Tuesday, February 17, 2009

Collapse of the US dollar: Global systemic crisis. The phase of global geopolitical dislocation

Collapse of the US dollar: Global systemic crisis. The phase of global geopolitical dislocation

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Back in February 2006, LEAP/E2020 estimated that the global systemic crisis would unfold in 4 main structural phases: trigger, acceleration, impact and decanting phases. This process enabled us to properly anticipate events until now. However our team has now come to the conclusion that, due to the global leaders’ incapacity to fully realise the scope of the ongoing crisis (made obvious by their determination to cure the consequences rather than the causes of this crisis), the global systemic crisis will enter a fifth phase in the fourth quarter of 2009, a phase of global geopolitical dislocation.

According to LEAP/E2020, this new stage of the crisis will be shaped by two major processes happening in two parallel sequences:

A. Two major processes:

1. Disappearance of the financial base (Dollar & Debt) all over the world
2. Fragmentation of the interests of the global system’s big players and blocks

B. Two parallel sequences:

1. Quick disintegration of the current international system altogether
2. Strategic dislocation of big global players.

We had hoped that the decanting phase would give the world’s leaders the opportunity to draw the proper conclusions from the collapse of the global system prevailing since WWII. Alas, at this stage, it is no longer possible to be optimistic in this regard (1). In the United States, as in Europe, China and Japan, leaders persist in reacting as if the global system has only fallen victim to some temporary breakdown, merely requiring loads of fuel (liquidities) and other ingredients (rate drops, repurchase of toxic assets, bailouts of semi-bankrupt industries,…) to reboot it. In fact (and this is what LEAP/E2020 means ever since February 2006 using the expression « global systemic crisis”), the global system is simply out of order; a new one needs to be built instead of striving to save what can no longer be saved.

Orders in the manufacturing sector, Quarter 4 2008 (Japan, Eurozone, United Kingdom, China, India) - Sources : MarketOracle / JPMorgan

Orders in the manufacturing sector, Quarter 4 2008 (Japan, Eurozone, United Kingdom, China, India) - Sources : MarketOracle / JPMorgan

History is not known to be patient, therefore the fifth phase of the crisis will ignite this required process of reconstruction, but in a harsh manner: by means of a complete dislocation of the present system, with particularly tragic consequences in the case of several big global players, as described in this 32nd issue of the GEAB (see the two parallel sequences).

According to LEAP/E2020, there is only one very small launch window left to prevent this scenario from shaping up: the next four months, before summer 2009. Practically speaking, the April 2009 G20 Summit is probably the last chance to put on the right tracks the forces at play, i.e. before the sequence of UK and then US defaults begin (2). Failing which, they will lose their capacity to control events (3), including those in their own countries for many of them; and the world will enter this phase of geopolitical dislocation like a “drunken boat”. At the end of this phase of geopolitical dislocation, the world will look more like Europe in 1913 rather than our world in 2007.

Because they persisted in bearing the ever-increasing weight of the ongoing crisis, most states, including the most powerful ones, failed to realise that they were planning their own trampling under the weight of History, forgetting that they were merely man-made organisations, only surviving because they matched the interest of a large majority. In this 32nd edition of the GEAB, LEAP/E2020 has chosen to anticipate the fallout of this phase of geopolitical dislocation so far as it affects the United-States, EU, China and Russia.

US Monetary base - (12/2002 – 12/2008) - Source US Federal Reserve / DollarDaze
US Monetary base - (12/2002 – 12/2008) - Source US Federal Reserve / DollarDaze

It is high time for the general population and socio-political players to get ready to face very hard times during which whole segments of our societies will be modified (4), temporarily disappear or even permanently vanish. For instance, the breakdown of the global monetary system we anticipated for summer 2009 will indeed entail the collapse of the US dollar (and all USD-denominated assets), but it will also induce, out of psychological contagion, a general loss of confidence in paper money altogether (these consequences give rise to a number of recommendations in this issue of the GEAB).

Last but not least, our team now estimates that the most monolithic, the most « imperialistic » political entities (5) will suffer the most from this fifth phase of the crisis. Some states will indeed experience a strategic dislocation undermining their territorial integrity and their influence worldwide. As a consequence, other states will suddenly lose their protected situations and be thrust into regional chaos.


(1) Barack Obama, like Nicolas Sarkozy or Gordon Brown, spend their time chanting about the historic dimension of the crisis, but they are just hiding the fact that they fully misunderstand its nature in an attempt to clear their names from the future failure of their policies. As to the others, they prefer to persuade themselves that the problem will be solved like any normal technical problem, albeit a little more serious than usual. Meanwhile everyone continues to play by decades old rules, unaware of the fact that the game is vanishing from under their noses.

(2) See previous GEABs.

(3) In fact it is probable that the G20 will find it more and more difficult to simply meet, as the growing trend is one of « every man for himself ».

(4) Source : New York Times, 102/14/2009

(5) Idem companies.

Obama Seeks Delay in Deciding on Rove Subpoena

Obama seeks delay in deciding on Rove subpoena

The Obama administration is asking for two more weeks to weigh in on whether former Bush White House officials must testify before Congress about the firings of nine U.S. attorneys.

The request comes after an attorney for former Bush political adviser Karl Rove asked the White House to referee his clash with the House of Representatives over Bush's claim of executive privilege in the matter.

House Judiciary Committee Chairman John Conyers , D- Mich. , has issued a subpoena requiring Rove to appear next Monday to testify about the firings and other allegations that the Bush White House let politics interfere with the operations of the Justice Department .

Michael Hertz , the acting assistant attorney general, said in a court brief released Monday that negotiations were ongoing.

"The inauguration of a new president has altered the dynamics of this case and created new opportunities for compromise rather than litigation," Hertz wrote in the brief dated Friday. "At the same time, there is now an additional interested party — the former president — whose views should be considered."

Members of the committee have been seeking the testimony of Rove and former White House Counsel Harriet Miers since the spring of 2007.

Last July, a federal judge in Washington agreed with the House that Miers didn't have the right to ignore a subpoena from Congress . District Judge John D. Bates' 93-page ruling was considered a significant setback for the administration, which had asserted a broad executive-privilege claim that would have protected Miers from appearing.

The U.S. Court of Appeals for the District of Columbia Circuit later delayed the effect of the ruling until after the November elections.

Since then, Rove's attorney has indicated that his client would be willing to testify about his role in the prosecution and conviction of former Democratic Alabama Gov. Don Siegelman on bribery charges. Democrats want Rove to testify about the matter because they suspect that he instigated the prosecution.

However, Democrats also insist that Rove should be made to testify about the firings of the nine U.S. attorneys.

Meanwhile, a special prosecutor is investigating what role White House officials had in the firings and whether their involvement constituted a crime.

Citi, Morgan Stanley May Pay $3 Billion "Retention Awards"

Citi, M. Stanley may pay $3 bln to keep brokers:WSJ

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Morgan Stanley and Citigroup Inc are preparing to pay $3 billion of retention awards to brokers to keep them from fleeing a brokerage joint venture, the Wall Street Journal said on Friday, citing people familiar with the matter.

Terms are not expected until later this month, but the issue could grow politically sensitive because the government has injected money into both companies, the newspaper said.

Morgan Stanley is paying Citigroup $2.7 billion to take control of the joint venture, which will combine its brokerage operation with Citigroup's Smith Barney unit.

Citigroup has taken $45 billion from the Troubled Asset Relief Program, while Morgan Stanley has taken $10 billion.

A spokesman for the joint venture did not immediately return a call seeking comment.

Broker retention payments have long been common on Wall Street, and brokerages themselves may become more important to banks because the credit crisis has curbed merger, underwriting and trading activity.

But many investors, politicians and regulators have questioned the propriety of the financial industry paying out big bonuses at all as losses mushroom from bad debts.

According to the newspaper, not all of the joint venture's 20,000 brokers would get retention payments. It said a broker who brought in $1 million in revenue last year might expect to get $500,000 to $1 million, depending on how much he continues to produce.

