Wednesday, October 29, 2008

U.S. pulls the plug on the world

U.S. pulls the plug on the world

The U.S. administration has prompted a huge surge in the U.S. dollar, which may help refinance its financial sector. The cost is a currency whirlwind that threatens the collapse not just of banks and companies but entire countries.

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In the past week the financial crisis, which began in banking and spread to stocks, has careered into the currency markets. The U.S. actively decided back in September 2008 to shut down the investment banks that lend to the biggest professional investors. This has caused those investors to sell anything and everything and to settle their trades.

The result was a whirlwind of liquidation. Korean won, Turkish lira, Brazilian real, British pounds and commodities from oil and metals, all were sucked into the downdraft.

Like a speeding truck heading home, dollar investors left a vacuum in their wake, a vortex of dust, where there had been steadily growing emerging market economies.

And you thought the U.S. authorities were doing their best to prop up asset prices? As the economic lights go out and the U.S. administration fumbles in the dark, maybe it's accidentally cut off the hand that feeds it.

Or has it deliberately prompted a shakeout of asset values and a flight to the dollar? On October 3 the $US 700 billion bailout of banks' bad bets was signed into law, after U.S. Treasury Secretary Henry Paulson assured U.S. Congress it was the only way to avoid financial Armageddon. The stated aim was to support asset prices.

But on September 22, with less publicity, Morgan Stanley and Goldman Sachs gave up their investment bank status, which had allowed them to borrow and lend much more than traditional banking companies. That was just seven days after another investment bank, Lehman Brothers, filed for bankruptcy protection.

These prime brokers, or investment banks, provided the loans that allowed America's professional investors to hunt worldwide in search of ever-bigger game. While U.S. investors earned profits, foreign countries benefited from U.S. investment in their bank, retail and property sectors.

All this dates back to September 2004, when the U.S. Securities and Exchange Commission gave in to pleading from the big five investment banks, who wanted to borrow more heavily against reserves that served to cushion against losses. This allowed them to raise their leverage up to 20, 30 or 40 times, in other words, to borrow $US 30 against every dollar of assets – and lend it on.

They certainly lent it! For mortgage-backed securities, collateralised debt obligations, credit default swaps and dangerous stuff with even safer sounding names.

Read more here.

The banks were Merrill Lynch and Bear Stearns along with Morgan Stanley, Lehman Brothers and Goldman Sachs headed at the time by Henry Paulson.

Treasury Secretary Paulson knows very well who lends to the hedge funds, how shutting down the prime broker system would force them to liquidate their trading strategies and cause a broad sell-off of all kinds of assets.

But what was he, along with the administration, trying to achieve? As professional investors dump foreign currencies and pile the dollars into that homeward bound truck, they're pushing up the U.S. currency.

The U.S. needs its currency to be strong. The U.S. is a debtor nation, spending more than it earns, dependent on foreign loans. Foreigners like the Chinese are financing the bailout of U.S. banks.

If the dollar were to crash in this environment the U.S., reliant as it is on borrowing, would struggle to raise the debt funding it needs to buy its way out of this crisis.

You would expect the dollar to fall as one state after another tips into recession and for gold to rise in times of uncertainty. Instead the reverse is happening.

Gold was approaching $US 700 in the last week of October, down from about $US 1200 just months before. It's a big leap to suggest the U.S. may be shorting gold as a way of supporting the dollar, but causing distressed hedge funds to sell gold amounts to the same thing.

There are other arguments for the rampant dollar. Some people argue that the U.S. entered this financial crisis earlier than other countries, that its housing market has been falling since 2006, and that the U.S. will recover before other countries. Traders may be anticipating interest rate cuts in the UK and Eurozone, while in the U.S. rates have less far to fall.

Companies are certainly buying dollars in order to pay off their debts. However, none of this explains the role of the U.S. administration in driving down asset prices.

I have argued before that governments should focus on supporting the real economy, on saving jobs and less on bailing out the banks. It is certainly not the job of governments to support asset prices at a particular level – and certainly not to spend $US 700 billion buying them off their banking chums.

Maybe Paulson's seen the light but, in that case, may the U.S. taxpayers have their $US 700 billion back please?

Tough times: Congress Grew 13 Percent Richer In 2007

Tough times: Congress Grew 13 Percent Richer In 2007

By Rob Hotakainen

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Times are tough, but don't worry about most members of Congress making ends meet.

Their collective wealth grew by 13 percent last year, leaving them in better shape than most Americans to make it through an economic downturn, according to a new analysis of personal financial reports.

Overall, nearly two of every three senators are millionaires. That includes presidential candidates Sen. John McCain, R-Ariz., and Sen. Barack Obama, D-Ill. In the House, 39 percent of all members belong to the exclusive club.

Only 1 percent of all Americans are considered millionaires.

"With a median net worth of $746,000, most members of Congress have a comfortable financial cushion to ride out any recession," said Sheila Krumholz, executive director of the nonpartisan Center for Responsive Politics, which conducted the study.

In the House of Representatives, Rep. Jane Harman, D-Calif., ranks No. 1, with $397 million, followed by Rep. Darrell Issa, R-Calif., with $343 million. Rep Robin Hayes, R-N.C., ranks third, with $173.4 million. House Speaker Nancy Pelosi, D-Calif., ranks sixth, with $62 million.

In the Senate, the two Democrats from Massachusetts claimed two of the top three spots.

Sen. John Kerry led the pack, with $336 million, while Sen. Edward M. Kennedy ranked third, with $104 million. Sen. Herb Kohl, D-Wis., ranked second, with $241.5 million. Overall, senators had a median net worth estimated at $1.7 million.

The 535 members of Congress, who earn average annual salaries of $169,000 and receive cost-of-living pay increases, had a total net worth of $3.7 billion last year. Although some are likely to take a hit from Wall Street's woes, their average net worth soared by 61 percent from 2004 to 2007.

However, not all members are wealthy and some appear to be bankrupt. The study found that 16 House members and three senators had an average net worth of less than zero.

Obama ranked as one of the biggest financial winners, with his net worth increasing from $800,000 in 2006 to $4.7 million last year, thanks mainly to royalties from his two best-selling books. McCain had a net worth estimated at $28.5 million, with most of the wealth attributed to his wife Cindy's family fortune.

Authors of the study said it's impossible to give a precise net worth for members of Congress because their individual assets and liabilities are disclosed in broad ranges. To conduct the study, the Center for Responsive Politics determined a member's minimum net worth and maximum net worth and then calculated an average, which was used to rank the members.

Because the law does not require them to do so, members of Congress don't disclose the value of their homes unless they produce income. As a result, a member's true net worth is likely to be much higher than what gets reported.

