Saturday, March 6, 2010

US payrolls shrank by 36,000 in February

US payrolls shrank by 36,000 in February

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The Labor Department’s employment report for February, released Friday, showed that the US economy is continuing to shed jobs, wages are continuing to decline, and the so-called economic “recovery” is based on an accelerating fall in the living standards of the working class.

The Obama administration hailed the report, which showed a less-than-expected net job loss of 36,000 and no rise from January’s official jobless rate of 9.7 percent, as a positive sign of a “stabilizing” labor market and a vindication of its economic policies. For the most part, the media similarly cast the report as a confirmation that the economy is improving.

This only highlights the chasm separating the political and corporate establishment from the vast majority of the American people. The report not only registered the 25th monthly decline in net jobs in the last 26 months, it showed an overall increase in the number of people counted officially as unemployed to 14.9 million, including 6.1 million who have been without a job for more than six months.

What is called the “underemployment rate,” which includes those who have given up looking for work and those involuntarily working part-time, shot up to 16.8 percent from 16.5 percent in January. Even this figure underestimates the devastating impact of the economic crisis. Many of the new jobs being created pay less than the jobs that have been lost and many are part-time.

The number of those working part-time because they cannot get a full-time job or because their hours have been slashed rose in February by half a million, to 8.8 million from 8.3 million in January. A separate report released by the Labor Department Thursday on productivity and labor costs provided a statistical reflection of the way in which mass unemployment is being used to extract more production from those who have a job for the same or lower wages—and consequently higher profits for big business.

The Labor Department revised upward its gauge of productivity growth for the fourth quarter of 2009 from an annual rate of 6.2 percent to 6.9 percent. Unit labor costs, it said, fell 5.9 percent, as compared to its original estimate of 4.4 percent, and inflation-adjusted hourly wages fell by 2.8 percent from the prior quarter. These figures document a sharp rise in the intensity of the exploitation of the labor force.

President Obama touted the jobs figures as “better than expected.” He went on to call the jobless rate “more than we should tolerate,” but signaled that he remained opposed to any government jobs program, saying, “We’ve got to do everything we can to help the private sector create jobs.”

This means, in practice, providing more tax cuts for business in the guise of a “jobs program.” On Thursday, the Democratic-controlled House of Representatives passed one such measure, similar to a bill passed earlier by the Democratic-led Senate, which would give $15 billion in tax credits to companies that hire unemployed workers. Even business groups dismissed this derisory measure, saying it would do little to drive down the jobless rate.

Christina Romer, who chairs the White House Council of Economic Advisers, said Friday’s jobs report “is consistent with the pattern of stabilization and gradual labor market healing we have been seeing in recent months.”

Senate Majority Leader Harry Reid, Democrat from Nevada, was even more effusive. Speaking from the floor of the Senate, he said, “Today is a big day in America. Only 36,000 people lost their jobs today, which is really good.”

On income, the employment report for February showed a further fall in average weekly earnings of 0.4 percent. Over the past 12 months, average hourly earnings, adjusted for inflation, are down 0.8 percent. The average work week declined 0.1 hour, to 33.8 hours.

The steepest job losses were in construction, which lost 64,000 positions. Local governments cut 31,000 jobs, a reflection of the budget cuts being carried out across the country. The financial industry cut 10,000 jobs. Factories eked out a net gain of 1,000 jobs, largely on the basis of reduced wages and intensified speedup.

The federal government added 7,000 jobs, in part due to the hiring of part-time census workers. The biggest increase by far was in temporary employment, which rose by 48,000.

Many analysts claim that the report would have shown a net increase in jobs were it not for severe snow storms that hit the East Coast in February. However, economists estimate at least 100,000 new jobs have to be generated each month just to keep pace with new entrants into the labor force. Even the rosiest prognoses, such as those of the Obama administration, project official unemployment above 9 percent for the remainder of the year. Bloomberg News reports that economists it has surveyed predict that the jobless rate will average 9.8 percent this year and end the year at 9.5 percent.

This means increasing poverty and desperation for millions of Americans. One barometer of the social crisis is a report released earlier this week by the American Bankruptcy Institute showing that consumer bankruptcy filings surged 14 percent in February, compared to a year earlier. February filings also increased by 9 percent from the previous month.

Bankruptcy filings in 2009 were up 32 percent from the previous year, hitting 1.47 million. They are expected to top 1.5 million this year.

Other economic data released this week similarly point to a protracted slump. The National Association of Realtors on Thursday reported that pending home sales unexpectedly dropped sharply in January, contracting by 7.6 percent from the previous month. Last week the Commerce Department reported that sales of newly-built homes fell in January by 11.2 percent from December to the lowest total in almost 50 years.

With the Federal Reserve poised to end its purchase of hundreds of billions of dollars in mortgage-backed securities at the end of the month, the prospects for a lasting stabilization or improvement in the housing market are remote. Home sales and prices are likely to resume their downward spiral, further depleting the wealth of ordinary Americans.

Finance capital and the Greek debt crisis

Finance capital and the Greek debt crisis

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In the wake of the most serious financial breakdown to hit world capitalism since the collapse of the US stock market in 1929, not a single serious measure has been put into place to rein in the activities of the banks and financial institutions responsible for the crisis.

In a recent essay, Financial Times journalist Lucas Zeise writes: "Two years have passed since the outbreak of the property and financial crisis, yet there has been no progress in the regulation of the banking and financial sectors. Worse still, a serious start has not even been made. This diagnosis… applies equally to the US, the European Union, and at the level of international regulation."

The failure of governments across the world to regulate the financial markets is an expression of the extent to which the major banks dictate government policy.

According to an analysis prepared by the Bank of England, state intervention in support of banks in the US, the UK and the eurozone has totaled $14 trillion. This sum represents a quarter of global gross domestic product (GDP).

Following the lead of the US, governments around the globe declared that such unprecedented measures were necessary because the major banks were "too big too fail." The result of this bailout has been to strengthen the economic and political power of the world's leading financial players.

Major banks are able to return to the gambling table fully aware that their losses will be picked up in future by the government. This has led them to intensify their involvement in the most hazardous forms of speculation.

Based on the near-zero interest rates, finance houses are able to borrow money at next to nothing and charge commercial customers 5 or 6 percent for loans. The result is soaring profits and bonuses—in some cases higher than those prior to the onset of the 2008 crisis.

The largess of governments has fuelled banking activities in all types of speculative investment. Trade is soaring in one of the most speculative forms of derivatives, credit default swaps (CDS), which played a key role in driving Lehman Brothers, Bear Stearns and American International Group (AIG) into bankruptcy.

Credit default swaps are insurance-like contracts that permit banks and hedge funds to place bets on whether or not a company, or even a country, will default on it debts. The nature of CDS trading, which is unregulated, is such that CDS speculators have an incentive to push companies or countries toward bankruptcy. According to one analyst, "Its like buying fire insurance on your neighbor's house—you create an incentive to burn down the house."

The role of CDS trading has been highlighted in relation to the financial crisis of the Greek state. Attracted to the highly indebted Greek economy like vultures to a decaying corpse, the CDS traders at major banks and hedge funds have moved in. According to the Depository Trust and Clearing Corporation, trading in credit default swaps linked to Greek debt has surged over the past year.

The overall amount of insurance on Greek debt hit $85 billion in February of this year. One year earlier, the same figure stood at $38 billion. The surge in such types of trading invariably drives up the cost of insuring Greek debt. The cost of insuring Greek bonds nearly doubled in February compared to early January. This, in turn, worsens the budgetary plight of the country and brings closer the specter of default—and a jackpot for CDS speculators.

The activities of CDS speculators are not restricted to Greece. In the past few weeks, they have increasingly switched their attention to the European currency, anticipating that a collapse of the Greek economy could lead to a crash of the euro. In the past week they have also increased their bets against the British pound, based on the fact that the current level of indebtedness of the British state actually exceeds that of Greece.

The list of world players in derivatives and CDS trading is headed by the US banks JPMorgan Chase, Citibank, Bank of America and Goldman Sachs. According to the Office of the Comptroller of the Currency, United States banks held a total of $13 trillion in notional value of credit derivatives at the end of the third quarter of 2009.

US banks, however, are not alone in such trading. A number of Europe's biggest banks, including Credit Suisse Group, UBS, Société Générale, BNP Paribas SA, and Deutsche Bank, are amongst the biggest buyers of swap insurance. Their activities on the derivatives market reflect their exposure to the Greek economy. The Bank for International Settlements reports that French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, and German banks, with an exposure of $43.2 billion.

The thoroughly parasitic relationship between international finance capital and world governments, which encourages the most exploitive and hazardous forms of speculation, was summed up by one financial analyst: “If companies were not implicitly backed by the taxpayers, then managements would get very reluctant to go out after that next billion of notional on swaps. They’d look over their shoulder and say, ‘This is getting dangerous.’”

Or, as a former International Monetary Fund chief economist put it, “Goldman Sachs has become the world’s biggest hedge fund underwritten by the US government.”

Vital political lessons must be drawn from the growing stranglehold of the international banks on economic and political life.

