Tuesday, June 25, 2013

The 441 TRILLION Dollar Interest Rate Derivatives Time Bomb

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Do you want to know the primary reason why rapidly rising interest rates could take down the entire global financial system?  Most people might think that it would be because the U.S. government would have to pay much more interest on the national debt.  And yes, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has actually been much higher in the past), the federal government would be paying out about a trillion dollars a year just in interest on the national debt.  But that isn't it.  Nor does the primary reason have to do with the fact that rapidly rising interest rates would impose massive losses on bond investors.  At this point, it is being projected that if U.S. bond yields rise by an average of 3 percentage points, it will cause investors to lose a trillion dollars.  Yes, that is a 1 with 12 zeroes after it ($1,000,000,000,000).  But that is not the number one danger posed by rapidly rising interest rates either.  Rather, the number one reason why rapidly rising interest rates could cause the entire global financial system to crash is because there are more than 441 TRILLION dollars worth of interest rate derivatives sitting out there.  This number comes directly from the Bank for International Settlements - the central bank of central banks.  In other words, more than $441,000,000,000,000 has been bet on the movement of interest rates.  Normally these bets do not cause a major problem because rates tend to move very slowly and the system stays balanced.  But now rates are starting to skyrocket, and the sophisticated financial models used by derivatives traders do not account for this kind of movement.
So what does all of this mean?
It means that the global financial system is potentially heading for massive amounts of trouble if interest rates continue to soar.
Today, the yield on 10 year U.S. Treasury bonds rocketed up to 2.66% before settling back to 2.55%.  The chart posted below shows how dramatically the yield on 10 year U.S. Treasuries has moved in recent days...
10 Year Treasury Yield
Right now, the yield on 10 year U.S. Treasuries is about 30 percentabove its 50 day moving average.  That is the most that it has been above its 50 day moving average in 50 years.
Like I mentioned above, we are moving into uncharted territory and this data doesn't really fit into the models used by derivatives traders.
The yield on 5 year U.S. Treasuries has been moving even more dramatically...
5 Year Treasury Yield
Last week, the yield on 5 year U.S. Treasuries rose by an astounding 37 percent.  That was the largest increase in 50 years.
Once again, this is uncharted territory.
If rates continue to shoot up, there are going to be some financial institutions out there that are going to start losing absolutely massive amounts of money on interest rate derivative contracts.
So exactly what is an interest rate derivative?
The following is how Investopedia defines interest rate derivatives...
A financial instrument based on an underlying financial security whose value is affected by changes in interest rates. Interest-rate derivatives are hedges used by institutional investors such as banks to combat the changes in market interest rates. Individual investors are more likely to use interest-rate derivatives as a speculative tool - they hope to profit from their guesses about which direction market interest rates will move.
They can be very complicated, but I prefer to think of them in very simple terms.  Just imagine walking into a casino and placing a bet that the yield on 10 year U.S. Treasuries will hit 2.75% in July.  If it does reach that level, you win.  If it doesn't, you lose.  That is a very simplistic example, but I think that it is a helpful one.  At the heart of it, the 441 TRILLION dollar derivatives market is just a bunch of people making bets about which way interest rates will go.
And normally the betting stays very balanced and our financial system is not threatened.  The people that run this betting use models that are far more sophisticated than anything that Las Vegas uses.  But all models are based on human assumptions, and wild swings in interest rates could break their models and potentially start causing financial losses on a scale that our financial system has never seen before.
We are potentially talking about a financial collapse far worse than anything that we saw back in 2008.
Remember, the U.S. national debt is just now approaching 17 trillion dollars.  So when you are talking about 441 trillion dollars you are talking about an amount of money that is almost unimaginable.
Meanwhile, China appears to be on the verge of another financial crisis as well.  The following is from a recent article by Graham Summers...
China is on the verge of a “Lehman” moment as its shadow banking system implodes. China had pumped roughly $1.6 trillion in new credit (that’s 21% of GDP) into its economy in the last two quarters… and China GDP growth is in fact slowing.
This is what a credit bubble bursting looks like: the pumping becomes more and more frantic with less and less returns.
And Chinese stocks just experienced their largest decline since 2009.  The second largest economy on earth is starting to have significant financial problems at the same time that our markets are starting to crumble.
Not good.
And don't forget about Europe.  European stocks have had a very, very rough month so far...
The narrow EuroStoxx 50 index is now at its lowest in over seven months (-5.4% year-to-date and -12.5% from its highs in May) and the broader EuroStoxx 600 is also flailing lower. The European bank stocks pushed down to their lowest in almost 10 months and are now in bear market territory - down 22.5% from their highs. Spain and Italy are now testing their lowest level in 9 months.
So are the central banks of the world going to swoop in and rescue the financial markets from the brink of disaster?
