Saturday, December 6, 2008

Retail Sales Are Weakest in 35 Years

Retail Sales Are Weakest in 35 Years

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The nation's retailers turned in the worst sales figures in at least a generation on Thursday, starting the holiday shopping season with double-digit declines across a broad spectrum of stores.

For many chains, the precipitous sales drops that took hold in September and October got worse, not better, in November, despite relatively strong sales in the few days after Thanksgiving.

The International Council of Shopping Centers, an industry group, described November's figures as the weakest in more than 35 years. Declines were recorded in every retail segment the group tracks, with the biggest coming from department stores, with sales down 13.3 percent compared with November a year ago, and specialty apparel retailers, down 10.4 percent.

Some retailers, though, have begun to figure out how to manage in the bleak environment, selling huge amounts of merchandise at steep discounts to generate cash. That will erode profits, of course. Department store profits will most likely plummet 20 to 60 percent in the final three months of the year, said Bill Dreher, senior retailing analyst with Deutsche Bank Securities. But retailers who are unloading merchandise early in the season are at least demonstrating an ability to take control.

"Even if they're giving away the product, it reduces inventory levels and keeps the problem from continuing," Mr. Dreher said. "It shows retailers are being disciplined."

Retail stocks rallied Thursday as investors interpreted the sales report as showing that, with sufficient discounts, goods can be sold in volume despite the poor economy. The Standard & Poor's retail index rose 1.5 percent.

The discounts being dangled by stores are the biggest retailing analysts have ever seen. "When did you ever see, on Dec. 1, 70 percent off apparel on the high end?" said Claire Gruppo, managing director of Gruppo, Levey & Company, a New York investment bank. "You just don't."

Any retailer that refused to trot out jaw-dropping bargains in November paid the price.

For example, Abercrombie & Fitch, the chain that uses sexy bodies in seductive poses to sell clothes to teenagers and young adults, has refused to get on the discount bandwagon. In November, sales at stores open at least a year, an important measure of retail health, fell a whopping 28 percent for the company, in contrast to a 2 percent increase for the period a year ago.

That is a far worse decline than previous months: Sales at Abercrombie & Fitch stores open at least a year were down 14 percent in September and 20 percent in October.

Saks, on the other hand, has driven consumers into shopping frenzies with eye-popping deals on luxury names like the Armani Collezioni and Zac Posen. The tactic worked: In November, Saks had only a 5.2 percent decline in sales at stores open at least a year, clawing its way up from months of double-digit declines.

Other stores that improved their lot in November took a page from the same playbook. Neiman Marcus, for example, has also been selling luxury goods at startling discounts. Sales at Neiman Marcus stores open at least a year fell 11.8 percent in November — better than the 15.8 percent drop in September and the 27.6 percent dive in October.

"If you don't understand the consumer and his mood right now and you're doing things as usual," said Walter Loeb, president of Loeb Associates, a consultant firm, "you're not going to get any business."

Stunning declines have become the norm in retailing since sales first plunged in September amid the financial crisis. The November figures indicate the downturn is migrating to some discount and warehouse stores, some of which even had sales growth in October.

Ken Perkins, president of Retail Metrics, a research firm, said either Wal-Mart Stores was stealing market share from its bargain competitors or the whole sector was softening.

At Target, sales at stores open at least a year tumbled 10.4 percent, in contrast to a 10.8 percent increase a year ago. Sales at Target were down 3 percent in September and 4.8 percent in October.

Sales at Kohl's stores open at least a year sank 17.5 percent, in contrast to a 10.2 percent increase last year. Sales at Kohl's stores dropped 5.5 percent in September and 9 percent in October. Sales at Costco were down 5 percent in November after a 7 percent increase in September and a 1 percent dip in October.

Even some stores with October sales increases lost their edge in November. Children's Place, which had a 4 percent sales increase in October, sank 7 percent in November. AĆ©ropostale, which was up 1 percent in October, was down 5 percent in November.

Of all the major retailers, only Wal-Mart and BJ's Wholesale Club, two of the country's best-known discount chains, thrived, in part because of robust grocery sales. Wal-Mart, in fact, enjoyed the biggest grocery sales spike in its history.

With new lines of brand-name merchandise from makers like Sony and Samsung, and with rock-bottom prices and an ability to move high volumes of merchandise, Wal-Mart seems to have cornered the market on Christmas this year.

The company began the critical holiday season by exceeding expectations. Sales at stores open at least a year increased 3.4 percent in November, not including fuel, compared with a 1.5 percent increase a year ago.

(The company made a point of being subdued in its sales announcement, noting its sadness that a worker, Jdimytai Damour, had been trampled to death at a Wal-Mart in Valley Stream, N.Y., when rowdy shoppers burst through the doors on Black Friday.)

Sales at BJ's Wholesale Club stores were up 4.1 percent in November, not including fuel, compared with a 7.7 percent increase a year ago.

Many retailers were buoyed by sales over Black Friday weekend, which increased about 0.9 percent, compared with a 6.5 percent increase last year, according to ShopperTrak, a research firm. Yet the weekend after Thanksgiving did not account for the majority of retailers' November sales. Results for the month were weakened, many people in retailing said, by the calendar — a later Thanksgiving this year meant fewer post-Thanksgiving shopping days in November.

"The Thanksgiving weekend improvement was not enough to significantly alter the month's outcome," Linda M. Farthing, president and chief executive of Stein Mart, said in a statement on Thursday. "We expect to continue aggressive promotional activity through the remainder of the year."

It was a plan echoed on Thursday by other retailers, like American Eagle Outfitters and Kohl's.

John D. Morris, an analyst with Wachovia whose Holiday Sale Rack Index tracks promotions at specialty mall retailers, said discounts were up 12 percent compared with last year. That may not sound like much, but it is the biggest jump in the decade-long history of the index. Usually, a big promotional period sends the index up 5 percent.

"It's a terrible story for retailers and their margins," said Michael Unger, a principal with Archstone Consulting. "But if you're a consumer looking for a good deal, you will find it."

Record 10% of U.S. homeowners in arrears or foreclosure

Record 10% of U.S. homeowners in arrears or foreclosure

California, with 19% of new foreclosures in the third quarter, is a big contributor to the worsening picture.

E. Scott Reckard

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A record 10% of the nation's mortgage-burdened homeowners fell behind on their loan payments or were in foreclosure during the third quarter, according to a survey released Friday by the Mortgage Bankers Assn., which said California and Florida were the biggest contributors to the worsening picture.

The percentage of loans at least a month overdue or in foreclosure was up from 9.2% in the second quarter and 7.3% a year earlier, the trade group said. In Florida, 7.3% of home loans were in foreclosure at the end of September. The figure was 3.9% in California and just under 3% for the nation.

Officials at the trade group said the number of loans entering foreclosure -- more than 1% of all residential mortgages nationally -- would have been higher if not for programs intended to save lenders and loan investors money by modifying the terms of troubled loans.

