Thursday, December 18, 2008

Madoff collapse has global impact

Madoff collapse has global impact

By Jean Shaoul

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Bernard Madoff's fraudulent investment firm, which collapsed last Thursday when its owner and founder was arrested, has ensnared victims around the world. These include some of the largest international banks, hedge funds, charities, pension funds, wealthy investors and some of more modest means. Madoff admitted that his firm was "a giant Ponzi scheme" and owed at least $50 billion.

The scandal, the world's largest ever fraud, will mean the widespread destruction of wealth, not just in the United States, but internationally. It will lead to billions of dollars in write-downs and losses for financial institutions, bankruptcies for weaker and smaller banks, and financial devastation for pensioners, hospitals, universities and philanthropic organisations whose assets were placed with Madoff. Even now, a week after the collapse, the full extent of the losses is unclear.

It has sparked fears about the financial viability of hedge funds and other investment firms, leading hedge funds to limit withdrawals. It threatens a chain of defaults by financial institutions and businesses that have invested in hedge funds which could, in turn, bring down other investors, including major infrastructure and industrial corporations which have made loans to them.

Madoff, who was well connected to rich investors, politicians and regulators, ran a $17 billion investment business for wealthy clients alongside his stock brokerage firm, ostensibly investing in blue chip stocks and options. But the warning signals were there for anyone who was watching. Madoff had for years been paying a 10 percent to 12 percent return to his clients, in good times and bad. The secretive nature of his operation and his astounding ability to generate such consistent returns aroused the suspicion of some prominent individuals and firms within the milieu of high finance.

His investment arm was not even registered with the US Securities and Exchange Commission (SEC) until September 2006. A number of financiers alerted the SEC to the likelihood that Madoff was running a scam, but were given short shrift by regulators. One hedge fund operator sent a letter to the SEC warning, "Madoff Securities is the world's largest Ponzi scheme."

Last year, a hedge fund advisory firm, Aksia, warned clients against Madoff in part because his accounts were audited by a three-person firm, one of whom was his secretary and another a 70-year-old retiree in Florida, and the Madoff business empire was its sole audit client. The auditors are now also under investigation.

Nevertheless, Madoff was considered a leading light on Wall Street with a reputation in certain wealthy circles as a financial wizard. New clients lined up to invest in his funds, which were closed to all but those with personal connections to his existing clients. Major banks and hedge funds funnelled money invested by their own clients into Madoff's operation.

It now appears that Madoff, in a classic Ponzi scheme, was paying existing clients with new clients' money. No one knew precisely what he was doing because he refused to allow clients to access their accounts online or to allow potential investors access to his books for "due diligence."

It all worked as long as there was plenty of cheap credit and hedge funds and banks seeking lucrative investment opportunities were piling up profits. Things started to go wrong when the credit crunch began to bite, new clients dried up and existing clients sought to withdraw their funds. Early in December clients of Bernard L. Madoff Investment Securities LLC requested some $7 billion in redemptions.

When Madoff realised the game was up, he tried to distribute his remaining $300 million as "bonuses" to his business associates and family members in December of this year, instead of his normal time for handing out bonuses, which was February. When his two sons, who held high positions in his family-based business, questioned him about such an unusual and early payout, he reportedly admitted the real state of affairs, and they turned him in.

The Fairfield Greenwich Group, a US fund manager, whose founder, Walter Noel, has ties to international wealth, has suffered the largest losses. It had $7.5 billion of its $17 billion invested with Madoff.

Fairfield and its Sentry Fund raised funds for Madoff and acted in partnership with European banks such as Europe's largest bank by market capitalization, the Spanish Banco Santander, and the Swiss Union Bancaire Privee, as well as Swiss money manager Genvalor, Benbassat et Cie., to market Madoff-based funds. They in turn repackaged Madoff's investments and sold them to "funds of hedge funds" firms that cater to wealthy investors.

Fairfield earned $160 million of its $250 million revenues in 2007 from Madoff-related business, promising its clients that they took more care of their money than other firms. Its web site said that it "employs a significantly higher level of due diligence work" than that carried out by other money managers.

Other big losses within the US include Rye Investment Management, part of Massachusetts Mutual Life Insurance's Tremont Capital, which has lost at least $3 billion. Tremont's hedge fund subsidiary reported that it had lost all $3 billion of its clients' money because Madoff was its sole fund manager.

In Britain, Kingate Global Fund Ltd, the $2.8 billion hedge fund run by Kingate Management Ltd, has lost $2.5 billion. Ascot Partners has lost $1.8 billion, Access International Advisors $1.4 billion, and Maxam Capital Management LLC $280 million.

While many of Madoff's clients were institutional investors, some of his victims were smaller investors, including charities, pension funds and individuals whom he knew socially and who had placed their nest eggs with him. Austin Capital Management, which managed funds on behalf of the Massachusetts state pension fund, has lost $12 million, and the Chase Family Foundation, which donates $12.5 million annually to charities, will be forced to close as all its money was invested with Madoff.

Fairfield's links with European financial institutions have led to major losses for their fund management subsidiaries, with European losses expected to reach $11 billion.

The Spanish banks, Banco Santander and Banco Bilbao Vizcaya Argentaria (BBV), have lost $3.1 billion and $405 million respectively.

The UK banks HSBC and RBS have lost $1 billion and $600 million, reportedly from loans to institutional clients, mainly hedge funds that wanted to invest in Madoff's funds. Bramdean Alternatives Ltd, a fund headed by well known fund manager Nicola Horlick, has lost $21 million, 10 percent of its holdings. This leaves her clients, including local authority pension funds in Merseyside and Hampshire, in dire straits.

The French bank BNP Paribas lost $468 million and Natixis (CNAT PA) $611 million, while Austria's Bank Medici has lost $2.1 billion and the troubled Dutch-based Fortis Bank Nederland faces up to $1.3 billion in losses.

Numerous Swiss banks and money managers have lost money. According to the Swiss newspaper Le Temps, total losses may be as much as $5 billlion. Those who have reported losses include Union Bancaire Privee and Genvalor, Benbassat et Cie., each with $1 billion, and Banque Bendict Hentsch, with $48.8 million in losses.

Benedict Hentsch had recently agreed to merge with Fairfield Greenwich and is now trying to get out of the deal. Reichmuth & Co, a Swiss private bank, has lost $325 million and EIM Group, a fund of hedge funds, $230 million.

Geneva is a major promoter of funds of hedge funds, which often exist within private banks and are sold to their clients and wealthy families. According to the Wall Street Journal, Madoff funds were marketed as so-called black boxes and any attempts to scrutinise them were rebuffed. The investment climate in Switzerland, famous for its banking secrecy, suited Madoff conduits to a T.

The fact that Madoff's fraudulent activities had such a big impact on European banks is the result of a five-year boom in hedge funds that has led to an exponential growth in fund-linked derivatives, products provided by banks that guarantee capital for clients or promise high returns. Under the typical terms of these deals, if the US authorities recover any of the money, the banks will be reimbursed first before their clients.

Japan too has been hit by the scandal. Nomura has lost $302 million. Aozora, part-owned by private equity firm Cerberus Capital Management LP with numerous connections to its sister companies, has lost $137 million. Aozora, a mid-size bank already hit by its involvement with Lehman Brothers and another Cerebus-controlled outfit, GMAC LLC., is one of Cerebus's key investments.

While the declared losses are mounting, less than half of the $50 billion has been accounted for, as fund managers seek to avoid the publicity and withdrawal of funds that such losses are likely to precipitate. It will take months to unravel the full consequences of Madoff's fraudulent activities, which appear to have been going on for years.

