Saturday, October 16, 2010

Get Ready For The Fed's Great Experiment

Get Ready For The Fed's Great Experiment

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For the third time in a little more than ten years Wall Street has embraced a dubious narrative to drive the market higher in the face of crumbling fundamentals. In early 2000 the conventional wisdom discarded over a hundred years of valuation history in denying that the market was in a bubble driven by speculation in internet-related stocks. In late 2007 investors again drove the market to a peak, insisting that the subprime mortgage problem was just too insignificant to impact either the economy or the market. And if anything did go wrong, the good old Fed was there to ensure that the worst outcome would be a so-called “soft landing”. In both cases the economy went into a recession and the market dropped more than 50%.

Now, once again the economy is struggling, and investors are depending on the Fed’s impending announcement of QE2 to bail them out, driving up the market in anticipation of the news. That the economy is deteriorating is obvious. If not, QE2 would not even be under discussion. The problem, though, is that after TARP, the stimulus plan, Fed purchases of $1.7 trillion in mortgages and Treasuries, near-zero interest rates, cash for clunkers, homebuyer tax credits, mortgage remodifications and unemployment insurance extensions, there is little more that the Fed can do that they haven’t already done. The Board has used all of its conventional tools and some not so conventional, and now is in the position of entering into a great experiment with unknown outcomes and possible unintended consequences. The truth is that the Fed cannot use monetary policy to force companies, banks and consumers to take credit that they do not want.

The problem was well presented in an August op-ed column in the Wall Street Journal by Alan Blinder, a former Fed vice-chairman and colleague of Ben Bernanke at Princeton. The article, called “The Fed is Running Out of Ammo”, outlined three options for the Fed—-expanding the Fed’s sheet further, changing the “extended period” language in the Fed’s statement or lowering the interest rate on bank reserves. He then demonstrated that each of these options had negative political consequences, economic drawbacks or limited effectiveness. He concluded by saying that if the economy didn’t pick up, it would be time to use even this “weak ammunition”, although he obviously didn’t think it would be of much help.

Blinder is a main-stream economist, and we doubt that his views differ much from the majority of the FOMC. They must know that they are about to implement a policy that has never been tried before on this scale and that the outcome is extremely uncertain. However, with the White House and Congress in gridlock, the Fed knows that they are the only game in town. What they are hoping to do is increase the Fed’s balance sheet, induce the banks to extend a lot more credit, lower long-term interest rates, spark spending by consumers and business and raise the inflation rate, which they regard as too low. In doing this they are also devaluing the dollar and raising commodity prices, at least in dollar terms.

We have serious doubts as to whether this works. The 10-year interest rate has already declined to 2.5% from 4% in April, a period during which the economy weakened. If the rate drops a bit more there is little reason to believe that the economy would be helped. In addition we note that most of the dollars created by QE1 ended up as excess reserves in the banking system, and did not result in any increase in credit availability or money supply as the money multiplier declined. The same is likely to happen with QE2. The effects on the real economy are also likely to be limited. Mortgage rates are already at historic lows, and QE2 won’t stop impending foreclosures or pare down bloated housing inventories. Similarly, QE2 won’t increase consumer spending as households are only in the early stage of deleveraging. In fact, to the extent that QE2 raises commodity prices, food and energy prices will rise, making the plight of the consumer even worse than it is now. Moreover, lower long-rates probably won’t increase capital spending, which depends more on the economic outlook than on interest rates.

Whether intentional or not, QE2 is also an effective tool in devaluing the dollar, an outcome that we suspect the Fed wouldn’t mind, since, other things being equal, it increases U.S. exports. As we pointed out last week, this would exacerbate the currency war that has already started. Most nations do not want to see their currencies rise and would likely take action to devalue, institute or raise tariffs, implement quotas or take steps to control capital inflows. The result would be major decline in world trade, resulting in a slowdown of economic growth or outright recession—exactly the opposite of what the Fed is trying to achieve.

In sum, we think the chances of QE2 succeeding are slim, and that the stock market is off on a flight of fantasy similar to 2000 and 2007. The economic problems we face today took a long time to build and will not be solved anytime soon as there are really no good options. The market is building up expectations that cannot be met and the expected Fed announcement after the November 3rd meeting may not have much impact as it has already been discounted. What has not been discounted is the potential failure of QE2 to solve our problems, leaving economic policy makers with even fewer options than before.

Map Of The Day: Here's Where The Labor Market Will Be Ugly For A Long Time

Map Of The Day: Here's Where The Labor Market Will Be Ugly For A Long Time

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In Ben Bernanke's speech this morning, he touched on this whole question of whether unemployment is structural or cyclical, and in doing so cited this IMF report (.pdf), where the authors attempted to create a structural unemployment index by state.

(Structural unemployment suggests that the weak labor market is the result of a skills mismatch, and not merely a lack of hiring due to weak end demand.)

Here's what the author's say:

We construct an index for skill mismatches across the 50 states and the District of Columbia. The index captures how shrinking industries contribute to the swelling of a particular skill set among the unemployed, which may not necessarily be absorbed by expanding industries. The skill-mismatch index (SMI), following Peters (2000), measures the disparity between demand and supply at each skill level (according to educational attainment) in a state, with higher readings indicating greater mismatches.

Skill mismatches have risen sharply during this recession, with considerable heterogeneity across states (Figures 1 and 2). Mismatches are now near or at peak historical levels in numerous states, mostly the ones with a large manufacturing sector. States that had specific characteristics (e.g., Delaware—a financial hub; Hawaii—highly reliant on tourism; and Michigan—an auto hub) experienced disproportionate increases in skill mismatches.

And here's how it looks on a state-by-state basis. Note that the dark green states are in the worst shape.


It's Official: Food Inflation Coming To A Grocery Store Near You

It's Official: Food Inflation Coming To A Grocery Store Near You

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All that agflation we've been seeing at the wholesale level is beginning to percolate into the price you pay at the grocery store.

Here's JPMorgan's Charles Grom on this morning's CPI:

CPI Food at Home Rises, But Rate of Increase Below PPI. September’s CPI results represented the 5th consecutive month of year-over-year increases in the CPI Food at Home Index, which is an indication that food prices at retail continue to rise. To explain, this month, the YOY index rose 60 bps sequentially, from 0.8% to 1.4% - which we note is much higher than the ~10 bp average sequential change over the prior 3 months. However, in spite of the evidence that retail prices have continued to increase, we point out that the spread between PPI and CPI has widened once again and now stands at ~370 bps compared to ~300 bps in August. Recall that this spread suggests that wholesale price increases continue to outpace price hikes at retail (i.e. inflation is not being 100% passed through to consumers). Looking ahead, with recent spikes in commodity prices already reflected in the producer price index, we’ll be keeping a close watch to see if the gap will widen (potentially negative for grocer margins) or if retail prices will "catch up" to wholesale prices.

Here's how it's looking on a category-by-category basis:


And here's the catch-up the CPI has to play with the PPI:


Pentagon grip weakens in Afghanistan, Pakistan

Pentagon grip weakens in Afghanistan, Pakistan

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There is much to be learned from the indisputable fact that the U.S. military, despite all its high-tech weaponry and the billions of dollars at its disposal, has lost control of the situation in Afghanistan and has forced even the corrupt Pakistani government to denounce Pentagon attacks as “intolerable” and close parts of its border with Afghanistan.

The Pentagon had argued that a “surge” of tens of thousands of additional U.S. troops to Afghanistan would turn the war around and win over the population. Clearly, the opposite has happened.

The more the U.S. kills and destroys Afghans, their homes, their livestock and their crops, the more the people hate the invaders. The only “social base” the occupation forces can count on are those they pay for their loyalty — and now it seems that even some of them are secretly for the resistance and may be on the U.S. payroll for tactical reasons.

It turns out that many of the people who work for the U.S.-NATO occupation forces, guarding their military bases, are adherents of the resistance — usually identified in the Western media as “the Taliban,” although other political groupings are also actively opposing the U.S. occupation and war.

The Senate Armed Services Committee just released a report on an investigation it conducted into the security of U.S. bases in Afghanistan. It seems that the Pentagon contracts out the job of security to private U.S. companies, which then pocket a healthy profit as they subcontract the work to local Afghans.