With the mortgage business already ripped apart by easy-money lending during the housing boom, the recession has added a more traditional creator of bad loans: losing a job.

In a grim report Friday, the government said U.S. employers cut 533,000 jobs in November, the weakest performance in 34 years, sending the jobless rate to a 15-year high of 6.7%. California unemployment is now well over 8%.

Combined with a 40% decline in California's median home price, the faltering economy is resulting in the highest rate on record of troubled home loans actually going into foreclosure, said Jay Brinkmann, chief economist for the Mortgage Bankers Assn.

California represents 13% of the loans in the country, Brinkmann said, but is recording 19% of all new foreclosures.

"California has lost more than 100,000 jobs over the past year, compared to Michigan, the usual poster child for unemployment, which only lost 70,000," Brinkmann said.

The group's report shows conditions on Sept. 30. Since then, the stock market has tumbled and the economy has gotten weaker.

"Things are going to get worse before they get better," said Thomas Lawler, a housing economist based in Virginia.

At first glance, California's troubles seem little different from those anywhere else, because just under 7% of borrowers in both California and the nation are behind on payments. But Brinkmann said a clearer picture emerges when you compare the number of newly delinquent loans in one quarter with the number of loans entering the foreclosure process the following quarter.

That foreclosure "roll rate" was about 10% to 12% nationally in the 1990s and ran from 12% to 15% for most of this decade, Brinkmann said. The percentage is now 30% nationally but has reached 79% in California and 65% in Florida, he said.

"This is nothing like anything we've ever seen before," Brinkmann said. "We were shocked when we saw the California roll rates."

Delinquencies on all loan types, including fixed-rate prime loans to the worthiest borrowers, remain on the rise. But the bankers group said the most intense problems are attributable to boom-era adjustable-rate mortgages -- which include tricky pay-option loans to prime borrowers as well as the riskiest subprime loans.

"Prime and subprime ARMs continue to have the highest share of foreclosures, and California and Florida have about 54% and 41% of the prime and subprime ARM foreclosure starts, respectively," Brinkmann said. "Until those two markets turn around, they will continue to drive the national numbers."

If the report had a bright spot, it was that foreclosure starts tapered off a bit, perhaps reflecting more efforts by lenders and loan servicers to modify loans.

State data provided to The Times by the mortgage trade group showed that 92,711 homes in California entered foreclosure proceedings during the third quarter, down from 110,023 in the second quarter and about the same as the 92,729 in the first quarter.

One in 10 American on food stamps

One in 10 American on food stamps

Statistics reveal that US unemployment reached the highest level in 15 years; as 31.6 million Americans are now receiving food stamps.

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According to Friday's figures from the U.S. Department of Labor Bureau of Labor Statistics, the unemployment rate reached 6.7 percent in November, the highest level since October 1993.

With 3.2 million more Americans unemployed than 12 months ago, the need for food assistance has risen. Last month saw the evaporation of 533,000 jobs, the biggest one-month loss since 1974.

Figures released earlier this week by the U.S. Department of Agriculture show that food stamp beneficiaries increased by 17 percent.

The food stamp program is now known as SNAP, Supplemental Nutrition Assistance Program. "While 10.3 million Americans are unemployed, more than 31 million -- one in every ten -- Americans now receives food stamps," said Dr. Jim McDonald, vice president of policy and programs at Bread for the World.

"In an economic recession, it is harder than ever for Americans to feed their families." McDonald added.

Investment banks set to cut 30,000 jobs

Investment banks set to cut 30,000 jobs

Up to 20,000 jobs look set to be lost as a result of the imminent merger of Merrill Lynch and Bank of America, as a further 10,000 job losses were announced across the investment banking fraternity.

By James Quinn

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Although restructuring teams working across both Merrill and BoA are still deciding on final headcount reductions, it is understood that the cuts will come through reducing overlap between the two institutions – in particular in areas such as technology and support services.

Duplication in Merrill's strong brokerage arm and BoA's private client business will also be hit.

Earlier reports that as many as 30,000 jobs woulds be lost are now understood to be wide of the mark. However, the cuts are likely to be twice the 10,000 redundancies that BoA internally estimated would be needed at the time of the rushed merger in September. Together, the two banks currently employ 360,000 staff.

Both companies' shareholders are due to vote on the merger today, but the cuts are not expected to be announced in full until next year, with actual redundancy announcements beginning at the end of January.

A Bank of America spokesman said: “We are currently evaluating our staffing levels, given both the pending merger with Merrill Lynch and the weak economic environment which is affecting the level of business activity. While we believe both factors will result in the elimination of positions, we have not completed our analysis. We expect to have a final plan early in 2009.”

It is also understood that as a result of Merrill's recent performance, the investment bank's final bonus pool is down 70pc on last year, with senior staff having already been informed that many will get no bonus.

Merrill is due to inform staff of bonuses on December 22, with payment due at the end of the month. A spokesman for the bank declined to comment.

Elsewhere, Credit Suisse announced it is to lose 5,300 staff – 11pc of its workforce – including 650 jobs to go in London. The Swiss bank, which has already cut 1,800 jobs this year, is trying to make savings of SFr2bn (£1.1bn) a year, with most of the cuts likely to come in its investment banking arm rather than its private client and wealth management business.

London is to lose a further 2,200 investment banking jobs with 1,000 jobs being shed at Nomura and 1,200 at Dresdner Kleinwort.

Nomura, which bought Lehman Brothers' European business, is cutting roughly a quarter of its 4,500-strong British workforce. Dresdner is shutting its UK mergers and acquisitions business as part of its cutbacks after being taken over by Commerzbank. The investment bank has to date been a significant player in the London M&A scene, advising HBOS most recently on its pending takeover by Lloyds TSB.

In addition, US institutional bank State Street is to lose 1,800 staff, or roughly 6pc of its global workforce, in a series of redundancies.

Foreclosures soar 76% to record 1.35 million

Foreclosures soar 76% to record 1.35 million

Foreclosure rate hits nearly 3% in the third quarter, while another 7% of borrowers fell behind on their mortgages.

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A record 1.35 million homes were in foreclosure in the third quarter, driving the foreclosure rate up to 2.97%, the Mortgage Bankers Association said Friday.

That's a 76% increase from a year ago, according to the group's National Delinquency Survey.

At the same time, the number of homeowners falling behind on their mortgages rose to a record 6.99%, up from 5.59% a year ago, the association said.

This means that one in 10 borrowers in America are either delinquent or in foreclosure.

Many of those troubled borrowers are in California and Florida, which have among the highest delinquency rates in the nation.

The weakened economy and mounting job losses are expected to push these numbers even higher. And that will likely affect homeowners with prime, fixed-rate mortgages, which make up the vast majority of loans and have so far held up fairly well. Until now, much of the housing market's problems were concentrated in the subprime, adjustable-rate market, where homeowners with weak financial backgrounds got loans they ultimately couldn't afford.