As the scandal unfolds, it sheds a revealing light on the social connections and financial relations between institutions and moneymen, and the reckless and semi-criminal methods employed by some of the most prominent banks.

Far from being sober, well run operations, many more closely resemble gambling syndicates driven by self-enrichment at the expense of their clients and society as a whole. They have placed their clients' money wherever they could get the best commission, barely bothering to check the books of shady outfits such as that run by Madoff.

The Madoff scandal is, moreover, an exposure of complicity and corruption on the part of government regulatory agencies, which have, on a world scale, been transformed by years of "free market" deregulation into partners and facilitators of financial skulduggery on the part of the financial elite.

Hunger and homelessness grow across US cities

Hunger and homelessness grow across US cities

By Oliver Richards

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Both the number of homeless and the demand for emergency food assistance have increased substantially in US cities, according to the findings of the most recent survey from the US Conference of Mayors Task Force on Hunger and Homelessness.

Available resources are severely strained due the economic crisis, while demand for food assistance has increased by 18 percent over the past year.

The Hunger and Homelessness Survey was released on December 12 and is based on a survey of 25 cities that provided information on food and homeless assistance for the period from October 1, 2007 to September 30, 2008. Given the increasing economic slowdown, one can safely conclude that the figures provided in the survey have only continued to grow worse.

The findings of the survey paint a grim picture of increasing social hardship in the United States. "At this time of significant economic downturn, the issues of hunger and homelessness in America are more prevalent than ever," stated the Miami Mayor and Conference President Manny Diaz in a press release.

The 25 cities include Boston, San Francisco, Chicago, Kansas City, Seattle, Cleveland, and Los Angeles, among others. More revealing, however, are the cities not included in this report. New Orleans, for example, has not been included in the survey since it was devastated by Hurricane Katrina in 2005. Detroit, the biggest poor city in America, was also left out, even though it was included in the task force's 2007 report.

While a majority (68 percent) of the cities increased their funding for emergency food assistance in 2008, this growth was generally outpaced by increases in demand. The largest gaps between supply and demand were found in Philadelphia, where demand increased by 23 percent, but supply decreased by 26 percent, and Phoenix, which saw demand increase by 35 percent, but supply decrease by 13 percent.

One cause of the growing gap between supply and demand for food assistance can be found in the changing sources of food donations. Large grocery chains and other food suppliers provide, on average, half of all food donations. "This dependence has become problematic as improvements in quality control and supply chain management have reduced the quantity of excess or slightly imperfect food products that food banks receive from large grocery chains and national food companies," the report notes.

Of the 21 cities that responded to the question, 20 stated that requests for emergency food assistance had increased in 2008. Much of this increase has resulted from a rise in first-time requests for assistance, particularly among working families affected by the economic downturn and rising food prices. The survey showed that 59 percent requesting food assistance are in families, 41 percent are employed, 15 percent are elderly, and 11 percent are homeless.

The ominous nature of these developments is highlighted by an answer from Cleveland, which noted, "Some agencies report that they are seeing families requesting assistance who were formerly donors to the pantry."

Because demand for food assistance has largely not been met by supply, many kitchens and pantries have had to reduce the quantity of food handed out (80 percent of cities), turn people away (60 percent), limit the number of times a person can visit, and restrict services to neighborhood residents.

The surveyed cities were also asked to list the top three causes of hunger in their city. Poverty was cited by 83 percent of the cities, followed by unemployment (74 percent), high housing costs (57 percent), and increases in food prices (39 percent).

Looking at rates of homelessness, the report states that 19 of the 25 cities (83 percet) reported that homelessness had increased over the past year. "On average, cities reported a 12 percent increase in homelessness in 2008." This includes family homelessness, which 16 of the cities reported increased.

Four cities—Portland, Oregon; Providence, Rhode Island; Gastonia, North Carolina; and San Francisco, California—report that homelessness has increased by more than 30 percent over the past year.

When asked if the number of employed homeless persons had increased, 11 of the 19 cities that collected this data showed an increase, while only one city reported a decrease, and seven reported no change. Homelessness has also been exacerbated by the foreclosure crisis, with 12 cities reporting that it has contributed to an increase in homelessness.

As with emergency food assistance, the demand for shelter on certain nights is greater than the capacity that most cities can provide. This has led cities to adapt by providing cots in hallways or opening shelters earlier than scheduled. However, cities still have to turn away individuals and families.

For example, in Los Angeles, 31 percent of individuals seeking shelter had to be turned away due to a lack of beds, according to a 2007 survey. Des Moines reports that "shelter providers regularly report that ‘turn-aways' are a routine occurrence."

The report finds that the mentally ill are particularly vulnerable, with 26 percent of the persons experiencing homelessness also suffering from a severe mental illness.

The survey notes that there are a number of limitations to the study. For example, the cities selected for the survey do not constitute a representative sample of US cities. Furthermore, the averages among the 25 cities used by the report, which vary in size and location, are not weighted by differences in the populations of the cities.

However, despite these and other drawbacks, the survey still provides valuable information on the dismal social decay that characterizes the urban centers in the United States.

Scared by Republic sit-in, banks pay up

Scared by Republic sit-in, banks pay up

By Sharon Black

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Workers streamed out of the Republic Windows and Doors factory on Dec. 10 chanting “¡Sí se puede!” (Yes we can!) After a six-day-long occupation, they were able to force the world’s largest private bank, Bank of America, to fully fund 60-days severance pay, health insurance and earned vacation pay for workers.

Armando Robles, president of the United Electrical Workers Local 1110, who worked the night shift, remarked, “You can do anything when you have the support of every one of your co-workers.” He added, “This is not a victory for us. It is a victory for every worker in this country.”

United Electrical Workers representatives announced that Bank of America and JPMorganChase have agreed to a $1.75 million loan which will go into a separate fund that will be used to pay the eight weeks of pay due to the workers by the WARN act, two months health insurance and earned vacation pay. In addition the union is setting up a separate fund from all of the donations that have flowed in called the “Windows of Opportunity” to explore keeping the factory open.

Their struggle gained national and international attention. Close to 1,000 protesters gathered at the Bank of America’s downtown headquarters earlier in the day on Dec. 10. Rev. Gregory Livingston of Rainbow/PUSH declared, “Bank of America got $25 billion. Republic workers got how much? Zero.”

Jill White, an organizer with the Illinois Moratorium Committee who attended the march with a group of community supporters, stated, “The Republic workers have showed the way for all of us. If the banks go to evict us from our homes, then we should stay in and refuse to leave. We should call on our neighbors to picket and protest.”

Dollar No Longer Haven After Fed Moves Rate Near Zero

Dollar No Longer Haven After Fed Moves Rate Near Zero

By Kim-Mai Cutler and Bo Nielsen

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The world’s biggest currency-trading firms say the dollar’s appeal as a haven amid the financial crisis all but evaporated.

The U.S. currency slid to a 13-year low against the yen today and had its biggest one-day decline versus the euro after the Federal Reserve reduced its target interest rate yesterday to a range of zero to 0.25 percent, the lowest among the world’s biggest economies. CMC Markets said today the currency’s prospects appear “ominous.” State Street Global markets said the dollar’s outlook has been “undermined.”

“The dollar has been under heavy downward pressure,” said Robert Minikin, a senior currency strategist in London at Standard Chartered Bank Plc. “This move is very well-justified and has a long way to run.” Standard Chartered is preparing to cut its dollar forecasts, Minikin said.

Yesterday’s rate cut brings the Fed’s target to below the Bank of Japan’s for the first time since January 1993. U.S. policy makers repeated plans to buy agency debt and mortgage- backed securities and said they will study buying Treasuries, a policy known as quantitative easing.

The dollar fell to 87.14 yen, the lowest since July 1995, before trading at 87.45 yen as of 3:51 p.m. in New York, from 89.05 yesterday. It depreciated to $1.4437 per euro from $1.4002 and traded at $1.4366, the weakest since Sept. 30.

‘Ominous’ Outlook

The dollar is likely to decline “longer term,” analysts including New York-based Ashraf Laidi at CMC Markets wrote in a report. “Prospects ahead appear particularly ominous for the world’s reserve currency once global economic stability starts to build up.”

The Fed’s debt purchases will cause the dollar to weaken to $1.4860 per euro, analysts led by Robert Sinche, New York-based head of global currency strategy at Bank of America Corp., wrote in a report yesterday. The Fed reduced the scarcity of dollars and investors slowed the deleveraging process, which drove the currency to a 2 1/2-year high against the euro in October, Sinche said.

“Those temporary supports for the dollar appear to have eroded,” Sinche wrote. “Aggressive quantitative easing by the Fed should add to U.S. dollar supply globally and undermine the value of the dollar.”

State Street Global Markets, a unit of the world’s largest money manager for institutions, said the Fed’s move is “perilous” for the dollar as investors accumulated an “extreme” long position on the currency, or bets it will climb.

Record Low Yields

“This implies a significant potential for a dollar unwind if the real money community attempts to chase price,” Hong Kong-based strategist Dwyfor Evans wrote today in a report. The shift toward quantitative easing “has undermined the U.S. dollar significantly over recent weeks.”

The dollar’s decline against the euro compares with a similar move in the early 1990s, indicating the U.S. currency may weaken to a record low of $1.65 late next year, Citigroup Inc. strategists Tom Fitzpatrick in New York and Shyam Devani in London wrote in a research note.

“If it walks like a duck and talks like a duck … it’s a duck,” Fitzpatrick and Devani wrote. “The dollar walks and talks like a currency going back into its bear market.”

The dollar declined 11 percent against the euro and 8 percent against the yen this month as yields on two-, five-, 10- and 30-year Treasuries fell to record lows, encouraging investors to look outside the U.S. for higher returns.

“The dollar is going to struggle while it has low yields,” said Roddy MacPherson, the Edinburgh-based head of currency strategy at Scottish Widows Investment Partnership Ltd., which manages the equivalent of $152 billion. “We’re looking to add to our short dollar position if U.S. yields continue downward.”

UBS Stays Bullish

MacPherson said he moved toward a short dollar position, or a bet it will depreciate, against the euro in the past four days. The currency may end next year at $1.40 per euro, he said.

For UBS AG, the world’s second-largest foreign-exchange trader, demand for cash amid the freeze in bank lending will support the currency. The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, was at 140 basis points today, or about 14 times its average in the five years before the credit crisis began.

“There is still a premium on liquidity, which will be supportive to the dollar even in the current environment,” said Geoff Kendrick, a senior strategist in London at UBS.

Goldman Sachs Group Inc. said investors can profit from the dollar’s decline by selling the currency for its Canadian counterpart.

The U.S. currency’s drop is becoming “broader-based,” Jens Nordvig, a New York-based strategist for the U.S. securities firm, wrote today. “Temporary dollar demand from deleveraging and funding flows has come to an end. The prospect of aggressive quantitative easing is starting to have a significant negative impact on the dollar.”

IEA produced a date for peak oil and it's not reassuring

At Last, A Date

For the first time, the International Energy Agency has produced a date for peak oil. And it’s not reassuring.

By George Monbiot

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Can you think of a major threat for which the British government does not prepare? It employs an army of civil servants, spooks and consultants to assess the chances of terrorist attacks, financial collapse, floods, epidemics, even asteroid strikes, and to work out what it should do if they happen. But there is one hazard about which it appears intensely relaxed. It has never conducted its own assessment of the state of global oil supplies and the possibility that one day they might peak and then go into decline.

If you ask, it always produces the same response: “global oil resources are adequate for the foreseeable future.”(1) It knows this, it says, because of the assessments made by the International Energy Agency (IEA) in its World Energy Outlook reports. In the 2007 report, the IEA does appear to support the government’s view. “World oil resources,” it states, “are judged to be sufficient to meet the projected growth in demand to 2030″(2); though it says nothing about what happens at that point, or whether they will continue to be sufficient after 2030. But this, as far as Whitehall is concerned, is the end of the matter. Like most of the rich world’s governments, the United Kingdom treats the IEA’s projections as gospel. Earlier this year, I submitted a Freedom of Information request to the UK’s Department for Business, asking what contingency plans the government has made for global supplies of oil peaking by 2020. The answer was as follows: “the Government does not feel the need to hold contingency plans specifically for the eventuality of crude oil supplies peaking between now and 2020.”(3)

So the IEA had better bloody well be right. In the report on peak oil commissioned by the US Department of Energy, the oil analyst Robert L.Hirsch concluded that “without timely mitigation, the economic, social and political costs” of world oil supplies peaking “will be unprecedented.”(4) He went on to explain what “timely mitigation” meant. Even a worldwide emergency response “10 years before world oil peaking”, he wrote, would leave “a liquid fuels shortfall roughly a decade after the time that oil would have peaked.”(5) To avoid global economic collapse, we need to begin “a mitigation crash program 20 years before peaking.”(6) If Hirsch is right and if oil supplies peak before 2028, we’re in deep doodah.

So burn this into your mind: between 2007 and 2008 the IEA radically changed its assessment. Until this year’s report, the agency mocked people who said that oil supplies might peak. In the foreword to a book it published in 2005, its executive director, Claude Mandil, dismissed those who warned of this event as “doomsayers”. “The IEA has long maintained that none of this is a cause for concern,” he wrote. “Hydrocarbon resources around the world are abundant and will easily fuel the world through its transition to a sustainable energy future.”(7) In its 2007 World Energy Outlook, the IEA predicted a rate of decline in output from the world’s existing oilfields of 3.7% a year(8). This, it said, presented a short-term challenge, with the possibility of a temporary supply crunch in 2015, but with sufficient investment any shortfall could be covered. But the new report, published last month, carried a very different message: a projected rate of decline of 6.7%, which means a much greater gap to fill(9).

More importantly, in the 2008 report the IEA suggests for the first time that world petroleum supplies might hit the buffers. “Although global oil production in total is not expected to peak before 2030, production of conventional oil … is projected to level off towards the end of the projection period.”(10) These bland words reveal a major shift. Never before has one of the IEA’s energy outlooks forecast the peaking or plateauing of the world’s conventional oil production (which is what we mean when we talk about peak oil).

But that is as specific as the report gets. Does it or doesn’t it mean that we have time to prepare? What does “towards the end of the projection period” mean? The agency has never produced a more precise forecast – until now. For the first time, in the interview I conducted with its chief economist Fatih Birol, it has given us a date. And it should scare the pants off anyone who understands the implications.

Fatih Birol, the lead author of the new energy outlook, is a small, shrewd, unflustered man with thick grey hair and Alistair Darling eyebrows. He explained to me that the agency’s new projections were based on a major study it had undertaken into decline rates in the world’s 800 largest oil fields. So what were its previous figures based on? “It was mainly an assumption, a global assumption about the world’s oil fields. This year, we looked at it country by country, field by field and we looked at it also onshore and offshore. It was very very detailed. Last year it was an assumption, and this year it’s a finding of our study.” I told him that it seemed extraordinary to me that the IEA hadn’t done this work before, but had based its assessment on educated guesswork. “In fact nobody had done this research,” he told me. “This is the first publicly available data”.(11)

So was it not irresponsible to publish a decline rate of 3.7% in 2007, when there was no proper research supporting it? “No, our previous decline assumptions have always mentioned that these are assumptions to the best of our knowledge - and we also said that the declines [could be] higher than what we have assumed.”

Then I asked him a question for which I didn’t expect a straight answer: could he give me a precise date by which he expects conventional oil supplies to stop growing?

“In terms of non-OPEC [countries outside the big oil producers’ cartel]”, he replied, “we are expecting that in three, four years’ time the production of conventional oil will come to a plateau, and start to decline. … In terms of the global picture, assuming that OPEC will invest in a timely manner, global conventional oil can still continue, but we still expect that it will come around 2020 to a plateau as well, which is of course not good news from a global oil supply point of view.”

Around 2020. That casts the issue in quite a different light. Mr Birol’s date, if correct, gives us about 11 years to prepare. If the Hirsch report is right, we have already missed the boat. Birol says we need a “global energy revolution” to avoid an oil crunch, including (disastrously for the environment) a massive global drive to exploit unconventional oils, such as the Canadian tar sands. But nothing on this scale has yet happened, and Hirsch suggests that even if it began today, the necessary investments and infrastructure changes could not be made in time. Fatih Birol told me “I think time is not on our side here.”

When I pressed him on the shift in the agency’s position, he argued that the IEA has been saying something like this all along. “We said in the past that one day we will run out of oil. We never said that we will have hundreds of years of oil … but what we have said is that this year, compared to past years, we have seen that the decline rates are significantly higher than what we have seen before. But our line that we are on an unsustainable energy path has not changed”.

This of course is face-saving nonsense. There is a vast difference between a decline rate of 3.7% and a rate of 6.7%. There is an even bigger difference between suggesting that the world is following an unsustainable energy path – a statement almost everyone can subscribe to – and revealing that conventional oil supplies are likely to plateau around 2020. If this is what the IEA meant in the past, it wasn’t expressing itself very clearly.

So what do we do? We could take to the hills, or we could hope and pray that Hirsch is wrong about the 20-year lead time, and begin a global crash programme today of fuel efficiency and electrification. In either case, the British government had better start drawing up some contingency plans.


1. Eg DECC Press Office, 28th October 2008. Statement emailed to Duncan Clark at the Guardian.

2. International Energy Agency, 2007. World Energy Outlook 2007, page 43. IEA, Paris.

3. BERR, 8th April 2008. Response to FoI request, Ref 08/0091.

4. Robert L. Hirsch, Roger Bezdek and Robert Wendling, February 2005. Peaking of World Oil Production: Impacts, Mitigation, & Risk Management. US Department of Energy, page 4.

5. ibid, page 59.

6. ibid, page 65.

7. International Energy Agency, 2005. Resources to Reserves: Oil and Gas Technologies for the Energy Markets of the Future, page 3. IEA, Paris.

8. International Energy Agency, 2007, ibid, page 84.

9. International Energy Agency, 2008. World Energy Outlook 2008, page 43. IEA, Paris.

10. ibid, p103.

11. This interview is broadcast on the Guardian’s website .

London Banker: "The market has failed, and officialdom is perpetuating that failure."

London Banker: 'The market has failed, and officialdom is perpetuating that failure.'

By Mike Whitney

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Ever since the two Bear Stearns hedge funds defaulted 17 months ago triggering a global financial crisis, the Federal Reserve has been busy putting out one fire after another. Fed chief Ben Bernanke has slashed interest rates to .25 percent, handed out billions in emergency funding to teetering insurance companies and mortgage lenders, and provided $8.3 trillion in loan guarantees to keep the financial system from collapsing. Unfortunately, nothing the Fed has done has either stabilized the markets or stopped the contagion from spreading to the broader economy where consumer spending has fallen sharply, unemployment has skyrocketed, manufacturing has slipped to a 30 year low, and housing prices have plummeted. Bernanke, the Princeton academic who is an expert on the Great Depression, is limited in his understanding of the crisis by his 'monetarist' bias. He believes that the only way to fight credit contraction is by flooding the financial system with liquidity ('quantitative easing'). But this remedy focuses more on reducing the symptoms rather than curing the disease. Christopher Wood sums it up in an article in the Wall Street Journal article 'The Fed is Out of Ammunition':

'The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.'

Bernanke's strategy may provide some temporary relief, but it won't fix the underlying problems. The debts will have to be brought forward and written off, insolvent institutions will have to be shut down, indictments will have to be served to those who defrauded investors, and transparency will have to be reestablished. Bernanke and his colleagues at the US Treasury believe they can bypass these confidence-building measures by simply opening the liquidity-valves and waiting for the economy to come charging back to life, but it won't work. Liquidity is not credibility and it's the lack of credibility that has investors racing for the exits.

Last week, the yield on the 3 month Treasury went negative, which is to say, the buyer of the bond would actually lose money at the date of maturity. So, why would an investor buy a T-bill for $100 when he knew he would only get $99 back?

Fear; pure, unadulterated fear. The same fear that has pushed 30 year Treasurys to historic lows, kept the VIX 'the fear gauge' in the stratosphere for months on end, and sent global stock markets into the biggest swoon since the 1930s. Bernanke's liquidity injections don't address the panic that has spread from the trading pits to every hearth and hamlet across the country where the tremors from the credit crunch are now being felt.

The problem isn't just money either, but how quickly the money is turned over. The Fed has increased the money supply at an unprecedented pace and expanded its balance sheet to $2.25 trillion, but velocity is down. Activity in the secondary markets has slowed to a crawl. Wall Street is leading the economy into recession. In 2005 through 2007, nearly 60 percent of the banks revenues came from securitized loans, that is, loans that were passed on to the big investment banks where they were repackaged and sold to foreign investors and hedge funds as securities. According to the Wall Street Journal, ' the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.'

This point is usually ignored by the pundits. Securitization increased velocity which added significantly to GDP, but that part of the market is now frozen--the investment banks are gone and the hedge funds are in distress--and the commercial banks are not capable of making up the difference. That means credit will continue to contract no matter what the Fed does. The recession will be long and deep.

Obama's economic team has signaled that they will try to revive consumer spending with a gigantic $1 trillion stimulus package. But $1 trillion barely covers the $800 billion that homeowners withdrew in home equity in 2007 alone. (Today home equity withdrawals have nearly disappeared altogether) But stimulus doesn't deal with the deeply-rooted problems either; its just another band-aid for a sucking chest wound. Besides, as chief blogger at Naked Capitalism points out, it is unlikely that economist John Maynard Keynes would have approved of the stimulus which Obama is championing:

'Now to my doubts about the proposed remedies, namely monster stimulus and monetary easing. First, as mentioned before, the analogy is to the US in the Depression, which we have said repeatedly before is questionable. The US in the 1920s was the world's biggest creditor, exporter, and manufacturer. Our position then is analogous to China's now. Indeed, Keynes in the 1930s urged America to take even more aggressive measures, and argued that it was not reasonable for the US to expect over-consuming, debt-burdened countries like the UK and France to take up the demand slack. So even though most economists are invoking Keynes, it isn't clear he'd prescribe such aggressive stimulus for the US and UK now.'

Treasury Secretary Timothy Geithner and presidential adviser Lawrence Summers believe they can fire off a massive stimulus salvo and put the economy back on track, but it will take more than that. The financial system needs fundamental structural reform and both men rose to power because they proved themselves loyal defenders of the status quo. Geithner and Summers may nibble at the edges and make grandiloquent proclamations about rebuilding the system, but when its time to pull the trigger, they will subvert every attempt to regulate or oversee the system which they feel is the sole province of the establishment elites who own the big financial institutions. There's bound to be plenty of blasting trumpets and celebratory confetti to greet Obama's economic whiz kids. Just don't expect change. Barring a complete economic meltdown, the rot at the heart of the system will continue to fester and grow under Obama just as it did under Bush and Clinton.

