Thursday, September 18, 2008

Bernanke: "We have lost control"

Economist recounts talk with Fed chairman

By Joshua Boak

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Several months ago, economist David Hale had a private meeting with Federal Reserve Chairman Ben Bernanke, who was trying to ward off a recession by lowering interest rates and increasing the money supply in the economy.

The problem with that approach is that the value of the dollar plunged against foreign currencies, causing crude oil prices to skyrocket because oil is pegged to the dollar. It affected food prices, gasoline and family budgets.

"Ben, you are playing a very unique role in world economic history," Hale recalled telling Bernanke, an expert in the Great Depression. "You are the first central bank governor of the United States to preside over a recession with no decline in commodity prices."

Bernanke could hypothetically limit inflation in commodities by raising interest rates, a policy that would restrict the flow of money but potentially lead to an avalanche of bank failures. At a financial conference in Florida on Tuesday, Hale, a Chicago-based economist for investment managers, hedge funds and multinational companies, paraphrased the Fed chairman's response.

"We have lost control," said Hale, quoting Bernanke. "We cannot stabilize the dollar. We cannot control commodity prices."

If efforts to stop a recession sent commodities to record levels through July, then the realization that a recession could be imminent has sunk oil prices by almost 40 percent during the past two months. For all the debate about foreign demand and financial speculators, one overlooked aspect of commodity prices is the health of the American economy.

With investment banks collapsing under the weight of subprime mortgages and the recent government bailout of Fannie Mae and Freddie Mac, commodity prices have retreated as the market predicts demand for oil will fall. October futures closed down $4.56 Tuesday, at $91.15 a barrel. And in response to inflationary concerns, the Federal Reserve responded Tuesday by holding the overnight federal funds rate steady at 2 percent as it has since April.

Hale believes the recessionary turns could keep oil below $100 a barrel, a consensus shared by many analysts who see oil staying in the $80 to $100 range.

But a problem for America is that much of the power it wields over oil prices is based on the strength of the dollar and economic demand. Russia, Venezuela, Ecuador and others have nationalized their reserves, stripping ownership rights away from private firms and complicating the global market for oil.

"While every other country is practicing natural resource nationalism, this country still pretends there is a free market in energy when, in fact, there is not," said John Hofmeister, the head of Citizens for Affordable Energy and the former president of Shell Oil Co.

If there is any relief for American consumers to come from global markets, it might emerge from China, a country that has successfully wrestled down inflation. China insulates its population from the market price of oil, a policy shared by Malaysia, Thailand and India.

As inflation in China dropped to 5 percent from 8 percent, the government has begun to pass actual commodity costs onto the public, said James McGregor, a consultant and author of the book "One Billion Customers: Lessons From the Front Lines of Doing Business in China."

"I think you're going to see them squeeze down subsidies," McGregor said. "They don't like them either because they distort the economy."

The Financial Elite Can't Bailout Everyone

The Financial Elite Can't Bailout Everyone

Lee Rogers

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It is difficult to know where to begin when analyzing the unraveling global financial system as so much has happened over the past couple of weeks and months. The one thing that is for sure is that neither the Federal Reserve nor the U.S. government can bailout everyone. We are seeing a mass consolidation of wealth on a wide scale and this is all being done by design. What is happening now is the result of fiscal policies put into place by the Federal Reserve that encouraged reckless lending and borrowing on all levels. This month we have seen a major reshuffling on Wall Street with the U.S. government nationalizing the two largest home mortgage owners Freddie Mac and Fannie Mae, the bankruptcy of Lehman Brothers, the Bank of America purchase of Merrill Lynch and now the $85 Billion bailout of insurance giant AIG. The end result of this is undoubtedly going to be a disaster, but it is going to be even worse because the Federal Reserve and the U.S. government has gotten involved in the practice of bailing out failed institutions. By propping up failed institutions using the excuse that these companies are too large to fail is nothing short of welfare for the rich and is entirely against the premise of a free market. It is nothing short of economic socialism. If you are a small business owner and you have trouble paying your bills the U.S. government is not going to come and help you out, but yet the establishment can step in and spend billions on these corporate bailouts. This is not a good situation and we can expect to see these bailouts contribute to a continued devaluation of the U.S. Dollar and a rise in gold and silver prices. This will occur irregardless of how much these powerful financial interests decide to manipulate the markets.

Essentially what is happening is that these bailouts will serve as a temporary short term fix, but will create more problems in the long term. While we see all sorts of money being used to rescue these institutions, the FDIC is running out of capital to be able to insure the bank accounts of individuals who might have their money in one of these insolvent banks. There's been speculation that Washington Mutual is in trouble and if their stock price is any indication, it very well could be. If Washington Mutual were to fail it would be a failure ten times larger than what we saw with IndyMac earlier this year. The IndyMac bank failure sapped approximately 10% of the FDIC's capital that is allocated towards insuring bank accounts. With that in mind, a failure of Washington Mutual would mean that the FDIC would not have enough capital to be able to properly insure account holders.

It is likely that Washington Mutual will get bought out by JP Morgan Chase but that's just one bank out of many. Analysts have predicted that we could see around 100 to 150 bank failures in the next 12 to 18 months and the FDIC will not be able to insure these bank accounts if this number of banks were to fail. As a result, the FDIC would need to get money from the U.S. Treasury which is ridiculous in of itself considering that there is no money to give. The U.S. government is close to $10 Trillion in debt, the debt ceiling has even been raised to accommodate the Freddie Mac and Fannie Mae bailouts. This means that more money will have to be created out of thin air in order to help out the FDIC or to bailout additional institutions. The insanity of this is unparalleled and is just part and parcel of the elite's agenda to consolidate wealth and create an inflationary climate where it will be easier to have the political will to replace the U.S. Dollar with a larger regional currency or even a merger between the U.S. Dollar and the Euro.

The financial powers that be spent the past couple of months suppressing the price of gold and silver almost as part of an effort to preemptively push the price down prior to this current debacle that we are seeing unfold before us today. One need only look at the daily price charts of gold throughout the past few months and see that there are significant price drops consistently during New York trading hours with no real reason as to why these price drops would take place. Not only that but some of the most significant price drops in gold occurred on days in which the news would normally result in a price rise and not a price drop.

Despite all of that, they could no longer keep the price of gold or silver down today with everything that's taken place over the past couple of weeks. Both precious metals saw substantial gains reflecting the true nature of this financial crisis. Gold at one point in the day was up over $85 an ounce marking the single biggest gain in the metal since 1999. If the Federal Reserve and the U.S. government continue to step in and bailout these private institutions, we will see a continued devaluation of the U.S. Dollar and a continued rise in gold and silver as I've discussed in previous articles. In fact, there is a significant danger of the whole system collapsing as the elite financial powers attempt to consolidate wealth in the hands of fewer and fewer controllers. The Federal Reserve itself could even fail in the next several years if we see these problems continue. They simply cannot create more and more money out of thin air to bailout more and more of these insolvent institutions which are heading towards bankruptcy.

Remember, all of this has happened by design. It is ridiculous that Alan Greenspan whose policies as Federal Reserve chairman earlier this decade caused the reckless lending which lead to the housing crisis is able to go on national television and critique the problems that are happening now as a result of the policies he approved. The Great Depression served as a mechanism for the elite to consolidate wealth, and now they are seeking to do it on a larger scale with everything that's happening now. It is very possible that even the elite cannot control this financial crash that is coming but even if they can, they cannot endlessly bailout company after company by creating more and more money out of thin air. If they decide to go that route, the U.S. Dollar may experience an Argentina like currency collapse which would be a disaster not only for the American people, but the elites as well. Gold and silver are the places to be, because regardless of what these people do, precious metals will never go to zero value.

August housing starts at 17-1/2-year low

August housing starts at 17-1/2-year low

By Glenn Somerville

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Construction starts on new U.S. homes plunged to a 17-1/2-year low during August as builders scaled back sharply to try to cope with the worst slump in U.S. housing since the Great Depression.

