Tuesday, October 7, 2008

Full of Doubts, U.S. Shoppers Cut Spending

Full of Doubts, U.S. Shoppers Cut Spending

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Cowed by the financial crisis, American consumers are pulling back on their spending, all but guaranteeing that the economic situation will get worse before it gets better.

In response to the falling value of their homes and high gasoline prices, Americans have become more frugal all year. But in recent weeks, as the financial crisis reverberated from Wall Street to Washington, consumers appear to have cut back sharply. Even with the government beginning a giant bailout of the financial system, their confidence may have been too shaken for them to resume their free-spending ways any time soon.

Recent figures from companies, and interviews across the country, show that automobile sales are plummeting, airline traffic is dropping, restaurant chains are struggling to fill tables, customers are sparse in stores.

When the final tally is in, consumer spending for the quarter just ended will almost certainly shrink, the first quarterly decline in nearly two decades. Many economists, who began the third quarter expecting modest growth, now believe the cutbacks are so severe that the overall economy did not expand either, and they warn that a consumer-led recession could be more severe than the relatively mild one earlier this decade.

“The last few days have devastated the American consumer,” said Walter Loeb, president of Loeb Associates, a consultancy, who said he worried that the constant drumbeat of negative news about the economy was becoming a self-fulfilling prophecy. “They all feel poor.”

For some Americans, the pain is already acute: jobs disappeared at a faster clip in September. For many others, day-to-day finances are fine for now, but the financial outlook is uncertain: 401(k) accounts are dwindling, loans are hard to get and house prices continue to fall.

Claudia Prindiville, a 41-year-old mother of three, is among those feeling anxious. Shopping at a Talbots store in Chicago’s northwest suburbs, she said her own family’s finances had not yet suffered. Still, she pulled out a coupon to buy a two-piece sweatsuit, and at The Children’s Place she bought pants and shirts from the sale rack.

“All the talk about how bad it is out there has started getting in my head,” she said. “I still need to shop for my kids’ school clothes, but I am definitely buying less for myself.”

Consumer spending, which accounts for nearly two-thirds of the economy, grew modestly earlier in the year but fell in July and August on an annualized rate. When the government releases quarterly numbers this month, they are expected to show that consumer spending shrank 3 percent or more. That would be the first quarterly decline since 1990, ahead of the 1991 recession, and the steepest since 1981.

According to interviews with shoppers, analysts and company executives, the impact of the financial news of the last two weeks has been palpable in many corners of the country, from car dealerships, which endured the worst month for sales in 15 years, to the flashy casinos of Las Vegas, where spending at luxury restaurants and stores and at gambling tables has gone from bad to worse.

“In the last few days, there has been a huge drop-off in foot traffic and almost zero sales,” said Gil Colon, sales manager at Villa Reale, a high-end art and furniture store in Las Vegas, who has laid off five sales people in the last five months, leaving three.

“People have lost their confidence. They have no buying power. They are losing their retirements, their vacation funds, and they are scared to commit to buying anything,” he said.

The picture is just as grim at suburban malls and city boutiques, where traffic is disappearing as retailers brace for what many predict will be a dismal holiday shopping season. Some have responded by reducing the number of sales people or their hours.

Taking a break outside an Office Depot store in suburban Chicago, Dave Cargerman, a 25-year-old sales clerk, said his hours had been cut back. “We got killed during the back-to-school sales,” Mr. Cargerman said. “And that time of year is usually our bread and butter.”

Nearby, employees at Lattof Chevrolet were preparing to close the doors this month on a business that opened in 1936. It may not be the last dealership to go: the percentage of people saying they expect to buy a car in the next six months, on a three-month moving average, has fallen to 5 percent, the lowest figure since the Conference Board started asking about such plans in its consumer confidence survey, in 1967.

“We’re not selling S.U.V.’s and trucks at all,” said Raul Trejo, 24, a mechanic. “We saw it coming.”

The situation is so uncertain that some retailers are simply not even trying to estimate their sales. Pier 1 Imports and Circuit City stores recently withdrew their guidance to Wall Street about earnings and said they would not offer any more predictions this year.

At a retail conference in New York on Thursday, Michael W. Rayden, chairman and chief executive of Tween Brands, which owns the Limited Too and Justice chains, spoke about consumer fears. “As I travel around the country and listen to moms and little girls, it is amazing how much even these 10-year-old girls are aware that something is going on,” he said. “Mom is saying, ‘I can’t afford that.’ ”

Even Apple, maker of the iPhone, is not immune as concerns mount about consumer electronics. The stock of Apple ended the week down 19 percent after two stock analysts suggested that the rapid cooldown in consumer spending would put an end to the company’s hot sales streak.

Casual dining restaurants, which have struggled in recent years because of a glut of restaurants and higher-quality fare at fast-food chains, have taken a beating already this year, forcing the Bennigan’s chain to close and leaving several others struggling. “I think September could be the worst month of the year, and we’ve had a lot of bad months,” said Lynne Collier, an analyst at KeyBanc Capital Markets who covers the restaurant industry.

At a Chili’s Grill & Bar in the Arlington Heights suburb of Chicago, Nichol Bedsole, a 23-year-old salon manager, said she used to eat at places like Chili’s at least once a week but no longer does.

“Now it’s more like twice a month, and it’s somewhere cheap, like Subway,” she said. “I have a lot of bills to pay.”

Consumers are cutting back on air travel, whether for business or pleasure. Passenger volume is dwindling even faster than airlines can sideline planes and cut poorly performing routes. At American Airlines, domestic passengers flew 11.7 percent fewer miles in September, while the airline cut 9.4 percent of domestic seats.

The consumer slowdown in recent weeks comes after spending drops in July and August, when tax rebates came to an end. The financial shocks on Wall Street accelerated the decline, along with limits on consumer credit imposed by some banks.

“Consumers have become quite concerned that the recession, which they think is already under way, will last longer than they anticipated and will be deeper,” said Richard Curtin, director of the Reuters-University of Michigan Surveys of Consumers, describing the most recent poll. “They see their worst fears coming true.”

In addition, household net worth, which greases spending, fell $6 trillion over the last year, with $1 trillion of that in just the last four weeks, said Mark Zandi, chief economist at Moody’s Economy.com.

Less than a month ago, Nigel Gault, chief domestic economist at Global Insight, a forecasting service, predicted that domestic economic output would rise 1.2 percent in the third quarter. “At the moment I’m running close to zero,” he said, “and maybe a negative.”

Of course, the economic malaise has not yet hurt all businesses. It has even been good for some.

Entertainment and media executives remain optimistic about sales of movie tickets, DVDs and games. At Nintendo of America, the popular Wii video game consoles are still selling briskly at about $300.

“My view is that when consumers get concerned about their nest egg, or their country, they need entertainment,” said Bo Andersen, president and chief executive of the Entertainment Merchants Association, which represents distributors and retailers of home entertainment products.

And as fewer people eat at restaurants, food is flying off the shelves at grocery stores. David Driscoll, a stock analyst for Citigroup, said the shares of big food companies have risen about 17 percent this year. By contrast, he said, the restaurant sector is down 4 percent.

“The alternative of restaurants is buying groceries and eating at home,” he said, “and right now, that’s an attractive alternative.”

Daniel Kimble, 31, was putting Mr. Driscoll’s theory into practice on Friday. An independent trucker from Oklahoma, he stopped his rig outside a Wal-Mart in Cleveland on his way to a nearby factory.

Mr. Kimble ticked off a long list of his money-saving steps, from driving his pickup truck less to using less laundry detergent to buying fewer clothes. And he has stopped eating at restaurants on the road, which is why he was parked at Wal-Mart.

“I’m going in to buy some lunch meat and some bread, whatever’s cheap,” he said. “I’ve got to save money, you know?”

Credit doors are closing

Credit doors are closing

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A crucial source of financing for companies and banks is making some ominous grinding sounds. The market for commercial paper, which is high-quality, short-term debt, shrank by a record $95 billion last week, to $1.6 trillion, according to the U.S. Federal Reserve. That's down from nearly $2 trillion before the credit crunch.

Meanwhile, interest rates on this normally inexpensive debt are skyrocketing. Borrowers had to pay 4.5 percent to borrow for one month in the CP market late last week, up from 3 percent Tuesday. Also, the market is essentially closed to all but the very strongest borrowers, and even they can't borrow money for more than a couple of months.