How can one maintain a free market system when financial institutions are not allowed to fail?
And how can such a system function properly without stop signs, guard rails, speed limits or rules that determine what side of the road one can drive?
And how can confidence be strengthened when no one pays for predatory lending, ratings manipulation, malfeasance, fraud, or any other white collar crime? So far, not one indictment has been served in the biggest financial swindle of all time. That's not how a 'rules-based' system is supposed to operate.

Meanwhile, the economy continues to deteriorate faster than anyone expected. Companies are cutting back on investment, slowing production and laying off workers. Corporations are unable to finance ongoing operations or expansion because of widening spreads on corporate bonds. The volume of debt issued around the world plunged by 75% in the last three months, according to the Bank for International Settlements (BIS). 'Net issuance of bonds and notes by corporations, financial institutions and governments fell to 247 billion dollars (195 billion euros) from 1.086 trillion dollars in the second quarter.' US households have begun paying down debt for the first time since the Fed kept records in 1952, another setback for an economy that depends on consumer spending for 72 percent of GDP. Also, the unemployment rolls have surged by 573,000 in November, creating 1.5 million jobless in the last 6 months. All of the economic data, including reinvestment and earnings, is showing weakness while asset prices across the spectrum--stocks, real estate and commodities-- continue to lose altitude. The prospects for a quick recovery are slim to none.

Undeterred by the pervasive signs of deflation, Bernanke is planning even bolder moves to stimulate spending and get credit flowing through the system. The Central Bank is purchasing securitized debt from Fannie Mae and Freddie Mac, buying $200 billion of credit card and student loans from finance companies, and has stated its intention to buy US Treasurys to keep long-term interest rates artificially low. Buying Treasurys is the equivalent of trying to cover a bank overdraft by issuing a check to oneself. This is the point at which monetary policy and lunacy intersect. Nevertheless, the scholarly Fed master is convinced that with a little ingenuity and a well-oiled printing press, success is certain.

The economic headwinds Bernanke is facing are ferocious. Consumer debt is at an all-time high, more than $13 trillion. And, as journalist Stephen Lendman notes, 'As a per cent of GDP, total credit market debt is now double its 1929 level at about 350%.' We have reached peak credit, a tipping point where consumers are forced to curtail spending and hunker-down for leaner times. The conventional strategy of pump-priming with low interest credit or stimulus checks from Uncle Sam will only soften the blow from the hard landing ahead. The fear of job loss, insolvency and even destitution is gnawing away at the psyche of maxed-out consumers. Hardship is reshaping attitudes towards spending. Bernanke's 'zero down', 'no doc', 'adjustable rate' easy money is out of step with the times. Profligate consumption is no longer cool. With Housing prices crashing and the Dow Jones on track for its worst year since the Great Depression, people are no longer feeling flush. In fact, tumbling property values have chopped a hefty $4 trillion from household balance sheets already while wages have continued to stagnate.

The Fed's persistent price-fixing and market interventions can only succeed as long as there's a reliable pool of speculators willing to borrow capital and put it to work to turn a profit; that's the basic premise of bubblenomics. With the financial system deleveraging, the broader economy contracting, and commodities, stocks and housing flat-lining; there are fewer and fewer opportunities for even the most risk-tolerant investor. That's why Bernanke is planning to force-feed credit into the system via untested methods that, many believe, will engender Weimer-like hyperinflation when the recession winds down. If the economy kicks in faster than Bernanke figures, he'll have to mop up $8.3 trillion of liquidity or watch while the dollar gets torn to shreds.

For now, the problem is deflation; steadily falling asset prices which are shrinking profits, increasing layoffs and forcing fire sales of distressed assets. As unemployment soars, aggregate demand falls even more, causing a vicious downward cycle. Once deflation becomes entrenched--as Japan discovered during its 'lost decade' in the 1990s---it becomes more difficult to eradicate. Between 1994 to 1999, Japan initiated 7 stimulus packages which amounted to hundreds of billions of dollars. All of them failed to restart the flagging economy. According to the Wall Street Journal: 'Only in this decade, with a monetary reflation and prime minister Junichiro Koizumi's decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover.'

By allowing the banking giants to conceal their mountainous debts, Bernanke and Paulson are following the same spotty path to disaster creating a zombie financial system that depends on regular infusions of state largess to maintain operations and avoid liquidation. It's a lose-lose situation.

The latest essay by London Banker, 'Deflation has become Inevitable', has been widely circulated on the Internet, but is worth reprinting here to underline the glaring and, perhaps, fatal flaws in Bernanke's thinking:

'For a while now I have been on the fence on the inflation/deflation issue .... I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels....

The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations. It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.

The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract. Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout. Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.

It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return.

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will 'swell' to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.

Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.

The market has failed, and officialdom is collaborating in perpetuating that failure.' (London Banker)

Well said.

Did Dick Cheney Just Confess to a War Crime on National TV?

Did Dick Cheney Just Confess to a War Crime on National TV?

By ZP Heller
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Not only has the Bush administration committed war crimes in plain sight, but now Dick Cheney is freely confessing it on national television. In an interview with ABC, Cheney admitted he directly authorized the CIA to use highly controversial enhanced interrogation tactics like waterboarding, as well as the torture of 9/11 mastermind Khalid Sheikh Mohammad.

Cheney showed no regret. In fact, he spoke with such insouciance it was almost as though the administration hadn't repeatedly denied authorizing use of these tactics over the years. (Of course, Cheney still denies waterboarding constitutes torture.) What's more, he actually praised the Guantánamo Bay prison facility. "Guantánamo has been very well run," he said, claiming it should remain open indefinitely.

Anthony Romero, Executive Director of the ACLU with whom Brave New Foundation created the Close Gitmo campaign, had this to say:

"The current administration's torture policies and fundamentally flawed military commissions make a mockery of the Constitution and violate America's commitment to human rights. Contrary to the vice president's opinion, these detainees should be prosecuted in U.S. military or civilian courts that are fully equipped to handle complex national security cases."

Cheney's confession is part of a broader effort from the intelligence community to justify the Bush administration's use of torture in an attempt to keep Gitmo open, keep the unconstitutional military commissions going, and keep torture on the table. It's as though they think that if they say it freely and openly enough, then we will just have to overlook the fact that they're confessing to war crimes!

We must urge President-elect Obama to close Gitmo and shut down these commissions. Then, we must play Cheney's interview on every political blog out there in an effort to command the attention of Congress and the DOJ. Cheney and his hubris have finally gone too far. Here's hoping a war crimes tribunal one day replays this interview at his trial.

Did America Get Punk'd on the Bailout?

Did America Get Punk'd on the Bailout?

By David Sirota

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When I went on Rachel Maddow's show on Tuesday, she asked a question about the bailout that is really the question of our time: Did we get punk'd? As progressive bailout critics have been saying since the current Wall Street bailout was first proposed, the answer is yes.

As the Minneapolis Federal Reserve reports, the major claims about a credit crisis that justified Congress cutting a trillion-dollar blank check to Wall Street were demonstrably false. And new data and reports show they remain demonstrably false.

For instance, take a look at line 1 and line 5 of this December Federal Reserve report on bank lending. That's right -- you see no significant decrease in lending, and in some cases, an increase. Interbank lending has dropped some, but certainly not at the crisis levels the Bush administration and banks claimed.