The Senate committee found that the Pentagon allows “local security deals among American military commanders, Western contracting companies and Afghan warlords who are closely connected to the violent insurgency.” (New York Times, Oct. 7)

The Times article adds: “The latest disclosures follow a series of reports, including articles in The New York Times and testimony before a House committee, describing bribes paid by contractors to the Taliban and other warlords to make sure supply convoys for the American military were provided safe passage.”

The U.S. government has nearly 100,000 troops in Afghanistan right now. At Washington’s prodding, 20,000 additional soldiers have been sent there by other countries.

The top political leadership in Afghanistan was imposed by the United States. It was U.S. agents who found Hamid Karzai — when he was pulling down a fat salary with Unocal, a U.S. energy corporation — and groomed him to “lead the nation” after the U.S. invaded Afghanistan in 2001. After cooked elections, Karzai became president of Afghanistan and continues to retain that title, although he is cynically referred to by many Afghans and foreigners as the “mayor of Kabul,” since his authority doesn’t extend far beyond the capital.

Karzai’s government consists of hirelings paid largely with U.S. funds and narco-dollars. His “re-election” was so crooked it was challenged even by Western observers.

No amount of dollars and firepower can win over people’s “hearts and minds.” Only justice can do that, and there is no justice at all in imperialist conquest. It is motivated by the crassest hunger for superprofits. In the case of strategically located Afghanistan, the goal is control over Southwest Asia, the world’s richest region in oil and gas. The billions of dollars the U.S. government spends securing these profits benefits only the super-rich owners of the energy corporations, not the workers in the U.S., Afghanistan or anywhere else.

Convoys stuck in Pakistan

Pakistan, Afghanistan’s neighbor to the southeast, has also become embroiled in this war. The Pentagon uses it as a resupply route for the great quantities of ammunition and provisions its troops need to keep the war going. Large convoys of trucks move cargo offloaded at Pakistani ports north to the border and then through the Khyber Pass to U.S.-NATO bases in Afghanistan.

These convoys were sitting ducks in the first week of October. The Pakistani government closed several border crossings into Afghanistan and the trucks were lined up for miles. They were attacked by insurgents and by bandits. Fuel trucks blew up in spectacular explosions as their drivers scattered for cover.

Why did the Pakistani government defy the U.S. by closing the border? It has gone along with most of the Pentagon’s demands. Pilotless U.S. drones have sent missiles crashing into Pakistani villages where the Pentagon suspected there was sympathy for Islamic resistance groups. This has been going on for a long time.

But the last straw came when U.S.-NATO helicopters actually attacked two Pakistani border posts, killing several border guards. Pakistan said the attacks were “intolerable” and retaliated on Sept. 30, closing the border crossing points.

Longest war in U.S. history

When the Bush administration invaded Afghanistan in 2001, it said it was going after a relatively small insurgent group led by Osama bin Laden, which it claimed was behind the attacks on the World Trade Center and the Pentagon.

The people of the United States were assured that this was going to be a surgical operation and would soon be over.

After eight years of Bush, the electorate voted for Barack Obama in 2008, believing that the new Democratic administration would quickly start the process of withdrawal from both Iraq and Afghanistan. Instead, there has been a “surge” in troops sent to Afghanistan.

The Afghan conflict is now the longest war the U.S. has fought in its entire history. Government and military officials say that any drawdown of troop strength will depend on “security conditions” in the different areas of Afghanistan.

This is a prescription for endless war, as the grip of both the Karzai regime and the invasion forces continues to weaken and the popularity of the resistance gains.

The only thing that can break this deadlock and bring the troops home is when the people in the U.S., who are suffering from a severe economic crisis and have shown in many polls that they are against these costly wars, take their demands to the streets instead of relying on the ballot box to bring peace.

Anthem Approved For Health Rate Hikes As High As 47 Percent

Anthem Approved For Health Rate Hikes As High As 47 Percent

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The state's largest insurer has won approval to raise health premiums by as much as 47 percent for policies sold to individual buyers, the largest price hikes seen in Connecticut since the adoption of national health care reform.

Anthem Blue Cross and Blue Shield has received approval to raise rates on those individual market plans by at least 19 percent — including a range of 30 to 44 percent for the brand that was most popular in 2009, Century Preferred.

The new federal health reform mandates are the reason for the increases, according to Anthem and the state Department of Insurance, which is defending its approval against a challenge by Attorney General Richard Blumenthal.

Those reforms took effect Sept. 23; the rate hikes took effect by Oct. 1.

The latest round of increases — approved without change last month by the Insurance Department — will affect relatively few Connecticut families. In all, the Anthem individual plans were in use by 55,536 people in the state as of April 2009, the latest figures available, and many of those customers will have their old policies "grandfathered" in, with smaller increases in 2011. Others get group insurance sold through employers.

But the Anthem rate hikes are likely to fuel a debate over whether such increases are justified by the costs insurers will have to pay to cover new mandated benefits. The increases come just weeks before all health insurers are expected to make separate requests for higher rates for 2011, which one recent forecast says will be an average of 11 percent more for group plans.

Individual plans could come in much higher.

Anthem's rate hikes "deeply disappointed" Blumenthal, who wrote an Oct. 6 letter to Insurance Commissioner Thomas Sullivan saying the increases were approved without detailed scrutiny or consideration of whether they are "excessive" under state law. Blumenthal also attacked rates approved for Aetna, saying the company didn't provide information to justify the rate hikes and it didn't spend enough of its revenue from premiums on customers' medical expenses.

"Rates are excessive when they exceed what is justified by the facts," Blumenthal told the Courant Thursday. "The only way to determine whether something is excessive or justified by the facts is to review the facts. That has not happened in these cases."

Insurance Department spokeswoman Dawn McDaniel said the department conducts "a thorough review of all rates filed based on sound actuarial principles. Credentialed actuaries review every rate filing objectively and run an analysis based on many factors, including actual claim data, projected estimates for future utilization, and medical cost trends."

Blumenthal did not give a breakdown of plans and prices in his letter, but documents obtained by The Courant from his office show price increases for a single male, age 40, ranging from $932 to $1,438 per year for Century Preferred plans. Increases could be higher for family coverage purchased by individuals.

The rate increases approved for health insurers took effect in late September for some plans and Oct. 1 for others. Health insurers will ask regulators later this month or next month for additional increases to take effect Jan. 1.

Blumenthal is asking Sullivan to reconsider the rates. Sullivan has responded by saying the rates include "very rich benefits" required by federal law.

"The rates that were filed and approved reflect the current cost to deliver care and the impact of more comprehensive benefit designs required under the federal healthcare reform law," Sullivan said. "If the attorney general wants to complain to someone, he should be complaining to Congress."

Health insurers submitted proposed rates last summer for individual-market plans sold after Sept. 23 that will include new mandated benefits. But Aetna also sought quarterly adjustments based on rising medical costs, for group plans as well as individual plans.

Aetna asked for 24.7 percent over last year for small-group HMO plans and received an average 18 percent for all of the company's small-group plans, and 14.2 percent for large-group and middle-market plans. In the individual market, Aetna prices are 6.4 percent to 7.5 percent higher for new customers, but existing customers won't see a change.

Any debate about premiums eventually comes to a central question: How much insurers should spend in medical care for every dollar they collect in premiums — known in the industry as "medical-loss ratio." Insurers are caught between investors, who want to see a low percentage spent on medical expenses, and federal reform, which will require insurers next year to spend 80 percent of premium revenue on medical expenses in the individual market.

Anthem did not provide the ratios in its filing. When asked by the Insurance Department to provide the ratios, Anthem responded by saying it will explain how much it pays for medical expenses when it files 2011 rates.

Aetna's filing shows that it paid 53 cents on medical expenses for every dollar collected in premiums in 2009, for plans in Connecticut in the individual market. Blumenthal asks state regulators how Aetna could be approved for a rate hike when the insurer isn't spending nearly the 80 cents per dollar that will be required next year.

Aetna spokeswoman Susan Millerick said, "With regard to future minimum loss ratios, the detailed federal rules have not been issued as to what will be required. However, it is our intent to comply with those rules when finalized, as well as with applicable state laws."

It is not clear how many people are paying, or will pay, the new Anthem rates because federal reform allows insurers to "grandfather" certain plans that existed before reform was passed in March. Anthem customers who enrolled in a plan before March 24 have the option of staying in it; those plans will not include the mandated new benefits and will not see rate hikes approved recently. Anyone who bought an Anthem plan on March 24 or later will pay the new rates.