"Members of Congress don't make it easy for the public to keep tabs on their personal holdings and any conflicts of interest those holdings present," said Dan Auble, who manages the center's database of lawmakers' financial information.

Who's the wealthiest of them all?

A new study suggests that members of Congress are in much better shape than most Americans to make it through an economic slowdown.

Here's a list of the members who had the highest average net worth last year:

Senate

1 John Kerry (D-Mass.)........$336,224,883

2 Herb Kohl (D-Wis.)........$241,545,513

3 Edward M. Kennedy (D-Mass.)........$103,560,020

4 Jay Rockefeller (D-W.Va.)........$93,715,011

5 Frank Lautenberg (D-N.J.)........$89,509,099

6 Dianne Feinstein (D-Calif.)........$84,171,162

7 Gordon Smith (R-Ore.)........$46,127,014

8 Olympia Snowe (R-Maine)........$33,308,537

9 Claire McCaskill (D-Mo.)........$32,428,089

10 Elizabeth Dole (R-N.C.)........$31,421,472

House of Representatives

1 Jane Harman (D-Calif.)........$397,412,077

2 Darrell Issa (R-Calif.)........$343,457,521

3 Robin Hayes (R-N.C.)........$173,409,173

4 Vern Buchanan (R-Fla.)........$165,748,714

5 Michael McCaul (R-Texas)........$64,073,077

6 Nancy Pelosi (D-Calif.)........$62,468,047

7 Carolyn Maloney (D-N.Y.)........$50,297,547

8 Rodney Frelinghuysen (R-N.J.)........$47,350,092

9 Nita Lowey (D-N.Y.)........$43,716,445

10 Gary Miller (R-Calif.)........$39,978,021

Source: Center for Responsive Politics

Two Parties, One Imperial Mission The US Empire will Survive Bush

Two Parties, One Imperial Mission, The US Empire will Survive Bush

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The United States may emerge from the Iraq fiasco almost unscathed. Though momentarily disconcerted, the American empire will continue on its way, under bipartisan direction and mega-corporate pressure, and with evangelical blessings. It is a defining characteristic of mature imperial states that they can afford costly blunders, paid for not by the elites but the lower orders. Predictions of the American empire's imminent decline are exaggerated: without a real military rival, it will continue for some time as the world's sole hyperpower.

But though they endure, overextended empires suffer injuries to their power and prestige. In such moments they tend to lash out, to avoid being taken for paper tigers. Given Washington's predicament in Iraq, will the US escalate its intervention in Iran, Syria, Lebanon, Afghanistan, Pakistan, Sudan, Somalia or Venezuela? The US has the strongest army the world has ever known. Preponderant on sea, in the air and in space (including cyberspace), the US has an awesome capacity to project its power over enormous distances with speed, a self-appointed sheriff rushing to master or exploit real and putative crises anywhere on earth.

In the words of the former secretary of defense, Donald Rumsfeld: "No corner of the world is remote enough, no mountain high enough, no cave or bunker deep enough, no SUV fast enough to protect our enemies from our reach." The US spends more than 20% of its annual budget on defense, nearly half of the spending of the rest of the world put together. It's good for the big US corporate arms manufacturers and their export sales. The Gulf states, led by Saudi Arabia, purchase billions of dollars of state-of-the-art ordnance.

Instead of establishing classic territorial colonies, the US secures its hegemony through some 700 military, naval and air bases in over 100 countries, the latest being in Bulgaria, the Czech Republic, Poland, Rumania, Turkmenistan, Kyrgyzstan, Tajikistan, Ethiopia and Kenya. At least 16 intelligence agencies with stations the world over provide the ears and eyes of this borderless empire.

The US has 12 aircraft carriers. All but three are nuclear-powered, designed to carry 80 planes and helicopters, and marines, sailors and pilots. A task force centerd on a supercarrier includes cruisers, destroyers and submarines, many of them atomic-powered and equipped with offensive and defensive guided missiles. Pre-positioned in global bases and constantly patrolling vital sea lanes, the US navy provides the new model empire's spinal cord and arteries. Ships are displacing planes as chief strategic and tactical suppliers of troops and equipment. The navy is now in the ascendant over the army and the air force in the Pentagon and Washington.

The US military presence in the Eastern Mediterranean, Red Sea, Persian Gulf and Indian Ocean from 2006 to 2008 shows how the US can flex its muscles half-way around the globe (and deliver humanitarian relief at gunpoint for political advantage). At least two carrier strike groups with landing craft, amphibious vehicles, and thousands of sailors and marines, along with Special Operations teams, operate out of Bahrain, Qatar and Djibouti. They serve notice that, in the words of the current defense secretary, Robert Gates, speaking in Kabul in January 2007, the US will continue to have "a strong presence in the Gulf for a long time into the future".

A week later the undersecretary of state for political affairs, Nicholas Burns, said in Dubai: "The Middle East isn't a region to be dominated by Iran. The Gulf isn't a body of water to be controlled by Iran. That's why we've seen the US station two carrier battle groups in the region." This is not new. In his farewell address in January 1980, weeks after the start of the hostage standoff in Tehran and the Soviet invasion of Afghanistan, President Jimmy Carter made it "absolutely clear" that an attempt by any outside force to gain control of the Persian Gulf will be regarded as an assault on the US, and such an assault will be repelled by any means including military force. He said that the Russian troops in Afghanistan not only threatened a region that "contains more than two-thirds of the world's exportable oil" but were at the ready "within 300 miles of the Indian Ocean and close to the Strait of Hormuz, a waterway through which most of the world's oil must flow".

A quarter of a century later, former secretary of state Henry Kissinger updated the Carter Doctrine, displacing the threat from Moscow to Tehran: should Iran "insist on combining the Persian imperial tradition with contemporary Islamic fervour, it simply cannot be permitted to fulfil a dream of imperial rule in a region of such importance to the rest of the world".

Ultra-modern conventional armed forces and weapons are ill-suited to fight today's asymmetrical wars against non-state actors resorting to sub-conventional arms and tactics. But supercarriers, supersonic aircraft, anti-missile missiles, military satellites, surveillance robots, and unmanned vehicles and boats are not going out of season. Intervention, direct and indirect, open and covert, military and civic, in the internal affairs of other states has been standard US foreign policy since 1945. The US has not hesitated to intervene, mostly unilaterally, in Afghanistan, Pakistan, Iraq, Lebanon, Palestine, Iran, Syria, Somalia, Sudan, Ukraine, Georgia, Kazakhstan, Bolivia and Colombia, in pursuit of its imperial interest.

