Monday, November 3, 2008

More from the Front Lines of the Financial Crisis

More from the Front Lines of the Financial Crisis

by Stephen Lendman

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In its latest economic outlook, Merrill Lynch economists "worry about inflation, or more precisely," a lack of it. From crashing global equity markets, falling commodity prices, rising unemployment, stagnant wages, over-indebted households, declining production, the continuing housing crisis, and more. All pointing to several future quarters of negative growth. Showing that Fed chairman Bernanke will face "his greatest fear: deflation." An analysis of the coincident to lagging indicators signals "deep recession."

In his October 24, commentary, Merrill's North American economist David Rosenberg sees "economic data deteriorating in a very serious way (and says) we are witnessing unprecedented stuff happen:"

-- the two-year housing recession "is still far from over" with new lows in a number of key readings;

-- it's "morphed into a capex recession, industrial production" had its worst decline in 34 years;

-- consumer confidence showed record declines;

-- retail sales keep falling; evidence is that auto and chain store sales will show four straight down months; it's happened only four other times since 1947, so "we're living through a 1-in-200 event;"

-- based on CPI data, prices are falling; at a rapid pace also seen only four other times since 1947;

-- GDP will decline at 2% annual rate in Q 4; 4% in Q 1 2009 and 3.3% in Q 2.

Conclusion: "This recession is unlike any seen in the last five decades." Typically caused by inflation, inventory cycles or aggressive Fed tightening. "This is a balance sheet recession deeply rooted in asset liquidation and debt repayment, and would seem to have more in common with pre-WW I cycles."

Going back to 1855, "a typical recession lasts 18 months." It's no assurance this one won't be longer. Rosenberg thinks it started in January and believes will end "within a month of the National Bureau of Economic Research (NBER) making the call." It defines recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Some say that occurs when economic growth is negative for two or more consecutive quarters.

The signs are evident and growing, yet NBER is usually late making its call. It may hold off until housing shows signs of stabilizing. For some analysts, it's the core economic problem, and as long as it keeps eroding no end of recession is in sight. The latest data aren't encouraging:

-- Case-Shiller's 10 and 20-city composite indexes set new record declines of 17.7% and 16.6% respectively; year-over-year dropping for 20 consecutive months; Case-Shiller predicts a peak to trough 28.6% drop in its 10-city composite index; it also sees up to 50% declines in some areas;

-- nominal house prices down 20% from their 2006 peak; according to the Center for Economic Policy Research (CEPR), this implies a 27% real decline; a loss of $5 trillion in housing wealth, and 60% of the bubble deflated so more is yet to come; at least another 10 - 15% to return to trend levels; another question is "whether markets will overshoot on the downside;" a very distinct possibility;

-- on October 29, CEPR reported record high ownership vacancies according to Census Bureau data at 2.8%; for rental units at 9.9%, slightly below the peak first quarter 10.1% level; CEPR predicts a fully deflated housing bubble by mid-2009 but added a caveat; "With the employment picture turning bleaker and the plunge in the stock market," housing is certain to be even more negative in coming months; "the tens of millions of workers....fearful about their future job prospects will be very reluctant to buy a new home;" compounded by trillions of lost personal wealth (from home and stock market losses) will make households "much more cautious in all their expenditures;"

-- the Office of Federal Housing Enterprise Oversight (OFHEO) index fell .6% in its latest July reading and is down 5.3% on a year-over-year basis; its sharpest decline ever;

-- Fitch expects home prices to fall another 10% in the next 18 months and will decline by an average 25% in real terms over the next five years; beginning from the second quarter 2008; they're now back to early 2004 levels and heading lower;

-- the PMI Group predicts home price declines will double to a national average of 20% by next year with lower values in areas experiencing the sharpest increases;

-- economist Paul Krugman cites his "preferred metric;" the ratio of housing prices to rental rates; it shows the former got way overvalued; will retrace and result in about a 25% home valuation decline;

-- Goldman Sachs forecasts a 15% home price decline with no recession and 30% with one; and

-- The Economist sees "no end in America's housing bust as prices continue to fall fast."

On October 28, economist Nouriel Roubini was even more alarming on housing citing "The recessionary macro effect of the worst US housing bust ever." He reported the view of a "senior professional in one of the (world's) largest financial institutions" who emailed him "privately and confidentially." As early as a year ago, he predicted "the worst housing recession in US history" and described "a bust process" in four phases:

(1) "rising mortgage defaults, home prices start falling, sale volumes fall, housing starts and permits decline;" it's been happening and we're beginning phase two;

(2) "home-builders' bankruptcies, housing starts and permits crash, substantial layoffs in construction and real estate-related fields (mortgage brokers, mortgage lenders, etc.);"

(3) "substantial price declines in major metro areas, large rise in defaults of prime but low-equity mortgages;"

(4) "large-scale government intervention to help households going bankrupt;" a political phenomenon so its timing and nature can't be reliably forecast.

He cites clear phase two evidence already:

-- countless smaller builder and subcontractor bankruptcies;

-- Levitt Corp. home-building unit getting loan default notices;

-- national home builder Tousa with $1 billion in senior notes and subordinated debt hired law firm Akin Gump Strauss Hauer Feld as a precaution in case of bankruptcy; and

-- Neumann Homes and Enterprise Construction file for bankruptcy.

Roubini agrees with his emailer "with one caveat." He believes we're past the beginning of phase two; most of its aspects have occurred, and we're heading into phase three or close to it; he cites sharply falling home prices; rising defaults in prime and near prime mortgages; also some prime and near prime lenders in trouble; we're also getting close to phase four as "over a dozen proposals to rescue 2 million plus households on the way to default and foreclosure are now being debated in Washington." Debate is one thing. Meaningful action another and likely a ways off at best. Possibly once a new president is in office for something substantial if it comes at all.

Rubini's emailer followed up with another. That consensus now "admits" what it denied last year. The reality of a severe housing downturn. In price action and foreclosures. The worst since the 1930s. But they're still behind the curve by acknowledging "only minor macro effects." He called it extraordinary that a decline this severe is being taken dismissively. "Perhaps the most astonishing aspect of this event is the refusal to recognize the possible dimensions, the impact of what is coming." It's "delusional" to believe that the "biggest housing recession in US history will not have severe macro effect. Most of the consensus (according to Bloomberg earlier)" was for 1.8% fourth quarter growth. It then predicted a Q 4 slow growth bottom with "economic growth recover(ing) in soft landing territory (2.5%)."

On what basis, he asks? "Mostly wishful thinking (because of) the economic and financial shocks leading to falling demand (and a worsening housing bust); anemic capex spending; slowdown in commercial real estate demand; sharp private consumption slowdown and weak supply (from weakening ISM - Institute of Supply Management;" falling employment; a glut of new and existing homes; weak auto sales; consumer durables; "a capacity overhang;" and excess inventory); these factors will persist well into the new year.

The latest Q 3 GDP report hints at what's coming. A minus .3% with personal consumption (PCE) dropping 3.1%. The first decline since 1991 and largest drop since falling 8.6% in 1980. Residential construction also fell at a 19.1% annual rate. Its 11th straight quarter drop. It now represents 3.3% of GDP. Its lowest level since 1982. Non-residential investment fell 1% and will likely fall further in Q 4. A quarter likely to be much weaker than Q 3 as most private activity is slowing. Only government spending remains strong.

On October 31, still another disturbing report. Bloomberg reported that the "US Chicago Purchasers Index (the Institute for Supply Management-Chicago, ISM) Falls by Most on Record." To 37.8 down from 56.7 in September, and its lowest reading since the 2001 recession. A clear indication of a deepening downturn. Readings below 50 signal contraction.

Another Shoe to Drop: Credit Cards

Even The New York Times published a rare ahead-of-the-curve October 28 admission. In an Eric Dash article headlined: "Consumers Feel the Next Crisis: Credit Cards." As they're squeezed by an "eroding economy." An "already beleaguered banking industry" is threatened as lenders are sharply curtailing credit card offers and "sky-high credit lines." Even creditworthy consumers are affected because of growing amounts of bad loan losses. An estimated $21 billion in the first half of 2008.