At this point it does not appear likely.
As I have written about previously, the Bank for International Settlements is the central bank for central banks, and it has a tremendous amount of influence over central bank policy all over the planet.
The other day, the general manager of the Bank for International Settlements, Jaime Caruana, gave a speech entitled "Making the most of borrowed time".  In that speech, he made it clear that the era of extraordinary central bank intervention was coming to an end.  The following is one short excerpt from that speech...
"Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road. And it is a call for recognizing that returning to stability and prosperity is a shared responsibility. Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilizing public finances."
Monetary policy has done its part?
That sounds pretty firm.
And if you read the entire speech, you will see that Caruana makes it clear that he believes that it is time for the financial markets to stand on their own.
But will they be able to?
As I wrote about yesterday, the U.S. financial system is a massive Ponzi scheme that is on the verge of imploding.  Unprecedented intervention by the Federal Reserve has helped to prop it up for the last couple of years, and there is a lot of fear in the financial world about what is going to happen once that unprecedented intervention is gone.
So what happens next?
Well, nobody knows for sure, but one thing seems certain.  The last half of 2013 is shaping up to be very, very interesting.

The Rational Market Myth; Armageddon Without Nukes

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One of the myths of economics is that markets are rational. Theories are based on this assumption, and the belief that markets are rational fuels the argument against regulation. The market response to the Federal Reserve’s June 19 statement that it will taper off its bond purchases if its forecast comes true is unequivocal proof that markets are irrational.
The Federal Reserve’s statement that it “currently anticipates that it would be appropriate to moderate the monthly pace of purchases [of bonds] later this year” depends on a very big if. The if is the correctness of the Fed’s forecast of moderate economic growth and employment gains.
The Fed has not stopped purchasing $85 billion of bonds each month. So nothing real has changed. Indeed, there was no new information in the Fed’s statement. It has been known for some time that, according to the Fed, its bond purchases will gradually cease.
In response to this repeat of old information, the stock and bond markets sold off in a major way on June 19-20. This market response to the Fed’s statement indicates that the Fed’s forecast is unlikely to come true. Low interest rates and a high stock market are totally dependent on the liquidity that the Fed is injecting by printing $1,000 billion per year. If this liquidity is not injected, what will sustain the markets? If the markets crash and interest rates rise, how can the Fed expect recovery?
In other words, the participants in the stock and bond markets know that the markets are bubbles created by the printing press. There is no real basis for the high stock and bond prices. The prices are an artificial reality created by the printing press. Rational markets would take into account the printing press element and would price stocks and bonds at a much lower level.
Zero real interest rates mean that there are no risks. But how can there be no risk in Treasury bonds when the debt is growing faster than the economy?
Normally, high stock values mean strong profits from strong consumer income growth and retail sales. But we know that there is no growth in real median family income and real retail sales.
I suspect that the reason the Fed made the announcement, which seems to be derailing the Fed’s forecast of recovery on which the announcement depends, is to relieve pressure on the US dollar. For several years the Fed has been printing 1,000 billion new dollars each year. There is no demand for these dollars. So far these dollars have inflated stock and bond prices instead of consumer prices. But the implication for the dollar’s price or exchange value in currency markets is clear. The supply is increasing faster than the demand. If the dollar falters, the Fed would lose control. Rising import prices would soon drive domestic inflation and interest rates far higher than the Fed’s targets.
Washington has succeeded in getting Japan and the EU to print yen and euros in order to eliminate the likelihood of flight to other large currency alternatives to the dollar. Smaller countries have also had to print in order to protect their export markets. With so many countries printing money, the Fed’s statement implying that the US might stop printing makes the dollar look good, and, indeed, the dollar rose on the currency exchange markets.
Having neutralized the alternative currency threat to the dollar, the Fed and its agents, the bullion banks, the banks too big to fail, are still at work against the gold and silver threats to the dollar. Massive short selling of gold began at the beginning of April. Again on June 20 massive shorts of gold were sold at a time of day chosen to maximize the price decline. Only those who intend to drive down the price would sell in this way.
Since QE began, the Fed has deprived retirees of interest income and has forced retirees to spend down their capital in order to pay living expenses. Judging from the initial market response, the Fed’s latest policy announcement is adversely impacting bond, stock and real estate investors, and the manipulation of the bullion markets continues to wreak destruction on wealth stored in the only known safe haven.
How can a recovery happen when the Fed is destroying wealth?
The Fed’s irrational behavior could be seen as rational if the assumption is that the Fed’s intent is not to save the economy but to save the banks. As the Fed is committed to saving the banks “too big to fail,” it is likely that the banks know of the Fed’s announcements in advance. With inside information, the banks know precisely when to short the stock, bond, and bullion markets. The banks make billions from the inside information. The billions made help to restore the banks’ balance sheets.