In terms of higher rates, Anthem spokeswoman Sarah Yeager attributed the rising price to robust new benefits that the plans hadn't offered before federal reform.

"Our … individual products include expanded benefits such as elimination of lifetime dollar maximums, no cost share for preventive coverage and extension of dependent coverage to age 26," she said. "With this enhanced coverage, pricing levels have also been adjusted to make sure that the cost of claims incurred is offset by the premiums collected, and that we anticipate the cost of future, expected claims. Low-cost, low-benefit plans experienced a higher rate adjustment because with the health care reform provisions the plans now offer richer benefits. Other plans that already offered rich benefits did not experience as much of an adjustment."

Anthem offers at least 17 different plans in the individual market. The company illustrated its rate changes by using an example of a single 40-year-old male — how much more he would pay for the upgraded plans which include new benefits mandated by reform. For that 40-year-old man, Anthem's Tonik plans are now 41 percent to 46.9 percent more expensive than they were in early 2010. BlueCare is 30 percent higher. Century Preferred plans are up 29.7 percent to 43.6 percent, and Lumenos is 19.5 percent to 29 percent more expensive.

Soldier silenced for testimony in Afghan killings probe

Soldier silenced for testimony in Afghan killings probe

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Soldier blew whistle on platoon
  • Army says Pfc. Justin Stoner was beaten by fellow soldiers for reporting their drug use
  • Stoner's report led to a wide-ranging investigation into the killings of Afghan civilians
  • 12 soldiers have been charged, some with pre-meditated murder and possessing body parts
  • For more on this story, watch CNN's Situation Room tonight at 5 p.m. ET

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First, Justin Stoner blew the whistle on his platoon. Now, the Army apparently wants to silence him.

In photos obtained by CNN, Stoner sports bruises and abrasions on his back, chest and near his neck -- the marks of a beating inflicted by fellow soldiers as payback for reporting their rampant hashish use, the Army said.

At the time, those close to the investigation tell CNN, Stoner just wanted the smoking in his tent and around him to stop. So he went outside his group and reported the drug use to his superiors.

But that move, and the subsequent beating he endured for being viewed as a snitch, triggered a wide-ranging criminal investigation that has left some soldiers accused of killing innocent Afghan civilians and others accused of posing in gruesome photos with the dead or keeping body parts as war trophies.

Now the Army is doing everything it can to limit the publicity its own explosive account created.

Pfc. Stoner posed for these pictures, taken by the U.S. Army, to show his physical injuries.
Pfc. Stoner posed for these pictures, taken by the U.S. Army, to show his physical injuries.

Stoner, a private first class now back in the United States, had agreed to speak with CNN about the torment he went through at the hands of fellow soldiers earlier this year.

But just three hours before the interview was to take place in Seattle, CNN received this e-mail from his military attorney, Capt. Ernesto Gapasin, Jr., abruptly pulling the plug on the scheduled interview:

"About two hours ago, prosecutors and I met re [regarding] the disposition of the case against PFC Stoner,'' the attorney wrote. "Based on this meeting, PFC Stoner will be given full immunity in this case and not be prosecuted for any allegations made against him, contingent also however, on staying away from the media."

The Army disputes that account, however, saying Stoner has not been given immunity.

"Discussing PFC Stoner's direct involvement in these hearings is inappropriate and could affect the outcome of these cases," Lt. Col. David P. Doherty, a spokesman for the Army's I Corps, told CNN in a statement issued Thursday.

"It is imperative that we follow the judicial process in order to provide the accused a fair and impartial trial, while at the same time serve justice," Doherty said. "PFC Stoner is currently not charged in these matters, nor has he been granted immunity by the convening authority for his cooperation in these ongoing investigations."

What is clear is the Army is scrambling to contain the news of an apparently out-of-control platoon.

The portrait of rogue soldiers at a forward operating base in Afghanistan has been painted by the Army itself in chilling charge sheets leveled at 12 members of the 5th Brigade, 2nd Infantry Division, based out of Joint Base Lewis-McChord outside Tacoma, Washington.

Five of the dozen are charged with pre-meditated murder in what investigators call the "staged" killings of three civilian Afghans. Those soldiers and the others face various other charges as well from unlawful use of illicit drugs, possession of a human skull, fingers and leg bones to the assault on Stoner.

Two directives have been sent to military and civilian attorneys representing the Stryker dozen. They involve grisly photos allegedly showing dead bodies and body parts, and soldiers posing as if they had killed a deer on a hunt.

One of the orders commanded military defense attorneys to return all "documents inadvertently provided by the government" on September 9. The marked exhibits, lawyers told CNN, correspond to the photos.

A number of lawyers have told CNN the photos are worse than those that depicted humiliating poses of Iraqi prisoners at the infamous Abu Ghraib prison. Those photos sparked outrage and riots in parts of the world.

Another directive apparently was meant for civilian attorneys and not only pointedly ordered the return of photos but further said defense and prosecution teams could only view them at Lewis-McChord.

Lawyer Dan Conway, who represents Pfc. Andrew Holmes, told CNN the order makes it difficult to represent their client, because it prohibits them from forensic testing and they are housed in many cases thousands of miles from where the lawyers are based.

Other attorneys have similarly complained to CNN that the Army is tying their hands in defending their clients to avoid more embarrassment.

Holmes is charged with premeditated murder in a January killing. Conway said his client is innocent of the charges and was denied representation for 20 days, despite repeatedly asking for an attorney while still in Afghanistan.

Both orders were signed by Col. Barry H. Higgins, the brigade's commander. The second directive reads, in part: "Further I order that all such images may not be distributed to any persons outside of personnel assigned to CID. 'Human Casualties' are defined as dead, wounded or injured human beings to include separated body parts, organs, and biological materials, resulting from either combat or non-combat activities.''

Even without those photos surfacing, much has already leaked out about the case, spurred in no small part by the Army's release and description of grisly details in the charging documents.

And the headlines around the world about the rogue unit have created a backlash in a part of the world where the Army desperately hopes to win over hearts and minds.

The beating of Stoner and the murders of Afghans apparently just for sport and then staged to look like combat casualties- have been highlighted by some of the accused soldiers' whose own words captured on interrogation tapes obtained by CNN.

Tapes describe killings for sport

In one of those videotaped sessions, Cpl. Jeremy Morlock -- who has been charged in all three of the killings -- recounts how he and several other soldiers deliberately ambushed Stoner on May 5.

"So yeah, we walked into the room and locked the door behind us and a couple guys started talking to him, laying on him," Morlock told investigators.

Asked by investigator what he meant, Morlock replied, "Why would you rat out your guys, stuff like that."

He said Stoner initially denied he went to superiors, then admitted it as he was being confronted by their squad leader, Staff Sgt. Calvin Gibbs.

"I think someone had grabbed him at that point and maybe punched him in the chest or something," Morlock said on the tape.

"He then made a comment like you guys can sit here and punch me all day long if you want and once he said that, Gibbs was like OK, grabbed him off his cot and threw him on the ground in his room and that's when a few guys got some licks in."

Morlock's attorney, Michael Waddington, said his client was on prescription drugs from the Army, high on hashish and suffering combat-related injuries when the crimes were committed.

The Army has recommended Morlock be court-martialed. Gibbs' attorney said he is not ready to comment on the case.

But Gibbs has been charged with the most crimes, and is depicted in the interrogation tapes made by some of the accused and in witness statements as the ringleader who reveled in his kills and dropped three human fingers in front of Stoner after the beating.

Other soldiers told investigators that Gibbs liked to collect fingers, teeth and leg bones as souvenirs.

Gibbs is also suspected of being a skinhead who kept track of his "kills" with skull tattoos on his leg.

Reports show Army sgt. tracked kills with tattoos

This photo from the U.S. Army shows Sgt. Calvin Gibbs' tattoos that are suspected to represent his "kills."
This photo from the U.S. Army shows Sgt. Calvin Gibbs' tattoos that are suspected to represent his "kills."

CNN has obtained investigators' photos of the tattoos clearly showing skulls and cross bones. One soldier, not charged, said Gibbs "associates with skinheads online.

"It's scary because they are worse than most gang members I've met," the soldier told investigators.

The photos are included in over 1,000 pages of evidence compiled by the Army and turned over to attorneys. They include witnesses' statements and depict a platoon where Gibbs ruled -- and anyone who didn't follow his rules believed they could end up like Stoner.

