Thursday, March 12, 2009

David Fiderer: How Dumb Does Alan Greenspan Think We Are? Very

How Dumb Does Alan Greenspan Think We Are? Very

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"Don't blame me," argues Alan Greenspan in a piece of historical revisionism that would have embarrassed Kurt Waldheim. Greenspan offered up a Panglossian analysis in today's Wall Street Journal that goes something like this:

The rise in housing prices was tied to the decline in the rates for long-term, fixed-rate mortgages. Historically there has been a strong historic correlation between the fed-funds rate and rates for long-term, fixed-rate mortgages (FRMs). "Between 2002 and 2005, however, the correlation diminished to insignificance," writes Greenspan. There was no correlation, ergo the Federal Reserve did not inflate the housing bubble.

Here's the truth.

In the years following the end of the last recession, which ended in November 2001, Greenspan lowered rates relentlessly in order to prime the economy for the 2004 election. By mid-2003, the fed funds rate was one percent, a 45-year low. Mortgage rates for both FRMs and adjustable rate mortgages (ARMs) fell dramatically, but rates on ARMs fell more. And this is a critical point. By early 2004 the rate difference between FRMs and ARMs was two percent, the highest it had been in 10 years. In other words, if you had a $120,000 mortgage, your monthly payments would have been $200 less under an ARM.

The bigger the rate difference, the more likely homeowners are to elect to finance with an ARM. But in prior years when homeowners flocked to ARMs, interest rates were high, so the likelihood that homeowners would face sticker shock at the time of a rate reset, or the likelihood that home prices had been inflated by low interest rates, was fairly low. In early 2004, when 5-year ARMs hovered around four percent, compared to FRMs at six percent, the refinancing risk associated with an ARM was much greater.


And it was precisely at this point, going into an election year, when Greenspan threw gasoline on the fire, encouraging homeowners to try ARMs. "Greenspan says ARMs might be better deal," was the USA Today headline on February 24, 2004. "Alan Greenspan said Monday that Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives," the paper reported.

Bear in mind, that Greenspan knew perfectly well that homeowners' capacity to take on incremental debt was already becoming strained.


When Greenspan spoke, people listened. So by March 2005 the percentage of homeowners taking out adjustable-rate mortgages hit an all-time record, at 36%. In 2001, it was 12%. In 2002, it was 17%.

Moreover, ARMs were concentrated among the riskiest types of mortgages in the riskiest markets, as we see from statistics from the New York Federal Reserve. These are the markets, and the mortgages, that drove the bubble and the financial crisis we face today. (For more details, see, "The Simple Arithmetic of the Mortgage Crisis.")


Of course the housing bubble was not only inflated by low interest rates. It was also driven by fraud and predatory lending, which was allowed to flourish because Alan Greenspan refused to do his job, which was to provide regulatory appropriate regulatory oversight on mortgage lenders.

For his CNBC special, "House of Cards," David Faber confronted Greenspan on the issue of subprime mortgages.

DAVID FABER: Alan Greenspan clearly didn't realize the full extent of the housing bubble in 2005, nor was he aware of the enormous growth in subprime mortgages, which, by 2005, represented 20 percent of all new mortgages.

ALAN GREENSPAN: I remember my initial response when a staff member
came up to me and he says, "I don't know if you have seen something like
this." I said, "I don't believe that number." It became a huge

DAVID FABER: Really? I mean, I find that somewhat hard to believe.

ALAN GREENSPAN: It is hard to believe, but it was still perceived to
be a small part of the market.

DAVID FABER: Greenspan now says that even if he did know the true
dimensions of the housing bubble back then, he wouldn't have been able to
do much to stop it.

ALAN GREENSPAN: The presumption that you could incrementally defuse a
bubble was a fantasy. Clearly, you cannot defuse these things, unless you
hit them right on the head and break the economy. Essentially, break the
potential profitability that is engendering that sort of stuff.

DAVID FABER: So you're essentially saying there is nothing the Fed
could have done.

ALAN GREENSPAN: To prevent the bubble?


ALAN GREENSPAN: Yes, we could have. We could have basically clamped
down on the American economy, generated a 10 percent unemployment rate.
And I will guarantee we would not have had a housing boom, stock market
boom or indeed a particularly good economy either.

Greenspan did to Faber what he did to The Wall Street Journal's readers. He threw sand in his face.

Is the Next Defense Budget a Stimulus Package?

How Shovel-Ready Is the Pentagon?

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President Obama has recently threatened to rescind the "blank check" the Bush administration offered to big defense contractors. So now is the time when all that planning by Lockheed Martin and the other major arms manufacturers comes into play. One of that company's major weapons systems, the F-22 Raptor, is potentially on the chopping block. How convenient then that, in the midst of an economic meltdown, Lockheed just happens to have more than 1,000 parts suppliers for that jet carefully scattered across 44 states, all of which, as far as I know, have representatives in Congress. This is pretty typical.

Take the Army's Future Combat System (FCS), which Noah Shachtman of's Danger Zone blog calls a "poster child in Washington for Pentagon bloat and overreach." According to a recent Army briefing document, "The FCS Manned Ground Vehicle program encompasses more than 839 suppliers in 38 states totaling more than $6.2B in development cost impact." The only question, of course, is: How could the prospective eight-vehicle system have missed those other 12 states? Similarly, when it comes to the Navy's much desired Virginia Class Submarine, according to MSNBC's Tom Curry, "Supplier work on the subs is spread from Northampton, Mass., (Kollmorgen Corp.) to Tacoma, Wash., (Bradken-Atlas Castings) not to mention the main sub building sites in Groton and in Newport News. Each of those congressional districts happens to be represented by a Democratic member of the House of Representatives."

The list of weapons systems is practically endless and the various services and companies responsible for them invariably try to spread the largess across as many congressional districts as possible. What this means is that any cuts are likely to be fiercely fought, both within the military and in Congress, backed by all the lobbying power of the weapons makers. That's why the latest post by Frida Berrigan, military expert for the New America Foundation and TomDispatch regular, is so important. It's a reminder that, for all the cash the military-industrial complex slathers over Congress, and all the money spread around the country, the modern weapons industry is a stimulus damper. That's not a point much trumpeted in this country. As Berrigan points out, however, if you want economic bounce, it's best not to put your money into things that go "boom" in the night, but into the peaceable professions like health care and education. Tom

Is the Next Defense Budget a Stimulus Package?

Why the Pentagon Can't Put America Back to Work
By Frida Berrigan


It's the magic incantation to fix our economic woes. Many states and federal agencies have already gone from scouring their budgets for things to cut to green-lighting construction projects. The Obama administration's $787 billion stimulus package is sure to muster many shovels in an effort to rouse a despondent economy and put Americans back to work.

Here's the strange thing though: That package was headline news for weeks, bitterly argued over, hailed and derided in equal measure. And yet road construction, housing projects, and green retrofits aren't the only major projects getting the shovel-ready treatment via massive infusions of cash.

At the end of February, another huge "stimulus" package was announced but generated almost no comment, controversy, or argument. The defense industry received its own special stimulus package -- news of the dollars available for the Pentagon budget in 2010; and at nearly $700 billion (when all the bits and pieces are added in), it's almost as big as the Obama economic package and sure to be a lot less effective.

Despite the sort of economic maelstrom not seen in generations, the defense industry, insulated by an enduring conviction that war spending stimulates the economy, remains almost impervious to budget cuts. To understand why military spending is no longer a stimulus driver means putting aside memories of Rosie the Riveter and the sepia-hued worker on the bomber assembly line and remembering instead that the Great Depression came before "the Good War," not the other way around. In World War II, it's also important to recall, the massive military buildup was labor intensive, employed millions, and was accompanied by rationing, austerity, and very high taxes.

This time around, we began with boom years and spent our way into the breach, in significant part by launching unnecessary, profligate wars. Meanwhile, President George W. Bush cut taxes at a more than peacetime pace and borrowed like an addicted gambler on a losing streak to underwrite his wars of choice, including his Global War on Terror. If the former president's nearly trillion dollar (and counting) global war got us into this mess, by simple logic it's not likely to bail us out as well.

Riding the Slide to Billions

While the good times rolled during the long slide from surplus to deficit, from no war to global war, it wasn't just the Merrill Lynches and subprime mortgage giants that cleaned up. Lockheed Martin, Boeing, and Northrop Grumman -- the top three defense contractors -- had a ball, too.

In 2002, the first full year of what came to be known as the Global War on Terror, for instance, those three companies -- ranking first, second, and third on the Pentagon's list of top ten contractors -- split $42 billion in contract awards, more than two-thirds of the $67 billion distributed among the top 10 Pentagon contractors.