"We have not gone into past recessions with the housing market as weak as it is now, so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past," said Jay Brinkmann, MBA's chief economist.

Unemployment soared to 6.7% as payrolls shrunk 533,000 in November, the Bureau of Labor Statistics said Friday. It was the largest monthly job loss in 34 years, and brought the year's total job losses to 1.9 million.

The number of homes going into foreclosure in 2008 is on track to hit 2.2 million, Brinkmann said.

Modification efforts evident

The percentage of homes starting the foreclosure process in the third quarter actually inched down to 1.07% from 1.08% a year ago. But that's due at least in part to the fact that some states have instituted foreclosure moratoriums in order to give troubled borrowers a chance to get their loans modified.

But the moratoriums may just delay the inevitable for many, and could push up the foreclosure rate even more in coming quarters. For instance, Massachusetts, which instituted such a moratorium earlier this year, saw a large drop in foreclosures during its moratorium and then a big increase the following quarter, Brinkmann said.

Asked how recent government and servicer efforts to modify loans would affect the foreclosure rate in coming quarters, Brinkmann said it depends on how many of those borrowers are interested in workouts. Some reports say that 40% of homes with delinquent mortgages are already vacant.

At the same time, the foreclosure moratoriums and foreclosure prevention efforts have pushed up the number of loans that are 90 days or more late to its highest level ever. But this might not be as dire as it sounds, Brinkmann said. Many of the one million homeowners who fall into this category may never go into foreclosure if a more affordable mortgage can be arranged.

Another hint of good news in Friday's report is that the number of borrowers one month behind in payments remained fairly steady at 3.39%. This remains below levels seen during the last recession in 2001, Brinkmann said.

As for 2009, it all depends on whether the economy recovers, he said.

"Absent a recession, the 2009 number would likely have fallen by several hundred thousand, but the effects of job losses and general economic deterioration make the 2009 outlook worse, particularly if mortgage problems become more widespread," Brinkmann said.

The report is based on 45.5 million mortgages, about 85% of the total number of first mortgages nationwide.

California, Florida continue to suffer

California and Florida continue to have the country's highest rates of new foreclosures. These states have about 93,000 and 90,300 of the foreclosure starts in the quarter, respectively, according to the group. The next state, Illinois, is far behind with about 27,500 starts.

California and Florida also lead the nation in job losses, with the Golden State losing 101,300 positions over the past year and the Sunshine State shedding 156,200 jobs.

"Until those two markets turn around, they will continue to drive the national numbers," Brinkmann said.

Seven other states had rates of foreclosure starts that were above the national average for the quarter: Nevada, Arizona, Michigan, Rhode Island, Illinois, Indiana, and Ohio. But 20 states saw a decline in their foreclosure start rate, due to the moratoriums and modification efforts.

Subprime loans weaken

One in five subprime loans are now delinquent, crossing the 20% threshold for the first time, the group said. That level was up 3.72 percentage points from a year ago.

The number of prime loans past due also increased to 4.34%, up 1.22% from a year ago.

A growing number of prime borrowers are expected to fall behind on their mortgages as they lose their jobs. Until the economy turns around, the housing market will continue to suffer.

"It's clear the mortgage market is being driven by fundamental issues with jobs and the economy," Brinkmann said.

Democrats Set to Offer Loans for Carmakers

Democrats Set to Offer Loans for Carmakers

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Faced with staggering new unemployment figures, Democratic Congressional leaders said on Friday that they were ready to provide a short-term rescue plan for American automakers, and that they expected to hold a vote on the legislation in a special session next week.

Seeking to end a weeks-long stalemate between the Bush administration and House Speaker Nancy Pelosi, senior Congressional aides said that the money would most likely come from $25 billion in federally subsidized loans intended for developing fuel-efficient cars.

By breaking that impasse, the lawmakers could also clear the way for the Treasury secretary, Henry M. Paulson Jr., to request the remaining $350 billion of the financial industry bailout fund knowing he will not get bogged down in a fight over aiding Detroit.

Democrats are hoping Mr. Paulson will use some of that money to help individual homeowners avoid foreclosure.

"We have had constructive discussions with members of Congress from both houses, and both sides of the aisle," President Bush's spokeswoman, Dana Perino, said in a statement released Saturday. "We hope to continue to make progress toward assistance for the automakers based on important principles — that taxpayer assistance only be considered for companies willing to make the difficult decisions across the scope of their businesses to be viable and competitive in the future; that taxpayer assistance should come from funds already appropriated in the program specifically intended to assist automakers — the auto loan program; and that assistance is accompanied by very strong taxpayer protections. Taxpayers should not be asked to finance assistance for automakers without a strong likelihood that they will be paid back."

The short-term plan is intended to help the automakers survive until the new administration takes over in January and can craft a longer-term solution to the industry's troubles.

President-elect Barack Obama and his transition team have been working with Congressional leaders on both counts. Ms. Pelosi spoke to Mr. Obama on Thursday, and to Rahm Emanuel, Mr. Obama's chief of staff, twice on Friday.

Ms. Pelosi also spoke by phone on Friday with Joshua B. Bolten, President Bush's chief of staff, and the White House, too, seemed ready to reach a deal.

"We're continuing to talk to both parties and both houses of Congress, and we hope to make more progress this weekend," said Tony Fratto, the White House deputy press secretary.

Details of the auto companies' rescue package were not immediately available, but senior Congressional aides said that it would include billions of dollars in short-term loans to keep the automakers afloat at least until Mr. Obama takes office.

The auto companies will have to submit to strict government oversight to make sure that the bailout funds are used to carry out the reorganization plans they delivered to Congress this week. The auto company chiefs testified this week that they were willing to accept such regulation.

Ms. Pelosi had resisted using money from the fuel-efficiency program, which was approved as part of an energy bill last year, and Democrats had repeatedly called on the Bush administration or the Federal Reserve to act unilaterally, using existing authority, to aid the auto companies.

On Friday, Ms. Pelosi said she would allow that money to be used provided "there is a guarantee that those funds will be replenished in a matter of weeks" and there was no delay in working toward greater fuel efficiency.

Word of a breakthrough came as Congress wrapped up two days of hearings at which lawmakers grilled the chief executives of the companies — Chrysler, the Ford Motor Company and General MotorsG.M. could collapse by the end of this month. — and experts warned that

The automakers seemed tentatively heartened by the progress at the Capitol. "We're encouraged by Speaker Pelosi's intent to move forward quickly to resolve a crisis that can only grow more serious without action," said Greg Martin, a spokesman.

The proposed deal could still fall apart for several reasons.

It was unclear Friday how much support would come from Republicans, particularly in the Senate where procedural hurdles are high. Crucial details remain to be worked out, including how to restore the money to the fuel-efficiency program.

Under federal budget rules, those loan guarantees are now likely worth less than $25 billion because of the deteriorating condition of the auto companies. Congress appropriated $7 billion this fall to secure those loans. But now that the automakers' finances have worsened, the default risk has increased substantially.

