Wednesday, January 21, 2009

Lights, Camera… Covert Action: The Deep Politics of Hollywood

Lights, Camera… Covert Action: The Deep Politics of Hollywood

by Matthew Alford and Robbie Graham

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Here we build a prima facae case supporting the idea that Hollywood continues to be a target for infiltration and subversion by a variety of state agencies, in particular the CIA. Academic debates on cinematic propaganda are almost entirely retrospective, and whilst a number of commentators have drawn attention to Hollywood’s longstanding and open relationship with the Pentagon, little of substance has been written about the more clandestine influences working through Hollywood in the post-9/11 world. As such, our work delves into the field of what Peter Dale Scott calls "deep politics"; namely, activities which cannot currently be fully understood due to the covert influence of shadowy power players.

The Latest Picture

A variety of state agencies have liaison offices in Hollywood today, from the FBI, to NASA and the Secret Service. Few of these agencies, though, have much to offer in exchange for favourable storylines, and so their influence in Hollywood is minimal. The major exception here is the Department of Defense, which has an ‘open’ but barely publicized relationship with Tinsel Town, whereby, in exchange for advice, men and invaluable equipment, such as aircraft carriers and helicopters, the Pentagon routinely demands flattering script alterations. Examples of this policy include changing the true identity of a heroic military character in Black Hawk Down (2001) due to his real-life status as a child rapist; the removal of a joke about "losing Vietnam" from the James Bond film Tomorrow Never Dies (1997), and cutting images of Marines taking gold teeth from dead Japanese soldiers in Windtalkers (2002). Instances such as these are innumerable, and the Pentagon has granted its coveted "full cooperation" to a long list of contemporary pictures including Top Gun (1986), True Lies (1994), Executive Decision (1996), Air Force One (1997), The Sum of All Fears (2002), Transformers (2007), Iron Man (2008), as well as TV series such as JAG (1995-2005).

Such government activity, whilst morally dubious and barely advertised, has at least occurred within the public domain. This much cannot be said of the CIA’s dealings with Hollywood, which, until recently, went largely unacknowledged by the Agency. In 1996, the CIA announced with little fanfare the dry remit of its newly established Media Liaison Office, headed by veteran operative Chase Brandon. As part of its new stance, the CIA would now openly collaborate on Hollywood productions, supposedly in a strictly ‘advisory’ capacity.

The Agency’s decision to work publicly with Hollywood was preceded by the 1991 "Task Force Report on Greater CIA Openness," compiled by CIA Director Robert Gates’ newly appointed ‘Openness Task Force,’ which secretly debated –ironically– whether the Agency should be less secretive. The report acknowledges that the CIA "now has relationships with reporters from every major wire service, newspaper, news weekly, and television network in the nation," and the authors of the report note that this helped them "turn some ‘intelligence failure’ stories into ‘intelligence success’ stories, and has contributed to the accuracy of countless others." It goes on to reveal that the CIA has in the past "persuaded reporters to postpone, change, hold, or even scrap stories that could have adversely affected national security interests…"

These admissions add weight to several reports and Congressional hearings from the 1970s which indicated that the CIA once maintained a deep-rooted and covert presence in national and international media, informally dubbed "Operation Mockingbird." In its 1991 report, the CIA acknowledged that it had, in fact, "reviewed some film scripts about the Agency, documentary and fictional, at the request of filmmakers seeking guidance on accuracy and authenticity." But the report is at pains to state that, although the CIA has "facilitated the filming of a few scenes on Agency premises," it does "not seek to play a role in filmmaking ventures." But it seems highly implausible that the CIA, whilst maintaining a decades-long presence in media and academia, would have shown no interest in the hugely influential Cinema industry.

Indeed, it should come as no surprise that the CIA has been involved in a number of recent blockbusters and TV series. The 2001 CBS TV series, The Agency, executive produced by Wolfgang Petersen (Das Boot, Air Force One) was actually co-written by ex-CIA agent and Marine Bazzel Baz, with additional ex-CIA agents working as consultants. The CIA gladly opened its doors to the production, and facilitated both external and internal shots of its Langley headquarters as the camera gazed lovingly at the CIA seal. This arrangement was comparable to the Feds’ efforts on the popular TV series The FBI (1965-74) which was shaped by the Bureau in cooperation with ABC and which thanked J. Edgar Hoover in the credits of each episode. Similarly, The Agency glorified the actions of US spooks as they fought predictable villains including the Russian military, Arab and German terrorists, Columbian drug dealers, and Iraqis. One episode even shows the CIA saving the life of Fidel Castro; ironically, since the CIA in real life had made repeated attempts to assassinate the Cuban President. Promos for the show traded on 9/11, which had occurred just prior to its premiere, with tag lines like "Now, more than ever, we need the CIA."

A TV movie, In the Company of Spies (1999) starring Tom Berenger depicted a retired CIA operative returning to duty to save captured Agency officers held by North Korea. The CIA was so enthusiastic about this product that it hosted its presentation, cooperated during production, facilitated filming at Langley, and provided fifty off-duty officers as extras, according to its website.

Espionage novelist Tom Clancy has enjoyed an especially close relationship with the CIA. In 1984, Clancy was invited to Langley after writing The Hunt for Red October, which was later turned into the 1990 film. The Agency invited him again when he was working on Patriot Games (1992), and the movie adaptation was, in turn, granted access to Langley facilities. More recently, The Sum of All Fears (2002) depicted the CIA as tracking down terrorists who detonate a nuclear weapon on US soil. For this production, CIA director George Tenet gave the filmmakers a personal tour of the Langley HQ; the film’s star, Ben Affleck also consulted with Agency analysts, and Chase Brandon served as on-set advisor.

Media sources indicate that the CIA also worked on the Anthony Hopkins/Chris Rock feature Bad Company (2002) and the Jerry Bruckheimer blockbuster Enemy of the State (2001). However, no details whatsoever about these appear to be in the public domain. Similarly, Spy Game director Tony Scott’s DVD commentary for said film indicates that he visited Langley whilst in pre-production but, according to one report, endorsement appeared to have been withheld after Chase Brandon read the final draft of the script.

More details than usual emerged about CIA involvement in the Tom Hanks movie Charlie Wilsons War (2007) and Robert De Niro’s The Good Shepherd (2006) – but not many. Milt Beardon had traveled to the Moscow Film Festival with De Niro and claims the pair then "disappeared and hung out with the mob and KGB crowd for a while. I introduced him to generals and colonels, the old guys I had been locked with for so many years." De Niro later tagged along with Beardon to Pakistan. "We wandered around the North-West Frontier Province," Bearden recalls, "crossed the bridge [to Afghanistan] I built years ago, hung out with a bunch of guys firing off machine guns and drinking tea." Still, The Good Shepherd didn’t fulfill the CIA’s earnest hopes of being the CIA equivalent of Flags of Our Fathers (2006), which the Agency’s official historian says it should have been – all in the interests of what he calls a "culture of truth."