With layoffs increasing, analysts forecast at least another $55 billion in the next 18 months. Around 5.5% of outstanding debt now and may "surpass the 7.9% level reached after the technology bubble burst in 2001." As a result, lenders like American Express, Bank of America, MasterCard and Visa are "tightening standards (and) culling their portfolios of the riskiest customers." Credit lines are being reduced as well, and lenders are avoiding over-indebted consumers. Treading carefully in housing ravaged areas and with customers employed by troubled industries.

It's impacting already strapped households. With lower credit scores. Higher rates for those rated creditworthy. Less willingness to allow high balances. Less availability of loans with many needing them shut out. "The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards....At the same time," lenders are retrenching with one CEO saying "If you're not fearful, you're crazy."

It's seen in mail solicitations slowing to a trickle. "Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back," according to Mintel analyst Lisa Hronek. "People are completely maxed out with mortgages, home equity lines and credit card debt."

It's hitting hard on both ends. Rising losses and shrinking profits for issuers. Less credit availability for consumers already strapped and cutting back of necessity. At a time the only bull market is in bailouts. Amidst towering debt levels. Soaring defaults. Wobbly global economies. Some cratering. America teetering. Confidence shattered, and everyone wondering what's next.

First the Banks. Next "the Coming Insurance Meltdown"

According to analyst Mike Larson of Weiss Research. AIG was just the beginning. Falsely called an "anomaly (and that) the rest of the insurance industry is doing just fine." Larson and Weiss disagree and identified "46 insurers with $500 million or more in assets that are at an elevated risk of failure." It's seen in their share prices. Down 80 - 90% for some because the largest US and Bermuda-based insurers have lost $98 billion year-to-date, and they have more in unrealized losses.

A Possible Goeotterdaemmerung?

On October 28, from the Financial Times forum in a Peterson Institute for International Economics Anders Aslund article titled: "It can be worse than the Great Depression." A possibility, not a prediction. Because of "the worst global asset bubble and financial panic" since that time. Because lessons learned then haven't prevented new mistakes, and unlike in the 1920s, "CNBC and Bloomberg can spread worldwide panic instantly." Old blunders may not be repeated, but "new policies (may be) even worse."

Anders laid out a "then" and "now" comparison:

-- Then: exchange rates over-zealously defended; Now: floating exchange rates could cause a trade panic;

-- Then: the money supply shrank dramatically; Now: monetary expansion and budget deficits are dangerously excessive; currency collapses may result; the fundamentals don't justify the current dollar surge;

-- Then: nations didn't go bankrupt; some may today; some major ones; Italy, for example, had over 100% of GDP in public debt before the crisis; it risks major state bankruptcies; America was unmentioned, but the rapidly mounting public debt and money supply growth alone pose immense risks, including default and future hyperinflation;

-- Then: subprime loans existed at modest levels, but that era didn't have "non-transparent collateralized debt obligations;" Now: derivatives "created the mother of all bubbles; the deeper the financial system, the harder we may fall;"

-- Then: the Great Depression "largely emanated from two countries, the US and Germany; Now: "never before has the world seen such a monstrous and truly global bubble;"

-- Then: financial institutions engaged in minimal overleveraging; Now: it's mirror opposite; "never have big financial institutions been as overleveraged as Fannie Mae and Freddie Mac or the former US investment banks, not to mention the hedge funds;"

-- Then: protectionism froze global trade; Now: frozen finances in countries like Iceland, Ukraine and possibly others have temporarily left them outside the world financial system;"

-- Then: the dollar and gold "were unchallenged sources of value;" Now: the dollar is neither stable nor the uncontested world currency;

-- Then: policymakers made mistakes but "stood for principles;" Now: "George Bush is assembling (Group 20 leaders) for a photo opportunity in Washington on November 15;" failure to come up with meaningful corrective policies "could unleash untold (global) financial panic;" and

-- Then: the 1920s lacked television and the internet for fast information dissemination; Now: information and decisions move instantly; often with no transparency; the combination is potentially harmful.

The Global Europe Anticipation Bulletin (GEAB), LEAP/E2020's Disturbing Prediction

In its October 15 28th edition. About a "global systemic crisis." An alert because its researchers believe that before summer 2009 "the US government will be insolvent (and will) default and be prevented to pay its creditors (holders of US Treasury Bonds, of Fannie May and Freddy Mac shares, etc.)." It envisions "the setting up of a new Dollar to remedy the problem of default and of induced massive drain from the US." It gives five reasons for its prediction:

-- the current US dollar surge is temporary; the result of world stock market collapses;

-- the Euro has become "a credible 'safe haven;' " an alternative to the dollar;

-- the out-of-control US public debt;

-- the collapsing US economy; and

-- future "strong inflation or hyper-inflation;" by 2009.

GEAB states: "the whole planet has become aware that a global systemic crisis is unfolding, characterised by the collapse of the US financial system and its contagion to the rest of the world." As a result, "a growing number of global players are beginning to act on their own." In their own self-interest. Because US policies are ineffective. The crisis is very serious and "far more important, in terms of impact and outcome, than" in 1929. With the US economy weaker now than then. Because of unmanageable public debt. Reckless consumer borrowing and spending. Enormous current account and budget deficits. A hollowed out industrial base, and a highly inflated dollar.

With that in mind, it's up to "vigilant" citizens and "clear-sighted" leaders to assure that America won't "drive the planet into a disaster." It will take divergent policies. What's "good for the rest of the world will not be good for the US." America defaulting will be partly from "this decoupling of decision-making...." A new dollar will be "imposed." And "one morning (in) summer 2009....after a long week-end or bank holiday," Americans will discover that their "US T-Bonds and Dollars are only worth 10 per cent of their value...."

A Jesse's Cafe Americain commentary suggests something similar. That in 2009, "the US will be forced to selectively default and devalue its debt." Because of its extraordinary financial needs. A $2 trillion annual deficit. It will take a terrible toll on Treasuries. Forcing a significant drop by 2011. We're approaching "the apogee of the Treasury bubble, with the credit bubble" already broken.

Once market deleveraging subsides, "the dollar and Treasuries will drop, perhaps with momentum, as the rest of the world realizes that the US has no choice but to default." Unless foreign sources (for a while at least) keep buying American debt despite the risk. Offer debt forgiveness. The dollar is devalued short of default. Taxes raised substantially, and debt instruments pay higher interest rates. Even then, these measures may fall short and prove ineffective.

America way exceeded its debt service ability from real cash flows. A turnaround will require a "severe devaluation and selective default." For GEAB down to 10 cents on the dollar. Following on its March 2008 prediction that by yearend "a formidable debacle will affect pension funds (worldwide) endangering the entire system of capital-based pensions." Their revenues collapsing "at the very moment when they should be making their first large series of payments to pensioners." A disturbing picture in the current climate that may reveal other unexpected hazards in the coming months.

On October 28, Bloomberg reported on the Treasury's "unprecedented" 2009 financing needs. To fund a growing budget deficit and raise hundreds of extra billions to contain the current financial crisis. To assure guarantees the government committed for. Almost $6 trillion alone for Fannie and Freddie debt and mortgage securities. With continued growing demands as other obligations arise. Plus over $1 trillion annually for national defense with all expenditure categories included. An impossible burden Bloomberg didn't mention. A deepening dilemma as the financial crisis grinds toward more unsettling realities.

What Euro Pacific Capital's Peter Schiff writes about in his 2007 book "Crash Proof: How to Profit from the Coming Economic Collapse." What he adds to in commentaries on his web site: His latest on October 31 titled "The Tales Get Taller." Debunking mainstream explanations for recent dollar strength. A currency he's very bearish on. Because of our extreme profligacy. Decades of borrowing trillions we can't repay. How we blew it on consumption and by letting our industrial base erode.

Our problems are now too big to contain. A possible bankruptcy is ahead. "The main lesson our creditors will learn from this crisis is not to lend American consumers any more money. Once the lending stops, our 'cart before the horse' borrow to spend economy will crumble. While the rest of the world absorbs their losses and moves on, we will be digging our way out of the rubble for years to come. Earthquakes are caused by the fundamental shifts of tectonic plates beneath the Earth's surface. A similar move is underway in the global economy."