Locked Out and Locked Up

Locked Out and Locked Up: Youth Missing in Action From Obama's Stimulus Plan

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Already imperiled before the recent economic meltdown, the quality of life for many young people appears even more fragile in the United States in this time of political, economic and social crisis. A great deal has been written critically about both the conditions that enabled the free market to operate without accountability in the interests of the rich and how it has produced a theater of cruelty that has created enormous suffering for millions of hard-working, decent human beings. Yet, at the same time, there is a thunderous silence on the part of many critics and academics regarding the ongoing insecurity and injustice experienced by young people in this country, which is now being intensified as a result of the state's increasing resort to repression and punitive social policies. The current concerns about the effects of poverty, homelessness, economic injustice and galloping unemployment rates and Obama's plans to rectify them almost completely ignore the effects of these problems on young people in the United States, especially poor whites and youth of color.

Increasingly, children seem to have no standing in the public sphere as citizens and as such are denied any sense of entitlement and agency. Children have fewer rights than almost any other group, and fewer institutions protecting these rights. Consequently, their voices and needs are almost completely absent from the debates, policies and legislative practices that are constructed in terms of their needs. This is not to suggest that adults do not care about youth, but most of those concerns are framed within the realm of the private sphere of the family and can be seen most clearly in the moral panics mobilized around drugs, truancy and kids killing each other. The response to such events, tellingly, is more "get tough on crime policy," never an analysis of the systemic failure to provide safety and security for children through improved social provisions. In public life, however, children seem absent from any discourse about the future and the responsibilities this implies for adult society. Rather, children appear as objects, defined through the debasing language of advertising and consumerism. If not being represented as a symbol of fashion or hailed as a hot niche, youth are often portrayed as a problem, a danger to adult society or, even worse, irrelevant to the future.

This merging of the neoliberal state in which kids appear as commodities or a source of profits and the punishing state, which harkens back to the old days of racial apartheid in its ongoing race to incarcerate, was made quite visible in a recent shocking account of two judges in Pennsylvania who took bribes as part of a scheme to fill up privately run juvenile detention centers with as many youths as possible, regardless of how minor the infraction they committed. One victim, Hillary Transue, appeared before one of the "kickback" judges for "building a spoof MySpace page mocking the assistant principal at her high school."[1] A top student who had never been in trouble, she anticipated a stern lecture from the judge for her impropriety. Instead, he sentenced her "to three months at a juvenile detention center on a charge of harassment." It has been estimated that the two judges, Mark A. Ciavarella Jr. and Michael T. Conahan, "made more than $2.6 million in kickbacks to send teenagers to two privately run youth detention centers" and that over 5,000 juveniles have gone to jail since the "scheme started in 2003. Many of them were first-time offenders and some remain in detention." While this incident received some mainstream news coverage, most of the response focused less on the suffering endured by the young victims than on the breach of professional ethics by the two judges. None of the coverage treated the incident as either symptomatic of the war being waged against youth marginalized by class and race or as an issue that the Obama administration should give priority to in reversing. In fact, just as there was almost no public outcry over a market-driven scheme to incarcerate youth to fill the pockets of corrupt judges, there was very little public anger over the millions slashed from the stimulus bill that would have directly benefited kids by investing in schools, Head Start and other youth-oriented programs. It seems that the real failure of post-partisan politics is its willingness to sacrifice young people in the interests of winning political votes.

Rendering poor minority youth as dangerous and a threat to society no longer requires allusions to biological inferiority; the invocation of cultural difference is enough to both racialize and demonize "difference without explicitly marking it,"[2] in the post-racial Obama era. This disparaging view of young people has promulgated the rise of a punishing and (in)security industry whose discourses, technologies and practices have become visible across a wide range of spaces and institutions, extending from schools to shopping malls to the juvenile criminal justice system.[3] As the protocols of governance become indistinguishable from military operations and crime-control missions, youth are more and more losing the protections, rights, security or compassion they deserve in a viable democracy. The model of policing that now governs all kinds of social behaviors constructs a narrow range of meaning through which young people define themselves. Moreover, the rhetoric and practice of policing, surveillance and punishment have little to do with the project of social investment and a great deal to do with increasing powerful modes of regulation, pacification and control - together comprising a "youth control complex" whose prominence in American society points to a state of affairs in which democracy has lost its claim and the claiming of democracy goes unheard. Rather than dreaming of a future bright with visions of possibility, young people, especially youth marginalized by race and color, face a coming-of-age crisis marked by mass incarceration and criminalization, one that is likely to be intensified in the midst of the global financial, housing and credit crisis spawned by neoliberal capitalism.

As Alex Koroknay-Palicz argues, "Powerful national forces such as the media, politicians and the medical community perpetuate the idea of youth as an inferior class of people responsible for society's ills and deserving of harsh penalties."[4] While such negative and demeaning views have had disastrous consequences for young people, under the reign of a punishing society and the deep structural racism of the criminal justice system, the situation for a growing number of young people and youth of color is getting much worse. The suffering and deprivation experienced by millions of children in the United States in 2008 - and bound to become worse in the midst of the current economic meltdown - not only testifies to a state of emergency and a burgeoning crisis regarding the health and welfare of many children, but also bears witness to - and indeed indicts - a model of market sovereignty and a mode of punitive governance that have failed both children and the promise of a substantive democracy. The Children's Defense Fund in its 2007 annual report offers a range of statistics that provide a despairing glimpse of the current crisis facing too many children in America. What is one to make of a society marked by the following conditions:

  • Almost 13 million children in America live in poverty - 5.5 million in extreme poverty.

  • 4.2 million children under the age of five live in poverty.

  • 35.3 percent of black children, 28.0 percent of Latino children and 10.8 percent of white, non-Latino children live in poverty.

  • There are 9.4 million uninsured children in America.

  • Latino children are three times as likely, and black children are 70 percent more likely, to be uninsured than white children.

  • Only 11 percent of black, 15 percent of Latino and 41 percent of white eighth graders perform at grade level in math.

  • Each year 800,000 children spend time in foster care.

  • On any given night, 200,000 children are homeless - one out every four of the homeless population.

  • Every 36 seconds a child is abused or neglected - almost 900,000 children each year.

  • Black males ages 15-19 are about eight times as likely as white males to be gun homicide victims.

  • Although they represent 39 percent of the US juvenile population, minority youth represent 60 percent of committed juveniles.

  • A black boy born in 2001 has a 1 in 3 chance of going to prison in his lifetime; a Latino boy has a 1 in 6 chance.

  • Black juveniles are about four times as likely as their white peers to be incarcerated. Black youths are almost five times as likely and Latino youths about twice as likely to be incarcerated as white youths of drug offenses.[5]
  • As these figures suggest, the notion that children should be treated as a crucial social resource and represent 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. Under the reign of the market-driven punishing state, a racialized criminal justice system, and a "financial Katrina" that is crippling the nation, the economic, political and educational situation for a growing number of poor young people and youth of color has gone from bad to worse. As families are being forced out of their homes because of record-high mortgage foreclosures and many businesses declare bankruptcy, tax revenues are declining and effecting cutbacks in state budgets, further weakening public schools and social services. The results in human suffering are tragic and can be measured in the growing ranks of poor and homeless students, the gutting of state social services, and the sharp drop in employment opportunities for teens and young people in their twenties.[6] Within these grave economic conditions, children disappear, often into bad schools, prisons, foster care and even into their graves. Under the rule of an unchecked market-driven society, the punishing state has no vocabulary or stake in the future of poor minority youth, and increasingly in youth in general. Instead of being viewed as impoverished, minority youth are seen as lazy and shiftless; instead of recognizing that many poor minority youth are badly served by failing schools, they are labeled as uneducable and pushed out of schools; instead of providing minority youth with decent work skills and jobs, they are either sent to prison or conscripted to fight in wars abroad; instead of being given decent health care and a place to live, they are placed in foster care or pushed into the swelling ranks of the homeless. Instead of addressing the very real dangers that young people face, the punishing society treats them as suspects and disposable populations, subjecting them to disciplinary practices that close down any hope they might have for a decent future.