"I take that man very seriously," Spc. Adam Winfield told investigators in his videotaped confession. "He likes to kill things. He is pretty much evil incarnate. I mean I have never met a man who can go from one minute joking around then mindless killings. I mean he likes to kill things."

Winfield is charged with premeditated murder in a May killing of an Afghan civilian whose death was made to look like a hostile enemy battlefield death. His lawyer, Eric Montalvo, said his client is not guilty of premeditated murder despite what his client told investigators on the videotaped interrogation.

The Army is now investigating claims by Winfield's father, Christopher Winfield, that it ignored his attempts to warn them about Gibbs.

Warning may have been ignored

The elder Winfield told CNN that his son alerted him after the first killing, and he said two more men died needlessly after that because the Army would not listen to his warnings.

In addition, the Army reportedly is re-examining Gibbs' role in the 2004 shooting of two adults and a child in Iraq, near the city of Kirkuk. The shooting involved a car which purportedly was swerving towards a uniformed patrol.

Spc. Michael Wagnon is the fifth member of the Stryker platoon charged with premeditated murder. His attorney, Colby Vokey, said his client is innocent.

The Army, meanwhile, seems to have decided to let the charging documents be its official comment.

"I don't want to do anything that could in any way jeopardize the prosecution or their ability of the defendants in this case to get a fair trial, " Geoff Morell, a Pentagon spokesman, told reporters October 5.

Predatory Finance: The New Mode of Global Warfare

Predatory Finance: The New Mode of Global Warfare

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Coming events cast their shadows forward.” – Goethe

What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale, in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1% interest cost? This is the game that is being played today. The outflow of dollar credit into foreign markets in pursuit of this strategy has bid up asset prices and foreign currencies, enabling speculators to pay off their U.S. positions in cheaper dollars, keeping for themselves the currency shift as well as the arbitrage interest-rate margin.

Finance has become the new mode of warfare – without the expense of military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy global real estate and natural resources, infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain monetary wealth and asset appropriation simply by financial means? Victory promises to go to the economy whose banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources.

The main hurdle confronting this financial Lebensraum drive is that it requires the central banks of targeted economies to accept electronic dollar credit of depreciating international worth in payment for national assets. U.S. officials demonize countries suffering these dollar inflows as aggressive “currency manipulators” for what Treasury Secretary Tim Geithner calls “‘competitive nonappreciation,’ in which countries block their currencies from rising in value.” Oscar Wilde would have struggled to find a more convoluted term for other countries protecting themselves from raiders trying to force up their currencies to make enormous predatory fortunes. “Competitive nonappreciation” sounds like “conspiratorial non-suicide.” These countries simply are trying to protect their currencies from arbitrageurs and speculators flooding their financial markets with dollars, sweeping their currencies up and down to extract billions of dollars from their central banks.

Their central banks are being forced to choose between passively letting these inflows push up their exchange rates – thereby pricing their exports out of foreign markets – or recycling these inflows into U.S. Treasury bills yielding only 1% with declining exchange value. (Longer-term bonds risk a price decline if U.S interest rates should rise.)

The euphemism for flooding economies with credit is “quantitative easing.” The Federal Reserve is pumping a tidal wave of liquidity and reserves into the financial system to reduce interest rates, ostensibly to enable banks to “earn their way” out of negative equity resulting from the bad loans made during the real estate bubble. This liquidity is spilling over to foreign economies, increasing their exchange rates. Joseph Stiglitz recently acknowledged that instead of helping the global recovery, the “flood of liquidity” from the Fed and the European Central Bank is causing “chaos” in foreign exchange markets. “The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy. ... It’s doing nothing for the American economy, but it’s causing chaos over the rest of the world.”

What U.S. quantitative easing is achieving is to drive the dollar down and other currencies up, much to the applause of currency speculators enjoying quick and easy gains. Yet it is to defend this system that U.S. diplomats and bank lobbyists are threatening to derail the international financial system and plunge world trade into anarchy if other countries do not agree to a replay of the 1985 Plaza Accord “as a possible framework for engineering an orderly decline in the dollar and avoiding potentially destabilizing trade fights.”

The Plaza Accord derailed Japan’s economy by raising its exchange rate while lowering interest rates, flooding its economy with enough credit to inflate a real estate bubble. IMF managing director Dominique Strauss-Kahn was more realistic. “I’m not sure the mood is to have a new Plaza or Louvre accord,” he said at a press briefing on the eve of the IMF meetings in Washington. “We are in a different time today.” Acknowledging the need for “some element of capital controls [to] be put in place,” he added that in view of U.S. insistence on open, unprotected capital markets, “The idea that there is an absolute need in a globalised world to work together may lose some steam.”

At issue is how long nations will succumb to the speculative dollar glut. The world is being forced to choose between subordination to U.S. economic nationalism or an interim of financial anarchy. Nations are responding by seeking to create an alternative international financial system, risking an anarchic transition period in order to create a fairer world economy.

Re-inflating the financial bubble rather than writing down debts

The global financial system already has seen one long and unsuccessful experiment in quantitative easing in Japan’s carry trade. After its financial and property bubble burst in 1990, the Bank of Japan sought to enable its banks to “earn their way out of negative equity” by supplying them with low-interest credit for them to lend out. Japan’s recession left little demand at home, so its banks developed the carry trade: lending at a low interest rate to arbitrageurs to buy higher-yielding securities. Iceland, for example, was paying 15%. So yen were borrowed to convert into dollars, euros, Icelandic kroner and Chinese renminbi to buy government bonds, private-sector bonds, stocks, currency options and other financial intermediation. Not much of this funding was used to finance new capital formation. It was purely financial in character – extractive, not productive.

By 2006 the United States and Europe were experiencing a financial and real estate bubble of its own. And after it burst in 2008, they did what Japan’s banks did after 1990. Seeking to help U.S. banks work their way out of negative equity, the Federal Reserve flooded the economy with credit. The aim was to provide more liquidity, in the hope that banks would lend more to domestic borrowers. The economy would “borrow its way out of debt,” re-inflating asset prices for real estate, stocks and bonds so as to deter home foreclosures and the ensuing wipeout of collateral on bank balance sheets.

Quantitative easing subsidizes U.S. capital flight, pushing up non-dollar currency exchange rates

Quantitative easing may not have set out to disrupt the global trade and financial system or start a round of currency speculation, but that is the result of the Fed’s decision in 2008 to keep unpayably high debts from defaulting by re-inflating U.S. real estate and financial markets. The aim is to pull home ownership out of negative equity, rescuing the banking system’s balance sheets and thus saving the government from having to indulge in a TARP II, which looks politically impossible given the mood of most Americans.

The announced objective is not materializing. Instead of increasing their loans against U.S. real estate, consumers or businesses, banks are still reducing their exposure. This is why the U.S. savings rate is jumping. The “saving” that is reported (up from zero to 3% of GDP) is taking the form of paying down debts taken out in the past, not building up liquid funds. Just as hoarding diverts revenue away from being spent on goods and services, so debt repayment shrinks spendable income. Why then would banks lend more under conditions where a third of U.S. homes already are in negative equity and the economy is shrinking as a result of debt deflation?

Mr. Bernanke proposes to solve this problem by injecting another $1 trillion of liquidity over the coming year, on top of the $2 trillion in new Federal Reserve credit already created during 2009-10. This quantitative easing has been sent abroad, mainly to the BRIC countries: Brazil, Russia, India and China. “Recent research at the International Monetary Fund has shown conclusively that G4 monetary easing has in the past transferred itself almost completely to the emerging economies … since 1995, the stance of monetary policy in Asia has been almost entirely determined by the monetary stance of the G4 – the US, eurozone, Japan and China – led by the Fed.” According to the IMF, “equity prices in Asia and Latin America generally rise when excess liquidity is transferred from the G4 to the emerging economies.” This is what has led gold prices to surge and investors to move out of the dollar since early September, prompting other nations to protect their economies.

Speculative credit from U.S., Japanese and British banks to buy bonds, stocks and currencies in the BRIC and Third World countries is a self-feeding expansion, pushing up their currencies as well as their asset prices. Their central banks end up with these dollars, whose value falls as measured in their own local currencies. U.S. officials say that this is all part of the free market. “It is not good for the world for the burden of solving this broader problem … to rest on the shoulders of the United States,” insisted Treasury Secretary Tim Geithner on Wednesday, as if the spillover from U.S. quantitative easing and deregulation was not promoting the speculative dollar glut.