Charlie Wilson’s War depicted the United States’ covert efforts to supply arms to Afghanistan to fight the Soviet Union in the 1980s which had the real-life consequence of America’s old ally turned against it in the form of al-Qaeda (as Crile explains in the book of the film). However, Beardon, who was the CIA agent who supplied the weapons, worked as consultant on the film and said prior to its release that it "will put aside the notion that because we did that, we had 9/11." CIA involvement in the film therefore appears to have paid dividends.

The real reasons for the CIA adopting an "advisory" role on all of these productions are thrown into sharp relief by a solitary comment from former Associate General Counsel to the CIA, Paul Kelbaugh. In 2007, whilst at a College in Virginia, Kelbaugh delivered a lecture on the CIA’s relationship with Hollywood, at which a local journalist was present. The journalist (who now wishes to remain anonymous) wrote a review of the lecture which related Kelbaugh’s discussion of the 2003 thriller The Recruit, starring Al Pacino. The review noted that, according to Kelbaugh, a CIA agent was on set for the duration of the shoot under the guise of a consultant, but that his real job was to misdirect the filmmakers: "We didn’t want Hollywood getting too close to the truth," the journalist quoted Kelbaugh as saying.

Peculiarly, in a strongly-worded email to the authors, Kelbaugh emphatically denied having made the public statement and claimed that he remembered "very specific discussions with senior [CIA] management that no one was ever to misrepresent to affect [film] content – EVER." The journalist considers Kelbaugh’s denial "weird," and told us that "after the story came out, he [Kelbaugh] emailed me and loved it… I think maybe it’s just that because [the lecture] was ‘just in Lynchburg’ he was okay with it – you know, like, no one in Lynchburg is really going to pay much attention to it, I guess. Maybe that’s why he said it, and maybe that’s why he’s denying it now." The journalist stands by the original report, and Kelbaugh has pointedly refused to engage us in further discussion on the matter.

Early Screening

Clandestine agencies have a long history of interference in the cinema industry. Letters discovered in the Eisenhower Presidential Library from the secret agent Luigi G. Luraschi (identified by British academic John Eldridge), the Paramount executive who worked for the CIA’s Psychological Strategy Board (PSB), reveal just how far the CIA was able to reach into the film industry in the early days of the Cold War, despite its claims that it sought no such influence. For instance, Luraschi reported that he had secured the agreement of several casting directors to subtly plant "well dressed negroes" into films, including "a dignified negro butler" who has lines "indicating he is a free man" in Sangaree (1953) and in a golf club scene in the Dean Martin/Jerry Lewis vehicle The Caddy (1953). Elsewhere, CIA arranged the removal of key scenes from the film Arrowhead (1953), which questioned America’s treatment of Apache Indians, including a sequence where a tribe is forcibly shipped and tagged by the US Army. Such changes were not part of a ham-fisted campaign to instill what we now call "political correctness" in the populace. Rather, they were specifically enacted to hamper the Soviets’ ability to exploit its enemy’s poor record in race relations and served to create a peculiarly anodyne impression of America, which was, at that time, still mired in an era of racial segregation.

Other efforts were made. The PSB tried –unsuccessfully– to commission Frank Capra to direct Why We Fight the Cold War and to provide details to filmmakers about conditions in the USSR in the hope that they would use them in their movies. More successfully, in 1950, the CIA –along with other secretive organizations like the Office of Policy Coordination (OPC) and aided by the PSB– bought the rights to and invested in the cartoon of George Orwell’s Animal Farm (1954), which was given an anti-Soviet spin to satisfy its covert investors. Author Daniel Leab has pointed to the fact it took decades for the rumours about CIA involvement in Animal Farm to be properly documented; this, he observes, "Speaks volumes about the ability of a government agency to keep its activities covert."

Additionally, the production of the Michael Redgrave feature Nineteen-Eighty Four (1956) was in turn overseen by the American Committee for Cultural Freedom, which was supervised by the CIA. Key points in the movie were altered to demonise the Soviets.

The CIA also tampered with the 1958 film version of The Quiet American, provoking the author, Graham Greene, to denounce the film. US Air Force Colonel Edward Lansdale, the CIA operative behind Operation Mongoose (the CIA sabotage and assassination campaign against Cuba) had entered into production correspondence with director Joseph L. Mankiewicz, who accepted his ideas. These included a change to the final scene in which we learn that Redgrave’s anti-hero has been hoodwinked by the Communists into murdering the suspicious American, who turns out not to be a bomb-maker as we had been led to believe, but instead a manufacturer of children’s toys.

Behind the Scenes

It would be a mistake to regard the CIA as unique in its involvement in Hollywood. The industry is in fact fundamentally open to manipulation by a range of state agencies. In 2000, it emerged that the White House’s drug war officers had spent tens of millions of dollars paying the major US networks to inject anti-drug plots into the scripts of primetime series such as ER, The Practice, Sabrina the Teenage Witch and Chicago Hope. Despite criticism for this blatant propagandizing, the government continued to employ this method of spreading its message on drugs.

The White House went to Tinsel Town again the following year when, on November 11, 2001 a meeting was held in Hollywood between President Bush’s then Deputy Chief of Staff, Karl Rove, and representatives of each of the major Hollywood studios to discuss how the film industry might contribute to the ‘War on Terror.’ Jack Valenti, president of the Motion Picture Association of America said with a straight face that, "content was off the table", but Rove had clearly outlined a series of requests. It is hard to gauge the consequences of the meeting, but a Rambo sequel, for instance, was certainly discussed, and duly produced. Similarly, several series with national security themes emerged within a short time of the meeting including She Spies (2002-2004) and Threat Matrix (2003).

The meeting was, in fact, just one in a series between Hollywood and the White House from October to December, 2001. On October 17, in response to 9/11, the White House announced the formation of its "Arts and Entertainment Task Force," and by November, Valenti had assumed leadership of Hollywood’s new role in the ‘War on Terror’. As a direct result of meetings, Congress sought advice from Hollywood insiders on how to shape an effective wartime message to America and to the world. In November 2001, John Romano, writer-producer of the popular US TV series Third Watch, advised the House International Relations Committee that the content of Hollywood productions was a key part of shaping foreign perceptions of America.

On December 5, 2001, the powerful Academy of Television Arts & Sciences convened its own panel entitled "Hollywood Goes to War?" to discuss what the industry might do in response to 9/11. Representing the government at the meeting were Mark McKinnon, a White House advisor, and the Pentagon’s chief entertainment liaison, Phil Strub. Also in attendance, among others, were Jeff Zucker, President of NBC Entertainment, and Aaron Sorkin, creator and writer of the White House drama The West Wing (1999-2006). Immediately after, Sorkin and his team set about producing a special episode of the show dealing with a massive terrorist threat to America entitled "Isaac and Ishmael". The episode was given top priority and was successfully completed and aired within just ten days of the meeting. The product championed the superiority of American values whilst brimming with rage against the Islamist jihadists.