The Commerce Department reported on Wednesday that starts on new homes dropped 6.2 percent to a seasonally adjusted annual rate of 895,000, their lowest since January 1991 and well below the 950,000 rate that Wall Street economists surveyed by Reuters had anticipated.

In a further sign of the severe strain the economy faces, the department also said the deficit on the broadest measure of U.S. trade with the rest of the world widened to $183.1 billion in the second quarter from $175.6 billion in the first three months his year.

The U.S. shortfall on trade in goods with other countries grew and imports of oil were up, the department said.

The data on new-home starts was bleak, reflecting a battered housing sector that Treasury Secretary Henry Paulson has described as posing the single greatest threat to the overall economy.

Some analysts said fewer starts were a step toward ensuring a housing correction occurs.

BUILDERS PULL BACK

"Builders are continuing drastically to cut the flow of new inventory to the market, the essential precondition for stability," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The August rate of starts on single-family homes -- a closely watched barometer that is more closely tied to average consumers' behavior -- fell 1.9 percent to 630,000, which also was the softest rate since the start of 1991.

Starts in August were a whopping 33 percent below the level a year earlier.

Roger Kubarych, chief economist at Unicredit Global Research in New York, said the data showed that house prices will keep declining for some time before markets stabilize but even that may be difficult if banks become reluctant to make loans.

"No one can doubt that a credit crunch is materializing with significant force that completely invalidates the notion that the housing slump is 'bottoming'" Kubarych said. "That proposition is entirely premature."

With home foreclosures soaring and prices falling, builders were clearly bracing for a protracted downturn. New applications for building permits declined 8.9 percent in August to an annual rate of 854,000.

It was the weakest rate for permits since February 1991 and was far below forecasts for a 930,000-unit rate. The rate of permit applications last month was 36 percent weaker than in August 2007.

Since the government seized ailing mortgage finance giants Fannie Mae FNM and Freddie Mac FRE earlier this month, hopes have risen that an expedited way will be found to refinance mortgages that are late or otherwise stressed.

A separate report on Wednesday showed home loan applications jumped last week as mortgage rates have fallen since the takeover of Fannie Mae and Freddie Mac. The Treasury department said at the time that it was willing to pump up to $200 billion into the companies to keep them functioning

The Mortgage Bankers Association's index of mortgage applications, which includes both purchase and refinance loans, jumped 33.4 percent to 661.7 last week, the highest level since May 9.

Most of the gain, however, reflected a pickup in demand for loan refinancings.

U.S. current account trade deficit rises to $183.1 billion

U.S. current account trade deficit rises to $183.1 billion

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The deficit in the broadest measure of American trade widened in the spring, reflecting a big jump in the country's foreign oil bill.

The U.S. Commerce Department says the current account trade deficit increased by 4.3 per cent to US$183.1 billion in the April-June quarter, compared to a revised deficit of $175.6 billion in the first quarter.

The current account is the broadest measure of America's dealings with the rest of the world because it includes not only trade in merchandise and services but also investment flows.

The deficit represents the amount of money the country is borrowing from foreigners.

The financial crisis entered a potentially dangerous new phase

Stocks Slump as Investors Run to Safety

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The financial crisis entered a potentially dangerous new phase on Wednesday when many credit markets stopped working normally as investors around the world frantically moved their money into the safest investments, like Treasury bills.

As a result, the cost of borrowing soared for many companies, while the stocks of Wall Street firms like Goldman Sachs and Morgan Stanley that only a couple of weeks ago were considered relatively strong came under assault by waves of selling. Investors were so worried that they snapped up three-month Treasury bills with virtually no yield and they pushed gold to its biggest one-day gain in nearly 10 years. Stocks fell by nearly 5 percent in New York.

The stunning flight to safety, away from other kinds of debt as well as stocks, could cause serious damage to an already weakened economy by making it more expensive for businesses to finance their daily operations.

Some economists worry that a psychology of fear has gripped investors, not only in the United States but also in Europe and Asia. While investors' decision to protect themselves may be perfectly rational, the crowd behavior could cause a downward spiral with broader ramifications.

"It's like having a fire in a cinema," said Hyun Song Shin, an economics professor at Princeton. "Everybody is rushing to the door. You are rushing to the door because everyone is rushing to the door. Clearly, as a collective action, it is a disaster."

Faltering confidence could have an infectious effect in Asia, whose savings has essentially bankrolled America for decades. "Asia, perhaps more than other markets, is a bit more volatile, a bit more based on sentiment," said Dan Parr, the head of Asia-Pacific for brandRapport, a consulting firm with an office in Hong Kong. "It doesn't take much for the man on the street to become very, very concerned." In early trading in Japan, the Nikkei index fell 3 percent.

Despite government efforts to reassure investors over the last 10 days by rescuing some giant institutions — Fannie Mae, Freddie Mac and American International Group — many investors remain worried that the financial system has been badly battered and that more firms may fail as Lehman Brothers did.

The Federal Reserve has greatly expanded its lending to banks and securities firms this year and is continuing to relax rules that govern financial companies in hopes of alleviating the credit squeeze. Central banks globally are also injecting more money into their economies and lowering reserve requirements for their own institutions out of concern that the problems in the American financial system will inflict further damage.

If the problems in the financial system persist, businesses will have less money to put to work, job cuts will spread and consumers, already fearful, will have less money to spend, knocking the economy down another notch. High borrowing costs will further weaken the housing market, which is still struggling. The Commerce Department reported Wednesday that housing starts fell to their lowest level since early 1991.

Flashes of fear were evident Wednesday as investors clamored for government debt. When investors bid up the price, the yield falls, and it sank on three-month Treasury bills to 0.061 percent, from 1.644 percent a week ago. The yield was the lowest in more than 50 years.

In the stock market, the Standard & Poor's 500-stock index fell 57.20 points, or 4.71 percent, to 1,156.39, the lowest close in more than three years. The Dow Jones industrial average fell 449.36 points, to 10,609.66.

Worries over financial investments hammered even the well-regarded Wall Street firms of Goldman Sachs, whose shares fell nearly 14 percent, to $114.50, and Morgan Stanley, whose shares dropped more than 24 percent, to $21.75. Now, both firms are reconsidering what their best strategies might be in such a fearful market.

In addition to shares of financial companies like Bank of America, those of other bellwethers like General Electric have also tumbled.

Responding to this pressure, the Securities and Exchange Commission proposed new rules on short selling, or betting on falling share prices, and even suggested that hedge funds and others might have to disclose short positions, a proposal that is likely to meet stiff resistance.

One key overnight lending rate was above 5 percent on Wednesday, more than double its level a week earlier. GMAC, the auto finance company owned in part by General Motors, had to pay interest of 5.25 percent on Wednesday for a form of short-term financing known as one-week commercial paper, up from 4 percent the previous day.

Businesses, stung by high interest rates, may be forced to trim expenses, an ominous turn in a slowing economy with unemployment rates on the rise.

"This is throwing sand in the gears of the economy," said G. David MacEwen, chief investment officer for the bond department of American Century Investments. "The economy depends on credit to finance homes, automobiles, student loans, and inventories."

Local governments and other enterprises will feel pressure, too. The city of Chicago and Lincoln Center in New York postponed debt offerings because they would have to pay such high interest rates to investors, said Daniel S. Solender, director of municipal bond management at Lord Abbett & Company.

Money market funds braced for possible fallout from the disclosure that one big fund's net assets fell below $1 a share, because it had held securities issued by Lehman Brothers. It is so rare for money market funds to fall below that threshold that many investors consider them as safe as cash or a checking account.

Some mutual fund companies reported that customers were moving money from broader money market funds that have had higher yields to more conservative funds within the same company, Peter Rizzo, a senior director of Standard & Poor's, said late Wednesday afternoon. The overall effect is to reduce the appetite for securities of companies with anything other than the most stellar reputations.