Congressional aides said that staff would work through the weekend to determine how much money would be available to aid the auto companies under the current conditions.

Under the financial system rescue law approved by Congress in October, the Treasury secretary must request the second $350 billion, and Congress then has 15 days to disapprove the disbursement. Congressional leaders, upset over Mr. Paulson's management of the bailout program, have warned him that if he wants the money, he must ask for it by the end of next week.

Until the breakthrough Friday evening, it had appeared unlikely that Mr. Paulson would be able to persuade Congress to release the funds. Of the first $350 billion portion of the rescue fund, only $15 billion remains uncommitted.

It was the Labor Department's report of 533,000 jobs lost in November that seemed to halt the hand-wringing on Capitol Hill over what to do about the auto companies, and prompted Democratic leaders to announce that they would draw up legislation for votes next week.

"Today's announcement of major job losses and findings from Congressional hearings from the last two days make it clear that Congress must work on a bipartisan basis to provide short-term and limited assistance to the automobile industry while it undertakes major restructuring," Ms. Pelosi said in a statement.

She added: "Congress will insist that any legislation include rigorous and ongoing oversight to guarantee that taxpayers are protected and that resources are directed to ensure the long-term viability and competitiveness of the American automobile industry."

The Senate banking committee, led by Christopher J. Dodd, Democrat of Connecticut, began drafting legislation on Friday and staff were expected to work through the weekend. Mr. Dodd and other Democrats have proposed a strong oversight board or trustee to monitor any aid to the automakers.

"We aim to have votes next week on a responsible plan to help the millions of Americans who rely on a healthy auto industry for their livelihoods," the Senate majority leader, Harry Reid of Nevada, said in a statement on Friday evening.

"We will need support and cooperation from Republicans to determine when that vote happens and whether it will succeed," Mr. Reid said.

The Republican leader, Senator Mitch McConnell of Kentucky, said Friday he would have no comment on the Democratic proposal until after the details are released.

Some conservative House Republicans have called for allowing one or more of the auto companies to enter bankruptcy.

"It's fair to say the jobs report, the disastrous jobs report, has heightened the interest to do something," said Representative Barney Frank, Democrat of Massachusetts, after leading a hearing on Friday on the auto companies' request for aid.

A compromise on how to help the troubled automakers had proved elusive since G.M., Ford and Chrysler came to Washington last month to plea for aid.

The hearings in mid-November were disastrous for the Big Three, as their chiefs were criticized for flying in on private jets and failing to bring plans to make their struggling companies viable for the long term.

The tone was noticeably different at this week's hearings.

G.M. is seeking $18 billion in loans, but says it needs $4 billion immediately to survive past the year. Chrysler, which is also running out of cash, wants $7 billion. Ford, the healthiest of the three, is asking for a $9 billion line of credit.

New York Times bares Obama’s campaign lies on Iraq war

New York Times bares Obama’s campaign lies on Iraq war

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In an article buried on page 35 of its main news section, the New York Times Thursday provided a candid analysis of the glaring contradiction between the antiwar sentiments to which Democratic presidential candidate Barack Obama appealed in the run-up to the November election and the actual policies that President-elect Obama is preparing to implement come January.

The article, written by Times Pentagon correspondent Thom Shanker, is entitled "Campaign promises on ending the war in Iraq now muted by reality." This headline belies the real situation, as the "reality" of the Iraq war has not changed in any fundamental way in the month since the American people went to the polls.

Rather what has taken place—in a manner that is breathtaking for both it speed and blatancy—is Obama's repudiation of his campaign pledge to end the Iraq war, which proved decisive in his victories in both the Democratic primary contest and the general election itself.

Of course, for those who listened closely, this pledge was always severely hedged, by Obama's statements about leaving a "residual force" in the occupied country and listening to recommendations by US military commanders. But, in the campaign itself, these caveats were overshadowed by his continuous criticism of the Bush administration over the war and his indictment of his principal rival for the Democratic presidential nomination, Hillary Clinton, for her October 2002 vote authorizing the invasion of Iraq.

Now, as the Times article spells out, this relationship has been reversed. Obama has ditched the rhetorical promises of his campaign and these previous caveats have emerged clearly as the "reality" of his policy. It is the continuation of the war and occupation in Iraq as well as the essential strategy of using military force to assert US hegemony over the oil resources of the region.

While Obama "electrified and motivated his liberal base by vowing to ‘end the war' in Iraq," the Times states, as the transition advances he is now singing a very different tune. The president-elect is "making clearer than ever that tens of thousands of American troops will be left behind in Iraq, even if he can make good on his campaign promise to pull all combat forces out within 16 months."

As the article makes clear, "combat troops" is a term of art, or in the case of the Obama campaign, of deception. Only 15 out of 50 brigade-strength units now deployed in the occupied country are formally classified as "combat" troops. The rest are considered "support" units, though large sections of them are armed and participate in combat operations.

Moreover, as the article makes clear, the semantic difference between combat and non-combat units offers Obama an even easier way to formally fulfill his campaign pledge while continuing the war and occupation that millions of those who voted for him believed he would end.

"Pentagon planners say that it is possible that Mr. Obama's goal could be accomplished at least in part by relabeling some units, so that those currently counted as combat troops could be ‘re-missioned,' their efforts redefined as training and support for the Iraqis," Shanker reports.

"Mr. Obama was careful to say that the drawdowns he was promising included only combat troops," he writes. "But supporters who keyed on the language of ending the war might be forgiven if they thought that would mean bringing home all of the troops."

This is a rather delicate way of saying that Obama's anti-war rhetoric was from the outset deliberately misleading, designed to con the millions of Americans who went to the polls with the aim of voting to stop the war.

As for Obama's 16-month deadline for withdrawing "combat" forces from Iraq, the Times reports that Pentagon planners are currently drawing up projections for up to 70,000 US troops continuing the occupation not only well past May 2010, but also long after the supposed December 31, 2011 deadline for a full withdrawal established under the recently concluded status of forces agreement reached between Washington and its client regime in Baghdad. It is generally believed that this deadline will be annulled in subsequent negotiations.

The real policy of the incoming Obama administration was made quite clear last Monday at the Chicago press conference in which the president-elect formally announced that Hillary Clinton—whom he excoriated during the Democratic primary campaign for supporting the Iraq war—was his nominee for secretary of state and that Robert Gates—Bush's appointee as defense secretary, who has publicly stated that US troops will remain in Iraq for years to come—will be kept at his post.

He used the occasion to stress the distinction between "combat troops" and the "residual force" and to make clear that he would listen to the advice of Gates and uniformed commanders in setting the pace for even a partial withdrawal.

The Republican right hailed Obama's performance. In a column published in the Washington Post Friday, former Secretary of State Henry Kissinger, a prominent adviser of the Bush administration, praised the cabinet choices, writing, "It took courage for the president-elect to choose this constellation." He particularly commended the retention of Gates, calling him "the guarantor of continuity."