The interlocking of Hollywood and national security apparatuses remains as tight as ever: ex-CIA agent Bob Baer told us, "There’s a symbiosis between the CIA and Hollywood" and revealed that former CIA director George Tenet is currently, "out in Hollywood, talking to studios." Baer’s claims are given weight by the Sun Valley meetings, annual get-togethers in Idaho’s Sun Valley in which several hundred of the biggest names in American media –including every major Hollywood studio executive– convene to discuss collective media strategy for the coming year. Against the idyllic backdrop of expansive golf courses, pine forests and clear fishing lakes, deals are struck, contracts are signed, and the face of the American media is quietly altered. The press has yet to be granted permission to report on these corporate media gatherings and so the exact nature of what is discussed at the events has never been publicly disclosed. It is known, however, that Tenet was keynote speaker at Sun Valley in 2003 (whilst still CIA head) and again in 2005.


Many would recoil at the thought of modern Hollywood cinema being used as a propagandist tool, but the facts seem to speak for themselves. Do agencies such as the CIA have the power, like the Pentagon, to affect movie content by providing much-sought-after expertise, locations and other benefits? Or are they able to affect script changes through simple persuasion, or even coercion? Do they continue to carry out covert actions in Hollywood as they did so extensively in the 1950s, and, beyond cinema, might covert government influence play some part in the creation of national security messages in TV series such as 24 and Alias (the star of the latter, Jennifer Garner, even made an unpaid recruitment video for the CIA)? The notion that covert agencies aspire to be more open is hard to take seriously when they provide such scant information about their role within the media, even regarding activities from decades past. The spy may have come in from the cold, but he continues to shelter in the shadows of the movie theatre.

California in dire financial straits, suspends billions in payments

California in dire financial straits, suspends billions in payments

By Dan Conway

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With the state of California unable to resolve the largest budget deficit in its history, Governor Arnold Schwarzenegger delivered a highly truncated State of the State speech January 15. Schwarzenegger spoke for a mere 12 minutes, declaring that, "It doesn't make any sense to talk about education, infrastructure, water, health care reform and all these things when we have this huge budget deficit."

The situation facing the California economy is dire. In addition to a projected $41.8 billion deficit by July 2010, the state is predicted to run entirely out of cash to pay for basic services by early February, and many drastic measures are either being planned or have already been implemented as a result.

State Controller John Chiang announced last Friday that the state would be short $346 million dollars on necessary payments to social programs by February 1 and would be issuing individual registered warrants or IOUs in lieu of cash payments.

Controller Chiang stated that he had no choice but to stop nearly $3.7 billion in payments. The suspended payments include $2 billion in tax refunds, $300 million in cash grants for needy families and the elderly and $13 million in grants for college students. Chiang announced that the delayed payments would be rolled into the IOUs should the state still lack sufficient cash to pay its bills by April 2009. These suspensions alone will produce enormous suffering.

This will be the first time since 1992 that the state has issued IOUs. At that time recipients were allowed to deposit the IOUs with banking institutions, whereupon the institutions would later reclaim the funds from the state at a high interest rate once the latter became solvent again. A January 17 article in the Los Angeles Times reports that Chiang is currently negotiating with banks to determine whether or not they will honor this latest round of IOUs at all, given the state's perilous financial situation.

California does not have the necessary funds this time around. The state typically relies on outside investment to maintain payments during the autumn and winter months when tax revenues have dried up. During these months, the state secures short-term loans, called Revenue Anticipation Notes, from large banks in order to cover expenditures.

This past year Goldman Sachs, which acted as loan underwriter for the notes, significantly drove up interest rates on the state's debt obligations by issuing credit default swaps against the state's debt and advising investors to short California bonds.

This action contributed, in no small measure, to the current financial paralysis whereby the state finds itself largely unable to raise revenues through bond sales. While Goldman Sachs was collecting millions from California for underwriting its debt, the investment firm was recommending to its well-heeled clients that they undermine the value of these same bonds.

Last December, the state halted the payment of $3.8 billion dollars for infrastructure projects, including $70 million in funds to needed levee-repair work in the state's Central Valley. Also last December, Gov. Schwarzenegger issued an executive order mandating that state agencies cut payrolls by 10 percent through furloughing state employees for two days each month without compensation.

An estimated 200,000 workers lost their jobs as a result of the infrastructure funding halt, adding to an already bleak state employment picture. As of November 2008, the state's official employment rate was 8.4 percent, the third highest rate in the nation, and the highest the state has experienced in over 14 years. It is also widely forecast that California's jobless rate will increase in 2009, while the newly unemployed will face an ever-dwindling pool of state services to draw from.

The 8.4 percent figure represents the average state unemployment rate. Sutter County, north of the state capital of Sacramento, recorded a 14.5 percent unemployment rate, while neighboring Colusa County recorded an even higher 18 percent. Imperial County, a primarily agricultural region in southeastern California, recorded the highest unemployment rate in the state, at 23.4 percent.

While unemployment figures continue to increase, the California state unemployment fund is anticipated to become insolvent in March 2009, with projections that the fund could be $2.4 billion in the red by the end of the year, a figure expected to increase to $3.5 billion by the end of 2010.

The unemployment insurance fund is financed primarily through taxes paid by employers. State officials are half-heartedly proposing to bolster the fund by increasing taxes on employers, but their real plan is to reduce benefit payouts along with the imposition of more exclusionary eligibility requirements.

Those who are currently unemployed are finding it increasingly difficult to obtain unemployment insurance, which provides a maximum benefit of only $450 per week. To make matters worse, the state Employment Development Department (EDD), which services unemployment insurance claims, has a staff of only 850 workers to handle the tens of thousands of requests per day.

The California Unemployment Insurance Branch, which is handled by that department, is the largest in the nation in terms of participating employers and benefits paid. According to a recent article in the San Diego Union Tribune, EDD call centers were averaging at least two million calls per day during the holiday season when many large employers announced massive layoffs.

Indeed, many recently-unemployed workers report that calls to EDD call centers are met with pre-taped voice messages informing them that there are too many calls and then disconnecting the caller. Email requests to the EDD are met with a similar type of response.

In a further blow to the jobless, the governor has proposed cuts to the so-called welfare-to-work program known as CalWORKS. The governor's plan would save the state an estimated $1 billion this fiscal year and next by reducing CalWORKS grants and reversing a long-standing policy of assisting impoverished children even if their parents are not eligible for cash assistance.

One out of every three impoverished children on the state's welfare rolls is expected to lose benefits as a result of the proposal. According to the Western Center on Law and Poverty, this will amount to 310,000 children losing benefits from the program in total.

The budget crisis will have an alarming impact on state youth. Besides the cuts being made in the CalWORKS program, Sacramento officials are proposing drastic cuts in university, elementary and secondary school education. California's school year could be reduced by one week, with commensurate salary reductions for teachers and support staff, while billions of dollars are to be cut from educational institutions across the state.