In 2007, the last year for which full contracting data is available, the same Big Three split $69 billion in Pentagon contracts, which was more than the total received by the top 10 companies just five years earlier. The top 10 divvied up $121 billion in contracts in 2007, an 80% increase over 2002. Lockheed Martin, the number one Pentagon contractor, graduated from a mere $17 billion in awarded contracts in 2002 to $28 billion in 2007. That's a leap of 64%. Given such figures, it's easy enough to understand how the basic military budget -- excluding money for actual war-fighting -- jumped from about $300 billion to more than $500 billion during the Bush years.

Given the economic climate, it's no surprise that the three defense giants have all posted losses in the past few weeks. But before the hankies come out and the histrionics start, it should be noted that Lockheed Martin alone has an $81 billion backlog in orders, enough to keep chugging along for another two years without a single new contract.

If such war spending had been an effective stimulus for the economy, we would be roaring along on 12 cylinders today. But increasingly this kind of spending mainly stimulates corporate shareholders, stock prices, and (of course) war itself.

No matter, the staggering new defense budget ensures that, for the defense industry, some version of good times will continue to roll, even if the economic impact of these huge military investments proves negligible and the need in other areas is staggering.

The 2010 Defense Budget

President Obama is reportedly intent on digging deep into the Pentagon budget. He has given his Office of Management and Budgetcomplete an "exhaustive line-by-line" review of the detailed budget request before it is released. In speeches, he has focused on wasteful and unnecessary defense spending. until April to

Just days ago, Obama insisted that "the days of giving defense contractors a blank check are over." To underline that assertion, he cited a 2008 Government Accountability Office study that found 95 military projects over budget by a total of $295 billion. He pledged to end such egregious practices, and the no-bid contracts that often go with them. That applause line plays well at a time when belts are tightening uncomfortably and boot straps remain elusive, but it misses a reality, no less potentially important in the Obama era than in the preceding one: for (at least) the last eight years, defense contractors haven't needed a "blank check" because they already have the combination to the safe, the PIN number to the account, and a controlling interest on the board of the bank.

Given the promised size of the next Pentagon budget, no matter what weapons programs are cut or companies and contracts disciplined, the "bank board" will remain the same because the overall amount available to it shows no signs of changing. In fact, basic funding levels (not including money still being set aside for the wars in Afghanistan and Iraq) are remarkably in line with the most recent Bush administration budget, right down to prospective further increases. The just released overall figure for the 2010 Pentagon budget is actually $533.7 billion; that is, $20.4 billion higher than Bush's last base budget.

President Obama does not like the term "Global War on Terror" (GWOT), dispensing with the Bush administration's moniker of choice to describe the most costly array of military operations since World War II. But Obama's Pentagon will continue to spend a GWOT-sized chunk of our national treasure, even as troops trickle home from Iraq, and the surge relocates to Afghanistan's inhospitable steppes. The preliminary figure for war-fighting in 2010 is $130 billion, which represents a modest decrease from the $144 billion that is expected to go to military operations in 2009. Add that to the base Pentagon budget and you get a subtotal of $664 billion for 2010 military expenditures.

If the estimated costs of military spending lodged in other parts of the federal budget (like funding for nuclear weapons which is considered the bailiwick of the Department of Energy), as well as miscellaneous non-Defense Department defense costs -- about $23 billion last time around -- are also included, then President Obama's first military budget should come in at around $670 billion.

After the preliminary budget figures were released, Secretary of Defense Robert Gates told reporters, "In our country's current economic circumstances, I believe that represents a strong commitment to our security." Almost $700 billion is a strong commitment alright. Unfortunately, as a stimulus commitment -- and a largely unquestioned one at that -- it is certain to prove a drag on our economic recovery, despite the claims of the defense industry and their ever-present publicists and lobbyists.

Lifting America by the (Combat) Bootstraps?

And are we hearing those claims these days! The Aerospace Industries Association (AIA), representing more than 100 leading defense and aerospace corporations, has been trumpeting their contributions to the economy in a print ad campaign and on their website under the catch-phrase: "Aerospace and Defense: The Strength to Lift America."

In terms of American well-being, the AIA estimates that defense and aerospace manufacturers contribute $97 billion in exports a year, while maintaining two million jobs. As Fred Downey, an association vice president, told the Associated Press, "Our industry is ready and able to lead the way out of the economic crisis."

As the association sees it, defense and aerospace corporations are about as shovel-ready as you can get. The U.S. Bureau of Labor Statistics (BLS), however, offers quite a different view of the AIA's two-million jobs claim. Their "Career Guide to Industries," for example, looks intensively at Aerospace Product and Parts Manufacturing (which would also include some non-defense related corporations) and finds that the sector employed 472,000 wage and salary workers in 2006. Now, this is not the whole picture of defense-related employment, but according to the Associated Press, the BLS estimates that only 647,000 people work in industries where at least one-fifth of the products are defense-related.

Perhaps the AIA was including not just jobs making weapons, but jobs lobbying Congress to pay for them. Then Downey and crew might almost have a case. The BLS would probably not consider lobbyist jobs to be defense-related, but maybe they should because the Center for Responsive Politics, a research group that tracks money in politics, reports that the industry spent $149 million on lobbying firms to get its points across to Congress and the administration last year. That has to be a lot of shovel-ready jobs right there.

Speaking of shovel-ready jobs shoveling out defense industry claims, if the lobbying sector is happy, ad firms must be ecstatic. These days, defense contractors and associations are spending striking sums on what's politely termed "public education": full-page ads in major newspapers, ads in Washington metro stations near the Pentagon, Crystal City (a Virginia community where many Pentagon satellite offices are located), Capitol Hill, and other places where the powerful congregate when their limos are in use, not to speak of aggressive pop-up ads on political news sites like the National Journal.

Lockheed Martin, for example, recently unveiled a new ad campaignabove the tagline: "95,000 employed, 300 million protected." At the bottom of the ad are the logos of the supersonic fighter plane known as the F-22 Raptor and the International Association of Machinists and Aerospace Workers whose members build it. As if to underline these messages, 200 members of Congress signed a January 20th "Dear Mr. President, Save the F-22" letter, meant to be waiting for Barack Obama as he entered the Oval Office. The letter asserted that the F-22 program "annually provides over $12 billion of economic activity to the national economy." pitched towards troubled economic times. It depicts proud blue-collar workers

Even if that dubious claim were substantiated, the economic activity comes at a high cost. The United States spent more than $65 billion to design and produce the F-22 Raptor -- a fighter plane originally conceived to penetrate the airspace of the long extinct Soviet Union, to counter large formations of enemy bombers in Cold War scenarios that are today inconceivable, and to achieve air superiority high over Eastern Europe whose greatest problems now involve a potential region-wide economic meltdown. In the wake of the Cold War, as military analyst Chalmers Johnson recently pointed out, the F-22 lacks a role in any imaginable war-fighting scenario the U.S. might actually find itself in.

Efforts to promote the plane as a critical tool in the Global War on Terror floundered when Defense Secretary Gates spoke plainly about the system's uselessness last year. "The reality," he said, "is we are fighting two wars, in Iraq and Afghanistan, and the F-22 has not performed a single mission in either theater."

Fortunately for Lockheed Martin, once the U.S. economy began to crater, it could emphasize a new on-the-ground use for the F-22 -- as an instant make-work jobs program.

However, even there the plane's utility is questionable. William D. Hartung, director of the New America Foundation's Arms and Security Initiative, points out that, if the F-22 program is cut, the "job losses will be stretched out over two and half years or more, and could happen after the end of the current recession." In addition, Lockheed has had to back away from the 95,000 jobs claims, clarifying that more than 70% of those jobs are only indirectly related to the F-22, and that just 25,000 workers are employed directly on the plane's construction. Winslow Wheeler is the head of the Center for Defense Information's Straus Military Reform Project and his scholarship is built on more than 30 years of service at the Government Accountability Office and on the Senate Budget Committee, among other places. He points out that, when it comes to high-tech weapons, today's military-industrial complex bears not the slightest resemblance to its World War II predecessor as a job generator. As he describes it, in the early 1940s "production lines cranked out thousands of aircraft each month: as fast as the government could stuff money, materials and workers into the assembly line."

In stark contrast, the F-22, he points out, is essentially an artisanal product. "Go to Lockheed Martin's plant," he writes. "You will find no detectable movement of aircraft out the door. Instead you will see virtually stationary aircraft and workers applying parts in a manner more evocative of hand-crafting. This ‘production rate' generates one F-22 every 18 days or so." This is, in fact, what shovel-ready largely means in Pentagon stimulus terms these days.