Governments around the world stepped up their efforts to ease the strain on the global financial system. The Bank of England extended a special bank lending program for three more months, while central banks in Japan and Australia injected more money into their banking systems. Russia injected money into its banks and lowered reserve requirements.

In New York, the Federal Reserve on Tuesday night said it would extend an $85 billion credit line to the insurer A.I.G. and receive the rights to a nearly 80 percent stake in the company. The deal came just after the government refused financial support to Lehman, leading it to file for bankruptcy on Monday.

The Treasury and Fed also said they would auction more Treasury bills. The Fed will use the securities to manage its balance sheet and inject more money into the financial system. Because the Fed has expanded its lending to banks and securities firm this year, some analysts had grown concerned that the central bank might run out of Treasury securities to conduct its operations. Mark Gertler, an economics professor at New York University, said the Fed was trying to balance two interests: protecting against a crisis but telling the market that it will not bail out every troubled institution. Despite the stress in the markets, he said, the Fed's actions may have averted a worse outcome.

"Maybe this is being Pollyannaish, but they have been successful in signaling that the bailouts are no longer automatic, and thus far they have prevented a market meltdown," Mr. Gertler said.

The dramatic events of the last year have called into question much of what policy makers, economists and investors once espoused about the financial system. As recently as the spring of 2007, many in Washington and New York continued to say housing prices could not fall across the board and that most of the bets made by Wall Street traders were inherently safe.

Now, there are signs that psychology is driving a reverse line of thinking. People are assuming that things will get worse and that any move by the Fed or the Treasury is a step down, not a step closer to improvement.

"There has been a tremendous amount of denial over the past two years, three years," said Barry Ritholtz, chief executive of Fusion IQ, an investment firm, and author of The Big Picture blog.

The Treasury's benchmark 10-year note rose 6/32, to 104 28/32, and the yield, which moves in the opposite direction from the price, fell to 3.41 percent from 3.44 percent late Tuesday.

Panic sell-off on Wall Street

Panic sell-off on Wall Street

By Barry Grey
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Collapsing confidence in the US and global financial system precipitated a panic sell-off of shares on Wall Street Wednesday, as all of the major indices registered drops in excess of 4 percent.

In the midst of the market frenzy, increasingly reminiscent of the 1929 crash that ushered in the Great Depression, more icons of American capitalism were set to topple, with investment bank Morgan Stanley and savings and loan giant Washington Mutual desperately seeking to avoid collapse by finding other banks willing to buy them.

The spreading financial panic is increasingly impacting on small investors, threatening the savings of millions of ordinary people. Late Tuesday, the money market fund Reserve Primary Fund announced that it had suffered a net loss as a result of its exposure to Lehman debt securities.

This is the first such loss by a money market fund in 14 years, but more funds are certain to report losses in the coming days and weeks. Tens of millions of Americans have money market accounts, which pay relatively low interest but have been deemed to be virtually as safe as cash.

Over the past eleven days, the US government has taken control of the mortgage finance giants Fannie Mae and Freddie Mac; Lehman Brothers, the oldest US investment bank, has gone into bankruptcy; Merrill Lynch has sold itself to Bank of America; and the government has taken over insurance giant American International Group (AIG) in order to stave off its collapse.

These unprecedented developments have only intensified fears in the US and around the world of a financial meltdown that could dwarf the collapse of the 1930s.

On Wednesday, the Dow Jones Industrial Average plummeted 449 points, a drop of 4 percent, the Nasdaq Composite Index fell 109 points, a 4.9 percent decline, and Standard & Poor’s 500 stock index dropped 57 points, a fall of 4.71 percent.

Following massive declines on Monday and a partial recovery on Tuesday, Wednesday’s sell-off threatened to leave the Dow down by more than 300 points for the week, the first such weekly decline since the terrorist attacks of September 11, 2001.

All of the major US banks and financial firms were hit with huge losses. Shares of the investment bank Morgan Stanley fell 44 percent, prompting it to begin talks with potential buyers, including Wachovia Bank—which itself has suffered heavy losses from the collapse of the subprime mortgage and other credit markets.

Washington Mutual shares fell 13.4 percent. Hit with big losses and reeling from downgrades by the credit agencies, the Seattle-based savings and loan company is reportedly in talks with firms such as Citigroup, JP Morgan Chase, the British bank HSBC and Wells Fargo in search of a buyer.

The imminent demise of the 73-year-old Morgan Stanley and Washington Mutual will add tens of thousands more people to the ranks of financial services employees who have lost their jobs since the credit crisis erupted last August. Not counting the thousands of job losses at Lehman and Merrill Lynch, over 110,000 jobs have been cut at US banks and financial firms over the past year.

The other remaining independent investment bank, Goldman Sachs, reported a 70 percent drop in its quarterly profits on Tuesday and saw its shares fall by 26 percent on Wednesday. Shares of Citigroup and JP Morgan Chase also fell sharply.

Shares of AIG, which on Tuesday night was given an $85 billion loan by the Federal Reserve in return for an 80 percent government stake in the company, fell 44 percent on Wednesday.

Credit markets in the US and around the world have seized up in the wake of the government bailout of AIG and the demise of Lehman and Merrill Lynch. Banks and financial firms have all but ceased lending to one another, and the cost of short-term credit upon which the financial system depends has skyrocketed.

Big investors are bailing out of stocks and other securities and rushing to buy Treasury securities, which are considered relatively safe. As a result, the yield on Treasury bills has plummeted, at one point on Wednesday falling below zero.

Other signs of a collapse of confidence in the financial markets were in evidence. Crude oil jumped by $6 a barrel and gold and silver futures soared, as investors scrambled to move their money out of stocks and bonds and into commodities and precious metals.

The financial turmoil was exacerbated by the release of a Commerce Department report showing that US housing starts fell in August by 6.2 percent, marking the slowest home building pace since January 1991. The decline was far higher than had been projected.

What is involved in the crisis is not simply the failure of certain large finance houses, but rather the bankruptcy of American capitalism itself.

The US central bank, the Federal Reserve Board, is heading toward insolvency. On Wednesday, the US Treasury handed over $40 billion in taxpayer funds to bolster the Fed’s dwindling reserves. One year ago, the Fed’s balance sheet boasted close to $800 billion in Treasury securities. By last week, that sum had fallen to just under $480 billion.

The massive decline in the Fed’s real assets is the result of its having doled out hundreds of billions of dollars in low-interest loans to prop up Wall Street, taking as collateral virtually worthless mortgage-backed securities and other assets that cannot be sold on the market because no one will buy them. Over the weekend, the Fed announced it would expand this bailout by accepting even more dubious bank assets, including bank stock whose value has collapsed.

If the Fed’s pledge to provide $200 billion in low-cost loans to Wall Street investment banks and its $85 billion loan to AIG are taken into account, the Fed’s reserves of Treasury securities fall below $200 billion.

The Treasury’s announcement of a bailout to the Fed, on the heels of its assumption of the $5.3 trillion in Fannie Mae and Freddie Mac liabilities, is the precursor to a colossal government bailout of the banking system, which will be engineered with the full support of the Democratic Congress and Democratic presidential candidate Barack Obama, and whose cost will be placed squarely on the working class.

Europe gripped by fear of global crash

Europe gripped by fear of global crash

By Stefan Steinberg
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Europe’s ruling elite has reacted with shock and disbelief to what they fear will be the most serious crisis for world capitalism since the Wall Street Crash of 1929.

The European Central Bank (ECB) responded to the bankruptcy filing by the US investment bank Lehman Brothers with a massive infusion of liquidity aimed at propping up European stock markets. On Monday, the ECB announced a one-day tender for 30 billion euros and declared in a statement that it “stands ready to contribute to orderly conditions in the euro money market.”

The action of the ECB was followed by that of the Swiss National Bank, which provided further liquidity as Asian and European stock markets tumbled.

Anticipating sharp falls in the British stock market, the Bank of England released £5 billion in fresh liquidity to ease markets on Monday.