    All of the talk about a post-racial society in light of Obama's election is meaningless as long as young people of color are disproportionally criminalized at younger and younger ages, allowed to disappear into the growing ranks of the criminal justice system and increasingly viewed as a racial threat to society rather than as a crucial social, political and economic investment. Obama's message of hope and responsibility seems empty unless he addresses the plight of poor white youth and youth of color and the growing youth-control complex. The race to incarcerate - especially youth of color - is a holdover and reminder that the legacy of apartheid is still with us and can be found in a society that now puts almost as many police in its schools as it does teachers, views the juvenile justice system as a crucial element in shaping the future of young people, and supports a crime complex that models schools for poor kids after prisons.


    [1] Ian Urbina and Sean D. Hamill, "Judges Plead Guilty in Scheme to Jail Youths for Profit," New York Times (February 13, 2009), p. A1, A20.

    [2] Jean Comaroff and John Comaroff, "Reflections of Youth, From the Past to the Postcolony," Frontiers of Capital: Ethnographic Reflections on The New Economy," ed. Melissa S. Fisher and Greg Downey (Durham, NC: Duke University Press, 2006), p. 267.

    [3] Garland, "The Culture of Control;" and Jonathan Simon, "Governing Through Crime: How the War on Crime Transformed American Democracy and Created a Culture of Fear" (New York: Oxford University Press, 2007). See also Phil Scranton, "Power, Conflict and Criminalisation" (New York: Routledge, 2007).

    [4] Alex Koroknay-Palicz, "Scapegoating of Youth," National Youth Rights Association (December 2001). Online: www.youthrights.org/scapegoat.php.

    [5] Children's Defense Fund, 2007 Annual Report (Washington, DC: Children's Defense Fund, 2008). Online: www.childrensdefense.org/site/DocServer/CDF_annual_report_07.pdf?docID=8421.

    [6] See Bob Herbert, "Head for the High Road," New York Times, (September 2, 2008), p. A25; Sam Dillon, "Hard Times Hitting Students and Schools," New York Times (September 1, 2008), p. A1, A9; and Erik Eckholm, "Working Poor and Young Hit Hard in Downturn," New York Times (November 9, 2008), p. A23.

    Davos Debt & Denial

    Davos Debt & Denial

    In an age of illusion, the guise of truth is often heresy

    By Darryl Schoon

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    The gathering of the world’s economic elites in Davos, Switzerland is a reflection of the reigning power dynamic of the modern world. Officially titled, the World Economic Forum, Davos is sponsored by the world’s most powerful and wealthy corporations and presents itself as a “not-for-profit” entity.

    However, if you believe the annual gathering in Davos is not-for-profit, you probably also believe that JFK died of natural causes while sightseeing in Dallas. Those who attend Davos—the Davo’tees of Mammon—are the winners in the game of capitalism, a game based on debt controlled by bankers through their issuance of credit.

    Investment bankers by virtue of their privileged position at the spigots of credit haveover the years garnered for themselves a disproportionate slice of the world’s wealth. The best description of their wealth is from a banker himself, Sir Josiah Stamp, at the time in1927 the 2nd richest man in England and former head of The Bank of England:

    Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.

    The fact that in 2008 bankers became victims in the game they created has profound implications for capitalism itself. Capitalism, which began in 1694 with the issuance of debt-based money from The Bank of England, has now over three hundred years later reached its last and final stage.

    Capitalism is not ending because those enslaved by bankers revolted. Capitalism is ending because the bankers’ insatiable greed destroyed the mechanism by which bankers indebt others. The sad truth is that those enslaved by debt still wish to remain the slaves of bankers and pay the cost of [their] own slavery [and] let them [the bankers] continue to create money.

    Although debtors fervently hope the bankers’ system of debt will continue, they will not have a say in the matter. Neither will the bankers. Davos will never again be the same.


    The World Economic Forum in Davos was founded in 1971, the same year in which all currencies became fiat, sic not backed by gold or silver. Perhaps this is coincidence. Perhaps not.

    Nonetheless, Davos will be always associated with the end of capitalism where the charade of the banker’s paper money was revealed to be what it was, a confidence game where in the end everyone would lose everything—including the bankers.

    The charade/con-game actually began in 1694 when the Bank of England was granted the right to issue England’s coinage in the form of paper money. This paper money was declared to be as good as gold or silver coins. Of course, it wasn’t; but in the beginning it was much better than it was to be later.

    Previous to 1694 the bankers were known as goldsmiths who profited by charging interest on the loaning of gold and silver coins. After 1694, the goldsmiths, now called bankers, profited by charging interest on the loaning of paper money, and thus the true alchemy of modern finance was born.

    The substitution of paper “money” for gold and the charging of interest on such “money” is the secret of the banker’s wealth. It is also the secret of capitalism as it is the process whereby bankers’ indebt others (businesses, consumers, governments, etc.) through the loaning of paper “money” created by central banks resulting in paper IOUs, IOUs which are then resold as investments to savers, savers being all who need to protect the value of their paper “money” from eroding because of the constant inflation of the paper money supply by bankers.

    That such a system has lasted over three hundred years is extraordinary; but it was not until the 20th century when the linkage between paper money and gold began to fail that the problems inherent in paper money systems became more apparent.

    England, the major recipient and beneficiary of the banker’s paper money for the previous two hundred years, had been very careful to maintain the fiction that paper money was as good as gold or silver. But in the next century, the 20th, the US the surrogate successor to England, was to be far less considerate of the considerable and questionable “gift” bequeathed to it by England’s bankers.

    In 1933, the US government by executive order confiscated the gold of all Americans thus ending the belief that paper money was interchangeable with gold and silver and was therefore a trustworthy medium of exchange.

    This confiscation of gold by the US was to be later repeated on an international level. But instead of only forcing Americans to abandon gold as it had in 1933, in 1971 the US would force the entire world to do so.


    By the end of WWII, the US had accumulated the largest amount of monetary gold reserves in history; and under the 1944 Bretton-Woods Agreement, the US dollar was to be convertible upon demand to gold and all currencies were to be tied to the US dollar. Thus, through the gold-convertible US dollar, the international monetary system was stable and anchored to gold.

    But by 1971, the US had overspent its entire hoard of gold. In 1958 alone, US gold reserves fell by 10 %. The reason is between 1949 and 1971 US overseas military expenditures and US overseas corporate expansion had left far more dollars in the hands of foreign nations than the US had gold to exchange.

    In their book, The Commanding Heights (1997 ed., pp. 60-64), Daniel Yergin and Joseph Stanislaw explain what happened next:

    But the growing U.S. balance-of-payments deficit meant that foreign governments were accumulating large amounts of dollars -- in aggregate volume far exceeding the U.S. government's stock of gold. These governments, or their central banks, could show up at any time at the "gold window" of the U.S. Treasury and insist on trading in their dollars for gold, which would precipitate a run. The issue was not theoretical. In the second week of August 1971, the British ambassador turned up at the Treasury Department to request that $3 billion be converted into gold.

    …The gold window was to be closed. Arthur Burns argued vociferously against it, warning, "Pravda would write that this was a sign of the collapse of capitalism." Burns was overruled. The gold window would be closed. But this would accentuate the need to fight inflation; for shutting the gold window would weaken the dollar against other currencies, thus adding to inflation by driving up the price of imported goods. Going off the gold standard and giving up fixed exchange rates constituted a momentous step in the history of international economics.

    The previous sentence bears repeating;
    Going off the gold standard and giving up fixed exchange rates constituted a momentous step in the history of international economics.

    Yergin and Stanislaw were right. It was to be a momentous—and ultimately fatal step—for as a result of the US default on its international gold obligations, all currencies in the world instantly became fiat.

    The security that gold and silver afforded the use of paper money would be no more—and when a con game is being run, nothing, absolutely nothing is more important than confidence.

    The last and most critical piece in the banker’s carefully constructed charade was eliminated by the US when it overspent it entire gold reserves leaving the international monetary system bereft of any intrinsic value. Only monetary momentum and residual confidence has allowed paper-based capitalist economies to function since the last vestige of gold was removed in 1971.

    Now, the postponed but inevitable destructive consequences of 1971 are about to make the demolition of the World Trade Center Twin Towers and Building 7 look like a spring day in Paris. A collapse of world economies caused by the default on trillions of dollars of paper debts and obligations has never before happened. Soon, it will.

    The consequences will be as devastating as they will be widespread as personal savings will be wiped out. Personal savings entrusted to banks have been invested in the same paper IOUs, sic bonds, owned by pension funds, investment funds, and insurance companies all over the world.