America's salad days are over, he believes. We've gone from a nation of savers, investors and producers to one of borrowers, consumers and gamblers. Official government statistics lie. They conceal hidden truths. America's house of cards is crumbling. It won't be pretty when it collapses. His advice is get out of the dollar. Get your money out of the country while you can, and gold is one of his recommendations.

Gold is on Paul Amery's mind as well in his Prudent October 31 commentary titled "The Credit Crisis Endgame." He sees it likely becoming "a bloody standoff between investors and governments (on a) market for government bonds" battlefield.

He reviewed the unfolding credit crunch stages:

-- its beginning with liquidity drying up in "esoteric, structured-finance securities, linked to riskier types of mortgages;"

-- it then spread "to more mainstream mortgage bonds, structured finance in general, and other types of debt;"

-- by early summer 2008, it hit many non-financial companies having trouble refinancing loans;

-- by late summer, it affected sovereign states; mostly ones with high current account deficits like Iceland, Hungary and Ukraine;

-- it points globally to a spreading ailment affecting major economies and their bond markets.

The US for example. While nominal Treasury bond yields declined (10 year T-bonds at 4% October 31), their credit risk component has been increasing since last year. Credit specialists CMA DataVision shows the 10 year credit default swap (CDS) spread rose steadily. From 1.6 basis points in July 2007; to 16 basis points in March 2008; to 30 basis points in September; and to over 40 basis points on October 27. In other words, insuring against a US government bond default rose 25-fold in the past 15 months. The same is true for Britain and Germany.

Some observers find this astonishing. How could America or other major states default on their debt? It would be "the equivalent of a (financial market) nuclear explosion" smashing global economies with it.

Further, the dollar is the world's reserve currency. The Fed can create unlimited amounts of them, so any default would likely be through inflation and devaluation, some argue.

Maybe not, according to University of Maryland's Carmen Reinhart and Harvard's Kenneth Rogoff in their April 2008 paper: "The Forgotten History of Domestic Debt." They explained that throughout history debt defaults have been more common than realized. They're the rule, not the exception, in times of severe economic stress.

Again America for example. Budget and national debt levels have exploded. Bailout amounts will increase them and cause enormous strains. Morgan Stanley forecasts a sharply rising 2009 fiscal deficit. Besides the escalating national debt, to more than double the previous 1983 record. As a percent of GDP, it's expected to be around 70% in 2009. The tip of the iceberg, some say, compared to the private debt to GDP ratio. At an unprecedented 300%, according to University of Western Sydney economist Steve Keen.

He saw the storm coming before most others. He's also very skeptical about the rescue plan and compares it to King Canute's effort against the tide. Given the enormity of the problem, he sees the possibility of the debt pyramid crashing from a violent and uncontrollable chain of defaults, taking the government bond market down with it.

Strains in the US Treasury market are already evident in spite of their historically low yields. Recent auctions have had poor bid-to-cover ratios and long "tails" indicate weak demand. Secondary market delivery failures are also at record levels. Another sign of poor liquidity. If the worst of all possible worlds happens - a US debt default - the consequences will be "cataclysmic for the financial economy." The entire system will be bankrupt.

Where to hide if it happens? Amery suggests a few safe havens. The "ultimate" one being in precious metals. Think gold. Understand also that the $725/ounce October 31 spot price reflects market manipulation (over the short term) to drive it down from its March 2008 high above $1000. As one analyst puts it: I'll "give you three good reasons why gold is (underperforming). First: manipulation. Second: rampant manipulation. Third: incessant, nonstop, unabated, fiendish manipulation."

He also believes the process is only temporary and won't stop the metal's eventual rise. Given the current crisis and its likely duration, it won't surprise experts to see its price above $1000 again before it ends.

A Final Comment

In spite of trillions of asset losses. American and global households hardest hit. Wobbly world economies getting weaker. The virtual certainty of a deep and protracted recession, and the likelihood of no robust recovery when it ends.

Despite all this and Wall Street's worst year in decades, it's celebrating like it always does. With big bonuses. In the many billions of dollars. According to Bloomberg, Merrill Lynch plans $6.7 billion. Goldman Sachs about $6.85 billion and Morgan Stanley about $6.44 billion.

Bloomberg noted that Goldman, Morgan Stanley, Merrill, Lehman Bros. and Bear Stearns paid their employees "a cumulative $145 billion in bonuses from 2003 through 2007," or more than the Philippines' GDP. In 2007, the firms paid out a record $39 billion. In a year when three of them posted their worst quarterly losses ever and their shareholders lost over $80 billion. Two of them no longer exist. Another went into forced liquidation. Their combined 2008 losses should way exceed last year when they're reported.

Yet there's plenty of money for bonuses. Courtesy of ESSA/TARP. For executive pay and dividends as well. At a time all these companies are insolvent. Their survival dependent on federal handouts. US taxpayers are on the hook for them as their consumption declines. According to the Commerce Department at the fastest rate in 28 years. Because they don't get big bonuses. Are maxed out on credit and haven't the money to spend.

But the Fed and US Treasury do and plan to dispense more of it. To other takers lining up. Sovereign nations. Insurance companies. GM and Chrysler perhaps for their reported merger. Dependent on government cash to complete it. Any other company as well deemed worth saving. Big campaign contributors with friends in high places. What beleaguered homeowners don't have.

Floated proposals to help them appear meager at best. For a fraction of the millions in trouble with inadequate suggested funding amounts. A suggested $40 billion for 20 million or more homeowners facing foreclosure. With more at issue as well, according to The New York Times. Giving qualified borrowers a few grace years. Perhaps three. For lower mortgage payments that won't reduce their principal balance. It would only provide temporary relief and delay today's problem for a later time. When households may be no better off than now, yet face higher ARM reset obligations.

What's needed, but not proposed, is a 1930s type Home Owners' Loan Corporation (HOLC) plan that refinanced homes at affordable rates and prevented foreclosures. One on a grand scale as part of an enlightened New Deal agenda.

In lieu of "trickle down" to fraudsters, "trickle up" for beleaguered households. An idea so far with no traction for a new administration to consider. The one now in charge has no "imminent" plan, according to White House spokesperson, Dana Perino. On October 30, she added only that "If we find one that we think strikes the right notes....then we would move forward and announce it." Ones so far advanced are for Wall Street. Main street apparently can wait.

Florida Democrats Sue GOP Over Voter "Caging"

Preemptive 'war:' Florida Dems sue GOP over unused tactic

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It may be the peak of the 2008 presidential election season, but the Florida Democratic Party is taking a trip down memory lane with the first voter lawsuit filed against the GOP.

This time, it's not about ballot recounts, as in Gore v. Bush in 2000. It's a Democratic legal salvo accusing the Republicans of plotting a last-minute challenge of registered voters with potentially bad addresses, which may prevent them from casting a regular ballot at the polls Tuesday.

The lawsuit, filed in Leon County last week, cites alleged evidence of Republicans trying to ''cage'' a Duval County voter and of a GOP sheriff's candidate challenging some 300 voters in Glades County. Caging is the term for sending mail to voters in a bid to identify, by the undelivered pieces, who might have moved from their address on the registration rolls.

''This is above politics,'' said state Democratic Party spokesman Eric Jotkoff. "This is about our foundation of democracy.''

Not so, said his GOP counterpart, who called the lawsuit ''bogus'' and insisted the Republicans have no intention of challenging voters at the polls.

''They're playing off the fears of Florida voters,'' said state GOP spokeswoman Erin VanSickle. "People still have memories of 2000.''

Before last week, top Democratic lawyers seemed reluctant to go to court with their Republican adversaries before Election Day.

But that all changed on Tuesday, when the state Democratic Party joined two Democrats registered to vote in Duval and Glades counties in a lawsuit. They're trying to convince a Leon County judge to stop the Republicans from doing something they haven't actually done -- submit challenge lists of registered Democratic voters with questionable addresses to supervisors of elections throughout Florida.

State Circuit Judge P. Kevin Davey has not made a decision yet.