Then there is Charles Krauthammer, the right-wing columnist for the Post who was a prominent supporter of the invasion of Iraq, as well as of a new war against Iran. "That's the kind of change I can believe in," he declared on Fox News Monday. "It is, I'm sure, a disappointment to his left," he added. "But even more disturbing, I'll bet, is what he said about Iraq."

As the Times article accurately reports: "To date, there has been no significant criticism from the antiwar left of the Democratic Party of the prospect that Mr. Obama will keep tens of thousands of troops in Iraq for at least several years to come."

Indeed, United for Peace and Justice, the most prominent antiwar protest outfit, has issued a series of statements for a national conference it is holding next weekend in which it hails "the new excitement and hope that the election of Barack Obama brings," without saying a word about the Democratic president-elect's clear signals that he intends to continue a war and occupation that has killed over 1 million Iraqis and claimed the lives of more than 4,200 US troops.

Organizations such as UFPJ are entirely subordinated to the Democratic Party. They played a subsidiary role in diverting the American people's overwhelming opposition to the war behind the Democratic wing of US imperialism.

Even before Obama takes office, the transition process has made it clear that the struggle against war can only be waged as a struggle against the Democratic Party and the Obama administration, by building an independent political party of the working class, directed at the capitalist profit system, the source of militarism.

Suit claims Halliburton, KBR sickened base

Suit claims Halliburton, KBR sickened base

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A Georgia man has filed a lawsuit against contractor KBR and its former parent company, Halliburton, saying the companies exposed everyone at Joint Base Balad in Iraq to unsafe water, food and hazardous fumes from the burn pit there.

Joshua Eller, who worked as a civilian computer-aided drafting technician with the 332nd Air Expeditionary Wing, said military personnel, contractors and third-country nationals may have been sickened by contamination at the largest U.S. installation in Iraq, home to more than 30,000 service members, Defense Department civilians and contractors.

“Defendants promised the United States government that they would supply safe water for hygienic and recreational uses, safe food supplies and properly operate base incinerators to dispose of medical waste safely,” according to the lawsuit, filed Nov. 26 in U.S. District Court for the Southern District of Texas. “Defendants utterly failed to perform their promised duties.”

Eller and his attorneys are seeking to have the lawsuit declared a class action.

Diana Gabriel, a spokeswoman for Halliburton, said her company is “improperly named” in the lawsuit. “As such, we expect Halliburton to be dismissed from the action as Halliburton has no responsibility, legal or otherwise, for the actions alleged,” Gabriel said. “It would be inappropriate for Halliburton to comment on the merits of a matter affecting only the interest of KBR.”

Halliburton announced in April 2007 that it had dissolved its ties with KBR, which had been its contracting, engineering and construction unit since the 1960s.

Heather Browne, director of corporate communications for KBR, said her company “has not been formally served with this litigation, so we are not commenting at this time.”

Eller filed his claim after he deployed in February 2006 for 10 months. The lawsuit claims he developed skin lesions that subsequently spread, filled with fluid and burst. He said they went away, then reappeared, followed by blisters on his feet that made it painful for him to walk. He said they healed, but continue to return every three to four months.

Then, Eller said he experienced vomiting, cramping and diarrhea, and continues to suffer severe abdominal pain.

“Plaintiff witnessed the open air burn pit in operation at Balad Air Force Base,” the lawsuit states. “On one occasion, he witnessed a wild dog running around base with a human arm in its mouth. The human arm had been dumped on the open air burn pit by KBR.”

Eller said he still has nightmares and has been diagnosed with adjustment disorder.

The lawsuit states that KBR was required to comply with military standards for clean water, and monitor it. Eller accused KBR of not performing water quality tests and of not properly treating or chlorinating water, and said an audit by the Defense Department backs up his claim.

A report from Wil Granger, KBR’s water quality manager for Iraq, states that non-potable water used for showering was not disinfected. “This caused an unknown population to be exposed to potentially harmful water for an undetermined amount of time,” according to the report. The report also stated the problems occurred all across Iraq and were not confined to Balad.

The lawsuit states there was no formalized training for KBR employees in proper water operations, and the company maintained insufficient documentation about water safety. The suit notes that former KBR employees Ben Carter and Ken May testified at a congressional hearing in January 2006 that KBR used contaminated water from the Euphrates and Tigris rivers. Carter testified that he found the water polluted with sewage and that KBR did not chlorinate it.

The lawsuit states the swimming pools at Balad were also filled with unsafe water.

Eller also accused KBR of serving spoiled, expired and rotten food to the troops, as well as dishes that may have been contaminated with shrapnel

“Defendants knowingly and intentionally supplied and served food that was well past its expiration date, in some cases over a year past its expiration date,” the lawsuit states. “Even when it was called to the attention of the KBR food service managers that the food was expired, KBR still served the food to U.S. forces.”

The food included chicken, beef, fish, eggs and dairy products, which caused cases of salmonella poisoning, according to the lawsuit.

“KBR prevented their employees from speaking with government auditors and hid employees from auditors by moving them from bases when an audit was scheduled,” the lawsuit states. “Any employees that spoke with auditors were sent to more dangerous locations in Iraq as punishment.”

The lawsuit also accuses KBR of shipping ice in mortuary trucks that “still had traces of body fluids and putrefied remains in them when they were loaded with ice. This ice was served to U.S. forces.”

Eller also accuses KBR of failing to maintain a medical incinerator at Joint Base Balad, which has been confirmed by two surgeons in interviews with Military Times about the Balad burn pit. Instead, according to the lawsuit and the physicians, medical waste, such as needles, amputated body parts and bloody bandages were burned in the open-air pit.

“Wild dogs in the area raided the burn pit and carried off human remains,” the lawsuit states. “The wild dogs could be seen roaming the base with body parts in their mouths, to the great distress of the U.S. forces.”

According to military regulations, medical waste must be burned in an incinerator to prevent anyone from breathing hazardous fumes.

“On at least one occasion, defendants were attempting to improperly dispose of medical waste at an open-air burn pit by backing a truck full of medical waste up to the pit and emptying the contents onto the fire,” the lawsuit states. “The truck caught fire. Defendants’ fraudulent actions were thereby discovered by the military.”

The lawsuit also states that the contractors burned old lithium batteries in the pits, “causing noxious and unsafe blue smoke to drift over the base.”

Military Times has received more than 100 letters from troops saying they were sickened by fumes from the burn pits, which burned plastics, petroleum products, rubber, dining-facility waste and batteries.

The lawsuit asks that the plaintiffs receive monetary compensation for physical injuries, emotional distress, fear of future disease, and need for continued medical treatment and involvement, and that KBR and Halliburton be stripped of all revenue and profits earned “from their pattern of constant misconduct and callous disregard to the welfare of Americans serving and working in Iraq.”

Werner Ayers, LLP, of Houston, and Burk O’Neil LLC of Washington, D.C., are representing Eller.

Mukasey's 'Nixon Defense' of Bush

Mukasey's 'Nixon Defense' of Bush

By Jason Leopold

Go To Original

When it comes to protecting George W. Bush and his administration, Attorney General Michael Mukasey is stretching legal arguments as far as his predecessor Alberto Gonzales ever did – now even invoking the “Nixon Defense” for justifying presidential wrongdoing.

This week, Mukasey argued that there is no legal basis to prosecute current and former administration officials for authorizing torture and warrantless domestic surveillance because those decisions were made in the context of a presidential interest in protecting national security.

"There is absolutely no evidence that anybody who rendered a legal opinion, either with respect to surveillance or with respect to interrogation policies, did so for any reason other than to protect the security in the country and in the belief that he or she was doing something lawful,” Mukasey said during a Dec. 3 roundtable discussion with reporters.

Mukasey’s argument is, in essence, the same as Richard Nixon’s infamous declaration in his 1977 interview with David Frost that – in the context of Nixon’s illegal wiretappings, black-bag jobs and infiltration of antiwar groups – “when the President does it, that means that it is not illegal.”

Nixon's approval of the so-called Huston Plan, which proposed these actions against adversaries deemed national security threats, became one of the articles of impeachment filed against Nixon before his resignation in August 1974. Nixon defended his decision as necessary to protect the country.

In the wake of the 9/11 attacks, President Bush, his White House legal advisers – and now Attorney General Mukasey – resurrected Nixon’s concept of a President operating above the law to defend the nation.

As with the “Nixon Defense,” Mukasey maintains that – at least when Bush and his subordinates are involved – a justifiable intent negates any violation of law. In other words, if Bush or his advisers decide that some illegal act is necessary for national security, the act becomes, effectively, legal.

Mukasey is wrapping his extraordinary argument in the context of protecting Bush’s subordinates – at places like the Justice Department’s Office of Legal Counsel – from second-guessing for giving the President advice on what he can do in engaging in acts that would be illegal if done by someone else.

“If the word goes out to the contrary, then people are going to get the message, which is that if you come up with an answer that is not considered desirable in the future you might face prosecution, and that creates an incentive not to give an honest answer but to give an answer that may be acceptable in the future,” Mukasey told the reporters.

Conyers Complaint

Rep. John Conyers, chairman of the House Judiciary Committee, immediately took issue with the “breadth” of Mukasey’s statement “and the blanket conclusion that everyone involved in approving these policies believed they were acting within the law.”

Conyers reminded Mukasey that reams of evidence – including testimony from career military and law enforcement officials – show that top White House officials may have broken the law by authorizing torture and warrantless domestic surveillance.

“The public record reflects ample warning to administration officials that its legal approach was overreaching and invalid, such as repeated objections by military lawyers … on interrogation issues and the stark warning by then-Deputy Attorney General [James] Comey that the [Justice] Department would be ashamed if the world learned of the legal advice it had given on torture issues,” Conyers said in a letter to Mukasey.

Indeed, Maj. Gen. Antonio Taguba, who led the investigation of abuses at the Abu Ghraib prison in Iraq, said “there is no longer any doubt as to whether the current administration has committed war crimes. The only question that remains to be answered is whether those who ordered the use of torture will be held to account.”

Conyers added, “Looked at another way, is it your view that the CIA attorney who reportedly told Guantanamo interrogators that Department legal guidance boiled down to ‘If the detainee dies you’re doing it wrong' — or the Department lawyer who advised him — justifiably believed that approach comported with the law?”

Conyers was referring to minutes of a discussion on Oct. 2, 2002, when Jonathan Fredman, chief counsel to the CIA’s Counterterrorism Center, told U.S. military officials how interrogators could use the “wet towel” technique, known as waterboarding, to extract information from detainees.

“It can feel like you’re drowning. The lymphatic system will react as if you’re suffocating, but your body will not cease to function,” Fredman said, adding that the “wet towel” technique would only be defined as torture “if the detainee dies.”

“It is basically subject to perception,” Fredman said. “If the detainee dies you’re doing it wrong.”

Fredman’s comments prompted Lt. Col. Diane Beaver, then the chief military lawyer at the U.S. military base at Guantanamo Bay, Cuba, to respond: “We will need documentation to protect us.”

Conyers’s letter signals a strong possibility that his investigation into the Bush administration’s interrogation practices will continue when the 111th Congress convenes in January.

Mukasey’s Resistance

Like Attorney General Gonzales before him, Mukasey has stonewalled congressional inquiries into the Bush administration’s counterterrorism policies by refusing to release top-secret documents about the programs.

Mukasey also rebuffed a request by Conyers in June to appoint a special prosecutor to investigate whether Bush and senior members of his Cabinet committed war crimes by authorizing CIA and military interrogators to use harsh tactics against detainees at Guantanamo Bay and in Iraq.

That request followed an investigation by the International Committee of the Red Cross into interrogation practices at Guantanamo Bay, which “documented several instances of acts of torture against detainees, including soaking a prisoner’s hand in alcohol and lighting it on fire, subjecting a prisoner to sexual abuse and forcing a prisoner to eat a baseball.”

Mukasey’s comments also would seem to undercut work by the Justice Department’s Office of Professional Responsibility, which has spent four years probing the infamous Aug. 1, 2002, “torture memo” addressed to then White House Counsel Alberto Gonzales and written by former Office of Legal Counsel attorney John Yoo and signed by Yoo’s boss Jay Bybee.

That OPR probe is examining “whether the legal advice contained in those memoranda was consistent with the professional standards that apply to Department of Justice attorneys,” according to H. Marshall Jarrett, the head of the watchdog office.

The probe has centered on Yoo's use of an obscure health benefits statute to justify use of brutal interrogation tactics as long as they don’t cause “death, organ failure, or serious impairment of body functions."

Jack Goldsmith, who succeeded Bybee as head of the OLC, withdrew the “torture memo” in fall 2003, calling it “sloppily written” and “legally flawed.”

Nevertheless, the opinion from the Office of Legal Counsel – which is responsible for advising the President on whether actions are lawful and constitutional – gave the White House cover for decisions on harsh interrogations that may have already been underway.

Last April, President Bush told an ABC News reporter that he approved of meetings of a National Security Council's Principals Committee where senior officials discussed specific interrogation techniques that the CIA could use against detainees.

The Principals Committee included Vice President Dick Cheney, then-National Security Adviser Condoleezza Rice, Defense Secretary Donald Rumsfeld, Secretary of State Colin Powell, CIA Director George Tenet and Attorney General John Ashcroft.

No Legal Accountability

Mukasey’s embrace of the Nixon Defense – essentially clearing anyone who acted under presidential authority with the intent of protecting the nation – means that none of the participants would face any legal accountability.

Indeed, Mukasey told the reporters that he saw no reason for President Bush to even consider granting blanket pardons.