The German finance ministry, the Bundesbank (central bank) and the Bafin financial supervisory authority all tried to restore calm in German markets with a joint statement saying the exposure of German banks to Lehman was manageable.

Such reassurances by European central bankers, combined with massive infusions of cash, did little to calm fears on the markets. On Monday, the London-based FTSEuro First 300 index of leading European shares fell 5 percent, while the German Dax index fell by 4.7 percent—reaching its lowest level in two years. Bank stocks were especially hard hit.

Following the huge stock market losses on Monday and growing fears of a collapse of America’s largest insurance group, American International Groups (AIG), European banks intervened once again on Tuesday, with the ECB pumping in an additional 70 billion euros and the Bank of England a further £20 billion.

Once again, the massive infusions of cash failed to re-stabilise markets. On Tuesday, London’s FTSE 100 fell below 5,000 for the first time in seven years. German stocks continued to fall. The blue chip Dax index fell by 98.99 points to 5,965.17, a 1.63 percent decline. The main French CAC index also registered heavy falls of 3.78 percent on Monday and 1.96 percent on Tuesday.

Contrary to official protestations in Germany, the full extent of the involvement of Europe’s major banks in Lehman Brothers is massive.

On Tuesday, for example, it was reported that the German state lender KfW had transferred 300 million euros in swaps to Lehman Brothers on the very day it applied for bankruptcy, while the Swiss UBS financial group announced that it expects similar losses of at least 300 million euros due to its involvement in Lehman Brothers. UBS is the world’s largest wealth manager and has already been forced to write down assets of $37 billion in connection with the US sub-prime mortgage crisis.

According to the German business newspaper Handelsblatt, it is probable that the entire emergency fund set up by a consortium of German banks to guard against financial crises will be absorbed by the collapse of Lehman. The Deposit Guarantee Fund of the Association of German Banks (BdB) is estimated at $4.6 billion, a sum that is swamped by the 6 billion euros required to cover the liabilities of Lehman’s bankrupt subsidiary in Germany. The 6 billion euro loss from the collapse of Lehman is the largest single loss in German financial history.

Britain is even more exposed to the US financial crisis. Following the collapse of the Northern Rock bank earlier this year, Britain’s largest mortgage lender, the Halifax Bank of Scotland (HBOS) also faces bankruptcy. Its shares plummeted by 40 percent on Tuesday and it looks set to be acquired by Lloyds-TSB.

Other major European banks could be swept into the financial maelstrom, under conditions where between April and June the combined economies of the European Union already shrank by 0.2 percent. Britain and Spain, which have been hit by a severe housing crisis, are both estimated to already be in recession. According to the Kiel Economic Institute, Europe’s single biggest economy, Germany, will also be hit by recession this year.

With inflation on the rise throughout Europe, in many countries exceeding 4 percent, economic commentators have already raised fears of stagflation within the European Union.

French and German politicians have issued reassuring bromides declaring that the fundamentals of the European economies and banking system are sound and in better shape than the US. But economic commentators have sounded dire warnings to the contrary, emphasising that it is not possible for Europe to insulate itself from the ongoing collapse of US financial institutions.

Pointing out the implications of the threatened collapse of the insurer AIG, the New York Times noted that European banks owned three-quarters of the $441 billion in unregulated AIG securities held by a consortium of banks. These securities are tied to the plunging sub-prime mortgage market and expose European financial institutions to enormous risks in the event of an AIG bankruptcy.

Writing in the Frankfurter Rundshau on Monday, Jan Pieter Krahnen spoke of the “great dangers of a shock wave” enveloping German and European banks should confidence in the type of credit default swap deals favoured by Lehman Brothers and AIG be shaken in Germany. On Wednesday, the Süddeutsche Zeitung headed its interview with a leading finance expert, “The Worst is Yet to Come.”

A number of near apocalyptic commentaries have appeared in the British media, stating that the current crisis is at least comparable to the financial collapse of 1929.

Writing in the Guardian on Tuesday, economics editor Larry Eliot headlined his piece “This Week the Crash Went Nuclear, and Britain Will Feel the Worst of the Fallout.” He wrote:

“Clearly, the events of the weekend now make a prolonged and deep recession far more likely. Forget all the talk about soft landings, or a recession so short and sharp that it will barely be noticed. The way things stand, it is now a question of whether there is a complete meltdown of the financial system, with institutions crashing like ninepins, or whether a severe rationing of credit over a prolonged period leads to falling house prices, weaker consumer spending, lower investment and rising unemployment.”

“This is without doubt the most serious financial shock since 1929,” he continued.

In an article for the right-wing Daily Mail, Alex Brummer recalled that the first indications of the swelling international crisis began with troubles at a European bank.

“The crunch began,” he wrote, “on August 9 last year after the leading French bank BNP Paribas announced it could not value assets in two of its investment funds because of the toxic securities they contained.”

He went on to refer to “tens if not hundreds of billions of assets which have turned bad and might be worthless,” and concluded, “Only now at Lehman, Merrill Lynch, AIG and elsewhere is the true size of the black hole being recognised. At Lehman, for example, the figure for suspect or toxic assets more than doubled from £17 billion to £44 billion in the course of last weekend alone.”

The Mail’s editorial declared, “For decades, we have worshipped at the shrine of gold. Prime ministers and presidents have bowed before its keepers. The monarchs of cash, arbiters of wealth, supposed founts of all wisdom, have bestridden Europe and the United States, humbling all in their path... Today, we awaken to discover that like so many wizards of Oz, these supremely confident figures are in reality foolish old men—and some young ones—mouthing hollow incantations from behind curtains.”

“A vision of capitalism stands discredited,” it concluded.

Willem Buiter, professor of European political economy at the London School of Economics, made one of the clearest statements on the global implications of the financial meltdown in the US.

In the Financial Times, Buiter said of the $85 billion bailout of AIG by the US government, “The largest insurance supermarket in the world, with a balance sheet in excess of $1 trillion, nationalised because it was seen to be deemed too big and too globally interconnected to fail!”

He continued, “The fear that drove this extraordinary decision is that AIG’s failure would increase counterparty risk, actual and perceived, throughout the financial system of the US and the rest of the world, to such an extent that no financial institution would have been willing to extend credit to any other financial institution. Credit to households and non-financial enterprises would have been the next domino to fall, and voilà!, financial Armageddon.”

Is the U.S. going overboard on bailouts?

Is the U.S. going overboard on bailouts?

Industry and government officials say the handouts are cheaper in the long run than doing nothing. But critics say they encourage bad behavior by removing the consequences.

By Michael A. Hiltzik

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How far will the bailout binge go?

So far this year, the federal government has put upnearly $30 billion to avert a major financial default by the investment bank Bear Stearns Cos.; committed to investing as much as $200 billion in preferred stock of the loss-plagued finance giants Fannie Mae and Freddie Mac and at least $5 billion in their mortgage securities; and agreed to provide an emergency loan of $85 billion to American International Group Inc. in return for an ownership stake of as much as 80% in the stricken insurance giant.

Tuesday's helping hand to AIG bailed out not only that company, which was contemplating a bankruptcy filing as early as today, but also countless trading partners of the firm, including investment banks that had failed to raise the massive loans themselves.

Thus far, only one major supplicant for federal assistance has been turned away: investment bank Lehman Bros. Holdings Inc., which was refused a bailout by Treasury Secretary Henry M. Paulson Jr. last weekend and filed for bankruptcy protection Monday. Meanwhile, Congress is contemplating a loan program of $25 billion to $50 billion for automakers.

This year's bailoutsadd up to an unprecedented surge of direct financial intervention by the government in the nation's private sector -- a cornucopia of handouts and guarantees dwarfing the rescue of the savings and loan industry in the 1980s, which ended up costing taxpayers some $124 billion.

In each case, industry and government officials have justified the bailout as cheaper in the long run than doing nothing. But critics contend that bailouts often encourage bad behavior by relieving underperforming industries of the consequences of their ineptitude.

In addition, sometimes the government can end up as an investor in companies that are the target of regulatory action, creating a conflict of interest. The government's potential ownership of AIG could put policymakers at cross-purposes with their own efforts to regulate a variety of financial transactions in which the company participates.

The situation is bound to raise thorny policy issues for the next president, who is likely to face further demands for assistance from mortgage lenders, home builders, automakers and other struggling industries. Economic and legal experts say Congress and regulators need a set of standards for how to treat industries and companies with their hands out, especially when the requests come in an atmosphere of crisis.

"The more the government steps in, the more there are people who want the government to step in," says Peter J. Wallison, a research fellow at the American Enterprise Institute and a former White House and Treasury Department official. "Every time you do it, that creates an equitable argument for someone else to get bailed out."

The president and Congress will also have to decide what sort of concessions to demand from recipients of public largess. For example, only days after the Treasury Department announced the Fannie Mae and Freddie Mac bailout this month, several Senate Democrats proposed that the mortgage companies freeze foreclosures for at least 90 days.

A loan guarantee package for the auto industry is likely to be one of the most closely watched measures in Congress this year. U.S. automakers contend that financial help is warranted because the cost of redesigning their products to meet federally mandated mileage standards by a 2020 deadline will be staggering.

That could provide a template for a similar appeal from airlines, which could argue that the costs of fuel and security measures are hobbling them.

Without more open rules governing the decision-making process, the entities with the most potent lobbyists may get bailouts, putting competitors at a disadvantage.

"We don't have any rules about whether the government should get involved or not," says Cheryl Block, a law professor at Washington University in St. Louis who has followed the bailout issue since the 1990s. "Certain things happen in the middle of the night, and no one knows who's in the meeting."

For now, the decisions seem to be based on a sense that an entity is "too big to fail."

Such concerns drove the bailout of Fannie Mae and Freddie Mac, which together back half of all U.S. residential mortgages. Their failure, government officials feared, could choke off the supply of mortgage credit or drive up mortgage interest rates to levels that would impede recovery for the country's beleaguered housing market.

"Fannie and Freddie define what's 'too big to fail,' " says Jared Bernstein, an economist at the Economic Policy Institute.

A similar case could be made for a company such as General Motors Corp. More than 250,000 workers and roughly 500,000 retirees worldwide are dependent to some degree on the survival of GM; a bankruptcy filing would throw many workers on the street and could deprive thousands of families of health coverage. It also could further strain the federal Pension Benefit Guaranty Corp., which insures retirement benefits and already has a $13-billion deficit.

But a company need not be the biggest in its industry to pass the "too big to fail" test. Bear Stearns was the nation's fifth-ranked investment bank in terms of assets when the Federal Reserve and the Treasury arranged its emergency sale to JPMorgan Chase & Co. in March. Bear Stearns' deal-making, though, extended deeply into the financial derivatives markets, raising fears that its sudden collapse would produce a tidal wave of defaults around the globe, shattering the confidence necessary to keep the international credit markets functioning smoothly.

The interventions surrounding Bear Stearns and Fannie/Freddie suggest that government officials have been fairly successful at distinguishing cases in which a company's failure would have broad "systemic risk," and acting only in those cases, says Laurent Jacque, professor of international finance and banking at Tufts University.

Still, some economists believe that the "too big to fail" standard, if too loosely applied, can lead to imprudent risk-taking by big companies.

"To the extent that creditors of TBTF banks expect government protection, they reduce their vigilance in monitoring . . . these banks' activities," wrote Gary H. Stern and Ron Feldman, two high-ranking Fed officials, in 2004.

"The case could be made that there's a shift on the part of the political establishment in favor of bailouts," says Robert Bliss, a former senior financial economist at the Federal Reserve Bank of Chicago who is now a business professor at Wake Forest University.

Presidential politics may be driving the recent rush toward government assistance. In June, Republican candidate Sen. John McCain drew a line against the auto industry bailouts during an appearance in Ohio, saying, "I just don't see a scenario where the federal government would come in and bail out any industry in America today."

As Michigan's importance as a swing state in the presidential race grew, however, McCain changed his tune. In August he proclaimed, "We should fund [the loan program] and take action that will assist Detroit and its suppliers in making it through this difficult time of transition."

Democratic nominee Sen. Barack Obama also supports the auto loans.

Bailouts have long been a part, albeit a controversial one, of U.S. policymaking.

In 1971, the government bailed out Lockheed Aircraft Co., which was then the third-largest commercial aircraft manufacturer but the nation's largest military contractor, with $250 million in loan guarantees. In 1979, Congress provided loan guarantees of as much as $1.5 billion for ailing Chrysler Corp., the No. 3-ranked U.S. automaker. After the Sept. 11, 2001, terrorist attacks the airlines received $5 billion in cash and $10 billion in loan guarantees to tide them over the slump in air travel.

Some experts fear that government investments in the open market could artificially support market prices, thus creating a "moral hazard" that investors will make unduly risky choices, assuming that government intervention will limit their losses.

That's a concern presented by the Treasury's plan to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac and take a large stake in AIG.

"They're essentially saying they're going to put a floor under the market," says John Lapp, a professor of economics at North Carolina State University. "That's just begging for excessive risk-taking."

Others say that bailouts can be good medicine for ailing industries, particularly when they're coupled with strong incentives to improve. It is widely assumed in Washington that the financial-industry bailouts will lead to tighter regulation of investment banks.

On occasion, the government may turn a profit on a bailout. Chrysler's recovery netted Uncle Sam about $300 million.

In any case, the bailout debate may help focus Americans on what industrial policies are proper for today's world.

"It doesn't take a genius to see that the auto industry has had a very bad time," economist Bernstein says. "Now we can all get together and decide whether we want an auto industry, and what kind."

Demands for government help will probably never go away, he adds. Loosely paraphrasing the opening line of Leo Tolstoy's "Anna Karenina," he observes: "All happy companies are alike, but every unhappy one wants a bailout."

The American “financial tsunami” hits Asia

The American “financial tsunami” hits Asia

By John Chan
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The American financial crisis has sent shockwaves throughout Asia over the past few days as governments, banks and corporations scramble to cope with plunging share prices, international financial turmoil and the prospects of a serious downturn in the US and other major economies.

The bankruptcy of US financial house Lehman Brothers and the takeover of Merrill Lynch prompted sharp falls on Tuesday when many Asian stock markets resumed trading after a public holiday. Tokyo fell by 4.95 percent to its lowest level in three years and Hong Kong’s Hang Seng Index shed 5.4 percent to reach its lowest point in nearly two years. The Shanghai share index fell 4.47 percent, Taiwan’s market tumbled 4.89 percent and South Korea’s benchmark index dropped 6.1 percent to an 18-month low.

The falls continued across Asian markets yesterday even after the US government announced an $85 billion bailout to prevent the impending collapse of insurance giant American International Group (AIG). Despite reassurances, worried AIG policyholders thronged to the company’s offices in Asian countries to terminate their agreements. Hundreds queued in Singapore outside the local AIG headquarters, while in Taipei more than 1,200 descended on the AIG subsidiary, Nan Shan Life Insurance.

In government and financial circles, concern extended beyond the immediate financial turmoil to the longer term impact of a recession in the US, which is the major export market for the entire region. At the same time, China, Japan, South Korea and Taiwan have all used their huge monetary reserves to invest heavily in the US as a means of preventing a slide of their currencies against the dollar. Fear is mixed with a certain bitterness over the potential for huge losses in their dollar-denominated assets.

All eyes were on China, which has functioned as the main economic motor for growth throughout the region. Within hours of Lehman Brothers filing for bankruptcy, the Chinese central bank cut the official interest rate for the first time in six years, from 5.85 to 5.31 percent. The decision signalled an end to Beijing’s tight monetary policy to fight inflation and a renewed focus on economic growth to avoid widespread unemployment and social unrest.