Then take a look at this story from Reuters, recounting a big report from a widely respected financial analysis firm:

"The credit crunch is not nearly as severe as the U.S. authorities appear to believe, and public data actually suggest world credit markets are functioning remarkably well, a report [from Celent consulting] released on Thursday says. ... The report, much of which is based on U.S. Federal Reserve data, challenges a long list of assumptions one by one, arguing that there is indeed a financial crisis but that, on aggregate, the problems of a few are by no means those of the many when it comes to obtaining credit.

"It is startling that many of (Federal Reserve) Chairman (Ben) Bernanke and (Treasury) Secretary (Henry) Paulson's remarks are not supported or are flatly contradicted by the data provided by the very organizations they lead," said the report.

Regarding U.S. business access to credit, the report says: Overall U.S. bank lending is at its highest level ever; U.S. commercial bank lending is at record highs and growing particularly fast since May 2007; corporate bond issuance has declined, but increased commercial lending has compensated for this; [interbank] lending hit its highest level ever in September 2008 and remained high in October and that overall interbank lending is up 22 percent; the cost of interbank lending ... dropped to its lowest level ever in early November and remains at very low levels; [consumer credit] was at a record high in September; and local government bond issuance had continued at similar levels to those before the credit crisis, while bank lending for real estate reached a record level in October 2008, it says. (emphasis added)

Then there's this from the Wall Street Journal looking at a new study by the National Federation of Independent Business:

The report found that among small businesses "no 'credit crunch' has appeared to date beyond the normal cyclical tightening of credit." The NFIB found that worries about interest rates and financing were a concern to only 3 percent of respondents. ... By and large, the story of the NFIB report was that if credit is going untapped, it's largely because company operators are not choosing to pursue the credit. It's not that companies can't get the extra money, it's that they don't want or need it because of the broader slowdown in economic activity. (emphasis added)

That last point is the big one: The real crisis is in the real economy -- ya know, the real world of jobs, wages, health care premiums and pensions that Washington has totally ignored as it keeps writing checks to its well-heeled campaign contributors on Wall Street under the guise of a lending crisis. Adding insult to injury is the last thing I discussed with Rachel -- the fact that because the bailout money came with almost no strings attached, the financial-industry recipients of the taxpayer largesse are either hoarding the money, using it to pay shareholder dividends and executive bonuses, or devoting it to efforts to buy up smaller competitors.

So what to do?

First things first -- we have to pressure, cajole, lambaste and downright humiliate Wall Street stooges on Capitol Hill who claim nothing can be done. These are people like Sen. Chuck Schumer, D-N.Y.. The recent subject of a scathing New York Times profile examining his complicity in the financial crisis, Schumer insisted to the Wall Street Journal that despite Congress' clear power to reform -- or even revoke -- the bailout, "there's not much we can do other than jawbone." It's the old Innocent Bystander Fable, designed to make us think Congress can do nothing other than keep forking over the money to campaign contributors. And it's a straight-up lie.

Second, Congress can reject the Bush administration's request to release the next $350 billion installment of no-strings-attached bailout money for Wall Street, if that request happens.

Third, Congress can add all the strings and oversight measures to the remaining money that bailout critics originally said were necessary. That means eliminating gaping loopholes in the executive pay limits; preventing the money from subsidizing shareholder dividends, forcing the government to buy voting shares of bank stock (rather than nonvoting stock, as it is doing today) so that regulators have the leverage to clean out bad bank management; following Britain's lead in making the money contingent on increased lending; and expanding the ways the money can be used so that it can be allocated to the real economy (i.e. manufacturing companies, etc.).

Finally, Congress can allocate the unspent bailout money to a robust economic-recovery package focused on job-creating infrastructure and health care priorities -- and Congress can pass that economic recovery package right now, rather than waiting for the next president.

Looking at what's gone on in the last three months, we see a classic example of Naomi Klein's "shock doctrine" and subsequent disaster capitalism. Bailout critics were attacked as "irresponsible" by Establishment pundits and politicians -- even though the data showed that those pundits and politicians were using an admittedly real problem to manufacture the perception of a full-on earth-shattering crisis so as to justify the biggest taxpayer heist in contemporary American history. And though that data was largely ignored by the same media that beat the drum for the bailout, it is now becoming too compelling to ignore.

As the real economy is ignored by Washington, and as the government's own numbers expose the shameless dishonesty of the Beltway's bailout proponents, it's time for our leaders to listen to the real pragmatists, who have been right all along.

David Sirota is a best-selling author whose newest book, The Uprising, was released this month. He is a fellow at the Campaign for America's Future and a board member of the Progressive States Network -- both nonpartisan organizations. His blog is at

Down on upward mobility

Down on upward mobility

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The labor movement, which made teachers into empowered professionals and factory workers into middle-class taxpayers, has been under attack for a generation from the forces of phony simplicity.

For every complex crisis -- low ISTEP scores, imbalance of trade, an auto industry on the brink -- there's an easy answer: Blame the unions.

The idea that collective bargaining has achieved a standard of living that is unfair and unsustainable, rather than one that society as a whole should pursue, is one of our most powerful national myths. Like the glory of war and the frivolousness of environmental protection, union bashing is a bill of goods sold by the most myopic of special interests and bought by ordinary folks against their own interests.

Thus, the United Auto Workers, whose wages and benefits account for 10 percent of their products' cost, and whose layoffs and concessions have been nothing short of devastating, becomes a scapegoat for politicians and voters who look at a train wreck and see a gravy train.

Thus, this city, just to take one timely example, can rationalize paying more for Toyotas than for UAW-built Chevies with Indianapolis-made parts even though the latter would circulate more money through the local economy -- the exact justification for another recent decision, to rebate the county income tax increase.

Unions, which mean better jobs and more secure and stable families, families who attend more PTO meetings and give more to United Way, ought to be models for policymakers; instead, they're afterthoughts -- or enemies. It doesn't add up.

"If you ask me, American workers have been silently bailing out their companies for 35 years," says Nancy Holle, a leader in the advocacy group Central Indiana Jobs With Justice.

"Want an increase in profits? Take it out of the workers' pay. Have them work longer with no increase, or let them go, and the CEOs get a bonus. Time after time, time after time. The U.S. worker works harder and longer than workers in any other industrialized country. It has been a silent bailout."

It is no coincidence that fewer and fewer of those workers are organized. Republican presidents, governors and legislators have not been inclined to make life easy for Democratically-inclined labor; and sadly, laborers themselves have become so conditioned to going unprotected that they resent those who have some insulation. Not to mention ignoring history. Consider those "featherbedding" retirees.

"These are the people who looked out for us in World War II. They built this country," Holle declares. "For the UAW to look out for them, that's something we should all aspire to. God bless 'em."

For me, one of the finest moments of the millennial hoopla came when longtime National Public Radio anchor Bob Edwards was asked what he deemed the most important national development of the century just past. The labor movement, he replied. Not long after, he was history, as NPR went for someone younger. Maybe, I'm thinking, there are some areas in which old ideas are our best hope for change we can believe in.

Obama's Betrayal of Public Education?

Obama's Betrayal of Public Education? Arne Duncan and the Corporate Model of Schooling

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Since the 1980s, but particularly under the Bush administration, certain elements of the religious right, corporate culture and Republican right wing have argued that free public education represents either a massive fraud or a contemptuous failure. Far from a genuine call for reform, these attacks largely stem from an attempt to transform schools from a public investment to a private good, answerable not to the demands and values of a democratic society but to the imperatives of the marketplace. As the educational historian David Labaree rightly argues, public schools have been under attack in the last decade 'not just because they are deemed ineffective but because they are public.'[1] Right-wing efforts to disinvest in public schools as critical sites of teaching and learning and govern them according to corporate interests is obvious in the emphasis on standardized testing, the use of top-down curricular mandates, the influx of advertising in schools, the use of profit motives to 'encourage' student performance, the attack on teacher unions and modes of pedagogy that stress rote learning and memorization. For the Bush administration, testing has become the ultimate accountability measure, belying the complex mechanisms of teaching and learning. The hidden curriculum is that testing be used as a ploy to de-skill teachers by reducing them to mere technicians, that students be similarly reduced to customers in the marketplace rather than as engaged, critical learners and that always underfunded public schools fail so that they can eventually be privatized. But there is an even darker side to the reforms initiated under the Bush administration and now used in a number of school systems throughout the country. As the logic of the market and 'the crime complex'[2] frame the field of social relations in schools, students are subjected to three particularly offensive policies, defended by school authorities and politicians under the rubric of school safety. First, students are increasingly subjected to zero-tolerance policies that are used primarily to punish, repress and exclude them. Second, they are increasingly absorbed into a 'crime complex' in which security staff, using harsh disciplinary practices, now displace the normative functions teachers once provided both in and outside of the classroom.[3] Third, more and more schools are breaking down the space between education and juvenile delinquency, substituting penal pedagogies for critical learning and replacing a school culture that fosters a discourse of possibility with a culture of fear and social control. Consequently, many youth of color in urban school systems, because of harsh zero-tolerance polices, are not just being suspended or expelled from school. They are being ushered into the dark precincts of juvenile detention centers, adult courts and prison. Surely, the dismantling of this corporatized and militarized model of schooling should be a top priority under the Obama administration. Unfortunately, Obama has appointed as his secretary of education someone who actually embodies this utterly punitive, anti-intellectual, corporatized and test-driven model of schooling.

Barack Obama's selection of Arne Duncan for secretary of education does not bode well either for the political direction of his administration nor for the future of public education. Obama's call for change falls flat with this appointment, not only because Duncan largely defines schools within a market-based and penal model of pedagogy, but also because he does not have the slightest understanding of schools as something other than adjuncts of the corporation at best or the prison at worse. The first casualty in this scenario is a language of social and political responsibility capable of defending those vital institutions that expand the rights, public goods and services central to a meaningful democracy. This is especially true with respect to the issue of public schooling and the ensuing debate over the purpose of education, the role of teachers as critical intellectuals, the politics of the curriculum and the centrality of pedagogy as a moral and political practice.

Duncan, CEO of the Chicago Public Schools, presided over the implementation and expansion of an agenda that militarized and corporatized the third largest school system in the nation, one that is about 90 percent poor and nonwhite. Under Duncan, Chicago took the lead in creating public schools run as military academies, vastly expanded draconian student expulsions, instituted sweeping surveillance practices, advocated a growing police presence in the schools, arbitrarily shut down entire schools and fired entire school staffs. A recent report, 'Education on Lockdown,' claimed that partly under Duncan's leadership 'Chicago Public Schools (CPS) has become infamous for its harsh zero tolerance policies. Although there is no verified positive impact on safety, these policies have resulted in tens of thousands of student suspensions and an exorbitant number of expulsions.'[4] Duncan's neoliberal ideology is on full display in the various connections he has established with the ruling political and business elite in Chicago.[5] He led the Renaissance 2010 plan, which was created for Mayor Daley by the Commercial Club of Chicago - an organization representing the largest businesses in the city. The purpose of Renaissance 2010 was to increase the number of high quality schools that would be subject to new standards of accountability - a code word for legitimating more charter schools and high stakes testing in the guise of hard-nosed empiricism. Chicago's 2010 plan targets 15 percent of the city district's alleged underachieving schools in order to dismantle them and open 100 new experimental schools in areas slated for gentrification. Most of the new experimental schools have eliminated the teacher union. The Commercial Club hired corporate consulting firm A.T. Kearney to write Ren2010, which called for the closing of 100 public schools and the reopening of privatized charter schools, contract schools (more charters to circumvent state limits) and 'performance' schools. Kearney's web site is unapologetic about its business-oriented notion of leadership, one that John Dewey thought should be avoided at all costs. It states, 'Drawing on our program-management skills and our knowledge of best practices used across industries, we provided a private-sector perspective on how to address many of the complex issues that challenge other large urban education transformations.'[6]

Duncan's advocacy of the Renaissance 2010 plan alone should have immediately disqualified him for the Obama appointment. At the heart of this plan is a privatization scheme for creating a 'market' in public education by urging public schools to compete against each other for scarce resources and by introducing 'choice' initiatives so that parents and students will think of themselves as private consumers of educational services.[7] As a result of his support of the plan, Duncan came under attack by community organizations, parents, education scholars and students. These diverse critics have denounced it as a scheme less designed to improve the quality of schooling than as a plan for privatization, union busting and the dismantling of democratically-elected local school councils. They also describe it as part of neighborhood gentrification schemes involving the privatization of public housing projects through mixed finance developments.[8] (Tony Rezko, an Obama and Blagojevich campaign supporter, made a fortune from these developments along with many corporate investors.) Some of the dimensions of public school privatization involve Renaissance schools being run by subcontracted for-profit companies - a shift in school governance from teachers and elected community councils to appointed administrators coming disproportionately from the ranks of business. It also establishes corporate control over the selection and model of new schools, giving the business elite and their foundations increasing influence over educational policy. No wonder that Duncan had the support of David Brooks, the conservative op-ed writer for The New York Times.

One particularly egregious example of Duncan's vision of education can be seen in the conference he organized with the Renaissance Schools Fund. In May 2008, the Renaissance Schools Fund, the financial wing of the Renaissance 2010 plan operating under the auspices of the Commercial Club, held a symposium, 'Free to Choose, Free to Succeed: The New Market in Public Education,' at the exclusive private club atop the Aon Center. The event was held largely by and for the business sector, school privatization advocates, and others already involved in Renaissance 2010, such as corporate foundations and conservative think tanks. Significantly, no education scholars were invited to participate in the proceedings, although it was heavily attended by fellows from the pro-privatization Fordham Foundation and featured speakers from various school choice organizations and the leadership of corporations. Speakers clearly assumed the audience shared their views.

Without irony, Arne Duncan characterized the goal of Renaissance 2010 creating the new market in public education as a 'movement for social justice.' He invoked corporate investment terms to describe reforms explaining that the 100 new schools would leverage influence on the other 500 schools in Chicago. Redefining schools as stock investments he said, 'I am not a manager of 600 schools. I'm a portfolio manager of 600 schools and I'm trying to improve the portfolio.' He claimed that education can end poverty. He explained that having a sense of altruism is important, but that creating good workers is a prime goal of educational reform and that the business sector has to embrace public education. 'We're trying to blur the lines between the public and the private,' he said. He argued that a primary goal of educational reform is to get the private sector to play a huge role in school change in terms of both money and intellectual capital. He also attacked the Chicago Teachers Union (CTU), positioning it as an obstacle to business-led reform. He also insisted that the CTU opposes charter schools (and, hence, change itself), despite the fact that the CTU runs ten such schools under Renaissance 2010. Despite the representation in the popular press of Duncan as conciliatory to the unions, his statements and those of others at the symposium belied a deep hostility to teachers unions and a desire to end them (all of the charters created under Ren2010 are deunionized). Thus, in Duncan's attempts to close and transform low-performing schools, he not only reinvents them as entrepreneurial schools, but, in many cases, frees 'them from union contracts and some state regulations.'[9] Duncan effusively praised one speaker, Michael Milkie, the founder of the Nobel Street charter schools, who openly called for the closing and reopening of every school in the district precisely to get rid of the unions. What became clear is that Duncan views Renaissance 2010 as a national blueprint for educational reform, but what is at stake in this vision is the end of schooling as a public good and a return to the discredited and tired neoliberal model of reform that conservatives love to embrace.

In spite of the corporate rhetoric of accountability, efficiency and excellence, there is to date no evidence that the radical reforms under Duncan's tenure as the 'CEO' of Chicago Public Schools have created any significant improvement. In part, this is because the Chicago Public Schools and the Renaissance Schools Fund report data in obscurantist ways to make traditional comparisons difficult if not impossible.[10][11] And, in part, examples of educational claims to school improvement are being made about schools embedded in communities that suffered dislocation and removal through coordinated housing privatization and gentrification policies. For example, the city has decimated public housing in coveted real estate enclaves, dispossessing thousands of residents of their communities. Once the poor are removed, the urban cleansing provides an opportunity for Duncan to open a number of Renaissance Schools, catering to those socio-economically empowered families whose children would surely improve the city's overall test scores. What are alleged to be school improvements under Ren2010, rest on an increase in the city's overall test scores and other performance measures that parodies the financial shell game corporations used to inflate profit margins - and prospects for future catastrophes are as inevitable. In the end, all Duncan leaves us with is a Renaissance 2010 model of education that is celebrated as a business designed 'to save kids' from a failed public system. In fact, it condemns public schooling, administrators, teachers and students to a now outmoded and discredited economic model of reform that can only imagine education as a business, teachers as entrepreneurs and students as customers.

It is difficult to understand how Barack Obama can reconcile his vision of change with Duncan's history of supporting a corporate vision for school reform and a penchant for extreme zero-tolerance polices - both of which are much closer to the retrograde policies hatched in conservative think tanks such as the Heritage Foundation, Cato Institution, Fordham Foundation, American Enterprise Institute, than to the values of the many millions who voted for the democratic change he promised. As is well known, these think tanks share an agenda not for strengthening public schooling, but for dismantling it and replacing it with a private market in consumable educational services. At the heart of Duncan's vision of school reform is a corporatized model of education that cancels out the democratic impulses and practices of civil society by either devaluing or absorbing them within the logic of the market or the prison. No longer a space for relating schools to the obligations of public life, social responsibility to the demands of critical and engaged citizenship, schools in this dystopian vision legitimate an all-encompassing horizon for producing market identities, values and those privatizing and penal pedagogies that both inflate the importance of individualized competition and punish those who do not fit into its logic of pedagogical Darwinism.[12]

In spite of what Duncan argues, the greatest threat to our children does not come from lowered standards, the absence of privatized choice schemes or the lack of rigid testing measures that offer the aura of accountability. On the contrary, it comes from a society that refuses to view children as a social investment, consigns 13 million children to live in poverty, reduces critical learning to massive testing programs, promotes policies that eliminate most crucial health and public services and defines rugged individualism through the degrading celebration of a gun culture, extreme sports and the spectacles of violence that permeate corporate controlled media industries. Students are not at risk because of the absence of market incentives in the schools. Young people are under siege in American schools because, in the absence of funding, equal opportunity and real accountability, far too many of them have increasingly become institutional breeding grounds for racism, right-wing paramilitary cultures, social intolerance and sexism.[13] We live in a society in which a culture of testing, punishment and intolerance has replaced a culture of social responsibility and compassion. Within such a climate of harsh discipline and disdain for critical teaching and learning, it is easier to subject young people to a culture of faux accountability or put them in jail rather than to provide the education, services and care they need to face problems of a complex and demanding society.[14] What Duncan and other neoliberal economic advocates refuse to address is what it would mean for a viable educational policy to provide reasonable support services for all students and viable alternatives for the troubled ones. The notion that children should be viewed as a crucial social resource - one that represents, for any healthy society, important ethical and political considerations about the quality of public life, the allocation of social provisions and the role of the state as a guardian of public interests - appears to be lost in a society that refuses to invest in its youth as part of a broader commitment to a fully realized democracy. As the social order becomes more privatized and militarized, we increasingly face the problem of losing a generation of young people to a system of increasing intolerance, repression and moral indifference. It is difficult to understand why Obama would appoint as secretary of education someone who believes in a market-driven model that has not only failed young people, but given the current financial crisis has been thoroughly discredited. Unless Duncan is willing to reinvent himself, the national agenda he will develop for education embodies and exacerbates these problems and, as such, it will leave a lot more kids behind than it helps.


[1] Cited in Alfie Kohn, 'The Real Threat to American Schools,' Tikkun (March-April 2001), p. 25. For an interesting commentary on Obama and his possible pick to head the education department and the struggle over school reform, see Alfie Kohn, 'Beware School 'Reformers',' The Nation (December 29, 2008). Online:

[2] This term comes form: David Garland, 'The Culture of Control: Crime and Social Order in Contemporary Society' (Chicago: University of Chicago Press, 2002).

[3] For a brilliant analysis of the 'governing through crime' complex, see Jonathan Simon, 'Governing Through Crime: How the War on Crime Transformed American Democracy and Created a Culture of Fear,' (New York, NY: Oxford University Press, 2007).

[4] Advancement Project in partnership with Padres and Jovenes Unidos, Southwest Youth Collaborative, 'Education on Lockdown: The Schoolhouse to Jailhouse Track,' (New York: Children & Family Justice Center of Northwestern University School of Law, March 24, 2005), p.31. On the broader issue of the effect of racialized zero tolerance policies on public education, see Christopher G. Robbins, 'Expelling Hope: The Assault on Youth and the Militarization of Schooling' (Albany: SUNY Press, 2008). See also, Henry A. Giroux, 'The Abandoned Generation' (New York: Palgrave, 2004).

[5] David Hursh and Pauline Lipman, 'Chapter 8: Renaissance 2010: The Reassertion of Ruling-Class Power through Neoliberal Policies in Chicago' in David Hursh, 'High-Stakes Testing and the Decline of Teaching and Learning' (Lanham, MD: Rowman & Littlefield, 2008).

[6] See:

[7] 'Creating a New Market of Public Education: The Renaissance Schools Fund 2008 Progress Report,' The Renaissance Schools Fund

[8] Kenneth J. Saltman, 'Chapter 3: Renaissance 2010 and No Child Left Behind Capitalizing on Disaster: Taking and Breaking Public Schools' (Boulder: Paradigm Publishers, 2007).

[9] Sarah Karp and Joyn Myers, 'Duncan's Track Record,' Catalyst Chicago (December 15, 2008). Online:

[10] (See Chicago Public Schools Office of New Schools 2006/2007 Charter School Performance Report Executive Summary)

[11] See Dorothy Shipps, 'School Reform, Corporate Style: Chicago 1880-2000,' (Lawrence: University of Kansas Press, 2006).

[12] See, for example, Summary Report, 'America's Cradle to Prison Pipeline,' Children's Defense Fund. Online at:; also see, Elora Mukherjee, 'Criminalizing the Classroom: The Over-Policing of New York City Schools,' (New York: American Civil Liberties Union and New York Civil Liberties, March 2008), pp. 1-36.

[13] Donna Gaines, 'How Schools Teach Our Kids to Hate,' Newsday (Sunday, April 25, 1999), p. B5.

[14] As has been widely, reported, the prison industry has become big business with many states spending more on prison construction than on university construction. Jennifer Warren, 'One in 100: Behind Bars in America 2008,' (Washington, DC: The PEW Center on the States, 2007). Online at: