Thursday, August 27, 2015

The Federal Reserve Board and the War for Poverty

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There has been much talk in recent years about inequality and the poor life chances of children who grow up in poverty. Even many conservative Republicans have been putting forward proposals that are ostensibly designed to give people the opportunity to raise themselves out of poverty and into the middle class and beyond.
While the usefulness of the various proposals for combatting poverty can be debated, the stated intention is increasing the income and opportunities for those at the bottom. This stands in sharp contrast to what the Federal Reserve Board seems prepared to do this fall. It plans to implement policies, specifically higher interest rates, which will reduce the income and opportunities for those at the bottom.
The story is that the Fed plans to raise interest rates, possibly beginning as early as next month, in order to slow the economy. The Fed immediately controls short-term interest rates, but raising these rates will likely also lead to increases in longer term interest rates like the interest rate people pay on car loans and mortgages. It will also mean that businesses have to pay more money on loans to finance investment and state and local government will pay higher interest rates on new bonds issued to pay for infrastructure.
The effect of raising these interests is to discourage people from buying cars and houses, companies from investing, and governments from improving and expanding infrastructure. This means less growth, fewer jobs, and higher unemployment.
The impact of this slowdown is disproportionately felt by those at the bottom. This can be seen clearly in the racial breakdown of unemployment. The unemployment rate for African Americans is consistently twice the unemployment rate for whites. In the data for July the unemployment rate for whites was 4.6 percent, for African Americans it was 9.1 percent. The unemployment rate for African American teens tends to be roughly six times the level for whites. In July it was 28.7 percent.
There is a similar story if we look at unemployment by education level. The July unemployment rate for college grads was 2.6 percent. It was 5.5 percent for those with just a high school degree. This means that if the Fed raises interest rates it is disproportionately workers at the bottom end of the income distribution who will be preventing from having jobs.
 And this is not just an issue of jobs for the unemployed; the tightness of the labor market also affects the wages of the people who have jobs. In a tight labor market workers can demand higher wages from their bosses or go to another employer who will pay them more money.
This is exactly the story we saw in the late 1990s boom when even workers at the bottom of the wage ladder saw substantial wage gains. There were accounts of major chains like McDonald's offering bonuses to employees who brought in new workers. In order to keep workers, even many low-wage employers began to offer benefits like flexible work hours or on-site child care.
In principle we could get back to this sort of situation today, if the Fed allows the economy to continue to grow and for the unemployment rate to fall. As a practical matter, we likely have a long way to go before we see the tight labor markets of the late 1990s. While the unemployment rate is not much above its pre-recession level, this is largely because many workers have dropped out of the labor force.
While some of the drop off in labor force participation is due to the aging of the baby boomers, the employment rate of prime age workers (ages 25-54) is still down by 3.0 percentage points from pre-recession levels. This implies a gap of roughly 3 million jobs. (The drop is 4.0 percentage points if the comparison is with the 2000 peak.)
These numbers indicate that we have a long way to go before the labor market is strong enough so that workers at the middle and bottom of the wage distribution have enough bargaining power to share in the gains of growth. However if the Fed raises interest rates too rapidly, the labor market may never reach that point.
Of course the Fed is not acting out of maliciousness. Its concern is that if it allows the current rate of job creation to continue we will see inflation. Many of us see the worry over inflation as very wrong-headed, given the lack of inflationary pressures anywhere in the economy.
However it is important that the public have a clear idea of what is at stake in the Fed’s decisions on interest rates. While many politicians and policy experts are grappling with ways to try to lower the poverty rate, by raising interest rates, the Fed will be directly preventing people in poverty from getting jobs and seeing pay increases. We can argue over the best policies to get people out of poverty, but a good place to start would be to end policies that keep them in poverty.

Five Things You Need to Know About the US "Reconstruction" Effort in Afghanistan

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Let's start with what we know: Since 2002, the US Congress has appropriated just over $109 billion for Afghanistan's development, making this the largest foreign reconstruction program the government has ever undertaken (and surpassing the amount spent on the Marshall Plan to rebuild Europe's economies following World War II). Much of the money has already been spent, with just $11.9 billion remaining in the kitty as of July 2015.
This much is clear. The rest - where the money has gone (and to whom), how it has been spent (and why), what there is to show for it (and where) - is guess work.
Last month a small government agency comprising 200 employees, also known as the office of the Special Inspector General for Afghanistan Reconstruction, or SIGAR, submitted its quarterly report to Congress. Its findings do not inspire confidence; in fact, it reveals that billions of dollars earmarked for the development of this ravaged and bleeding country have all but disappeared into a black hole.
Under any circumstances, mismanagement of funds on this scale is a problem. In Afghanistan, a country worn very nearly down to the bone by over three decades of uninterrupted warfare, it is a tragedy whose cost will eventually be counted in human lives.
The first six months of 2015 have already witnessed close to 5,000 civilian casualties, including a death toll of 1,500 people classified as "noncombatants."
Half a year after NATO officially ended its military operations, much of the countryside lies in tatters, and the so-called armed opposition, which encompasses the Taliban and a plethora of armed militias including groups operating in the eastern region who have declared their allegiance to ISIS, is alive and kicking.
A shaky Afghan state helmed by president Ashraf Ghani is floundering: The most recent Rule of Law Index - a global survey of over 100,000 households measuring public perceptions of corruption, the courts, and the criminal justice system - ranks Afghanistan second from the bottom in a list of 102 countries.

"The number of police determines how many rifles we allocate, how much money we set aside to purchase boots, fuel, tanks. How can we determine what worked if we don't have a baseline? This is accounting 101." 

These are the very problems that US financial assistance was supposed to alleviate. When the troops came home it was with the promise that huge monetary injections would help to immunize the country against terrorism and disillusionment with the central government. Investments in equipment and training would beef up the armed forces, creating a body capable of keeping the Taliban at bay. It was to be a new age.
Instead, what is playing out is a warped echo of the early years of the US invasion and occupation, only this time it is not war and weapons, but aid and charity, that is fueling a bloody conflict that appears to have no end.
1. The Afghan National Army and Police: Paying Phantom Personnel?
After 13 years and billions of dollars in salary assistance to the Afghan National Army, an April 2015 SIGAR report found "minimal oversight" of personnel and payroll data, information that forms the backbone of assessments by the Ministry of Defense, the Combined Security Transition Command-Afghanistan (CSTC-A) and NATO, among others.
In its audit report covering the approximately $2.3 billion that have been allocated since 2009 to salaries and incentive payments for the entire Afghan National Army, including the Air Force, SIGAR discovered that there were no requirements stipulating that supervisory officials observe attendance data collection, while an information management program that CSTC-A has been implementing since 2010 is still unable to distinguish between active and inactive personnel.
Officers neglect to sign in and out daily, making it difficult if not impossible to ascertain how many paid employees are working at any given time and leaving plenty of room for service men and women to receive salaries for days not worked.
As of January, existing data suggested that nearly 170,000 personnel were assigned to the Afghan National Army, accounting for 87 percent of the 195,000 available posts. But in an inquiry letter to US Defense Secretary Ashton Carter, Special Inspector General John F. Sopko called attention to the gaps in oversight that make confirmation of those numbers a daunting task.  
With 70 percent of civilian casualties in 2015 attributed to the actions of the "armed opposition," according to an August 2015 report by the United Nations Assistance Mission in Afghanistan, the Afghan government can ill afford lax management of its armed forces into which so many millions of dollars have been invested.
The same holds true for the Afghan National Police (ANP), the recipient of $15 billion of US aid since 2002 aimed at training, equipping and sustaining counter-insurgency efforts. Here again, inaccurate data regarding payroll and personnel has put close to $300 million at risk of being wasted.
"If we're paying the salary of somebody that doesn't exist we don't know where that money goes," Sopko told Truthout. "A lot of our assistance is based upon numbers: The number of police determines how many rifles we allocate, how much money we set aside to purchase boots, fuel, tanks. How can we determine what worked if we don't have a baseline? This is accounting 101."
2. Health Care: Clinics in the Mediterranean Sea
By March of 2015, the United States Agency for International Development (USAID) had sunk $210 million into a program known as Partnership Contracts for Health (PCH), made possible by budget assistance to the Afghan Ministry of Public Health to provide basic health services across the country.
On paper, this money has been well spent, much of it going into the construction of 641 medical facilities throughout the country. The program has been touted as a major success and portrayed as partly responsible for increasing the proportion of Afghans living within an hour's walking distance of a health-care facility from 9 percent in 2002 to 57 percent in 2013.
Last year, however, when SIGAR received and analyzed geospatial data for 551 of these clinics, it found that USAID was likely missing accurate location information for about 510 facilities, or 80 percent of the total.
In a June 25 inquiry letter to USAID's acting administrator, Alfonso E. Lenhardt, SIGAR noted the following: 13 coordinates were not located within Afghanistan at all, 6 were located in Pakistan, 6 in Tajikistan and 1 in the Mediterranean Sea. Coordinates for 30 buildings were located in different provinces than those reported by USAID, while in 13 separate cases, the aid agency reported identical coordinates for different facilities.
Further analysis revealed that 189 coordinates did not show a physical structure within 400 feet of the reported location, and 81 coordinates had no physical structure within half a mile.
The absence of reliable data is indicative of much more than just mismanagement of funds.
"We're talking about a conflict zone," Sopko told Truthout, explaining that to minimize the risks they face, aid workers who oversee clinics in Helmland Province prefer to "go in, do a quick survey and get out."
"Now if your coordinates are bad - some are off by 40 km - you can't do that," Sopko added. "This is risky business; it's risking my people, USAID people, the Afghan people. It's reckless."
3. The Rule of Law: A Billion Dollars Down the Drain?
For over a decade, since 2003, no less than $1 billion have been funneled into efforts to buoy up the rule of law in Afghanistan, long considered one of the most corrupt nations in the world.
Undertaken jointly by the Departments of State, Defense and Justice, together with USAID, the program was designed to reform or overhaul aspects of the prison system, introduce legal education initiatives and implement anti-corruption efforts, all with the aim of building a functional, centralized Afghan state.
Twelve years later, the agencies lack a comprehensive strategy on how to guide their work; the Department of Defense cannot say for certain exactly how much it has spent on the initiative; and there is no way of measuring tangible successes or outcomes of pilot projects.
To top it off, the most recent National Corruption Survey undertaken by Integrity Watch Afghanistan found that the vast majority of citizens believe the judiciary to be the most corrupt institution in the country.
Integrity Watch Afghanistan's executive director, Sayed Ikram Afzali, told Truthout that the US's obsession with "winning hearts and minds" has fostered a quick-fix attitude toward aid delivery, with rapid implementation of projects taking precedence over the slower process of building robust institutions.
Far from flocking to the centralized justice system, more and more people in this largely rural country are turning to informal structures such as jirgas (tribal councils, or councils of elders), shuras (local consultative councils) and increasingly to the armed opposition.
In 2012, Integrity Watch Afghanistan put out a report called "Shadow Justice: How the Taliban Run Their Judiciary," examining features of the Taliban's legal system from mobile courts to speedy trials. Riddled as these legal bodies are with rights abuses, paltry record keeping and little opportunity for appeal, they respond to local needs.

"We are absolutely certain that money has been diverted from our reconstruction programs into the Taliban and other terrorist organizations."

It is no coincidence that when the Talibs first rose to power in the 1980s they did so on a relentless platform of law and order, filling a chaotic void with strict moral and religious codes. While regimes have risen and toppled around them, this aspect of the Taliban's rule has remained basically unchanged. Afzali estimates that in 2007, only 20 percent of the population relied on the central judiciary in any way, compared to 80 percent who put their trust in informal judicature (including Taliban courts), a ratio he believes still holds in 2015.
He told Truthout the US missed an opportunity to regain public trust in state-run courts by failing to engage with traditional models like shuras and jirgas, which operate according to age-old customs, allowing for fluidity depending on the context and location of disputes.
And by pouring money into top-down solutions and international experts with a quick turnover, the US also neglected grassroots initiatives such as Integrity Watch Afghanistan's community-based monitoring of trials that have a proven track record of success.
"When we started our [monitoring] program in Kapisa Province, only 15 percent of trials were conducted openly, as per constitutional requirements," Afzali said. "Within three years, we have increased this to 70 percent."
In addition to acting as a watchdog for the courts, Integrity Watch Afghanistan also monitors schools, mines and construction projects, stepping into the cavity created by the US's complete lack of oversight or accountability by enlisting community members on a voluntary basis to take ownership over projects carried out in their name.
"We did receive some support from USAID for our [infrastructure] monitoring work," Afzali said. "But that was only for a brief time; after a year, the funding stopped."
Instead, USAID has directed its funds toward bigger and bulkier rule of law efforts that were not only unsustainable but that, in one instance, the Afghan Supreme Court itself claimed to have no interest in.
As a result of reckless and at times meaningless bankrolling of unwanted initiatives, "too much of that billion dollars have been wasted," Sopko said.
4. Education: Empty Classrooms
On August 6, US Sen. Bob Casey (D-Pennsylvania) submitted a letter to Larry Sampler, USAID's assistant to the administrator for Afghanistan and Pakistan affairs, requesting additional information on "monitoring and evaluation of current USAID-funded education program."
Citing a major investigation undertaken by Buzzfeed News this past July, Casey expressed concern that education figures widely cited by US officials going all the way up to Hillary Clinton were wildly exaggerated and in some cases were blatant falsehoods.
Buzzfeed's expose came on the heels of a June 2015 SIGAR inquiry into USAID's $769 million investment in Afghanistan's educator sector, including nearly $600 million in off-budget assistance "and $146 million in so-called 'preferenced' funding to the World Bank's Afghanistan Reconstruction Trust Fund (ARTF) to support education programs."
Sopko said local media reports that quoted Afghan ministers alleging fraud in the education sector prompted his inquiry, which also casts doubt on widely touted claims that development assistance has helped boost the number of enrolled students from 900,000 in 2002 to over 8 million in 2013.
Unable to independently verify these statistics, USAID continues to stand by the data - sourced from the Afghan Ministry of Education's Education Management Information System (EMIS) - in spite of strong evidence that officials in the Hamid Karzai Administration falsified those records in order to obtain more funding.
Indeed, as Sopko pointed out in a May 2015 speech, a ranking USAID official recently put the number of Afghan children in school at 4 million - less than half the figure on which current funding commitments is based. SIGAR also noted that the education monitoring system counts absent children as enrolled for up to three years, before dropping them from the database, making endorsement of numbers a guessing game at best.
A long string of US officials have stressed that investment in education is one of the surest ways to frustrate Taliban recruitment in the largely illiterate hinterland of Afghanistan: UNESCO data suggests that the country has one of the lowest literacy rates in the world, with just 31 percent of its population over the age of 15 able to read.
But if the largest US aid agency continues to parrot false figures and allow money to drain away from classrooms, fundamental improvements to the country's educational infrastructure seem unlikely.
5. Corruption, Warlords and Militarization
A biannual survey carried out by Integrity Watch Afghanistan in 2014 identified corruption as the second most pressing problem for the country, where bribery has doubled in the past four years to hit $2 billion.
It is into this insatiable mouth that the US is tipping its coffers, hoping repeating past mistakes will somehow bring about different results, this time around.
Asked where the missing billions of US development aid could be hiding, Sopko stated plainly: "We are absolutely certain that money has been diverted from our reconstruction programs into the Taliban and other terrorist organizations."
Jarring as it is to hear a US official admit this fact so freely, it comes as no surprise to anyone who's read the fine print of US military policy in Afghanistan over the last 13 years.
In his recent book No Good Men Among the Living, journalist Anand Gopal documents in meticulous detail the long list of occupation-era military blunders and ill-informed allegiances that have shaped Afghanistan's prevailing political reality, from the rise of Washington-allied warlords like Kandahar's Gul Agha Sherzai (who played a major role in turning the derelict Kandahar Airfield into a detention center-cum-torture chamber), to the January 2002 massacre by US special forces of 21 pro-American Afghan leaders in Uruzgan Province in a single night.
In his tenacious investigation of the situation on the ground post April 2002, when al-Qaeda leadership had fled to Pakistan and the Taliban had ceased to exist in key areas like Kandahar and elsewhere, Gopal offers an analysis that bears a striking resemblance to the current reconstruction effort, namely that the Americans were fighting a war against a "phantom enemy, happily fulfilling their mandate from Washington."

"The Afghan state is designed to meet the national security interests of the United States - not to be responsive to the needs of Afghan citizens." 