Taking the USAID (United States Agency for International Development), Fulbright Programme and Congress for Cultural Freedom of the anti-Communist cold war as their model, the stalwarts of the new global war on terror have created equivalents in the State Department's Millennial Challenge and Middle East Partnership Initiative. The defense department enlists universities through Project Minerva to help with the new model counterinsurgency warfare and unconventional military state-building operations.

The US economy, syncretic culture and Big Science are unequalled. Despite huge fiscal and trade deficits, and the Wall Street banking and insurance meltdown, which have unhinged its financial system and rippled across the global economy, overall the US economy remains robust and pacesetting in creative destruction. Never mind the social costs at home and abroad. But its shrinking industrial and manufacturing sectors may be the weakest link.

The US still holds a substantial lead in research, development and patents in cybernetics, molecular biology and neuroscience. This is facilitated by publicly, privately and corporately funded research universities and laboratories that establish outposts overseas as they draw in brains from around the globe.

They remain the US model for the rest of the world, as do its globalising museums, corporate architectural idioms and marketing strategies (political and commercial). It is no surprise that the US reaps disproportionate harvests of Nobel Prizes, not only in economics but in the natural sciences; or that American English has become a global language. This is both cause and effect of the immense leverage of US multinationals. US popular and consumer cultures penetrate the most remote places on the planet. Along the shifting periphery Washington and K Street (the Washington street known for its lobbies) join forces with collaborating elites and regimes.

This American empire has significant family resemblances with past empires in its grab for critical natural resources, mass markets and strategic outposts. Americans know they have a considerable stake in the persistence of their imperium. Some social strata benefit more from its spoils than others. Still, it is profitable socially, culturally and psychologically, especially for its intelligentsia, liberal professions and media.

The empire has extraordinary reserves of hard and soft power for persisting in its interventionism. The US has the wherewithal and will to stay a face-saving course in Iraq. There is a deficit of combat troops for large conventional ground operations and a strategic incoherence in the face of irregular warfare against insurgent, guerrilla and terrorist forces. But the deficit of soldiers will be remedied. Private contractors will raise armed and civilian mercenaries, preferably at cut-rate wages from third world dependencies.

Washington masks its imperial self-interest with declamations about the promotion of civil rights, social welfare, women's liberation, the rule of law and democracy.

However, for US power elites, regardless of party, there is an absolute need and priority: until the implosion of the Soviet Union it was to lay the specter of communism; since 9/11 it is to slay the serpent of radical Islamism.

The Iraq Study Group's report of December 6, 2006, prepared by the bipartisan Baker-Hamilton Commission, was not so much concerned with the turmoil on the Tigris as with its impact on the US empire: "Iraq is vital to regional and even global stability, and is critical to US interests. It runs along the sectarian fault lines of Shiite and Sunni Islam, and of Kurdish and Arab populations. It has the world's second-largest known oil reserves. It is now a base of operations for international terrorism, including al-Qaida. Iraq is a centerpiece of American foreign policy, influencing how the United States is viewed in the region and around the world."

Iraq matters because, should it "descend further into chaos," it risks diminishing "the global standing of the United States". James Baker (Republican) and Lee Hamilton (Democrat) take it as given that Washington will continue to make the law in the Greater Middle East, as it has since 1945. The report is clear: "Even after the United States has moved all combat brigades out of Iraq, we would maintain a considerable military presence in the region, with our still significant force in Iraq and with our powerful air, ground, and naval deployments in Kuwait, Bahrain, and Qatar, as well as an increased presence in Afghanistan."

Baker-Hamilton turned for help to the best and the brightest of non- or bi-partisan organisations and think tanks that mushroomed since the Vietnam war. Several of these institutions, some of whose staffers prepared questions, position papers and partial drafts for the Iraq report, make no secret of their engagement.

The "bipartisan" Center for Strategic and International Studies (CSIS), partly funded by the Bill & Melinda Gates Foundation, was a major contributor to the Commission. Drawing trustees and advisers "equally from the worlds of public policy and the private sector," its aim is to "advance global security and prosperity in an era of economic and political transformation by providing strategic insights and practical solutions to decision makers."

The “non-partisan” International Republican Institute is deeply implicated in Iraq and chaired by John McCain; it means to "advance freedom and democracy worldwide by developing political parties, civic institutions, open elections, good governance and the rule of law." And the non-profit National Democratic Institute for International Affairs, chaired by the former secretary of state, Madeleine Albright, works "to strengthen and expand democracy worldwide". The self-advertised bipartisan but far-right Washington Institute for Near East Policy claims "to advance a balanced and realistic understanding of American interests in the Middle East [and to] promote an American engagement in the Middle East".

The Baker-Hamilton Commission also took counsel with ex-officials and pundits of certified research and public policy institutes like the Council on Foreign Relations, the Brookings Institution, the Rand Corporation and the American Enterprise Institute. Whatever their political proclivities, very few of the collaborators, associates and patrons of these policy centers rigorously question the political, economic or social costs and benefits of empire for the US and the world. Their disagreements and debates are about how best to secure, exploit and protect the empire.

Underscoring that the role of the US is unique in a world in which few problems can be resolved without it, Secretary of State Condoleezza Rice affirms that "we Americans engage in foreign policy because we have to, not because we want to, and this is a healthy disposition - it is that of a republic, not an empire". Defense Secretary Gates says the US must keep its "freedom of action in the global commons and its strategic access to important regions of the world to meet our national security needs", which entails supporting a global economy contingent on ready access to energy resources.

Even centrist censors do not challenge Washington's unconditional support of Israel. They, like the neocons, oppose any hard-and-fast linkage between the Iraqi morass and the Israeli-Palestinian impasse. Both baulk at the Baker-Hamilton report's suggestion that the US "cannot achieve its goals in the Middle East unless it deals directly with the Arab-Israeli conflict and regional instability". Democrats and Republicans are of one mind in their resolve to step up undercover operations in Iran backed by the threat of a full-scale economic blockade or military action.

Neither presidential candidate proposes an alternative to the imperial charge except perhaps to muffle the moralising and messianic rhetoric in contentious relations with Iran, China and India, and a resurgent Russia - all four driven by untried, nationally conditioned forms of capitalism. Both candidates have used foreign capitals as stages for attesting to their imperial bona fides and determination.

The “dirty little secret” of the US bank bailout

The “dirty little secret” of the US bank bailout

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In an unusually frank article published in Saturday's New York Times, the newspaper's economic columnist, Joe Nocera, reveals what he calls "the dirty little secret of the banking industry"--namely, that "it has no intention of using the [government bailout] money to make new loans."

As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.

Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.

Asked by one of the participants whether the $25 billion in federal funding will "change our strategic lending policy," the executive replies: "What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling."

Referring to JPMorgan's recent government-backed acquisition of two large competitors, the executive continues: "And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way, and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."

As Nocera notes: "Read that answer as many times as you want--you are not going to find a single word in there about making loans to help the American economy."

Later in the conference call the same executive states, "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side."

"It is starting to appear," the Times columnist writes, "as if one of the Treasury's key rationales for the recapitalization program--namely, that it will cause banks to start lending again--is a fig leaf.... In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation."

Early this month, he explains, "in a nearly unnoticed move," Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.

Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.

Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.

What the Wall Street Journal on Saturday called the "strong-arm sale" of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.

All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.

In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would "help American consumers and businessmen get credit to meet their daily needs and create jobs." If the bailout was not passed, he warned, "More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account.... More businesses would close their doors, and millions of Americans could lose their jobs ... ultimately, our country could experience a long and painful recession."

One month later, the bailout has been enacted, and all of the dire developments--banks and businesses disappearing, the stock market plunging, unemployment skyrocketing--which the American people were told it would prevent are unfolding with accelerating speed.

While Obama talks about the need for all Americans to "come together" in a spirit of "shared sacrifice"--meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs--and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.

As the World Socialist Web Site warned when it was first proposed in mid-September, the "economic rescue" plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.

The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.

While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.

Beginning of Hyperinflation

Beginning of Hyperinflation

By Florian Godovits

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Hard-Cash investor Walter K. Eichelburg, predicted the mortgage bubble bust and insolvency of Fannie Mae and Freddie Mac in the United States in an early 2007 Epoch Times interview. He made himself available for another interview with The Epoch Times.

Epoch Times (ET): Mr. Eichelburg, what can we learn from today’s crisis?

Walter K. Eichelburg (WKE): This [crisis] is a progression of the entire economic system. Everything repeats itself. My thinking is that for every investment there is a specific time frame within a cycle, which one must recognize. If one acts at about the right time, one can make a good living. But, I must tell you that I’m not here to save the world. What I’m doing here is educating the investor.

I discovered that the true problem is not the business, but the information. There is a pent-up demand for correct information and that is what I want to satisfy.

ET: Would you share which area of information we need to address?

WKE: You must ask for different information than from today’s “Bubble-Media.” I have studied the history from the Dutch ‘Tulip Crash’ (1624-1636), and it always repeats itself over and over again. The values are artificially pushed up by easy borrowing, which brings investors running – the money comes in for a time and then the insiders quickly exit shortly thereafter, the bubble bursts. It is always the same scenario.

There is something else, called a Kondratiev cycle [1]. A Kondratiev cycle lasts from 50 to 70 years and is present in any national economy where credit (borrowing) is available.

If one invested 5 cents one-hundred years ago, during the time of Franz Josef [2], one would have a shilling today [3]. But, after about 1,460 years, one would have a globe of gold – which in truth is not possible.

Common sense says that at some point in time, there must be at a bottoming out. This is cyclical and was discovered by the Russian scientist Kondratieff. So, [according to his theory] we are in the spiraling downward phase. This is generally called the Kondratieff Winter.

These cycles expand and contract slowly. Therefore very few people notice it. But, a seasoned investor must be able to recognize these contractions. A man in Canada arranged these cyclical movements by the four seasons. A different investment ideal governs during each of these business seasons. Such a phase generally lasts between 10 and 20 years. If one does not change ones investment strategy one will suffer enormous losses.

ET: Can you explain about today’s Kondratiev cycle?

WKE: The present German Kondratiev cycle began in 1948 with the monetary reform. In the beginning, credit is granted prudently. Therefore, there is little inflation. The “growth cycle” began in 1966. Borrowing activities were on the rise, but it was still on the positive side. That continued until 1980. Then, we saw the Kondratieff-maturity cycle. This is the ideal time for trading with paper money, such as stock and bond issues, as well as property types of transactions. Their price depends on credit availability.

ET: Can you explain please? Perhaps using Iceland’s growth as an example?

WKE: For us, there was only one creditworthy entity—that was the state. And now the state was also fully tapped. That means, when the state loses its creditworthiness and their guarantees are worthless, it will crash.

There is something that Robert Rubin, the former U.S. treasury secretary said, when he was asked what he wanted to be in his next life. He responded, “The bond market.” Why? “The bond market controls everything.”

ET: Why is this the case?

WKE: Because interest and credit terms control everything. The reason for an economy to crash is because the bond market collapses. This is the reason.

ET: What do you think about the situation in other countries?

WKE: It was rumored in Austria that the SPO [Social Democratic Party of Austria] politician Hannes Swoboda said the following, “If the 100 billion Euro used for guarantees granted by the State were called, the Austrian State would be bankrupt. This is what could happen and that would be a catastrophe. And the Americans are running out of money. That means they monetize government bonds like crazy.

ET: What do you mean by monetize [4]?

WKE: What is the United States doing? The government sells bonds to the U.S. Federal Reserve Bank, and the bank then has money. A bond is not the same as money. One has to be careful about this point. This is called monetizing. It is not important if it is through borrowing activities or through time debentures. The importance lies in the fact that the central bank generates the money.

ET: Do central banks print the money?

WKE: In the past they printed money, now it is done electronically.

ET: Is it known which bank will fail and which will not?
WKE: Today, no one can predict which institution is safe and which is not. One does not know which bank will collapse first; perhaps Raiffeisen [Raiffeisen International Bank Holding AG] is going to be the first one, or perhaps Constantia Privatbank [5]. No one can predict it.

ET: What about the bank managers? Don’t they know?

WKE: No, they themselves have no clue. I couldn’t believe my eyes and thought that it was completely irrational when Raiffeisen International assumed the Russian Oligarchs Oleg Deripaska debt, held by the Deutschen Bank AG. Banks are just like small investors.

ET: In the past, the currency was backed by gold. Does it mean that this increases the risk of bankruptcy?

WKE: As I mentioned earlier, the last solvent creditor – the State -- was drawn into the crisis. If the banks go under and need to call on the guarantees, then the state will collapse. That can be seen in Iceland, Hungary, the Ukraine and other countries. Then, they sell-off the government bonds for currency, which is now worthless. If that happens then all has reached the end.

ET: What does this mean for the public?

WKE: The collapse happens because all the money is worthless. There will be hyperinflation at the supermarket. Then hunger will begin.

ET: What do you suggest an investor should do?

WKE: Don’t keep paper money. The Euro has become toilet paper, and the Franc is not better off. I suggest that people have sufficient food, buy an acre of arable land and invest in gold. Gold is still cheap at US$3,000 an ounce.

Notes

[1] The Kondratiev wave/cycle theory was discovered by Nikolai Dmitriyeivich Kondratiev (1892-1938), a Russian economist. Proponents of the Kondratiev wave theory note it successfully predicted the 1929 stock market crash based on the 1870 crash. The Kondratiev wave is also referred to as the Kondratiev cycle.”

[2] Franz Josef was the oldest son of Archduke Franc Karl and crowned Emperor of Austria in 1848 at the age of 18.

[3] A shilling is a coin formerly used in the United Kingdom.

[4] When one monetizes, one converts government debt from bonds to currency. The currency is then used to buy products or services.

[5] Constantia Privatebank was taken over by five Austrian banks. The Austrian Central Bank has told Reuters that “the bank was relevant to Austria's financial health because it had a fund subsidiary managing 10 billion Euros (US$13.5 billion) in client assets.”

Uses for $700 billion bailout money ever shifting

Uses for $700 billion bailout money ever shifting

By JOHN DUNBAR

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First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.

Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.

But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.

Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.

As the crisis worsens, the government's reaction keeps changing. Lawmakers in both parties are starting to gripe that the bailout is turning out to be far different from what the Bush administration sold to Congress.

In buying equity stakes in banks, the Treasury has "deviated significantly from its original course," says Alabama Sen. Richard Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee. "We need to examine closely the reason for this change," said Shelby, who opposed the bailout.

The centerpiece of the Emergency Economic Stabilization Act is the "troubled asset relief program," or TARP for short. Critics note that tarps are used to cover things up. The money was to be devoted to buying "toxic" mortgage-backed securities whose value has fallen in lockstep with home prices.

But once European governments said they were going into the banking business, Treasury Secretary Henry Paulson followed suit and diverted $250 billion to buy stock in healthy banks to spur lending.

Bank executives hinted they might instead use it for acquisitions. Sen. Christopher Dodd, chairman of the Senate banking committee, said this development was "beyond troubling."

Sure enough, a day after Dodd, D-Conn., made the comment, the government confirmed that PNC Financial Services Group Inc. was approved to receive $7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp. for $5.58 billion.

"Although there will be some consolidation, that's not the driver behind this program," Paulson recently told PBS talk show host Charlie Rose. "The driver is to have our healthy banks be well-capitalized so that they can play the role they need to play for our country right now."

Other planned uses of the bailout money have lawmakers protesting, although it is only fair to note there is nothing in the law that they just wrote to prevent those uses.

Sen. Charles Schumer, D-N.Y. questioned allowing banks that accept bailout bucks to continue paying dividends on their common stock.

"There are far better uses of taxpayer dollars than continuing dividend payments to shareholders," he said.

Schumer, whose constituents include Wall Street bankers, said he also fears that they might stuff the money "under the proverbial mattress" rather than make loans.

Neel Kashkari, head of the Treasury's financial stability program, told Dodd's committee this past week that there are few strings attached to the capital-infusion program because too many rules would discourage financial institutions from participating.

As the bank plan has become a priority, the effort to buy troubled assets has receded from the headlines. Potential conflicts of interest pose all kinds of problems in finding qualified companies to manage that program.

"Firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP or represent clients who hold troubled assets," Kashkari said.

The challenge was made plain when the Treasury hired the Bank of New York Mellon Corp. as "custodian" of the troubled assets purchase program. The bank will conduct "reverse auctions" to buy the toxic securities on behalf of the Treasury. The lower the price they set, the better chance sellers have of getting rid of the devalued securities.

On the same day it hired Mellon, the Treasury also picked the company to receive a $3 billion investment as part of the capital-infusion program. The same bank hired to help manage part of the economic rescue plan became a beneficiary of it.

With the Nov. 4 election nearing, lawmakers decided it was important to remind the government officials running the bailout program about parts of the law aimed at helping distressed homeowners by offering federal guarantees to mortgages renegotiated down to lower monthly payments.

"The key to our nation's economic recovery is the recovery of the housing market," Dodd said. "And the key to recovery of the housing market is reducing foreclosures."

Sheila Bair, who heads the Federal Deposit Insurance Corp., responded that her agency is working "closely and creatively" with Treasury officials to "realize the potential benefits of this authority."

Gates Expands Bush Doctrine

Gates Gives Rationale for Expanded Deterrence

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Defense Secretary Robert M. Gates said Tuesday that the United States would hold “fully accountable” any country or group that helped terrorists to acquire or use nuclear, chemical or biological weapons.

The statement was the Bush administration’s most expansive yet in trying to articulate a vision of deterrence for the post-Sept. 11 world. It went beyond the cold war notion that a president could respond with overwhelming force against a country that directly attacked the United States or its allies with unconventional weapons.

“Today we also make clear that the United States will hold any state, terrorist group or other nonstate actor or individual fully accountable for supporting or enabling terrorist efforts to obtain or use weapons of mass destruction — whether by facilitating, financing or providing expertise or safe haven for such efforts,” Mr. Gates said.

The comments came in an address in which he said it was important to modernize the nation’s nuclear arsenal as a hedge against what he described as “rising and resurgent powers” like Russia or China, as well as “rogue nations” like Iran or North Korea and international terrorists.

By declaring that those who facilitated a terrorist attack would be held “fully accountable,” Mr. Gates left the door open to diplomatic and economic responses as well as military ones. And, to be sure, the United States has acted forcefully before against those who sheltered terrorists, with the invasion of Afghanistan to oust Al Qaeda and its Taliban government supporters after the attacks of Sept. 11.

His speech here before the Carnegie Endowment for International Peace was the latest signal that the administration was moving in its closing months to embrace more far-reaching notions of deterrence and self-defense.

On Monday, senior officials justified a weekend attack against a suspected Iraqi insurgent leader in Syria by saying the administration was operating under an expansive new definition of self-defense. The policy, officials said, provided a rationale for conventional strikes on militant targets in a sovereign nation without its consent — if that nation were unable or unwilling to halt the threat on its own.

By law, the new president must conduct a review of the nation’s nuclear posture, and Mr. Gates’s address could be viewed as advocating a specific agenda for the next occupant of the White House.

The first public indication that the administration was expanding the traditional view of nuclear deterrence came in a statement by President Bush in October 2006 that followed a test detonation of a nuclear device by North Korea. Mr. Bush said North Korea would be held “fully accountable” for the transfer of nuclear weapons or materials to any nation or terrorist organization.

The president was not as explicit then as Mr. Gates was on Tuesday in saying that the administration would extend the threat of reprisals for the transfer of nuclear weapons or materials to all countries, not just North Korea. Mr. Gates also expanded the threat to nations or groups that provide a broader range of support to terrorists.

Early this year, in a little-noticed speech at Stanford University, Stephen J. Hadley, Mr. Bush’s national security adviser, also spoke of how the president had approved an expanded deterrence policy.

In his speech Tuesday, Mr. Gates argued for modernizing the nation’s nuclear arsenal because “as long as other states have or seek nuclear weapons — and potentially can threaten us, our allies and friends — then we must have a deterrent capacity.”

Although Mr. Gates earlier this year fired the Air Force secretary and chief of staff after the discovery of shortcomings in the service’s stewardship of nuclear weapons and components, he stressed that the nuclear arsenal was “safe, secure and reliable.”

“The problem is the long-term prognosis — which I would characterize as bleak,” he said.

Veteran weapons designers and technicians are retiring, and Congress has not voted for the money to build replacement warheads for an aging arsenal that can be produced without abandoning the nation’s unilateral moratorium on nuclear tests, he said.

To that end, he endorsed a comprehensive test ban treaty if adequate verification measures could be negotiated.

Mr. Gates praised efforts to reduce the number of warheads, and predicted that the United States and Russia would at some point conclude another agreement limiting their arsenals.

The Ugly America

The Ugly America

Where have all the water fountains gone?

Where have all the water fountains gone?

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People are turning away from bottled water as fast as they turned onto it. Municipalities across Canada and the United States are limiting the sale and purchase of bottled water in city buildings, bottled water free zones are popping up on college and university campuses, community groups are phasing out the use of bottled water, and the message about the ills of this product is all over the mainstream media.

I was recently asked in an interview about the next steps for the movement away from bottled water given that the backlash had spread so widely. The interviewer mentioned that he wasn’t sure what people would do at his local hockey arena when the only access to water was from an old dusty water fountain. His question struck a chord and confirmed my belief that the success of the anti-bottled water movement must more and more be accompanied with stronger demands for the renewal of public access to potable drinking water.

Municipal leaders have shown that there is a strong political will for increased use and promotion of tap water. However, we continuously hear of new buildings being constructed without water fountains and existing buildings decommissioning older water fountains without replacing them.

One example comes from the University of Central Florida (UCF) where a $55 million football stadium was constructed with no water fountains.

In September 2007, UCF opened the 45,000 seat football stadium for a home game. The day of the game was very hot and the concessions had less than 45,000 bottles of water on hand. The concessions ran out of bottled water and fans were left thirsty. More than sixty people were treated for heat exhaustion.

In the aftermath, it became clear that by omitting water fountains from the building plans the University administration had not followed the latest building codes that required either fountains or large water coolers. The administration hid behind the fact that the plans for the stadium were created in 2001 when the building code stated that selling single serve bottled water would be enough to hydrate tens of thousands of people.

The University and the developers knew that there were no water fountains in the building plans, and relied on the concession stands to supply drinking water at $3 a bottle. This was a conscious choice to exclude water fountains, and in this case, the choice was to interpret the building codes in such a way that would ensure expensive single serve bottled water would be the only water available in the stadium.

Outraged students quickly mobilized an online campaign to pressure the university administration to install water fountains. The campaign got the attention of the media, and the university administration quickly promised to install 50 water fountains in the stadium.

A Canadian example of water fountain omission comes from a recent survey of corporate presence on Canadian university campuses. The survey confirmed that access to drinking water on university campuses is becoming increasingly limited. Respondents to the survey noted a reduction of the number of fountains on campus and an increasing number of broken fountains. One respondent from Brock University said that, “In new buildings on campus, there are no water fountains, only Pepsi machines, and the water fountains that do exist are sparse and in inaccessible places.”

These two examples show that serious questions need to be asked about how developers, and, in these cases, university administrations, can get away with leaving water fountains out of building plans.

Who writes the building codes that allow for the omission of water fountains? How are the codes interpreted or manipulated by developers to exclude proper access to municipal drinking water sources? Regulatory bodies charged with writing and overseeing building codes need to hear loud and clear that bottled water is not the right option for hydrating large numbers of people.

Now that the bottled water industry is on the ropes and municipalities are shunning these products in favour of tap, water activists have a golden opportunity to start looking for answers. The question of public infrastructure should be thrust into the bottled water debate with strong and well organized calls for greater public investment in water services.

Any action taken by municipal governments moving consumers away from bottled water needs to be accompanied with a deep commitment to reinvest in the continent’s public water infrastructure, which seems to be on the brink of crisis.

In the United States, the American Society of Civil Engineers (ASCE) found in 2005 that the “nation's 54,000 drinking water systems face staggering public investment needs over the next 20 years.” The ASCE also claims that water infrastructure in the U.S. faces an 11$ billion (usd) funding shortfall every year. Meanwhile, in Canada, a 2007 report from the Federation of Canadian Municipalities (FCM) declared it will cost more than $25 billion (usd) to bring water and waste water systems up to par. New water and wastewater needs are estimated at $48 billion (usd).

For-profit water services corporations exploit these funding shortfalls to push for public-private partnerships and full privatization of public water systems. Take United Water (US subsidiary of French water services giant Suez), for example, that states on its website that there are “options available to municipalities faced with shrinking budgets and aging infrastructures.” The company then markets its services saying that it can provide “flexible solutions to these challenges through public-private partnerships and comprehensive asset management contracts.”

Our political leadership is not doing much to help the situation either. When the FCM report was released, Canada’s Finance Minister Jim Flaherty told municipal leaders to stop “whining” and to “do their job.” This lack of sensitivity by elected officials and lurking for-profit water services companies means that we could see more privatization in the near future.

Consumers’ love affair with bottled water is coming to an end. However, if vows are not renewed between politicians, public institutions and public water delivery, people may find themselves living in a society where cheap access to water is a privilege and not a right. This is the time for activists and concerned people everywhere to issue strong calls for greater public access to free potable water and a wholesale reinvestment in water infrastructure and services.

There's a Huge Wave of Inflation Coming Toward Us

The New Hooverites

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The time has come to review how back in 2005-2006 George W. Bush -- now increasingly perceived as another Herbert Hoover -- picked two top appointees who helped steer him towards his fateful 2008 rendezvous with a second Great Crash.

One of them, a top level financier, insured that Washington's eventual rescue policies would concentrate on trying to bail-out Wall Street while ignoring the gnawing cancer of its warped ambitions and financial malpractices. The second, a professor, misapplied dogma about how to guard against severe downturns into a disastrous attempt to refight the onset of the 1930s depression - his academic specialty. He did not understand the very different context of our own era of cyber-spatial financial recklessness and gathering global inflation.