A recent proposal by state Democrats, meant to address $18 billion of the budget shortfall and which Schwarzenegger vetoed early this year, would have reduced overall education funding by $2.9 billion. The governor, however, has vowed to work with lawmakers to enact measures that would address the entire $41 billion deficit, meaning that the $2.9 billion figure will most likely rise dramatically.

The California State University system is proposing to cut enrollment for the first time in its history, turning away over 10,000 qualified students as a result of the state's fiscal woes. California State University Chancellor Charles B. Reed noted in a memorandum to CSU staff that the universities received 20 percent more applications than the previous year with a 36 percent increase in applications from community college students seeking to transfer, implying that a 10,000-person reduction in current enrollment levels would actually affect a much larger body of potential students.

The University Of California Board Of Regents recently approved plans to cut enrollment by 2,300 students next year, while leaders in both systems are also preparing other budget-slashing measures, including salary and hiring freezes along with cuts in financial aid.

Schwarzenegger already proposed cutting the state's main student grant program by $88 million for fiscal year 2009-2010. He also proposed phasing out the Competitive Cal Grant program, which provides more than $100 million annually to ‘second chance' students, or those students initially deemed ineligible to attend a given university but who have since demonstrated potential. The governor's proposal would also reduce the amount of aid available to students attending private colleges in the state by $1,400 per student.

High school and elementary schools across the state are also feeling the brunt of the cuts and taking drastic measures to compensate. To cite one example, the Los Angeles Unified School District, which is the country's second largest, is preparing to lay off 1,690 elementary and 600 middle and high school teachers to deal with its own $250 million shortfall. Elementary school class sizes could now rise to an average of more than 30 students per teacher.

LA Unified's Ramon Cortines, addressing his first board meeting as superintendent of the district, acknowledged this reality while at the same time admitting it would be nearly impossible for students to learn in such an environment.

In his state of the state remarks, Schwarzenegger made cursory mention of the programs which will and already have been impacted by the budget crisis, saying that "no one wants to take money from Medi Cal or from education. Of course not. No one wants to pay more taxes or fees. But each of us has to give up something, because our country is in an economic crisis and our state simply doesn't have the money."

The state's working population, not Schwarzenegger and his millionaire and billionaire cronies, will have to make massive sacrifices and face increasing social misery on account of the criminality of the financial elite who are alone responsible for California's economic disaster. The situation is increasingly explosive.

US markets plummet as banks falter and world slump deepens

US markets plummet as banks falter and world slump deepens

By Patrick O’Connor

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Even as Barack Obama was sworn in as the 44th US president, Wall Street markets fell sharply in response to further indications of the accelerating crisis of American and world capitalism. The stock market decline, triggered by reports of massive losses suffered by US and European banks, was the worst ever inauguration day sell-off.

The Dow Jones Industrial Average closed 4 percent lower, losing 332 points and falling below the 8,000 mark to 7,949. Also sharply down were the Standard & Poor's 500 Index (-5.3 percent) and the Nasdaq Composite Index (-5.8 percent). The Dow and S&P are now at two-month lows, largely erasing the rebound that followed the November presidential election, which saw the markets anticipate an Obama administration stimulus package. "Optimism that government spending would revive the economy [has] evaporated," Bloomberg News reported.

The financial sector took the biggest hit yesterday, with the S&P 500 Financials Index closing down 17 percent to its lowest level in 13 years.

Bank of America stocks closed 29 percent lower, Wells Fargo lost 24 percent, JPMorgan Chase fell 21 percent, and Citigroup declined 20 percent. Boston-based bank State Street, the world's largest institutional money manager, plummeted 56 percent after it announced $6.3 billion of unrealized losses in its investment portfolio, shocking financial analysts who had regarded State Street's financial operations as among the safest in the market.

Stocks in British-based banks also plunged as they announced massive losses and the government unveiled a new bailout package. (See "British government mounts new bank bailout amid warnings of economic collapse") The New York-listed shares of Royal Bank of Scotland fell by 69 percent, Barclays was down 42 percent, and HSBC Holdings lost 15 percent of its value.

Underlying the latest plunge of US and European banking stocks is the growing awareness that none of the multibillion-dollar bailout packages has resolved the underlying crisis of the financial sector that was first triggered by the collapse of the American subprime mortgage market. New York University Professor Nouriel Roubini yesterday estimated that US financial losses may total $3.6 trillion. "If that is true, it means the US banking system is effectively insolvent because it starts with capital of $1.4 trillion," he said. "This is a systemic banking crisis."

The financial meltdown has in turn triggered an increasingly sharp decline in global economic activity.

The European Commission yesterday forecast that the Eurozone economy will contract by 1.9 percent this year, before recording just 0.4 percent growth in 2010. The official forecast may underestimate the situation. Bank of America economists, for example, anticipate a Eurozone contraction of 2.6 percent this year.

The European Commission described the situation as a "deep and protracted recession," and said it expected unemployment in the 16 countries using the euro to exceed 10 percent by 2010. Europe's largest economies—and major trading partners with the US—are among the worst affected. Britain is forecast to lose 2.8 percent of its gross domestic product this year, Germany 2.3 percent, France 1.8 percent, Italy 2 percent.

The Spanish economy is also expected to decline by 2 percent this year, triggering a massive rise in unemployment from 11 percent to 19 percent. Spain lost its Standard & Poor's triple-A credit rating on Monday in response to concerns over its growing budget deficit. The downgrading follows a similar revision of Greece's credit rating last week. Standard & Poor's has said it is now reviewing several European economies, including Ireland and Portugal. Analysts say the region's largest economies, including Germany and France, are also likely to be affected.

Britain's ballooning debt has led to speculation concerning its credit worthiness. "Investors are concerned about the cost of the government measures and the implications they might have, with escalating borrowing and the possible doubling of Britain's debt ratio," Neil Mackinnon, chief economist at ECU Group, told Associated Press.

Lower credit ratings make it more difficult and expensive for governments to access finance. This in turn makes sustaining budget deficits problematic, creating pressures for increased taxes and lower social spending—measures which have the potential to accelerate the deflationary spiral, plunging Europe further into recession.

European producers have already sharply curtailed output. A recent article in Newsweek magazine reported: "The numbers are horrifying, and increasingly so. There's been a violent collapse in industrial production in Europe; the latest monthly data now show annual contractions of 17 percent in Spain, 13 percent in the UK, 9 percent in France and Italy, and 6 percent in Germany. Emerging economies are now on the same course, with contractions of 9 percent in Russia and 4 percent in Brazil."