Not only were US Special Forces receiving faulty "intel," allowing warlords access to their armories, carrying out bogus raids and attacking compounds belonging to their own allies, their commanders were facing no consequences for these military disasters, a pattern that is now repeating itself in the ranks of the DoD, DoJ, and USAID who are handing out million- and billion-dollar projects without any notion of whose fist is closing around the contracts, or why the programs are being carried out in the first place.
"I've had a dozen or more USAID people out in Afghanistan come up to me and say, 'You're right on, John. That's how I got rewarded: for how much money I put on contract, not how much it actually worked'," Sopko told Truthout.
If we follow this analysis to its conclusion, then we arrive at the place where corruption is not only to be expected, it is the other side of the coin of the US's invasion of a sovereign country and will likely continue for as long as Washington has a vested interest in directing Afghanistan's economic and geopolitical future.
As Gopal told Truthout, "People who live in Afghanistan will tell you that the corruption we see today as a result of the US pouring so much money into the country is far greater than anything that's ever been seen before, be it under the communist regime, the Taliban or anyone else.
"The fact is that the very presence of the US and the war they're fighting has done more to damage the rule of law in Afghanistan than anything else."
He pointed to the "justice" programs being rolled out in Kandahar City, the same place where Washington's support for Kandahar Police Chief Abdul Raziq makes a mockery of the notion of good governance.
"Raziq undermines rule of law by his very existence, by the torture, extrajudicial killings and assassinations that he carries out," Gopal added. "It's things like this that make the idea of the West trying to build the rule of law in Afghanistan a farce."
It is a hand-in-glove crisis, an impossible contradiction: The aid regime is the result of years of militarization; but stopping that aid means Afghanistan - a struggling state currently capable of raising just $2 [billion] out of the $10 billion it needs annually to manage its affairs - could quickly slide back into the abyss of the 1992-96 civil war years, a period Gopal describes in his book as a time when "any date picked out of the calendar is the anniversary of some grisly toll."
He believes the crux of the crisis lies in the fact that, "The Afghan state is designed to meet the national security interests of the United States - not to be responsive to the needs of Afghan citizens."
As long as this remains the case, the reconstruction effort will continue to be an exercise in futility: The US is watering a patch of militant soil upon which nothing but armed groups can grow. And as their ranks swell, these armed groups will count the US as their most loyal benefactor.