The political grip of the banks has grown in tandem with their increasing economic power. This has occurred over recent decades under social democratic as well as conservative governments in Europe, and under Democratic as well as Republican administrations in the US.

Few, if any, US governments have been so stocked with bankers and financiers as the Obama administration. It was Democratic President Bill Clinton who signed the bill repealing the Glass–Steagall Act and opened the floodgates for extreme forms of speculative trading by commercial banks.

In Europe, the political influence of the financial interests centered in the City of London has grown enormously under New Labour. In Germany, the legislation which permitted German banks to increase their dealings in the derivatives markets was introduced by the former Social Democratic Party-Green Party coalition. In Greece, the social democratic PASOK government of George Papandreou recently appointed a former Goldman Sachs official to manage the country’s public debt.

Flanked by their banking cronies on the one side, the social democrats in Europe and the Democrats in America turn to the trade unions to suppress the resistance of the working class, which is now called on to pay the gambling losses of the banks.

In addition to destabilizing entire currencies and states, the speculative activities of the banks are creating new financial bubbles and future financial crises that threaten to explode and overshadow the breakdown of 2008. The growth of extreme forms of speculative investment arises out of the objective logic of the capitalist system itself.

US presses for new UN sanctions against Iran

US presses for new UN sanctions against Iran

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The US-led push for tougher sanctions on Iran over its nuclear program intensified this week with the circulation of a draft UN Security Council resolution to Russia and China. While the draft has not been made public, leaked details indicate that sanctions would target the Iranian Revolution Guard Corps (IRGC) as well as widening the scope of existing penalties against Iran’s shipping, banking and insurance sectors.

US Secretary of State Hillary Clinton revealed the thinking behind US tactics during her trip last month to the Persian Gulf. Declaring that Iran was “moving towards a military dictatorship,” she urged Iranian clerics and political leaders to “take back the authority which they should be exercising on behalf of the people”. By imposing sanctions on the IRGC, Washington is clearly hoping to open up a rift in the ruling elites in Tehran that will produce a regime more aligned to US interests.

The US and its European allies have drawn up the draft resolution, but Russia and China, both of which hold a veto in the UN Security Council, have been reluctant to agree. US President Obama offered Russia a thinly-disguised enticement last year by agreeing to end US plans for a ballistic missile shield based in Poland and the Czech Republic. Speaking in Paris on Monday, Russian President Dmitry Medvedev gave qualified support for new sanctions, but insisted that they be “calibrated and smart” and “not target the civilian population”.

China remains the chief obstacle. It continues to call for negotiations, implicitly opposing further sanctions. Asked about Russia’s stance, Foreign Ministry spokesman Qin Gang declared that Beijing sought “a resolution to the Iranian nuclear issue through diplomatic means”. He added: “We believe there is still room for diplomatic efforts and the parties concerned should intensify those efforts.”

The Obama administration, however, is engaged in a full-scale diplomatic offensive to drum up support for new sanctions. The US has rejected Iran’s call for further talks on an International Atomic Energy Agency (IAEA) sponsored deal last year to exchange low-enriched uranium for fuel rods for its Tehran research reactor. At an IAEA board meeting on Wednesday, the US and several European allies condemned Iran for taking steps to further enrich uranium to the 20 percent level required to fuel the Tehran reactor, which produces the country’s medical isotopes.

The US is also exploiting the latest IAEA report handed down last month, which for the first time raised “concerns” that Iran might have engaged in research related to the manufacture of a nuclear weapon. This tentative claim is based on dubious information provided by Western and Israeli intelligence agencies (see: “The UN nuclear agency, the US and Iran”), but is nevertheless being used to inflate fears over Iran’s nuclear programs.

The US and Israel have both sent high-level delegations to Beijing over the past week to press for support for new UN sanctions. The Israeli team headed by deputy prime minister Moshe Yaalon reportedly showed Chinese officials details of Israeli intelligence in an effort to convince Beijing that Iran has ambitions to build a nuclear bomb. The Financial Times noted a possible lever that Israel might have used in the talks—Israel has previously sold military technology to China that has been under US and European embargo. Israel also has an unstated threat—if China refuses to back UN sanctions, Israel is prepared to strike Iran’s nuclear facilities.

The US delegation headed by deputy secretary of state James Steinberg was billed as a fence-mending mission. Since the beginning of the year, Washington has taken a more aggressive stance toward Beijing on a number of fronts: the US has authorised an arms sale to Taiwan; President Obama met with the Dalai Lama last month; and the White House has been pressing China on trade and currency issues.

Concerns in the US and Europe that China might abstain or even vote against new sanctions on Iran are underlined by the growing attention being paid by think tanks and commentators to China’s relations with Iran. A lengthy report last month by the Brussels-based International Crisis Group (ICG) entitled “The Iran Nuclear Issue: The View from Beijing” noted that China “is unconvinced that Iran has the ability to develop nuclear weapons in the short term and does not share the West’s sense of urgency about the possibility of a nuclear-armed Iran”.

The report summed up China’s vested interests in a good relationship with Iran, noting: “Iran is China’s third largest source of imported crude oil and possesses abundant energy reserves that the rising power needs to sustain its rapid economic growth … But China’s priorities in Iran go beyond economic interests. Strong bilateral relations help to counter US dominance in the Middle East and increase Beijing’s strategic leverage. China sees Iran’s influence in the Middle East and Central Asia as useful in that region.”

Needless to say, the ICG does not point to the obvious vested interests of the US in Iran, which run counter to those of China. Washington’s overriding aim is to fashion a regime in Tehran more closely aligned with US ambitions to secure a dominant position in the energy-rich Middle East and Central Asia. At present Iran and its relations with Russia and China act as a barrier to US aspirations. As Beijing is undoubtedly aware, Iran’s nuclear programs are simply a convenient pretext for Washington to exert pressure on Tehran. By contrast, the US openly or tacitly accepts the nuclear arsenals of its allies—Israel, Pakistan and China’s regional rival India.

At this stage, it is not clear what China will decide. Even though it voted for three previous UN Security Council resolutions sanctioning Iran, China may break ranks with other UN Security Council permanent members to defend what it regards as its vital strategic and economic interests. To date, unlike Russia, the US has not offered China any significant quid pro quo to entice it to shift its stance. A veto vote by China would lead to a further deterioration of relations with the US.

The US also faces opposition from at least three temporary, non-veto UN Security Council members—Brazil, Turkey and Lebanon. As part of a trip this week to Latin America, US Secretary of State Clinton attempted to convince Brazil to support sanctions against Iran. However, speaking at a media conference on Wednesday, President Luiz Inacio Lula da Silva declared that it was “not prudent to push Iran into a corner” and called for further negotiations. As well as tensions with the US over regional affairs, Brazil is sensitive to US demands that Iran halt uranium enrichment because Brazil is constructing similar facilities as part of its own nuclear program.

According to the New York Times, the US is pressing for a new UN resolution before May, when Lebanon will take over the presidency of the UN Security Council. At the same time, the US and its allies are preparing to impose unilateral financial and economic sanctions should the resolution fail to pass. Pressure is also being brought to bear to tighten up on existing sanctions. Japan’s ambassador to the UN, Yukio Takasu, who heads the UN Security Council sanctions committee, warned this week that private companies involved in “illegal” Iranian weapons sales might also face UN penalties.

The push for a new UN resolution has been accompanied by a renewed debate in US and European ruling circles over strategy toward Iran, revolving around the use of the so-called military option. In comments reported in the Wall Street Journal, former White House national security adviser Zbigniew Brzezinski called for a policy of containment, including possible sanctions, with the long-term aim of changing the regime in Tehran. He strongly cautioned against military strikes, saying this would isolate the US more than Iran.

The Obama administration, however, continues to repeat that all options are on the table. Moreover, the US is under pressure from Israel, which has threatened its own military strikes, to take decisive action to halt Iran’s nuclear programs. In this high stakes brinkmanship, which involves the key economic and strategic interests of rival major powers, the danger is that the reckless US-led push for tougher sanctions can slide into confrontation and war.

IMF "Economic Medicine" Comes to America

IMF "Economic Medicine" Comes to America

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In addition to mandatory private health insurance premiums, we may soon be hit with a “mandatory savings” tax and other belt-tightening measures urged by the President’s new budget task force. These radical austerity measures are not only unnecessary, however, but will actually make matters worse. The push for “fiscal responsibility” is based on bad economics.

When billionaires pledge a billion dollars to educate people to the evils of something, it is always good to peer closely at what they are up to. Hedge fund magnate Peter G. Peterson was formerly Chairman of the Council on Foreign Relations and head of the New York Federal Reserve. He is now senior chairman of Blackstone Group, which is in charge of dispersing government funds in the controversial AIG bailout, widely criticized as a government giveaway to banks. Peterson is also founder of the Peter Peterson Foundation, which has adopted the cause of imposing “fiscal responsibility” on Congress. He hired David M. Walker, former head of the Government Accounting Office, to spearhead a massive campaign to reduce the runaway federal debt, which the Peterson/Walker team blames on reckless government and consumer spending. The Foundation funded the movie “I.O.U.S.A.” to amass popular support for their cause, which largely revolves around dismantling Social Security and Medicare benefits as a way to cut costs and return to “fiscal responsibility.”