Major industrial sectors have been among the hardest hit. The EU's industry commissioner, Guenter Verheugen, last week warned that some of the leading carmakers could face bankruptcy. "The outlook for the industry is, to say the least, brutal," he declared. "We have seen a dramatic decrease in car sales, especially in the last quarter of 2008—with a drop of more than 20 percent—and we expect another drop of 20 percent for 2009 that will affect hundreds of thousands, if not millions, of workers. There is no guarantee that all the main European manufacturers can survive the crisis."

Massive job losses, wage cuts and potential corporate bankruptcies are also anticipated in the US auto industry. Italian firm Fiat yesterday announced it was taking a 35 percent stake in Chrysler. The agreement is aimed at allowing Chrysler to use Fiat's technology to produce smaller and more fuel efficient vehicles and also access Fiat's European distribution networks. Fiat's shares declined after the announcement, however, indicating the markets' lack of confidence across the auto sector.

Whatever the impact of the agreement on each firm's balance sheet, there is no doubt that autoworkers will be faced with additional plant closures, job losses and wage cuts. While no details have yet been announced, Fiat and Chrysler announced that they expect "substantial cost savings opportunities." Chrysler executives added that they would be asking employees to make "sacrifices" to support the company's restructuring.

Major layoff announcements are being issued on a daily basis. Vehicle hire company Hertz Global is to cut 4,000 jobs worldwide due to declining travel demand. Clear Channel, the largest US radio broadcaster, has sacked 1,850 employees, or about 9 percent of its workforce. Also cutting 9 percent of its staff is audio manufacturer Bose Corp., which is to lay off about 1,000 workers. Warner Bros. Entertainment is slashing about 800 positions, or 10 percent of its workforce. Several hundred of these positions are to be outsourced to cheap labor platforms, including India and Poland.

Conoco Phillips, the second-largest refiner in the US, has announced that it will cut 4 percent of its staff, or 1,350 jobs. Chemical company Rohm & Haas is sacking 900 workers, nearly 6 percent of its total, and is also freezing salaries. Further layoffs are also expected across the financial sector. According to the Financial Times, Bank of America will soon announce an additional 4,000 job cuts.

In addition to mounting layoffs, increasing numbers of workers are being forced to accept significant wage cuts. An article in the Wall Street Journal last Saturday noted: "In addition to layoffs, companies are increasingly trimming wages, a tactic economic historians said hasn't been wielded broadly since the Great Depression... The last time the US had widespread wage cuts was during the great Depression, when benefits were a smaller slice of overall compensation."

Obama’s inaugural address: Amid banalities, a call for austerity

Obama’s inaugural address: Amid banalities, a call for austerity

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In his inaugural address Tuesday, President Barack Obama offered nothing in the way of concrete pledges or programs to confront the economic crisis or bring an end to war. Instead, he indicated that the American people would have to accept even greater sacrifices.

The pomp and ceremony dating back 220 years to the birth of the American republic, reinforced by the accession of the first African-American to the presidency, stood in sharp contrast to the banality of Obama's words and the hollowness of his message.

For the millions who packed the Washington Mall, the emotions of the day were driven by hopes that the coming to power of an African-American would signify genuine change and by relief at the exit of George W. Bush, whose first appearance on the Capitol steps drew loud boos from the assembled crowd. At the end of the ceremony, the departure over the Mall of the helicopter bearing Bush, the most hated president in the country's history, drew a chant from the crowd most often heard from sports fans jeering an opposing team: "Na-na-na-na, Na-na-na-na, Hey Hey, Goodbye."

There was a general hope that the inauguration of a new president would signal an end to an eight-year national nightmare that began with a stolen election and brought two wars of aggression, historically unprecedented attacks on constitutional rights, an uninterrupted growth of social inequality and the deepest economic crisis in modern American history. These sentiments were shared by people around the world who watched international broadcasts of the ceremony.

Yet Obama's speech seemed crafted in large measure with the aim of damping down such expectations. The message universally trumpeted by the corporate media, headlining the lead stories on the web sites of both the New York Times and the Washington Post, was Obama's call for a "new era of responsibility."

There is more than a small dose of irony in this invocation, as the principle of responsibility is to be very selectively applied. In recent weeks, Obama and his advisors have repeatedly made clear that they have no intention of holding Bush, Cheney or other senior officials in any way accountable for policies that constituted war crimes and crimes against the Constitution during their tenure in office.

As for the deepest financial crisis in the history of American capitalism, no one at the top bears any particular responsibility, at least in Obama's estimation. "Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some but also our collective failure to make hard choices and prepare the nation for a new age," he declared at the beginning of the speech.

This formulation holds tens of millions of workers facing the loss of their jobs and homes through no fault of their own equally responsible for the present crisis as Wall Street executives and hedge fund managers whose financial parasitism and criminality helped drag their own institutions and the world economy into ruin.

Now Obama is telling working people that they must take "responsibility" for the crisis that is destroying their livelihoods by accepting deeper attacks on jobs, wages and social benefits, even as trillions of dollars in public funds are used to bail out Wall Street while its CEOs continue to draw down their seven- and eight-figure compensation packages.

In some of Obama's rhetoric there were indications that he and his speechwriters had attempted to mine the first inaugural address given by Franklin D. Roosevelt in 1933, in the depths of the Great Depression. Clearly there are historical parallels, made ever more apparent as the stock market plunged below the 8,000 mark Tuesday, its broadest index losing over 5 percent of its value even as Obama was being sworn in.

Yet what was most notable was Obama's inability to speak in the frank manner of Roosevelt 76 years ago. What characterized the new president's inaugural address above all was an appalling lack of concreteness about anything.

When Roosevelt addressed the nation, he vowed to "speak the truth, the whole truth, frankly and boldly." While he certainly did not do that, and his aim was to save capitalism from social revolution, he did speak in fairly explicit terms about what had created the crisis and what he intended to do about it.

The crisis of the 1930s, Roosevelt declared, had arisen not because of any lack of nature's "bounty" or "human efforts" to multiply it, but because "the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence." He continued: "Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men."

Obama appeared to have drawn part of his speech from the first part of this conception, declaring, "Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year." Left unstated, however, was why, if this is the case, the economy is spiraling downward into depression with nearly 3 million jobs wiped out in the US over the last year alone.

Involved in this evasion is a stunning level of contempt and condescension towards those who support him. He obviously feels he owes them no such explanation, and the less said the better.

Obama is unable to even mention the role of today's "money changers," who paid a large share of the money for his campaign and bankrolled the inauguration itself. All of the vague rhetoric about "equality" notwithstanding, it is their interests he intends to defend at the expense of the broad mass of American working people.

This is the real significance of his claims to have transcended the "stale political arguments of the past" about the role of government and the capitalist market, and his vow that the time for "putting off unpleasant decisions has ended."

"The question we ask today is not whether our government is too big or too small, but whether it works... Where the answer is yes, we intend to move forward," he said. "Where the answer is no, programs will end." Again, there was no specificity about what programs will be terminated, but in the past week he has indicated his intention to radically cut back bedrock social programs, including Social Security and Medicare, as a means of attacking the government's fiscal crisis.