Guy Lawson’s book, Octopus (2012), shows that front-running on the basis of inside information has always been the source of financial fortunes. In order to save the banks, the Fed now supplies the inside information.
How is this going to play out? I suspect that the recovery, although officially a weak one, does not really exist. However, thanks to statistical artifacts that understate inflation and unemployment and overstate GDP growth, the Fed and the markets think that a recovery of sorts is in process and that the unprecedented money printing by the Fed will succeed in shifting the economy into high gear.
No such thing is likely to happen. Instead, as 2013 progresses, a further downturn will become visible through the orchestrated statistics. This time the Fed will have to get the printed money past the banks and into the economy, and inflation will explode. The dollar will collapse, and import prices–as globalism has turned the US into an import-dependent economy–will turn high inflation into hyperinflation. Disruptions in food and energy deliveries will become widespread, and a depreciated currency will cease to be used as a means of exchange.
I wouldn’t bet my life on this prediction, but I think it is as likely as the Fed’s prediction of a full recovery that allows the Fed to terminate its bond purchases and money printing by June 2014.
Americans, who have been on top of the world since the late 1940s, are not prepared for the adjustments that they are likely to have to make. And neither is their government.

Tennessee Official Says Complaining About Water Quality Could Be Considered 'Act of Terrorism'

The claim was made during a meeting with residents who say the "cloudy, odd-tasting water" is making their children sick.
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A representative for the Tennessee Department of Environment and Conservation told a group of concerned citizens that complaining about water quality could be considered an “act of terrorism,” The Tennessean reports.
Sherwin Smith, deputy director of TDEC’s Division of Water Resources, made the claim during a meeting with residents of Maury County, Tennessee. Organized by State Rep. Sheila Butt, R-Columbia, the gathering sought to address complaints by residents that area water was making their children sick. In audio obtained byThe Tennessean, Smith can be heard equating water quality complaints, an act of citizenry, with DHS-defined acts of terrorism:
We take water quality very seriously. Very, very seriously … But you need to make sure that when you make water quality complaints you have a basis, because federally, if there’s no water quality issues, that can be considered under Homeland Security an act of terrorism.
According to The Tennessean, several residents saw the statement as “an attempt to silence complaints.” One 68-year-old woman who says she “prays” before sipping the “cloudy, odd-tasting water,” felt that Smith’s message was, “Leave us alone. Don’t come back anymore. We’re not going to continue on dealing with whatever problem you may have.” An official TDEC spokesperson says the department is investigating the matter:
In terms of the comments made by a member of the Water Resources Division at the meeting, we are just receiving the information and looking into this on our end … The department would like to fully assess what was said in the meeting. I am told that the meeting was far longer than the audio clip provided by SOCM and that Mr. Smith actually clarified his remarks. But again, we are looking into it.
At time of publication, the Department of Homeland Security could not be reached for comment.

How Giving Spying Power to Giant Corporations Is Dangerous to Your Future

After two decades of downsizing government, we shouldn't be surprised that corporate spooks are surveilling us.

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Whether one views Edward Snowden as a hero or a villain, perhaps we could all agree that if the government is to keep secrets, a 29-year-old private contractor with a soft spot for Ron Paul shouldn't have access to a treasure trove of its most sensitive information.
Of course, that assumes that there still exists a bright line between government and the private sector. But that's become an antiquated notion after two decades of ideologically driven outsourcing of what were once considered core government functions. As a result of that effort, there are now a million potential Edward Snowdons – or, more precisely, 483,263 contractors with top-secret clearances, according to James Clapper, the director of National Intelligence– any of whom could slip out with sensitive data on a thumb drive if they have a personal or ideological axe to grind.
More troubling is the fact that we're being constantly monitored by private spy companies with virtually no oversight or accountability. According to journalist Tim Shorrock, around 70 percent of our national security spending now goes to private firms. Michael Hayden, “who oversaw the privatization effort as NSA director from 1999 to 2005,” told Shorrock that “the largest concentration of cyber power on the planet is the intersection of the Baltimore Parkway and Maryland Route 32,” where the NSA's top contractors are located. Hayden coined the term, “Digital Blackwater” to describe the privatization of American cyber security agencies.
“I think it's extraordinarily frightening because the oversight by Congress is so minimal to begin with,” says Robert McChesney, a professor of communications at the University of Illinois and author of Digital Disconnect: How Capitalism Is Turning the Internet Against Democracy. “From what we know, the oversight of spying, intelligence and surveillance is really rock-bottom, with members of Congress often knowing little or nothing” about the details of these programs. “So, they're going off the books [with private firms] to avoid even the minimal oversight they do have.”