The Peterson-Pew Commission on Budget Reform has pushed heavily for action to stem the federal debt. Bills for a budget task force were sponsored in both houses of Congress. The Senate bill was narrowly defeated, and the House bill was tabled; but that was not the end of it. In Obama’s State of the Union speech on January 27, he said he would be creating a presidential budget task force by executive order to address the federal government’s deficit and debt crisis, and that the task force would be modeled on the bills Congress had failed to pass. If Congress would not impose “fiscal responsibility” on the nation, the President would. “It keeps me awake at night, looking at all that red ink,” he said. The Executive Order was signed on February 17.

What the President seems to have missed is that all of our money except coins now comes into the world as “red ink,” or debt. It is all created on the books of private banks and lent into the economy. If there is no debt, there is no money; and private debt has collapsed. This year to date, U.S. lending has been contracting at the fastest rate in recorded history. A credit freeze has struck globally; and when credit shrinks, the money supply shrinks with it. That means there is insufficient money to buy goods, so workers get laid off and factories get shut down, perpetuating a vicious spiral of economic collapse and depression. To reverse that cycle, credit needs to be restored; and when the banks can’t do it, the government needs to step in and start “monetizing” debt itself, or turning debt into dollars.

Although lending remains far below earlier levels, banks say they are making as many loans as they are allowed to make under existing banking rules. The real bottleneck is with the “shadow lenders” – those investors who, until late 2007, bought massive amounts of bank loans bundled up as “securities,” taking those loans off the banks’ books, making room for yet more loans to be originated out of the banks’ capital and deposit bases. Because of the surging defaults on subprime mortgages, investors have now shied away from buying the loans, forcing banks and Wall Street firms to hold them on their books and take the losses. In the boom years, the shadow lending market was estimated at $10 trillion. That market has now collapsed, leaving a massive crater in the money supply. That hole needs to be filled, and only the government is in a position to do it. Paying down the federal debt when money is already scarce just makes matters worse. When the deficit has been reduced historically, the money supply has been reduced along with it, throwing the economy into recession.

Another Look at the Budget Reform Agenda

That raises the question, are the advocates of “fiscal responsibility” merely misguided? Or are they up to something more devious? The President’s Executive Order is vague about the sorts of budget decisions being entertained, but we can get a sense of what is on the table by looking at the earlier agenda of Peterson’s Commission on Budget Reform. The Peterson/Walker plan would have slashed social security entitlements, at a time when Wall Street has destroyed the home equity and private retirement accounts of potential retirees. Worse, it would have increased the social security tax, disguised as a “mandatory savings tax.” This added tax would be automatically withdrawn from your paycheck and deposited to a “Guaranteed Retirement Account” managed by the Social Security Administration. Since the savings would be “mandatory,” you could not withdraw your money without stiff penalties; and rather than enjoying an earlier retirement paid out of your increased savings, a later retirement date was being called for. In the meantime, your “mandatory savings” would just be fattening the investment pool of the Wall Street bankers managing the funds.

And that may be what really underlies the big push to educate the public to the dangers of the federal debt. Political analyst Jim Capo discusses a slide show presentation given by David M. Walker after the “I.O.U.S.A.” premier, in which a mandatory savings plan was proposed that would be modeled on the Federal Thrift Savings Plan (FSP). Capo comments:

“The FSP, available for federal employees like congressional staff workers, has over $200 billion of assets (on paper anyway). About half these assets are in special non-negotiable US Treasury notes issued especially for the FSP scheme. The other half are invested in stocks, bonds and other securities. . . . The nearly $100 billion in [this] half of the plan is managed by Blackrock Financial. And, yes, shock, Blackrock Financial is a creation of Mr. Peterson's Blackstone Group. In fact, the FSP and Blackstone were birthed almost as a matched set. It's tough to fail when you form an investment management company at the same time you can gain the contract that directs a percentage of the Federal government payroll into your hands.”

What “Fiscal Responsibility” Really Means

All of this puts “fiscal responsibility” in a different light. Rather than saving the future for our grandchildren, as the President himself seems to think it means, it appears to be a code word for delivering public monies into private hands and raising taxes on the already-squeezed middle class. In the parlance of the International Monetary Fund (IMF), these are called “austerity measures,” and they are the sorts of things that people are taking to the streets in Greece, Iceland and Latvia to protest. Americans are not taking to the streets only because nobody has told us that is what is being planned.

We have been deluded into thinking that “fiscal responsibility” (read “austerity”) is something for our benefit, something we actually need in order to save the country from bankruptcy. In the massive campaign to educate us to the perils of the federal debt, we have been repeatedly warned that the debt is disastrously large; that when foreign lenders decide to pull the plug on it, the U.S. will have to declare bankruptcy; and that all this is the fault of the citizenry for borrowing and spending too much. We are admonished to tighten our belts and save more; and since we can’t seem to impose that discipline on ourselves, the government will have to do it for us with a “mandatory savings” plan. The American people, who are already suffering massive unemployment and cutbacks in government services, will have to sacrifice more and pay the piper more, just as in those debt-strapped countries forced into austerity measures by the IMF.

Fortunately for us, however, there is a major difference between our debt and the debts of Greece, Latvia and Iceland. Our debt is owed in our own currency – U.S. dollars. Our government has the power to fix its solvency problems itself, by simply issuing the money it needs to pay off or refinance its debt. That time-tested solution goes back to the colonial scrip of the American colonists and the “Greenbacks” issued by Abraham Lincoln to avoid paying 24-36% interest rates.

Economic Fearmongering

What invariably kills any discussion of this sensible solution is another myth long perpetrated by the financial elite -- that allowing the government to increase the money supply would lead to hyperinflation. Rather than exercising its sovereign right to create the liquidity the nation needs, the government is told that it must borrow. Borrow from whom? From the bankers, of course. And where do bankers get the money they lend? They create it on their books, just as the government would have done. The difference is that when bankers create it, it comes with a hefty fee attached in the form of interest.

Meanwhile, the Federal Reserve has been trying to increase the money supply; and rather than producing hyperinflation, we continue to suffer from deflation. Frantically pushing money at the banks has not gotten money into the real economy. Rather than lending it to businesses and individuals, the larger banks have been speculating with it or buying up smaller banks, land, farms, and productive capacity, while the credit freeze continues on Main Street. Only the government can reverse this vicious syndrome, by spending money directly on projects that will create jobs, provide services, and stimulate productivity. Increasing the money supply is not inflationary if the money is used to increase goods and services. Inflation results when “demand” (money) exceeds “supply” (goods and services). When supply and demand increase together, prices remain stable.

The notion that the federal debt is too large to be repaid and that we are imposing that monster burden on our grandchildren is another red herring. The federal debt has not been paid off since the days of Andrew Jackson, and it does not need to be paid off. It is just rolled over from year to year, providing the “full faith and credit” that alone backs the money supply of the nation. The only real danger posed by a growing federal debt is an exponentially growing interest burden; but so far, that danger has not materialized either. Interest on the federal debt has actually gone down since 2006 -- from $406 billion to $383 billion -- because interest rates have been lowered by the Fed to very low levels.

They can’t be lowered much further, however, so the interest burden will increase if the federal debt continues to grow. But there is a solution to that too. The government can just mandate that the Federal Reserve buy the government’s debt, and that the Fed not sell the bonds to private lenders. The Federal Reserve states on its website that it rebates its profits to the government after deducting its costs, making the money nearly interest-free.

All the fear-mongering about the economy collapsing when the Chinese and other investors stop buying our debt is yet another red herring. The Fed can buy the debt itself – as it has been stealthily doing. That is actually a better alternative than selling the debt to foreigners, since it means we really will owe the debt only to ourselves, as Roosevelt was assured by his advisors when he agreed to the deficit approach in the 1930s; and this debt-turned-into-dollars will be nearly interest-free.

Better yet would be to either nationalize or abolish the Fed and fund the government directly with Greenbacks as President Lincoln did. What the Fed does the Treasury Department can do, for the cost of administration. There would be no shareholders or bondholders to siphon earnings, which could be recycled into public accounts to fund national, state and local budgets at zero or near-zero interest rates. Eliminating debt service payments would allow state and federal income taxes to be slashed; and the public managers of this money, rather than hiding behind a veil of secrecy, would be opening their books for all to see.

A final red herring is the threatened bankruptcy of Social Security. Social Security cannot actually go bankrupt, because it is a pay-as-you-go system. Today’s social security taxes pay today’s recipients; and if necessary, the tax can be raised. As Washington economist Dean Baker wrote when President Bush unleashed the campaign to privatize Social Security in 2005:

“The most recent projections show that the program, with no changes whatsoever, can pay all benefits through the year 2042. Even after 2042, Social Security would always be able to pay a higher benefit (adjusted for inflation) than what current retirees receive, although the payment would only be about 73 percent of scheduled benefits.”