US stock rally collapses amid fears of global slump

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US stock markets plunged following an early rally Tuesday, with the Dow Jones industrial average plummeting 600 points from the day’s peak to close down 205 points, or 1.29 percent.
The Standard & Poor’s 500 index lost 1.35 percent, falling for a sixth consecutive day to end 12 percent below its peak in May. A Financial Times headline summed up the day’s events succinctly: “Wall Street recovery turns to dust.”
The stock selloff reflected extreme nervousness over the decline in economic growth and stock market turmoil in China, a growing crisis in emerging economies and a collapse in commodity prices. Market confidence in the ability of any government or central bank to restore stability and ensure sustained growth has been all but shattered, and fears are mounting of a crisis of even greater proportions than the financial meltdown of September 2008.
The US selloff occurred despite a substantial monetary policy intervention Tuesday by the Chinese central bank, which took the unusual step of slashing interest rates and cutting banks’ reserve requirements simultaneously.
The Chinese central bank acted after yet another massive plunge in the Chinese stock market earlier in the day. Its stimulative moves led to a rally in most Asian and all major European markets, with the UK’s FTSE 100 index closing up by 3.13 percent and the German DAX gaining nearly five percent.
The US rally largely held until the last hour of trading, when the markets were hit by a wave of sell orders. The general sentiment was to recoup some of the losses of the previous week by taking the gains from the day’s rally, pocketing them and exiting as quickly as possible.
Tuesday’s selloff followed an even sharper rout Monday, when the Dow lost nearly 1,100 points at the opening bell, a record intraday drop. Less than five minutes later, a wave of buy orders, likely orchestrated by the Federal Reserve and other government agencies, halted and partially reversed the meltdown, preventing a full-scale collapse of the US financial system. Nevertheless, the Dow ended the day down 588 points, or 3.6 percent.
The failure to stage a reversal of Monday’s selloff underscored the disarray and perplexity of capitalist governments and central banks. There is virtually no confidence that any of the major imperialist powers—the United States, Europe or Japan—acting either separately or in concert, can lead the way out of the crisis. Instead, all hopes are pinned on crisis-ridden China.
This sentiment was expressed by Mohamed A. El-Erian, the former head of the world’s largest bond trading firm Pimco, who wrote that the only longer-term solution to the crisis gripping the world economy was an economic normalization in emerging markets, most notably China.
El-Erian declared that a significant portion of the selloff “arose from the correct realization that the primary response would have to come from the emerging economies that are the source of the growth and financial concerns.”
The prospects of China or another emerging market country (India, Brazil, etc.) even temporarily rescuing the world capitalist system are remote. In a statement announcing Tuesday’s rate cut, the Chinese central bank declared: “China’s economic growth is still facing downward pressure, and the task of stabilising growth, adjusting institutions, advancing reform, benefiting people’s lives and preventing risks is still extremely arduous.”
El-Erian admitted that “the best that can be hoped for right now is short-term market stabilization through another series of liquidity-driven Band-Aids.” He added, “This approach would provide much-appreciated immediate relief, but it wouldn’t be sufficient to deliver the longer-term anchor of stability that the global financial system is searching for.”
The one constant of economic policy on which there is general consensus is to do whatever it takes to protect the wealth of the financial elite, beginning with the provision of a limitless supply of cash to the financial markets via the central banks.
Over the weekend, former US Treasury Secretary Lawrence Summers called for the Federal Reserve to abandon its plans to raise the federal funds rate for the first time in nearly nine years and instead extend its current policy of zero interest rates into the indefinite future.
Summers went further on Tuesday, tweeting that the Federal Reserve should consider further monetary expansion in response to the selloff. As the Financial Times put it, Summers “suggested… that the Fed should even consider another [quantitative easing] bond-buying programme.”
This sentiment was echoed in even more explicit terms by Ray Dalio, head of Bridgewater Associates, the world’s largest hedge fund, who predicted in a research note quoted by the Financial Times that the “next big Fed move will be to ease (via QE) rather than to tighten.”
The solution offered by Summers, Dalio and El-Erian, three wise men of contemporary capitalism with a net worth of nearly $18 billion between them, is an expansion of money-printing operations by the world’s central banks, with the hope that the decrepit Chinese Stalinist regime can keep a lid on popular opposition to its brutal economic policies long enough to somehow restabilize its economy.
The effect of such policies will be a further expansion of the wealth of the financial elite, to be paid for with intensified attacks on the living standards of the working class, which will once again be made to bear the burden of a new eruption of the crisis of world capitalism.