So other countries are obliged to solve the problem on their own. Japan is holding down its exchange rate by selling yen and buying U.S. Treasury bonds in the face of its carry trade being unwound as arbitrageurs pay back the yen they earlier borrowed to buy higher-yielding but increasingly risky sovereign debt from countries such as Greece. These paybacks have pushed up the yen’s exchange rate by 12% against the dollar so far during 2010, prompting Bank of Japan governor Masaaki Shirakawa to announce on Tuesday, October 5, that Japan had “no choice” but to “spend 5 trillion yen ($60 billion) to buy government bonds, corporate IOUs, real-estate investment trust funds and exchange-traded funds – the latter two a departure from past practice.”

This “sterilization” of unwanted inflows is what the United States has criticized China for doing. China has tried more normal ways to recycle its trade surplus, by seeking out U.S. companies to buy. But Congress would not let CNOOC buy into U.S. oil refinery capacity a few years ago, and the Canadian government is now being urged to block China’s attempt to purchase its potash resources. Such protectionism leaves little option for China and other countries except to hold their currencies stable by purchasing U.S. and European government bonds.

The problem for all countries today is that as presently structured, the global financial system rewards speculation and makes it difficult for central banks to maintain stability without recycling dollar inflows to the U.S. Government, which enjoys a near monopoly in providing the world’s central bank reserves by running budget and balance-of-payments deficits. As noted earlier, arbitrageurs obtain a twofold gain: the margin between Brazil’s nearly 12% yield on its long-term government bonds and the cost of U.S. credit (1%), plus the foreign-exchange gain resulting from the fact that the outflow from dollars into reals has pushed up the real’s exchange rate some 30% – from R$2.50 at the start of 2009 to R$1.75 last week. Taking into account the ability to leverage $1 million of one’s own equity investment to buy $100 million of foreign securities, the rate of return is 3000% since January 2009.

Brazil has been more a victim than a beneficiary of what is euphemized as a “capital inflow.” The inflow of foreign money has pushed up the real by 4% in just over a month (from September 1 through early October), and the past year’s run-up has eroded the competitiveness of Brazilian exports. To deter the currency’s rise, the government imposed a 4% tax on foreign purchases of its bonds on October 4. “It’s not only a currency war,” Finance Minister Guido Mantega explained. “It tends to become a trade war and this is our concern.” Thailand’s central bank director Wongwatoo Potirat warned that his country was considering similar taxes and currency trade restrictions to stem the baht’s rise. Subir Gokarn, deputy governor of the Reserve Bank of India, announced that his country also was reviewing defenses against the “potential threat” of inward capital flows.”

Such inflows do not provide capital for tangible investment. They are predatory, and cause currency fluctuation that disrupts trade patterns while creating enormous trading profits for large financial institutions and their customers. Yet most discussions treat the balance of payments and exchange rates as if they were determined purely by commodity trade and “purchasing power parity,” not by the financial flows and military spending that actually dominate the balance of payments. The reality is that today’s financial interregnum – anarchic “free” markets prior to countries hurriedly putting up their own monetary defenses – provides the arbitrage opportunity of the century. This is what bank lobbyists have been pressing for. It has little to do with the welfare of workers in their own country.

The potentially largest speculative prize promises to be an upward revaluation of China’s renminbi. The House Ways and Means Committee is demanding that China raise its exchange rate by the 20 percent that the Treasury and Federal Reserve are suggesting. Revaluation of this magnitude would enable speculators to put down 1% equity – say, $1 million to borrow $99 million – and buy Chinese renminbi forward. The revaluation being demanded would produce a 2000% profit of $20 million by turning the $100 million bet (and just $1 million “serious money”) into $120 million. Banks can trade on much larger, nearly infinitely leveraged margins, much like drawing up CDO swaps and other derivative plays.

This kind of money has been made by speculating on Brazilian, Indian and Chinese securities and those of other countries whose exchange rates have been forced up by credit-flight out of the dollar, which has fallen by 7% against a basket of currencies since early September when the Federal Reserve floated the prospect of quantitative easing. During the week leading up to the IMF meetings in Washington, the Thai baht and Indian rupee soared in anticipation that the United States and Britain would block any attempts by foreign countries to change the financial system and curb disruptive currency gambling.

This capital outflow from the United States has indeed helped domestic banks rebuild their balance sheets, as the Fed intended. But in the process the international financial system has been victimized as collateral damage. This prompted Chinese officials to counter U.S. attempts to blame it for running a trade surplus by retorting that U.S. financial aggression “risked bringing mutual destruction upon the great economic powers.”

From the gold-exchange standard to the Treasury-bill standard to “free credit” anarchy

Indeed, the standoff between the United States and other countries at the IMF meetings in Washington this weekend threatens to cause the most serious rupture since the breakdown of the London Monetary Conference in 1933. The global financial system threatens once again to break apart, deranging the world’s trade and investment relationships – or to take a new form that will leave the United States isolated in the face of its structural long-term balance-of-payments deficit.

This crisis provides an opportunity – indeed, a need – to step back and review the longue durĂ©e of international financial evolution to see where past trends are leading and what paths need to be re-tracked. For many centuries prior to 1971, nations settled their balance of payments in gold or silver. This “money of the world,” as Sir James Steuart called gold in 1767, formed the basis of domestic currency as well. Until 1971 each U.S. Federal Reserve note was backed 25% by gold, valued at $35 an ounce. Countries had to obtain gold by running trade and payments surpluses in order to increase their money supply to facilitate general economic expansion. And when they ran trade deficits or undertook military campaigns, central banks restricted the supply of domestic credit to raise interest rates and attract foreign financial inflows.

As long as this behavioral condition remained in place, the international financial system operated fairly smoothly under checks and balances, albeit under “stop-go” policies when business expansions led to trade and payments deficits. Countries running such deficits raised their interest rates to attract foreign capital, while slashing government spending, raising taxes on consumers and slowing the domestic economy so as to reduce the purchase of imports.

What destabilized this system was war spending. War-related transactions spanning World Wars I and II enabled the United States to accumulate some 80% of the world’s monetary gold by 1950. This made the dollar a virtual proxy for gold. But after the Korean War broke out, U.S. overseas military spending accounted for the entire payments deficit during the 1950s and ‘60s and early ‘70s, while private-sector trade and investment were exactly in balance.

By August 1971, war spending in Vietnam and other foreign countries forced the United States to suspend gold convertibility of the dollar through sales via the London Gold Pool. But largely by inertia, central banks continued to settle their payments balances in U.S. Treasury securities. After all, there was no other asset in sufficient supply to form the basis for central bank monetary reserves. But replacing gold – a pure asset – with dollar-denominated U.S. Treasury debt transformed the global financial system. It became debt-based, not asset-based. And geopolitically, the Treasury-bill standard made the United States immune from the traditional balance-of-payments and financial constraints, enabling its capital markets to become more highly debt-leveraged and “innovative.” It also enabled the U.S. Government to wage foreign policy and military campaigns without much regard for the balance of payments.

The problem is that the supply of dollar credit has become potentially infinite. The “dollar glut” has grown in proportion to the U.S. payments deficit. Growth in central bank reserves and sovereign-country funds has taken the form of recycling of dollar inflows into new purchases of U.S. Treasury securities – thereby making foreign central banks (and taxpayers) responsible for financing most of the U.S. federal budget deficit. The fact that this deficit is largely military in nature – for purposes that many foreign voters oppose – makes this lock-in particularly galling. So it hardly is surprising that foreign countries are seeking an alternative.

Contrary to most public media posturing, the U.S. payments deficit – and hence, other countries’ payments surpluses – is not primarily a trade deficit. Foreign military spending has accelerated despite the Cold War ending with dissolution of the Soviet Union in 1991. Even more important has been rising capital outflows from the United States. Banks lent to foreign governments from Third World countries to other deficit countries to cover their national payments deficits, to private borrowers to buy the foreign infrastructure being privatized or to buy foreign stocks and bonds, and to arbitrageurs to borrow at a low interest rate to buy higher-yielding securities abroad.