War for Jobs?

Economists have also weighed in on why "war for jobs" as a way out of recession or depression has entered the world of mythology. An analysis from the University of Massachusetts' Political Economy Research Institute, for instance, finds that, for every one billion dollars invested in defense, 8,555 jobs are created. By contrast, the same billion invested in health care would create 12,883 jobs, and in education, 17,687 jobs or more than double the defense stimulus payoff.

It has often been said that World War II -- and the production stimulus it offered -- lifted the United States out of the Great Depression. Today, the opposite seems to be the case. The "war economy" helped propel the U.S. into what might turn out to be another great depression, and so, unlike in 1929, as our economy crumbles today, we are already on a global war footing.

As the Obama administration grapples with economic disaster and inherited wars, it will have the added challenge of confronting a military-industrial complex accustomed to budgets that reach almost three quarters of a trillion dollars, based on exaggerated global threats, unsubstantiated economic claims, and entrenched profligacy. When Obama's analysts pour over the budget, looking at all those overpriced weapons and plum contracts, they'll have to ask: Is each weapons system or program actually needed for American security and is it cost effective? Or are the defense contractors shoveling a load of shovel-ready bull?

Citigroup Enters Union Fray With Anti-EFCA Call

Citigroup Enters Union Fray With Anti-EFCA Call

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Embattled financial giant Citigroup Inc., which has received at least $50 billion in federal bailout funds, hosted a private conference call on Wednesday to build opposition to the Employee Free Choice Act.

The call, which came just one day after the labor-backed legislation was introduced in Congress, suggests a growing effort on Citi's behalf to spur concerns about the bill, which would make it easier for employees to organize. On Tuesday, the bank downgraded Wal-Mart's rating over fears that the Employee Free Choice Act could pass.

Wednesday's conference call was led by Glenn Spencer, a senior executive at the U.S. Chamber of Commerce and an ardent EFCA opponent. It was promoted as "An Update on the Employee Free Choice Act," but much of the content was focused on demonizing the legislation. EFCA will "inhibit flexibility," "hamper companies from competing effectively," and prove "cumbersome" for business, declared Spencer. "From the Chamber's perspective, and I would say probably from the whole business communities perspective, there are really no amendments you could make to this bill that would make it acceptable."

The lines of attack from the Chamber official were familiar. But Citigroup's participation, led by retail analyst Deborah Weinswig, raised some eyebrows. The bank has received ample taxpayer-funded aid through the TARP program, leading some to question whether rallying support for an anti-union effort was the best use of its time or that money.

"Everyone should recognize that when we are talking about Citigroup here, the emperor has no clothes," said Dan Pedrotty, director of the Office of Investment at the AFL-CIO. "You have a company surviving on taxpayer largess weighing in against workers who want to improve their lives."

And with Citigroup lowering Wal-Mart's rating one day before the call, some were left wondering whether the bank was deliberating trying to frame EFCA as so calamitous for business that Congress would recoil from touching it. Indeed, as pointed out by one Democratic observer, Weinswig was high on Wal-Mart just a few weeks ago, giving the company a 9.5 rating out of 10.

"Citigroup and the Chamber of Commerce have no shame," said Stephen Lerner, director of the Private Equity Project at SEIU. "One day, Citi issues a report claiming it would hurt the stock of the Billionaire Walton family if free choice passes and workers win decent wages. Then they follow it up with a conference call where the Chamber of Commerce claims paying workers a living wage is bad for the economy."

Asked for comment about the bank's role in the EFCA debate, Citi spokesman Duncan Smith said that the company had a responsibility to advise clients on pertinent legislative matters. "The role of Citi analysts is to make stock recommendations to investing clients, and in doing so they examine a broad range of factors that may affect a company's market position," he said.

After the story was published, Smith sent another statement emphasizing that the firm "has taken no position" on EFCA. "Citi Retail Analyst Deborah Weinswig provides independent investment research to clients. In doing so she may examine a broad range of factors - including the impact of legislation - solely in the context of her coverage of a company or the industry. Her views are always independent and do not represent the views of Citi's management," he wrote.

Citi held a conversation with union officials on EFCA some time ago, according to another source, though not along the lines of a conference call to drum up support. Asked whether the firm would host a separate call with analysts favorable to the legislation's passage, Smith replied: "Weinswig may host further calls on EFCA for clients in the future. No further comment."

Other bailout recipients have also hosted calls designed to stir up opposition to the Employee Free Choice Act. As reported by the Huffington Post, Bank of America hosted an even more vehemently anti-EFCA forum just three days after receiving $25 billion in federal bailout funds. Good government groups responded by urging an investigation into the whether the call's hosts were trying to solicit political donations. Rep. Keith Ellison, meanwhile, questioned the bank's CEO over whether he was using taxpayer dollars to dissuade unionization.

During Wednesday's call with Citigroup, Spencer offered some insight into the forthcoming EFCA debate. With the legislation introduced on Tuesday, he declared that the prospects of passage were up in the air. Democrats in the Senate did not have the 60 votes needed for cloture, he predicted, as elected officials were "looking at the economy and thinking is this really the right time to put a bill like this into place."

At one point, Weinswig herself engaged the discussion (after mostly moderating questions) by highlighting some anti-EFCA academic material. Citing a study from a Canadian professor, she said that "for every two percentage points gained in union membership through card check and mandatory arbitration, the following year's unemployment rate is expected to increase by one percentage point, and job creation is predicted to fall by about 1.5 million jobs."

Union officials scoffed at these projections, arguing that increased union membership would result in more money for working class families to spend. That, in turn, would spur economic growth and job creation.

"Let's remember, these are the same business 'experts' who brought us the housing crisis, record unemployment and the stock market collapse," said Lerner. "Now they're trying to tell us that raising wages, growing the middle class and putting more money in workers' pockets is somehow bad for the economy. American workers' patience for economic theory from wealthy corporate interests wore thin about two bailouts ago."

Key Obama economic adviser admits he has no answers

Key Obama economic adviser admits he has no answers

By Alex Messenger

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In a sign of the panic gripping Washington's policy-makers, one of Barack Obama's key economic advisors, Paul Volcker, has warned a gathering of his leading peers that the crash of 2008 might be "the mother of all financial crises... I don't remember any time, maybe even the Great Depression, when things went down quite so fast, quite so uniformly around the world". Volcker, chairman of the president's Economic Recovery Advisory Board and former chair of the Federal Reserve, told a conference at Columbia University's Centre for Capitalism and Society on 20 February that the crisis was "characterised by being very international" and was the product of deep global imbalances.

But it is not only for their candour about the scale of the crisis that Volcker's Columbia comments are notable. The former Fed chief admitted to his star-studded audience (including celebrity economist Jeffrey Sachs, George Soros and three Nobel Prize winners) that the profession of which they were all a part had failed. The breakdown of the world financial system has "occurred in the face of almost all policy and intellectual analysis... Even the experts don't know what's going on".

Obama's chief advisor on economic recovery went on to concede that he himself had no answers, saying: "The first priority is to restore some semblance of stability and order in the market and restore the flow of credit. I'm not going to talk about that. I haven't got—if I had the answer I might talk about it, but I'm not sure I have it, so I think we'll neglect that for the moment."

These admissions suggest that even the architects of the bank bailouts and of Obama's new lending fund have no confidence in those policies and no alternatives to put forward. This is the fund that Obama claimed during his 24 February speech to Congress would "aggressively break [the] destructive cycle [of frozen credit]" by "helping to provide auto loans, college loans, and small business loans to the consumers and entrepreneurs..."

The significance of Volcker's Columbia comments becomes clear when one considers his broader political role, in particular the respect Volcker commands among bourgeois economists as the senior ruling class "enforcer". Apparently aware that Volcker would relish the opportunity to "tell it like it is", Columbia University president, Lee Bollinger, introduced Volcker as having "a special place in the history of this country and of the world as... being a person who provided leadership at a critical moment and was able to see things and say things clearly, even when [people] did not want to hear them."

The leadership that Bollinger praised was Volcker's anti-inflation, interest-rate policy while Fed chairman between 1979 and 1987, a policy designed to produce mass unemployment and real wage declines. The result was the deindustrialisation of the US economy and a massive increase in the national and global role of the US financial sector.