Henry Paulson, Bush's pick as treasury secretary, was not your ordinary gray-flannel investment bank CEO. One 2006 Business Week article spotlighted the new secretary as a high-roller: "Think of Paulson as Mr. Risk. He's one of the key architects of a more daring Wall Street where securities firms are taking greater and greater chances in their pursuit of profits." That, the magazine added, "means taking on more debt...it means placing big bets on all sorts of exotic derivatives and other securities." That means stuff like collateralized debt obligations (CDOs) and credit default swaps (CDSs), innovations we now know to have spread toxicity, opacity and paralysis.

Economics professor Ben Bernanke, before replacing Alan Greenspan as Federal Reserve Board chairman in early 2006, had served almost three years as the Chairman of George W. Bush's Council of Economic Advisers. There he had been a cheerleader for Bush economic policies, including upper-bracket tax cuts, Social Security privatization, "securitization" of assets and "safe" financial derivatives. On top of which, he was an academic and theoretical specialist in monetary policy and economic depressions - a man who boasted of understanding downturns' critical preventative. The Fed should pump up the money supply or liquidity which would overcome any credit crunch. As a card-carrying monetarist, he also insisted there was no meaningful inflation during the 2005-2007 period even though global commodity price indexes had been soaring.

Thus, and without knowing it, did an inept George W. Bush assemble his two chief architects of neo-Hooverism. They would pick up where the original Disasterman, Alan Greenspan, Fed Chairman between 1987 and early 2006, had left off. Together, alas, the two would steer U.S. policy towards false pretenses, panic and economic disaster - Old Hoover outcomes re-achieved through new biases, ideology and myopia.

Wall Street's "Mr. Risk," calling the shots at Treasury, would focus the Bush administration's 2008 economic "rescue" policies not on the broad national interest but on bailing-out the "Frankenstein Fifteen" top U.S. financial institutions - the big five investment firms, the five largest commercial banks, the four mortgage biggies, and AIG, the rogue insurance giant. Along with the buccaneering hedge funds, these were the big firms that borrowed huge sums, merged grandiosely,, experimented with all "the exotic derivatives and other securities" and led the multi-trillion-dollar metastasis through which finance ballooned to take over domination of the U.S. economy by 2004 with 20-21% of the U.S. Gross Domestic product. Although in mid-2007, Paulson pretended that the emerging crisis involved no more than bad real estate lending practices, the cynical observer can assume that "Mr Risk," the arch-insider, knew what he was covering up - how deeply the malpractice and deception ran -- and on whose behalf.

If Paulson wanted to keep the spotlight off the real culprits - the Frankenstein financial and mortgage banker laboratories, with their several trillions of exotic mortgages, toxic CDOs and Las Vegas-like credit swaps - then narrow-gauge academician Bernanke at the Fed was the perfect sidekick. The economic ivory-tower theory in which Bail-out Ben had immersed himself for thirty years ignored 21st century mega-innovations and looked back seven decades to the Crash of the 1930s and how that long-ago debacle might have been prevented.

Alas, poor Ben - his economist heroes have long been Milton Friedman and the latter's wife, Anna Schwartz, who some four decades ago co-authored a landmark volume entitled A Monetary History of the United States. On October 18, in a prominent interview published by the Wall Street Journal, Anna Schwartz opined that Bernanke was simply getting Fed policy wrong. The problem does not lie with the money supply or liquidity as it did in the 1930s. It lies with all these toxic securities the Wall Street geniuses dreamed up, gorged on, and sold around the globe in huge quantities between 2003 and 2007. "They're toxic," says Ms. Schwartz, "because you cannot sell them, you don't know what they're worth, your balance sheet is not credible, and the whole market seizes up." In fact, by giving transfusions to otherwise insolvent banks, Paulson and Bernanke have prolonged the crisis: "They should not be recapitalizing firms that should be shut down...Firms that made wrong decisions should fail." That, of course, was how it worked in the old days when "creative destruction" kept capitalism on its toes. Now, of course, it's on its butt.

If Paulson and Bernanke had been willing to take a reformist blowtorch to the big fifteen and their practices and products back in late 2007 or early 2008, some six or eight might well have had to be dismantled, taken over or forced into bankruptcy or receivership, but the stock market and credit crisis of the last few months might been avoided or greatly mitigated. Instead, Paulson pretended that nothing serious was wrong because he came out of the same Wall Street ego-trip, and Bernanke could not transcend his student-of-the- 1930s academic background. "This was {his} claim to be worthy of running the Fed," says Anna Schwartz. However, Bernanke flubbed because he was fighting the last war, not the present one.

Worse still, the policies that Paulson and Bernanke did implement at such staggering cost have only begun to do their full long-term damage, which will probably come in a round of even more serious inflation. Together, the Treasury and the Fed have spent or loaned over a trillion dollars in financial-sector aid. As set out by economist Brad Setser of the Council of Foreign Relations, besides steering $950 billion into the U.S. financial system ($500 billion sent over by the Treasury), the Fed has provided still another $450 billion of dollar liquidity to European central banks to spread around on that continent. This decision by the United States to be the lender of last resort, in tandem with Washington's late September and October scare rhetoric about U.S. and world economy seizing up unless Congress passed the Paulson-Bernanke bail-out plan, has internationalized the crisis and made the U.S. dollar the pretended currency of the rescue instead of the vulnerable currency of the underlying problem. Something similar happened back in August 2007, when for 4-5 weeks a flight to "safety" and U.S. treasury debt buoyed the U.S. dollar. September and October have brought this result on an even larger scale.

Administration economists have said not to worry. This trillion won't be inflationary because that effect will be lost amid the 2008 assets deflation. This is probably more bunk from economic experts who have been right about practically nothing in the last few years. Global commodity indexes have been rising since 2003, although carefully crafted federal statistics kept that pressure from being acknowledged in the U.S. until 2008. Now the common wisdom is that declining commodity prices spell a long-term decline. The better likelihood is that inflation, still much in evidence globally, is only taking a breather, as it did circa 1971 and circa 1974 during the 1967-1980 inflation cycle. Within a matter of months, Washington's huge 2008 borrowing and soon-to-be-record trillion-dollar budget deficits will send inflation to new heights, and the current "treasuries bubble" and "U.S. dollar bubble" will pop.