The corollary is that other countries’ balance-of-payments surpluses do not stem primarily from trade relations, but from financial speculation and a spillover of U.S. global military spending. Under these conditions the maneuvering for quick returns by banks and their arbitrage customers is distorting exchange rates for international trade. U.S. “quantitative easing” is coming to be perceived as a euphemism for a predatory financial attack on the rest of the world. Trade and currency stability are part of the “collateral damage” caused by the Federal Reserve and Treasury flooding the economy with liquidity to re-inflate U.S. asset prices. Faced with this quantitative easing flooding the economy with reserves to “save the banks” from negative equity, all countries are obliged to act as “currency manipulators.” So much money is made by purely financial speculation that “real” economies are being destroyed.

The coming capital controls

The global financial system is being broken up as U.S. monetary officials change the rules they laid down half a century ago. Prior to the United States going off gold in 1971, nobody dreamed that an economy could create unlimited credit on computer keyboards and not see its currency plunge. But that is what happens under the global Treasury-bill standard. Foreign countries can prevent their currencies from rising against the dollar (which prices their labor and exports out of foreign markets) only by (1) recycling dollar inflows into U.S. Treasury securities, (2) by imposing capital controls, or (3) by avoiding use of the dollar or other currencies used by financial speculators in economies promoting “quantitative easing.”

Malaysia used capital controls during the 1997 Asian Crisis to prevent short-sellers from covering their bets. This confronted speculators with a short squeeze that George Soros says made him lose money on the attempted raid. Other countries are now reviewing how to impose capital controls to protect themselves from the tsunami of credit flowing into their currencies and buying up their assets – along with gold and other commodities that are turning into vehicles for speculation rather than actual use in production. Brazil took a modest step along this path by using tax policy rather than outright capital controls when it taxed foreign buyers of its bonds last week.

If other nations take this route, it will reverse the policy of open and unprotected capital markets adopted after World War II. This trend threatens to lead to the kind of international monetary practice found from the 1930s into the ‘50s: dual exchange rates, one for financial movements and another for trade. It probably would mean replacing the IMF, World Bank and WTO with a new set of institutions, isolating U.S., British and eurozone representation.

To defend itself, the IMF is proposing to act as a “central bank” creating what was called “paper gold” in the late 1960s – artificial credit in the form of Special Drawing Rights (SDRs). However, other countries already have complained that voting control remains dominated by the major promoters of arbitrage speculation – the United States, Britain and the eurozone. And the IMF’s Articles of Agreement prevent countries from protecting themselves, characterizing this as “interfering” with “open capital markets.” So the impasse reached this weekend appears to be permanent. As one report summarized matters: “‘There is only one obstacle, which is the agreement of the members,’ said a frustrated Mr Strauss Kahn.” He added: “The language is ineffective.”

Paul Martin, the former Canadian prime minister who helped create the G20 after the 1997-1998 Asian financial crisis, noted that “the big powers were largely immune to being named and shamed.” And in a Financial Times interview, Mohamed El-Erian, a former senior IMF official and now chief executive of Pimco, said: “You have a burst pipe behind the wall and the water is coming out. You have to fix the pipe, not just patch the wall.”

The BRIC countries are simply creating their own parallel system. In September, China supported a Russian proposal to start direct trading between the yuan and the ruble. It has brokered a similar deal with Brazil. And on the eve of the IMF meetings in Washington on Friday, October 8, Premier Wen stopped off in Istanbul to reach agreement with Turkish Prime Minister Erdogan to use their own currencies in tripling Turkish-Chinese trade to $50 billion over the next five years, effectively excluding the U.S. dollar. “We are forming an economic strategic partnership … In all of our relations, we have agreed to use the lira and yuan,” Mr. Erdogan said.

On the deepest economic plane today’s global financial breakdown is part of the price to be paid for the Federal Reserve and U.S. Treasury refusing to accept a prime axiom of banking: Debts that cannot be paid, won’t be. They tried to “save” the banking system from debt write-downs in 2008 by keeping the debt overhead in place while re-inflating asset prices. In the face of the repayment burden shrinking the U.S. economy, the Fed’s idea of helping the banks “earn their way out of negative equity” is to provide opportunities for predatory finance, leading to a flood of financial speculation. Economies targeted by global speculators understandably are seeking alternative arrangements. It does not look like these can be achieved via the IMF or other international forums in ways that U.S. financial strategists will willingly accept.


[1] Sewell Chan, “Currency Rift With China Exposes Shifting Clout,” The New York Times, October 11, 2010.

[2] Walter Brandimarte, “Fed, ECB throwing world into chaos: Stiglitz,” Reuters, Oct. 5, 2010, reporting on a talk by Prof. Stiglitz at Columbia University, Dirk Bezemer and Geoffrey Gardiner, “Quantitative Easing is Pushing on a String” (paper prepared for the Boeckler Conference, Berlin, October 29-30, 2010), make clear that “QE provides bank customers, not banks, with loanable funds. Central Banks can supply commercial banks with liquidity that facilitates interbank payments and payments by customers and banks to the government, but what banks lend is their own debt, not that of the central bank. Whether the funds are lent for useful purposes will depend, not on the adequacy of the supply of fund, but on whether the environment is encouraging to real investment.” (p.c., G. Gardiner)

[3] Tom Lauricella, “Dollar's Fall Roils World: As Global Leaders Meet, Strains Rise Among Nations Competing to Save Exports,” Wall Street Journal, October 8, 2010, quoting Edwin Truman, a former U.S. Treasury official now a senior fellow at the Peterson Institute for International Economics.

[4] Alan Beattie, Chris Giles and Michiyo Nakamoto, “Currency war fears dominate IMF talks,” Financial Times, Oct. 9, 2010, and Alex Frangos, “Easy Money Churns Emerging Markets,” Wall Street Journal, Oct. 8, 2010.

[5] Gavyn Davies, “The global implications of QE2,” Financial Times, October 5, 2010.

[6] Alan Beattie, “Global economy: Going head to head,” Financial Times, October 8, 2010.

[7] Megumi Fujikawa and David Wessel, “Central Banks Open Spigot,” Wall Street Journal, October 6, 2010.

[8] Jonathan Wheatley, “Investors calm over Brazil tax rise,” Financial Times, October 6, 2010.

[9] Alan Beattie, Joshua Chaffin and Kevin Brown, “Wen warns against renminbi pressure,” Financial Times, October 7, 2010.

[10] Alan Beattie, “Global economy: Going head to head,” Financial Times, October 8, 2010.

[11] Chris Giles and Alan Beattie, “Leaders pledge cooperation on currencies,” Financial Times, October 9, 2010.

[12] Chris Giles and Alan Beattie, “Global clash over economy,” Financial Times, October 10, 2010.

[13] Alan Beattie and Chris Giles, “IMF meeting dashes hopes for co-operation,” Financial Times,

October 10, 2010.

[14] Joe Parkinson, “Turkey, China Shun the Dollar in Conducting Trade,” Wall Street Journal, October 8, 2010.

How Come Right-Wingers Aren't Up in Arms About Wall St's Assault on Private Property?

How Come Right-Wingers Aren't Up in Arms About Wall St's Assault on Private Property?

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Ever since the financial crisis hit, conservatives -- at places like the American Enterprise Institute and the Heritage Foundation, joined by some prominent Tea Party groups -- have fought tooth-and-nail to deflect new regulation of Wall Street’s wheeler-dealers. (In my new book, The Fifteen Biggest Lies About the Economy, I note that the Right, following the advice of conservative message-maker Frank Luntz, derided new regulations that Wall Street was fighting hard to kill as a “second bailout” of the big banks. It was a lie so bold that one couldn’t help but be impressed with their chutzpah.)

So there’s a certain amount of irony in new revelations that the banks, in their quest for easy profits, appear to have undermined one of the Right’s most important principles: the sanctity of property ownership.

“If you own something,” George W. Bush explained in a 2004 speech, “you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country.”

Yet today, thanks to the “innovative” financial instruments cooked up by the Wall Street Casino, doubt may be cast on the ownership of American homes across the country. Brady Dennis and Ariana Eunjung Cha, writing in the Washington Post, laid out the contors of the story last week:

Millions of U.S. mortgages have been shuttled around the global financial system -- sold and resold by firms -- without the documents that traditionally prove who legally owns the loans.

Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.

These fundamental concerns over ownership extend beyond those that surfaced over the past two weeks amid reports of fraudulent loan documents and corporate "robo-signers."