Read the full story at

NYC foreclosures hit Queens hardest

NYC foreclosures hit Queens hardest

By Mary Owen

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The borough of Queens had the highest rate of home foreclosures in New York City over the past year, averaging more than 150 foreclosures a month.

Only in September 2008 did the Queens foreclosure rate dip below the rate in Staten Island, according to online real estate data company

As of Oct. 1, “New York City foreclosures climbed 60 percent to 1,118, led by Staten Island and Queens,” reported. (Oct. 1) This is the highest citywide level in two years.

The latest round of Queens foreclosures came on top of a huge spike in August, when the borough’s foreclosures “shot up like the Alps,” increasing by 113 percent over the last year. (, Sept. 4)

New York City’s largest borough geographically, Queens is also the most diverse county in the U.S. Statistics from the U.S. Census and combined demographic studies show that Queens has the highest number of foreign-born residents—more than 48 percent—and that 87 percent of Queens residents like the diversity of the population. (New York Daily News, Sept. 18) The borough also includes a number of large African-American communities.

As in other major cities with high foreclosure rates like Detroit and Los Angeles, it is communities of color in Queens that are hardest hit by the seismic wave of foreclosures.

Southeast Queens has been the epicenter of the foreclosure earthquake, where oppressed communities such as Jamaica and South Jamaica, Hollis, St. Albans, the Rockaways and Broad Channel, Laurelton and Cambria Heights top the list.

“This could be the single greatest loss of Black wealth since the Great Depression, the greatest loss of Asian wealth since Japanese internment,” said City Council member James Sanders Jr., whose Laurelton district is in southeast Queens. (Queens Chronicle, Sept. 11)

Queens communities such as Jackson Heights, East Elmhurst and Corona, home to many Latin@s, have also suffered from high foreclosure rates. In addition, many Queens foreclosures affect two-family, three-family or larger homes, which jeopardize tenants who face eviction from rental apartments in foreclosed buildings.

A moratorium on foreclosures and evictions is needed to turn this situation around and stop the catastrophic loss of homes in Queens and throughout the U.S.

‘Bailout’ billions used to swallow Cleveland’s largest bank

'Bailout' billions used to swallow Cleveland's largest bank

By Martha Grevatt

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In Michael Moore's film "Fahrenheit 9/11," Bush is shown defining his constituency as "the haves and the have-mores." Now that Bush and Congress have orchestrated a historic giveaway of wealth—created by the have-nots—the have-mores are using it to swallow the less fortunate haves.

The banks that got a free government handout are taking their lottery winnings and buying up the banks that got none. When $7.7 billion was awarded to PNC Bank of Pittsburgh, PNC decided to spend $5.6 billion and buy National City Bank of Cleveland.

The 163-year-old bank was the ninth largest in the U.S. and the largest in Cleveland. Among local financial institutions, NCB was the most deeply entrenched in the subprime scandal.

This deal will create the fifth largest bank in the country, topped only by Bank of America, JP Morgan Chase, Citigroup and Wells Fargo.

Thanks to a "change of control" clause in their contracts, NCB's three highest-ranking executives will be compensated to the tune of $40 billion. The other 25,000 employees, including 8,000 in northeast Ohio, won't be so lucky. In fact, both PNC and NCB workers will face layoffs once the consolidation goes through. These are job losses that neither Cleveland nor Pittsburgh, reeling from the flight of manufacturing jobs that began in the 1980s, can afford. (Cleveland Plain Dealer, Oct. 25)

As local activists chanted in an Oct. 25 demonstration outside NCB's downtown headquarters: "NCB, PNC; all the banks are greedy!"

The End of a Subprime Administration

The End of a Subprime Administration

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[Note for TomDispatch Readers: As Election 2008 approaches, this seems like an appropriate time to look back, but also to say goodbye to all that. Yes, we have almost three months of the Bush administration to go; yes, so much that George W. did will be with us for an eternity. Still, the moment needs to be marked. I've done my best below. For new TomDispatch readers, in particular, let me suggest another way to mark this boundary moment: pick up a copy of The World According to TomDispatch: America in a New Age of Empire. It will bring you up to speed on this site, remind you of just what we've gone through since September 11, 2001, and offer you a sense of the ways in which our world has been changed that no new administration will be capable of ignoring. Tom]


The George W. Bush Story
By Tom Engelhardt

They may have been the most disastrous dreamers, the most reckless gamblers, and the most vigorous imperial hucksters and grifters in our history. Selling was their passion. And they were classic American salesmen -- if you're talking about underwater land in Florida, or the Brooklyn Bridge, or three-card monte, or bizarre visions of Iraqi unmanned aerial vehicles armed with chemical and biological weaponry let loose over the U.S., or Saddam Hussein's mushroom clouds rising over American cities, or a full-scale reordering of the Middle East to our taste, or simply eternal global dominance.

When historians look back, it will be far clearer that the "commander-in-chief" of a "wartime" country and his top officials were focused, first and foremost, not on the shifting "central theaters" of the Global War on Terror, but on the theater that mattered most to them -- the "home front" where they spent inordinate amounts of time selling the American people a bill of goods. Of his timing in ramping up a campaign to invade Iraq in September 2002, White House Chief of Staff Andrew Card infamously explained: "From a marketing point of view, you don't introduce new products in August."


From a White House where "victory strategies" meant purely for domestic consumption poured out, to the Pentagon where bevies of generals, admirals, and other high officers were constantly being mustered, not to lead armies but to lead public opinion, their selling focus was total. They were always releasing "new product."

And don't forget their own set of soaring inside-the-Beltway fantasies. After all, if a salesman is going to sell you some defective product, it always helps if he can sell himself on it first. And on this score, they were world champs.

Because events made it look so foolish, the phrase "shock and awe" that went with the initial attack on Iraq in March 2003 has now passed out of official language and (together with "mission accomplished") into the annals of irony. Back then, though, as bombs and missiles blew up parts of Baghdad -- to fabulous visual effect in that other "theater" of war, television -- the phrase was constantly on official lips and in media reports everywhere. It went hand-in-glove with another curious political phrase: regime change.

Given the supposed unique technological proficiency of the U.S. military and its array of "precision" weapons, the warriors of Bushworld convinced themselves that a new era in military affairs had truly dawned. An enemy "regime" could now be taken out -- quite literally and with surgical precision, in its bedrooms, conference rooms, and offices, thanks to those precision weapons delivered long-distance from ship or plane -- without taking out a country. Poof! You only had to say the word and an oppressive regime would be, as it was termed, "decapitated." Its people would then welcome with open arms relatively small numbers of American troops as liberators.

It all sounded so good, and high tech, and relatively simple, and casualty averse, and clean as a whistle. Even better, once there had been such a demonstration, a guaranteed "cakewalk" -- as, say, in Iraq -- who would ever dare stand up to American power again? Not only would one hated enemy dictator be dispatched to the dustbin of history, but evildoers everywhere, fearing the Bush equivalent of the wrath of Khan, would be shock-and-awed into submission or quickly dispatched in their own right.

In reality (ah, "reality" -- what a nasty word!), the shock-and-awe attacks used on Iraq got not a single leader of the Saddamist regime, not one of that pack of 52 cards (including of course the ace of spades, Saddam Hussein, found in his "spiderhole" so many months later). Iraqi civilians were the ones killed in that precise and shocking moment, while Iraqi society was set on the road to destruction, and the world was not awed.

Strangely enough, though, the phrase, once reversed, proved applicable to the Bush administration's seven-year post-9/11 history. They were, in a sense, the awe-and-shock administration. Initially, they were awed by the supposedly singular power of the American military to dominate and transform the planet; then, they were continually shocked and disbelieving when that same military, despite its massive destructive power, turned out to be incapable of doing so, or even of handling two ragtag insurgencies in two weakened countries, one of which, Afghanistan, was among the poorest and least technologically advanced on the planet.

The Theater of War

In remarkably short order, historically speaking, the administration's soaring imperial fantasies turned into planetary nightmares. After 9/11, of course, George W. and crew promised Americans the global equivalent -- and Republicans the domestic equivalent -- of a 36,000 stock market and we know just where the stock market is today: only about 27,000 points short of that irreality.