Today incomes over $97,000 escape the tax, disproportionately imposing it on lower income brackets. Projections over the next 75 years show that just removing that cap could eliminate the forecasted deficit. When the Democratic presidential candidates were debating in the fall of 2007, Barack Obama and Joe Biden were the only candidates willing to seriously consider this reasonable alternative. President Obama just needs to follow through with the solutions he espoused when campaigning.

The Mass Education Campaign We Really Need

What is really going on behind the scenes may have been revealed by Prof. Carroll Quigley, Bill Clinton’s mentor at Georgetown University. An insider groomed by the international bankers, Dr. Quigley wrote in Tragedy and Hope in 1966:

“[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences.”

If that is indeed the plan, it is virtually complete. Unless we wake up to what is going on and take action, the “powers of financial capitalism” will have their way. Rather than taking to the streets, we need to take to the courts, bring voter initiatives, and wake up our legislators to the urgent need to take the power to create money back from the private banking elite that has hijacked it from the American people. And that includes waking up the President, who has been losing sleep over the wrong threat.

Fallujah birth defects blamed on US weapons

Fallujah birth defects blamed on US weapons

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Birth defects in the Iraqi city of Fallujah have soared in recent years, with doctors saying advanced US weaponry such as white phosphorous and depleted uranium shells may have caused a "massive, unprecedented number" of congenital health problems.

A BBC investigative report has found that the incidence of birth defects in Fallujah has reached a rate 13 times higher than that found in Europe. One doctor at a US-built hospital in the city says the number of birth defects has spiked from one or two per month prior to the Iraq war to two or three per day today.

"I am a doctor. I have to be scientific in my talk. I have nothing documented. But I can tell you that year by year, the number [is] increasing," Dr. Samira al-Ani told the BBC.

Fallujah, about 40 miles west of Baghdad, was the site of a brutal 2004 battle that was arguably the largest campaign of the Iraq war.

The Pentagon admitted in 2005 that it had used white phosphorous munitions during the battle, as well as depleted uranium shells, which contain radioactive material.

BBC world affairs editor John Simpson said the Fallujah hospital's maternity ward is "absolutely packed" with babies suffering from congenital heart defects. He says he was shown a picture of a three-headed baby, and saw children suffering from paralysis and brain damage.

Researcher Malik Hamdan told the BBC he had seen footage of "babies born with an eye in the middle of the forehead, the nose on the forehead."

Iraqi officials 'anxious not to embarrass the Americans'

Simpson admits he can point to no concrete evidence of a spike in birth defects -- principally because no study has ever been carried out on the situation in Fallujah.

And he reports that the Iraqi government is seeking to downplay the medical problems. Simpson says the Fallujah doctors who raised the alarm about birth defects were "well aware that what they said went against the government version, and we were told privately that the Iraqi authorities are anxious not to embarrass the Americans over the issue."

Simpson further reported that he had "heard many times" that women in Fallujah were being warned not to have children.

A report at the UK's Guardian last fall stated that the rise in birth defects "may be linked to toxic materials left over from the fighting," but, lacking further research, the increase is "unprecedented and at present unexplainable."

"We are seeing a very significant increase in central nervous system anomalies," hospital director Dr. Ayman Qais told the Guardian. "Before 2003 [the start of the war] I was seeing sporadic numbers of deformities in babies. Now the frequency of deformities has increased dramatically."

Fallujah is not the only place in Iraq where medical researchers are alarmed by high rates of childhood disease that they believe may be linked to the war.

US and Canadian researchers have found that leukemia in children has nearly tripled in the southern city of Basra over the past 15 years. Basra was the site of armed conflict even before the US invasion, and was a frequent site of violence during the Iran-Iraq war of 1980-1988. But much of the increase in leukemia came in the three years after the 2003 US invasion, the researchers found.

"It's impossible to say without further study why (rates in Basra) are going up," researcher Tim Takaro said. "But this may be an unintended result of armed conflict.

Indiana faces wave of 'sovereign citizens' declaring independence

Indiana faces wave of ’sovereign citizens’ who declare independence

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An increasing number of Indiana residents are declaring themselves "sovereign citizens" and personally seceding from the United States, says a report from ABC channel 6 in Indianapolis.

By doing so, residents contend that they no longer have to pay taxes, claiming their homes as embassies and using identification cards that show them as diplomats, 6News' Rafael Sanchez reported.

Indiana authorities call such proclamations both illegitimate and illegal. About 10 people every month ask the state to put a seal on a document so that they can claim freedom from taxes.

Channel 6 profiled Donald Moore, a father of seven who has made himself "official- looking" identification that he says exempts him from U.S. laws and U.S. taxes by making him an "ambassador" to the United States.

The ID card "gives me diplomatic immunity," Moore said. "The way I understand it, the federal government is incorporated, and all the states are incorporated. This takes me out of the corporation."

But his assertion was rejected by Indiana's secretary of state.

"Just because you allege something or concoct yourself a document doesn't mean you're getting off the hook," Todd Rokita told channel 6. "You're going to get in worse trouble."

The "Sovereign Citizen" movement, which the Southern Poverty Law Center says has been around since the 1970s, focuses on laws and government paperwork its adherents believe allow them to effectively declare independence from the US.

But that assertion is often challenged in court. Earlier this week, a Florida man was sentenced to two years in prison after followers of the Sovereign Citizen movement convinced him to file a tax return in which he claimed the US government owed him $14 trillion.

According to the Miami New Times, "sovereign citizenship" is proliferating in prisons because of its promises of easy cash from the government and independence from laws.

Channel 6 in Indianapolis notes the case of Jonathan Dilley, who was sentenced to four years in prison for printing his own currency to pay off an $800,000 debt.

According to the Southern Poverty Law Center, which tracks extremist groups in the United States, the sovereign citizen movement originates "in the ideology of the Posse Comitatus, an anti-Semitic group that raged through the Midwest in the late 1970s and 1980s. ... Some of the more famous adherents of sovereign citizens' ideology include Oklahoma City bombing conspirator Terry Nichols and members of the Montana Freemen."

Outrage in San Francisco: City Gives Residents 'Organic' Compost Containing Toxic Sewage Sludge

Outrage in San Francisco: City Gives Residents 'Organic' Compost Containing Toxic Sewage Sludge

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When San Francisco, one of the greenest cities in America, offered its residents free compost, many were excited to take it. After all, purchasing enough compost for even a small 10 x 10-foot garden can cost over $50, and generating one's own compost in high enough quantities for such a garden takes a long time.

Few of the gardeners who lined up to receive the free compost at events like last September's Big Blue Bucket Eco-Fair suspected that the 20 tons of free bags labeled "organic biosolids compost" actually contained sewage sludge from nine California counties. On Thursday, March 4, angry San Franciscans returned the toxic sludge to the city, dumping it at Mayor Gavin Newsom's office in protest.

Sewage sludge is the end product of the treatment process for any human waste, hospital waste, industrial waste and -- in San Francisco -- stormwater that goes down the drain. The end goal is treated water (called effluent), which San Francisco dumps into the Pacific Ocean and San Francisco Bay. But the impurities and toxins removed from the water do not go away. With the water removed, the remaining byproduct is a highly concentrated toxic sludge containing anything that went down the drain but did not break down during the treatment process. That usually includes a number of heavy metals, polycyclic aromatic hydrocarbons, pharmaceuticals, steroids, flame-retardants, bacteria (including antibiotic-resistant bacteria), fungi, parasites and viruses.

On its Web site, San Francisco's Public Utilities Commission describes a "green" process, in which its own sludge is treated until it qualifies as "Class B Biosolids" and is then applied to farmlands in Solano and Sonoma counties. A small percentage undergoes further treatment to qualify as "Class A Biosolids" -- that's the stuff San Francisco's gardeners have been receiving as free "compost" since 2007. (The major difference between Class A and Class B is the amount of fecal coliforms present in the sludge. While it's lower in Class A, studies show it regrows in the compost after the treatment process is over.)

Along with San Francisco's sludge, the "compost" contains sludge from eight other California counties (Alameda, Contra Costa, Marin, Napa, San Mateo, Santa Rosa, Solano and Sonoma) and equal parts yard waste and wood chips. But the fact that the sludge qualifies by law as safe to spread on farms and gardens does not make it so.

The EPA only requires treatment plants to kill off any fecal coliforms in the sludge and ensure that nine heavy metals (arsenic, cadmium, chromium, copper, lead, mercury, molybdenum, selenium and zinc) are not present in unacceptable levels. But that only cleans up a tiny fraction of the harmful substances present in the sludge. A recent EPA study of 84 sludge samples from around the country found 27 metals, three pharmaceuticals (Ciprofloxacin, Diphenhydramine and Triclocarban), four anions (nitrates/nitrites, fluoride and water-extractable phosphorus), three steroids (Campesterol, Cholestanol and Coprostanol), and a number of toxic flame-retardants in nearly every single sample tested.

Many of the other contaminants tested for showed up in a high percentage of samples as well. While the study did not take into account whether these sludge samples were intended for spreading on agricultural land, nearly every one of the samples legally qualified as Class A or Class B biosolids and could have been spread on farm fields. (The study noted that the few samples with molybdenum, nickel or zinc exceeding federal limits for land application sent their sludge to landfills or incinerated it.)