That is a big problem for companies that need to refinance outstanding CP that is coming due - which happens often, since maturities in this market only range from overnight to 270 days.

Partly, the CP market's problems are caused by recent problems in the world of money market mutual funds. Investors pulled a lot of cash out of those funds in mid-September, after several revealed losses. Those funds are usually big buyers of CP, but they had to cut back on their purchases.

That problem diminished somewhat when the U.S. government announced an insurance program for money fund investors on Sept. 19.

The CP market's more recent woes have additional causes. First, investors' willingness to bear risk continues to decline throughout the financial markets. There is little interest in making loans to financial firms; the fall in their issuance of CP accounted for the bulk of the market's contraction. These borrowers are stuck on the sidelines until demand returns and interest rates fall.

But that may take time. Lenders have also been shunning corporate debt in favor of less risky government issues. And the U.S. Treasury has ramped up its sales of short-term debt. It recently issued $440 billion to finance the Federal Reserve's emergency lending programs. It may issue a lot more now that its $700 billion bank rescue plan has been approved by Congress.

All this government borrowing may be crowding out corporate borrowers. If so, the Treasury could find itself with an unpleasant paradox; its attempts to stabilize the debt markets may aggravate their problems. - Robert Cyran and Dwight Cass

FOR NOW, THAIN SETTLES FOR LESS

John Thain is boldly going where few have trodden before him. The Merrill Lynch boss has agreed to stay on in a less senior role after his company's sale to Bank of America is complete. He will be running the combined company's global banking, securities and wealth management units. All told, that's a bigger business than just Merrill. But it's still a step down from the chief executive's office.

Often, big merger deals are used as cover for one or other chief to leave - or at least to semi-retire into a chairman-only or senior adviser role. Those few former head honchos who have in the past tolerated a drop in status mostly haven't done so for long, unless they had a promise of future glory. Back in 2004, Jamie Dimon, then chief of Bank One, retreated to the number two spot at JPMorgan Chase after the two banks merged - but he extracted a public commitment that he would be the boss within two years.

No doubt he had learned from John Mack's experience. While only Morgan Stanley's number two when it merged with Dean Witter just over a decade ago, Mack thought he had an ironclad deal with the latter's boss, Phil Purcell, to take the top spot within a couple of years. But the private agreement came to naught and Mack left in 2001, only returning after Purcell had been pushed out.

Of course, Thain and Ken Lewis, the chairman and chief executive of Bank of America, may have struck their own backroom accord - though at a relatively youthful 60, Lewis might not be in any hurry to step aside. It is also possible Thain feels that the opportunity to craft the next phase of the investment banking model within the Bank of America behemoth is sufficient compensation for no longer being the ultimate decision-maker.

Still, Thain won't be short of temptation should he hanker after another chief executive seat. The credit crisis is likely to open up more corner office jobs at rival companies, and it would be no surprise if Thain were on everyone's short lists. If the new Bank of America doesn't end up satisfying him, Thain may disappear at warp speed.

Worst-case scenario is approaching rapidly

Worst-case scenario is approaching rapidly

The credit crisis, which has been building slowly for the past year, is now moving so fast that governments around the world are finding it impossible to keep pace.

On Saturday Angela Merkel, the German leader, criticised last week's decision by the Irish to guarantee all deposits in their leading banks without consulting other European countries. The Irish Government said that the move was forced on it by the threat of a run on one of its banks. Only a day later Ms Merkel was forced to take almost the same action in almost the same circumstances.

In the longer term, this clearly raises questions about the hopes for (or fears of) European financial integration. In the short term, it presents serious challenges for other European governments.

A week ago the British Government was hoping that it had coped with its immediate banking headache after the bailout of Bradford & Bingley. With the proposed rescue takeover of HBOS by Lloyds TSB, this stabilised the two big British banks that looked most vulnerable.

Then came the shock move by the Irish Government to guarantee not only individual savings but also the large deposits held by companies. Downing Street was furious because British banks feared they would see a flight of money towards Irish banks.

Downing Street decided merely to accelerate the planned increase in the ceiling on guaranteed deposits from £35,000 to £50,000, although the decision remains under review.

The Irish move was triggered partly by the failure of Congress to vote through the proposed $700 billion bailout package for the troubled US banking system. The uncertainty about the package caused another blow to confidence in banks around the world, making it even more difficult for them to get long-term funding.

On Friday the Bank of England responded by saying that it would inject another £40 billion into the system to ease the pressure on British banks. Combined with the passing of the US bailout Bill at the second attempt, this appeared to buy the authorities a bit of time.

But yesterday's decision by the German Government plunged Europe back into turmoil. It is less of a threat to British banks than the Irish move as it applies only to retail deposits.

Although the Government has made clear there is an implicit guarantee on all personal savings, it is very reluctant to make that explicit because of the potential exposure of the taxpayer and the concern that it would be difficult to remove once the crisis is over.

But it seems likely that other European countries will be forced to follow Germany, increasing pressure on Britain to fall in line.

The Bank of England and the Treasury are also considering a range of other measures to shore up the banking system, including the injection of taxpayers' money into leading banks and a US-style purchase of banks' "toxic" mortgage-related investments.

These were viewed as worst-case contingency plans. After this weekend, the worst case appears to be approaching rapidly.

UK Stock market suffers its worst fall in history

Stock market suffers its worst fall in history

The UK stock market has suffered its worst one-day fall in history as the banking crisis intensified.

By Robert Winnett

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The FTSE-100 index of Britain's biggest companies dropped by 391.06 points - its steepest ever fall - to end the day down 7.9 per cent.

The FTSE's tumble was mirrored across Europe, as markets in France, Germany, Italy and Spain all recorded heavy falls.

On Wall Street, the panic drove the Dow Jones Industrial Average down through the 10,000 level for the first time in four years.The mild euphoria that greeted the passage of the $700bn bail-out of Wall Street on Friday evaporated as traders digested the more bad news from Europe.

The Dow Jones Industrial Average fell as much as 800 points during the session, slipping below the key psychological level of 10,000 for the first time since 2004.

Just after the closing bell, the blue-chip index was down 340.49 points (3.30 percent) at 9,984.89.

Japanese stocks plunged more than five percent within the first 30 minutes of the Tuesday session amid the global financial crisis that has sent major markets plummeting.

The Tokyo Stock Exchange's benchmark Nikkei-225 index dropped 554.76 points or 5.3 percent within 30 minutes from the opening bell to 9,918.33.

A statement by Alistair Darling, the Chancellor, to Parliament failed to calm nerves with the stock market taking a further dive as he spoke.

The Chancellor refused to outline firm plans to deal with the crisis – however, he confirmed the Government was working on a radical scheme which could be implemented in the coming weeks.

European leaders issued an unprecedented joint statement pledging to do whatever is necessary to help struggling financial markets.

An increasing number of Governments across Europe are offering to guarantee the deposits of both households and companies as fears that further banks will fall escalate. Those fears prompted more panic selling of shares.

Mr Darling acknowledged that financial disruption had "intensified" over recent weeks and spread to all parts of the world.

The Government had made available more than £100 billion of long-term lending and was willing to make further resources available as necessary.

"Our aim is to reduce uncertainty and improve confidence in financial markets," he said.

The "process of change" would take time to work through and would require action not just at national level but internationally too.

"It would be irresponsible to speculate on the specifics of future responses," he said. "Providing a running commentary could add to uncertainty in already febrile market conditions.

"But all practical options must remain open to us."

He added: "These are exceptional times and I'm in no doubt as to the size of the task facing us, and governments across the world, in bringing order to the financial system.

The US Simply Doesn't Get It

The US Simply Doesn't Get It

Biden and Palin hid like rabbits from the centre of the Middle East earthquake


By Robert Fisk

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Saturday, 4 October 2008 -- Palestinians ceased to exist in the United States on Thursday night. Both Joe Biden and Sarah Palin managed to avoid the use of that poisonous word. "Palestine" and "Palestinians" – that most cancerous, slippery, dangerous concept – simply did not exist in the vice-presidential debate. The phrase "Israeli occupation" was mercifully left unused. Neither the words "Jewish colony" nor "Jewish settlement" – not even that cowardly old get-out clause of American journalism, "Jewish neighbourhood" – got a look-in. Nope.

Those bold contenders of the US vice-presidency, so keen to prove their mettle when it comes to "defence", hid like rabbits from the epicentre of the Middle East earthquake: the existence of a Palestinian people. Sure, there was talk of a "two-state" solution, but it would have mystified anyone who didn't understand the region.