Once upon a time, they really did think that, via the U.S. Armed Forces, or, as George W. Bush once so breathlessly put it, "the greatest force for human liberation the world has ever known," they could dominate the planet without significant help from allies or international institutions of any sort. Who else had a shot at it? In the post-Soviet world, who but a leadership backed by the full force of the U.S. military could possibly be a contender for the leading role in this epic movie? Who else could even turn out for a casting call? Impoverished Russia? China, still rebuilding its military and back then considered to have a host of potential problems? A bunch of terrorists? I mean… come on!

As they saw it, the situation was pretty basic. In fact, it gave the phrase "power politics" real meaning. After all, they had in their hands the reins attached to the sole superpower on this small orb. And wasn't everyone -- at least, everyone they cared to listen to, at least Charles Krauthammer and the editorial page of the Washington Post -- saying no less?

I mean, what else would you do, if you suddenly, almost miraculously (after an election improbably settled by the Supreme Court), found yourself in sole command of the globe's only "hyperpower," the only sheriff on planet Earth, the New Rome. To make matters more delicious, in terms of getting just what you wanted, those hands were on those reins right after "the Pearl Harbor of the twenty-first century," when Americans were shocked and awed and terrified enough that anything-goes seemed a reasonable response?

It might have gone to anyone's head in imperial Washington at that moment, but it went to their heads in such a striking way. After all, theirs was a plan -- labeled in 2002 the Bush Doctrine -- of global domination conceptually so un-American that, in my childhood, the only place you would have heard it was in the mouths of the most evil, snickering imperial Japanese, Nazi, or Soviet on-screen villains. And yet, in their moment of moments, it just rolled right out of their heads and off their tongues -- and they were proud of it.

Here's a question for 2009 you don't have to answer: What should the former "new Rome" be called now? That will, of course, be someone else's problem.

The Cast of Characters

And what a debacle the Bush Doctrine proved to be. What a legacy the legacy President and his pals are leaving behind. A wrecked economy, deflated global stock markets, collapsing banks and financial institutions, soaring unemployment, a smashed Republican Party, a bloated Pentagon overseeing a strained, overstretched military, enmired in an incoherent set of still-expanding wars gone sour, a network of secret prisons, as well as Guantanamo, that "jewel in the crown" of Bush's Bermuda Triangle of injustice, and all the grim practices that went with those offshore prisons, including widespread torture and abuse, kidnapping, assassination, and the disappearing of prisoners (once associated only with South America dictatorships and military juntas).

They headed a government that couldn't shoot straight or plan ahead or do anything halfway effectively, an administration that emphasized "defense" -- or "homeland security" as it came to be called in their years -- above all else; yet they were always readying themselves for the last battle, and so were caught utterly, embarrassingly unready for 19 terrorists with box cutters, a hurricane named Katrina, and an arcane set of Wall Street derivatives heading south.

As the supposed party of small government, they succeeded mainly in strangling civilian services, privatizing government operations into the hands of crony corporations, and bulking up state power in a massive way -- making an already vast intelligence apparatus yet larger and more labyrinthine, expanding spying and surveillance of every kind, raising secrecy to a first principle, establishing a new U.S. military command for North America, endorsing a massive Pentagon build-up, establishing a second Defense Department labeled the Department of Homeland Security with its own mini-homeland-security-industrial complex, evading checks and powers in the Constitution whenever possible, and claiming new powers for a "unitary executive" commander-in-chief presidency.

No summary can quite do justice to what the administration "accomplished" in these years. If there was, however, a single quote from the world of George W. Bush that caught the deepest nature of the president and his core followers, it was offered by an "unnamed administration official" -- often assumed to be Karl Rove -- to journalist Ron Suskind back in October 2004:

"He] said that guys like me were 'in what we call the reality-based community,' which he defined as people who 'believe that solutions emerge from your judicious study of discernible reality.' I nodded and murmured something about enlightenment principles and empiricism. He cut me off. 'That's not the way the world really works anymore,' he continued. 'We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors.... and you, all of you, will be left to just study what we do.'"

"We create our own reality… We're history's actors."

It must for years have seemed that way and everything about the lives they lived only reinforced that impression. After all, the President himself, as so many wrote, lived in a literal bubble world. Those who met him were carefully vetted; audiences were screened so that no one who didn't fawn over him got near him; and when he traveled through foreign cities, they were cleared of life, turned into the equivalent of Potemkin villages, while he and his many armored cars and Blackhawk helicopters, his huge contingent of Secret Service agents and White House aides, his sniffer dogs and military sharpshooters, his chefs and who knows what else passed through.

Of course, the President had been in a close race with the reality principle (which, in his case, was the principle of failure) all his life -- and whenever reality nipped at his heels, his father's boys stepped in and whisked him off stage. He got by at his prep school, Andover, and then at Yale, a c-level legacy student and, appropriately enough when it came to sports, a cheerleader and, at Yale, a party animal as well as the president of the hardest drinking fraternity on campus. He was there in the first place only because of who he wasn't (or rather who his relations were).

Faced with the crises of the Vietnam era, he joined the Texas Air National Guard and more or less went missing in action. Faced with life, he became a drunk. Faced with business, he failed repeatedly and yet, thanks to his dad's friends, became a multi-millionaire in the process. He was supported, cosseted, encouraged, and finally -- to use an omnipresent word of our moment -- bailed out. The first MBA president was a business bust. A certain well-honed, homey congeniality got him to the governorship and then to the presidency of the United States without real accomplishments. If there ever was a case for not voting for the guy you'd most like to "have a beer with," this was it.

On that pile of rubble at Ground Zero on September 14, 2001, with a bullhorn in his hands and various rescuers shouting, "USA! USA!" he genuinely found his "calling" as the country's cheerleader-in-chief (as he had evidently found his religious calling earlier in life). He not only took the job seriously, he visibly loved it. He took a childlike pleasure in being in the "theater" of war. He was thrilled when some of the soldiers who captured Saddam Hussein in that "spiderhole" later presented him with the dictator's pistol. ("'He really liked showing it off,' says a... visitor to the White House who has seen the gun. 'He was really proud of it.'") He was similarly thrilled, on a trip to Baghdad in 2007, to meet the American pilot "whose plane's missiles killed Iraq's Al Qaeda leader, Abu Musab al-Zarqawi" and "returned to Washington in a buoyant mood."

While transforming himself into the national cheerleader-in-chief, he even kept "his own personal scorecard for the war" in a desk drawer in the Oval Office -- photos with brief biographies and personality sketches of leading al-Qaeda figures, whose faces could be satisfyingly crossed out when killed or captured. He clearly adored it when he got to dress up, whether in a flight suit landing on the deck of an aircraft carrier in May 2003, or in front of hoo-aahing crowds of soldiers wearing a specially tailored military-style jacket with "George W. Bush, Commander In Chief" hand-stitched across the heart. As earlier in life, he was supported (Karl Rove), enabled (Condoleezza Rice), cosseted (various officials), and so became "the decider," a willing figurehead (as he had been, for instance, when he was an "owner" of the Texas Rangers), manipulated by his co-president Dick Cheney. In these surroundings, he was able to take war play to an imperial level. In the end, however, this act of his life, too, could lead nowhere but to failure.

As it happened, reality possessed its own set of shock-and-awe weaponry. Above all, reality was unimpressed with history's self-proclaimed "actors," working so hard on the global stage to create their own reality. When it came to who really owned what, it turned out that reality owned the works and that possession was indeed nine-tenths of one law that even George Bush's handlers and his fervent neocon followers couldn't suspend.

Exit Stage Right

The results were sadly predictable. The bubble world of George W. Bush was bound to be burst. Based on fantasies, false promises, lies, and bait-and-switch tactics, it was destined for foreclosure. At home and abroad, after all, it had been created using the equivalent of subprime mortgages and the result, unsurprisingly, was a dismally subprime administration.

Now, of course, the bill collector is at the door and the property -- the USA -- is worth a good deal less than on November 4, 2000. George W. Bush is a discredited president; his job approval ratings could hardly be lower; his bubble world gone bust.