When confronted by angry gardeners who had been duped into applying toxic sludge to their gardens, city and state authorities defended their actions. The California Association of Sanitation Agencies insisted that because San Francisco has "virtually no industrial facilities within its borders or sewer service area," the waste was not a combination of "industrial, commercial, hospital, and household wastewater." But, according to Organic Consumers Association, the San Francisco Public Utilities Commission (SFPUC) has documented the following in San Francisco sludge alone: p-Isopropyltoluene (an industrial chemical used in the manufacture of paint, furniture, etc); 1,4-Dichlorobenzene, a disinfectant, deodorant and pesticide; Tolulene (an aromatic hydrocarbon widely used as an industrial feedstock and as a solvent); 1,2,4-Trimethylbenzene (a product of petroleum refinery distillation); and Phenol (used in the manufacture of drugs, antiseptics, nylon and other synthetic fibers). [Full disclosure: I am on the policy advisory board of Organic Consumers Association.]

Also, even if the San Francisco sludge were innocuous, the sludge given out as compost also came from eight other counties and those areas include oil refineries, metal container manufacturers, foundries and electronics manufacturers. In tests commissioned by the Center for Food Safety, all samples of the "organic biosolids compost" handed out by SFPUC contained the flame retardant PBDE (polybrominated diphenyl ethers), which the Centers for Disease Control (CDC) says "may cause neurobehavioral alterations and affect the immune system in animals." The CDC says that children should not play in dirt containing PBDE, yet SFPUC gave its sludge as compost to home gardeners, community gardens and school gardens, where children would certainly come in contact with it. The tests also revealed triclosan, nonylphenols and some "new" non-PBDE flame retardants.

SFPUC also defended its usage of the word "organic," claiming its use of the term "referred to the scientific definition of organic matter as in containing significant amounts of organic carbon" and never meant that the compost was certified organic by the United States Department of Agriculture (USDA). Use of the word "organic" was particularly misleading because the USDA's organic standards strictly forbid the application of any sewage sludge on land used to grow organic crops. SFPUC now plans to refrain from using the term "organic."

However, San Francisco's sludge handler, Synagro, continues to sell its "Allgro" sludge as "All Purpose Organic Compost and Natural Fertilizer." The Web site for Allgro claims it is "composted thoroughly to produce a high quality humus material free of pathogens and weed seeds." (Interestingly, Synagro -- the largest marketer of sewage sludge based "compost" in the nation -- is owned by the secretive Carlyle Group, the private global investment firm co-founded by Bush family friend and former Secretary of State James Baker III.)

The land application of sewage sludge is actually a national issue, not merely an issue limited to San Francisco or even California. It can be traced back to the Clean Water Act and the subsequent outlawing of dumping sewage sludge into the ocean. The Clean Water Act of 1972 required sewage plants to remove at least 85 percent of pollutants in the waste they received before discharging the resulting effluent. Waste treatment reform advocate Abby Rockefeller points out the irony that the more successful a plant is in removing impurities and toxins from wastewater, the more concentrated and toxic the resulting sludge.

In addition to the chemicals already noted, sludge may contain PCBs (polychlorinated biphenyls), pesticides, dioxins, petroleum products, industrial solvents, radioactive waste or even asbestos. Until a few decades ago, cities could dump their sewage sludge in the ocean. Predictably, this was an environmental catastrophe. Environmental groups took action to ban ocean dumping, which Congress did with the Ocean Dumping Reform Act of 1988. That's when the cheerleading for applying sewage sludge to agricultural land began.

In order to secure the end of ocean dumping, groups like Environmental Defense and the Natural Resources Defense Council agreed to support a policy of land application of sewage sludge instead. With the increased necessity to dispose of sludge on land, the Water Environment Federation, the sewage industry's trade, lobby and public relations organization, held a contest among its members to find a new, more appealing name for sludge. In 1991, they selected the innocuous-sounding name "biosolids," which the EPA has also embraced. Along with the new name came new rules from the EPA, which modified its rules in 1992, reclassifying sludge from hazardous waste to fertilizer. Then they gave the Water Environment Federation a $300,000 grant to run a PR campaign promoting the "beneficial uses" of sludge.

Other options to dispose of the sludge exist, such as dumping into landfills, incineration (releasing pollutants into the air), or gasification to generate methanol for energy (the most environmentally sound and most expensive option), but land application is the cheapest. That is -- it's the cheapest to the dumper, but perhaps not to the dumpee. One year after sludge was spread on an adjacent farm, the cows began to die on the Washington dairy farm of Linda and Raymond Zander. Tests revealed heavy metals in the soil where the sludge was applied and in two neighborhood wells. The casualties were not limited to the cows; Raymond Zander suffered from nickel poisoning and 16 neighboring families reported a range of health problems they believe are linked to the sludge.

In 2008, another sewage sludge victim, Andy McElmurray, testified before Congress about his experience. He and a neighboring dairy farm each applied sewage sludge on their land for more than a decade. In the late 1990s, the cows on each farm began dying and both dairies went out of business as a result. The uneventful application of sludge for years, followed by the rapid poisoning of the cows points to one of the areas that EPA should carefully examine prior to allowing any land application of sludge. Over the years that sludge was applied, the farmland became more and more acidic. To counteract this, both farms applied lime, a common soil amendment to raise soil pH. The change in pH made a number of toxins suddenly more bioavailable to the forage crops grown to feed the cows.

A further investigation showed that the Augusta, Georgia treatment plant providing the sludge had illegally fudged its numbers, covering up high concentrations of the nine heavy metals regulated by the EPA. However, even if the sludge had contained legal amounts of molybdenum, it still would have killed the cows. Thallium, a rat poison toxic to humans even in small doses, went from the sludge, to the crops, to the cows, all the way to milk on grocery store shelves. As thallium levels in sludge are unregulated, the thallium contamination would have occurred even if the treatment plant had followed the law. (In the EPA's recent tests, 80 out of 84 samples of sewage sludge tested positive for thallium.) Instead of taking action against the treatment plant the EPA reacted by covering up its violations. According to McElmurray, "federal bureaucrats in the EPA Office of Water, who developed the EPA's sludge regulations, had too much to lose if local Augusta officials were held accountable."

So where does this leave San Francisco? According to the EPA, about half of all sewage sludge is applied to farmland as fertilizer. As seen in the McElmurray case, even when sludge is limited to use on fields growing animal feed, the toxins in it can still find their way to the human food supply. Also, Class A biosolids are approved for unrestricted use, meaning they can be applied to farms growing food for humans (although they cannot be applied on land where organic food is grown). EPA expert Hugh Kaufman warns that government regulation for Class A biosolids ignores 99 percent of the pollutants found in it.

In San Francisco, the sludge hit the fan because the city had the audacity to label sludge as "organic" and give it away to home gardeners and even school gardens. The city's actions are outrageous, but they serve as a wake-up call that the entire nation regularly consumes foods grown on fields fertilized with sludge. The so-called beneficial use of our sewage sludge is actually the distribution of sludge into our land, our water and our bodies.

Fish Oil Supplements -- Want PCBs With That?

Fish Oil Supplements -- Want PCBs With That?

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If you're taking fish oil for your health, you may want to rethink your next pill. According to a lawsuit filed in California on Tuesday, many popular fish oil companies knowingly sell products with unnecessarily high levels of polychlorinated biphenyl (PCB) compounds—despite claims on the label that the product has been treated and is safe from PCB contamination. PCBs are a toxic manmade chemical thought to cause birth defects, cancer, and disruption to the endocrine, reproduction, immune, and nervous systems, so their presence in a supplement taken strictly for health benefits seems a little counterproductive.

California's Proposition 65, established in 1986, prohibits companies from knowingly exposing people to toxic substances without providing clear warnings—which is precisely what the lawsuit says some brands of fish and shark oil products have been doing. Eight companies are named in the suit—CVS Pharmacy, Inc.; General Nutrition Corp. (GNC); Now Health Group, Inc.; Omega Protein, Inc.; Pharmavite LLC (Nature Made brand); Rite Aid Corp.; Solgar, Inc.; and TwinLab Corp.—and others are likely to be added as further testing is carried out. There's lots to learn over at

Due to the contamination of so much of the world's water supply, the presence of PCBs in fish oil is not a surprise—what is a surprise is how many of the products labeled as "treated" actually had extremely high contamination. Some brands had PCB levels as high as 70 times other brands—and they all have the capacity to reduce that, which is where the lawsuit comes in. If successful, companies will be required to either clean up their product, or warn their customers about the toxicity—and David Roe, a lawyer for the plaintiff, thinks that no company is going to want to advertise how dangerous it is, so the end result should be healthier products on consumer shelves. And the hope is that with market effect, "if one company cleans up, other companies will feel competition pressure to get clean."

The list of samples tested is not comprehensive, of course, but it illustrates how wide the range is between products you can buy on the shelves. Rode said that Omega Protein, one of the defendants and the biggest bulk fish oil supplier in the business (and which also puts out its own label), is omitted from the results that were made public because it was tested in a preliminary round and to different standards than the next batch—standards that are rigorous and costly, because PCBs are actually a family of 209 compounds, all of which have to be tested for individually. Which is likely the reason this issue has not come up until now: who is willing to put in the $1,000-plus for each test?

In Roe's experience with other lawsuits under Proposition 65, the ruling in California can have a nationwide effect and improve products across the board, because any company with a reputation and a brand name "would be crazy to sell a version that the company itself is already doing better than."

Flax wins again
Roe did say that while all the fish oil products contained some contamination, the only two products that tested for zero PCBs were flax and algae-based omega 3. It has been claimed as a superfood countless times before, and the lack of PCBs is another reason to add to the list.

How Did A Bank Lobbyist Score The Top Bank Regulator Job?

How Did A Bank Lobbyist Score The Top Bank Regulator Job?

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Of all the architects of last year's financial crash, John Dugan remains the most obscure, despite his stature as one of the most influential. While regulatory errors have made Larry Summers, Robert Rubin and Alan Greenspan household names, most people have never heard either of Dugan or his agency, the Office of the Comptroller of the Currency. But as the chief regulator for the largest US banks, Dugan and his staff are one of the most powerful engines of economic policy in the world.

Over the course of nearly a quarter-century, Dugan has proved himself a staunch ally of the American financial elite as a Senate staffer (1985-89), a Treasury official (1989-93) and a lobbyist (1993-2005), building a career that culminated in 2005 when George W. Bush appointed him comptroller of the currency. When the financial system finally succumbed to its own excesses in September 2008, Dugan's fingerprints were all over the economic wreckage, but almost nobody noticed.

Dugan began navigating the intersection of politics and finance in the mid-1980s as an aide to deregulatory ideologue Republican Senator Jake Garn. But he didn't distinguish himself as anything more than a partisan workhorse until he entered the Treasury Department in 1989. That year, Congress ordered the Treasury to conduct a study on deposit insurance--the federal program that makes sure you don't lose all your money if your bank fails. Under Dugan's direction, the study ballooned into a nearly 750-page book that is perhaps the single most boring manifesto for sweeping economic change that has ever been written. Published in 1991 under the mundane title Modernizing the Financial System: Recommendations for Safer, More Competitive Banks, Dugan's tome became known as the Green Book, and it established him as one of the earliest architects of the "too big to fail" economy.

With the Green Book, Dugan pushed dozens of policies that were ultimately enacted, but three stand out from the pack. His first objective was to allow banks to expand into multiple states without incurring additional regulatory oversight. His second, more radical goal was to allow relatively safe commercial banks to merge with riskier investment banks and insurance companies. And his third, most extreme initiative was to allow commercial firms--General Electric, Sears--to purchase a bank.

Dugan was not the first to suggest these reforms. Congress poked holes in the wall between banking and commerce in 1987. That same year, Paul Volcker's tenure as chair of the Federal Reserve came to an end, in part because of his resistance to using the central bank to weaken Glass-Steagall. But the banking system of 1991 still largely resembled the banking system of 1951. The significance of the Green Book is that it expressed these radical deregulatory positions in a single, seamless policy platform.

"It was unquestionably the blueprint for the major Clinton-era deregulation," says George Washington University Law School professor Arthur Wilmarth Jr., a longtime banking scholar. "It was the first real recipe for too big to fail." (Dugan declined to comment for this article.)

The Green Book policies may sound like technocratic tweaks, but Dugan was injecting himself as a key player in a fundamental restructuring of the US economy. Since the 1930s, the Glass-Steagall Act had barred banks that performed essential functions like accepting deposits and extending loans from making risky bets in the securities markets. In the late 1980s policy-makers and free-market economists began questioning the usefulness of the law and urged that banks be allowed to expand their activities in the name of global competition and profit. The Green Book marked the first time that the repeal of Glass-Steagall entered the official economic policy platform of an administration.

"The time has come for change," Dugan wrote in the Green Book. "Laws must be adapted to permit banks to reclaim the profit opportunities they have lost to changing markets. Where banking organizations have natural expertise in other lines of business, they should be allowed to provide it.... Adapting to market innovation is critical."

The step was so radical that in 1991, the finance lobby had not even figured out how to approach the issue. Big commercial banks were salivating over the prospect of acquiring securities firms, but Wall Street investment banks actually fought to uphold Glass-Steagall to keep from being swallowed up.

"This report represented a big paradigm shift in saying that the government's task is not to restrict what banks do; it's to facilitate their expansion into new activities in the quest of profitability," says Patricia McCoy, a law professor at the University of Connecticut. "It was enormously influential."

Dugan's vision for hybridized banking and commerce has so far only partly been realized, but his other plans were enacted within a decade. Dugan was particularly effective in selling the Green Book to the Democratic Congress, whose relationship with George H.W. Bush's Treasury had soured in negotiations involving the 1989 savings and loan cleanup bill, according to Richard Carnell, an aide to Senate Banking Committee chair Donald Riegle Jr. from 1987 to 1993. Dugan and Riegle communicated frequently about new legislation, passing less controversial aspects of the Green Book platform in 1991. By 1994, Congress had abolished barriers to interstate banking with the Riegle-Neal Interstate Banking and Branching Efficiency Act. The mash-up of investment banking and commercial banking was approved in 1999 with the passage of the Gramm-Leach-Bliley Act, which repealed parts of the Glass-Steagall Act.

"It built momentum for significant reforms," says Michael Klausner, a former official at the White House Office of Policy Development, one of dozens who worked on the Green Book under Dugan. "There was a time during the first Bush administration when it looked like a lot of it might pass.... Ultimately, less of it was passed under Bush, but it set things in motion that allowed the Clinton administration to finish the job."

"There were two pieces of legislation that facilitated our migration toward too big to fail... Interstate Banking and Branching Efficiency Act of 1994, which permitted banks to grow across state lines, and the Gramm-Leach-Bliley Act, which eliminated the separation of commercial and investment banking," said Kansas City Federal Reserve president Thomas Hoenig in an August 6 speech before the Kansas Bankers Association. "Since 1990, the largest twenty institutions grew from controlling about 35 percent of industry assets to controlling 70 percent of assets today."

Citibank, for example, transformed itself from a credit card issuer and commercial lender into a multitrillion-dollar behemoth, running hedge funds all over the world and gorging itself on subprime mortgages at home. The same story developed at Bank of America and JPMorgan Chase. Every megabank opened its own securities shop and began packaging garbage mortgages into bonds to sell to investors, spreading risk around the globe. Even after these banks received billions in taxpayer funds, their political clout remains so strong that financial regulatory reform has been stalled for over a year.

Gramm-Leach-Bliley "was a horrible mistake," says Senator Byron Dorgan, one of just eight senators to vote against the act. "The risks of investment banking and securities trading became embedded in commercial banks. We were promised there would be firewalls, but they must have been gasoline-soaked firewalls, because they went up in flames pretty fast." Of Riegle-Neal Dorgan says, "It really gave a green light for banks to expand, letting the big get bigger."

The Green Book didn't accomplish all this on its own. By the late 1990s the direct pressure for action was coming from the lobbying efforts of financial giants. And Dugan was a critical part of the lobbying effort. When he left Treasury in 1993, Dugan took a job as a partner at the Covington & Burling law firm, where he began advising big banks on skirting the very regulations he had been writing for years. A top client was the American Bankers Association, the chief lobby group for the banking industry. One of Dugan's most important assignments was to help the ABA push through Gramm-Leach-Bliley. "ABA helped craft nearly every significant part of the Act that affects the banking industry," Dugan boasted in a 1999 letter to ABA bankers.

Of course, for this lobbying push to be effective, Clinton's top economic advisers had to be receptive to Dugan's overtures. "These ideas really cannot be enacted until you get a takeover of the Democratic Party and a Democratic president who is willing to push them," says economist James Galbraith, "that neutralizes the opposition on the left that would otherwise organize to block this legislation."

Things could have been worse. Even former Congressman Jim Leach, the author of Gramm-Leach-Bliley, believes that Dugan's proposal to allow commercial firms to acquire banks would have been a catastrophe. "If Glass-Steagall's prohibition on combining commerce and banking...had been repealed, the contagion of misjudments in finance and financial regulation would have spread even more deeply," says Leach.

General Electric serves as a useful example. It's one of a handful of companies that have broken the commerce and banking barrier, and it needed a huge bailout when markets hit the skids in 2008. The company has issued nearly $74 billion in debt guaranteed by the government since December 2008.

The Green Book policies did not invent too big to fail, but they transformed a relatively controlled imbalance into an economic wrecking ball. When the FDIC invoked "too big to fail" in the late '80s and '90s, those troubled banks actually did fail--their shareholders were wiped out and their management teams were fired. The bailout went not to the bank but to its creditors--other banks that it owed money. Here's how the Green Book explains it: "The phrase 'too big to fail' refers to a situation in which the unwilling to inflict losses on uninsured depositors and even creditors in a troubled bank."

But by 2008 many banks had become so large and interwoven in different lines of business that policy-makers feared the consequences of shutting them down. The term "too big to fail" now means that government helps salvage not only creditors but shareholders and management teams.

There's another critical difference in the scope of the problem. In 1984 the FDIC bailed out creditors of Continental Illinois, which would prove the largest bank failure until 2008. But the total cost of the resolution was just $1.1 billion, a price tag that included not only the cost of bailing out the firm's creditors but also of backing its deposits. As It Takes a Pillage author Nomi Prins documented with Christopher Hayes in our pages on October 12, 2009, over the past two years the government has committed more than $17 trillion to save the banking sector, in the form of direct capital injections, loans and guarantees. Not all that money will be lost, and some of it has already been repaid. But there is simply no way to imagine the bailout tab running so high without Dugan's deregulatory work.

Too big to fail banks were a ticking time bomb, but they might not have ravaged the global economy in 2008 without major shortcomings in consumer protection over the previous five years. As head of the Office of the Comptroller of the Currency, Dugan played a leading role in gutting the consumer protection system, allowing big banks to take outrageous risks on the predatory mortgages that led to millions of foreclosures.

"For years, the OCC has had the power and the responsibility to protect both banks and consumers, and it has consistently thrown the consumer under the bus," says Harvard University Law School professor Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program. "The result has not only been no consumer protection but also a collapsed banking system. That is why we so urgently need a separate agency in Washington that is specifically focused on protecting families from credit tricks and traps."

Although Dugan continues to press the assault on consumer protection today, the OCC's effort to insulate big banks from consumer complaints predates his appointment in 2005. Between 1995 and 2007, the OCC issued only thirteen public enforcement actions against national banks on consumer protection issues, for the more than 1,600 banks it regulates. Over that same period, zero public actions were taken against the eight largest national banks, even though these banks were at the heart of the predatory mortgage explosion. Through 2006, the OCC staff devoted to handling consumer complaints numbered fifty or fewer. OCC-regulated banks process millions of mortgages every year.

Ever since it became apparent in 2007 that reckless mortgage lending had spurred an economic catastrophe, Dugan has been defending himself, his agency and the banks he supposedly regulates. His favorite talking point is a claim that OCC-regulated banks issued only 10 percent of all subprime mortgages in 2006. But that statement is a distortion, since many of the largest subprime players were regulated by the OCC, according to data from the National Mortgage News, a banking trade publication. Wells Fargo, Citi, Chase and First Franklin--all OCC charges--were among the top ten subprime lenders through the peak years of the housing bubble. In 2006 alone, Wells Fargo extended nearly $28 billion in subprime loans, while Citi issued more than $23 billion. The OCC had authority over more than nine of the twenty-five biggest subprime offenders identified by a Center for Public Integrity investigation.

A recent study by the National Consumer Law Center found that national banks and thrifts issued 31.5 percent of subprime mortgage loans, 40.1 percent of toxic Alt-A loans (predatory mortgages that don't qualify as subprime) and 51 percent of the predatory payment-option and interest-only adjustable-rate mortgage loans made in 2006. The OCC is responsible for national banks but not thrifts. A separate Federal Reserve study found that banks and thrifts accounted for about half the exotic mortgages originated in 2004 and 2005, 54 percent of those issued in 2006 and 79 percent of those from 2007.

"It's just amazing that after all that's happened, Dugan still says nothing happened, and whatever did happen wasn't the OCC's fault," says Kathleen Keest, a former assistant attorney general for the State of Iowa who serves as senior policy counsel for the Center for Responsible Lending, a consumer advocacy group. "Why did his banks need big bailouts if they were making such great loans? It's like he's standing in a room full of broken crockery and saying, 'I didn't break that cup.'"

Dugan repeated his narrative in a speech in September: "It is widely recognized that the worst subprime loans that have caused the most foreclosures were originated by nonbank lenders and brokers regulated exclusively by the states. Although the OCC has little rule-writing authority in this area, we have closely supervised national bank subprime lending practices. As a result, national banks originated a relatively smaller share of subprime loans and applied better standards, resulting in significantly fewer foreclosures." Dugan then concluded that "nothing in federal law precluded states from effectively regulating their own nonbank mortgage lenders and brokers."

Yet both Dugan and his OCC predecessor, Clinton appointee John Hawke Jr., have crusaded to defang state regulators. The OCC oversees federally chartered banks. Until 2004 states were able to enforce anti-predatory lending laws against any bank operating within their borders, regardless of whether the bank's corporate charter came from the state or the federal government. But the OCC changed all that, insisting that while state laws did in fact apply to national banks, only the OCC had the authority to enforce them. The order was so broad, it prevented states from enforcing their own laws against state-chartered subsidiaries of national banks and even mortgage brokers who worked with national banks.

The pre-emption of state consumer protection laws was a deliberate attempt to preserve the ability of the nation's largest banks to earn short-term profits from predatory loans. Every major OCC-regulated bank--Wells Fargo, Chase, Citi, Bank of America and Wachovia--had tremendous subprime and no-documentation loan operations. When state regulators tried to enforce their own laws, the OCC joined forces with a bank lobby group to sue the states. When courts sided against the states, the OCC became the sole agency responsible for cracking down on predatory lending at national banks--and it didn't lift a finger. State investigations throughout the country shut down, and state legislatures stopped moving to enact stricter laws.

"It created a get-out-of-jail-free card for national banks and their subsidiaries to engage in dangerous underwriting practices, and then it put pressure on the states to relax underwriting standards" says McCoy, who served as a member of the Federal Reserve's Consumer Advisory Council from 2002-04, warning the regulators about the dangers of predatory lending.

The big banks moved fast. When state regulators in Illinois took aim at a subsidiary of Wells Fargo, the company quickly reshuffled its legal paperwork and moved the offending sub-company under its nationally chartered bank, where the OCC could shield it from state action.

"It didn't just affect national banks, either," says Chuck Cross, a former regulator with Washington State. "Remember, the state-chartered banks can jump charters. They can go from a more restrictive state regulator to a less restrictive OCC. That creates a very tenuous political environment for a state trying to pass laws."

But twenty-six states did tighten mortgage standards over the course of the housing bubble. Meanwhile, Dugan was actively looking the other way. In 2006 the OCC finally offered guidance on nontraditional mortgage lending, in lieu of formal regulations, and didn't bother to enforce that guidance, since it was, after all, just guidance.

The OCC's dramatic reinterpretation of banking law was initiated by Hawke, but Dugan ramped up those efforts. In the current debate over the creation of a Consumer Financial Protection Agency, Dugan has demanded that the OCC have exclusive power to enforce consumer protection laws over national banks, with no authority for state regulators or even the new CFPA.

Dugan's aggressive stance against consumer protection extended even into the basic function of collecting data on foreclosures. In 2007 a group of state attorneys general formed the State Foreclosure Prevention Working Group (SFPWG), which tried to gather information from major banks about what kinds of loans were causing problems and what the banks were doing to solve them. The banks turned to Dugan, who instructed them not to work with the state officials. Federal pre-emption was so sweeping, according to Dugan, that banks couldn't cooperate with state regulators on gathering data.

"So even though these folks are operating in our states, the foreclosures are affecting our communities and the banks are asking us to help them get in touch with the public to encourage them to contact their servicer--despite all that, we can't know what the banks are doing," says SFPWG member John Ryan.

Six months later, the OCC began issuing its own bank-friendly mortgage data. The first report, from June 2008, included no information on the quality or effectiveness of efforts by banks to work out loans with troubled borrowers--the primary purpose of the state AG effort. In December 2008, the OCC finally started publishing relevant data on loans that banks had modified, but it failed to distinguish between modifications that reduced borrower payments and schemes that increased their monthly burden. Dugan told a housing conference that month that he was shocked, shocked to learn that more than 50 percent of mortgages that banks had modified had quickly redefaulted.

The figure wouldn't have surprised him if he'd been interested in gathering useful data. A study by Valparaiso University Law School professor Alan White found that less than half of loan modifications performed by banks had decreased borrowers' monthly payments. In other words, the banks weren't trying to help people stay in their homes; they were trying to squeeze them for just one more check.

Dugan's term expires in August 2010, when President Obama can reappoint him or nominate someone else. But given Dugan's record, it's hard to see why he has been allowed to stay on the job for Obama's first year. It is not customary for the president to discharge the comptroller in the middle of his term, but he does have the legal authority to do so.

The New McCarthyism

The New McCarthyism

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The "Gitmo Nine" aren't terrorists. They weren't captured fighting for the Taliban. They've made no attempts to kill Americans. They haven't declared war on the United States, nor have they joined any group that has. The Gitmo Nine are lawyers working in the Department of Justice who fought the Bush administration's treatment of suspected terrorists as unconstitutional. Now, conservatives are portraying them as agents of the enemy.

In the aftermath of September 11, the Bush administration tried to set up a military-commissions system to try suspected terrorists. The commissions offered few due process rights, denied the accused access to the evidence against them, and allowed the admission of hearsay -- and even evidence gained through coercion or abuse. The Bush administration also sought to prevent detainees from challenging their detention in court. Conservatives argued that the nature of the war on terrorism justified the assertion of greater executive power. In case after case, the U.S. Supreme Court sided with the administration's critics.

"These lawyers were advocating on behalf of our Constitution and our laws. The detention policies of the Bush administration were unconstitutional and illegal, and no higher a legal authority than the Supreme Court of the United States agreed," says Ken Gude, a human-rights expert with the Center for American Progress, of the recent assault on the Justice Department. "The disgusting logic of these attacks is that the Supreme Court is in league with al-Qaeda."

The attorneys who challenged the Bush administration's national-security policies saw themselves as fulfilling their legal obligations by fighting an unconstitutional power grab. At heart, this was a disagreement over process: Should people accused of terrorism be afforded the same human rights and due process protections as anyone else in American custody? But rather than portray the dispute as a conflict over what is and isn't within constitutional bounds, conservatives argue that anyone who opposed the Bush administration's policies is a traitor set to undermine America's safety from within the Justice Department.

"Terrorist sympathizers," wrote National Review's Andrew McCarthy in September, "have assumed positions throughout the Obama administration."

Since Obama took office, the question of detention procedure has been reintroduced and more deeply politicized. The Bush-era military commissions turned out to be woefully ineffectual and were widely seen as skewed against the defendants. Yet they produced only three convictions during the entire administration, in part because the U.S. Supreme Court kept knocking them down for failing to meet minimal due process standards. Meanwhile, civilian courts tried more than a hundred terrorism cases. But much to the disappointment of human-rights advocates, the Obama administration, while choosing to try the alleged September 11 plotters in civilian court, has opted to continue many Bush-era policies, including reformed military commissions.

Nevertheless, McCarthy, a former assistant U.S. attorney, blamed the "al-Qaeda bar" -- the attorneys who secured due process rights for detainees -- for Bush-era setbacks. "The principal reason there were so few military trials is the tireless campaign conducted by leftist lawyers to derail military tribunals by challenging them in the courts," McCarthy wrote in November. "Many of those lawyers are now working for the Obama Justice Department." In December, an unsigned National Review editorial referred to the series of "pro-terrorist" rulings by the courts that affirmed rights for individuals accused of terrorism.

Justice Department lawyers aren't the only ones who have represented accused terrorists. American military personnel have as well, often successfully. Major Eric Montalvo (retired), who acted as a defense counsel in the Guantanamo Bay military commissions, said that the accusation that lawyers who fought the Bush administration's policies were "terrorist sympathizers" was absurd. "That's not sympathy for a terrorist -- that's sympathy for the rule of law, the American way of doing business."

Lt. Col. David Frakt, who has represented detainees both in military and civilian courts, said that the lawyers who secured due process rights for detainees were ultimately vindicated. "There is an assumption there that has proven to be a fallacy, which is that everyone at Guantanamo was a terrorist," Frakt says, pointing to the fact that the government has lost three-quarters of the habeas petitions filed by detainees at Guantanamo. "What we have seen over and over and over is that the vast majority of detainees at Guantanamo are innocent."

Even former military prosecutors have expressed views similar to those of the Gitmo Nine. Col. Morris Davis (retired) served as the former chief prosecutor for the Guantanamo Bay military commissions and has since argued that they should be abandoned. But initially, when the commissions were formed, he volunteered to be chief defense counsel. "I thought for the good of our system, they needed zealous representation," says Davis. He dismissed the charge that having represented a detainee indicated "sympathy" for terrorist goals. "I don't think that anyone, because they signed up to represent a detainee means they've signed up with al-Qaeda."

"[McCarthy] was a prosecutor for a number of years, so he knows better than that," Davis adds. "I think he's just saying it for the shock value of it."

McCarthy is no stranger to shock value -- he entertains a number of fringe beliefs, including the possibility that Barack Obama was not born in the United States and that former Weather Underground member William Ayers wrote the president's autobiography. Nonetheless, because of his experience as a prosecutor in the trial of Sheik Omar Abdel Rahman, the mastermind behind the first World Trade Center bombing, McCarthy wields a great deal of influence in conservative circles on national-security matters. When Attorney General Eric Holder testified in front of the Senate regarding his decision to try Khalid Sheik Mohammed and the other alleged 9/11 conspirators in civilian courts, Sen. John Kyl read aloud from an op-ed McCarthy had published just the day before, in which McCarthy alleges that "leftist lawyers" actively sought to aid "America's enemies."

Holder shrugged off the op-ed's insinuations: "I'm not worried about McCarthy."

In the same hearing, Sen. Chuck Grassley demanded that Holder identify the number of attorneys in the Justice Department who had litigated on behalf of suspected terrorist detainees, or at least offer a list of the recusals. He argued that "this prior representation creates a conflict-of-interest problem for these individuals." Holder said he would consider Grassley's request and assured him that "we're very sensitive to that concern and mindful of it, and people who should not participate in certain decisions do not do so." Holder added that he had already recused himself because his former law firm, Covington and Burling, had been involved in detainee cases. Grassley subsequently formalized his request in a letter to Holder, and separately, the rest of the Republicans on the Judiciary Committee wrote a joint letter to the Justice Department demanding that Holder identify the attorneys by name.

On Feb. 18, Assistant Attorney General Ronald Weisch responded to Grassley's inquiries, saying, "Only five of the lawyers who serve as political appointees in those components represented detainees, and four others either contributed to amicus briefs in detainee-related cases or were otherwise involved in advocacy on behalf of detainees." Weisch said that some lawyers had recused themselves from specific cases. But he added that it was common for lawyers in the Justice Department, who go in and out of public practice, to "make legal arguments on behalf of the United States that are contrary to legal arguments they made previously on behalf of a prior client in private practice." Prosecutors become defense lawyers, and vise-versa.

But it was too late for reasoning. By this point the rest of the conservative media had begun taking up the cause, referring to the lawyers Weisch had mentioned as the Gitmo Nine. At the Washington Examiner, Byron York accused Holder of "stonewalling" Congress. "Who are the Gitmo 9?" McCarthy demanded to know from his perch at National Review. Then, last Friday, Republicans responded to Weisch, accusing the Justice Department of being "at best nonresponsive and, at worst, intentionally evasive." The Washington Times followed up, echoing McCarthy's demand for the identities of the so-called Gitmo Nine. By that point, two Justice Department lawyers, Deputy Solicitor General Neal Katyal and Human Rights Watch former senior counsel Jennifer Daskal, had already been identified. Unlike the Republican senators, whose concerns were centered around "potential conflicts of interest," the Times editorial argued that "the public has a right to know if past work for terrorist detainees has biased too many of Mr. Holder's top advisers." It was a delicate way of suggesting that lawyers who were holding the government to its constitutional obligations were in fact, if not agents of, sympathetic to al-Qaeda.

On Tuesday, all attempts at subtlety were abandoned. Keep America Safe, the conservative advocacy group which was founded by Liz Cheney to defend torture and oppose civilian trials for suspected terrorists and which has close ties to McCarthy, turned the Gitmo Nine into the "al-Qaeda Seven." The group put out a Web video demanding that Holder name the other Justice Department lawyers who had previously represented terrorist detainees or worked on similar issues for groups that opposed the Bush administration's near-limitless assumption of executive power. "Whose values do they share?" a voice asks ominously. "Americans have a right to know the identity of the al-Qaeda Seven." The ad echoed McCarthy's references to the "al-Qaeda bar" from months earlier.

"This is exactly what Joe McCarthy did," said Gude. "Not kind of like McCarthyism; this is exactly McCarthyism."

The attorneys who secured greater due process rights for detainees weren't attempting to prevent terrorists from being punished -- they were attempting to prevent the government from assuming limitless power to imprison people indefinitely based on mere suspicion. Not all of those fighting the Bush administration's policies even believed that terrorists should be tried in civilian courts. Katyal, who litigated the 2006 Hamdan v. Rumsfeld case in which the Supreme Court decided in the detainees' favor, advocated for using military courts martial -- and later, authored an op-ed for The New York Times alongside former Bush lawyer Jack Goldsmith arguing for a new "national security court" to try terrorists. Still, Katyal held that Bush's general policy for trying terrorists "closely resemble those of King George III."

For human-rights advocates, there's something bitter about conservatives targeting those attorneys who worked to curtail the Bush administration's abuses of power. Two weeks ago, the government released a long-awaited Office of Professional Responsibility report recommending professional sanctions for John Yoo and Jay Bybee, two former lawyers in the Bush administration's Office of Legal Counsel who gave the green light for the use of torture in interrogations. OPR's recommendations were overruled by David Margolis, a high-ranking Justice Department official. Margolis nevertheless acknowledged that Yoo and Bybee exercised "poor judgment," and said that it was a "close question" as to whether Yoo "intentionally or recklessly provided misleading advice to his client."

Conservatives have since claimed that Yoo and Bybee were "exonerated" by the report. Last week, at a Senate Judiciary Committee hearing on the OPR report, Sen. Jon Cornyn of Texas said that "the Department's decision in this matter should once and for all put to rest any notion that John Yoo, Jay Bybee, and their associates deserve anything other than the thanks of a grateful nation for their service."

"The right is treating the lawyers who came up with the justification for torture as heroes, and the lawyers like Katyal who helped restore the rule of law as villains," says Frakt. "They've just got their heads screwed on backwards."