China’s exports have already been hit by economic slowdowns in the US, Europe and Japan. Although China’s economy grew at more than 10 percent at the first half of the year, there are signs of a sharp downturn in the second half. Exports have weakened, share prices have plunged by more than 60 percent since the beginning of the year and the property sales have reversed from a 25.7 percent increase in square footage last year to an annualised 10.8 percent decline for the first six months.

The official People’s Daily warned on Wednesday that a “financial tsunami” was approaching, which recalled the Great Depression in the US in 1929. “As the contemporary economy has been integrated globally, American consumption and currency exchange rates will directly influence countries dependent on the US as the main export destination for economic growth and employment”. The Chinese Communist Party organ complained that the US had unleashed financial “weapons of mass destruction” on the world economy in the form of subprime debts and related financial derivatives.

China is particularly vulnerable. For years, Beijing has been financing debt-driven consumption in the US by recycling its huge foreign currency reserves earned from exports back into US Treasury bonds and other investments to prevent the yuan rising against the dollar and thus maintain exports to the US. According to the China International Capital Corp (CICC), China holds a fifth of its foreign currency reserves, or up to $400 billion, in the mortgage giants Fannie Mae and Freddie Mac, which the US administration had to bail out this month.

Since the US subprime crisis erupted last year, Beijing has been cautiously reducing its holding of dollar-denominated assets from the current 60 percent. But amid the concerns about suffering huge losses, there are also fears of using what Chinese officials refer to as the “nuclear option”—a sudden dumping of China’s dollar holdings. As Beijing is well aware, such a step could precipitate a crash of the US dollar, economic depression and endanger the entire international financial system—with devastating economic, social and political ramifications for China.

Regional downturn

In line with central banks around the world, the Bank of Japan injected 3 trillion yen ($US28.32 billion) into the domestic money market on Wednesday, taking the total to 5.5 trillion yen this week. Although Japan’s financial institutions claimed to have just 400 billion yen ($3.8 billion) in exposure to Lehman Brothers, banks such as Aozora Bank and Mizho Bank are among the top creditors to the bankrupt US investment house. Share prices continued to fall yesterday following the AIG bailout, amid fears that the US economic turmoil would hit Japanese exports.

Japan, the world second largest economy, is already in deep trouble. The US financial crisis hit as official figures published last week showed that the economy had shrunk by 3 percent on the annualised basis in the second quarter this year. After two decades of economic stagnation, Japan’s growth rate has made a limited recovery in recent years, mainly as a result of exports to China. Like other Asian economies dependent on exporting parts, capital goods and raw materials to China, Japan faces a double whammy as any US recession will affect its exports to both the US and China.

The mood of gloom was reflected in an editorial in the conservative Yomiuri Shimbun on September 17: “A vicious cycle—in which financial uncertainty cools down the real US economy and causes an economic downturn—is become a reality. Fears over ensuing slowdowns in the economies of Japan and other nations are growing... Under these circumstances, the government’s top priority should be to quell uncertainty over the financial markets.”

But the Japanese government is divided. Prime Minister Yasuo Fukuda resigned earlier this month after an 11.7 trillion yen ($110 billion) stimulus plan received a generally negative response in financial circles. The contenders for his post are split over economic policy, with the frontrunner Taro Aso known as an advocate of greater government spending, while his main rivals are demanding greater austerity, higher consumption taxes and further economic restructuring to rein in the country’s massive public debt—now equivalent to 180 percent of GDP, the highest of all OECD industrialised countries.

Other major Asian economies have fared no better. India, the world’s 12th largest economy, is often hailed alongside China as one of the latest economic miracles. While Indian officials reassure the markets that the country is less dependent on exports than China, investors are already leaving. Last week, prior to the announcement that Lehman Brothers was bankrupt, foreign investors dumped $610 million worth of Indian shares.

India’s central bank injected 298.15 billion rupees ($6.37 billion) into the local market yesterday to try to maintain financial stability. But all the indicators point to further turmoil. The Sensex index has declined by a third this year, representing a net withdrawal so far this year of $8 billion in foreign investment—compared to net inflow of $17.4 billion in 2007. The Indian rupee has also weakened by 8.3 percent against the dollar this year.

The potential impact goes far beyond India’s money and equity markets as any global downturn would seriously undermine India’s ambition to become a new manufacturing powerhouse. Known at present for its low-cost call centres, software development and outsourcing of financial services, India had plans to create 250 “special economic zones” by the end of 2009.

Even before the US financial crisis, Indian economic growth had slowed to 7.9 percent in the second quarter on an annualised basis—down from 8.8 percent in the previous quarter. Even though still high, it is the lowest rate since 2004. Driven by rising global oil and food prices, the inflation rate has almost tripled this year to 12.4 percent. In response, the central bank has raised interest rates three times since June, but now confronts the dilemma that further hikes could send the economy into a tailspin.

In South Korea, the world’s 13th largest economy, there is deep concern about a further tightening of the global credit markets, even though the exposure of financial institutions to Lehman Brothers is relatively small. The Bank of Korea has declared that it will inject funds into the financial and foreign exchange markets if needed in order to “calm nerves of market participants”.

The Chosun Ilbo sounded a sharp warning: “Many small and mid-sized businesses are being pushed to the verge of bankruptcy as banks toughen loan requirements amid heightened fears of defaults as economic uncertainties grow. The financial shock that began in the US has begun to impact not only Korea’s financial markets but also its real economy. If conditions worsen in the US financial markets, there are worries of an intensifying vicious cycle of banks and businesses facing tougher conditions raising funds overseas, which will lead to cutbacks in corporate activities, which in turn will slow the economy.”

Like Japan, any slowdown in the US that impacts on China will adversely affect South Korea, which is heavily dependent on both markets. South Korean companies have in recent years received a huge boost from exports to China, which is now the country’s largest trade partner.

Any slowdown will be an Asia-wide trend. The Asian Development Bank (ADB) released a study on Tuesday, which foresaw a sharp downturn in the Asian economies. The report pointed out that India would end five consecutive years of rapid growth, which would decrease to 7.4 percent this year and an estimated 7 percent in 2009, down from 9 percent last year. The ADB also forecast that China’s growth rate would fall to 9.5 percent in 2009, down from 11.9 percent last year.

The ADB predicted the average growth rate for its 44 member states to be 7.5 percent for this year, followed by 7.2 percent next year. Both figures were revised down from estimates in April. The predicted average inflation rate is 7.8 percent this year and 6 percent in 2009, both significantly higher than the previous estimates of 5.1 percent and 4.6 percent respectively. Rising prices and falling growth rates confront all these economies with the prospect of stagflation, posing deep dilemmas for governments.

All of this is before the full force of the US financial tsunami takes its toll in Asia. The empty speculation about the prospect of Asia—China in particular—being “decoupled” from the US crisis and pulling the world economy out of recession, has been quietly shelved in recent days. The regional ruling elites confront a new period of capitalist breakdown and the political and social struggles it will inevitably produce in Asia and internationally.

Unemployment and poverty grip New York State

Unemployment and poverty grip New York State

By Sandy English
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Two new surveys issued by the Fiscal Policy Institute (FPI) highlight the increasingly bleak economic situation for New York State’s workers and professionals.

Given that they were released in advance of the tumultuous events on Wall Street in recent days, with their dire implications for the economy in New York City and New York State, these reports on unemployment and poverty can perhaps best be seen as a rather dismal baseline from which conditions will inevitably enter into far deeper decline.

The FPI, a liberal watchdog group that tracks the effects of New York State’s fiscal policy, has published a report, “New York’s Rising Unemployment—The Other Crisis in Albany,” which reviews the impact of the economic downturn thus far. New Yorkers, the report states, face a “shrinking economy and falling real wages as inflation rises to levels not seen in 17 years.”

The FPI has also released a statement that notes that New York has the highest poverty rate of any northern state in the US.

New York State has the third-largest population in the United States, following California and Texas, with more than 19 million people. Of these, approximately 12 million live in and around New York City, whose metropolitan area includes a further 6 million residents in New Jersey and Connecticut.