As global selloff deepens, US stock market teeters on edge of collapse

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World stock markets continued to plummet Monday, fueled by another steep decline in Chinese shares and concerns over a marked slowdown in the world’s second-largest economy and turmoil in emerging market economies.
The Shanghai Composite Index fell 8.5 percent, its sharpest fall since February 2007, bringing its losses since June to nearly 40 percent. Major stock exchanges across Asia followed suit, with Japan and Hong Kong falling 4.6 percent and 5.2 percent, respectively.
The panic spread to Europe, with the British, German and French indexes plunging between 4.6 percent and 5.2 percent. Stocks also sank across the Middle East and in Latin America.
But the meltdown was most intense in the United States. With pre-market futures for the Dow Jones Industrial Average down 700 points, the Dow collapsed at the opening bell, along with the S&P 500 and Nasdaq indexes.
Within four minutes of the trading start, the Dow had sunk by 1,089 points, or 6.6 percent, the biggest single-day point drop in US history. The Nasdaq dropped 400 points, or more than 8 percent, and the S&P 500 fell over 100 points, about 5 percent.
The massive and seemingly unstoppable wave of selling shocked market experts and commentators and provoked comparisons to the “Black Monday” trading disaster of 1987, when the Dow plunged 22 percent in one day. There were many indications that a full-scale meltdown was in progress.
Apple stock plunged 13 percent at the opening, prompting CEO Tim Cook to go on CNBC television to reassure Apple investors that the company’s business in China was not threatened. Apple ended the day with a 2.47 percent loss.
Online brokerage firms TD Ameritrade and Scottrade were swamped by a wave of sell orders, blocking many investors from gaining access to their accounts. Scottrade said that it experienced a 230 percent spike in trading volume at the opening.
The VIX, a market index that measures volatility and is known as the “fear index,” hit 53. The last time it was over 50 was in March 2009, when the market hit bottom following the September 15, 2008 Wall Street crash.
The atmosphere of panic was also reflected in a large-scale move from stocks to US government bonds. The yield on US ten-year Treasury notes, considered a safe haven, fell below 2 percent for the first time in months, reflecting a surge in demand for the bonds.
Yet five minutes after the initial US market collapse, a wave of buying cut the losses in half. At one point the Dow came within 115 points of breaking even. The selloff resumed later in the day and the Dow ended the session with a loss of 588 points, or 3.6 percent. The S&P 500 ended down 77 points, or 3.94 percent, and the Nasdaq closed with a loss of 179 points, a decline of 3.82 percent.
All three indexes are in “correction” territory, having declined by more than 10 percent from their recent highs.
There can be little doubt that the Federal Reserve Board and related government agencies intervened behind the scenes to organize the massive buying spree that halted the opening market plunge. Reports emerged later that the New York Stock Exchange had invoked an obscure and rarely used rule to preempt panic selling. Rule 48 speeds up the opening of trading by suspending a requirement that stock prices be announced at the beginning of the session. This may have been used to facilitate an intervention by the Fed.
Given the role of the Fed in financing the tripling of stock prices since the 2008-2009 crash by holding interest rates at near-zero and pumping trillions of dollars into the financial markets, such an intervention to once again rescue the financial elite would not be an aberration. The entire policy of the Fed and other major central banks and governments since the eruption of the crisis seven years ago has been focused on engineering a vast redistribution of wealth from the working class to the corporate-financial elite through a combination of austerity and record high stock prices.
The unprecedented bull market has been the main mechanism for further enriching the world’s multimillionaires and billionaires, even as the real economy was starved of productive investment and remained mired in stagnation. The current stock market panic reflects the growth of deflationary pressures in the global economy that are overpowering the efforts to inflate and maintain financial bubbles for the benefit of the rich and the super-rich.
The slowdown in China, marked by a decline in manufacturing and falling exports and investment, is itself an expression of a global downturn. China is hit particularly hard because it has been the main impetus for global economic growth since the 2008 crisis and is heavily dependent on expanding world production and markets for its industrial exports. Its attempts to stimulate growth through infrastructure projects, real estate speculation and an expansion of its stock markets have foundered against a general climate of stagnant or anemic growth in the US, Europe and Japan.
Analysts attributed Monday’s further decline in Chinese stocks to disappointment over the government’s failure to intervene more strongly to prop up the market after a series of sharp falls last week. The regime gave approval for Chinese pension funds, with some $550 billion in assets, to invest in the stock market, but failed to lower the level of bank reserves, which would free up cash to plough into the market.
“The pension fund signal didn’t work, which proves that investors have entirely lost confidence in the market,” said Wu Xianfeng, president of Longteng Asset Management in Shenzhen. “The market has been in a panic since last week.”
The slowdown in China and in the world economy more broadly, along with a rise in the US dollar, has undermined so-called emerging market economies from Brazil and Mexico to Turkey, Russia, Indonesia and South Africa, which depend on China as a market for their commodities exports. The financial markets and currencies of these countries have been plunging for weeks, exacerbating the international tendencies toward slump and threatening to spark a financial crisis.
A definitive expression of economic stagnation is the ongoing decline in commodity prices. US oil prices on Monday fell another 5 percent to six-year lows, dipping below $38 a barrel. Brent crude oil fell below $45 for the first time since 2009. London copper and aluminum futures also hit their lowest levels since 2009.
Since China devalued its currency two weeks ago following poor data on exports and industrial activity, trillions of dollars in market value worldwide have been wiped out as a result of falling stock prices. Germany’s DAX index has lost 22 percent since its April high.
“Until we have some sign that China and the emerging markets aren’t being sucked into some vortex from which they can’t recover…it is unlikely this selloff will stem,” Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, told Reuters.
A former adviser to ex-British Prime Minister Gordon Brown was more apocalyptic. Damian McBride tweeted advice on “the looming crash,” stressing the need to put “hard cash in a safe place” and not assume that banks will be open. Suggesting the eruption of civil strife and state repression, he counseled the need to stock up on “bottled water, tinned goods & other essentials at home to live a month indoors.”
He further advised the preparation of a “rally point” for loved ones “in case transport and communication get cut off.”

The Evidence Keeps Pouring In: Capitalism Just Isn’t Working

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To followers of Ayn Rand and Ronald Reagan, and to all the business people who despise government, ‘community’ is a form of ‘communism.’ Even taking the train is too communal for them. Americans have been led to believe that only individuals matter, that every person should fend for him/herself, that “winner-take-all” is the ultimate goal, and that the winners have no responsibility to others.
To the capitalist, everything is a potential market. Education, health care, even the right to water. But with every market failure it becomes more clear that basic human rights can’t be bought and sold like cars and cell phones. The pursuit of profit, when essential needs are part of the product, means that not everyone will be able to pay the price. Some will be denied those essential needs.
Global Failures
Capitalism hasn’t been able to control runaway global inequality. For every $1.00 owned by the world’s richest 1% in 2011, they now own $1.27. They own almost half the world’s wealth. Just 70 of them own as much as 3.5 billion people.
Capitalism has not been able — or willing — to control the “race to the bottom” caused by “free trade,” as mid-level jobs continue to be transferred to low-wage countries.
Nor has capitalism been able to control global environmental degradation, with trillions in subsidies going to polluters that don’t even pay their taxes, and with corporations ignoring any semblance of social responsibility as they seek ways to profit from global warming.
Job Creation Failures I
With or without globalization, middle-class jobs are disappearing, even higher-end positions in financial analysis, medical diagnosis, legal assistance, and journalism. Artificial intelligence is making this happen. Millions of Americans have had a role in the great American productivity behind this technological takeover, but capitalism allows only an elite few of us to reap the disproportional profits.
Reports of job recovery are based on low-income jobs, many of them part-time. Layoffs are cutting into the military and technology. Gallupdiscounted Wall Street’s job-creating ability. As noted by former Wall Street Journal Associate Editor Paul Craig Roberts, the US rate of unemployment is 23 percent when long-term discouraged job-seekers are included. That’s close to the unemployment rate of the Great Depression.
Job Creation Failures II
Closely related to employment woes is the collapse of corporate investment in new product R&D, from 40 cents per dollar in the 1970s to 10 cents now. CEOs are choosing instead to spend almost all of their profits on buybacks and dividends to enrich investors.
Health Care Failures
The capitalist profit motive allows the cost of a hepatitis pill that costs $10 in Egypt to sell for $1,000 in the United States, and the cost of ablood test to range from $10 to $10,000 in two California hospitals (a 100,000% markup at the second hospital).
Patent abuse is one of the factors making this possible. Pharmaceutical companies can tweak a drug with a minor change to create a “brand new” drug with a new patent.
Another health-related scam that affects most of us is bottled water. According to Food & Water Watch, about half of it is filtered tap water with fancy names, as evidenced in one case by an actual “tap water”label on a company’s product. Yet with the demise of community water fountains, and the barrage of advertising for “safe and pure” drinking water, unsuspecting Americans pay dearly: for the price we pay for a bottle of water we would be able to fill up that bottle a thousand times with tap water.
Housing Failures
Because of the “invisible hand” of the free market, in just 35 years the investment wealth of the super-rich has gone from 15% of middle-class housing to almost 200% of middle-class housing.
Education Failures
A remarkable story of privatization failure is told in the story of charter schools in Florida, where Jeb Bush still holds dear to his delusions of free-market educational success.
That’s just one example. In general, charters are riddled with fraud and identified with a lack of transparency that leads to even more fraud. Since 2001 nearly 2,500 charter schools have been forced to close their doors, leaving over a quarter-million schoolchildren between one bad business decision and the next. A report from PR Watch summarizes the billions of dollars spent on charters without accountability to the public.
Disposable Americans
Chris Hedges wrote: “Human life is of no concern to corporate capitalists. The suffering of the Greeks, like the suffering of ordinary Americans, is very good for the profit margins of financial institutions such as Goldman Sachs.”
People become meaningless in a successful capitalist system.