    Savers forced by the constant depreciation of paper money have given their savings to banks, pension funds, insurance companies and investment funds in the hopes of salvaging the value of those savings. But those hopes will prove to be false as the escalating financial collapse reveals such investments, e.g. corporate, government and consumer IOUs, to be increasingly worthless.

    Governments that allowed this crisis to occur will then be forced to indemnify such losses in order to maintain civil and social order. But, when done, the indemnification of trillions of dollars of lost savings will cause what remains of the international monetary system to collapse.

    Paper “money” is but a paper tiger and when exposed to the twin disasters of economic deflation and central bank hyperinflation, fiat “money” will ultimately revert to its intrinsic value—zero.


    Economies built on credit and debt are by nature unstable. Caught between cycles of expansion and contraction, they are also vulnerable to the vagaries of man and the dictates of nature, i.e. war, famine, greed, drought, etc.

    When the backing of gold was finally removed from paper money, it was the final straw that was to bring down the bankers’ house of cards. But before the house of cards collapsed, capitalism was to erupt in one last display of shameless glory.

    The 25 years between 1982 and 2007 was the longest expansion in capitalism’s history. It was, however, to be its last; for the expansion was built on misallocated and historically excessive amounts of credit—and Davos occupied center stage in the display of this excessive “achievement”.

    It is natural that at the end of the banker’s system, bankers would have garnered the largest share of the spoils and so it was, at least for a short while. The greatest spectacle of Davos was in 2007, the momentary triumph of bankers standing atop the world of global commerce whose profits and productivity they had increasingly purloined as their own.

    The triumph of the bankers, however, was to be as short as it was spectacular. The era of billion dollar bonuses paid to bankers was to occur at the apogee of their triumph, a triumph that was to be as short as it was lucrative, for soon after, both banks and the capital markets would collapse.


    In January 2008 when I wrote Davos, Debt & Systemic Failure, the August credit contraction was but six months old. But that year, the escalating effects of the credit contraction were to sweep through Wall Street, the City, and the world’s financial centers with the same destructive ferocity as the recent wildfires in Melbourne, Australia.

    In the previous year, 2007, it had appeared the endless liquidity provided by central banks would ensure endless profits for investment bankers. How wrong they were. But, at the time, they didn’t know it. Soon, they would.

    This is an excerpt from my 2008 article Davos, Debt & Systemic Failure which explains why it would be only a matter of time before the foundations of capital markets would fail:

    Davos, Debt & Systemic Failure
    When West Meets East
    The preferred diet of most Davos attendees is a fusion inspired composition of individual, government, and corporate debt combined with a free-market frisee of lax regulatory oversight held together by a roux of central bank credit that dissolves instantly when paired with matching counter-party risk.

    The January 2008 gathering in Davos, Switzerland at the World Economic Forum is similar to the 1957 meeting in Palermo, Sicily of American and Sicilian Cosa Nostra crime families who met to discuss mutual problems and opportunities. The notable difference being that those in the Cosa Nostra live outside the law; while those at the World Economic Forum in Davos make them.

    Those in Davos, however, share with the Cosa Nostra a common problem—the success of both depends on inherently unstable systems. The Cosa Nostra model is based on violence and greed which is both its strength and weakness. Capitalism, the source of wealth for those in Davos, is based on greed and leveraged debt, a combination as powerful and effective as the system of the Cosa Nostra—and just as unstable.


    Unstable systems can function for years without serious problems. But over time, unstable systems will always break down. We are witness to such a systemic failure today. Global credit markets are slowing and contracting. The capitalist system responsible for economic expansion and wealth is in disarray.

    Debt, in capitalist systems, is a wondrous device. That is, until it can’t be paid back. Under capitalism, credit fuels expansion but it does so at a cost. As capitalism expands, credit becomes debt and the greater the expansion, the greater the debt.


    Capitalism’s fatal flaw is apparent only in its later stages. As capitalism matures, its inherent systemic instability manifests. The very expansion of capitalism sets in motion its demise. The Achilles heel of capitalism is its perpetual need to expand.

    Only perpetual capital expansion can create sufficient capital flows to service and retire previously created debts, the amounts of which are always increasing because of the accruing compound interest being charged. While any slowdown is cause for worry, a contraction bodes far worse.


    One year ago, the mood at Davos was one of quiet, almost smug, confidence. The on-going economic expansion appeared to be endless, the profits of investment bankers skimmed off the top of productive enterprise was greater than ever. Private equity, the investment banker’s equivalent of flipping real estate, was the hottest game in town.

    It is no longer. Today in Davos, the scent of Armani is now mixed with the acrid smell of anxiety produced by falling markets and uncertain futures. Concern has replaced confidence. The major phernome in Davos today is fear.

    Davos will not be the same next year. If you’re planning on going, be sure to take some air freshener.

    That was then. Now, the major phernome in Davos is panic. Wall Street institutions such as Bear Stearns and Lehman Bros. have vanished into thin air (appropriately Davos is the highest city in Europe) and the financial sector, formerly the king of predators, is struggling to survive. Air freshener will be no more effective at Davos than central bank credit will be successful at reversing now deflating economies.


    Central banks are now engaged in a life and death struggle, a struggle which they cannot win. When the US removed gold from the fictional foundation of central bank fiat currencies, the death warrant of fiat currencies was signed. The execution itself would be only a matter of time.

    The central bank struggle to maintain the fiction that paper money is as good as gold is as doomed as the hope that more central bank credit will solve the problem that too much central bank credit created.

    The last and only remaining hope of central banks is to prolong the value of paper money by the use of smoke and mirrors in order to hide their declining value. The strategy is to remove as much evidence of that decline as possible.

    There is perhaps no better description of the central banks strategy than the following excerpt from Peter Warburton’s April 2001 essay, The Debasement Of World Currency--It Is Inflation But Not As We Know It:

    Central banks are engaged in a desperate battle on two fronts

    What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.

    [Note: Warburton’s explanation of central bank strategy is important, to wit: “Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.”]

    It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first. Last November, I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil and commodity markets? Probably, no more than $200 billion, using derivatives. Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world’s large investment banks have over-traded their capital so flagrantly that if the central banks were to lose the fight on the first front, then their stock would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil and commodity prices.

    [Note: Here, Warburton has given us the motive underlying the investment bank role in keeping commodity prices low. This especially pertains to gold as gold is the traditional measure of monetary distress.]

    Central banks, and particularly the US Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the equity index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade.
    Again, in this instance, Warburton’s last sentence bears repeating: [since 1994]

    “For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade.”

    Warburton wrote the above in April 2001 and the relevance of Warburton’s commentary is even greater today than it was then. Then, the two central bank objectives were: (1) making sure bond investors continue to finance the private sector bond market, and (2) making sure a technical break in the Dow Jones did not occur.

    Now, both have happened despite the best efforts of central banks. The 2007 credit contraction froze the corporate bond markets where the private sector obtains most of its financing and the second objective, to keep the Dow from breaking down, was violated in October and September of 2008. Systemic collapse as predicted by Warburton is now in the process of occurring.

    Where does this leave the central bankers? In my opinion, they had better start looking for jobs. As long as people believe bankers can solve their problems, they will continue to be employed. But when people finally understand the role bankers played in the current crisis, they and their cohorts in government may very well be indicted for their unconscionable plundering at the public trough and, also now for the added insult of destroying the trough when done plundering.

    When this era has ended, it is not known what bankers will do as bankers are notoriously bad businessmen. Bankers achieve their considerable success not by entrepreneurial talent but by their unique proximity to credit and their ability to leverage that proximity into excessive profit. Stripped of this advantage, bankers would be forced to earn a living on a level playing field—an ability which has never before been tested.


    Professor Antal Fekete stated when the price of gold begins to move rapidly upwards towards its final highs, it will be a time of tragedy; for when gold explodes upwards, the economies built around paper money and paper assets will collapse. The human suffering then and afterwards will be immense.

    The smoke and mirror attempts of central bank to postpone the inevitable day of reckoning have failed. The smoke is now clearing from the central banks’ purposive obfuscation of economic truths and their mirrors which previously reflected pure fiction are now broken and muddied.

    It is now only a matter of time before people realize what has occurred in the absence of their understanding. The considerable bill is now due and owing for all debts incurred at the bankers’ window. It will be paid.

    Already, gold and silver coins have disappeared from the supplies of retail dealers as the public increasingly seeks to protect the declining value of what they have saved. Soon, the same will be true for the 1,000 ounce gold bullion bars being purchased by the very wealthy.

    The day people realize that paper money is worthless is the day economic activity as we know it will come to a halt. What happens next has happened before. Barter begins the movement of goods and services until a trustworthy medium of exchange arises to take the place of the bankers’ debased paper.

    Currency collapse is a reoccurring story. Because we denied its reality does not mean it would not happen. Denial is very powerful but, in the end, it changes nothing except the ability to effectively respond.

    Our wish that gold achieve its rightful price level in today’s accelerating crisis is tempered by our realization that when that day is reached, the human carnage and suffering will be without precedence. It is best, then, to buy gold and silver whenever possible and to wait patiently for things to unfold as they will. And they shall.


    In his wonderful and final and most readable book (at least for me), Grunch of Giants, (Design Science Press, 1983) Buckminster Fuller writes about the history of power and money in a way that explains our present economic system.

    Bucky’s word “Grunch” is an acronym for gross (GR) universal (UN) cash heist (CH) and the word Giant is a reference to modern corporations and those who control them. On page 18, Bucky recounts a conversation with one of the “giants”, a friend of his who was a scion of the JP Morgan family.

    He said to me, “Bucky, I am very fond of you, so I am sorry to have to tell you that you will never be a success. You go around explaining in simple terms that which people have not been comprehending, when the first law of success is, “never make things simple when you can make them complicated.”

    The roots of modern economics are intertwined with institutional deceit on a massive scale because the material rewards are so great. Therefore, the attempt to ascertain the truth about money is not an easy task; and it is not made easier by those who benefit by its deceit.

    This is why the discussion of ideas antithetical to those in positions of power are now found only at the edges of society. Writers and readers alike must search for truth in books not easily found, such as Buckminster Fuller’s Grunch of Giants (out of print, still available at www.bfi.org, Peter Warburton’s Debt & Delusion—Central Bank Follies That Threaten Economic Disaster (reissued and currently available in a deluxe edition from WorldMetaView Press) and Bernard Lietaer’s The Future of Money (published in 1999 by Random House and never made available in the US, currently out of print).

    Those in power maintain their power because those without power do not understand the power dynamics operant in the world in which they live. Thus, the economic control over the many for the benefit of the few has continued irrespective of the form the economy takes.

    We are at the end of an extraordinary epoch, the end of the age of credit. In 1981, Bucky Fuller predicted the collapse of the present power structures in tandem with an unprecedented crisis that would transform humanity.

    That time, the collapse of the world power structures, has now arrived. Transformation comes next; and when the crisis finally passes—and it will—tomorrow will be a far better day. Awareness, community, faith and a bit of gold and silver will be invaluable in the days to come

    Eastern Europe Is About to Blow

    Eastern Europe is about to Blow

    By Mike Whitney

    Go To Original

    Eastern Europe is about to blow. If it does, it could take much of the EU with it. It's an emergency situation but there are no easy solutions. The IMF doesn't have the resources for a bailout of this size and the recession is spreading faster than relief efforts can be organized. Finance ministers and central bankers are running in circles trying to put out one fire after another. Its only a matter of time before they are overtaken by events. If one country is allowed to default, the dominoes could begin to tumble through the whole region. This could trigger dramatic changes in the political landscape. The rise of fascism is no longer out of the question.

    The UK Telegraph's economics editor Edmund Conway sums it up like this:

    "A 'second wave' of countries will fall victim to the economic crisis and face being bailed out by the International Monetary Fund, its chief warned at the G7 summit in Rome....But with some countries' economies effectively dwarfed by the size of their banking sector and its financial liabilities, there are fears they could fall victim to balance of payments and currency crises, much as Iceland did before receiving emergency assistance from the IMF last year." (UK Telegraph)

    Foreign capital is fleeing at an alarming rate; nearly two-thirds gone in matter of months. Deflation is pushing down asset prices, increasing unemployment, and compounding the debt-burden of financial institutions. It's the same everywhere. The economies are being hollowed out and stripped of capital. Ukraine is teetering on the brink of bankruptcy. Poland, Latvia, Lithuania, Hungary have all slipped into a low-grade depression. The countries that followed Washington's economic regimen have suffered the most. They bet that debt-fueled growth and exports would lead to prosperity. That dream has been shattered. They haven't developed their consumer markets, so demand is weak. Capital is scarce and businesses are being forced to deleverage to avoid default. All of Eastern Europe has gotten a margin call. They need extra funds to cover the falling value of their equity. They need a lifeline from the IMF or their economies will continue to crumble.

    The UK Telegraph's economics correspondent Ambrose Evans-Pritchard has written a series of articles about Eastern Europe. In "Failure to save East Europe will lead to Worldwide meltdown" he says:

    "Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

    "A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

    The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc....

    Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

    Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data). (Ambrose Evans-Pritchard UK Telegraph)

    An economic crisis is quickly turning into a political crisis. Riots have broken out in capitals across Eastern Europe. Mr. Geithner had better be paying attention. The prospects for political upheaval are growing. Public anxiety can spill out onto the streets at a moments notice. Governments must act quickly and with resolve. These countries need hard currency and guarantees of support. If they don't get help, the simmering public fury will turn into something much more lethal.

    UK Telegraph's economics correspondent Ambrose Evans-Pritchard:

    "Global banks have so far written down half the $2,200bn losses estimated by the IMF. On top of this, EU banks have $1,600bn of exposure to Eastern Europe -- increasingly viewed as Europe’s subprime debacle, and EU corporate debts are 95pc of GDP compared to 50pc in the US, a mounting concern as default rates surge.

    “It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems. Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance." (UK Telegraph)

    It's the same wherever banks merged their commercial and investment branches. Debt has skyrocketed to unsustainable levels destabilizing the entire economy. The banks have been operating like hedge funds, concealing their activities on off-balance sheets operations and maximizing their leverage through opaque debt-instruments. Now the global economy is caught in the downdraft of a collapsing speculative bubble. East Europe has been hit hard, but it's just the first of many bowling pins that will fall. All of Europe has been infected by the same virus which originated on Wall Street. Monday's New York Times summarizes developments in the EU:

    "Europe sank even deeper into recession than the United States in the closing months of last year, according to figures published Friday...The economy of the 16 countries sharing the euro currency declined by 1.5 percent in the fourth quarter, (an annualized drop of roughly 6 percent) according to the European Union's statistics office. That is even worse than the 1 percent decline in the United States economy during that period, compared with the previous quarter.

    “Today’s data wipes out any illusion that the euro zone is getting off lightly in this global downturn,” said Jörg Radeke, an economist at the Center for Economics and Business Research in London. ("Europe Slump Deeper than Expected" New york Times)

    The "liquidationists" would like to see governments cut off the flow of funds to ailing financial institutions and let them fail by themselves. It's Darwinian madness, like waiting out a heart attack on the kitchen floor instead of rushing to the hospital for emergency care. The global economy is decelerating at the fastest pace on record. 40 percent of global wealth has been wiped out. The banking system is insolvent, unemployment is soaring, tax revenues are falling, the markets are in shock, housing is crashing, deficits are soaring, and consumer confidence is at its lowest point in history. This is no time to cling to half-baked ideology. The global economy is undergoing a massive system-wide contraction which could spin out of control and plunge us into another world war. Political leaders need to grasp the urgency of the moment and keep the vehicle from careening into the ditch.

    Financial Crisis: Toxic Plans for Toxic Assets

    Financial Crisis: Toxic Plans for Toxic Assets

    by Stephen Lendman

    Go To Original

    Exit Paulson, enter Geithner with the latest "no banker left behind plan" - aka whatever Wall Street wants, Wall Street gets. Yet, the reception was underwhelming. The Dow plummeted 382 points while investors took shelter in bonds and gold. AP reported that "the new bank rescue plan landed with a thud on Wall Street" as investors worried that no end to the crisis is in sight. Editorial and op-ed commentaries were near unanimously negative and some especially critical.

    At a February 9 congressional briefing, lawmakers greeted Geithner with laughter and sarcasm, but most of it is just politics. Bailout opponent Brad Sherman (D, California) asked for details and a dollar amount, but instead got generalities about what he announced the next day - a plan to:

    -- "clean up and strengthen the nation's banks;" in other words, spend hundreds of billions more to recapitalize insolvent ones;

    -- create a Public - Private Investment Fund to shift toxic assets from them to the public;

    -- expand the Fed's Term Asset-Backed Securities Loan Facility (TALF) to provide funding for investors to buy toxic assets; partial government guarantees would be offered as incentive; and

    -- use "the full resources of the government to bring down mortgage payments (and) reduce mortgage interest rates;" already tried are foreclosure moratoriums, payment reductions, re-amortizations of delinquent balances, interest rate cuts, and more; yet home prices keep falling; a glut of unsold homes remains; foreclosures mount at a ferocious pace; the Foreclosure Data Bank cites "over 1 million bank foreclosures for sale;" and borrowers with modified loans are re-defaulting anyway.

    The Office of the Comptroller of the Currency (that charters, regulates, and supervises national banks) reported that 36% of first quarter 2008 modified loans were delinquent after three months and 58% after eight months. The main problems are over-indebtedness and huge numbers of continuing job losses.

    Geithner omitted these facts and that each of his elements conflicts with the others. Most important, instead of closing or nationalizing zombie banks, punishing their top executives for decades of criminal fraud and excess, and wrecking the global economy, Geithner, like Paulson, will reward them as The New York Times reported.

    On February 10, it explained that he'll "flood the financial system with as much as $2.5 trillion" on top of $9 trillion previously doled out, and this is just "Stage One of a two-stage plan," according to economist Michael Hudson. He asked: "recovery for whom (and what do) they want to recover?" For Wall Street, of course, in a new "Bubble economy" of the kind Alan Greenspan engineered: "wealth in the form of indebtedness of the 'real' economy at large to the banking system, and unprecedented capital gains to be made (from) a wave of asset-price inflation."

    The problem, according to Hudson, is it can't be done given "today's debt levels, widespread negative equity, and still-high level of real estate, stock and bond prices. No amount of new (bank) credit or capital will induce (them to loan more) to real estate that already is over-mortgaged, or to individuals and corporations already over-indebted" or on the edge like the auto giants, auto suppliers, homebuilders, others, and who knows who next will join them.

    Geithner got hammered on all fronts, including by former hedge fund manager Andy Kessler in a February 10 Wall Street Journal op-ed saying:

    "The Treasury secretary seems stuck on keeping the banks we have in place. But we don't need zombie banks overstuffed with nonperforming loans - ask the Japanese. Mr. Geithner wants to 'stress test' banks to see which are worth saving. The market already has" with Citigroup, Bank of America and others now a mere fraction of their former worth, and Geithner's idea is to "throw good money after bad to a banking system struggling under the weight of its own mistakes."

    "What we need are healthy banks with clean balance sheets and enlightened risk assessment to provide consumer and business loans that will generate returns to shareholders." Let them sell their own toxic debt. They won't because they "don't like the price." As for TARP, it failed and so will TARP 2.0 or what's now called a Financial Stability Plan. The idea is to get "private capital to buy bad loans and derivatives," but banks won't price them low enough to sell. Moreover, who'll buy risky assets unless they're practically given away or Washington guarantees them.

    Kessler wants the banks nationalized but only short-term. Others agree saying no quick fixes are possible, and Financial Times writer Martin Wolf asked whether Obama's presidency already failed in headlining his February 10 column: "Why Obama's new Tarp plan will fail to rescue the banks."

    It looks like "yet another child of the" previous year and a half's interventions: "optimistic and indecisive" at a time "focus and ferocity" are needed. Instead of crafting a surer solution, it timidly chose "three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress."

    Better advice is what Washington gave the Japanese in the 1990s but won't follow itself: "admit reality, restructure banks, (create good ones) and above all, slay zombie institutions at once." Instead, dead banks keep walking away with trillions more good money after bad.

    It's why banking analyst Meredith Whitney told Bloomberg (on February 4) that "Investors should not even consider owning banks at this point on an equity basis." Looking forward, she also doubts that Citigroup will exist in its current form, large numbers of Wall Street layoffs will continue, and eventually "we'll go back to an older and smaller bank system, where local banks lend off what they have in deposits."

    In October 2007, Whitney was one of the first to spot trouble when she predicted that Citigroup would cut its dividend in the face of a weak balance sheet. She followed by forecasting losses and write-downs at Bank of America, Lehman Bros., and UBS as well as insights on bond insurer implosions that threatened banks' bottom lines. More still about damaged assets at Merrill Lynch.

    She advised investors to bail out of bank stocks and saw the economy heading into an "early 1980s-style" recession that would devastate 10% of the population that was overextended by the housing boom. She said: "It feels like I'm at the epicenter of the biggest financial crisis in history," yet she didn't realize how accurate that was at the time.

    She criticized the incestuous relationship between Wall Street and the credit-rating agencies that, in her judgment, would impede the banks' ability to recover. They hated her, but one top Citigroup executive said: "You've got to give it to her - she figured it out," well enough that today her comments move markets.

    Investor Jim Rogers never holds back, and, on February 11, was true to form on Bloomberg: Interviewed on Geithner's plan he said:

    "Mr. Geithner has been bombing for 15 years. (He) caused the problem. He was head of the New York Fed that was supposed to be supervising banks. (Instead), all last year he came up with TARP. He came up with all these absurd bailouts. Geithner's has never known what he's doing. He doesn't know what he's doing now, and pretty soon everyone will know it, including Mr. Obama."

    Asked how to fix the problem, he referenced Washington's advice to Japan in the 1990s. "You let (bad banks) go bankrupt. You clean out the system. You wipe out insolvent ones and let (good banks) take over. America is making the same mistake (as Japan), and the politicians are making it worse. You want to know why they're making it worse? They want to support their friends on Wall Street."

    "The idea of the government buying up bad assets is not going to work." Either the price will be too high (at taxpayer expense) or it will be too low....it's not going to work. It's never worked....Pouring in new money will only weaken the whole system. Go back in history and see what worked. Countries that took their pain (solved their crisis). It was horrible going through it, but they came out of it and became rapidly growing. Countries that did it our way never came out of it until a long, long time later, if ever."

    "What Geithner should have said was we have a horrible problem of too much borrowing, too much debt, and too much consumption. You know what we are going to do - we're going to borrow more, go deeper in debt, and consume more....These guys don't know what they're doing (and it's why) I'm shorting" the market.

    Is It Time to Nationalize Insolvent Banks?

    George Soros framed it this way:

    "The hard choice facing the Obama administration is between partially nationalizing the banks, or leaving them in private hands but nationalizing their toxic assets."

    For Nouriel Roubini in his February 10 commentary, the choice is clear - the former, not the latter option that will be a "royal (taxpayer) rip-off" if assets are bought at above market valuations.

    He sees losses so large that the US banking system "is effectively insolvent in the aggregate." So are most UK banks and many other continental European ones. He lists four Obama options under consideration:

    (1) "recapitalization together with" some kind of government "bad bank" purchase of toxic assets;

    (2) "recapitalization together with government guarantees - after a first loss by the banks - of the toxic assets;"

    (3) "private purchase of toxic assets with a government guarantee and/or....public capital to set up a public-private bad bank where private investors participate" in buying bad assets; or

    (4) "outright government takeover" through nationalizations or "receivership" to be cleaned up, then sold back to private investors.

    The first three are deeply flawed. A bad bank may overpay at higher cost to taxpayers. If it buys at mark-to-market prices, "many banks (may go) bust." Even offering guarantees cause "massive valuation problems (with) very expensive risks for taxpayers." Under a bad bank, "the government has the additional problem of having to manage" these assets, something it has little expertise doing.

    Geithner's proposal for removing bad assets is "very cumbersome," problematic, and foggy on details. Its main problem is it may end up being "a royal rip-off of the taxpayer if the guarantee is excessive given the true value of the underlying assets." On the other hand, low valuations will expose bank insolvencies and show that government takeovers are essential.

    All proposed plans so far "may be a big fudge that either (don't) work or work only if the government bails out shareholders and unsecured (bank) creditors."

    Roubini calls nationalization the best option to let shareholders take the pain, not the public. It also "resolves the too-big-to-fail problem (because it's now) become an even bigger-to-fail" (one) as the approach (of letting) weak banks take over weaker ones" has failed.

    Sweden in the 1990s had the right approach. Japan had a lost decade with the wrong one and is still mired in trouble. "The US, UK and other (troubled) economies risk near depression and stag-deflation....if they fail to appropriately tackle this most severe crisis."

    Plans so far adopted have failed. Wasting more months on more of the same may turn a "U-shaped recession into an L-shaped near depression" with governments forced to nationalize anyway. Roubini proposes Plan N for "nationalization of insolvent banks" here and in other troubled economies.

    In a February 15 Washington Post op-ed, Roubini and Matthew Richardson headlined: "Nationalize the Banks! We're all Swedes Now." The US banking system is so close to the edge that "unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it."

    The time for dithering is past. "We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it."

    Roubini and Richardson are "free-market economists" and New York University Stern School of Business professors.

    Michael Hudson's Way "to Save the Economy from Wall Street"

    In his view: "The only real solution to today's debt overhang is a debt writedown," and let debtors (the banks and others) take the pain, not the public. "Until this occurs, debt service will crowd out spending on goods and services and there will be no recovery. Debt deflation will drag the economy down while assets are transferred further into the hands of the wealthiest 10 percent of the population (in the financial sector)" while the rest of us get poorer.

    Wall Street wants another way, and that's the problem. It wants costs socialized and profits privatized. It believes "free markets are 'free' of public regulation against predatory lending; 'free' of taxing the wealthy (and) shift(ing) the burden onto labor; 'free' for the financial sector to (plunder) the 'real' economy like parasitic ivy around a tree to extract the surplus." This makes a travesty of freedom, but they get away with it because presidents like Obama let them, and, according to one observer, trillion dollar giveaways are like buses. They'll be another one along shortly.

    Paul Krugman on Obama's Stimulus Plan

    On February 12, Krugman's New York Times article headlined: "Failure to Rise."

    "Break out the Champagne," he wrote...."Or maybe not. These aren't normal times (so) Obama's victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks." Disappointing? Corrupted and awful more accurately describes it.

    As for stimulus, Republicans backed the idea that Bush's tax cuts for the rich deserves more of them while John McCain called aiding troubled households "generational theft."

    Obama got what he asked for, but "almost certainly didn't ask for enough." While $800 billion sounds impressive, it doesn't bridge the $2.9 trillion gap between the economy's ability to produce over the next three years and what, in fact, it will, according to the Congressional Budget Office.

    It's also too long on tax cuts and not enough for millions of troubled households. Overall, "the Obama administration's response....is all too reminiscent of Japan in the 1990s: (hoping for) a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; (it) supports the banking system, but (is) reluctant to force banks to take their losses."

    "....I've got a sick feeling in the pit of my stomach....that America isn't rising to (its) greatest economic challenge in 70 years....they seem alarmingly willing to settle for half (and failed) measures (that expose) the grotesque failure of their doctrine in practice." So far the "verdict" on Obama is "no, we can't."

    Today's Global "Financial Coup d'Etat" Legacy

    Catherine Austin Fitts was a high-level business and government insider and now is Solari.com's editor. On February 2, her Financial Coup d'Etat article discussed a "Washington - Wall Street partnership" that for years:

    -- through fraud, engineered a housing and debt bubble;

    -- illegally offshored vast sums of capital globally; in Russia, for example, where millions of people discovered their bank accounts and pension funds were gone - "eradicated by a falling currency or stolen by mobsters who laundered money back into big New York Fed member banks for reinvestment to fuel the debt bubble;"

    -- turned privatization schemes into "piracy," or what she calls "mov(ing) government assets to private investors at below-market prices and then shift(ing) private liabilities back to government at no cost to the private liability holder."

    This was in the 1990s. Eight years under George Bush accelerated these practices and created today's global economic crisis, the result of a "Washington - Wall Street game." People everywhere are "up against the same financial pirates and (economic warfare) model" as those in America and the West.

    Year after year, a bankster - politician conspiracy continues the global heist - sucking trillions of capital "out of country after country," including in America from Americans. Fitts posed a question she raised in 2001: once the bubble economy imploded, is "the time coming when we (like emerging economies) would be de-modernized?" More than ever, "this is the question" we must ask, and how that prospect affects us.

    Stimulus 101 - The Devil Is in the Details and Follow-Through

    Hudson again: Trillions for banksters, crumbs for the public. But fixing today's economy requires change. "Today's economic shrinkage cannot be reversed without a recovery in consumer demand." Not a small or temporary one, a real sustained one. "The economy has lost the 'virtual wealth' in higher-priced homes and (a healthy) stock market, and must rely on after-tax earnings (alone). But I see little concern for wage earners in the Treasury plan," and not enough in the stimulus. "Without debt relief (and ending job losses), consumer spending and business investment will not recover."

    Geithner's plan doesn't address this. "It seeks to recover the debt-bubble economy, not the real (one) of production and consumption." It's the same failed approach as under Bush. Why not? As New York Fed president, Geithner and Paulson engineered it along with Fed chairman Bernanke.

    As for "stimulus," the House and Senate (on February 13) passed the American Recovery and Reinvestment Act (ARRA) of 2009. It contains 1041 pages, and as Bloomberg reported, full details "were still emerging as the plan headed for congressional passage." Others in Congress complained that it was impossible to read ahead of the rushed through vote.

    From what's known, here's a breakdown of most of the approved $787 billion:


    -- $287 billion in tax cuts; $310 billion in discretionary spending, including infrastructure, energy and healthcare systems; and $190 billion for benefits, including unemployment and Medicaid.

    For the Poor and Unemployed

    -- $40.5 billion for 20 extra weeks of unemployment benefits through December 31 plus another 13 weeks for workers in 30 "high unemployment" states; also a temporary extra $25 weekly benefit, and the first $2400 in benefits are exempt from federal income tax in 2009;

    -- $20 billion for food stamps;

    -- $3 billion in temporary welfare and other miscellaneous benefits.

    Comment: these are meagre amounts for millions of beleaguered households, including one worker every five seconds losing his or her job; many more forced to part-time from full-time ones; pensions and benefits being lost; and tens of millions in the country overall under growing duress.

    Direct Cash Payments

    --$14 billion for one-time $250 payments to Social Security recipients, poor people on Supplemental Security Income, and veterans on disability and pensions.

    Comment: the amount is so small, it hardly matters.


    -- $46 billion for transportation projects, including $27 billion for highways and bridge construction;

    -- $8.4 billion for mass transit;

    -- $8 billion for high-speed railways; $1.3 billion for Amtrak;

    -- $4.6 billion for the Army Corps of Engineers;

    -- $4 billion for public housing;

    -- $6.4 billion for clean and drinking water projects;

    -- $7 billion for broadband Internet service to underserved areas.

    Comment: most allocations are small; will take time to kick in; and will mostly enrich developers, construction firms, and the FIRE sector (finance, insurance, and real estate).

    Health Care

    -- $24.7 billion for a 65% subsidy for health insurance premiums for up to nine months for the newly unemployed under the (1985-enacted) COBRA program; COBRA lets these workers keep their health insurance for a limited time; those eligible are individuals earning $125,000 or less and couples with incomes of $250,000 or less;

    -- $87 billion to states for Medicaid;

    -- $19 billion to modernize health information technology systems - this is a plan to create a health history database for everyone in the country; let private produce business produce and control it, and share or sell the information to all takers; in other words, our personal health history will be privatized for profit;

    -- $10 billion for health research and construction of National Institutes of Health facilities;

    -- $8 billion to states to defray budget shortfalls.

    Comment: some of this will help, but it's not enough; no plan is envisioned for even partial national health care at a time nearly 50 million Americans are uninsured and millions more will be in coming years; as for the states and cities, combined they need tens of billions to close their budget gaps.


    -- $50 billion for various programs; some for efficiency, weatherizing low-income homes, and likely small amounts for renewable energy - too small to matter;

    -- $6.4 billion for nuclear weapons site clean up; the problem is so great, tens of billions are needed;

    -- $11 billion for a so-called "smart electricity grid" to reduce waste;

    -- $13.9 billion for subsidized renewable energy project loans;

    -- $6.3 billion for state efficient and clean energy;

    -- $4.5 billion to make federal buildings more energy efficient.

    Comment: nearly all of this is for business.


    -- $47 billion for states to relieve budget shortfalls and other purposes;

    -- $26 billion for special education and No Child Left Behind privatization and testing programs in K-12;

    -- $15.6 billion for Pell Grant increases by $500 - $5350 in 2009 and $5500 in 2010;

    -- $2 billion for Head Start.

    Comment: like the Bush administration, Obama and his Education Secretary, Arne Duncan, are committed to destroying public education nationally and turning it over to business for profit.

    Homeland Security

    -- $2.8 billion for DHS programs, including $1 billion for airport screening equipment.

    Comment: this is more funding to militarize the country.

    Law Enforcement

    -- $4 billion to states and local law enforcement for officers and equipment.

    Comment: still more funding for militarization.


    -- a new tax credit: $115 billion for a $400 per worker, $800 per couple tax credit in 2009 and 2010;

    -- starting in June 2009, most workers will have about $15 less per bi-weekly pay period withheld from paychecks over a one-year period;

    -- millions of Americans who earn too little to pay federal income tax can file returns in 2010 and receive credits;

    -- individuals earning over $75,000 and couples exceeding $150,000 will receive reduced amounts; individuals earning over $100,000 and couples $200,000 get nothing;

    -- $70 billion in 2009 for alternative minimum tax (AMT) relief for about 24 million taxpayers; an average family of four affected will save $2300; this is substantial since families earning as little as $45,000 otherwise would be taxed;

    -- $13.9 billion for a $2500 expanded tax credit (above the current $1800) for college tuition and related expenses for 2009 and 2010; the credit applies for individuals earning no more than $80,000 and couples a maximum $160,000; this helps but barely relieves the burgeoning tuition burden that makes college unaffordable for millions without considerable scholarship aid plus the ability to get loans for the residual;

    -- $5 billion in 2009 for faster business depreciation on equipment, including computers;

    -- $6.6 billion for a temporary $8000 first-time home-buyer credit for purchases after January 1 and before December 1, 2009; removed is the current requirement for credits to be repaid if buyers stay in their homes for less than three years; those eligible are individuals earning $75,000 or less and couples earning $150,000 or less;

    -- $2.5 billion to make sales and excise taxes paid on new car, recreational vehicle or motorcycle purchases tax deductible; excluded are individuals earning $125,000 or more and couples earning $250,000 or more;

    -- $14.8 billion for a temporary child tax credit increase by lowering the income threshold to $3000 in 2009 and 2010;

    -- $4.6 billion for a temporary earned income tax credit to 45% from 40% for qualifying families with three or more children; it also includes marriage penalty relief for couples who qualify;

    -- companies and buyout firms that restructure debt without bankruptcy also get tax help; and

    -- a late addition was a $3.2 billion tax benefit for General Motors and a $19 billion tax refund commitment to businesses for later this year;

    Comment: some provisions for the public are helpful but fall way short of aiding beleaguered homeowners and restoring jobs and income, without which economic recovery won't happen.

    Overall, "stimulus" provides some household help given the degree of public anger that could boil over without it. The amounts, however, are small, inadequate, and, at best, for temporary, not longer term, relief, and even then, way too little for people most in need.

    Critics call it a spending, not a stimulus, bill. Others fear unmanageable deficits and the willingness of foreign capital to keep financing them. Mostly there's concern for what economists like Michael Hudson, Nouriel Roubini and others explain. Nationalizing zombie banks and writing down their debt is the only way back to economic health, but administration plans aren't proposing it.

    ARRA Caps on Executive Pay?

    A late ARRA provision caps top executives' pay at $500,000 for firms getting government "exceptional assistance." It also restricts bonuses and other incentive compensation (but not retroactively), including severance packages, for the five most senior officers and 20 highest-paid executives. Wiggle room divides beneficiaries into two categories - those getting "exceptional assistance" and others aided through programs like the original TARP with $350 remaining in to be dispensed.

    Restrictions have been imposed before and failed as little enforcement is applied, and companies can manipulate rules to avoid them. It's likely they'll do it again, and who'll be watching to stop them.

    On February 15, Bloomberg acknowledged it in an article headlined: "Obama to Work on Executive-Pay Limits After Industry Complaints." In other words, legislate tough rules, then arrange "technical" ways around them even though presidential spokeswoman Jen Psaki said "The president shares a deep concern about excessive executive compensation."

    Apparently not enough and a greater concern for Wall Street, and why not. Along with corporate lobbyists, major law firms, and the health industry, the entire FIRE sector comprised his largest campaign contributors.

    Help for Beleaguered Homeowners?

    On February 13, AP reported that Obama will outline a foreclosure prevention plan in a February 18 speech. Efforts by the Bush administration failed, so critics wonder whether new efforts will fare no better than old ones. Maybe they'll be old ones repackaged.

    Perhaps because they'll work about the same way with lower rates, reduced monthly payments, extended loan terms, and adding unpaid balances to principal. It's called negative amortization to restructure lower payments than the full amount due. Interest accrues and principal increases. A day of reckoning is delayed for when home prices are lower but even less affordable because mortgage balances are higher than property values. In other words, the solution is worse than the problem. Owners get deeper in debt, become levered renters, and later on end up defaulting anyway.

    Further, Bank of America's mortgage group tracks most at-risk borrowers. Those most likely to default have Jumbo and Options ARMS. Jumbos are mostly debt and little equity. Options are even more aggressive as lenders distinguish between the offered and payment rates that can be substantial. They also can be interest-only arrangements causing negative amortization, and rates can be adjusted from day one. Home buyers are enticed by teaser rates as low as 1%. But payment amounts are much higher and can change at any time.

    Preventing these types of risky mortgage foreclosures will take far more than the suggested $50 billion total Obama may announce, perhaps eight or ten times that amount, structured to advantage homeowners, not lenders. Even then, quick fixes won't solve today's problems - just time, patience, good policy, and government working for people, not predators, something Washington never does.

    A Final Comment

    Examine Obama's economic team. Poor policy produces failed results no different than under George Bush. Neither Bernanke or Greespan saw bubbles, so it's no surprise that in late 2006 Mr. B. said "US housing prices merely reflect a strong US economy." Today he risks serious inflation by flooding the market with liquidity and worrying later how he'll sop it up.

    Debt defines today's crisis, yet under Bush, Geithner, as New York Fed president, helped fuel it and believes more debt, over-consumption, and unaffordable new borrowing will return the economy to sustainable growth which, of course, it can't.

    Larry Summers completes the economic troika as head of the National Economic Council (NEC). As Clinton's Treasury Secretary, he engineered Gramm-Leach-Bliley in November 1999. It let commercial and investment banks and insurance companies combine and eased the way for rampant speculation, fraud, abuse, and multiple bubbles that created today's crisis.

    Paul Volker plays a role as well as special Economic Recovery Advisory Board head, but look at his resume. As Fed chairman in 1979 and the early 1980s, he engineered a deep recession and set in motion a path to neoliberalism. He helped destroy family farms, crush labor, reduce wages, lower living standards, send unemployment soaring, rev up de-industrialization, and supercharge the early years of financialization and casino capitalism under Ronald Reagan.

    With this kind of "dream team," Obama may match or exceed "the most incompetent eight years of government in modern times, and (be) a contender" for all time, according to money manager and market strategist Jeremy Grantham. If so, the worst of today's crisis lies ahead. Massive future plunder is coming to make working Americans no better off than millions of global wage slaves, that is if they have any decent employment at all.

    Meanwhile in Rome, G 7 finance ministers and central bankers promised to "stabili(ze) the global economy (and take) exceptional measures....using the full range of policy tools to support growth and employment and strengthen the financial sector." Surely as well as they've done it up to now.