“In those circumstances, there is no occasion to consider prosecution and there is no occasion to consider pardon,” Mukasey said.

Nevertheless, there are ongoing investigations being conducted by Mukasey’s Justice Department into actions related to Bush’s “war on terror.”

In a semi-annual report sent to Congress, Inspector General Glenn Fine said he is continuing to probe the Justice Department’s involvement with the terrorist surveillance program and the FBI’s use and abuse of exigent letters where agents sought phone and e-mail records.

There is also the investigation by John Durham, an assistant attorney general in Connecticut who was appointed special counsel earlier this year to investigate the destruction of videotapes in 2002 that documented CIA interrogators waterboarding detainees.

The tapes were ordered destroyed, according to published reports, because the individuals overseeing the interrogations feared criminal prosecution if the tapes were leaked.

During his roundtable talk with reporters, Mukasey again refused to say whether he believed waterboarding was torture.

At his Senate confirmation hearings, Mukasey balked at answering that question, almost derailing his nomination, which was saved by the support of Democratic Sens. Charles Schumer and Dianne Feinstein.

Mukasey first insisted that he hadn’t been briefed on the practice, and later maintained that since the use of waterboarding had been suspended, there was no reason for him to give an opinion.

That argument – asserting that he had no responsibility for investigating acts like waterboarding since they had occurred before his arrival at Justice – foreshadowed his current assertion that it would be wrong to reexamine actions by Bush and his subordinates earlier in the “war on terror.”

Sanctioned Acts

Some of those controversial techniques also appear to have been sanctioned by the Justice Department, before Mukasey’s arrival.

For instance, CIA officials pressed the Justice Department’s criminal division for assurances that they would not be prosecuted under anti-torture laws if they followed guidelines on aggressive interrogation techniques. The officials appealed to the head of the Criminal Division for these guarantees, to Michael Chertoff, who is now Secretary of Homeland Security.

Three years ago, when Chertoff was facing confirmation hearings to be Homeland Security chief, the New York Times cited three senior-level government sources as describing Chertoff’s Criminal Division as fielding the questions from the CIA.

“One technique the CIA officers could use under circumstances without fear of prosecution was strapping a subject down and making him experience a feeling of drowning,” the Times reported. In other words, Chertoff appears to have green-lighted waterboarding.

Chertoff reportedly did object to some other procedures, such as death threats against family members and mind-altering drugs that would change a detainee’s personality, the Times reported

During his Senate confirmation hearings in February 2005, Chertoff denied providing the CIA with legal guidance on the use of specific interrogation methods, such as waterboarding. Rather, he said he gave the agency broad guidance in response to questions about interrogation methods.

"You are dealing in an area where there is potential criminality," Chertoff said in describing his advice to the CIA. "You better be very careful to make sure that whatever you decide to do falls well within what is required by law."

Nevertheless, the evidence continues to build that Chertoff’s assurances gave CIA interrogators confidence they would avoid prosecution as long as they stayed within the permissive guidelines devised by Yoo and Bybee.

Concerns about Obama

That evidence has lead civil rights organizations to press President-elect Barack Obama to aggressively investigate the Bush administration’s actions once he is sworn in next month.

Obama has not indicated whether Eric Holder, his choice for Attorney General, will pursue an investigation into the Bush administration’s policies, particularly issues related to torture.

In response to press reports about Obama shying away from such a probe, Michael Ratner of the Center for Constitutional Rights said “one of Barack Obama’s first acts as President should be to instruct his Attorney General to appoint an independent prosecutor to initiate a criminal investigation of former Bush administration officials who gave the green light to torture.”

In an article published in the magazine The Progressive, Ratner pointed to a statement Holder made a few months ago in which the Attorney General designee said the “American people” are owed “a reckoning.”

Ratner said anything less than a full-scale criminal investigation – a substitute like a Truth Commission assigned simply to ascertain the facts – would be unacceptable.

“If Obama and Holder want to adhere to our Constitution and uphold our highest values, they must pursue those in the Bush administration who violated that Constitution, broke our laws, and tarnished our values,” Ratner wrote. “To simply let those officials walk off the stage sends a message of impunity that will only encourage future law breaking. The message that we need to send is that they will be held accountable.

“This is not Latin America; this is not South Africa. We are not trying to end a civil war, heal a wounded country and reconcile warring factions. We are a democracy trying to hold accountable officials that led our country down the road to torture. And in a democracy, it is the job of a prosecutor and not the pundits to determine whether crimes were committed.”

Interior Dept. Changes Rule to Remove Congress Veto

Interior Dept. Changes Rule to Remove Congress Veto

Go To Original

In another regulatory action in the waning days of the Bush administration, the Interior Department on Thursday unveiled a new rule that challenges Congress’s authority to prevent mining planned on public lands.

Congress has emergency power to stop mineral development, and has used it six times in the last 32 years. The most recent was in June, when it put a three-year moratorium on uranium mining on one million acres near the Grand Canyon. Interior Secretary Dirk Kempthorne has ignored that Congressional directive, saying it was procedurally flawed.

The new rule issued by the Interior Department’s Bureau of Land Management comes as environmental groups are suing the bureau in federal court for failing to obey Congress’s directive, which under a 1976 law can be invoked when “an emergency situation exists and extraordinary measures must be taken to preserve values that would otherwise be lost.”

The revision of the rule eliminates all references to Congressional authority. The revision moved through the often-cumbersome rule-making process with lightning speed; it was proposed in October, and the public was given just 15 days to comment.

The rule seems intended to speed a judicial confrontation on the constitutionality of the 1976 law, and to underscore the Interior Department’s determination to leave public land near Grand Canyon National Park in northern Arizona open for mineral development.

Tina Kreisher, a spokeswoman for the department, said that revising the rule did not relieve the department of its legal obligation to obey Congress. “We are obliged to follow the law,” Ms. Kreisher said.

Bill Hedden, the executive director of the Grand Canyon Trust, described the new rule as a power play, saying, “They certainly are wanting to remove anything that might crimp their power” to determine what can be done on public lands.

In September, the Center for Biological Diversity, the Grand Canyon Trust and the Sierra Club sued the secretary of the interior for ignoring the mandate of the House Natural Resources Committee. The Interior Department contends that the committee action withdrawing lands from mining was invalid because the panel lacked a quorum. In response, the committee chairman said the appropriate numbers had been present to validate its action.

The environmental groups’ lawsuit is the most obvious opportunity for a constitutional challenge to the 1976 law.

Congress’s emergency withdrawal power gives “the government an opportunity to reflect on whether or not the lands should be left open to mining or closed,” said Mark Squillace, director of the Natural Resources Law Center at the University of Colorado Law School.

Because of the broad ability of mining companies to make claims, Mr. Squillace added, “without the time out, the choice is essentially made.”

This is not the first time a Republican administration has tried to block the emergency withdrawal provisions; in the early 1980s, a federal judge rejected a challenge brought by Interior Secretary James G. Watt.

Asked why the new rule was necessary, Chris Paolino, another department spokesman, said that the law had been dormant since the early 1980s, but that “it has again come forward and that makes this an appropriate time to address this sticking point in our regulations.”

The Bush administration is not unique in seeking to put its stamp on rules in the final days of its term. The Clinton administration, for example, did, too.

This week another rule made it easier for coal companies to dump rock and dirt from mountaintop mining operations into streams and valleys.

Record number of Americans using food stamps: report

Record number of Americans using food stamps: report

By Roberta Rampton

Go To Original

Food stamps, the main U.S. antihunger program which helps the needy buy food, set a record in September as more than 31.5 million Americans used the program -- up 17 percent from a year ago, according to government data.

The number of people using food stamps in September surpassed the previous peak of 29.85 million seen in November 2005 when victims of hurricanes Katrina, Rita and Wilma received emergency benefits, said Jean Daniel of the USDA's Food and Nutrition Service.

September's tally -- the latest month available -- was also boosted by hurricane and flood aid, Daniel said on Wednesday.

But anti-hunger groups said the economic downturn is the main reason behind the higher figures.

"It's a disturbing trend," said Ellen Vollinger, legal director with the Food Research and Action Center. She said she expects more people will turn to food stamps as unemployment figures rise and the economy remains weak.

One in 10 Americans were participating in the food stamp program as of September, said Dottie Rosenbaum, analyst with Center on Budget and Policy Priorities, a think tank.

That's approaching the all-time high of 10.5 percent of the population that used the program in 1994, and is similar to levels seen in the early 1980s, she said.

States that have seen a drop in job numbers and increase in home foreclosures such as Florida and Nevada also have seen a marked increase in food stamp use, Rosenbaum said.

Food banks are struggling to meet increased requests for food, said Maura Daly of Feeding America, a network of food banks.

"The tough economic time that our nation is facing is having a tremendous impact on the level of food assistance needed across the country," Daly said.

On average, people who used food stamps received $100 per month in benefits in September. That increased slightly in October to account for higher food prices, but hunger groups said the benefits still don't go far enough at a time of high food prices and home heating costs.

Last month, the USDA said 36.2 million Americans or 11 percent of households struggle to get enough food to eat, and one-third of them had to sometimes skip or cut back on meals.

Hunger groups want Congress and the new administration to increase food stamp benefits as part of an economic stimulus package they hope will come in early 2009.

The benefits go directly to people who spend it at local grocery stores, supporting businesses and jobs, said Vollinger of the Food Research and Action Center.

"They (the benefits) don't sit in a pocket," she said, pointing to USDA estimates that $5 in food stamp spending generates $9 in economic activity.

World stability hangs by a thread as economies continue to unravel

World stability hangs by a thread as economies continue to unravel

The political bubble is bursting. Spreads on geo-strategic risk are now widening as dramatically as the spreads on financial risk at the onset of the credit crunch.

Whether it is the Indian rupee, the Shanghai bourse, or Kremlin debt, the stars of the credit boom have fallen to earth. Investors are retreating into 3-month US Treasury bills – the ultimate safe-haven. The yield has fallen to 0.02pc, less than zero after costs. You pay Washington to guard your money.

The working assumption of the "Great Boom" is – or was – that we live in a benign era where most societies are converging towards some form of market liberalism; where trade and capital flows are unrestricted; where governments have enough legitimacy to keep order by light touch; where a major war is unthinkable.

This illusion is now being tested.

We should not to read too much into the Bombay carnage. It may or may not be significant that the Deccan Mujahideen – whoever they are – picked India's financial hub to launch their spectacular.

Even so, the love affair with Bombay's bourse was cooling anyway. The Sensex index is down almost 60pc from its peak.

The exodus of foreign capital may now quicken, laying bare the horrors of Indian public finance. The combined federal and state deficit is 8pc of GDP. Plainly, spending will have to be slashed.

If the atrocity now propels the Hindu nationalist leader Narendra Modi into office at the head of a revived Bharatiya Janata Party (BJP), south Asia will once again face a nuclear showdown between India and Pakistan.

Events are moving briskly in China too. Wudu was torched by rioters this month in a pitched battle with police. Violence has spread to the export hub of Guangdong as workers protest at the mass closure of toy, textile, and furniture factories.

"The global financial crisis has not bottomed yet. The impact is spreading globally and deepening," said Zhang Pin, head of the national development commission. "Excessive bankruptcies and business closures will cause massive unemployment and stir social unrest".

We are about to find out whether China has made the wrong bet with a development strategy of vast investment in manufacturing plant for mass export at thin margins to the US and Europe.

The shocking detail in the World Bank's latest report on China is that wages have fallen from 52pc to 40pc of GDP since 1999. This is evidence of an economic model that is disastrously out of kilter, and unlikely to retain popular support.

The Communist Party lost its ideological mission long ago. The regime depends on perpetual boom to stay in power. As the economy sours, there must be a high risk that it will resort to the nationalist card instead.

Tokyo certainly thinks so. When I visited Japan's Defence Ministry last year the deputy minister showed me charts detailing the intrusion of China's fast-growing fleet of attack submarines into Japanese waters. "We see its warships in the Sea of Japan all the time," he said.

Shoichi Nakagawa, the head of the ruling LDP party, was even more explicit. "What happens when China attacks Japan? Will the US retaliate on our behalf?" he said.

As for Europe, it is already fragile. Iceland, Hungary, Ukraine, Belarus, Latvia, and Serbia have turned to the IMF. Russia is a hostage to oil prices. If Urals oil stays below $50 a barrel for long, we are going to see an earthquake of one kind or another.

It is too early in this crisis to conclude whether Europe's monetary union is a source stability, or is itself a doomsday machine. The rift between North and South is growing. The spreads on Greek, Irish, Italian, Austrian, and Belgian debt remain stubbornly high. The lack of a unified EU treasury has become glaringly clear. Germany has refused to underpin the system with a fiscal blitz.

In the 1930s, it was not obvious to people living through debt deflation that their world was coming apart. The crisis came in pulses, each followed by months of apparent normality – like today.

The global system did not snap until September 1931. The trigger was a mutiny by Royal Navy ratings at Invergordon over pay cuts. Sailors on four battleships refused to put out to sea. They sang the Red Flag.

News that the British Empire could not uphold military discipline set off capital flight. Britain was forced off the gold standard within five days. A chunk of the world followed suit.

Nor was it obvious that Germany would go mad. Bruning persisted with deflation, blind to the danger. The result was the election of July 1932 when two parties committed to the destruction of Weimar – the KPD Communists and the Nazis – won over the half the seats in Reichstag.

We can hope that governments have acted fast enough this time – with rate cuts and a fiscal firewall – to head off such disasters. But then again, the debt excesses are much greater today. If in doubt, cleave to those countries with a deeply-rooted democracy, a strong sense of national solidarity, a tested rule of law – and aircraft carriers. The US and Britain do not look so bad after all.