The report on unemployment notes: “Most New Yorkers have not fared well through much of this decade. The steep decline in 2001 and 2002, with a national recession exacerbated by the economic aftermath of 9/11, was followed by jobless growth, then a weak recovery.

“When job growth did resume in mid-2003, it was weak, and largely driven by debt and an unprecedented housing market bubble. The 2003-2007 recovery and expansion never achieved a sound footing. By 2007, the bubble had burst, and the national economy began its decline, characterized by a sharp contraction in housing construction and the implosion of subprime lending and related highrisk credit market practices.”

According to the most recent figures, in July, half a million workers were officially unemployed in the state, 5.3 percent of the workforce. This has undoubtedly grown with a rise in the national unemployment figure from 5.7 in July percent to more than 6 percent in August.

The report observes that 22.4 percent of those now jobless were defined as the “long-term unemployed”, workers who have not found a job for over six months. New York State has the fifth-highest number of long-term unemployed of any state.

The report also considers the larger category of underemployed, which includes the unemployed but also workers who have become so discouraged that they have stopped looking for work and those trapped in part-time jobs who are seeking full-time work. In 2007, the number of underemployed in the state stood at 8.1 percent, much higher than the official 4.6 unemployment rate at the time.

The underemployment figures for minority workers were higher, with black workers at 12.5 percent and Hispanic workers at 10.5 percent.

Since the beginning of the year, the state has seen a surge in claims for unemployment insurance. Data for the middle of August show 20,000 new claims a week, primarily in New York City. At the beginning of 2008, figures in the city kept pace with the rest of the state, but since the summer, there has been a proportional increase in the city, partly due to the massive layoffs in the financial sector. Three of the wealthier suburban counties around New York City—Nassau, Westchester and Suffolk—have seen unemployment increases of 21 to 23 percent.

The report is critical of the current system of unemployment benefits. The maximum weekly benefit of $405 was set in 2000, and its real-dollar value has declined 25 percent since then. This sum is about 35 percent of the average weekly wage in the state. Moreover, only 40 percent of the unemployed in the state can collect this insurance, excluding most part-time workers and many workers at low-wage jobs.

The report singles out the plight of seasonal, non-professional school employees, such as bus drivers and cafeteria workers, who are prevented by law from collecting benefits when they have a “reasonable chance” of being rehired after school breaks and summer vacations. These positions are almost entirely low-wage.

The report also notes that adjunct college professors, who earn far less than their full-time colleagues and seldom receive benefits such as health insurance, are excluded from eligibility for unemployment insurance.

The state is singularly unequipped to handle large increases in the number of those seeking unemployment insurance. It has been “chronically under-financed” since 2003, when it has paid more than $36 million in fines and interest after the fund became depleted. According to the US Department of Labor’s assessment of the solvency of state unemployment insurance systems, New York ranks 49 out of 50 states, coming ahead of only Michigan, whose unemployment fund is insolvent.

The increases in unemployment take place in a state whose people have been beleaguered for years by the destruction of its manufacturing base, particularly in the northern counties, and by chronically high poverty rates in New York City and many smaller, upstate cities.

In its statement on poverty figures, the FPI observes that despite a modest economic growth in the last few years, recently released census data show that “New Yorkers were just as likely to be poor in 2007” as during the last recession in 2001. Income in the state has stagnated, and the FPI predicts that the situation will worsen with the new economic downturn.

Census Bureau statistics published in the last week of August show that New York State had a poverty rate of 14.3 percent of its population, higher than the national average (12.3 percent) and the highest of any state in the US outside of the South and Southwest. The next poorest state, according to a survey of two-year average poverty rates, is Alabama. The Census Bureau’s federal poverty threshold is set at a yearly income of $16, 530 for a family of three.

The cities with the highest totals were Syracuse at 31.0 percent, Rochester at 29.1 percent, Buffalo at 28.7 percent, the State capital of Albany at 24.4 percent, and New York City at 18.5 percent. Buffalo remains the second-poorest major American city after Detroit.

Bronx County (the borough of the Bronx in New York City), the poorest urban county in the US, has a poverty rate of 27.1 percent. In absolute numbers, this amounts to 362,206 people. While Kings County (the borough of Brooklyn in New York City) has a lower percentage of impoverishment at 21.9 percent, with a larger population to start with this means 550,169 people in absolute numbers.

Brooklyn, therefore, has the highest concentration of poor people in the state, followed by the Bronx, then by New York County (Manhattan) with 279,532 and Queens County, also in New York City, with 270,066. These figures do not take into account the higher cost of living in New York City compared to the rest of the state.

Erie County, with a poverty rate of 13.8 percent, includes Buffalo and has the largest concentration of the poor of any upstate county with 122,338 people listed as living in poverty.

Also noteworthy is the fact that three of the four counties with the state’s lowest poverty rate (Westchester at 7.9 percent, Suffolk at 5.0 percent and Nassau at 4.4 percent) are those that registered some of the steepest percentages of growth in unemployment since the summer.

The FPI notes that the median income for working-age New York households was $49,267 in 2006-2007 (compared to a US median income of $50,223), not statistically different form the median income in 2000-2001.

“The lack of a substantial increase in income over the course of this past recovery, and our failure to reduce poverty, show that the benefits of economic growth haven’t been broadly shared,” said Trudi Renwich, the FPI’s senior economist. She added: “A lot of New York families are struggling harder and harder just to stay in place. Basic purchases like food and gasoline are getting much more expensive, and family incomes just aren’t keeping up. These figures illustrate that many New Yorkers are struggling to make ends meet.”

New York’s Democratic governor, David Paterson, with the complicity of both Democrats and Republicans in the State legislature, has enacted severe cuts in state spending for the coming year.

This was due partly to the shortfall of tax revenue from Wall Street firms battered by the recent credit crisis. Following last weekend’s bankruptcy filing by Lehman Brothers and the buyout of Merrill Lynch by Bank of America, Paterson indicated that he may be forced to call the state legislature back into emergency session before Election Day to enact still more sweeping budget reductions.

The cuts that are being undertaken will have a direct and severe impact on the conditions of life for poor and unemployed throughout the state. As the WSWS recently noted,

“Social service providers have warned that these reductions will lead to a significant deterioration in vital services. ‘The cuts that were enacted will inflict real pain on health care providers, health care workers, and the New Yorkers they serve,’ said the president of the Greater New York Hospital Association, Kenneth E. Raske.”

In New York City, the Metropolitan Transit Authority is planning to increase subway and bus fares, which have recently seen an increase in ridership with the rise in gas prices. The $2.00 fare is already beyond the reach of many of the working poor in the city.

Life And Death

Life And Death

By Peter Chamberlin

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When it becomes obvious to the rest of the country that we are truly locked into a life or death struggle the people will rise-up from their easy chairs and demand answers. If we cannot make them aware of the obvious fateful track we are now on before then, then it will be too late for us all.

The life or death struggle I am referring to is not with some shadowy terrorist group, or with an axis of foreign governments, but with our own government. We are in an existential struggle with the Bush Administration and everyone in government who supports the violence they carry-out upon the world.

The struggle is between the American people and an out of control administration determined to visit world war III upon the world before its allotted time is up. For their own reasons (which are transparent to the discerning eye), Bush and Cheney are going to find a politically feasible way to attack someone else before their power is taken away.

This attack plan risks the survival of the planet and all life upon it, to carry-out the neocon war. Our two co-presidents are so committed to their obviously catastrophically failed war plan to seize all the resources of South Asia that they cannot allow their time to expire without taking irreversible actions. They think that they can threaten, bribe, intimidate and selectively nuke key governments in the region (including Russia and China) to have their way with them.

This most distrusted government in our history wants us to trust their judgment that they can "shock and awe" the world into submission to American demands, without destroying the world in the process. This most incompetent government ever elected by the American people, diddled while the economy was crushed by the weight of its insane economic and military policies, and enacted police state laws in an illegal manner, and now intends to kill many millions more innocents than it already has for the sake of total control.