The court decisions, should they continue to spread, could call into doubt the ownership of mortgages throughout the country, raising urgent challenges for both the real estate market and the wider financial system.

Having pushed for deregulation that broke down the wall between commercial lending and investment banking, Wall Streeters came up with a way to slice and dice risky mortgages into investment vehicles, which they peddled for fat fees. Essentially, they laundered the risk out of shaky mortgages, at least in theory, transforming some slices into AAA-rated securities (which allowed pension funds and other institutional players to invest in them). In doing so, they broke the relationship between lenders and homeowners, and shielded themselves from the fallout. (Again, only in theory -- when the house of cards eventually came down it brought about the most painful economic downturn since the Great Depression, and they came running to the taxpayers for a bailout.)

Those investments -- the hottest thing around at the time -- created an enormous demand for new loans. They were the raw material from which all those securities that were later referred to as “toxic” were created. Lenders, drinking deeply of their own stream of fees, were happy to accommodate the bankers. They relaxed loan standards to ridiculous levels, and families trying to live the American Dream went on a home buying (and refinancing) binge.

In order to do their supposed magic, Wall Street needed a way to trade mortgages back and forth quickly, without waiting for all the paperwork to be processed in the time-consuming way mortgages had traditionally been transferred. So, in 2000, the mortgage industry --- led by GMAC, Fannie Mae, Freddie Mac and the Mortgage Bankers Association -- created the Mortgage Electronic Registration Systems (MERS), a Virginia-based firm that would serve as an electronic clearing house to track the mortgages being sliced and diced and swapped by the big trading houses.

MERS allowed Wall Street to trade mortgages in an instant without conforming to local property laws that required new paperwork to be filed when a mortgage was transferred. Looking to turn quick deals for a fee, many mortgages were processed without verifying that all the paperwork was in order. They thought they were smart, but it turned out they were too smart for their own good -- and the good of American homeowners.

As a result, in the wake of the crash of the real estate market, millions of families may now find themselves not only “underwater,” but also living in homes without clear titles.

"It's an issue of the whole process of foreclosure having been so muddied by the [securitization] process," Nancy Bush, a banking analyst from NAB Research, told the Washington Post. "It is no longer a straightforward legalistic process, which is what foreclosures are supposed to be." This may all be leading toward what Bush calls a "possible nightmare scenario [in which] no foreclosure is valid."

Lawyers representing struggling homeowners are increasingly challenging the banks’ right to foreclose on properties in default. “If millions of foreclosures past and present were invalidated because of the way the hurried securitization process muddied the chain of ownership,” wrote the Post's Dennis and Cha, “banks could face lawsuits from homeowners and from investors who bought stakes in the mortgage securities -- an expensive and potentially crippling proposition.”

In the wake of recent revelations that big lenders had engaged in fraud, the muddled paper trails of millions of mortgages threaten to bring a second crushing blow to the economy, courtesy of the financial wiz kids the Corporate Right has been so eager to defend. It’s far too early to tell where this alarming dynamic may lead, but it has the potential to fundamentally weaken the principle that ownership of private property is sacrosanct absent due process.

Yet just last week, the Heritage Foundation’s Conn Carroll blasted the Obama administration’s new Consumer Financial Protection Bureau, and its head, Elizabeth Warren. “An enlightened expert, like Warren, given broad new powers by an unaccountably vague statute is exactly what the federal government needs to enforce order on our complex modern world,” he sneered. “For our Founding Fathers, however, everything about Warren, from the way she attained her new powers to the way she plans to use them, is antithetical to our nation’s First Principles and the United States Constitution.”

Warren’s agency is supposed to prevent the kinds of shenanigans that are now coming to light in the mortgage industry; yet for the Right, no regulation is acceptable. It’s yet more evidence that despite conservatives’ self-proclaimed adherence to “principles” -- like private property rights -- the one that rises above all others is protecting the privilege of the wealthy.

US jobless claims rise

US jobless claims rise

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The number of Americans filing first-time applications for unemployment benefits rose unexpectedly last week, the Labor Department reported Thursday. Jobless claims increased by 13,000 to 462,000 in the week ended October 9, confounding economists' projections that claims would hold at 445,000.

The four-week moving average of claims also rose, increasing to 459,000 from 456,750. It was the first rise in the four-week measure since the week ended August 21. Economists consider any figure above 400,000 indicative of an economy that is failing to generate sufficient jobs to reduce unemployment.

States and territories across the country reported an increase in newly unemployed filers, with 39 registering a rise and only 14 reporting a decline.

The jobless claims figures provide further evidence that the so-called recovery, which has overwhelmingly benefited corporate profits and the stock market rather than the working population, is faltering, while the Obama administration is taking no serious measures to address the worst jobs crisis since the Great Depression. They follow last Friday's disastrous employment survey for September, which reported a net drop in US payrolls of 95,000, the fourth straight monthly decline.

Private-sector jobs increased last month by an anemic 64,000, while the public sector lost 159,000 jobs. The private sector needs to generate at least 125,000 jobs a month to keep pace with the normal growth of the labor market. So far this year employers have created an average of only 68,111 jobs per month.

The official unemployment rate remained at 9.6 percent in September, but only because of a sharp increase in the number of so-called "discouraged" workers who stopped looking for work. The broader "underemployment" rate, which includes discouraged workers and those working part-time because they cannot find full-time employment, jumped to 17.1 percent, the second highest level on record.

Most of the new jobs that are being created are low-paying and a majority are temporary positions. According to the Labor Department's Bureau of Labor Statistics, the number of workers placed by temporary staffing agencies has risen by 404,000 over the past year, making up 68 percent of the 593,000 jobs added by private employers.

Thursday's report on jobless claims indirectly pointed to the growing distress in which long-term unemployed workers find themselves. While initial jobless claims rose, the total number of people on unemployment insurance rolls decreased to the lowest level since November 2008. Those who have used up traditional benefits and are now collecting emergency extended payments financed by the federal government also decreased, falling about 340,000 in the week ended September 25.

These declines reflect the growing number of workers who are exhausting their jobless benefits and finding themselves without any cash income.

The New York Times on Wednesday published an article providing statistics indicating the depth of the economic crisis in the US and the lack on any real prospect for a genuine recovery. The Times noted, “At the current rate of job creation, the nation would need nine years to recapture the jobs lost during the recession. And that doesn’t even account for five million or six million jobs needed in that time to keep pace with an expanding population. Even top Obama officials concede the unemployment rate could climb higher still.”

The article went on to outline the depths of the real estate collapse: “Median house prices have dropped 20 percent since 2005. Given an inflation rate of about 2 percent—a common forecast—it would take 13 years for housing prices to climb back to their peak.” According to Allen L. Sinai, chief global economist at the consulting firm Decision Economics, “Commercial vacancies are soaring, and it could take a decade to absorb the excess in many of the largest cities.”

The Times quoted Sinai as saying, “No wonder Americans are pessimistic and unhappy. The only way we are going to get in gear is to face up to the reality that we are entering a period of austerity.”

Citing the impact of the crisis on Arizona, one of the boom states before the onset of the slump, the newspaper reported that the Association of Arizona Food Banks says demand has nearly doubled in the last 18 months.

A report released Wednesday by the Brookings Institution's Hamilton Project, formed by a number of Clinton administration Democrats, noted that what it calls the "job gap"--the number of jobs that need to be created for the economy to return to pre-recession levels and absorb the 125,000 new entrants to the labor force each month--grew to 11.9 million in September.

The report went on to say: "If the economy adds about 208,000 jobs per month (the average monthly rate for the best year of job creation in the 2000s), then it will take almost 12 years to close the job gap. At a more optimistic rate of 321,000 jobs per month (the average monthly rate for the best year of the 1990s) the economy will reach pre-recession employment levels only after five years.”

By this reckoning, with net payrolls declining or, at best, growing by considerably less than 100,000 a month, the job gap will never by closed and mass unemployment will remain a permanent feature of American life.

The Real Horror Story: The U.S. Economic Meltdown

The Real Horror Story: The U.S. Economic Meltdown

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This October, millions of Americans are going to watch horror movies and read horror stories because they enjoy being frightened. Well, if you really want to be scared, you should just check out the real horror story unfolding right before our eyes - the U.S. economic meltdown. It seems like more bad news for the U.S. economy comes out almost every single day now. Unfortunately, things are about to get a whole lot worse. The mainstream media has been treating "Foreclosuregate" as if it is a minor nuisance, but the truth is that the lid is about to be publicly lifted on years and years of massive fraud in the U.S. mortgage industry, and this thing has the potential to cause economic chaos that is absolutely unprecedented. Over the past several days, expert after expert has been coming forward and warning that this crisis could completely and totally paralyze the mortgage industry in the United States. If that happens, it will be essentially like pulling the plug on the U.S. economic recovery.