Nonetheless, let's remember one other theme of his previous life. Whatever his failures, Bush always walked away from disastrous dealings enriched, while others were left holding the bag. Don't imagine for a second that the equivalent isn't about to repeat itself. He will leave a country functionally under the gun of foreclosure, a world far more aflame and dangerous than the one he faced on entering the Oval Office. But he won't suffer.

He will have his new house in Dallas (not to speak of the "ranch" in Crawford) and his more than $200 million presidential "library" and "freedom institute" at Southern Methodist University; and then there's always that 20% of America -- they know who they are -- who think his presidency was the greatest thing since sliced bread. Believe me, 20% of America is more than enough to pony up spectacular sums, once Bush takes to the talk circuit. As the president himself put it enthusiastically,"'I'll give some speeches, just to replenish the ol' coffers.' With assets that have been estimated as high as nearly $21 million, Mr. Bush added, 'I don't know what my dad gets -- it's more than 50-75' thousand dollars a speech, and 'Clinton's making a lot of money.'"

This is how a legacy-student-turned-president fails upward. Every disaster leaves him better off.

The same can't be said for the country or the world, saddled with his "legacy."

Still, his administration has been foreclosed. Perhaps there's ignominy in that. Now, the rest of us need to get out the brooms and start sweeping the stables.

Judge tells White House to release wiretapping docs

Judge tells White House to release wiretapping docs

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The Bush administration must give to a federal court documents related to government wiretapping of domestic communications without a warrant after the September 11 attacks, according to a recent court order.

U.S. District Judge Henry Kennedy signed the order on Friday requiring the U.S. Justice Department to provide the court for private review certain documents that were sought in lawsuits filed by the civil liberties groups.

Kennedy ordered the administration to provide the documents from the White House Office of Legal Counsel by November 17, and said he will review them in private to see if their release would endanger national security.

The department argued that it was serving as the attorney for the administration and thus attorney-client privilege would allow it to keep classified information from public viewing, but Kennedy said its arguments were too vague.

"The attorney-client privilege is not necessarily the means for protecting this information," the order said. "Without more information, the court cannot conclude that the attorney-client privilege applies."

Dean Boyd, a Justice Department spokesman, said: "We're reviewing the opinion and will respond appropriately in court."

Elite combat brigade for homeland security missions raises ire of ACLU

Elite combat brigade for homeland security missions raises ire of ACLU

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In the next three years the military plans to activate and train an estimated 4,700 service members for specialized domestic operations, according to Air Force Gen. Gene Renuart, commander of U.S. Northern Command, which was created in 2002 for homeland defense missions.

The comments, made at the annual National Homeland Defense and Security Symposium in Colorado Springs last week, reveal more details about the recent stationing of active military personnel inside United States borders for what officials say is a mission centering around responding to catastrophic emergencies.

In September the Army Times reported that the 3rd Infantry Division’s 1st Brigade Combat Team — a unit based in Fort Stewart, Ga., that most recently spent 35 of the last 60 months in Iraq patrolling in full battle gear — would be put under the control of Northern Command, located on Peterson Air Force Base in Colorado Springs.

Military representatives claim that the unit, now referred to as the Consequence Management Response Force, is only supposed to assist in responding to terrorist attacks or natural disasters, but that hasn’t stopped numerous civil liberties advocates from speculating just how closely the military will be involved with law enforcement issues falling under a state’s jurisdiction.

“This isn’t a military police brigade or a civil affairs brigade. This is actually a combat brigade being assigned a domestic mission,” said Mike German, national security counsel for the American Civil Liberties Union’s legislative office in Washington., D.C.

The ACLU filed a Freedom of Information Act Request last week with the Department of Justice and the Pentagon asking for records relating to the assignment of domestic forces to the Northern Command.

“One of our founding touchstones of democracy is that the military is not to be used against the American people. Over a hundred years ago that sentiment was put into law in the Posse Comitatus Act, which prohibited the military from being involved in law enforcement functions,” German said. “Our hope is to find as much information as we can to challenge whether this is appropriate or not and to create some public awareness about what’s going on”

Now the commander of Northern Command claims that at least two more military units will be stationed inside the county in the next two years, contributing to an estimated total of 4,700 specially trained service members.

“It’s to help us manage the consequences of a large-scale event,” said Renuart. “We have one [unit] now trained and equipped and assigned to the Northern Command. We’ll grow a second one this calendar year of 2009 and a third one in the calender year 2010 so we can provide the nation three sets of capabilities that could respond to an event of the size of 9/11 or larger.”

According to Renuart, that means the units will have unique training in the logistics and medical fields.

“These are medical personnel, they’re chemical decontamination teams, they’re engineering teams, they’re logistics folks,” Renuart said. “It is really a force designed to respond to an event of catastrophic size. There have been some who say that this is designed as a law enforcement activity or that it will somehow be used to take away the authorities of a governor or a state, and that’s absolutely not the case.”

But German isn’t convinced.

“It’s fine for the general to say that,” the counter-terrorist operations specialist said. “But we want to know what the policies actually are, what the roles are and what the regulations are to see whether this is actually complying with the law.”

During the symposium Renuart admitted that the Northern Command has assisted regularly with law enforcement activities in the past.

“Here in Colorado every day we’re integrated with 45 other federal agencies in our headquarters planning for not only the natural disasters, but what would happen if a chemical attack was brought into our country by a terrorist organization,” Renuart said, emphasizing the command’s roles with intelligence and supporting anti-drug efforts.

“How do we track intelligence information that might identify networks of terrorists that might be around the world trying to get to us? How do we support law enforcement every day in the fight against narcotics entering illegally in our southwest borders? All of these things are part of the Northern Command mission.”

Said German, “It seems to be an incremental approach where the military is being used for narrow missions, but then more and more types of narrow missions until they all combine into one overarching mission.”

It is currently unknown what units may be assigned to domestic tasks in the next two years, but members of Northern Command will undergo a large-scale exercise this month simulating a destructive earthquake in southern California.

The Battle Over CA Prop 5: Special Interests Overwhelming the Public Interest

The Battle Over CA Prop 5: Special Interests Overwhelming the Public Interest

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Here is picture that sums up much that is wrong with American politics. Five governors of California, Democrats and Republicans, joining forces to oppose something that is indisputably in the public interest.

This is an image that could be repeated, with different faces, in region after region of our country, involving issue after issue. Public officials standing against the public good, with the disastrous results on display from Detroit to Wall Street. All suffering from the same destructive force: the power of entrenched special interests to cloud the vision of our leaders, causing them to thwart good sense, good legislation, and the will of the people.

In today's version, we have Jerry Brown, Pete Wilson, Gray Davis, George Deukmejian, and Arnold Schwarzenegger coming together to oppose Prop 5, a common sense ballot initiative that seeks to effectively and intelligently tackle the chronic problems facing California's deeply flawed criminal justice system.

California's prisons are a budget-busting debacle. There are currently more than 170,000 inmates crammed into prisons designed to hold 100,000 people. Around 70,000 of these prisoners are nonviolent offenders, with over half of them incarcerated for a drug offense.

A large part of the problem is a parole system the New York Timesrecently called "perhaps the most counterproductive and ill-conceived" in the U.S.. California's recidivism rate is 70 percent -- twice the national average. This stems in no small measure from the state's insistence on treating paroled murderers the same way as paroled nonviolent drug offenders. They all spend 3-5 years on parole. This overburdens parole officers, who end up spending very little time with any of their charges -- violent or nonviolent (According to the Times, 80 percent of California parolees have fewer than two 15-minute meetings with their parole officer per month.) Wouldn't it make more sense to keep a closer watch on rapists and killers than on nonviolent drug offenders?

As a result of this dysfunctional system, prison costs have risen 50 percent since 2000, to over $10 billion a year -- close to 10% of the state's budget (and roughly the same amount California spends on higher education). It costs $46,000 a year to keep a nonviolent prisoner in the state behind bars. Is it any wonder California is gushing red ink?

Enter Prop 5, a ballot initiative that will reduce prison overcrowding, increase public safety, cut costs, expand drug treatment programs inside California's prisons, and start the state's first drug treatment program for at-risk youth.

Prop 5 is structured to build on the proven success of Prop 36, a law promoting drug treatment over incarceration for nonviolent drug offenders. It was approved by 61 percent of California voters in 2000, despite almost unanimous opposition from public officials. Since being enacted, Prop 36 has saved California taxpayers $2 billion -- and graduated 84,000 people who, according to studies, are far less likely to become repeat offenders.

"Prop 5 finally addresses the twin tragedy of crushing prison costs on society and the revolving trapdoor of incarceration that stems from locking up too many nonviolent offenders," filmmaker Gabriel London, who has documented the state of our prisons, told me.

Given all this, and the fact that a majority of the public favors low-cost treatment models over the high-cost incarceration model, passage of Prop 5 would seem like a no-brainer. Especially given its support from a wide-range of drug treatment professionals, good government advocates, and clearly-not-soft-on-crime law enforcement types such as former San Quentin warden Jeanne Woodford who, blogging on HuffPost, wrote of Prop 5:

Prop 5 may well be California's last chance to bring about a solution to the many, intertwined problems in our criminal justice system... Incarceration of non-serious non violent drug offenders does not improve public safety. Treatment and accountability do. Prop 5 provides treatment and accountability. It is accountability for the drug user, the prison system, treatment providers, probation departments and the courts.

Yet Prop 5 is struggling because of a very powerful special interest: the prison guards union. It has funneled $1.8 million into the campaign to derail Prop 5.

For the guards, prison overcrowding means more overtime pay. So the state's prison industrial complex has unleashed the full force of its financial power -- funding an array of ads that blatantly mischaracterize Prop 5. Truth has gone out the window, replaced by overheated claims that the initiative is a "drug dealer's bill of rights," "a get out of jail free card" for meth dealers, and a law that will allow parents to abuse their kids and escape punishment.

Goodbye reform, hello fear. The special interests are, once again, overwhelming the public interest.

And, sadly, many politicians, many on the receiving end of prison guard contributions, have fallen in line. As Margaret Dooley-Sammuli, deputy campaign manager for Yes On 5, puts it: "The prison guards hold the keys to the California statehouse, so it's not a surprise that those thinking of running for governor in 2010, like Jerry Brown, Diane Feinstein, and even Meg Whitman, have come out against Prop 5." (Here's Daniel Abrahamson, co-author of Prop 5, on his dealings with Jerry Brown.)

The truly disturbing thing about their opposition to Prop 5 is that not one of them -- nor any of the governors at today's photo op -- has stepped forward with an alternate solution to the undeniable criminal justice crisis California is facing. A crisis so pressing that, if Prop 5 doesn't pass, in all likelihood the federal courts will step in. On November 17, a three-judge panel will consider putting California's entire prison system under federal control -- a move that could require the state to spend an additional $8 billion to bring the system up to constitutional standards.

So to review: Prop 5 follows a successful model, will lessen over-crowding, will save a cash-strapped state billions, will reform a "counterproductive and ill-conceived" parole system, and will shift criminal justice dollars from incarceration to treatment -- an effective approach favored by a majority of the public. Yet our leaders are opposing it, without offering any alternatives.

The drug war continues to be an electrified third rail in American politics. And political money continues to be a roadblock to real reform.

Don't believe the hype. Don't allow a sensible solution to be drowned by a torrent of money.

Vote Yes on Prop 5.

The Case of Patients v. Big Pharma

The Case of Patients v. Big Pharma

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On November 3rd the Supreme Court will hear the case of Wyeth v. Levine, which has been called the “business case of the century”—and with good reason. In essence, Monday’s ruling will decide if patients have the right to sue pharmaceutical companies for personal injuries stemming from prescription drugs approved by the Food and Drug Administration (FDA). This is the big one, folks.

First, the details of the case: In the spring of 2000, Diana Levine of Vermont received treatment for migraines which consisted of the painkiller Demerol and Phenergan, an antihistamine manufactured by Wyeth Pharmaceuticals. Phenergan is typically injected directly into the muscle or dripped into the vein through steady doses (a procedure called an “IV drip”). When administering the drug, clinicians must be careful not to expose it to blood in the arteries; doing so causes “swift and irreversible gangrene,” to use an evocative phrase from a September New York Times article on Levine’s case.

Unfortunately, the physician assistant who attended to Levine administered Phenergan neither through muscular injection nor IV drip, but through a process called “IV push”—a direct intravenous shot in the arm. The assistant missed and hit an artery. Over the next few weeks, Levine, who was an avid guitarist, saw her right hand and forearm turn purple and then black—until both were finally amputated.

The court battle is over whether or not Wyeth Pharmaceuticals sufficiently warned against the dangers of IV push on its packaging for Phenergan—packaging that had been approved by the FDA. The drug’s labeling did warn that it was preferable to give Phenergan through IV drip, and warned that “inadvertent intra-arterial injection”—accidentally injecting the drug into an artery—could cause “gangrene requiring amputation.” But nowhere on the Phenergan label was there an express warning that the method of IV push is extremely risky for this very reason.

In 2006, the Vermont Supreme Court upheld a jury decision in state court to grant Levine $6.7 million from Wyeth on grounds that the company should have more expressly prohibited IV pushing on the drug’s labeling. Wyeth appealed, arguing that, because the packaging was FDA approved, patients had no right to question it through state laws. In effect, Wyeth claims that federal approval preempts state-based challenges to regulatory standards.

The Preemption Wars

This principle of preemption makes for one of the most heated and important Court cases in a very long time. Levine is really about more than just drug labeling: it’s about whether or not the FDA can be second-guessed, even after a patient has been harmed by a product that the agency has approved.

Earlier this year, the U.S. Supreme Court upheld this principle in deciding that preemption applied to medical devices in the case of Riegel v. Medtronic. New Yorker Charles Riegel and his wife, Donna, brought suit against Medtronic Inc. after a catheter it had manufactured burst inside Riegel’s coronary artery during heart surgery. In February, the High Court ruled against Riegel in an 8-1 decision.

When the Court announced its decision, I lamented Medtronic's victory as a “blank check” for medical device makers in that it effectively shields them from law suits once they manage to get FDA approval for their products. But the stakes around Levine are even higher—in the words of the Times, Monday’s case is the “next frontier” in preemption.

That’s because, at its heart, Riegel was a question of statutory interpretation. In 1976, Congress passed a Medical Device Amendment to the Food, Drug, and Cosmetic Act (FDCA), the law that effectively created the FDA. This amendment expressly calls for preemption in the regulation of medical devices. As such, the Court’s decision was relatively simple, albeit ultimately dangerous. In that case, the Justices pretty much just read the letter of the law.

But Levine isn’t so cut-and-dried. There’s nothing in the broader Food, Drug and Cosmetic Act that constitutes an express intent to preemption. There is no preemption clause. Thus, as NYU law professor Catherine Sharkey put it to the Times, Levine “challenges the court to define the parameters of preemption outside the safe confines of the legislators’ text.”

In other words, Monday’s decision will decide if preemption is valid even when legislation doesn’t explicitly call for it—if, in effect, the way we regulate drugs in the United States of America prevents injured patients from bringing suits against drug companies that have FDA approval for their products.

Taking Sides

This case will make law. If the Court rules in favor of Wyeth, patients effectively lose their right to sue a drug company, even if its product harms them in an unexpected way. An FDA stamp of approval would essentially function as a shield from law suits.

To the pro-business crowd, this sounds just peachy. In June, the Bush Administration, a long-time proponent of preemption, filed an amicus brief with the Court on behalf of Wyeth. The administration argued that the FDA’s “thorough evaluation” of new drugs should not be questioned. The Bushies specifically note that, in approving a drug, the FDA strikes a particular balance between risks and benefits. “[S]tate laws that strike a different balance” necessarily “conflict with the FDA’s determination,” they say, and in such a conflict the federal government’s assessment should come out on top. Hence there’s an “implied preemption” to all of the FDA’s decisions.

The Chamber of Commerce also filed a brief urging the Court to rule against Levine, as did PhRMA, the pharmaceutical manufacturers association. PhRMA insists that the state tort laws that allow patients to sue drug companies pose “significant risks to public health and to FDA’s ability to accomplish its mission.” In PhRMA’s view, a win for Levine would force “pharmaceutical companies to inundate the FDA with requests for labeling changes to ensure that federal regulators have been presented with every potential labeling permutation.” In turn, this will supposedly “distract agency scientists from their core mission of reviewing the safety and effectiveness of prescription medications.”

When the Bush Administration, the largest business lobby in the country and the drug industry are all arguing that we should respect the authority and integrity of federal regulators, you know something’s up. And indeed it is: conservative forces know that the FDA is one of the most impotent federal regulatory agencies we have.

Earlier this year, a former legal counsel to the FDA estimated that the agency needed to double its budget and expand its staff by 50 percent in order to effectively regulate the $1.5 trillion worth of goods that falls under its purview. Strapped for resources, in recent years the FDA has instituted a “user fees” program through which drug companies pay extra to speed up approval of their products. Every year the agency hauls in close to $400 million—or almost 20 percent of its total budget—from this program. That’s right: about one-fifth of the FDA is directly bankrolled by the prescription drug industry.

Most drug companies pay the fees for expedited approval, which means that the under-staffed, under-funded FDA is often scrambling to get approvals out the door. Last year an FDA insider told Health Beat that the mad rush for approval compromises the quality of the agency’s oversight. According to the source, drug companies are “betting that, because [the FDA wants] to make the [expedited] deadline [for reviewing and approving new drugs], we won’t send the application [for approval] back. If you find a problem or there is something missing [from the application] and it doesn’t seem terribly material, there is a tendency to overlook it. Because if you don’t it will just delay the whole process.” Time pressures mean that FDA regulators “send [a drug submission] back [only] if it’s really crappy.”

It’s no wonder that the drug industry is so eager to give the FDA the final word in drug safety: the agency is gradually becoming a rubber stamp factory that survives on corporate pharmaceutical money to operate. There’s no easier regulatory process to navigate than the one you control. As Dr. Marcia Angell, a former editor of the New England Journal of Medicine (NEJM), recently told the Wall Street Journal: “the FDA has been given over to the industry it regulates.”

An Inexact Science

Even if the FDA were operating efficiently and effectively, it would still be unreasonable to insist that its decisions preclude any future legal challenges to drug safety. In a commentary published earlier this month in support of Levine, the Journal of the American Medical Association (JAMA) noted that “the drug and device regulation process is at best an inexact and incomplete science.”

Indeed, no matter how honest FDA regulators may be, “the current approach of basing drug approval decisions on clinical trials of efficacy that include relatively small numbers of patients virtually guarantees that the full risks and complete safety profile of these drugs will not be identified at the time of approval.” You can’t really know what will happen when millions of people take a drug for years if you’ve only tested it on dozens of people over a few months. The FDA is a regulatory body, but it’s not omniscient.

Moreover, because the Agency has been pushed to approve drugs as quickly as possible, many are “fast-tracked” through the agency. This means that they are rushed to market before there is time to know how patients who take it will fare over the long-term. In theory, manufacturers are supposed to continue long-term trials, and report the results to the Agency. But in practice many ignore this regulation, and the FDA doesn’t have the funding to enforce post-market surveillance. So much for what the Bush administration calls the FDA’s “thorough evaluation” of new drugs.

Drug companies are betting on the FDA’s limited knowledge—and are eager to limit it further. As the NEJM noted in a brief filed in support of Levine—the first such document to have the full support of the publication’s full roster of past and present editors—“pharmaceutical companies…[often] learn about dangers caused by their drugs long before the FDA does…[and do not] disclose this information to the FDA.”

Consider the case of Trasylol, a clotting drug used during heart surgery to prevent bleeding that was linked to increased probability of kidney damage and death. Bayer pharmaceuticals, the drug’s manufacturer, knew that it was associated with severe kidney damage since the 1980s, but the company ignored this evidence and a steady stream of similar studies over the next decade. In 1993, the drug was brought to market and wasn’t pulled from the shelves until November of last year, after the Canadian government had to stop large clinical trials of the drug because too many patients in the study group were dying. Researchers estimate that 22,000 lives could have been saved had the drug been recalled sooner.

There’s also Vioxx, Merck’s blockbuster $2.5 billion painkiller. In 2001, company scientists discovered that patients who took their drug were at a threefold risk of death due to heart problems relative to placebo patients. They withheld this information from the FDA for two years before law suits began popping up around the nation and the drug was pulled from shelves in 2004.

Other examples: internal documents show that drug maker Eli Lilly consciously played down the risks of Zyprexa, a drug for schizophrenia that causes major weight gain in many patients, for years. In the late 1990s, court investigators found that Wyeth had known that its weight-loss drug cocktail of Pondimin and Redux was causing a rare heart valve disease on a much wider scale than had been reported to federal regulators.

These are just a few examples of how the drug industry conceal risks. As the Medicare Payment Advisory Commission noted in its June 2008 report to Congress, "researchers have shown that bias in industry-sponsored trials is common.”

The problem is that the manufacturers control the trials of their own products. Big Pharma is virtually the only industry that is not subject to third-party evaluation of the safety of its products. Imagine if we let automakers oversee crash tests on new models, allowing the industry report results, as it sees fits, to the government and consumers. This would never happen: we have the U.S. the National Highway Traffic Safety Administration (funded by taxpayers) and the Insurance Institute for Highway Safety (funded by insurers) to run safety trials.

But in the case of drugs that have the power to kill or maim patients, drug makers themselves monitor the trials. Thus, when it comes to protecting patients, law suits and court orders have played a unique role in bringing the true dealings of drug companies into the light. Often, transparency and accountability must be forced on these companies through legal proceedings. As the JAMA commentary puts it, “tort law serves in effect as a way to close regulatory gaps in the FDA premarketing approval process and to provide a mechanism for postmarketing surveillance.” But if the Supreme Court decides in favor of Wyeth, we’re less likely to ever see internal documents that show what drug companies know and don’t know at any given moment, because we’d see fewer court orders and fewer law suits.

It’s hard to pinpoint how many personal injury law suits would be thrown out should the Court decide that FDA approval preempts any other claims that drugs are unsafe. The L.A. Times puts the number in the “tens of thousands” and JAMA says that such a “decision would likely result in thousands of lawyers defending drug manufacturers to file motions in state courts to dismiss plaintiffs' claims under preemption.” Thousands of people like Diana Levine would lose their only recourse for redress.

This, of course, would be great news for Big Pharma, which spends billions on law suits every year. In 2005, Eli Lilly spent $700 million to settle 8,000 lawsuits over Zyprexa, Between 1998 and 2006, Wyeth spent $15 billion to resolve lawsuits over Pondimin/Redux. In November, Merck offered a $4.85 billion settlement to cover some 27,000 lawsuits over Vioxx, but only after spending $1.2 billion in order to get to the settlement stage. Some analysts expect the Vioxx debacle will ultimately cost the drug giant somewhere around $30 billion. This year Bayer announced that it faced 78 law suits in the U.S. over Trasylol.

Do we really need all of these law suits to keep the prescription drug industry in check? Surely, even if the Supreme Court were to uphold preemption, medical research into prescription drugs would continue, and we’d find out what's safe and what isn’t, right?

Wrong. As we’ve seen, if you leave truth-seeking only to company researchers, the drug companies will do all they can to ignore or suppress unpleasant results. And without the threat of legal action to serve as a deterrent to misconduct, poor clinical trials becomes little more than bad press. Drug companies are well-equipped to deal with the press: they spend about $57 billion a year on marketing—almost twice what they spend on R & D.

The Blank Check

When the Supreme Court decides Wyeth v. Levine on Monday, it will effectively be deciding whether or not prescription drug companies get a blank check from the government. A victory for preemption will mean that, so long as a company can manipulate the FDA—or cover-up the risks of its product—it will never be held accountable for the harm its products and decisions cause patients around the country. An industry forecasted to hit $842 billion in sales in 2010 would be told that its only public safety hurdle is the FDA—an toothless agency that operates on industry dollars.

Diana Levine’s case is about much more than the wording of a drug label. It’s about transparency and accountability, about industry’s hold on the federal government, and about patients’ right to protect themselves. Let’s hope the Supreme Court makes the right decision.