"Nor is the question before us whether the market is a force for good or ill," Obama continued. "Its power to generate wealth and expand freedom is unmatched." He allowed that the present crisis showed the need for a "watchful eye" and voiced the belief that the "reach of prosperity" should be extended by offering "opportunity to every willing heart." There is nothing here that could not have been lifted from the speeches of Ronald Reagan or any of the other right-wing politicians that have ruled on behalf of Wall Street and corporate America for the last three decades.

It was no accident that, in illustrating the kind of actions he sees as vital to overcoming the crisis, Obama cited the "the selflessness of workers who would rather cut their hours than see a friend lose their job." This, under conditions where workers all over the country are being hit with cuts in hours and pay in the name of saving jobs, even as bailed-out bankers reject any sacrifice whatsoever.

"War on terror" to go on

There was a second fundamental theme that ran through the speech, which was that America's bellicosity and militarism will continue, albeit with slightly greater attention to wrapping a predatory foreign policy in the rhetoric of morality and altruism.

In the first substantive line of the speech, Obama declared, "Our nation is at war against a far-reaching network of violence and hatred." The implication was unmistakable: The "global war on terror," the pretext used by the Bush administration for launching two wars of aggression, carrying out torture, extraordinary rendition, unlawful detentions and domestic spying, continues unabated.

Obama vowed that under his administration, "We'll begin to responsibly leave Iraq to its people and forge a hard-earned peace in Afghanistan." There was not a word of criticism, however, for the decision to launch these wars. Indeed, the incoming administration has already indicated that far from leaving Iraq "to its people," occupation, on a more economical scale, will continue indefinitely, while tens of thousands of additional US troops are to be sent to Afghanistan in an escalation of the war there.

There was an ugly note of arrogance and jingoism in the speech, with Obama declaring, "We will not apologize for our way of life, nor will we waver in its defense" and his chastisement of foreign leaders--presumably in the historically oppressed countries of Africa, the Middle East, Asia and Latin America--who "blame their society's ills on the West."

He issued a rhetorical challenge to "those who seek to advance their aims by inducing terror and slaughtering innocents," vowing, "We will defeat you." Coming in the wake of Israel's three-week onslaught against Gaza in which thousands of Palestinian innocents were killed or maimed with US supplied weapons and the tacit support of a silent Obama, these words reeked of hypocrisy.

Finally, Obama paid tribute to the US troops "who at this very hour patrol far-off deserts and distant mountains," declaring "their spirit of service" to be "precisely [the] spirit that must inhabit us all."

The newly inaugurated president thus provided a textbook definition of modern militarism--upholding the ethos and spirit of the military as the ideal for the nation--as the substance of his "vision" for reviving America.

It was noteworthy, given the inauguration of the first African-American president, that what went completely unmentioned was the civil rights struggle—or, for that matter, any form of social struggle.

There are two reasons for such an omission. Obama has no intention of encouraging such mass social struggles today, and he is anxious not to offend the forces of social reaction upon which he rests and which now surround him.

Whatever his intentions, however, the immense economic and social crisis that is now unfolding in America and across the globe will produce such struggles and on an even greater scale. The policies that are only hinted at in what was a banal and dishonest inauguration speech are completely at odds with the social interests and aspirations of the vast majority of the American people. Sooner rather than later, they will produce a political confrontation and a new eruption of class struggle that will challenge the foundations of US capitalism.



Go To Original

The 1930s was the birth of Keynesianism. Economists needed a simple answer as to why they had been so wrong. Since then, the U.S., and much of the rest of the world, has endured 70 years of economic concepts that have generated a continuous lack of success in economic matters. Most professions would seriously review their methodology when faced with as many repeated failures. Not so for the economics community. They just keep coming with more of the same failed policies.

Consider their advice at the present. Too much reliance on debt caused a considerable portion of the current economic mess. So, economists now advise issuing more debt. For you see, now will be different. This debt spending will be for wise ideas generated by themselves and those darlings running governments. See the difference?

Easy money was a goodly part of the last two economic meltdowns. Easy money gave us the internet bubble and burst. Easy money gave us the housing market bubble and burst. If easy money is the solution to economic ills, why are two successive economic bubbles and burst associated with easy money? Does easy money have unintended consequences that are being ignored, again?

The world is really at one of those points in time where the community of economists must prove that they can get it right once or twice a century. Creating financial bubbles that burst, producing massive financial carnage, really does not take a degree in economics. Any out of work mall cop could accomplish the same. But enough of that criticism, economists have been good to some us, especially those that did not take their advice. Did not their advice create a financial environment in which Gold rose from less than $300 to more than a $1,000?

Obama’s administration is already providing that much promised change. Bush’s current annual Federal deficit of $1.3 trillion was created after taking office. Obama is creating an additional deficit just shy of a trillion dollars before taking office. See, already change that is more efficient. But, who buys the $2.5 trillion of debt to be created in Obama’s first year is an matter of great importance, and may be the more important change.

Consideration of who buys the debt is an important matter. For some time, the Federal Reserve has not had to monetize much of the debt of the U.S. government. Foreign central banks have been both willing, and sufficiently gullible, to purchase much of that debt. That situation may change as governments around the world embark on their own economic stimulation plans. China, for one, is committed to almost $600 billion to stimulate domestic demand. Could the Federal Reserve be forced by political considerations to monetize the massive Obama debt mountain?

But note, the Federal Reserve has not been idle. It has been monetizing assets wherever they can be found. From that effort, a massive burst in the U.S. money supply has developed. This week’s chart, found below, portrays that money supply growth. Redline, using the right axis, is the annualized rate of change in the U.S. money supply, M-1, NSA. As is readily apparent, U.S. money supply growth has exploded, and is now running at more than a 40% annualized rate. And as money supply growth TODAY influences TOMORROW’S prices, we can reasonably expect higher FUTURE inflation in the U.S.

[Image 1]

In simplest of terms, a lot of U.S. dollars are being created. Demand for dollars in this world is limited. It has an upper limit. That supply of U.S. dollars may be starting to over power the demand for dollars. In the chart above is a second line that represents our dollar index, a better measure than the improperly designed popular index.

This vast quantity of money being created seems to becoming dominant. That supply of money may be capping the value of the dollar, and will likely over come it. Money supply growth this excessive can only push down the value of the currency, in this case the U.S. dollar. The dollar index seems already to be topping out. Investors must answer an important question. Has any currency created in such abundance ever appreciated?

Two U.S. Presidents have been very good to Gold investors. Obama is likely to continue that run of Gold prosperity. $2.5 trillion of debt, largely to be financed by Federal Reserve monetization, is indeed change. No economic hegemon has ever been so financially irresponsible. While such debt monetization has been practiced in “banana republics” for over a century, it is new to the market for U.S. dollars. As a consequence, the clearest investment theme for the Obama era is Gold, bought on any and all price weakness.

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save investors from the financial abyss of paper assets. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports, go to

British banks are 'technically insolvent' (and other secrecies)

British banks are 'technically insolvent' (and other secrecies)

by Ben Russell and David Prosser

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Britains biggest banks are "technically insolvent", Royal Bank of Scotland said yesterday, as the global banking industry was rocked by another day of turmoil, including the announcement of $23bn (£16bn) of new losses from Merrill Lynch and Citigroup, the giant US institutions.

Analysts working for RBS, one of several British banks to have received emergency funding from the UK Government last year, told the City that "the domestic UK banks are technically insolvent on a fully marked-to-market basis".

The warning does not mean British banks are about to go bust, because the assessment is purely theoretical, and RBS said the position was "not unusual at this stage in the economic cycle".

However, it will add to pressure on the Government to provide more support for the country's banks. Treasury officials are now set to spend this weekend in talks about a fresh round of measures, which could be unveiled as early as next week, to free up lending to households and major corporations hit by the credit crunch.

The value of Barclays fell by a quarter in stock market trading yesterday, amid a series of wild rumours about its finances, although the bank said it saw no need to comment on the drop. Its board said in a statement last night that it knew "no justification for the fall".

The statement said next month the bank expected to report that profits before tax for 2008 were "well ahead" of the £5.3 billion forecast by analysts.

City analysts said the bank had been targeted by traders after regulators lifted a ban yesterday on the short selling of financial stocks. Barclays' share price, along with the value of other British banks, was also hit by dismal news from the international markets, including the announcement on Thursday night that the Irish government was nationalising Allied Irish Banks. In the US, Bank of America announced yesterday that it was taking a $20bn injection of emergency funding from the US government, subsequently revealing that Merrill Lynch, the investment bank it rescued last year, had lost more than £15bn in the final three months of last year.

Citigroup, once the world's largest bank, announced more than $8bn of losses for the final quarter of last year, and revealed plans to split itself in two.

Treasury officials were still discussing plans to help British banks last night but the proposals are likely to include up to £100bn of new guarantees for the wholesale markets that underpin mortgage and other loans.

Other possible measures being considered include state support to help Britain's largest companies raise their own funds. Another option is to launch a "bad bank" to remove tainted assets from the banks' balance sheets, though while this policy is under consideration, it is thought to remain some way off.

Other proposals include ring-fencing the toxic assets within bank balance sheets. Lord Mandelson, the Business Secretary, has also talked of easing the terms of the Government's £37bn bank bailout in order to kickstart lending. Downing Street made it clear yesterday that the Government remained committed to doing "whatever is necessary to help British businesses and families get through this global financial recession". Reform plan raises fears of Bank secrecy

The urge to coverup what one ought not be doing is immense. That fact helps explain Plans To Allow Secret Printing By The BOE.

The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.

The Government is set to throw out the 165-year old law that obliges the Bank to publish a weekly account of its balance sheet – a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel's Government in 1844 which originally granted the Bank the sole right to print UK money.

The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority.

However, some have warned that it means: "there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses."

It comes after the Bank's Monetary Policy Committee cut interest rates by half a percentage point, leaving them at the lowest level since the bank's foundation in 1694.

Debating the issue in the House of Lords recently, Lord James of Blackheath, a Conservative peer, said: "Remove [this] control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses.

"Quite why the Bank has to keep its operations so shrouded in secrecy is a mystery to me," said Simon Ward, economist at New Star. "This [reform] will make it much more difficult to track what the Bank is doing." Where's the mystery? Simon answers his own question.

Monetary union has left half of Europe trapped in depression

Monetary union has left half of Europe trapped in depression

By Ambrose Evans-Pritchard

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Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.

Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.

A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling before the pain begins, which bodes ill.

Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped.

As UKIP leader Nigel Farage put it in a rare voice of dissent at the euro's 10th birthday triumph in Strasbourg, EMU-land has become a Völker-Kerker – a "prison of nations", to borrow from the Austro-Hungarian Empire.

This week, Riga's cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia's finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.

"Trust in the state's authority and officials has fallen catastrophically," said President Valdis Zatlers,
who called for the dissolution of parliament.

In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday.

These three states are all members of the Exchange Rate Mechanism (ERM2), the euro's pre-detention cell. They must join. It is written into their EU contracts.

The result of subjecting ex-Soviet catch-up economies to the monetary regime of the leaden West has been massive overheating. Latvia's current account deficit hit 26pc of GDP. Riga property prices surpassed Berlin.

The inevitable bust is proving epic. Latvia's property group Balsts says Riga flat prices have fallen 56pc since mid-2007. The economy contracted 18pc annualised over the last six months.

Leaked documents reveal – despite a blizzard of lies by EU and Latvian officials – that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. Such adjustments are crucial in IMF deals. They allow countries to claw their way back to health without suffering perma-slump.

This was blocked by Brussels – purportedly because mortgage debt in euros and Swiss francs precluded that option. IMF documents dispute this. A society is being sacrificed on the altar of the EMU project.

Latvians have company. Dublin expects Ireland's economy to contract 4pc this year. The deficit will reach 12pc of GDP by 2010 on current policies. "This is not sustainable," said the treasury. Hence the draconian wage deflation now threatened by the Taoiseach.

The Celtic Tiger has faced the test bravely. No government in Europe has been so honest. It is a tragedy that sterling's crash should have compounded their woes at this moment. To cap it all, Dell is decamping to Poland with 4pc of GDP. Irish wages crept too high during
the heady years when Euroland interest rates of 2pc so beguiled the nation.

Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year's end.

Private economists fear 25pc before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible.

Either Mr Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight "l'euro dictature capitaliste".

Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist.

They mean that capital flight from Club Med could set off an unstoppable process.

Mexico's Tequila drama in 1994 was triggered by a combination of the Chiapas uprising, a current account haemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days.

Fixed exchange systems – and EMU is just a glorified version – rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defence of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931.

Don't expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia.

Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up "roll-over risk" for later in the year. Hedge funds are circling.

Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in "repo" actions.

In other words, the ECB is already providing a stealth bail-out for Europe's governments – though secrecy veils all.

An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany's hard-working citizens find out?

Global Depression. This Doesn't Look Good

Global Depression. This Doesn't Look Good: Taiwan, Korea and China Exports Tank

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Words don’t really do justice to the brutality of recent downturn in Korean and Taiwanese exports.

These look a lot like charts of financial variables after a bubble bursts, not charts of the level of exports. That isn’t good.

Looking just as the monthly data risks being misleading. There is a lot of seasonality in Taiwan’s exports. They usually dip in February. It is a short month, it often corresponds with the Chinese new year and the data isn’t seasonally adjusted. A small dip in December after the end of the Western holiday season also isn’t unusual. But such a big dip in December is most unusual. Plotting the rolling 3m sum eliminates the big February dip. The current downturn is real.

The data do not look much better if plotted as a percent change. The y/y change in the 3m rolling sum isn’t quite as bad as it was at the depth of the tech bust. But give it time. The 40% fall in Taiwan’s December exports is worse than anything observed then.

Almost all of Taiwan’s exports seem to go to China for final assembly. Korea though exports to both China (electronic components, steel, no doubt other products) and the US (cars). And there has been a very sharp fall in both Korean shipments to both the US and China. Then again, it seems that exports are down across the board. Europe doesn’t look much different.*

Korean and Taiwanese imports are down too. Korea’s trade balance is actually improving even as its exports fall off a cliff. Imports from the Gulf are following the trajectory one would expect.

What of China? Well, the official data isn’t out — but if the data leakedDow Jones is accurate, China is following a similar trajectory but with one difference: its imports are down more than its exports. In December, year over year exports were down close to 3% and year over year imports were down 21%. to

Why is the fall in China’s exports lagging the fall in Korean and Taiwanese exports? Is China taking market share in the downturn? Or does the regional supply chain mean that the fall in China’s export will take longer to materialize, fewer imported components from Taiwan in December could just mean lower Chinese exports in January and February. It also sure seems like China’s own internal downturn is adding to the global contraction in trade.

Incidentally, China’s 2008 trade surplus (custom’s basis) should come in at close to $300 billion in 2008 — up from about $260 billion in 2007, even with the big run up in average commodity prices.

Korea and Taiwan aren’t the global economy. But they both report their trade data quickly – and they both export a ton. I wish I could say that I thought they were sending a deceptive signal ….

Three other points:

a) The trajectory of this downturn looks much worse than the trajectory of the 2000 recession. That isn’t news. But it is still worth noting. KoreaTaiwan export a lot of electronics, so they were among the hardest hit by the tech bust. and

b) It is striking that neither Taiwan nor Korean exports seem to have been impacted by the (modest) slowdown in US imports that started in 2006. They made up for slower export growth to the US – counting both their direct exports to the US and their indirect exports through China – with strong growth in their exports to Europe, China and the Gulf. Y/y export growth rates for Taiwan and Korea were actually up a bit earlier this year, during the peak of “decoupling.” No more …

c) Policy choices matter. From 2002 to 2004, the won depreciated significantly v the euro. After 2004 the won rose the RMB - -and ChinaKorea’s exports to China. These trends show up more easily on a graph that shows the percentage change in the rolling 12m sum of Korean exports (a variable that moves slowly but capture big trends) than in the monthly data. slammed the brake on domestic demand growth. That too had an impact on

But right now the sheer severity of the global downturn dominates all other variables. Everything is shrinking.

Thanks to Paul Swartz of the Council on Foreign Relations for help with the data downloads and the graphs.

* To flesh out the November and December data for Europe, I used the the fall in Korean shipments to France to extrapolate the fall for smaller European economies. Using the fall in exports to Germany would have produced an even sharper fall. But this data should be taken with a grain of salt.

Treasury Allowed IndyMac to Cook Books, Commit Fraud

Government Regulators Aided IndyMac Cover-Up, Maybe Others

Darrel Dochow May Not Be the Only Official Who Helped Banks Hide Financial Problems


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A brewing fraud scandal at the Treasury Department may be worse than officials originally thought.

Investigators probing how Treasury regulators allowed a bank to falsify financial records hiding its ill health have found at least three other instances of similar apparent fraud, sources tell ABC News.

In at least one instance, investigators say, banking regulators actually approached the bank with the suggestion of falsifying deposit dates to satisfy banking rules -- even if it disguised the bank's health to the public.

Treasury Department Inspector General Eric Thorson announced in November his office would probe how a Savings and Loan overseer allowed the IndyMac bank to essentially cook its books, making it appear in government filings that the bank had more deposits than it really did. But Thorson's aides now say IndyMac wasn't the only institution to get such cozy assistance from the official who should have been the cop on the beat.

The federal government took over IndyMac in July, after the bank's stock price plummeted to just pennies a share when it was revealed the bank had financial troubles due to defaulted mortgages and subprime loans, costing taxpayers over $9 billion.

Darrel Dochow, the West Coast regional director at the Office of Thrift Supervision who allowed IndyMac to backdate its deposits, has been removed from his position but he remains on the government payroll while the Inspector General's Office investigates the allegations against him. Investigators say Dochow, who reportedly earns $230,000 a year, allowed IndyMac to register an $18 million capital injection it received in May in a report describing the bank's financial condition in the end of March.

"They [IndyMac] were able to maintain their well-capitalized threshold and continue to use broker deposits to make loans," said Marla Freedman, an assistant Inspector General at Treasury. "Basically, while the institution was having financial difficulty, it kept the public from knowing earlier than it otherwise should have or would have."

Critics Point to Cozy Relationship Between Banks and Regulators

In order to backdate the filings, IndyMac sought and received permission from Dochow, according to Freedman.

"That struck us as very unusual," said Freedman. "Typically transactions are to be recorded in the period in which they occur, not afterwards. So it was very unusual."

One former regulator says Dochow's actions illustrate the cozy relationship between banks and government regulators.

"He did nothing to protect taxpayers in losses," former federal bank regulator William Black told ABC News. "Instead of correcting it [Dochow] made it worse by increasing the accounting fraud."

Meanwhile, IndyMac customers who lost their savings are demanding answers and are further infuriated after learning Dochow was also the regulator in 1989 who oversaw the failed Lincoln Savings and Loan, a scandal that sent its CEO Charles Keating to prison.

"He's the person that claimed that he looked into Charles Keating's eyes and knew that Charles Keating was a good guy and therefore ignored all of the professional staff that told him that Keating was a fraud, and he produced the worst failure of the Savings and Loan Crisis at $3.4 billion. Now he's managed more than triple that," said Black, now an economics professor at the University of Missouri in Kansas City, Missouri.

Following the Lincoln scandal, Dochow was demoted and placed into a relatively obscure office, but later, inexplicably was brought back into the Office of Thrift Supervision.

Dochow declined to answer questions from ABC News.

IndyMac Customers Furious

After Ronnie Lopez was killed in Iraq, his mother Elaine invested the life insurance proceeds at IndyMac. She lost $37,000 of it.

"I was hysterical," she told ABC News. "I literally thought I was going to kill myself that day, because I felt so bad that I had let him down. I remember going to his grave and telling him "don't worry, I'm going to get that money back', and I feel like he was saying 'hey mom, don't let them take that. I did the ultimate for that'."

A group of angry investors has started a website, demanding answers on the extent of Dochow's actions.

"It's just the strife and anger," said IndyMac customer Lisa Marshall. "That this Dochow person is still employed, it's unbelievable, it's shocking."

While Dochow could end up losing his job, neither he nor his colleagues are expected to go to prison.

"This is criminal with the small 'c'," said Black. "No one within the regulatory ranks may go to jail, but they have done the worst possible disservice to the taxpayers of America."