Not that there was going to be a recovery anyway. The truth is that economic statistic after economic statistic has been pointing to incredible trouble for the U.S. economy.

For example, the U.S. government just announced that the U.S. trade deficit went up again in August. According to the U.S. Census Bureau, the U.S. trade deficit was $46.3 billion during August, which was up significantly from $42.6 billion in July.

So how much coverage did this get in the mainstream media?

Well, just about none.

We have gotten so used to horrific trade deficits that it isn't even news anymore.

But these trade deficits are absolutely killing our economy.

How long do you think that the U.S. economy can keep shelling out 40 or 50 billion more dollars than we take in every single month?

If you look at the countries around the world that have become very wealthy, almost all of them have gotten that way by trading with the United States.

Meanwhile, many of our once great manufacturing cities are turning into open sewers.

Every single politician in the United States should be talking about the trade deficit.

But hardly any of them are.

Is it because Americans have all become so dumbed-down that we don't understand these things anymore, or is it because we are so distracted by the various forms of entertainment that we are addicted to that we just don't care?

But the trade deficit is not the only economic statistic that is getting worse.

According to the Department of Labor, for the week ending October 9th the advance figure for seasonally adjusted initial jobless claims was 462,000, which represented an increase of 13,000 from the previous week.

We have an unemployment epidemic going on in this country, but what did the mainstream media do in response to this news?

They yawned. Instead, many of the "financial experts" were busy talking about how wonderful it is that the Stock Market is going up, up, up.

Well, as one reader recently reminded me, if you want to evaluate an economy by how much the stock market is going up, then the economy of Zimbabwe has had an absolutely wonderful decade!

The truth is that the stock market is not a good barometer for what is actually going on.

What is really happening is that the U.S. economic system is literally coming apart at the seams.

Yet another piece of really bad economic news that just came out is that the number of home repossessions by banks set a new all-time record during the month of September. The record total of 102,134 bank repossessions was the first time ever that bank repossessions climbed over the 100,000 mark for a single month.

The good news is that bank repossessions are about to come to a screeching halt.

The bad news is that it is because the U.S. mortgage industry is about to become completely and totally paralyzed by this foreclosure fraud crisis.

The following are three basic points to remember about this foreclosure mess....

A) Massive Fraud Was Committed At Every Stage By The Mortgage Industry

In a previous article entitled "Foreclosure Fraud: 6 Things You Need To Know About The Crisis That Could Potentially Rip The U.S. Economy To Shreds", I attempted to describe just how widespread the fraud in the mortgage industry has been....

The truth is that there was fraud going on in every segment of the mortgage industry over the past decade. Predatory lending institutions were aggressively signing consumers up for mortgages that they knew they could never repay. Many consumers were also committing fraud because a lot of them also knew that they could never possibly repay the mortgages. These bad mortgages were fraudulently bundled up and securitized, and these securitized financial instruments were fraudulently marketed as solid investments. Those who certified that these junk securities were "AAA rated" also committed fraud. Then these securities were traded at lightning speed all over the globe and a ton of mortgage paperwork became "lost" or "missing".

Finally, when it came time to foreclose on these bad mortgages, a whole lot more fraud was committed. Thousands upon thousands of foreclosure documents were "robo-signed", but the truth is that investigators are starting to discover a lot of things about these mortgages that are a lot worse than that.

B) Nobody Really Knows Who Owns Or Who Has The Right To Foreclose On Millions Upon Millions Of Mortgages

The legal rights to millions of U.S. mortgages has been scrambled so badly that it might actually be impossible to fully sort this mess out. In particular, MERS (Mortgage Electronic Registration Systems) has created a paperwork nightmare that may never be able to be completely remediated.

On a previous article, a reader named William left a comment that did a great job of describing the very serious problem that we are now facing because of MERS....

MERS – potentially the most serious problem because it affects who really owns the loans. Securitization mandates that loans be transferred into REMIC trusts within a strict timeframe. Late transfers are not allowed. In spite of the supposed “ease” of transfer through MERS, it now appears that perhaps 60% of US loans were never properly transferred. Absent remedial legislation, it is impossible to do so now. And the former owners may be out of business or bankrupt. So how do we get these loans to the trust beneficiaries who were supposed to own them? This is no simple paperwork correction. The train has left the station, with no more to follow.

C) Unprecedented Chaos Is Going To Erupt As Faith In The Mortgage System Completely Dies

So what is going to happen as a result of all of this fraud and confusion in the mortgage industry? Well, basically everybody is going to sue everybody. It is going to be absolute mayhem.

Charles Hugh Smith recently put it this way....

Real estate attorneys can rejoice: everyone will get sued, in every court in the land. Banks will get sued, title insurance companies will get sued, realtors will get sued, foreclosure mills will get sued, MERS will get sued, and so on. The attorneys general of the states will all sue the banks and mortgage mills, claiming billions in damages.

Meanwhile, virtually nobody will want to buy any house that has been foreclosed on in the past ten years or so until this mess is sorted out (which could take years and years).

Meanwhile, title insurance companies are going to avoid foreclosures like the plague.

Meanwhile, all of the investors that have been propping up the housing market by buying foreclosures are going to be fleeing the market in droves.

Meanwhile, the financial world is going to be trying to figure out which U.S. lending institutions are still solvent. The value of most mortgage-based assets is now totally up in the air.

Meanwhile, millions more homeowners across the United States will be emboldened to quit making payments on their mortgages as they realize that those holding their mortgages may not have the legal right to foreclose on them.

And that is where the true horror of this entire situation may lie. What is going to happen if millions upon millions of Americans holding underwater mortgages look at this situation and decide that they really don't have to be afraid of the threat of foreclosure any longer?

If a massive wave of homeowners suddenly decides to simply quit paying their mortgages, it would basically wipe out nearly the entire mortgage industry.

That would likely mean more government bailouts, more government control, much higher mortgage rates and eventually a serious crash in housing prices.

This crisis is incredibly complicated and it has a ton of moving parts, so it is extremely difficult to describe accurately. But the reality is that this mess has the potential to hurt the U.S. real estate market much more than "subprime mortgages" ever did.

Hopefully this crisis will not be "the straw that broke the camel's back" for the U.S. economy, but with each passing day this thing looks even more horrifying.

One way or another, real estate law in the United State is going to be changed forever as a result of this crisis. It is going to be extremely interesting to see how all of this plays out.

Is Bernanke Already Getting Nervous About The Consequences Of QEII?

Is Bernanke Already Getting Nervous About The Consequences Of QEII?

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“Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.”

I am still not convinced that Mr. Bernanke can talk inflation into the global economy although asset markets certainly appear to disagree with me in the near-term. I don’t want to read into these tests at all (it is very clear that the Fed intends to remain accommodative for “an extended period”), but it’s hard not to view this as Mr. Bernanke perhaps being a bit more concerned about inflation and unintended consequences than he leads on. After all, you don’t tell the QB to warm up if you don’t even intend to use him. Perhaps worse, however, this makes me wonder if Mr. Bernanke even understands the implications of the levers he is pulling. He famously trashed the Japanese in 1999 for not trying anything and everything:

“Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work.”

Paul Krugman recently said that this exact sentence is now perfectly applicable to the USA. Boy is he right about that. Bernanke never could have imagined that he’d so arrogantly rail against the Japanese only to find himself in their exact shoes just a decade later. Except Mr. Bernanke isn’t hesitant to try anything and everything. The problem is, he doesn’t seem to be sure what is going to fall out of the sky after he pulls each lever. In other words, he is just as clueless as the same Japanese bankers he arrogantly berated.

The Fed performed a $260MM reverse repo test yesterday morning in order to “ensure that this tool will be ready if the Federal Open Market Committee decides it should be used.” Of course, this is the Fed’s way of saying that they want to be on the ready when tighter monetary policy is necessary. These little tests are just small scale ways of making sure that the QB’s arm is loose before he needs to go into the game. The NY Fed explained clearly that these are merely tests and do not reflect any change in monetary policy: