of Canadian victim of U.S. torture Maher Arar. His suit names, among others, former Attorney General John Ashcroft, former Deputy Attorney General Larry Thompson, and former head of "Homeland Security" Tom Ridge.

We can also work at the local level to follow the example of Brattleboro, Vt., passing ordinances making it the law that if Bush, Cheney, or key co-conspirators enter our towns they will be arrested.

And we can make citizens arrests all on our own right now:

Judge William Price in Iowa in July heard the case of people who had been arrested for trying to make a citizens' arrest of Karl Rove. When told what they were charged with, the judge remarked "Well, it's about time!"

And it's about time we put together a serious plan to establish the rule of law at home and abroad. I'll see you in Andover next weekend.

World's richest got even richer last year: report

World's richest got even richer last year: report

By Joseph A. Giannone

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The old saying holds true: The rich do get richer.

Even as world financial markets broke down last year, personal wealth around the world grew 5 percent to $109.5 trillion, according to a global wealth report released on Thursday by Boston Consulting Group.

It was the sixth consecutive year of expanding wealth. The fastest growth was among households in developing regions, such as China and the Gulf States and among families who were already rich.

That wealth also is increasingly concentrated among the richest.

The top 1 percent of all households owned 35 percent of the world's wealth last year. Meanwhile, the top 0.001 percent, ultra-rich households holding at least $5 million in assets, commanded $21 trillion -- a fifth of the world's wealth.

The planet also continues to mint new millionaires rapidly. The biggest jumps in 2007 came from emerging countries in Asia and Latin America. Overall, the number of millionaire households grew 11 percent to 10.7 million last year.

BCG notes that, while the rich are still rich, they have been making some adjustments as a result of the financial crisis.

This year, assets are being shifted to more conservative investments, more money is being kept onshore in home markets and some individuals have curtailed new investment.

Yet BCG cautioned the outlook for wealth markets and the banks who serve them, is dimmed by the current financial crisis.

North American personal wealth growth slowed to 3.8 percent last year, compared with 9 percent in 2006, reflecting the the mortgage crisis and the onset of the credit crunch last summer.

"The financial crisis continue to cast a pall over established wealth markets," said Victor Aerni, a Zurich based partner who coauthored the report.

BCG, which advises banks and wealth managers, forecasts personal wealth will continue growing, but at a slower pace. This year, with Wall Street suffering through one of its worst slumps in decades, growth in assets is expected to rise less than 1 percent.

Things will improve over the next five years, BCG said, with personal wealth growing more than 3 percent annually -- well off the 8.5 percent set between 2002 and 2007.

Wealth is growing at much faster rates among the rest of the world. Households in Asia, the Pacific Rim excluding Japan and Latin America saw the greatest growth, with wealth rising 14 percent. That growth was fueled by manufacturing in Asia and commodities in Latin America and the Middle East, as well as more currency and political stability.

BCG observed that banks, brokerages and money managers will have little choice, but to expand their presence in these fast growing centers. Dubai and Singapore, the firm said, are becoming regional private banking centers offering greater competition to traditional havens such as Switzerland.

Explaining Windfalls to Ben Stein

Explaining Windfalls to Ben Stein

Dean Baker

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I apologize to readers who know what a windfall is, but since NYT columnist Ben Stein does not and asked to be taught, I thought I would oblige him. Mr. Stein notes that Senator Obama wants to tax the profits of the oil industry to help to pay for a stimulus package. He then asks:

"why punish the owners of the oil companies, who are largely pension plans, group or individual, and individual investors? Why should we punish some American firefighters who own oil company stocks more than American firefighters who own drug company stocks or tobacco stocks? Why tax away the savings of some Americans because they happen to own a share in a company that supplies a totally legal, absolutely indispensable product like oil? I don’t get that at all."

Okay, I'll write this slowly so that even Ben Stein can follow it.

First, close to half of stock, included oil company stock, is owned by very rich people, so the fact that a small portion is owned by firefighters has nothing to do with the time of day. Some of the oil companies' stock is owned by child molesters. Should we be discussing that?

More practically, the oil companies are making enormous profits at present because oil prices went up far beyond what almost anyone had anticipated. In other words, Exxon-Mobil, Shell, and the others had not anticipated $120 a barrel oil when they undertook their investments 10-20 years ago. They would have made a fine profit if oil had stayed in the range of the $30-$40 a barrel they anticipated when they made their investments. The gap between the return they expected and the return they are getting because of unanticipated events is what economists call a "windfall."

The government often acts to prevent windfall gains. For example, if workers in a key industry opted to go on strike to press for higher wages, they would get put in jail. Mr. Stein may be too young to remember, but this is what happened to air traffic controllers when they went on strike in 1981. Their leaders were thrown in jail. The government has held the threat of jail over the heads of other unions that have considered or carried through strikes in situations where they were arguably exploiting their bargaining position.

The neat thing about a windfall is that the elimination of the windfall does not affect supply. It would have been profitable to produce the amount of oil that the industry is currently producing even at far lower prices. This means that we can tax away much of the industry's profits without affecting the supply of oil. In the longer-term, there could be some modest impact, since oil companies will realize that their likelihood of collecting an extraordinary windfall in the future is lower if governments are prepared to tax it away. However, this may not be much of a concern, since just about everyone recognizes that we have to move away from oil consumption in any case.

Mr. Stein also mentions the claim from Martin Feldstein, an economist who has made a career out of being wrong (e.g. he claimed that Social Security had a large negative impact on private savings and that the Clinton tax increases would raise very little revenue), that most of the recent tax cut was saved. This one prompts a really big "huh?" from those familiar with arithmetic.

Real consumption was 5.6 percent higher in May than April, 2.6 percent higher in June than April, and 0.9 percent higher in July than April, all months in which real disposable income would have fallen from April's level, absent the tax rebates. Maybe Feldstein thinks that families increased their spending because of optimism about the economy, but I doubt that many would agree with that view.

Election Observer Arrested in Arizona

Election Observer Arrested in Arizona

By Steven Rosenfeld

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According to the Election Defense Alliance blog, John Brakey, one of the country's leading election activists known for bring secretive electronic voting into public view, was arrested while observing problems in local elections this week in Pima County, Arizona.

The arrest begs the question of whether the same response will be forthcoming against election observers this November. That scenario is hardly moot after the police used excessive force in St. Paul in response to protests and other First Amendment activities at the Republican National Convention.

The EDA blog report said Brakey was arrested while officially observing the vote colunt.

From the EDA blog:

While monitoring a handcount of ballots from the September 3rd Arizona primary, in his capacity as an official election observer for the Democratic and Libertarian parties, EDA Investigations Co-Coordinator John Brakey was arrested and ejected from the Pima County election headquarters on orders of Pima County Elections Director Brad Nelson.

Brakey had noticed that several of the incoming bags containing ballots from the precincts had unsecured or missing seals. The seal failures appeared to be the result of pollworkers not knowing how to properly lock them.

Brakey then wondered whether the serial numbers on the bag seals matched the serial numbers recorded by the precinct pollworkers when they sealed the ballots. One question led to another, and Brakey ended up in handcuffs.

Watch the television news video of the incident from KGUN TV, Pima AZ.

Seal serial numbers are supposed to be recorded on yellow report sheets, called "End of Day Certification Reports." The certification sheets are supposed to be signed by all precinct pollworkers and included with the ballots inside the delivery bags. The bags are supposed to remain sealed until opened for counting at county election headquarters.

In one bag, instead of the signed official certification sheets, there was instead a slip of white paper with what Brakey said were "two illegible, scrawled signatures." Brakey watched Election Manager Brad Nelson read the slip, say he recognized who the two pollworkers were, and approve acceptance of that bag of ballots for counting.

Brakey found it rather remarkable that Nelson would be so familiar with the county's 3000 pollworkers that he could identify two of them by illegible scrawls on a slip of paper.

Brakey then began checking other incoming ballot bags. In the first 7 successive ballot bags he checked, the required yellow certification reports were missing. This included bags with open seals, as well as bags with seals intact.

As Brakey was speaking to members of the counting panels alerting them to his discoveries, Election Director Nelson came up to him and told him to leave.

Brakey replied that he was appointed to be an election observer and he intended to stay on the job until closing time at 1:00 a.m. Nelson told him to leave immediately or he would be arrested. Brakey refused. At that point a deputy sheriff present placed Brakey under arrest for trespassing, handcuffed him, and removed him from the building.

Once outside, Brakey requested his legally allowed phone call, and placed it to his attorney, Bill Risner. Word of Brakey's arrest immediately went out to the network of election integrity activists Brakey has built with the grassroots group AUDIT-AZ.

Shortly thereafter the county elections building was swarming with television news crews.

Fluoride: Industry's Toxic Coup

Fluoride: Industry's Toxic Coup

by Joel Griffith

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For nearly 50 years, the US government and media have been telling the public that fluoride compounds (generally referred to simply as "fluoride") are safe and beneficial chemicals that reduce cavities - especially in children.

Manufacturers add it to toothpaste, municipalities put it in the public's drinking water. But fluoride has another side that the government never mentions. It is a toxic industrial pollutant.

For decades, US industry has rained heavy doses of waste fluoride on people. By the Environmental Protection Agency's (EPA) last estimate, at least 155,000 tons a year are released into the air by US industrial plants. Emissions into lakes, rivers and oceans have been estimated to be as high as 500,000 tons a year.

While people living near or working in heavy fluoride-emitting industrial plants receive the highest doses, the general population has not been spared. Because fluoride compounds are not biodegradable, they gradually accumulate in the environment, in the food chain, and in people's bones and teeth.

If this general increase in fluoride dose were proved harmful to humans, the impact on industry would be major. The nation's air is contaminated by fluoride emissions from the production of iron, steel, aluminum, copper, lead and zinc; phosphates (essential for the manufacture of all agricultural fertilizers); plastics; gasoline; brick, cement, glass, ceramics, and the multitudinous other products made from clay; coal-burning electrical powerplants; and uranium processing.

As for water, the leading industrial fluoride polluters are the producers and processors of glass, pesticides and fertilizers, steel and aluminum, chemicals and metals - copper and brass, titanium, superalloys, and refractory metals for military use.

Industry and government have long had a powerful motive for claiming that fluoride is safe. But maintaining this position has not been easy since fluoride is one of the most toxic substances known. "Airborne fluorides," reports the US Department of Agriculture, "have caused more worldwide damage to domestic animals than any other air pollutant." Evidence that industrial fluoride has been killing and crippling human beings has existed at least since the 1930s.

Primal Poison

Of the highly toxic elements that are naturally present throughout the earth's crust - such as arsenic, mercury and lead - fluoride is by far the most abundant. Normally, only minute amounts of these elements are found on the earth's surface, but industry mines vast tonnages - none in greater quantity than fluorine, which is most often found in the form of calcium fluoride.

As early as 1850, fluoride emissions from the iron and copper industries poisoned crops, livestock, and people. By the turn of the century, lawsuits and burdensome regulations threatened the existence of these industries in Germany and England.

In 1933, when the world's first major air pollution disaster struck Belgium's Meuse Valley. Several thousand people became violently ill and 60 died. Kaj Roholm, the world's leading authority on fluoride hazards, placed the blame on fluoride.

It was abundantly clear to both industry and government that US industrial expansion would necessitate releasing millions of tons of waste fluoride into the environment. It was equally clear that US industrial expansion would be accompanied by complaints and lawsuits over fluoride damage on an unprecedented scale.

Liability Into Asset

During the industrial explosion of the 1920s, the US Public Health Service (PHS) was under the jurisdiction of Treasury Secretary Andrew W. Mellon, a founder and major stockholder of the Aluminum Company of America (Alcoa). In 1931, a PHS dentist named H. Trendley Dean was dispatched to remote towns in the West where drinking-water wells contained high concentrations of natural fluoride. His mission: to determine how much fluoride people could tolerate without sustaining obvious damage to their teeth. Dean found that teeth in these high-fluoride towns were often discolored and eroded, but he also reported that they appeared to have fewer cavities than average.

The University of Cincinnati's Kettering Laboratory, funded largely by top fluoride-emitters such as Alcoa, quickly dominated fluoride safety research. A book by Kettering scientist (and Reynolds Metals consultant) E. J. Largent, was admittedly written in part to "aid industry in lawsuits arising from fluoride damage." Nonetheless, the book became a basic international reference work.

In 1939, ALCOA-funded scientist Gerald J. Cox was one of the first to note that "The present trend toward complete removal of fluoride from water and food may need some reversal." Cox also proposed that this "apparently worthless by-product" might reduce cavities in children. Cox fluoridated lab rats, concluded that fluoride reduced cavities and declared flatly: "The case should be regarded as proved."

In 1939, the first public proposal that the US should fluoridate its water supplies was made, not by a doctor, or dentist, but by Cox, an industry scientist working for a company threatened by fluoride damage claims.

Undoubtedly, most proponents were sincere in their belief that the procedure was safe and beneficial. Nonetheless, their unquestioning endorsement of fluoridation made possible a master public relations stroke. If the leaders of dentistry, medicine, and public health supported pouring fluoride into the public's drinking water - proclaiming to the nation that there was a "wide margin of safety" - how were they going to turn around later and say industry's fluoride pollution was dangerous?

If fluoride could be introduced as a health-enhancing substance that should be added to the environment for the children's sake, those opposing it would look like quacks and lunatics.

ALCOA Foils Accountability

The name of the company with the biggest stake in fluoride's safety was ALCOA - whose name is stamped all over the early history of water fluoridation.

By 1938, the aluminum industry (which then consisted solely of ALCOA) was placed on a wartime schedule. During World War II, industry's fluoride pollution increased sharply because of stepped-up production of ALCOA aluminum for fighters and bombers. And fluoride was the aluminum industry's most devastating pollutant.

Following the war, hundreds of fluoride damage suits were filed around the country against producers of aluminum, iron and steel, phosphates, chemicals, and other major polluters.

Most of the lawsuits, particularly those claiming damage to human health, were settled out of court, thus avoiding legal precedents. In a rare exception, a federal court found in Paul M. and Verla Martin v. Reynolds Metals (1955) that an Oregon couple had sustained "serious injury to their livers, kidneys and digestive functions" from eating "farm produce contaminated by [fluoride] fumes" from a nearby Reynolds aluminum plant.

ALCOA and six other metals and chemical companies joined with Reynolds as "friends of the court" to get the decision reversed. Finally, in a time-honored corporate solution, Reynolds mooted the case by buying the Martins' ranch for a hefty price.

"Friends" of Children

The postwar casualties of industrial fluoride pollution were many - from forests to livestock to farmers to smog-stricken urban residents - but national attention had been diverted by fluoride's heavily publicized new image. In 1945, shortly before the war's end, water fluoridation abruptly emerged with the full force of the federal government behind it.

In that year, two Michigan cities were selected for an official "15-year" comparison study to determine if fluoride could safely reduce cavities in children, and fluoride was pumped into the drinking water of Grand Rapids.

In 1946, despite the fact that the official 15-year experiment in Michigan had barely begun, six more US cities were allowed to fluoridate their water.

In 1947, Oscar R. Ewing, a long-time ALCOA lawyer, was appointed head of the Federal Security Agency, a position that placed him in charge of the Public Health Service. Under Ewing, a national water fluoridation campaign rapidly materialized, spearheaded by the PHS. Over the next three years, 87 additional cities were fluoridated. The two-city Michigan experiment (the only scientifically objective test of fluoridation's safety and benefits) was abandoned before it was half over.

The Father of All Spin Doctors

The government's official reason for this unscientific haste was "popular demand." This enthusiasm was not really surprising, considering Oscar Ewing's public relations strategist for the water fluoridation campaign was none other than Sigmund Freud's nephew Edward L. Bernays.

Bernays, also known as the "father of public relations," pioneered the application of his uncle's theories to advertising and government propaganda. The government's fluoridation campaign was one of his most enduring successes.

In his 1928 book, Propaganda, Bernays expounded on "the mechanism" that controls the public mind. "Those who manipulate this unseen mechanism of society," Bernays wrote, "constitute an invisible government which is the true ruling power of our country.... [O]ur minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of...."

Almost overnight, under Bernays' mass mind-molding, the popular image of fluoride - which at the time was being widely sold as rat and bug poison - became that of a beneficial provider of gleaming smiles, absolutely safe, and good for children,

The prospect of the government mass-medicating the water supplies with a well-known rat poison to prevent a non-lethal disease flipped the switches of skeptics across the country. But, under Bernays' spell, fluoride's opponents were permanently engraved on the public mind as crackpots and right-wing loonies.

In 1950 the PHS officially endorsed fluoridation. Since then, two-thirds of the nation's reservoirs have been fluoridated and about 143,000 tons of fluoride are pumped in yearly to keep them that way.

Today, companies forced to reduce their fluoride emission can even recoup some of the expense by selling the waste to cities for water fluoridation.

Protected Pollutant

In 1972, the newly formed EPA surveyed atmospheric polluters and reported: "The fluorides currently emitted [by industry] may damage economic crops, farm animals, and construction [i.e. buildings, statuary and glass]...." Nonetheless, the report concluded that "the potential to cause fluoride effects in man is negligible."

Another EPA report confirmed that, "Fluoride emissions do have adverse effects on livestock and vegetation" but insisted that "fluoride emissions from primary aluminum plants have no significant effect on human health. " In other words, the stuff withers plants, cripples cows, and even eats holes in stone, but it doesn't hurt people. Nature ever surprises.

Whenever new scientific evidence threatens fluoride's protected pollutant status, the government immediately appoints a commission - typically composed of veteran fluoride defenders and no opponents. Usually, these commissions dismiss the new evidence and reaffirm the status quo.

In 1983, however, a PHS panel of "world-class experts" reviewed the safety data on fluoride in drinking water and was surprised to discover that much of the vaunted evidence of fluoride's safety barely existed. The panel recommended caution, especially in regard to fluoride exposure for children.

But when Surgeon General Everett Koop's office released the official report a month later, the panel's most important conclusions and recommendations had been deleted, apparently without consulting its members.

Any suggestion that low doses of fluoride might be harmful was thrown out. In its place, the government substituted this blanket statement: "There exists no directly applicable scientific documentation of adverse medical effects at levels of fluoride below 8 ppm [parts per million]."

The panel's final draft had firmly recommended that "the fluoride content of drinking water should be no greater than 1.4-2.4 ppm for children up to and including age 9 because of a lack of information regarding fluoride effect on the skeleton in children (to age 9), and potential cardiotoxic effects [heart damage]...."

To quote one exchange from the transcript of the panel's meeting:

Dr. Wallach: "You would have to have rocks in your head, in my opinion, to allow your child much more than 2 ppm."

Dr. Rowe: "I think we all agree on that."

In 1985, basing its action on the Surgeon General's altered report, the EPA raised the amount of fluoride allowed in drinking water from 2 to 4 ppm for children and everybody else.

Bones of Contention

Between 1990-92, eight different epidemiological studies suggested that water fluoridation may have increased the rate of bone fractures in females and males of all ages across the US. A 1992 study in the Journal of the American Medical Association (JAMA) found that "low levels of fluoride may increase the risk of hip fracture in the elderly."

Since 1957, the bone fracture rate among male children and adolescents has increased sharply in the US according to the National Center for Health Statistics. The National Research Council (NCI) reports that the US hip fracture rate is now the highest in the world. "Clearly," JAMA editorialized in 1991, "it is now appropriate to revisit the issue of water fluoridation."

Evidence that fluoride is a carcinogen has cropped up since at least the 1940s. A 1956 federal study found nearly twice as many bone defects (of a type considered possibly pre-malignant) among young males in the fluoridated city of Newburgh, New York.

In 1977, congressional hearings revealed that the government had never cancer-tested fluoride. The NCI was ordered to begin an investigation.

Twelve years later, in 1989, the study was finally completed. It found "equivocal evidence" that fluoride caused bone cancer in male rats. The NCI found that nationwide evidence "of a rising rate of bone and joint cancer of all ages combined, due mainly to trends under the age of 20, was seen in the 'fluoridated' counties but not in the 'non-fluoridated' counties."

A new commission, chaired by venerable fluoridation proponent and PHS official Frank E. Young, was impaneled to respond to the NCI's alarming findings. The commission concluded that it could find "no evidence establishing an association between fluoride and cancer in humans." As for the evidence on bone fractures, the commission merely stated, "further studies are required."

Government Doubts

William Marcus, an EPA senior science adviser and toxicologist maintains that "fluoride is a carcinogen by any standard we use. I believe EPA should act immediately to protect the public, not just on the cancer data, but on the evidence of bone fractures, arthritis, mutagenicity and other effects." Marcus adds that a still-unreleased study by the New Jersey State Health Department has found that the bone cancer rate is six times higher among young males in fluoridated communities.

"The level of fluoride the government allows the public is based on scientifically fraudulent information and altered reports," charges Robert Carton, an EPA environmental scientist. "People can be harmed simply by drinking water," Carton warns.

Does fluoridation reduce cavities in children? Over the years, many health professionals - especially abroad - have decided the beneficial effects of fluoride are mostly hokum; but open debate has been stifled if not strangled.

During the early 1980s, New Zealand's most prominent fluoridation advocate was John Colquhoun, the country's chief dental officer. He styled himself an "ardent fluoridationist" until the day he tried to gather statistics to bolster the claim that fluoride was a boon to dental health.

"I observed that... the percentage of children who were free of dental decay was higher in the unfluoridated part of most health districts in New Zealand." Colquhoun reported. The national health department refused to allow Colquhoun to publish his findings and he was encouraged to resign.

In 1990, Colquhoun issued a warning that "the harmful effects of water fluoridation are more real than is generally admitted while the claimed dental benefit is negligible."