Indeed, Ben Bernanke must remember from his old research that in the Spring of 1933, even after the huge assets deflation of 1929-32, new President Franklin D. Roosevelt's talk about cheap money, stimulus and reflation quickly sent commodity prices and inflation climbing. And today's rampant loan-making and deficit economics, by comparison, promise to make the FDR of 1933 look like Ebenezer Scrooge. Neo-Hooverism, in contrast to the 1929-32 version, is coming out of a new playbook.

California high-risk pool for medically uninsurable helps fewer residents

California high-risk pool for medically uninsurable helps fewer residents

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A $75,000 benefit cap, high deductible and costly premiums make the program unavailable, ineffective or unaffordable for many. Gov. Arnold Schwarzenegger recently vetoed a bill to expand the pool.
By Jordan Rau

October 28, 2008

Reporting from Sacramento — Dave Dunlap is a Kern County trucker with a failing liver. Like about 600,000 Californians, he is too sick to qualify for private insurance on the open market.

"I'm trying to fight to get a transplant," he said. "Everyone's waiting for me to have a way to pay for it. I can't even get on the donor list until I have a way to pay for it."

California is supposed to have a solution for people like Dunlap. It is one of 35 states that arranges health coverage for people rejected by commercial companies because they have blemished medical histories.

This group -- known as "medically uninsurable" -- accounts for about an eighth of the 5 million Californians who lack health insurance. Most are self-employed, work for companies that don't provide insurance or don't have a job.

But California's publicly subsidized high-risk pool, long one of the least generous in the country, has atrophied over the tenure of Gov. Arnold Schwarzenegger -- even as the governor put the plight of the uninsured at the top of his political agenda.

Rising premiums and limited subsidies have made the Major Risk Medical Insurance Program either unaffordable, unavailable or ineffective for many of those who most need health insurance.

The program now covers about 13,000 Californians -- about 2% of the medically uninsurable.

Enrollment has dropped by almost a third since Schwarzenegger became governor.

Schwarzenegger last month vetoed a measure that would have expanded the 17-year-old pool, overruling the bill's endorsement by the pool's own governing board, most of whom he appointed.

The governor said "the only solution for our healthcare crisis" is a complete overhaul of the state's healthcare system along the lines of his $14.9-billion plan that the Legislature rejected last January as too expensive.

"We supported wholesale health reform, but this is a population that has nowhere else to go, and he's leaving them high and dry," said Elizabeth Landsberg, legislative advocate for the Western Center on Law & Poverty, a Los Angeles nonprofit.

Subscribers pay two-thirds of the pool's cost and the state about one-third. The insurers that voluntarily participate -- primarily Blue Cross of California and Kaiser Permanente -- break even.

Unlike most other states, which finance their programs either directly with tax dollars or with assessments on insurers, California's subsidies have come only from the state's tobacco tax.

Lawmakers have kept annual financing at or below $40 million a year, requiring the pool's administrators to cap its enrollment. As a result, for much of Schwarzenegger's tenure, the pool has had a waiting list of hundreds of people.

This year, Schwarzenegger and legislators provided a one-time allotment of $10 million out of fines against insurers to expand the pool's enrollment to 915 more people, including all those on the waiting list.

Even with that expansion, the pool will assist half the number enrolled at the program's apex in 1999.

One of the major obstacles is the cost of premiums, which the law sets at 125% of commercial insurance rates. More than a third of pool participants who dropped out this year told the pool's administrators that they couldn't afford it anymore. A 55-year-old Los Angeles County resident with one dependent would have to pay $11,240 in premiums and a $450 deductible this year for the cheapest plan.

Anne Walzer, a freelance graphic designer in San Francisco who is insured through the pool, said her premiums amount to 14% of her income. She said that she was diagnosed with the mildest form of multiple sclerosis.

Even though she has no symptoms and her doctor said the chance of serious sickness was minute, Blue Cross told her she was a "lifetime denial," she said.

"I'm healthy," said Walzer, 56, who said she pays $600 a month in premiums. "I hardly ever go to the doctor. I don't feel I belong in the major risk pool."

Despite its cost, California's high-risk pool is of limited use for people needing extensive medical care, such as those with cancer or chronic diseases. That is because the pool's benefits are capped at $75,000 a year, lower than the limits of any other state's pool.

Someone with hemophilia "would blow through that in a month and a half," said Doug Stratton, the outgoing chairman of the National Assn. of State Comprehensive Health Insurance Plans, an association of state high-risk pools.

Only five other states' high-risk pools have any annual benefit limits. Indeed, California's cap makes the state ineligible for between $4 million and $8 million in federal money to help finance the pool, according to a legislative estimate.

About 2.4 million Californians buy health insurance coverage directly rather than through employers. Insurers have broad discretion to reject applicants. About 20% of applicants are rejected because of their health history, said Peter Harbage, a healthcare consultant.

Harbage projected that with fewer employers offering coverage each year, the number of Californians to whom no insurer will sell policies may grow to 1 million by 2010.

"There are hundreds of thousands of people in California who can't get coverage because the individual health market is broken," Harbage said. "You're trying to fight a forest fire with a garden hose."

Stratton said the most inventive states have found ways to control the costs in their high-risk pools by careful management of chronic ailments. He said in 2002, when Indiana arranged to buy drugs for hemophiliacs at the lower prices available to the federal government, the cost of caring for 54 patients with the blood disease dropped from $19 million to $9 million.

To fix California's pool, the Legislature this year proposed placing a $1 monthly per customer fee on insurers that sell policies directly to customers. The money would have allowed the pool to eliminate the annual cap on benefits, lower premiums and increase enrollment.

Cliff Allenby, the chairman of the board that oversees the pool, told Schwarzenegger in a letter that the measure, AB 2, would "ameliorate the dysfunction" in the individual insurance market.

But in his veto message, Schwarzenegger said the fee would be passed on to customers and thus "only exacerbates their burden."

Dave Dunlap's problems have grown since he was diagnosed with Hepatitis C in 2003. Dunlap, a 54-year-old from Pine Mountain Club, about 60 miles north of Los Angeles, said the disease weakened him so much that he was in two traffic accidents and had to stop driving his 18-wheeler.

Cirrhosis caused by the infection is now in the most advanced stage, according his medical records.

His wife, Susan, said his liver has broken down so much that sometimes she can smell the odor of his body discharging toxins through his skin.

"I suppose in different phases it is controllable, but not when you're at the end," she said. "My husband is dying."

She said a liver transplant and a year of drugs to prevent his body from rejecting the new organ would cost more than $350,000.

The Dunlaps said they had never heard of the state's high risk pool, but given its premiums and benefit cap, it would be of little use to them.

"We couldn't afford it anyway," Susan Dunlap said. "I sell real estate, and obviously real estate isn't selling."