Reinventing Government
How did we get here? Ironically, while a lot of Americans are convinced that Democrats hold an unwavering fealty to “big government,” during the 1990s, a central tenet of Bill Clinton's agenda was shrinking down the size of the federal government. The administration's “Reinventing Government” initiative – which took place in two phases, known as REGO I and II – resulted in a whopping 17 percent reduction in the federal workforce.
Ed Kilgore, former vice president for policy at the Democratic Leadership Council and now a journalist with the Washington Monthly, said REGO, “reflected not just a serious determination by the Clinton administration to rethink how government works, but also a much broader trend on the center-left – at think tanks and magazines really for years – that suggested that the future of liberalism depended on sorting out ends and means.”
Liberals, the administration believed, had become too eager to identify progressivism with government programs. “So a lot of the neoliberal movement and the whole New Democrat thing was very explicitly focused on making the efficient achievement of progressive goals the definition of being a liberal rather than just defending programs and how they were administered.”
The initiative resulted in some decent innovations, like government data being made available in easily accessible form over the Internet. But 20 years later, Donald Kettl, dean of the School of Public Policy at the University of Maryland, told the industry magazine Government Executive that the elimination of over 425,000 federal jobs had caused serious problems. “The reduction didn’t happen in a way that matched workforce needs because they used a strategy for downsizing to hit a target,” he said. “The effort got in the way of the ‘making government work better’ piece. Many with special skills left, and people who stayed might have been those we’d have wanted to leave.”
In 1994, when Bill Clinton announced the results of the first phase of REGO, he quipped, “I kind of hate to sign this bill today. What will Jay Leno do, there will be no more $500 hammers, no more $600 toilet seats, no more $10 ashtrays.” But the reality is that one of the most problematic consequences of his reforms was a significant reduction in oversight of government contracts.
According to a 1999 study by the Project on Government Oversight (PoGo), the very agencies that had been “successful at reining in industry fraud” were those hit hardest by the cuts, including a 19 percent cut in staff at the Defense Contract Audit Agency, which had saved “almost $10 for each dollar invested,” and a 21 percent cut in the Department of Defense Inspector General's office.
Rather than eliminating the $500 hammer, PoGo found:
Defense contractors are taking advantage of new opportunities to rip off the federal government under policy reforms instituted by Clinton/Gore's Reinventing Government campaign and an industry-chummy Congress. Spare parts prices have ballooned by up to fifteen times (or 1,532%) by contractors like Boeing and AlliedSignal taking advantage of lax accounting and oversight under federal policy changes.
According to surveys conducted in the late 1990s, the haphazard nature of the downsizing also left many of those remaining in the federal government frustrated, overworked and demoralized.
Bush: Outsourcer-In-Chief
When Bush came to power, he wasn't interested in many of the reforms initiated during the Clinton years, but his administration continued advancing the rhetoric of “reform” by streamlining government procurement processes. Paul Light, a professor of public service at New York University, told Government Executivethat the Bush team embraced Ronald Reagan's formulation that “the problem with government is government,” and focused primarily on outsourcing more functions to the private sector.
Then came the attacks of September 11, 2001. In the aftermath, the 9/11 Commission determined that the National Security Agency (NSA) had collected data that might have averted the attacks, but hadn't had the available manpower to analyze them in time. The agency's staffing, like that of the rest of the federal government, had been reduced significantly in the prior decade.
And an agency that had been established during the Cold War to monitor the USSR, a centralized nation-state, now had to contend with a diffuse network of operators spread out around the world – a network that could take advantage of the proliferation of digital communications technologies.
The quantity of worldwide digital communications was exploding just as NSA was trying to adapt to a new enemy with a lighter staff. These factors, combined with the pressure of post-9/11 war rhetoric, sent the agency scrambling to figure out how to analyze the masses of data it was collecting. Although the exact figures are classified, the NSA's budget, the largest of any intelligence agency, is estimated to have doubled to $8 billion in the following years, according to the Project on Defense Alternatives (PDF). And it increasingly relied on private contractors like Edward Snowden's former employer, Booz Allen Hamilton, to sift through the massive amounts of digital information it was sucking up.
For Bush, outsourcing had an additional benefit: it allowed his administration to significantly increase the size of our national security apparatus without expanding a heavily unionized federal workforce. While Clinton and Gore had eliminated the jobs of tens of thousands of unionized federal workers, they'd also strengthened unions' hands by implementing new labor/management partnerships, but according to Elaine Kamarck, a former aide to Al Gore, one of the first things Bush did was dismantle the partnerships. And, as Richard Conley recalled in America's 'War on Terrorism': New Dimensions in U.S. Government and National Security, Bush threatened to veto legislation creating the Department of Homeland Security unless it came with “flexible personnel rules that... ran counter to traditional civil service protections.” (Senate Democrats balked, but after the Republicans' strong showing in the 2002 mid-terms, Bush ultimately got his way.)