There was even a Biden jibe at George Bush for pressing on with "elections" – again, the adjective "Palestinian" went missing – that produced a Hamas victory. But Hamas appeared to exist in never-never land, a vast landscape that gradually encompassed all the vast and black deserts that stretch, in the imagination of US politicians, from the Mediterranean to Pakistan.

"Pakistan's (nuclear) missiles can already hit Israel," Biden thundered. But what was he talking about? Pakistan has not threatened Israel. It's supposed to be on our side. Both vice-presidential candidates seemed to think that our ally in the "war on terror" was now turning into an ally of the axis of evil. Even Islam didn't get a run for its money.

Indeed, one of the funniest reports of the week, yet another investigation of Obama's education, came from the Associated Press news agency. The would-be president, the Associated Press announced, had attended a Muslim school but hadn't "practised" Islam.

What on earth did this mean, I asked myself? Would AP have reported, for example, that McCain had attended a Christian school but hadn't "practised" Christianity? Then I got it. Obama had smoked Islam but he hadn't inhaled!

Travelling across the US this week – from Seattle to Houston to Washington and then to New York – I kept bumping into the results of America's White House-induced terror. A well-educated, upper-middle-class lady at a lunch turned to me and expressed her fear that Islam "wanted to take over America". When I suggested that this was pushing things a bit, she informed me that "the Muslims have already taken over France".

How does one reply to this? It's a bit like being informed by a perfectly sane and rational person that Martians have just landed in Tennessee. So I used the old Fisk trick when confronted by ravers of the "admit George Bush did 9/11" school. I looked at my watch, adopted a shocked expression and shouted: "Gotta go!"

But seriously. There was Biden on Thursday night, telling us that along Pakistan's border with Afghanistan – he was referring, of course, to the old frontier drawn by Sir Mortimer Durrand which most Pushtuns (and thus all Taliban) regard as fictional – "there have been 7,000 madrassas built ... and that's where bin Laden lives and we will go at him if we have actually (sic) intelligence".

Seven thousand? Where on earth does this figure come from? Yes, there are thousands of religious schools in Pakistan – but they're not all on the border. In another extraordinary bit of myth-making, Obama's man told us that "we kicked the Hizbollah out of Lebanon" – which is totally untrue.

And, of course, Israel – a word that must be uttered, repeatedly, by all US candidates – became the compass point of the entire Middle East, this "peace-seeking nation ... our strongest and best ally in the Middle East" (quoth Palin) of whom "no one in the United States Senate has been a better friend...than Joe Biden" (quoth Biden).

Israel was "in jeopardy" if America talked to Iran, Palin revealed. "We have got to assure them that we will never allow a second Holocaust." Thus was the corpse of Hitler dug up yet again – just as McCain resurrected the shadow of the Second World War last week when he blathered on about Eisenhower's sense of responsibility before D-Day. That Israel can quite adequately defend herself with 264 nuclear warheads went, of course, unmentioned, because acknowledging Israel's real power undermines the image of a small and vulnerable country relying on America for its defence.

Israelis deserve security. But where were the promises of security for Palestinians? Or the sympathy which Americans would immediately grant any other occupied people? Absent, needless to say. For we must gird ourselves for the next struggle against world evil in Pakistan.

Biden actually demanded a "stable" government in Islamabad, which was a little bit hypocritical only a few days after US troops had crossed its sovereign border to shoot up a Pakistani house allegedly used by the Taliban. As General David Petraeus told The New York Times this week, "The trends in Afghanistan have been in the wrong direction ... wresting control of certain areas from the Taliban will be very difficult."

It's an odd situation. Obama and Biden want to close down Iraq and re-conquer Afghanistan. The Palin College of Clichés characterised this as "a white flag of surrender in Iraq" while continuing to warn of the dangers of Iran, the name of whose loony president – Ahmadinejad – defeated McCain three times in last week's pseudo-debate.

But it's the same old story. All we have learned in America these past two weeks, to quote Joan Littlewood's Oh! What a Lovely War, is that the war goes on.

It's a Worldwide Crash By Jim Cramer

It's a Worldwide Crash

By Jim Cramer

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Here it is, the dawning of the selloff that will finally put us at levels where ... we will sell off again.

For two years the credit markets have been submerged under central bank happy talk and a sense that the worries were about inflation. You can see why in the outlines of the institutions that are failing now.

The problem is the Europeans got stuck fighting the inflationary war that ended in July. Rates are ridiculously high in Europe vs. the crunching of debt that is happening and will continue to happen.

In our country, the "Fundamentals are Sound" group at Treasury, and the "Whip Inflation Now" group at the Federal Reserve couldn't switch fast enough either.

But boy, are they great at public relations. There has been remarkable awe at how well Treasury, the Fed and the FDIC are handling the crisis.

It seems very misplaced. Some of it is pure economic ignorance. Fed Chairman Ben Bernanke studied the Depression, or so they say, and knew more about how to stop it than anyone. Actually, he knew less than anyone, and he and his merry band of governors and presidents presided over the deflationary destruction of Western finance with a bias toward -- are you ready? --inflation. Yes, that's still their bias. We were able to jump-start the economy in 2003 with rates as low as 1%. But our rates are twice that now even though we are in a deflationary spiral, not an inflationary one. We should be printing money left and right here but Bernanke is Hoover and we all know it now.

There's another sainted figure, who I guess must call the media all the time to burnish his image. That's Tim Geithner, the Federal Reserve Bank of New York president, who is supposed to be the eyes and ears of the Fed. We learn from The New York Times Monday that Geithner was the genius behind the "not too big to fail" decision to keep Lehman out of the Federal Reserve system. That was brilliant. We had rescued Bear, but not twice-its-size Lehman, perhaps because the watchdog/press hound Geithner didn't understand the complexity of Lehman's book, or because it was time to mete out punishment to the worst banker on earth, Dick Fuld.

And I thought the guy had a handle on it. I was fooled, but unlike Geithner, I would have had to call Fuld a liar, and you can't do that without subpoena power and a bunch of sources who would betray him. I knew only the people who surrounded him, and they told me everything was fantastic, just a little slow.

Of course, we know the truth now. The Fed has been put out to pasture, a victim of being theoretical, not practical, an organization that simply didn't take seriously those of us who warned them in person and on TV. What did they think, we made it up for ratings? Is that what they thought? You think I, a reputed bull, want to go on TV and scream that they knew nothing? I would rather recommend Colgate(CL Quote - Cramer on CL - Stock Picks), but given the crisis it sure seemed worth waking them up.

Even as late as the summer, the Fed thought for sure the price of iron and copper meant more than the implosion of housing-based finance.

Now along comes Sheila Bair and Hank Paulson, who alternately want us to believe that everything is sound (with public pronouncements that the worry is misplaced) and that there is a list of obscure banks that might have to be taken over.

Then Paulson comes to the Capitol and says the truth, that the Western world of finance is going to break, and Bair seizes Washington Mutual and tries to seize Wachovia(WB Quote - Cramer on WB - Stock Picks), no doubt to save Citigroup(C Quote - Cramer on C - Stock Picks), which could have risen, done an equity offering and joined Bank of America(BAC Quote - Cramer on BAC - Stock Picks), JPMorgan(JPM Quote - Cramer on JPM - Stock Picks) and Wells Fargo(WFC Quote - Cramer on WFC - Stock Picks) as the new titans of finance.

Of course, either the FDIC doesn't know the tax law changed to make it so if Wells bought WB it wouldn't have to pay taxes on ordinary income for years, or was oblivious to the imminent passage of TARP.

This, plus the disintegration of Lehman, which then left Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) and Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) in the hands of the shorts, was too much for everyone, and now no one lends to banks and it makes no sense to them, and no one wants commercial paper because it makes no sense to them.

Which is where we are this morning, in a worldwide crash that will leave us with gigantic institutions that we have never heard of, with balance sheets that are ridiculously large that must fall, and a hedge fund community that has lost control of its asset base.

And in this moment we are supposed to be buyers?

I say let it fall without me. I say keep selling industrials unless they yield more than 4%.

I say it is no longer in the hands of the central banks. It is in the hands of rational people making rational decisions to get out before more institutions fail, more hedge funds liquidate, and still lower prices are upon us.

Down the Road to Serfdom

Down the Road to Serfdom

By Ann Berg

Anti War

Threatening an imminent economic collapse, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke have bamboozled Congress into enacting the most brazen confiscatory scheme ever concocted by government. The scheme would have American taxpayers fork over $700 billion of their cash to help recapitalize some of the country's biggest banks – the same banks that recently larded their bigwigs with $62 billion in bonuses.

Sensing a pushback by the world's dollar-surplus regions – Asia and the Mideast – to finance the largest debtor economy, the U.S. government will now plunder its own countrymen to keep capital running "uphill." As with most statist remedies, it is being marketed as a boon for Main Street, tantalizing its inhabitants with the prospect of profits wafting westward from those malodorous Wall Street investments. However, Congress has inured the Treasury from accountability and legal recourse, giving Paulson dictatorial power over the nation's financial sector. Rather than let this bloated segment of the economy shrink and consolidate, Paulson and his successor will extend it unlimited life support, bloodletting everything else, in a final ruin of the nation.

The problem that is vexing the financial system, we are told, is the pile of mortgage-backed securities held by financial institutions. These have lost value as the underlying assets – the actual homes – have plummeted in value. But this is a fraud. This precipitating event no more caused the financial fiasco than the murder of someone named Ferdinand provoked World War I, as taught in elementary school.

Remember the war? Not just the current and future wars, but the one that gave us the fiat monetary system: the war in Vietnam. Prior to that calamity the world operated under the Bretton Woods monetary system, a post-World War II arrangement that pegged all currencies to the dollar and made only the dollar convertible to gold, thereby ensuring the dollar's reserve currency status. During the 1950s, the system seemed invulnerable as U.S. gold reserves exceeded foreign liabilities by threefold. By 1970, however, as the U.S. inflated its money supply to fund the Southeast Asian conflict, the monetary position of the U.S. reversed, with foreign liabilities exceeding gold reserves fivefold. When France demanded gold for dollars at the statutory rate of $35/oz., President Nixon shut the gold window for good. As a result, currencies went from a fixed to a floating (and pegged) rate system in 1973. It has vexed economists ever since.

This system of fiat currencies has given peculiar leverage to the U.S. dollar. As the world's reserve currency, the dollar has preserved faith in its purchasing power among its holders, including foreign central banks. This faith and willingness to buy U.S. low-yield debt instruments such as Treasuries has enabled the U.S. public and private sectors to go on the largest borrowing binge the world has ever seen, manifesting in the gargantuan twin deficits of budget and trade. These imbalances would never have occurred under a gold standard. Credit would have been constrained by statutory levels of gold reserves in the banking system, instead of being created out of thin air by the 40-1 leverage levels granted by the SEC in 2004 to the five now defunct investment banks. Also, the huge influx of imported goods would have halted due to inflationary pressures in the exporting countries – a phenomenon deemed the "price-specie flow mechanism" by 18th century philosopher David Hume.

Robert Mundell, a Nobel Prize-winning economist who sparred with Milton Friedman over floating rates vs. the gold standard, had this to say about fiat currencies:

"The present international monetary system neither manages the interdependence of currencies nor stabilizes prices. Instead of relying on the equilibrium produced by [gold's] automaticity, the superpower has to resort to 'bashing' its trading partners, which it treats as enemies."

So here we are: a phony monetary system, $3 trillion wasted on wars, and a citizenry mired in debt. And what does Congress do? It adds more debt – a trillion dollars, just for starters, since once starting down this slippery slope, it won't be able to stop. It then gives the Treasury the green light to buy securities that are trading as low as 20 cents on the dollar at the hold-to-maturity value, i.e., par! Not surprisingly it has engaged in a media blitz to "sell" this boondoggle, convincing the taxpayer that this bucket of dross will one day turn to platinum. Sensing that working stiffs are a little perturbed about the fleecing, it has leapt to the offense: "No, this is not a bailout of Wall Street. This is a rescue plan for Main Street." By embracing the mortgage waste dump, U.S. citizens are supposedly saving jobs and retirement dreams. They are told that interest-free car loans will stream from dealerships and refi windows will again beckon, even to those with homes worth half the value of mortgage paper.

With Congress granting the Treasury (along with an "oversight" board) almost unlimited power over the country's financial landscape, the U.S. has terminated its democracy and is well on the Road to Serfdom. As Friedrich Hayek explained in 1944, "Economic control is not merely control of a sector of human life that can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower – in short, what men should believe and strive for."

Farewell, America.

We're on "the edge of the abyss”

We're on "the edge of the abyss”

By Mike Whitney

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Years from today, when the current financial crisis is over, historians are likely to agree that it would have been far better if the Bush administration had declared a state of emergency earlier in the process so that the necessary steps could have taken to avoid a complete financial meltdown. The media could have been used to bring the American people up to date on market-related developments and educated in the bizarre language of structured finance. Knowledge is power; and power can prevent panic.

Now we're in a terrible fix. People are scared and removing their money from the banks and money markets which is intensifying the freeze in the credit markets and driving stocks into the ground like a tent stake. Meanwhile, our leaders are "caught in the headlights", still believing they can "finesse" their way through the biggest economic cataclysm since the Great Depression. It's madness.

If something is not done to increase the flow of credit immediately, the stock market will tumble, unemployment will spike, and many businesses will grind to a standstill. We could be just days away from a severe shock to the system. Secretary of the Treasury Henry Paulson's $700 billion bailout does not focus on the fundamental problems and is likely to fail. At best, it puts off the day of reckoning for a few weeks or months. Contingency plans should be put in place so the country does not have to undergo post-Katrina bedlam.

Does Congress have any idea of the mess they've made by passing the Bailout bill? Do they even read the papers or are they so isolated in their Capital Hill bubble-world that they're entirely clueless? Did any Senator or congressman even notice, that while they were busy mortgaging off America's future, the stock market was plummeting to new lows? Between the time the ballots were cast on Paulson's bailout, and the announcement of the final tally (which was approved by a generous margin) the market went from a 310 point gain to a 157 point loss; a whopping 467 plunge in less than two hours.

Thus spake the Market: "Paulson's bill is a fraud!"

Listen up, Congress: This massive trillion dollar deleveraging process cannot be stopped. The system is purging credit excesses which are unsustainable. The levies you're building with this $700 billion bill may plug a few holes, but it won't stop the flood. Economist Ludwig von Mises put it like this:

"There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

The best course of action is to soften the blow as much as possible for underwater homeowners and let the market correct as it should. Otherwise the dollar will be torn to shreds.


Look around; the six year Bush economic boom is vanishing before our eyes. Manufacturing is contracting, wages are stagnant, good paying jobs are headed overseas, unemployment is rising, and the middle class has shrunk every year since Bush took office. Is this the miracle of the "Washington consensus" and neoliberalism? The prosperity of the Bush era is as fake as the weapons of mass destruction; it's all smoke and mirrors. The Federal Reserve created the massive equity bubble in housing and finance through its low interest monetary policies. Cheap money is the rich man's method of social engineering; swift and lethal. The public be-damned. Now that the bubble is bursting, Congress needs to decide what it can do to soften the hard landing. Paulson's bill does not do that. In fact, even Paulson's supporters admit it's a flop. Here's what Martin Feldstein had to say in a Wall Street Journal editorial:

"The recent financial recovery plan that Congress enacted will not rebuild lending and credit flows. That requires a program to stop a downward overshooting of house prices and the resulting mortgage defaults....The prospect of a downward spiral of house prices depresses the value of mortgage-backed securities and therefore the capital and liquidity of financial institutions. Experts say that an additional 10% to 15% decline in house prices is needed to get back to the prebubble level. That decline would double the number of homes with negative equity, raising the total to 40% of all homes with mortgages. The mortgages of five million homeowners would then exceed the value of their homes by 30% or more, which could prompt millions of defaults." (Martin Feldstein, "The Problem is still Falling house Prices", WS Journal)

Get it? Feldstein doesn't give a hoot about the struggling homeowner who is worried-sick about losing his home in foreclosure. He just wants to make sure that the banks get their blood-money back, and the only way they can do that is by putting a floor under housing prices so mortgage-backed securities (MBS) and all the other derivatives that are gunking-up the financial system begin to stabilize. Even though the article is little more than a paean to human greed; it does admit that Paulson's bailout falls short of its objectives. It won't work.

Not only that, but it elevates G-Sax ex-chairman to Finance Czar, with almost unlimited powers to buy whatever toxic "structured" garbage he wants without any real oversight. Who will stop the Treasury Secretary if he decides to waste the taxpayers money on the full range of impaired assets including complex derivatives, collateralized debt obligations (CDOs), low-rated MBS, or even credit default swaps (CDS), which were sold in unregulated trading and which are oftentimes nothing more than side-bets made by speculators with no direct connection to the housing market?

Is that what Congress approved? What if he decides to spend the whole $700 billion buying back mortgage-backed bonds from China and Europe, leaving US banks still underwater? (except for Goldman, of course) It's possible; especially if he thinks China will stop purchasing our debt if we don't back up our worthless bonds with cold hard cash.

This bailout has DISASTER written all over it.

Consider this from a September 29 report in the Washington Post:

“Twenty of the nation's largest financial institutions owned a combined total of $2.3 trillion in mortgages as of June 30. They owned another $1.2 trillion of mortgage-backed securities. And they reported selling another $1.2 trillion in mortgage-related investments on which they retained hundreds of billions of dollars in potential liability, according to filings the firms made with regulatory agencies. The numbers do not include investments derived from mortgages in more complicated ways, such as collateralized debt obligations.” (from Paul Craig Roberts, "Can a Bailout Succeed", counterpunch.org)

So, how does Paulson expect to recapitalize the banks--which are loaded up with $2.4 trillion in mortgage-related investments--when congress's bill allocates a paltry $700 billion for the rescue plan? It's impossible. Just as it is impossible to keep prices artificially high with this kind of government buy-back program. These structured investments were vastly overpriced to begin with due to the fact that the market was hyperinflated with the Fed's low interest credit. As Doug Noland said, "This Credit onslaught fostered huge distortions to the level and pattern of spending throughout the entire economy. It is today impossible both to generate sufficient Credit and to main previous patterns of spending. Economic upheaval and adjustment are today unavoidable." (Doug Noland's Credit Bubble Bulletin)

Yes, and "economic upheaval" leads to political upheaval and blood in the streets. Is that what Bush wants; a chance to deploy his North Com. troops within the United states to put down demonstrations of middle class people fighting for bread crumbs?


In less than 8 years, the Financial Sector Debt tripled, mortgage debt doubled, and financial borrowing rose 75 percent. Why? Was it because the US was producing more goods that the world wanted? Was it because production rose sharply or demand doubled?

No, it was because of asset-inflation; a chimera created by the illusionists at the Federal Reserve and the investment banks. That's the source of the massive credit expansion which is presently collapsing and pushing the world towards another Great Depression. As Henry Liu said in his article “Liquidity Boom and Looming Crisis” in the Asia Times:

"Unlike real physical assets, virtual financial mirages that arise out of thin air can evaporate again into thin air without warning. As inflation picks up, the liquidity boom and asset inflation will draw to a close, leaving a hollowed economy devoid of substance. …A global financial crisis is inevitable”

The man who is most responsible for the current meltdown, Alan Greenspan, even admitted that he spotted the humongous equity bubble early on but refused to do anything about it. Here's a clip from an article by Maestro in the Wall Street Journal:

"The value of equities traded on the world's major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions." ("The Roots of the Mortgage Crisis", Alan Greenspan, Wall Street Journal)

This admission proves Greenspan's culpability. If he knew that stock prices had doubled their value in just 3 years, then he also knew that equities had not risen due to increases in productivity or demand.(market forces) The only reasonable explanation for the asset inflation is the deeply-flawed monetary policies of the Fed. As his own mentor, Milton Friedman famously stated, "Inflation is always and everywhere a monetary phenomenon". Any capable economist would have known that the explosion in housing and equities prices was a sign of uneven inflation. Now the bubble has popped and the tremors are likely to be felt through the global economy.


No one in Congress has the foggiest idea of what is going on in the economy. They're all in La-la Land. The credit markets are paralyzed. The capital-starved banks are dramatically cutting back on lending and making it nearly impossible for consumers to borrow or businesses to even carry out daily operations like payroll. The commercial paper market has slowed to a crawl, forcing cash strapped companies to try and access existing credit lines or sell corporate bonds. Money market rates are soaring but wary depositors keep withdrawing their money putting more pressure on financial institutions. The whole system is wading through quicksand. The banking system is breaking apart before our eyes. The $700 billion "rescue package" will not relieved the situation at all. In fact, the various rates (like Libor, Libor-OIS spread, or the TED spread) which indicate the amount of stress in interbank lending have stayed at record highs signaling huge dislocations in the near future. Are we headed for an October stock market crash?

This is from the Times Online:

"US banks borrowed a record $367.8 billion (£208 billion) a day from the Federal Reserve in the week ended October 1. Data from the US central bank shows how much financial institutions are relying on the Fed in its role as lender of last resort as short-term funding becomes almost impossible to find elsewhere. Banks' discount window borrowings averaged $367.80 billion per day in the week ended October 1, nearly double the previous record daily average of $187.75 billion last week."

$368 billion a day, just to keep the banking system from collapsing. Did they forget to mention that on FOX News?

And, yes; the Fed has started up the printing presses as everyone feared from the beginning. This tidbit appeared on the op-ed page of Saturday's Wall Street Journal:

"Thursday, the Federal Reserve released the latest data on its balance sheet, which has ballooned by some $500 billion to $1.5 trillion in the past month. That may sound alarming, but it beats cutting interest rates across the board to prop up the banks. Those extra Fed assets and liabilities can be worked off as the crisis passes without the long-term inflationary impact of pushing interest rates still further into negative territory. By lending freely in a bank run until they stop running, the Fed can make banks pay for their desire for safety while contributing to financial stability." (Wall Street Journal)

"$1.5 trillion"? But the Fed's balance sheet is only $900 billion. Where is the extra money coming from? Gutenberg, no doubt.

Rep. Peter DeFazio made an impassioned plea on the floor of the House in a failed effort to stop Paulson's bailout. It's a good summary of the bill's shortcomings as well as an indictment of its author:

Rep. Peter DeFazio: "This $700 billion bill is not aimed at the real economy in America. Not one penny of it will go to Main Street. It is aimed solely at the froth on Wall Street, the speculators on Wall Street, the non productive people on Wall Street the certifiably smart , masters of the universe, like Secretary of the Treasury Henry Paulson who created these weapons of financial destruction and now, lit the fuse by claiming there would be worldwide economic collapse if we didn't pass this bill to bail out Wall Street....I believe there are simpler answers. I just came from a meeting with William Isaacs who was head of the FDIC, they deal with banks. Mr. Paulson was a speculator on Wall Street; he deals with speculation. He doesn't understand regulative banking. (What is happening is) there is a tremendous amount of pressure being applied by some very powerful creditors such as the People's Republic of China who own a lot of this junk ($450 billion) and they want their money back or they're threatening us. That is not a good reason for going ahead with this faulty proposal. It does not deal with the underlying problems in housing.

If we don't deal with the foreclosures and the deteriorating values, then, when the values drop another 5 or 10 percent, we're going to find there's another trillion dollars in junk securities out there and we will have already maxed out our credit and more people will have already lost their jobs. People are not spending because they are afraid they will lose their jobs. Their wages haven't increased. They are worried about the real economy, not the Wall Street economy. This bill will not solve the underlying problems.

There is a cheaper, low cost alternative. The FDIC should declare an emergency. That would give them the power to assess the same guarantee to all bank depositors. (According to Isaacs) That would immediately free up all interbank lending. It would immediately bring a flood of foreign deposits into the US because we would be a safe haven for depositors. But Isaacs is a regulator; a regulator with experience who piloted this country out of the savings and loans crisis and saved us a bunch of money. He's not a big-time Wall Street speculator who came down here and got appointed by George Bush with three-quarters of a billion dollars in his pocket from money he had made creating these financial weapons of mass destruction. So, we are listening to the wrong guy here...Don't be stampeded!" (Watch the whole 5 minute video http://www.infowars.com/?p=5056)

DeFazio is exactly right, especially about Paulson. As the New York Times article on Friday, "Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk", points out, Paulson, as chairman of Goldman Sachs, was one of the leaders of the five investment banks, who duped the SEC into loosening the rules on capital requirements which created the problems we are now facing.

According to the Times:

(The Big 5 investment banks) "wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments."

This is the crux of the matter. Paulson polluted the system by bending the rules for the prudent leveraging of assets so he and his dodgy friends could maximize their profits. It's all about the bottom line. Paulson walked away with hundreds of millions of dollars in a scam that has now put the nation's economic future at risk.

Last year the five Wall Street behemoths had "combined assets of more than $4 trillion". Now, everyone can see that it was all froth created through extreme leveraging that was intentionally ignored by S.E.C. boss Chris Cox. Now the banks are getting clobbered by short-sellers that are going from one financial institution to the next making them prove that they are sufficiently capitalized. They know its all a smokescreen, so they are saying, "Show me the money". One by one, the investment banks have fallen by the wayside. If the SEC was really operating in the public's interest, they'd being thumbing through G-Sax and Morgan Stanley's balance sheets right now making them prove that they're solvent. Instead, Cox has declared a moratorium on short selling while the investment banks have positioned themselves to get multi-million dollar taxpayer treats for their crappy assets. Where's the justice?


As for Paulson's "No Banker Left Behind" boondoggle; it is not an effective way to recapitalize the banks and it doesn't fix the systemic problems in the credit markets. All it does is put the US at greater risk of losing its Triple A rating. If that happens it will be impossible to attract foreign capital which would be the equivalent of detonating a nuclear bomb in every city in the country. This is not the time to be putting more chips on the table like a riverboat gambler. It's time to show judgment and restraint, otherwise this whole thing will blow up. Emergency measures should be thoroughly examined so that liquidity is provided for the credit markets as fast as possible. The markets are already in meltdown-mode.

"Real" economists--not the ideological hacks and loose cannons in the Bush administration--understand the fundamental problems and have generally agreed on a solution. It is a difficult issue, but one that anyone can grasp if they make the effort. Watch this 8 minute video with Nobel Prize winning economist, Joseph Stiglitz, http://www.cnbc.com/id/15840232?video=874100965&play=1

Stiglitz says: "There is a growing consensus among economists that any bail-out based on Paulson's plan won't work. If so, the huge increase in the national debt and the realization that even $700bn is not enough to rescue the US economy will erode confidence further and aggravate its weakness.

Stiglitz's point is proven by the fact that the Dow Jones cratered after reports circulated that the House had passed the bailout. Paulson's fiasco has not calmed the markets at all; in fact, investors have begun to race for the exits. Confidence is draining from the system faster than the deposits in the dwindling money market accounts.

Stiglitz adds:

"This is not a good bill...It is based on "trickle down" economics which says that is you throw enough money at Wall Street and than some of it will go into ways that help the economy, but it is not really doing what needs to be done to recapitalize the banking system, stem the hemorrhaging of foreclosures, and deal with the growing unemployment..... We have seen these problems with banks before we know how to repair them. (Stiglitz worked with the World Bank during many similar crises) So why didn't they use these "tried and proven" methods? They (Paulson) decided that rather than a capital injection; they would try the almost impossible task of buying up all these bad assets, millions of mortgages and complex products, and hope that this will somehow solve the problem. It doesn't fix the big hole in the banks balance sheets, unless they vastly overpay for these products (Mortgage-backed securities)"


This isn't rocket science. Many of the economists who disapproved of the bill have been through this drill before and they know what to do. The way to proceed is to have the US Treasury buy preferred shares in the banks that are not already technically insolvent. (The insolvent banks will have to be unwound by the FDIC) This will give the banks the capital they need to continue operations while protecting the taxpayer who gets an equity share with "upside potential" when the bank starts making profits again.

This is how one goes about recapitalizing the banking system IF that is the real intention. Paulson's phony-baloney operation suggests he has something else up his sleeve; some ulterior motive like rewarding his friends on Wall Street with boatloads of taxpayer money or buying-back the toxic mortgages from foreign investors so they don't stop buying US debt. Here's how Bloomberg's Jonathan Weil sums it up:


"If the government wants to save dying banks before they take others down with them, it should choose the clean and direct path: Inject capital into them. Take ownership stakes in return. And, where that's not feasible, seize them and sell their assets in an orderly way, just as the Resolution Trust Corp. did after the 1980s savings-and-loan crisis.

Infusing capital directly, though, was too simple for Paulson. It lacked subterfuge. He decided the way to save the financial system from the evils of structured finance was through more structured finance.
Instead of asking Congress to let Treasury recapitalize needy banks, he proposed buying some of their troubled assets at above-market prices. This would have let other banks create phony capital by writing up the values of similar assets on their own balance sheets, using Treasury's prices as their guide. Small Wonder.

In short, Paulson's plan was one part robbery (with the banks doing the robbing) and one part accounting sleight of hand. No wonder House members rejected it.(at first)
If Paulson or congressional leaders devise a Plan B, they should look to the example of Fortis, Belgium's biggest financial-services company. This week, the governments of Belgium, the Netherlands and Luxembourg invested 11.2 billion euros ($16.3 billion) in Fortis. In exchange, they got ownership of almost half its banking business.

That's how a government intervention is supposed to work. The company gets fresh capital, which has the added benefit of not being fake. The buyers get equity. Legacy shareholders get slammed with dilution. And if the company recovers, the government can sell shares to the public later, maybe even at a profit." (Jonathan Weil, Bloomberg News)


Direct capital injections is the best way to recapitalize the banks and save the taxpayer money. Paulson's plan is just more flim-flam intended to reflate the value of sketchy assets. So far, investors and taxpayers are equally skeptical about the bill's prospects. Interbank lending remains clogged and the VIX, the "fear gauge", is still rising to record levels. Paulson hasn't fooled anyone.

This bill does nothing to reduce foreclosures, reassure the markets, decrease unemployment, unfreeze the bond market, increase consumer spending, or put a floor under the stumbling dollar. All it does is hand out a few ripe plums to Paulson's buddies on Wall Street while (temporarily) soothing the frayed nerves of China's Finance Minister. That doesn't mean that China will be increasing its stash of US Treasuries or other US financial assets anytime soon. As the saying goes: "Fool me once, shame on you. Fool me twice, ..."

Worst of all, Paulson's bailout bill wastes precious resources on a plan that is considerably wide of the mark. These problems have to be dealt with quickly to avert a larger catastrophe. Here's how Nouriel Roubini sees it:

"It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly...The Commercial paper market is shut down...Corporations have no access to long or short term credit markets. Brokers are increasingly not dealing with each other. The interbank market is seizing up...This cannot continue for more than a few days. It is the economic equivalent to cardiac arrest." (Nouriel Roubini's Global EconoMonitor)

The levies have already broken, and the water is flooding into the city. The Federal Reserve will be forced to act. Expect an emergency rate cut of 50 basis points or more in the next 10 days coordinated with cuts in the other G-7 countries. Also, expect another bailout by the time Obama or McCain take office. As the French premier, Francois Fillon, warned on Saturday the world is “on the edge of the abyss”.

Rumsfeld Updated Army's Continuity of Operations Plan before 9/11

Rumsfeld Updated Army's Continuity of Operations Plan before 9/11

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Ten months before the September 11, 2001 terrorist attacks, Secretary of Defense Donald Rumsfeld approved an updated version of the U.S. Army's secret operational Continuity of Government (COG) plans.

A draft document published by the whistleblowing website Wikileaks

Issued by Headquarters, Department of the Army and signed off by Secretary of Defense Donald Rumsfeld and the Secretary of the Army, the document is affixed with a warning: "Destruction Notice: Destroy by any method that will prevent disclosure of contents or reconstruction of the document." The restricted document as published by Wikileaks states:

entitled, "Army Regulation 500-3, Emergency Employment of Army and Other Resources. Army Continuity of Operations (COOP) Program," dated 19 January 2001, spells out changes in Army doctrine.
History. This regulation is a revision of the original regulation that was effective on 10 July 1989. Since that time, no changes have been published to amend the original.

Summary. This regulation on the Army Continuity of Operations (COOP) Program has been revised to update Army COOP policy and extend the requirement for all-hazards COOP planning to all Army organizations. Classified information contained in the 1989 version of this AR has been removed and placed in a classified HQDA Operations Plan (OPLAN).

Applicability. This regulation applies to the Active Army, the U.S. Army Reserve (USAR), and when federalized to the Army National Guard (ARNG). In the event of conflict between this regulation and approved OSD or JCS publications, the provisions of the latter will apply. ("Army Regulation 500-3, Emergency Employment of Army and Other Resources. Army Continuity of Operations (COOP) Program," 19 January 2001, p. 3) [emphasis added]

"All-hazards COOP planning" is described as the means by which "the Army remains capable of continuing mission-essential operations during any situation, including military attack, terrorist activities, and natural or man-made disasters." While the Army stresses the updates described in AR 500-3 relate to chemical, biological, nuclear attacks, "natural disasters" and "technical or man-made disasters or accidents," current Army doctrine is also heavily weighted towards contingency planning for "civil disturbances."

Two national "civil disturbance" plans, Garden Plot and Cable Splicer have been operational since the 1960s. Researcher Frank Morales has detailed how,

Under the heading of "civil disturbance planning," the U.S. military is training troops and police to suppress democratic opposition in America. The master plan, Department of Defense Civil Disturbance Plan 55-2, is code-named, "Operation Garden Plot". Originated in 1968, the "operational plan" has been updated over the last three decades, most recently in 1991, and was activated during the Los Angeles "riots" of 1992, and more than likely during the recent anti-WTO "Battle in Seattle." ...

Equipped with flexible "military operations in urban terrain" and "operations other than war" doctrine, lethal and "less-than-lethal" high-tech weaponry, US "armed forces" and "elite" militarized police units are being trained to eradicate "disorder", "disturbance" and "civil disobedience" in America. Further, it may very well be that police/military "civil disturbance" planning is the animating force and the overarching logic behind the incredible nationwide growth of police paramilitary units, a growth which coincidentally mirrors rising levels of police violence directed at the American people, particularly "non-white" poor and working people. (Frank Morales, "U.S. Military Civil Disturbance Planning: The War at Home," in Police State America, ed. Tom Burghardt, Toronto/Montreal: Arm The Spirit/Solidarity, 2002, P. 59)

AR 500-3 should be viewed in this context. Plans for Continuity of Government have been in place since the 1950s. Originally conceived during the Cold War when fears of a nuclear strike envisaged by atomic war-gamers at the RAND Corporation, believed that an immobilization of government functions and a breakdown of civilian rule would follow a nuclear attack. But from their inception, COG planning has been shrouded in secrecy.

In addition to constructing nuclear-proof underground facilities where the civilian leadership could escape a decapitation strike, other COG provisions included a series of executive orders designating which officials would assume Cabinet-level posts and other Executive Branch positions. Officials so designated would constitute a "shadow government" should office holders be killed in an attack "or otherwise incapacitated."

However, when these and other Pentagon "civil disturbance" plans surfaced in the 1980s during the Iran-Contra hearings, they were roundly criticized by members of Congress, civil liberties groups and the media before disappearing once again, down Orwell's "memory hole." The inherent dangers implicit in such plans are that unelected Executive Branch officers could assume the Presidency and other appointed offices subject neither to congressional scrutiny nor judicial oversight.

Exercising sweeping emergency powers buried within Presidential Decision Directives (PDDs), unelected officials could suspend the Constitution, declare martial law and create an Executive Branch dictatorship that rests solely on the power of the U.S. military.

Most troubling, Executive Branch officials under secret rules of a COG regime could suppress and usurp the lawful powers of Congress and the Judicial Branch (by force of arms if deemed necessary) as a means of ensuring "cooperation" under a "unitary executive."

As we have seen, the "unitary executive" theory has been a salient feature of Bushist rule since the December 2000 judicial coup d'état, when the Supreme Court's Bush v. Gore decision handed a contested election to George W. Bush by stopping the vote count in Florida.

Since assuming office, the administration has ruthlessly wielded executive power in order to achieve their antidemocratic agenda: from the looting of the economy through "deregulation," massive deficit spending and tax cuts for their corporate "clients," to waging a preemptive war of conquest in Iraq, the "unitary executive" has systematically shredded America's constitutional system of checks and balances.

The Bush administration put COG plans into operation for the first time in U.S. history in the hours directly following the September 11, 2001 terrorist attacks. They have never been rescinded.

Their implementation involves a rotating staff of 75-150 senior government officials and others from every Cabinet department in two "secure, undisclosed locations" on the East Coast. However, key congressional representatives have been kept out of the loop and House and Senate leaders have said they were not informed the "shadow government" had "gone live."

So secretive are Bush administration plans that Peter DeFazio (D-OR), a member of the House Committee on Homeland Security, was denied access in 2007 to the classified version of the COG plans contained in top secret Presidential Decision Directive annexes. This too, is unprecedented.

While the Bush administration admitted that COG was activated in 2001, their disclosure came only after The Washington Post broke the story based on confidential administration sources troubled by the scope of the program and its secretive implementation.

Since the late 1980s, Rumsfeld was a habitué of COG exercises along with Vice President Dick Cheney. Indeed early COG drills had been organized by the right-wing Center for Strategic and International Studies (CSIS). As investigative journalist Andrew Cockburn revealed in his definitive political biography of the former Defense Secretary:

This highly secret program was known as Project 908, and among the individuals earmarked to take power when disaster struck was Donald Rumsfeld. ... There, for several days, he would be immured in artificial caverns, staring at electronic displays streaming data of disaster and confusion, sleeping on cots and subsisting on the most austere rations. ...

Insofar as the COG games gave the illusion of reality, they taught Rumsfeld and his fellow players some dangerous lessons, particularly when the fall of the Soviet Union induced some changes in the usual scenarios. Although the exercises continued, still budgeted at over $200 million in the Clinton era, the vanished Soviets were now customarily replaced by terrorists. The terrorism envisaged however, was almost always state-sponsored. ...

There were other changes, too. In earlier times the specialists selected to run the "shadow government" had been drawn from across the political spectrum, Democrats and Republicans alike. But now, down in the bunkers, Rumsfeld found himself in politically congenial company, the players' roster being filled almost exclusively with Republican hawks. (Andrew Cockburn, Rumsfeld: His Rise, Fall, and Catastrophic Legacy, New York: Scribner, 2007, pp. 85-86, 88)

As researcher Peter Dale Scott revealed, in early 2006 the Department of Homeland Security awarded a $385 million contract to a Halliburton subsidiary, KBR, to provide "temporary detention and processing facilities." Scott wrote,

The contract--announced Jan. 24 by the engineering and construction firm KBR--calls for preparing for "an emergency influx of immigrants, or to support the rapid development of new programs" in the event of other emergencies, such as "a natural disaster." The release offered no details about where Halliburton was to build these facilities, or when. ...

After 9/11, new martial law plans began to surface similar to those of FEMA in the 1980s. In January 2002 the Pentagon submitted a proposal for deploying troops on American streets. One month later John Brinkerhoff, the author of the 1982 FEMA memo, published an article arguing for the legality of using U.S. troops for purposes of domestic security. (Peter Dale Scott, "Homeland Security Contracts for Vast New Detention Camps," Pacific News Service, February 8, 2006)

The DHS contract to KBR had been preceded by the April 2002 creation of the Pentagon's Northern Command (NORTHCOM), specifically empowered by the Bush administration for domestic U.S. military operations in direct violation of Posse Comitatus prohibitions forbidding the use of the military for domestic law enforcement. At the time, Defense Secretary Rumsfeld called NORTHCOM's launch "the most sweeping set of changes since the unified command system was set up in 1946."

Sweeping indeed! Last month Army Times reported that the Army's "3rd Infantry Division's 1st Brigade Combat Team [BCT] has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys. Now they're training for the same mission--with a twist--at home." According to Army Times,

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks. ...

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities. ...

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack. ...

The 1st BCT's soldiers also will learn how to use "the first ever nonlethal package that the Army has fielded," 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.

"It's a new modular package of nonlethal capabilities that they're fielding. They've been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we're undertaking we were the first to get it."

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets. (Gina Cavallaro, "Brigade Homeland Tours Start Oct. 1," Army Times, September 8, 2008)

While senior Pentagon brass have downplayed the significance of deploying a BCT that has taken part in aggressive occupation duties to suppress the Iraqi people's resistance, Col. Lou Vogler, NORTHCOM's chief of future operations said in an interview that the military "will integrate with law enforcement to understand the situation and make sure we're aware of any threats." An article published by the Army News Service disclosed,

During the exercise, commanders and staff of the force will train, rehearse and exercise--from academic classes to making decisions and executing orders--all to help prepare them for the mission they will assume on Oct. 1, said Vogler.

"It's an opportunity for network building in an unprecedented assignment of forces," said [Marine Corps Lt. Col.] Shores. "DOD always had allocated contingency sourced forces--but this is precedent-setting network building with the forces that we ultimately will go out and execute with. It's an opportunity to get to know our forces, to see them in execution, to mission-orient them and be that much better--to be that much more responsive."

One goal of the exercise is to exercise with partners from the civilian agencies they would support. To that end, the Federal Emergency Management Agency (FEMA) and other interagency representatives are participating to ensure integration with civilian consequence managers who would lead a response, said Vogler.

"The overall federal response builds on the local and state response in accordance with the incident command system and existing plans and processes that are out there," said Vogler. "The response force would supplement local efforts." ("Consequence Management Response Force to join Army Northern Command," Army News Service, September 15, 2008)

Vogler and Shores were discussing an exercise code-named Vibrant Response, that took place September 8-19 at Fort Stewart in Georgia. Three brigades form the core of NORTHCOM's Consequence Management Response Force: the 1st Brigade Combat Team, 3rd Army Division; the 1st Medical Brigade, Fort Hood, Texas, and the 82nd Combat Aviation Brigade, Fort Bragg, North Carolina. All three units participated in Vibrant Response.

As researcher and analyst Michel Chossudovsky comments:

The BCT is an army combat unit designed to confront an enemy within a war theater.

With US forces overstretched in Iraq, why would the Pentagon decide to undertake this redeployment within the USA, barely one month before the presidential elections?

The new mission of the 1st Brigade on US soil is to participate in "defense" efforts as well as provide "support to civilian authorities".

What is significant in this redeployment of a US infantry unit is the presumption that North America could, in the case of a national emergency, constitute a "war theater" thereby justifying the deployment of combat units.

The new skills to be imparted consist in training 1st BCT in repressing civil unrest, a task normally assumed by civilian law enforcement.

What we are dealing with is a militarization of civilian police activities in derogation of the Posse Comitatus Act. ("Pre-election Militarization of the North American Homeland. US Combat Troops in Iraq repatriated to 'help with civil unrest'," Global Research, September 26, 2008)

One scenario envisaged by Chossudovsky is that "civil unrest resulting from from the financial meltdown is a distinct possibility, given the broad impacts of financial collapse on lifelong savings, pension funds, homeownership, etc."

One might reasonably inquire, what "precedent-setting network" does the Army have in mind that would "ensure integration" with "civilian agencies" such as FEMA (a branch of Homeland Security)? As the World Socialist Web Site reports:

It is noteworthy that the deployment of US combat troops "as an on-call federal response force for natural or manmade emergencies and disasters"--in the words of the Army Times--coincides with the eruption of the greatest economic emergency and financial disaster since the Great Depression of the 1930s.

Justified as a response to terrorist threats, the real source of the growing preparations for the use of US military force within America's borders lies not in the events of September 11, 2001 or the danger that they will be repeated. Rather, the domestic mobilization of the armed forces is a response by the US ruling establishment to the growing threat to political stability. (Bill Van Auken, "Army deploys combat unit in U.S. for possible civil unrest," World Socialist Web Site, 25 September 2008)

As the 2001 COOP planning document describes, a host of on-going Army plans and exercises have been revised by the Bush administration. In addition to Vibrant Response discussed above, they include: Plan EXCALIBUR, a COG Army training exercise; ADOBE, described by investigative journalist William M. Arkin as a "FEMA continuity of government special access program designation." Arkin describes special access programs or SAPs as,

Classified research and development, acquisition program, operation, intelligence activity, or plan that is so sensitive or critical that the value of the information warrants enhanced protection beyond that normally provided for access to Confidential, Secret, or Top Secret information. (William M. Arkin, Code Names: Deciphering U.S. Military Plans, Programs, and Operations in the 9/11 World, Hanover, NH: Steerforth Press, 2005, p. 598)

The impetus for revising Army COOP was, according to AR 500-3 primarily because,

The end of the Cold War and the breakup of the former Soviet Union significantly reduced the probability of a major nuclear attack on CONUS but the probability of other threats has increased. Army organizations must be prepared for any contingency with a potential for interruption of normal operations. To emphasize that Army continuity of operations planning is now focused on the full all-hazards threat spectrum, the name "ASRRS" has been replaced by the more generic title "Continuity of Operations (COOP) Program." (p. 13)

Towards this end, the Rumsfeld-era document states that the Army's new "mission-critical" functions will be restructured so that, "Army COOP plans must ensure that the Army remains capable of continuing mission-essential operations during any situation, including military attack, terrorist activities, and natural or man-made disasters." (p. 13) The Army, following various contingencies analyzed in the document will "coordinate with mission-essential external organizations and agencies." (p. 14)

So sensitive are the political ramifications of these plans that under the heading, 3-12 Operational Security (OPSEC), the Army avers,

a. The success of COOP planning relies on denying access by unauthorized parties to information on COOP plans, procedures, capabilities and facilities.

b. Overhead imagery, signals intelligence, human sources, and exploitation of open literature during peacetime are threat capabilities used to gain knowledge of Army emergency plans, command and control systems, and facilities.

c. See Appendix B, Security Classification Guide, for guidance on the level of classification of COOP-related information. (COOP, op. cit., p. 20)

Appendix A of AR 500-3 lists relevant references for changes included in the COOP planning document. These include:

Section I
Required Publications


HQDA Operations Plan EXCALIBUR, 30 April 1999 (Being Revised)
HQDA Continuity of Operations Plan (cited in para 1-4.f)

Section II

Related Publications a related publication is merely a source of additional information. The user does not have to read it to understand this publication.

Executive Order 12656
National Security Emergency Preparedness (NSEP), 18 November 1988

DoD Directive (Dodd) 2000.12
DoD Antiterrorism/Force Protection (AT/FP) Program, 13 April 1999

CJCSM 3410.01
Continuity of Operations Plan for the Chairman of the Joint Chiefs of Staff (COOP-CJCS), 1 March 1999

Executive Order 12787
Prescribing the Order of Succession of Officers to Act as Secretary of Defense, 31 December 1991

DoDD 3020.26
Continuity of Operations (COOP) Policy and Planning, 26 May 1995

DoD 3020.26P
Continuity of Operations Plan, 21 June 2000 (Classified SECRET)

DoDD 3020.36
Assignment of National Security Emergency Preparedness (NSEP) Responsibilities to DoD Components, 2 November 1988

DoDD 3025.15
Military Support to Civil Authorities (MSCA), 18 February 1997

The Federal Response Plan, April 1999

Presidential Decision Directive (PDD) 67, (Top Secret) Enduring Constitutional Government (ECG) and Continuity of Government (COG) Operations, Oct 21, 1998

Federal Preparedness Circular 65, Federal Executive Branch Continuity of Operations, (COOP), July 26, 1999

As Peter Dale Scott reported in CounterPunch, apparently members of Congress are considered "unauthorized parties" to be denied access "to information on COOP plans, procedures, capabilities and facilities." Congressman DeFazio had been denied access to the classified annexes of National Security and Homeland Security Presidential Directive (NSPD 51/HSPD 20) Scott wrote,

NSPD 51 contains "classified Continuity Annexes" which shall "be protected from unauthorized disclosure." Congressman DeFazio twice requested to see these Annexes, the second time in a letter cosigned by House Homeland Security Committee Chairman Bennie Thompson and Oversight Subcommittee Chairman Christopher Carney. It was these requests that the White House denied. ...

DeFazio's inability to get access to the NSPD Annexes is less than reassuring. If members of the Homeland Security Committee cannot enforce their right to read secret plans of the Executive Branch, then the systems of checks and balances established by the U.S. Constitution would seem to be failing.

To put it another way, if the White House is successful in frustrating DeFazio, then Continuity of Government planning has arguably already superseded the Constitution as a higher authority. (Peter Dale Scott, "The Showdown," CounterPunch, March 31, 2008)

With the stunning revelations published by Wikileaks, it is abundantly clear that top Bush administration officials were busily revising Continuity of Government plans, including "civil disturbance" contingencies for suspending the Constitution and imposing martial law, long before the 9/11 attacks.

Since that fatal and tragic day seven long years ago, we have been told repeatedly by the government and their media sycophants that 9/11 was the day "when everything changed."

We now know thanks to Wikileaks, that as with the invasion and occupation of Iraq, the unprecedented and lawless surveillance of Americans, the illegal detention and torture of prisoners of war, that Bush administration assertions are no more than a pack of murderous lies.

One fact is abundantly clear from the mass of conflicting evidence and assertions made by proponents of various theories surrounding the 9/11 events: AR 500-3 demonstrates that from the very first moments after being installed in office, the Bush regime was involved in a "controlled demolition" of the U.S. Constitution.