This most devious and malign administration to ever curse the White House threshold thinks that it would be a good thing to kill millions as "collateral damage" in their plan to create a global American empire. They are either so foolish that they think that America would survive in a post-nuclear war world, or they have other plans for themselves so that they do not care whether this Nation survives the ravages of their scheme to reap absolute wealth. Perhaps this gives credence to the rumor from the Latin American press about a recent Bush family purchase of a large portion of Paraguay –

"...a few short miles from the US Mariscal Estigarribia Military Base...

[Sitting atop the] Acuifero Guaraní...one of the largest underground water reserves in South America."

The solutions being discussed (to this life or death struggle between the American people and a malignant administration determined to risk the fate of the world) range from impeachment to outright revolution. I am of the opinion that violent revolution is wrong, unless government actions turn it into a matter of self-defense, and that impeachment is too slow and weak to stop Bush from pushing the button when the opportunity arises. The opportunity may arise very soon in the mountains of Pakistan, as American troops making illegal incursions are now being repelled by Pakistani military forces.

This administration cannot be trusted to possess the powers that it has usurped. The Bush Administration has to have its hands tied now, even before it is removed from office. Congress must know whose side in this life or death struggle the American people are on.

We the people have to assume our rightful power and show our hand now, as we find the means to legally bind the bloody hands and force the issue to a head, before Bush or Cheney acts. Congress must witness an aroused population that is "mad as hell and not gonna take it anymore!"

America Needs a Shadow Government

America Needs a Shadow Government

By Timothy V. Gatto

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I think I can speak for many Americans when I say that our government has been less than responsive as far as ending militarism and holding our civil liberties sacrosanct. In fact, less than responsive is being generous, as we have seen this nation totally scrap the Constitution and the Bill of Rights, station troops in bases world-wide in over 130 different nations, and wage aggressive war on three nations, become complicit with another nation to wage war (Georgia) and institute trade sanctions (another Act of War by International law) on Iran.

During the past two terms of this Presidency we have learned in-depth about signing statements, the "Unitary Presidency", numerous Executive Orders that remain secret from the Congress, extraordinary "rendition", and torture to include inflicting injuries on another human being "to the point of, but not exceeding organ failure". We know of places such as Abu Graib, and Guantanamo and watched as our Army dropped white Phosphorus on innocent civilians in a city called Fallujah where photographs of women and children showed burned blackened corpses while the clothes and blankets they were wrapped in weren't even singed. We learned about depleted uranium and exposed our soldiers and Iraqi citizens to ionizing radiation that causes cancers, leukemia, and birth defect among other things. Radiation that we brought to Iraq and Afghanistan has a half-life of eight billion years.

We watched as Congress enabled the President to commit vast sums of money on an aggressive war in the Middle-East, taking money away from the taxpayer that could have been used to build schools, hospitals and to fix crumbling infrastructure in this country. We could have offered every American student tuition free higher education instead of dumping it into Iraq in the quest for global resources like oil. We could have taken the trillion dollars that we spent on these wars and used it to promote alternate energy resources. Instead of looking out for the taxpayers, the Congress, controlled by BOTH major corporate political parties, squandered our nation's wealth on war and weapons of war for a global empire nobody voted on and nobody wants save those that are now in government.

Congress voted for The Patriot Act, The Military Commissions Act, The John Warner Defense Bill (The re-vamped Insurrection Act), the enhanced FISA Bill that gave the telecom companies retroactive immunity for illegally wiretapping American citizens for the Executive Branch which was against the law. Congress ignored Articles of Impeachment against the President and Vice-President time and time again. Congressional subpoenas have been ignored by members of the Executive Branch and Congress does not impose inherent contempt charges on these individual and send Capitol Police to arrest them for willfully disobeying Congress. The checks and balances that were built into our Constitution are broken from neglect and disuse. Congress has allowed the Executive Branch to supersede those powers that were expressly given to Congress by our Constitution.

We are now facing an election in which the nominees were presented to us by a compliant corporate led media. Before a single vote had been cast, two of the Democratic nominees had been barred from taking part in the Primary Debates. We saw, according to The Center for Responsive Politics (opensecrets.org), corporate money in bundles campaign donations go to two Democrats almost exclusively before a vote was cast in the primaries. The two major party nominees both support more war and more military spending, while ignoring the fact that we have lost a majority of our civil liberties that were stated in the Bill of Rights.

Meanwhile the media is controlled by the same interests that now control our elected officials from the two major parties, and tout only two candidates, the Democrat and the Republican. To illustrate that there is hardly a difference between them, they must rely on "straw man" arguments such as gay rights, abortion, taxes and education. These are the same issues that are brought up time after time, election after election, yet most of these issues should be settled by the States, not the Federal Government. They fail to bring up the loss of our constitutional rights like freedom of speech and the press, unrestricted search and seizures without a warrant. Non-lethal force such as tasers, rubber bullets and riot gas being used on demonstrators in violation of their free speech rights, as they are rounded up from "free speech" zones. The candidates neglect to bring up the fact that the Unites States of America spends 48% of the entire world's spending on the military. The candidates threaten Russia as we encircle them with nuclear –tipped missiles and American military bases. We demonize Venezuela and Hugo Chavez while we interfere in the internal affairs of Bolivia against the democratically elected government of Evo Morales by giving five provinces rich in natural gas, hundreds of thousands of dollars to succeed from Bolivia.

Our Federal government has allowed unchecked predatory capitalism to thrive in this country, offering mortgages to people with suspect credit, knowing full well that these people would never be able to pay the ballooning mortgages in the future in order to make a quick buck. Our economy is going belly-up by these "lassie faire" practices that have raped the taxpayers while the government bails out the banks and brokers with "corporate welfare". The top 10% of the wealthiest people in this nation own 71% of its wealth! This gives the remaining 90% of us 21% to share together.

I have written about all of this before. There are examples that for sake of brevity I have not mentioned instances which are just as egregious as those mentioned above like the Federal assistance after Katrina and the saber-rattling towards Iran. I needed to restate all of these things to illustrate that our federal government is totally out of control, and is not concerned about the well-being of the American taxpayer. The simple fact is that after this election, with the two candidates they are running and the third parties shut out of participating in an honest election because of impediments set up by the two-party duopoly, we will have no change in the foreseeable future. Others besides me have predicted that we will have more of the status quo if McCain or Obama are elected. Unless this nation comes to an epiphany and all at once gets behind Nader or McKinney which is very doubtful, our votes will not win this election. This election will be decided by the mass media's coverage of the two corporate candidates that are both more of the same, and the general public that has been dumbed-down by the same media and the lack of honest news.

So what can we do? I propose a "Shadow Government" that be made up of all the third parties and the disaffected Republicans and Democrats that are tired of the American Empire and the squandering of our nation's wealth on wars while our civil liberties are being taken from us. It can be formed at a conference much like the one last week-end at Andover, Mass. We are looking at a police state that operates outside the rule of law that we have operated on for over two hundred years. This shadow government will be divided up much like the Federal Government. Instead of individuals holding office however, there will be committees that will monitor every action by every part of every branch of this government to insure that they are following the laws, and not operating outside the rule of law which is US code and the Constitution.

These committees will have not power but to seek indictments against those in the federal government that break US law. They can seek relief in local, State and Federal Courts. Every move that this corporate government makes will be followed closely by this shadow government to insure that the excesses that happened in the last decade are not allowed to continue. The shadow government can also lobby for campaign finance reform to get corporate money out of political elections. All other partisan issues will be left to political interests lest they take the focus off of what the shadow government was designed to do.

Drastic times call for drastic measures. This country is rapidly coming apart at the seams and our government continues as if this is what is expected of them. It's time to tell them what is expected of them by banding together, left, right, liberal, conservative the old paradigms' no longer matter. So for now it is not between left and right, only between right and wrong, and it's about time.