Booz is one of a thousand contractors who grew fat at this growing public trough. According to the New York Times, “over the last decade, much of the company’s growth has come from selling expertise, technology and manpower to the National Security Agency and other federal intelligence agencies.” According tothe Associated Press, 98 percent of the company's revenues come from government contracts and half of its employees hold security clearances.
A rapidly spinning revolving door further undermines outside security contractors' accountability. Edward Snowden claims that he worked for Dell, the CIA and then the NSA via a contract with Booz. Former director of National Intelligence Michael Hayden is now a principal with the Chertoff Group, the intelligence firm led by former secretary of Homeland Security Michael Chertoff. The current DNI, James Clapper, was formerly an executive with Booz Allen Hamilton. The AP reported that “the ties between government and contract workers are so pervasive in Washington that those on each side are known by nicknames: Contractors are called 'green badgers' for the color of their identification badges. Government workers, who sport blue, are known as 'blue badgers.'"
The Commercialized InterNet Is Ideal for Spying on Americans
According to Robert McChesney, security contractors represent just one part of the increasingly privatized security state. What he calls the “military-digital complex” (and James Bamford calls the “surveillance-industrial complex”) includes Internet giants that have become familiar names in American households. “The key part of the 'military-industrial complex',” says McChesney, “is that there were firms that greatly benefited – arms manufacturers and the like – that would provide a permanent lobby to keep military spending high, Eisenhower warned, even when there might not be a need.”
McChesney says the military-digital complex follows the same logic. Having privatized much of our national security apparatus, “there is this huge commercial interest that benefits from an extension of the status quo.”
He notes that firms like Amazon, Microsoft, Google and Verizon have massive market shares (13 of the 31 companies with market valuations of $100 billion or more are Internet related firms, compared with just three from the financial sector) and adds that these behemoths already collect massive amounts of data on us all, and have little incentive not to cooperate with security agencies. “What we have now are these huge digital companies that are central to the whole process of surveillance and national security,” he says. “They have very close relations with the government and are very much part of the system. It's one of the defining features of our times.”
We Don't Know What We Don't Know
I asked Scott Amey, general counsel for the Project on Government Oversight, if the use of private contractors gave the government the ability to circumvent legal constraints on its own in-house snooping. “It's a tough question,” he said, “because I don't know what we don't know.” With non-security contracts and grants, there's a degree of transparency in the process. “We get to see what the requests and solicitations are, we get to see the summary data of the contract, we can even [use the Freedom of Information Act] to get a copy of the contract. There can be a dialogue over the policy, the mission or the program.” But with “programs being run by the NSA or other agencies in the intelligence community, you don't know if there are the same checks and balances built into the system.”
For spies, whether they're working for a government agency or a private firm, that opacity is a feature, not a bug. While some casually wave away concerns about the civil liberties and privacy implications of all this, it's important to remember that the intelligence community is used to operating in the shadows and outside of the jurisdiction of traditional law enforcement.
As Peter Ludlow, a professor of philosophy at Northwestern University recently wrote in the New York Times, some of the work these private intelligence firms perform “involves another common aspect of intelligence work: deception. That is, it is involved not just with the concealment of reality, but with the manufacture of it.”
Ludlow recalled a recent example when such deception was brought to light by hackers.
Important insight into the world these companies came from a 2010 hack by a group best known as LulzSec ... which targeted the private intelligence firm HBGary Federal. That hack yielded 75,000 e-mails. It revealed, for example, that Bank of America approached the Department of Justice over concerns about information that WikiLeaks had about it. The Department of Justice in turn referred Bank of America to the lobbying firm Hunton and Willliams, which in turn connected the bank with a group of information security firms collectively known as Team Themis.
Team Themis (a group that included HBGary and the private intelligence and security firms Palantir Technologies, Berico Technologies and Endgame Systems) was effectively brought in to find a way to undermine the credibility of WikiLeaks and the journalist Glenn Greenwald (who recently broke the story of Edward Snowden’s leak of the N.S.A.’s Prism program), because of Greenwald’s support for WikiLeaks.
Embarrassed by the breach, HBGary insisted that the proposal had never been put into action, but it nevertheless provided some insight into the mindset of the private intelligence community. Team Themis considered falsifying documents and feeding them to Greenwald in order to discredit his reporting. They pitched the Chamber of Commerce with a plan to infiltrate Chamber Watch, a progressive group that opposes the CoC's anti-regulatory agenda. They suggested creating “two fake insider personas, using one as leverage to discredit the other while confirming the legitimacy of the second.” And the hack revealed that Team Themis was developing a system with the U.S. Airforce that would have allowed a single operator to control a number of fake online identities in order to influence the discourse in social media. According to Ludlow, that “contract was eventually awarded to another private intelligence firm.”
Can We Put the Genie Back Into the Bottle?
In thinking seriously about these issues, there are a few things one should probably acknowledge. First, data are being collected on us all the time, and there's probably nothing one can do to change that short of going “off the grid.” Second, the government has an interest in keeping some things secret – we can't reasonably expect it to perform the functions we expect it to without covert intelligence. Third, looking for patterns in “big data” can be an effective tool to combat crime, terrorism and other ills.
Finally, whether we like it or not, we need to face the fact that there are powerful incentives for everyone involved in national security to surveil us. There's virtually no political (or career) price to be paid for erring on the side of too much security, but the consequences of allowing another major terror attack are significant. As a nation, we allowed ourselves to be terrorized by terrorism, and in that sense we all bear some responsibility for the rise of the post-9/11 national security state.
If one accepts those premises (and clearly not everyone does), then the real issue here comes down to adequate oversight – making sure there are checks and balances to protect our privacy from snoops and assure that our civil liberties remain intact.
Whatever one thinks of Edward Snowden, his revelations -- and a lot of solid reporting since his leaks – have shown that claims made by President Obama and others that there's already sufficient oversight of these surveillance programs are totally untrue. Oversight by both the White House and Congress is a complete joke, and the FISA court is a rubber-stamp that has “rejected only 11 of the more than 33,900 surveillance applications by the government,” according to the Wall Street Journal. Within the halls of hundreds of private security firms, we really have no clue what's going on.
So rather than take on an almost hopeless battle to get the government not to use the technologies available to it, those concerned about these issues would be wiser to focus on restoring some semblance of balance. That would mean real review at the FISA court, real oversight from Congress and, perhaps most importantly, re-nationalizing our intelligence apparatus (or at a minimum paying our spooks enough to keep them working in the public sector).
Because even if many Americans hold an instinctive distrust of government, the fact remains that it is at least somewhat accountable to we the people, whereas the myriad security companies that are getting fat from the “war on terror” are beholden only to their shareholders and the bottom line.

7 Institutions That Have Grown So Monstrously Big They Threaten to Destroy America

With power increasingly corrupted by ever-bigger forces, who will speak for the individual citizens of this country?

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Bigger isn’t always better. From the Tower of Babel to Teddy Roosevelt’s trust-busting, that principle’s been enshrined in law and legend since the dawn of history. Have we forgotten the lesson?
Corporations, databases, storehouses of personal and institutional wealth all are expanding at ever-increasing speed, threatening to engulf our economy and our lives as they do. That’s the problem with Big Things: Once they reached a certain size, they keep on getting bigger. 
Here are seven ways the runaway power of Bigger in finance and in data is threatening to overwhelm us all.
1. Bigger Corporations
Americans have known about the danger of overly large corporations since the founding of the Republic. “I hope that we shall crush in its birth the aristocracy of our monied corporations,” said Thomas Jefferson, “which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country.” 
“The money powers prey upon the nation in times of peace and conspire against it in times of adversity,” Abraham Lincoln observed. “The banking powers are more despotic than a monarchy, more insolent than autocracy, more selfish than bureaucracy.” 
Even an unlikely populist, Grover Cleveland, said this: “As we view the achievements of aggregated capital, we discover the existence of trusts, combinations, and monopolies, while the citizen is struggling far in the rear, or is trampled beneath an iron heel. Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters.”
Oversized corporate power is why Congress passed the Sherman Antitrust Act of 1890. It’s why Theodore Roosevelt broke up the railroad. When businesses become so large that competition’s squeezed out, everybody suffers.
And yet today we’re confronted with the largest corporations in history, with predictable, even inevitable, results. In real dollar terms, the minimum wage is less than half what it was in 1968. One of the main reasons for that is that most minimum-wage employees work for large corporations who dominate both their labor markets and the political process.
The Census Bureau reported in 2008 that 33 million Americans—more than 25 percent of the total workforce—worked for corporations with 10,000 employees or more. The largest employer is Walmart, with an astonishing 1,400,000 employees, followed by the company that owns Taco Bell, Pizza Hut and KFC, and then McDonald's. 
With that kind of clout it’s easy to keep wages low while doling out record payouts to executives and shareholders. Walmart, for example, paid $11.3 billion in dividends and share buybacks last year. That comes to more than $8,000 per worker. McDonald’s shareholder payouts came to nearly $7,000 per worker.
What’s more, despite their PR campaigns, there’s no evidence that shoppers benefit by paying less for their goods. Walmart aggressively forces prices downward for its suppliers, sometimes below the cost of production. But the suppliers have to make up the difference somewhere, either by over-charging other stores or underpaying their own employees and suppliers.
Either way, it comes out of the public’s pocket in the end.
Companies like Walmart don’t create jobs, either. They take them from elsewhere, and frequently pay less in wages. A Pennsylvania study found a correlation between the presence of Walmart and increases in county-wide poverty, which the authors speculated might have been because “Walmart stores destroy civic capacity in the communities in which they locate by driving out local entrepreneurs and community leaders.”
They can kill leadership at the national level, too.
2. Bigger Banks
The statistics on too-big-to-fail banks and financial institutions are staggering: The largest 0.2 percent of US banks—12 of them, altogether—control 69 percent of the industry’s total assets, while 98.6 percent of all banks held only 12 percent of assets. 
The four biggest banks still control 83 percent of the derivatives market, and only 25 commercial banks—out of a total of 8,430 FDIC-insured commercial banks in the United States—control roughly 90 percent of the market.
With the exception of struggling Bank of America, the top five banks all grew even more in the first quarter of this year. Richard Fisher, president of the Dallas Federal Reserve Bank, co-authored a plan to address the unfair advantage these banks receive because everybody knows the government won’t let them fail.
And while the mega-banks tell us that customers can benefit from their “economies of scale,” customers have not seen lower rates or charges as the result of their extraordinary consolidation.
These banks are holding the economy and the public hostage to their own possible failure. That’s why they—and the bankers who work for them—were publicly notified by the Attorney General of the United States that they needn’t fear prosecution for their crimes. He later tried to walk that statement back, but he had only articulated a policy that had long been obvious among observers and lawmakers.
Our largest banks are becoming bigger than the law.
3. Bigger Investors
Holding companies, hedge funds, and other institutions own more and more of the private-sector economy. That includes groups like Mitt Romney’s Bain Capital, which invests in everything from pharmacies to retail chains to homes for troubled teens.
Edward Snowden’s revelations about the NSA lifted the veil of secrecy surrounding government contractors like his last employer, Booz Allen Hamilton, which is owned by a holding company called the Carlyle Group. Booz Allen brought the Carlyle Group $5.9 billion in revenue last year. In a classic example of Bigger in action, it also announced a new national security deal in February worth $11 billion.
Mega-investors like Bain Capital and the Carlyle Group aren’t like entrepreneurs or investors of the past, who put money and effort into businesses they believed in and then built them to last. They want their payouts on the shortest possible timeline, so they push executives at the companies they own to make the bottom line look as good as possible.
Sometimes that means sacrificing the long-term good of the company for a fast-buck payout to these holding companies. That may be one of the reasons why so many American corporations are giving out so much in dividends and share buybacks, rather than investing in infrastructure and employees.
When investors get Bigger, they insist on getting paid Faster.
4. Bigger Charities
It should be no surprise that all of this, along with government policies toward taxation and other matters, is creating runaway levels of individual wealth. And as a few individuals amass extraordinary wealth, even charitable giving becomes a bigger problem.
The philanthropic world is now dominated by a few players. The Bill and Melinda Gates Foundation is the mega-player, with more than $34 billion in assets. That’s more than the next three foundations combined. As of 2011, the top five foundations held nearly one-third as much in assets as the top 100 foundations put together. As foundations and other philanthropies expand, charitable organizations which are outside their funding protocols are less and less likely to receive funds.
Some players get Bigger within a niche. New York’s Robin Hood Foundation, originally funded by hedge fund donors, was given a great deal of authority over small donors’ funds to aid the region’s victims of Hurricane Sandy. Like similar foundations, Robin Hood has occasionally been used as a propaganda tool for arguing that government “can’t do the job.”
That’s not charity. That’s ideology.
Using aggressive sales tactics and rough elbows, the Susan G. Komen Race for the Cure came to dominate the breast cancer charity world. It became controversial after suing other charities that used some of the same phrases or symbols, even when they would have seemed to be in the public domain. (The word “cure” and the color pink were the subjects of two such lawsuits.) 
The Komen group then abruptly defunded Planned Parenthood and other service groups, seemingly for political reasons. The resulting controversy helped the debate in one very real sense: it provided an object lesson in the dangers of Bigger, even in the world of charity.
5. Bigger Corporate Data
The recent NSA scandals have revealed the dangers of Bigger Data. But that phenomenon’s closely linked to Bigger’s other areas of overgrowth, especially in finance and investment. The scandal and controversy surrounding Facebook’s IPO (initial public offering) offered a glimpse into the intersection of Mega-Banks, Mega-Investors, and Mega-Data.
Every large enterprise is now pursuing bigger data. A new private study suggests that there continue to be fewer corporate data centers in the United States, but that each is correspondingly larger. Highly centralized databases leave businesses, economies and societies more vulnerable to disruptions caused by accidents, natural disasters, or acts of terror.
The Big Data vendors include Twitter, Facebook and Google. But they also include niche forms of Big Data, like banking. Newly launched banking investigations involve something called "dark pools," an alternative form of trading that takes place outside the normal stock markets. There is now evidence that the banks and service companies whose data platforms provide this service have been "front-running" trades, using customer information from their data systems to enrich themselves.
Even news organizations are entering the data-selling business. For $2,000 a month, Thomson Reuters offers a service called “ultra-low latency” which gives subscribers access to key economic reports two seconds before they’re released to the public. As Business Insider notes, “two seconds in … trading time is an eternity.” That’s because stock markets are computerized Big Data operations, too, and transactions can occur at nearly light-speed.
Big Data corporations are typically currently valued well in excess of what its real revenues would suggest. That’s certainly true of Facebook, because the world of Bigger believes in the power of data—and Facebook has it.
Most Facebook users would probably say that its interface is hard to use. Its founders aren’t wealthy because they’re brilliant programmers. They’re not visionaries, either. They thought they were creating a relatively small set of social networks for colleges. But they stumbled onto something powerful—the power of data that users volunteered about themselves—and they exploited it aggressively before anyone else could compete with them.
That’s how the world of Bigger works. You don’t need to be the best. You need to be the first. Then you need to be aggressive in order to stay the biggest. The forces of Bigger will do the rest.
6. Bigger Government Data
Mega-data is changing our government, too. The Obama administration’s “Big Data Initiative” suggests a mentality which believes Big Data is more useful than other forms of information.
Big Data has already created a national security apparatus of staggering proportions, as Dana Priest and William Arkin reported for the Washington Post. Large databases can provide enormously useful information, but they can be a distraction too. As Priest and Arkin observed, “lack of focus, not lack of resources,” prevented law enforcement officials from stopping the Fort Hood shootings.
That can happen when too much data is presented without adequate screening. Reports from a smaller data initiative—perhaps even an old-fashioned warrant and search on the radical cleric with whom he was corresponding—might have been much more effective in preventing this tragedy.
We should learn from experience before assuming that the best thing to do with Big Data is make it even bigger. But that’s not the plan: Amazon, one of the corporate world’s biggest data players, has been hired to create a “private cloud” system for the CIA at a cost of $600 billion. That’s more than half a trillion dollars. For what, exactly? We don’t know. Perhaps to ensure that the same technology which keeps recommending those novels you don’t want to read guides the thinking of our intelligence community.
With Bigger Data comes greater temptation. Thanks to the Center for Media and Democracy’s review of Freedom of Information Act documents, we now know that at least one national security “fusion center” strayed from its anti-terrorism mission in order to analyze data on citizens conducting peaceful protests. Why? Because Jamie Dimon, the CEO of Bigger bank JPMorgan Chase, was coming to town and didn’t want to confront protesters. 
That’s how Bigger works. Money, data and influence can intersect in unexpected and harmful ways.
7. Bigger Cronyism
As institutions and databases become larger, the temptations of power become bigger too. The Carlyle Group has been able to use its money to attract government figures from both parties, including former President George H. W. Bush and several senior members of the Clinton administration.
For his part, former President Clinton dealt for years with billionaire Ron Burkle, who offered him what the New York Times described as “the potential to make tens of millions of dollars without great effort and at virtually no risk.” For her part, former Secretary of State and leading presidential contender Hillary Clinton was on the board of directors of Walmart.
Big Power Often Follows Big Money
The Clinton, Bush and Obama Treasury Departments and regulatory agencies each became revolving-door operations for Wall Street. Officials and bank executives must have grown accustomed to seeing one another on the Acela train that runs from New York to Washington. The ones headed south are taking government jobs, where their friends will be well protected.
The ones headed north are cashing in.
We’ve seen the spectacle of three former presidents, two Republicans and a Democrat, unable to resist the lure of big wealth. We’ve seen the 21st century’s two sitting presidents, one from each party, unable to resist the power of big data. With power increasingly corrupted by ever-bigger forces, who will speak for the individual citizens of this country?
Obama advisor Cass Sunstein attributes a wise quote to legal scholar Karl Llewellyn: “Technique without morals is a menace, but morals without technique is a mess.” But while Sunstein is presumably arguing against the latter, today’s more urgent and difficult task is to put an end to the former.
That’s why we need a new system of checks and balances. We need to recognize that Bigger needs to be tempered by fairer, that top-down control needs to be replaced with lateral decision-making, that a centralized financial, corporate, and government complex must never replace the smaller and more humane systems of democracy and small-business free enterprise.
The universe offers us a warning in the astronomical phenomenon known as a “singularity,” or “black hole.” If a star becomes too large, it begins to draw everything around it into its gravity field. Nothing can escape the hole around it, not even light. Then the star begins to collapse in upon itself, compressed by the irreversible force of its own mass growing greater and greater.
We don’t deserve Bigger, we deserve better.