Twenty years after leaving the Fed to chair a Wall Street investment bank, Volcker continues to render an important service to the ruling elite. He not only retains elder-statesman status, but can be put forward by the Obama administration, disingenuously, as "old-school", a sane voice from a time before financial engineering and securitisation. Broadly speaking, the decline in stocks of former Fed Chairman and free-market high priest Alan Greenspan, have set the stage for Volcker's resurrection as sober pragmatist: the ultimate bank manager. The Obama administration can associate itself with a safe critic of what Volcker calls "financial alchemy", that is, the mechanisms through which the global financial system became a giant Ponzi scheme built on recycled debt.

In this vein, Volcker told the Columbia gathering that "I think there's... a behavioural personality kind of aspect which should not be overlooked. We went from banks to the open market, and in the process we went from a financial system that was largely, not entirely, devoted to what might be called relationships..... You went to a very impersonal kind of market where there was no real customer relationship—everything was a deal..."

Volcker went on to suggest that "the most important financial innovation in the past 20 or 30 years for the average person" was not any "high-class financial operation" but the ATM. "I have more connection with my automatic teller machine that any other part of the financial market."

Finally, Volcker offered his thoughts on the new forms of international financial regulation that must be established: "All banks must be supervised and regulated, but those of systemic significance around the world, which, almost inevitably... are international, they're not just national, will be subject to a particular layer of supervision."

This commentary is pure opportunism. Suddenly, in the face of what appears to be the greatest economic crisis in world history, it becomes conventional wisdom among Volcker and his colleagues to label the last 30 years a giant mistake. Did they ever say this before 2008? In any case, Volcker's attack on financial engineering and his concomitant call for smarter regulation beg the question: what does any of this add to the resolution of the deep global contradictions that even on Volcker's reading are the real cause of the crisis? What does it add to the plans for "recovery"? Indeed those are questions raised by Volcker's own observation that financial engineering has played a secondary role: "I think the very rapid and sweeping changes we've had in financial markets in recent decades helped prolong the imbalances in the real economy but in a very overall way."

Although Volcker's call for finance sector regulation does nothing to address the crisis itself, it still serves an important political function: to distract from the fact that, on Volcker's own estimation, not even the world's experts have a clue. The purpose of the regulatory talk is to promote the illusion that the policy-makers in power and bourgeois economists more generally can exert rational control over the global system and that, despite that system's breakdown, the crisis will be resolved by the clever tweaking of national governments and by patience on the part of the public.

The outbreak of honesty at Columbia on February 20 contrasts starkly with Volcker's appearance before the Senate Joint Economics Committee just six days later. Columbia's plain-speaker had been replaced by Volcker the bank manager, delivering the Obama administration's message that the economic situation, although serious, would tamed by men like Volcker. Things had to be toned right down: "We are living in a difficult time for the economy". Here was a plain demonstration of the political role played by bourgeois economics.

But the Senate appearance also demonstrates the difficulties faced by Volcker and his associates. It became clear as Volcker's testimony progressed that, far from delivering a serious report about economic policy, Volcker had come to talk about a futuristic international regulatory landscape. Like a new civilisation rising up after a nuclear winter, the new regime would forestall poor risk management and the excesses of securitisation. In particular, it would "help assure [the] stability and continuity [of banks] and limit potential conflicts of interest, strong restrictions on risk-prone capital market activities—hedge funds, equity funds, and proprietary trading—would be enforced." In order for this to happen there needed to be "strong cooperation and coordination among national authorities and regulators."

Volcker's testimony produced a revealing exchange.

So are any of these international discussions going on at the moment? asked Rep. Ron Paul "No," said Volcker, fiddling with his pen and avoiding eye-contact. "I don't know of any coherent or regular discussions going on officially, and very few unofficially in terms of the construction of the monetary system.... The questions that you raise are relevant questions."

And what about the underlying issues? The global imbalances? Can we "patch together" the international monetary system? asked Paul. "Well", Volcker giggled, "I think there are problems with the present international monetary system which have not received sufficient attention. And I think I will leave it at that." The Congressman: "Isn't that ducking it a little bit?" Volcker: "I agree!"

As Volcker all but concedes, there is no real prospect of the current crisis being solved by international co-operation. Indeed, the trajectory of the crisis so far—mounting protectionism, support for national banks at the expense of foreign institutions—points in the opposite direction.

US bank regulator retires amid fraud scandal

US bank regulator retires amid fraud scandal

By Barry Grey

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On February 27, Darrel W. Dochow quietly retired from his job at the US Treasury Department's Office of Thrift Supervision. Over more than two decades, Dochow compiled a record as a bank regulator that epitomizes the corrupt relationship between government agencies and the banks they nominally police that has played a significant role in the financial collapse and resulting global depression.

Dochow was removed from his post as West regional director of the Office of Thrift Supervision last December after an investigation by the Treasury Department's Inspector General's Office found that in May of 2008 he had allowed IndyMac Bank of Pasadena, California to falsify its financial filings with the government in order to conceal the bank's perilous capital position. Two months later IndyMac, which specialized in high-risk, high interest home loans, collapsed after a run on the bank by depositors and was seized by the Federal Deposit Insurance Corporation, at an estimated cost of $9 billion to US taxpayers.

At the time the third biggest bank failure in US history, the IndyMac collapse wiped out an estimated $300 million in depositors' savings. By colluding with the bank's management to conceal its losses and continue luring investors and ordinary depositors with high interest rates, Dochow helped raise the ultimate cost of the bailout by perhaps billions of dollars and increase the losses suffered by depositors by many millions.

Dochow continued to draw his lucrative salary even after he was removed from his high-level position. According to government reports, he earned $230,000 in 2007. A March 5 report by ABC News on Dochow's retirement concluded, "Dochow is not expected to go to prison."

At the time of the IndyMac collapse, depositors were enraged when they learned that two decades earlier Dochow, then head of supervision and regulation at the Federal Home Loan Bank Board in Washington, had intervened to veto calls by regional regulators to investigate Irvine, California-based Lincoln Savings & Loan.

Lincoln collapsed in 1989 with losses of $3.4 billion, making it the biggest of more than 700 thrift institution failures in the late 1980s and early 1990s that ultimately cost taxpayers over $130 billion in a government bailout and wiped out the life savings of tens of thousands of families. Lincoln's CEO, Charles Keating, went to prison in the biggest financial scandal in US history—until the current crisis.

Dochow was eventually demoted but then worked his way up through the ranks of the Office of Thrift Supervision, which replaced the Home Loan Bank Board, and was promoted in September of 2007 to the top position at the agency's western division.

After the IndyMac failure, the Office of Thrift Supervision categorically defended Dochow. Its spokesman declared, "The OTS has the highest confidence in Regional Director Darrel Dochow. Any attempt to draw parallels between the events of 2008 and two years ago is a stretch, at best. There is no valid comparison."

Among other failed banks that Dochow supervised were the giant subprime mortgage lender Countrywide Financial, Downey Savings & Loan and Washington Mutual. The latter, the sixth largest bank in the US, was the biggest bank failure in American financial history. It occurred in September of 2008, two months after the IndyMac collapse, while Dochow was still in charge.

IndyMac was a spin-off of Countrywide Financial, initially headed by Countrywide's founder and long-time CEO Angelo Mozilo. Until the collapse of the housing bubble, it raked in profits and gave investors high returns by marketing so-called "Alt-A" home loans, otherwise known as "liar loans" because they required no documentation of the borrower's income or assets.

Last December, the Treasury Department's inspector general, Eric Thorson, sent a letter to members of Congress summing up his findings on Dochow's role in the IndyMac failure. He explained that in a telephone conference call in May of 2008, Dochow approved IndyMac's request to backdate a just-received cash infusion of $18 million from its parent company to the end of March. The purpose of this bit of accounting fraud was to enable the bank to file a first-quarter report with regulators that would show the bank having, as of March 31, sufficient reserve capital to obtain a "well-capitalized" rating.

Without such a rating, the bank would be prohibited from gathering deposits through brokers who funnel money from investors around the country. IndyMac was heavily reliant on such funds, and without them it faced imminent collapse. With Dochow's blessing, IndyMac filed a false first-quarter report and retained its "well-capitalized" rating.

It is a crime to knowingly make false statements in the financial records of a public company.

The Washington Post reported December 23 in an article on Thorson's letter to Congress that Dochow's machinations with IndyMac went further. "At another point last spring," wrote the Post, "Dochow limited the scope of a review by OTS regulators of IndyMac's portfolio of loans and other assets, overruling the advice of others in the agency, according to a source with knowledge of the incident."

In its March 5 report on Dochow's retirement, ABC News said: "In at least one instance, investigators say, banking regulators actually approached [IndyMac] with the suggestion of falsifying deposit dates to satisfy banking rules—even if it disguised the bank's health to the public."

In his letter, Thorson said the Office of Thrift Supervision—which is financed from fees paid by the institutions it supervises—allowed other banks besides IndyMac to make similar revisions to financial statements, although the letter gave no details of other examples. The Washington Post article from December reported that when asked at a briefing with members of Congress "whether he would describe the problem as ‘systemic,' Thorson responded, ‘Yes,' according to a congressional aide who attended the briefing."

Certain questions immediately arise from this litany of official corruption and criminality. How was it possible that an individual compromised in the Lincoln Savings & Loan scandal could reemerge in a top regulatory position? Why have Dochow's machinations been given so little media attention? Why are Congress and the Obama administration refusing to sound the alarm and conduct serious public investigations and criminal prosecutions of those involved in "systemic" fraud?

The basic answer is that Dochow is not an aberration, but rather one example of financial fraud and government collusion that are pervasive in the US economic and political system. Three decades of banking deregulation, carried out by both Democratic and Republican administrations in order to facilitate a growth of financial parasitism and the enrichment of a financial aristocracy, have transformed government regulatory agencies into facilitators of criminal activity.

The real role of agencies such as the Office of Thrift Supervision and the Securities and Exchange Commission (SEC), whatever their official mandates, is to aid and abet the redistribution of wealth from the bottom to the top of society and run interference for the big banks and financial interests. Their leading personnel are selected accordingly. Dochow was promoted to oversee banks on the West Coast because his record proved his suitability for this job.

There is, moreover, a well-established revolving door between bank regulatory agencies and Wall Street, with regulators using their government positions as a stepping stone to landing plum jobs in the private sector with seven-figure compensation packages.

Other recent cases of financial fraud on a gigantic scale exemplify the same corrupt relationships. Billionaire Texas businessman Robert Allen Stanford, charged by the SEC last month with operating a $9 billion Ponzi scheme, was able to operate with impunity for years because he enjoyed the support of top politicians from both parties, to whose campaign coffers he contributed $1 million—78 percent of it going to Democrats. The Washington Post last month quoted an SEC official in Fort Worth, Texas who reported that after beginning an earlier investigation into Stanford's suspicious investment schemes, "the SEC ‘stood down' at the request of another federal agency."

Bernard Madoff, a Wall Street "legend" and former head of the Nasdaq Stock Market, who is expected to plead guilty today of running a Ponzi scheme that collapsed last December, with losses estimated by the government at $65 billion, was shielded for years by the SEC and other regulators. Since 2000, he has given at least $100,000 to the Democratic Senatorial Campaign Committee and more than $23,000 to the party's candidates, including New York Senator Charles Schumer, the chairman of the Joint Economic Committee of Congress.

Beginning in 1999, Harry Markopolos, an executive in the securities industry, repeatedly urged the SEC to investigate Madoff. "Madoff Securities is the world's largest Ponzi scheme," he wrote in one letter to the SEC. Other investment firms steered their clients away from Madoff.

The SEC, which had investigated and cleared Madoff in 1992, refused to intervene. On the contrary, Madoff was appointed to a committee of academics, regulators and executives formed in 2000 by then-SEC Chairman Arthur Levitt to advise the agency on new stock market rules in response to the growth of electronic trading.

The immense power of financial moguls like Madoff was underscored in congressional testimony by Markopolos last month. The whistleblower said he feared for his safety during the years he sought unsuccessfully to convince regulators to investigate Madoff's operations. "We knew that he was one of the most powerful men on Wall Street," he said, "and in a position to easily end our careers, or worse."

At a business roundtable meeting in 2007, Madoff boasted of his "very close" relationship with regulators, chuckling as he added, "In fact, my niece even married one."

Naval incidents highlight tense US-China relations

Naval incidents highlight tense US-China relations

By John Chan

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A series of naval scuffles over the past week involving US and Chinese vessels has provoked a sharp spike in tensions between the two countries. While the issue was played down in talks yesterday in Washington between US Secretary of State Hillary Clinton and Chinese Foreign Minister Yang Jiechi, the incidents underscore the potential for underlying frictions to flare up dramatically.

According to the Pentagon, the incidents began last Wednesday when a Chinese fishing patrol boat used a high-intensity spotlight to illuminate the USNS Victorious, a surveillance ship operating in the Yellow Sea. The following day, a Chinese Y-12 maritime surveillance aircraft buzzed the vessel 12 times, flying overhead at an altitude of just 120 metres.

Another American ship, USNS Impeccable, operating in the South China Sea off China's sensitive Hainan Island has also been involved. The US military claimed last Thursday that a Chinese frigate approached the Impeccable without warning and crossed its bow, passing within 90 metres. Two hours later, a Y-12 aircraft buzzed the ship at low altitude. On Saturday, a Chinese vessel radioed the Impeccable, telling it to leave or "suffer the consequences".

The most serious incident took place on Sunday. Again by the Pentagon's account, five small Chinese vessels "shadowed and aggressively manoeuvred in dangerously close proximity" to the Impeccable in an apparent attempt to drive it out of the area. The crew of the US ship responded by using fire hoses to spray the Chinese ships. The Impeccable was forced to stop in order to avoid a collision after two Chinese ships blocked its route and threw debris into the water.

In testimony before the Senate Armed Services Committee yesterday, US Director of National Intelligence Dennis Blair described the confrontation as the "most serious" military dispute between the countries since a midair collision in 2001 that led to the death of a Chinese pilot and forced an American surveillance plane to land on Hainan Island.

Pentagon spokesman Stewart Upton declared: "Chinese ships and aircraft routinely steam or fly near US navy ships in this area. However, these actions were considerably more aggressive and unprofessional than we have seen, and greatly increased the risk of collision or miscalculation." He insisted that all US navy ships have been operating in international waters.

Chinese authorities have not provided details of the incidents, but have accused the US ships of spying on key military facilities on Hainan Island, which include a major naval base with underground submarine pens. Moreover, Beijing insists that such intelligence gathering activities are banned under international law within China's Exclusive Economic Zone, which extends 200 nautical miles from its coastline. The Impeccable was about 70 nautical miles south of Hainan Island. The US is not a signatory to the international law of the sea, but disputes China's interpretation.

US defence analysts acknowledge that the Impeccable was engaged in tracking Chinese submarines, possibly including the new Shang-class nuclear-powered attack submarines. The International Herald Tribune reported a US Navy photo showed a Chinese sailor using a long pole to try to snag a cable used by the Impeccable to tow an underwater listening device.

The head of US Pacific Command, Admiral Timothy Keating, told reporters last month that the US was considering a code of naval conduct with China to avoid confrontations. At the same time, however, he expressed the Pentagon's growing concerns about China's naval build-up. Noting that 65 of the 200 submarines operating in the Pacific were Chinese, Keating said: "We want to understand why the Chinese feel compelled to develop underwater capability to the extent that they are... Their submarines do not keep me awake at night but we are watching with great interest Chinese submarine development."

For decades, the Chinese navy was in no position to challenge the US. In recent years, however, China has been expanding its fleet of destroyers, frigates, amphibious assault ships and submarines, supported by long-range aircraft and missiles. While still much weaker than its American counterpart, the Chinese navy is becoming more sophisticated. In 2006, a Chinese submarine caused a stir in US defence circles by suddenly surfacing near the American aircraft carrier, the USS Kitty Hawk, after approaching undetected. China also has plans to build its own fleet of aircraft carriers.

The Obama administration has made certain conciliatory gestures toward China. Hillary Clinton's first foreign tour as Secretary of State was to Asia, including China. Even as rivalry continues, the economies of the two countries are closely intertwined. US corporations rely on China as a huge cheap labour platform and China depends on the US as a major market for its goods. Clinton urged Beijing to continue to use its huge foreign reserves to buy US bonds—and help prop up the debt-laden American financial system.

Despite these moves, tensions have never been far below the surface. In January, prior to his installation, Treasury Secretary Timothy Geithner provocatively accused China of "manipulating" its currency—an accusation that, if acted on, could result in punitive trade measures under US law against China. Sections of the Democratic Party are already beginning to stir up protectionist sentiment, particularly aimed against China, as a means of deflecting social discontent at home.

The naval incidents, however, come somewhat out of the blue. During her trip, Clinton announced the restoration of mid-level military exchanges between the two countries, which were cut last October when the Bush administration proceeded with a $6.5 billion arms sale to Taiwan. Just one week after the two countries resumed formal military discussions, the US-China naval confrontations began.

Behind these tensions are more fundamental geopolitical shifts driven by the declining economic power of the US and the rapid rise of China as a potential challenger to American interests in Asia and internationally. China's demands for raw materials and energy to provide for its huge manufacturing industries has forced it further a field into the Middle East, Central Asia, Latin America and Africa, and fuelled rivalry with the established powers—above all, the US.

Not accidentally, the conflicts have emerged in the naval sphere, where the strategies of the two countries are sharply at odds. Since World War II, American strategists have regarded the Pacific Ocean as an American lake. The US deployment of military forces in Japan, South Korea, Guam and the Philippines was part of the Cold War containment of the Soviet Union and China. At the same time, US control of the major sea lanes, particularly from the oil-rich Middle East, served in part to ensure that Japan could not re-emerge as a major threat to US interests.

China is acutely conscious that US control of the major sea lanes is also a threat to its vital supplies of raw materials, particularly oil and gas. Beijing's decision to build a blue water navy as well as a series of ports—known as the "string of pearls"—from the Middle East through South East Asia is aimed at protecting these key strategic routes. At the same time, China confronts challenges from Japan, the main US ally in Asia, to its sovereignty over the Diaoyutai Islands (known in Japanese as Senkaku) in the East China Sea, and has longstanding disputes in the South China Sea with Vietnam and the Philippines over the Spratly and Paracel islands and surrounding waters.

It is not surprising if the Chinese military irritated by the presence of American spy ships not far off its coastline decided to take a more assertive stance. Its decision in January to dispatch two destroyers to protect Chinese vessels off the coast of Somali from pirates was a sign that Beijing intends to use its growing military muscle to defend its economic and strategic interests. However, as in the case of the anti-piracy operation, China has generally calibrated its moves quite carefully so as not to provoke a military confrontation, particularly with the US.

For its part, the Obama administration has not backed away from President Bush's efforts to contain China through a series of strategic alliances and basing arrangements, stretching from Japan and South Korea through South East Asia and Australia to the Indian subcontinent, Afghanistan and Central Asia. Within the American political establishment, while tactical approaches vary, there is a general consensus that China is emerging as a major challenge to US interests.

Among the most militarist layers, the view is that the US will have to confront China. A study published by the right-wing American Enterprise Institute in January asserted: "The minimal aim of American strategy must remain what it has been for the past century: to preclude the domination of Asia by any single power or coalition of hostile powers. This is necessary to prevent others from threatening our security and prosperity through any attempts to control the region's resources, form exclusive economic blocs, or deny our physical access to and through Asia." The think tank concluded that the most likely "hostile power" was China.

An editorial in the Wall Street Journal on Tuesday took a particularly belligerent attitude to the naval confrontation on Sunday, stating: "The incident with the Impeccable is another reminder that China's ambitions for regional dominance, and for diminishing US influence, remain unchanged despite a new American administration." The newspaper continued: "Next time the Impeccable sails in these waters—and for the sake of responding to China's provocation it should be soon—President Obama ought to dispatch a destroyer or two as escorts."

What the US-China naval skirmishing has revealed is a tinderbox of economic and strategic rivalries in Asia and internationally, made even more combustible by the deepening global recession. The danger is that any, even insignificant, incident has the potential to produce a far wider conflict, irrespective of the initial calculations of the protagonists involved.

The Upcoming Political Crisis in Washington

The Upcoming Political Crisis in Washington

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In recent days we have seen even mainstream Democratic figures as Joe Stiglitz and Paul Krugman sound the alarm on what seems to be uncertainty in the Obama administration. Stiglitz, Krugman et al. are following in their essential critique a path well worn over the past few weeks by a range of commentators to be found as much among the Austrians as those on the liberal-to-left part of the spectrum. The fundamental point is, of course, that it is now clear to all but the militantly unreflective that Obama can – perhaps - save the Real economy or - perhaps – save Finance (i.e. Bank bond- and shareholders), but certainly not both. The increasing, but still relatively gentle, criticism of Stiglitz, Krugman and their ilk is owing to the fact that it is becoming all too clear that Obama is still unwilling to engage Finance in what might turn out to be the greatest intramural fight capitalism has ever seen.

As always with the all-things-to-all-people Obama, it is possible to sift through his recent speeches and find words of comfort (to those who opt for saving the economy rather than Finance) even as the Fed, FDIC and Treasury keep pouring out trillions to Finance. Further, in areas as critical as civil liberties and Empire, Obama has managed to speak out of both sides of the mouth in a manner seldom if ever seen in history and – so far – to avoid the messes that usually come with that. [Examples: the U.S. upping the ante with Africom’s new adventures, with forces moving further afield into S. Lanka, B’Desh and yet simultaneously getting brownie points for half a dozen nice words about speaking to Syria; doing all that is needed - including an unsavory folding before Rove - to maintain all of Bush 43’s assertions of unrestricted executive power, while heightening the rhetoric about a new dawn of American Values; opening to Iran, but appointing Dennis Ross as the new U.S. legate, etc.]

That the vast majority of citizens of the U.S and of its principal tributary nations are generally unconcerned about the expansion of liberal militarism, unless it is unsuccessful or impacts their standard of living negatively, and have no problems with dictatorial presidential power, unless it hurts them directly, is evidenced by the fact these and related issues were non-starters in the last electoral round. The Battle of the Bailout is different for one brutally simple reason: there is simply too much at stake for the two rival formations of capitalist power to come up with the usual compromise solutions that have seen unity in the face of past challenges.

The devil is in the details and while there is a surfeit of sets of details any one of which makes for fascinating reading, a look at the big picture as regards the politics of the Crisis is in order. If Finance is saved at the cost of further trillions of a publicly funded bailout, it will be in a position of almost unimaginable strength as far as the further consolidation of ownership of the US (and world) Real economy. Therefore, it is hard to see how non-Finance capital can possibly be enthusiastic about allowing these rentier interests to acquire at bargain-basement prices great swaths of their various industries. At the time of writing, market capitalization of several Fortune 500 firms is being pummeled by the very crisis that Finance - as proximate cause, pace Marxist friends - has triggered. On February 20, 2009, GM, admittedly on the verge of bankruptcy, had a market capitalization of less than $1 billion. It doesn’t take much foresight to see what the vulture brigade of Finance would make of this unique conjuncture. Likewise, the sense of outrage that non-Finance capital feels at the prospect of the crisis being exploited so mercilessly by the very forces that caused it is an additional guarantor that acquiescence is just not in the cards. The Rubin Gang around Obama may intone as menacingly as it likes the promise that failure to bail out Finance will lead to the end of capitalism and the American Way of Life, but this time it’s not going to fly.

(Let it be noted in passing that such warnings delivered by one side of the mouth are and will continue to be accompanied by sad songs from the other about, e.g., the transfer of wealth from poor to rich that has occurred in the past few decades [engineered thanks largely to the Rubin Gang itself, of course.])

The contours of the upcoming political battle are not yet clear: each side will use its surrogate experts, agitators and useful idiots, but the very gentleness of the Stiglitz/Krugman warnings are an indication that such as they still hope that mortal combat may be avoided. This is, of course, pure fantasy. These two groupings, acting in concert, are the force that has given us a) the national security state, b) multiple armed interventions, covert and front-door, from Guatemala and Greece, to Iraq, Pakistan and fill in the blank, all the while building an executive power that Augustus would have envied, so neither of them are going to be put off by the prospect of political conflict. More important, they both know the real score: the bailout of Finance will debase the integrity of U.S. economic and political power, and by consequence, that of the entire capitalist world that has come to depend on the U.S. as the last line of defense against chaos. So in that sense the long-mooted euthanasia of the rentiers is the “right” prescription and will be seen as so by both the leaders of the “Real” economy and by the public at large, save those who remain unable to distinguish between Bailout and Stimulus. But the genesis of the crisis itself reveals the stark truth about the actual existing balance of power: the controlled bubble-bust economy of the past two decades is not simply the core engine of growth for world capitalism; far, far more importantly it is both the result of and the ongoing reinforcement of the political and intellectual hegemony that Finance has built up before and during that time.

No hegemonic power has ever willingly given up its position of dominance and there is no reason to suppose that the forces that paid for and orchestrated the Washington Consensus through use of the U.S. state - i.e. the power that backed it up - will be the first, though Stiglitz and Krugman are to be commended for suggesting that they do just that.

Former Accused Iraqi Agent - Susan Lindauer, Secret Charges and The Patriot Act in Action

Former Accused Iraqi Agent - Susan Lindauer, Secret Charges and The Patriot Act in Action

by Michael Collins

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'Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country."
- Herman Goering, Interview at Nuremburg Trials, April 14, 1946

"The Patriot Act was used against me in total contradiction to its stated purpose. Or perhaps it was the most logical use of the law, since it establishes a legal framework to crush free thinking and interrupt individual questioning of the government. It is the beginning of all dictatorship in America."
- Susan Lindauer, March 9, 2009

In March, 2004 Susan Lindauer was arrested for allegedly acting as an "unregistered agent" for prewar Iraq. She challenged the government's assertion and sought the right to prove at Trial that she'd been a United States intelligence asset covering Iraq and Libya from the early 1990's through 2003 (see articles).

In an unprecedented judicial ploy that lasted five years, federal prosecutors blocked Ms. Lindauer's rights to trial or any other sort of evidentiary hearings that would test her story. For 11 months, she was confined at Carswell federal prison on a Texas military base and at the Metropolitan Correctional Center in Manhattan, without a conviction or plea bargain.

During the indictment, she was conveniently gagged from sharing her direct knowledge of Iraqi Pre-War Intelligence, which she gained as a primary asset covering the Iraqi Embassy at the United Nations from August, 1996 onwards. She was also silenced from talking about the advance warning she gave the Office of Counter-Terrorism and U.S. Attorney General John Ashcroft's private staff in August, 2001, about possible airplane hijackings and a reprise of the 1993 World Trade Center attack.

But there was more than the Sixth Amendment's "right to a speedy trial" at stake.

Lindauer was one of the first citizens charged under special judicial provisions of the Patriot Act. The exceedingly complex legislation, emerged from the desk of John Yoo just days after the 9/11 attack. It passed the House 357 to 66 and the Senate 98 to 1. The Patriot Act eviscerated long standing Constitutional protections. It fundamentally altered how trials are conducted whenever provisions of the act are invoked in a court of law.

Lindauer's indictment was the one of the first test drives of the Patriot Act for the Bush-Cheney Department of Justice. Her nightmare officially ended five days before the Obama Inauguration, when the prosecution dropped the case "in the interests of justice."

In the current interviews, Susan Lindauer explains how the Patriot Act was used to quash her most fundamental rights of due process, which would otherwise have empowered her to repudiate the indictment and protect her reputation.

United States Department of Justice Criminal Resource Manual (Classified Information Procedures Act and FISA) Summary and original source

Secret Evidence is Slowly Eroding the Adversary System: CIPA and FISA in the Courts. Ellen Yaroshefsky, BenjaminN.CardozoSchool of Law Summary and original source

Susan Lindauer Interviews by Michael Collins

Michael Collins: Not many people know that you were arrested under provisions of the Patriot Act. You were one of the fist U.S. citizens to experience the brutality of this legislation. How did it shape your case and treatment in the Courts?

Susan Lindauer: That's right. Along with Jose Padilla, I will go down in history as one of the first and only non-Arab Americans ever indicted on the Patriot Act during the Bush Administration.

I believe that my case demonstrates why the Patriot Act should be repealed immediately to safeguard our country and our freedom.

I have always opposed war and advocated diplomacy to solve conflicts. The indictment accused me of "acting as an unregistered Iraqi Agent," on the grounds that I delivered a letter forecasting the failure of the Occupation to my cousin, Andy Card, Chief of Staff to President George Bush. That's what used to be known as Freedom of Speech. The letter was not hostile or threatening. In fact, it proved tragically accurate. That did not matter to the Justice Department. Vocalizing opposition to Bush policy was treasonous. End of discussion.

Collins: What happened when you got to court?

Lindauer: Once I got to Court, I discovered that the indictment also contained two "secret charges," gratis of the Patriot Act. My attorney and I were given the dates for the two allegations, saying that I attended meetings with Iraqi officials in October, 1999 and October, 2001, but nothing more to explain what I had allegedly done wrong.

There was nothing unusual about the fact that those meetings had occurred. I visited the Iraqi Embassy at the United Nations about every three weeks for 7 years. My handlers were fully informed, which explains how the government could have been tracking the dates in the first place. They got the dates from me.

"a. On or about October 14, 1999, Susan Lindauer -- met with an officer of the Iraq Intelligence Service ("IIS") in Manhattan.

"c. In or about October 2001, SUSAN LINDAUER -- accepted a task given to her in Manhattan by an officer of the IIS." USA v. Lindauer. S2 03 Cr. 807 (MBM)

No, the government was claiming that something unusual took place during those specific meetings. Under the Patriot Act, the Prosecution was not required to tell us what those offensive actions were. Nor was the Court allowed to tell us what type of laws might have been violated by those actions.

We were only told that conviction on either of the "secret charges" would get me five years in federal prison.

Collins: Please help readers understand more about "secret evidence." Were you and your lawyer denied access to evidence, because it was considered "secret" or "classified"? How did this work under the Patriot Act?

Lindauer: It's unbelievable, isn't it? As if "secret charges" were not terrible enough, there was also "secret evidence" which could be applied to those "secret charges."

The Prosecution had the right to ask a jury to convict me of those two undisclosed charges without revealing a shred of evidence to support the charges whatsoever. The Patriot Act authorized the prosecutor to ask a jury to "take it on faith" that some unspecified evidence would prove that some unspecified law had been broken.

If a judge so instructed before deliberations, the jury could be required to ignore the lack of presentation of evidence in weighing whether to convict me. The Judge could simply instruct a jury that the Justice Department regarded the evidence as "sufficient" to constitute a crime and that would be "sufficient knowledge" for their review. That kind of instruction practically requires a jury to convict a defendant.

The fundamental question of "guilty beyond reasonable doubt" is shattered. To say the least, it drastically undercuts protections in the jury system of the United States.

Conversely, evidence that might exonerate me, and prove my innocence, could be considered "secret and classified" as well. My attorney and I could be prohibited from knowing of its existence or using it in my defense. Even if that evidence or witness statements tossed out the whole case, and saved me from years in prison, I would not be entitled to know of its existence or present it to the jury.

Collins: This sounds like Franz Kafka's "The Trial" combined with the Queen of Hearts in "Alice in Wonderland." How did you conceptualize your experience at the time?

Lindauer: The outstanding blog, Welcome Back to Pottersville published a headline that I loved: Franz Kafka, Meet Susan Lindauer.

Oh yes, I was floored. I know the Constitution. I cherish it, in fact. I could not believe such a thing would happen to somebody like me, with my education from Smith College and the London School of Economics, and all of my community resources. I mean, if the government could do this to somebody like me, what could they do to somebody who has nothing? It's a frightening thought.

Above all, I despised the Assistant US Attorney, Edward O'Callaghan, who prosecuted my case. Numerous times I correctly told the Court that the FBI had verified my story and Mr. O'Callaghan was falsifying his claims about the availability of witnesses to authenticate my story. He flat out lied about my identity and activities to a senior federal judge. I mean, come on. We interviewed those witnesses, too. We know what they told the FBI.

And so I kept challenging the Court that nobody had to take my word for anything. I challenged the Court to subpoena the witnesses and question them directly under oath. For FIVE YEARS, I told the Court that all questions could be cleared up in ten minutes, with a simple pre-trial evidentiary hearing.

(Part three of this interview focuses on that issue.)

Collins: Back to the "secrecy rules," How did those work in trial preparation?

Lindauer: Within the category of "secret evidence," the law pretends to establish a safeguard for defendants by allowing two levels of secrecy.

Under the main category of secrecy, both the attorney and defendant are prohibited from laying eyes on evidence or witness statements. The Prosecutor always retains the right to deny access on the grounds of national security.

A sub-section of the Patriot Act allows the defense attorney to petition the government for a security clearance in order to review some parts of the "secret evidence." In reality, the process drags out for many months, while most defendants languish in prison waiting for trial. (And because the case involves the Patriot Act, they're frequently detained in solitary confinement.) Getting clearance can take six months to a year, costing the Defense valuable time to review the evidence or plan a rebuttal.

A security clearance does not automatically guarantee access to evidence, however. Depending on their backgrounds, different attorneys qualify for different levels of security clearances. For example, an activist attorney with a history of pro bono cases involving the ACLU or something equally subversive, like Greenpeace, might qualify for a very low security clearance, because their career choices and previous cases might be perceived to threaten the State. So one attorney might have more or less access to secret evidence than another. But you can't know until the security clearance review is completed.

Hope is vain, however. That safeguard is mostly irrelevant and procedural.

To illustrate that point, in five years under indictment, I had two separate attorneys with very different levels of security clearances, including a former federal prosecutor, the outstanding Mr. Brian Shaughnessy of Washington, DC, who regularly handles the most high level and complicated security cases. Neither attorney was ever able to determine what those two "secret charges" were. Neither attorney ever saw the "secret evidence."

More disturbingly, the attorney is strictly prohibited from revealing any part of that "secret evidence" to the Defendant. The Defendant cannot see it or know about it, and therefore cannot provide an effective response to the attorney to rebut it. Thus, ironically, the Patriot Act handicaps the defendant's ability to assist in the preparation of their Defense strategy.

Thus, it renders the Defendant INCOMPETENT TO STAND TRIAL.

Ah, the plot thickens.

Collins: It does in a very major way. What actions could be so serious as to deny your constitutional rights? Did you ever figure out what those "secret charges" might have been? Surely you know what you were doing in October, 1999 and October, 2001.

Lindauer: Oh yeah. And I'll bet your readers think those accusations must be very serious! Wouldn't you think? I must have done something far too horrible for the government to whisper aloud! Wanna bet?

In five years, we could only guess about those two charges. We surmised that in October 1999, I was indicted for blocking the Iraqi Government in Baghdad from making financial campaign contributions to the George W. Bush Presidential Campaign.

That's right. With immediate assistance from my U.S. Intelligence contacts, I stopped Iraq from making illegal campaign contributions to the 2000 Bush Election campaign--at least through my channels.

We have speculated that perhaps Saddam gave money to the Bush Campaign in 2000 through somebody else and some other channel. And the Republicans don't want anybody to know about it. Perhaps I was indicted to stop the Democrats from investigating campaign contribution records.

Consider that Andy Card was warned of Iraq's attempts in two progress reports on March 1, 2001 and December 2, 2001. The Republican leadership that attacked me was very much aware that this question of illegal campaign contributions was hanging out there. And I was indicted for stopping it from happening.

Collins: What about the second "secret charge"?

That was allegedly in October, 2001. We're still in the dark on that one; however, we think it involves my efforts to collect health statistics from Baghdad regarding depleted uranium left behind by the United States in the first Gulf War.

Depleted Uranium has resulted in a spike in Iraqi birth defects and cancer rates from long-term exposure. They say Iraqi children suffer cancer "like the flu," it's so common.

Tragically, exposure to depleted uranium might seriously harm American soldiers and their future unborn children, too! I suspect it will become a major health risk for soldiers who return from repeated tours of duty in Iraq. When they start having families back home, we're going to hear about this.

That's probably all it took to categorize the documents as "secret evidence" and "secret charges." They didn't want my case to raise the profile of that health risk for Americans in Iraq. None of that health information was ever returned to me in discovery.

For knowing something so unpleasant about the government's responsibilities, the Justice Department actually wanted me to serve five years in prison. It's unbelievable.

Collins: It must have been terrifying. The government figuratively tied you to a chair and challenged you to a 15 round boxing match. Did you ever consider pleading guilty to stop the beating?

Lindauer: Never! I'm a helluva boxer myself, Mike! They must have been surprised to find I could go 15 rounds. I'm strong and tenacious to this day!

No, I had my entire legal strategy mapped out in the first couple of hours after my arrest. I could see mistakes in the indictment, and I quickly identified which witnesses and evidence would be necessary to repudiate the whole lot.

My witness list was outstanding. It included international attorneys from the Lockerbie Trial, former Congressional staffers, even a couple of international journalists. One of Scotland's finest Solicitors, Edward MacKechnie, who won acquittal for his Libyan client in the Lockerbie Trial, immediately promised to travel at his own expense to testify for me as to the identity and credentials of Dr. Richard Fuisz, my CIA handler. I have the emails to prove it. His participation was beyond dispute.

There was no question that I had an outstanding defense. What's more, I have outstanding bona fides to go with it. I took perverse satisfaction in knowing that once the jury received witness corroboration of my extensive credentials dealing with Libya and Iraq, Yemen, Egypt, Syria/Hezbollah and Malaysia for 9 years from 1993 to 2002, they would be appalled by the prosecution's arguments to convict me.

Any jury would recognize that I had legitimate reason for participating in the 9/11 investigation as a "first-responder," not to mention that I'm one of the few individuals who openly warned about 9/11 for several months before the attack. I still think a New York jury would have applauded me.

The public just didn't know who I was-- yet-- or the extensive work that put me on the cutting edge of anti-terrorism for so many years.

That would change with witness testimony at trial. It would not be boring.

Collins: What was your reaction to getting arrested in March, 2004?

I was disgusted and perversely amused. At my home, while FBI agents were handcuffing me, I asked what I was charged with. That's a natural question when FBI agents come pounding on your door.

They wouldn't tell me. That's the Patriot Act for you. The arresting FBI agent said that I could read the indictment when I got to Baltimore-- Not Washington D.C. or Greenbelt, Maryland, which are 15 minutes from my home. They processed me in Baltimore, a city that's 45 minutes away and out of the sphere of Washington media. All through the drive, the FBI agent only told me that I would be extradited to New York. I had no idea why I'd been arrested at all.

When I finally got to read the indictment, I was purple with outrage. After 9 years of hard work and devotion to Anti-Terrorism as an Asset for the U.S. government, I was now accused of acting as an "unregistered Iraqi agent" and "conspiracy with the Iraqi Intelligence Service." Oh My!

I told the arresting FBI agent, "This is bullshit. This is political. You want me out of the way so you can lie about Iraq and 9/11 during the (2004) election."

Collins: You were arrested in March 2004, when President Bush was locked in a tight race with John Kerry and appeared to be losing. Do you think presidential campaign politics was involved in your indictment?

Lindauer: There was never any question that it was a cheap, political indictment engineered by ruthless White House staff, including my own cousin, Andy Card, afraid of losing Bush's re-election.

A few weeks before my arrest, I contacted the offices of Senators Trent Lott and John McCain and asked to testify before the new blue-ribbon Presidential Commission on Iraqi Pre-War Intelligence. As part of that testimony, I would have detailed Iraq's efforts to cooperate with the 9/11 investigation, and, before 9/11, our threats to bomb Baghdad in April and May, 2001 if they failed to serve up any fragments of intelligence relating to a new conspiracy involving airplane hijackings. I, personally, bickered with Iraqi diplomats at the United Nations for several months seeking that information. Iraq had nothing to give us.

Under the circumstances, arresting me must have presented an irresistible temptation.

Collins: How so?

Lindauer: They saw that I would be sidelined in legal wrangling until after the November election. I would be gagged from telling the full and accurate story of Iraqi Pre-War Intelligence and the government's advance warnings of a 9/11 style attack. This gave Republicans a significant advantage over the Democrats, shielding them from criticism during their campaigns.

After November, the charges against me would be declared bogus, and the case would be dismissed for lack of merit. I would ultimately win, whereas American voters would have lost an opportunity to make informed decisions about which candidates to support. They would be flying blind just the way politicians wanted.

Collins: What was some of the most devastating information that you would have shared?

Lindauer: Imagine if American voters had known that the 9/11 strike was not a surprise to U.S. Intelligence! Would it have changed any votes if Americans had known the truth? That throughout the summer of 2001, there were extensive discussions about possible airplane hijackings and a reprise of the 1993 World Trade Center attack, specifically?

In August 2001, we thought the attack was "imminent." At the instruction of my CIA handler, Dr. Richard Fuisz, I personally alerted the private staff of U.S. Attorney General John Ashcroft and the Office of Counter-Terrorism at the Justice Department about our fears, asking for their cooperation in issuing an emergency alert throughout all agencies for any fragment of intelligence or suspicious activity that might help us pre-empt a conspiracy to hijack and/or bomb airplanes.

Would any of that have made a difference in the voting booth? Would Americans still think the "War on Terror" was a success? That's the kind of wild card that campaign staff hate during a tight election.

Collins: Do you have any parting words on the Patriot Act?

Lindauer: It strikes me as ironic that the Patriot Act, which Congress passed after 9/11 to empower law enforcement to hunt down terror suspects, was first used to suppress and punish an American citizen who spent a life-time opposing violence in terrorism or war, and who gave advance warning about the 9/11 attack in specific detail.

I'm obviously a very dangerous woman! My indictment provides a classic example of a fearful incumbent -- a dictator -- arresting his political opponents on trumped up charges so that he can remove obstacles to staying in power, and intimidates others into silence when they would otherwise speak against him.

It's what you'd expect from Chile under Pinochet in the 1970s, the El Salvadoran juntas in the 1980s, Egypt today. It's Myanmar and Tibet. And it's what happened to me.

Collins: Part three of this interview explores the intense and chilling abuse Ms. Lindauer suffered when confined to the Carswell federal prison facility housed in the Carswell U.S. Air Force base near Ft. Worth Texas. At the same time, Lindauer will describe how federal law enforcement officials associated with her case manipulated proceedings and falsified reports about her life and activities.