Washington's Blog: April 2009

Thursday, April 30, 2009

Elliot Wave Theorists Claim Pandemics Always Happen In a Bear Market

Elliot Wave International has just written an article entitled "Swine Flu and Elliot Wave Analysis", claiming that pandemics only happen in bear markets.

Their theory seems to be that a downbeat social mood leads to both a bear market and susceptibility to disease.

I will leave it to the technical market analysts and the epidemiologists to decide whether the theory is right or wrong.

Note: At least some people have tried to blame the plague on the 1340 economic depression.

U.S. Swine Flu Death Was of Mexican - Not U.S. - Resident

The sole person to die outside of Mexico of the swine flu was a resident of Mexico, not the U.S.

Specifically, the child was a Mexican citizen whose family was visiting relatives in the United States. "The family had traveled to South Texas. The child became ill and they transported the child to Houston for medical care," said a Houston health department official.

Authorities do not currently even know what part of Mexico the child was from.

I'm not sure why all of the deaths so far have been of Mexican residents, but this seems to be the case to date.

Instead of Deleveraging, Companies are INCREASING Leverage, Putting the Economy at Heightened Risk

As I have repeatedly tried to point out, the problem is too much leverage, and what is needed to fix the economy is for the financial players to deleverage.

But instead of encouraging orderly deleveraging, the government has done everything it can to prop up and even increase leverage.

The Wall Street Journal has confirmed the problem in a new article:

Deleveraging? What deleveraging? Since the start of the credit crunch, corporate leverage has risen at a faster rate than it did at the peak of the boom, even as firms work hard to reduce borrowings. Companies that once embraced leverage in the name of shareholder value now find their debt piles balanced precariously on shrinking earnings. Absent a swift recovery, leverage is likely to rise even higher...

The picture is more worrying for companies where deleveraging should be the top priority: those bought by private-equity firms. For example, look at chip maker Freescale Semiconductor. When taken private in December 2006, it had leverage of just over 5 times, but relentless earnings pressure has pushed that figure ever higher. Analysts now forecast leverage will peak at more than 10 times earnings before interest, tax, depreciation and amortization, despite an exchange offer that cut debt by $1.9 billion.

Meanwhile, among the most aggressive European LBOs, leverage is standing still or rising, according to Fitch Ratings...

None of this bodes well for credit ratings. Even if total debt outstanding is stabilizing or falling in some cases, the ratings agencies focus on metrics such as asset-backing and interest cover. In the first quarter, Standard & Poor's downgraded 523 companies and upgraded just 38, giving a record downgrade ratio of 93%. That will make it harder for companies to refinance at attractive rates, leaving many running hard just to stand still.

Way to go Geithner, Bernanke and Summers. Instead of insisting that a couple of levels be taken off the top of the house of cards, you've encouraged the gamblers to add new, ever-flimsier layers.

The Swine Flu Might Be Less Deadly Than the Average Winter Flu

The headlines have been scary.

For example, the headline from the Telegraph says:

"Swine flu: 'All of humanity under threat', WHO warns"

That sounds extremely dire, indeed.

And every new case of swine flu is being treated as a breaking news alert.

However, the World Health Organization quote was taken out of context. And science actually paints more a reassuring picture.

For example, as the Los Angeles times notes today:

Scientists studying the virus are coming to the consensus that this hybrid strain of influenza -- at least in its current form -- isn't shaping up to be as fatal as the strains that caused some previous pandemics.

In fact, the current outbreak of the H1N1 virus, which emerged in San Diego and southern Mexico late last month, may not even do as much damage as the run-of-the-mill flu outbreaks that occur each winter without much fanfare.

The LA Times goes on to provide useful detail:

Mounting preliminary evidence from genetics labs, epidemiology models and simple mathematics suggests that the worst-case scenarios are likely to be avoided in the current outbreak.

"This virus doesn't have anywhere near the capacity to kill like the 1918 virus," which claimed an estimated 50 million victims worldwide, said Richard Webby, a leading influenza virologist at St. Jude Children's Research Hospital in Memphis, Tenn...
"There are certain characteristics, molecular signatures, which this virus lacks," said Peter Palese, a microbiologist and influenza expert at Mt. Sinai Medical Center in New York. In particular, the swine flu lacks an amino acid that appears to increase the number of virus particles in the lungs and make the disease more deadly...
We expect to see more cases, more hospitalizations, and, unfortunately, we are likely to see more deaths from the outbreak," Health and Human Services Secretary Kathleen Sebelius told reporters Wednesday on her first day at work.

But certainly nothing that would dwarf a typical flu season. In the U.S., between 5% and 20% of the population becomes ill and 36,000 people die -- a mortality rate of between 0.24% and 0.96%...
And a pandemic doesn't necessarily have a high fatality rate...
Though scientists have begun to relax about the initial toll, they're considerably less comfortable when taking into account the fall flu season. They remain haunted by the experience of 1918, when the relatively mild first wave of flu was followed several months later by a more aggressive wave.

The longer the virus survives, the more chances it has to mutate into a deadlier form.

"If this virus keep going through our summer," Palese said, "I would be very concerned."

And while Vice President Biden advised people not to travel by plane or subway, the head of the CDC said such travel was safe:

"I think flying is safe. Going on the subway is safe. People should go out and live their lives," Richard Besser, acting director of the Centers for Disease Control and Prevention, told reporters.

"In terms of flights, if you have a fever and flu-like symptoms, you should not get on an airplane," he said.

But Besser added that officials involved in public health "should put in context what the risk is."

The bottom line is that while this flu is certainly spreading worldwide, and many folks will likely catch it - in the same way that many catch the normal flu every winter.

The real question is how dangerous it is.

While it could mutate into something extremely lethal, right now it is fairly mild.

Note: Precautions, such as frequent hand-washing, should certainly be undertaken. And studies note that Vitamin D can help ward off flus or reduce their severity. There is also some evidence that certain probiotics do the same.

Does Goldman Sachs Run the Government?

Everyone agrees that Goldman Sachs pretty much runs the government's economic and financial agencies.

As the New York Times explained last October in a must-read 4 page article, the presence of Goldman Sachs alumni in virtually all of the top government financial posts is so great that their team is dubbed "Government Sachs":

Indeed, Goldman’s presence in the [Treasury] department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.

The Times points out that Goldman alums include:

Former treasury secretary Hank Paulson

Paulson's bailout chief Neel Kashkari

Interim Treasury investment officer Reuben Jeffrey

Key Treasury players Dan Jester, Steve Shafran, Edward C. Forst, and Robert K. Steel

Key New York Federal Reserve players Stephen Friedman (head of the New York Fed board of governors, who sat on Goldman's board and owned a substantial stake in Goldman while he was making official decisions - and see this), William C. Dudley (head of the New York Fed's unit that buys and sells government securities), and E. Gerald Corrigan (charged with convening a group to analyze risk on Wall Street)

And there are many more Goldman alums who have been - or are soon to be - appointed. For example, Obama has named Gary Gensler to head the Commodity Futures Trading Commission. And Geithner named Mark Patterson as his top aide last January

As Glenn Greenwald writes today:

Here is just one random item this week announcing a couple of standard personnel moves:

Goldman Sachs' new top lobbyist was recently the top staffer to Rep. Barney Frank, D-Mass., on the House Financial Services Committee chaired by Frank. Michael Paese, a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank's committee in September, will join Goldman as director of government affairs, a role held last year by former Tom Daschle intimate, Mark Patterson, now the chief of staff at the Treasury Department. This is not Paese's first swing through the Wall Street-Congress revolving door: he previously worked at JP Morgan and Mercantile Bankshares, and in between served as senior minority counsel at the Financial Services Committee.

So: Paese went from Chairman Frank's office to be the top lobbyist at Goldman, and shortly before that, Goldman dispatched Paese's predecessor, close Tom Daschle associate Mark Patterson, to be Chief of Staff to Treasury Secretary Tim Geithner, himself a protege of former Goldman CEO Robert Rubin and a virtually wholly owned subsidiary of the banking industry. That's all part of what Desmond Lachman -- American Enterprise Institute fellow, former chief emerging market strategist at Salomon Smith Barney and top IMF official (no socialist he) -- recently described as "Goldman Sachs's seeming lock on high-level U.S. Treasury jobs."

And the Independent wrote last July:

The New York Times columnist David Brooks noted that Goldman Sachs employees have given more money to Barack Obama's campaign for president than workers of any other employer in the US. "Over the past few years, people from Goldman Sachs have assumed control over large parts of the federal government," Brooks noted grimly. "Over the next few they might just take over the whole darn thing."

In March, Geithner was questioned by Congresswoman Maxine Waters about the appearance of conflict of interest by Goldman Sachs insiders:

"I am just asking the questions," Waters said, "because the talk is...that this small group of decision makers at the center of it is Goldman Sachs and that's what's causing a lot of the distrust, because people are thinking or believing that Goldman Sachs, because of the connections, have had a lot to do with the decisions that are being made."

Geithner responded: "I think it's deeply unfair to the people who are part of these decisions to suggest that they were making judgments that in their view were not in the best interest of the American people."

What is interesting is that Geithner did not deny that Goldman players were at the center of the government's financial decisions, only that their decisions were not bad ones.

So has Government Sachs made selfless decisions for the benefit of the American people? Or has it engaged in some self-dealing?

Well, as Time magazine notes:

Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs, the investment-banking house that has been the single largest supplier of financial talent to the government. Critics have been quick to note — and not favorably — the almost uncanny influence of former Goldman executives. Initial phases of the rescue were orchestrated by ex–Goldman chairman Hank Paulson, who was recruited as Treasury Secretary in part by former White House chief of staff and Goldman senior exec Josh Bolten. Goldman's current boss, Lloyd Blankfein, was invited to participate in meetings with the Fed. AIG's Liddy is a former Goldman director and an ex-CEO of Allstate. Another alum, Mark Patterson, once a Goldman lobbyist, serves as chief of staff at the Treasury, while Neel Kashkari, who runs TARP, was a Goldman vice president.
Goldman has repeatedly declared that its exposure to AIG was "immaterial" and fully hedged. But some rivals point to the fact that Goldman had uncharacteristically piled into contracts with a single counterparty. "I am shocked that Goldman had this much exposure [with AIG]," says an analyst at a competing bank. "This was a major failing, but they got bailed."

Goldman got bailed twice: first on its CDS exposure and a second time, to the tune of $4.8 billion, for another AIG fiasco, losses on its securities-lending business.

Indeed, Goldman's current CEO, Lloyd C. Blankfein, apparently participated in several of the important meetings determining which companies the government would save and which would fail.

And Marketwatch columnist Paul Farrell literally says that Goldman "rules the world":

"Obama's victory and Geithner's appointment are the completion of Goldman's meticulously crafted plan to become a superpower. The firm now has the clout to impose its will on the financial markets, and the world."
GOP or Dems? Conservatives or liberals? It doesn't matter. We'll all controlled by "The [Goldman] Conspiracy." So why not surrender, let them have the power? The truth is, through their lobbyists and surrogates in Washington, they already rule America.

(and he said it again here).

Indeed, Goldman's influence reaches abroad, as well. For example, the head of the World Bank, Robert Zoellick, was formerly Goldman's managing director. See also this.

The New York post also claims that Goldman is gaming the stock market.

And Rolling Stone has shown that Goldman gamed the oil market as well.

Wednesday, April 29, 2009

Spanish Judge Opens NEW Torture Investigation of BIGGER Fish

The Spanish Judge who went after Pinochet has opened a new torture investigation of bigger fish.

The first one was just against the lawyers who wrote torture memos.

The new one includes Cheney, Rice and perhaps other leading authors of the torture policy.

At least someone still thinks the rule of law should be upheld.

Update on Swine Flu

Contrary to wide-spread initial reports that the swine flu included bird, pig and human flu strains, doctors are now saying that the flu is solely made up from 2 strains of pig flu.

And while earlier reports put the number of confirmed cases in Mexico well above 100, the World Health Organization (WHO) is now giving the following update, revising the number of cases in Mexico sharply downwards:

As of 18:00 GMT, 29 April 2009, nine countries have officially reported 148 cases of swine influenza A/H1N1 infection. The United States Government has reported 91 laboratory confirmed human cases, with one death. Mexico has reported 26 confirmed human cases of infection including seven deaths.

The following countries have reported laboratory confirmed cases with no deaths - Austria (1), Canada (13), Germany (3), Israel (2), New Zealand (3), Spain (4) and the United Kingdom (5).

WHO advises no restriction of regular travel or closure of borders.

That's too good news.

The bad news is that - from what a doctor tells me - it appears that the horse is already out of the barn, the flu really is spreading worldwide, and there is no way to stop its spread.

Obama has said that schools where any children have confirmed infections may need to be closed temporarily. And it should be obvious that WHO will declare it a pandemic within the next day or so.

Here is a current list of swine flu cases by states (in the U.S.), and here is the latest official health guidance.

Larry Summers is a Big Fat Idiot

Many people inside the Washington beltway - including, unfortunately, President Obama - think that Larry Summers is a genius.

Of course, Summers was one of the people most responsible for gutting the Depression-era banking laws which helped protect our economy, allowing the big financial institutions to speculate and gamble using insane amounts of leverage, and insisting that toxic derivatives be left completely unregulated.

Arianna Huffington, Naomi Klein and others have argued that - even if smart - his ideas are toxic.

But Friday, Summers proved that he's really not that smart. On Friday, Summers basically said we should continue to do the exact same things which got us into this mess because:

All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.

Um . . . sorry to break it to you there Larry, but a group of economics professors has recently demolished the "self-equilibrating economy" theory:

If one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. In our hour of greatest need, societies around the world are left to grope in the dark without a theory. ...
The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. ...
The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena ... This tradition, however, has been neglected ...

And when economist James Galbraith spoke at a recent panel on the causes of the financial crisis, the first thing he listed as the main cause of the crisis was "The idea that capitalism ... is inherently self-stabilizing."

Summers a genius?

Will the Swine Flu Get the Same Response as the Financial Crisis - Protect the Status Quo without Really Changing Anything?

Even though we've suffered the worst economic crisis since the Great Depression, Obama, Summers and Geithner are not really changing anything, but are instead doing everything they can to keep the status quo intact. Instead of breaking up the insolvent banks in an orderly fashion, the "too big to fail" financial players are being allowed to keep on gambling using our money.

Is the same thing happening with swine flu and industrial meat facilities?

As William Engdahl writes:

It has been widely documented and subject of US Congressional reports that large-scale indoor animal production facilities such as that of Granjos Carroll are notorious breeding grounds for toxic pathogens.
A recent report by the US Pew Foundation in cooperation with the Johns Hopkins School of Public Health notes, ‘the method of producing food animals in the United States has changed from the extensive system of small and medium-sized farms owned by a single family to a system of large, intensive operations where the animals are housed in large numbers in enclosed structures that resemble industrial buildings more than they do a traditional barn. That change has happened primarily out of view of consumers but has come at a cost to the environment and a negative impact on public health, rural communities, and the health and well-being of the animals themselves.

The Pew study notes, ‘The diversified, independent, family-owned farms of 40 years ago that produced a variety of crops and a few animals are disappearing as an economic entity, replaced by much larger, and often highly leveraged, farm factories. The animals that many of these farms produce are owned by the meat packing companies from the time they are born or hatched right through their arrival at the processing plant and from there to market.’

The study emphasizes that application of ‘untreated animal waste on cropland can contribute to excessive nutrient loading, contaminate surface waters, and stimulate bacteria and algal growth and subsequent reductions in dissolved oxygen concentrations in surface waters.’...
Avian Flu was traced back to huge chicken factory farms in Thailand and other parts of Asia whose products were shipped across the world. Instead of a serious investigation into the sanitary conditions of those chicken factory farms, the Bush Administration and WHO blamed ‘free-roaming chickens’ on small family farms, a move that had devastating economic consequences to the farmers whose chickens were being raised in the most sanitary natural conditions. Tyson Foods of Arkansas and CG Group of Thailand reportedly smiled all the way to the bank.

Tuesday, April 28, 2009

Gallows Humor

How it started?

Decorated swine flu surgical mask in Mexico:

Jimmy Kimmel spoof on protecting yourself:

Now Or Never for Torture Prosecutions: Conyers and Nadler Request a Special Prosecutor for Torture

John Conyers, Jerold Nadler and others on the House Judiciary Committee today asked Attorney General Holder to appoint a special prosecutor for torture:

Holder Letter 042809

Publish at Scribd or explore others: Law & Government Business & Law holder prosecutor

Holder is required by law to prosecute violations of the Geneva Convention such as torture. And this is not supposed to be a decision based upon politics.

Unfortunately, Holder will likely do whatever Obama tells him to do. Therefore, it is now or never to call Obama and demand prosecution.

Industrial Hog Farming Is Just Like Wall Street

One theory about the swine flu which is quickly gaining traction is that the flu was spread by flies swarming around the hog manure ponds at the giant Granjas Carrol hog farm in Vera Cruz, Mexico. Granjas Carrol, which is partly owned by Smithfield Foods - the world's largest hog company - raises 950,000 hogs per year at the facility.

On these industrial-scale hog farms, pigs are jammed together so tightly that they can barely turn around. There are so many of them that they produce many tons of manure, which is just dumped into giant open ponds.

This is the Wall Street of hog farming. On both Wall Street and at giant meat production farms, the hogs feed at the public trough.

On hog farms, as with Wall Street:

A couple of giant companies dominated the landscape

Regulators allowed the companies to run amok

The companies went "hog wild", knowing that governments would pick up the pieces if things crashed

The profits were privatized, and the losses socialized. In the case of the hog farms, the profits from the mega-farms were pocketed by the companies, while the costs of the swine flu epidemic will be borne by the taxpayers. The hog farms dumped huge amounts of manure into their local communities, which sickened not only the locals, but caused a global health problem. Similarly, the Wall Street giants cranked out trillions in "toxic assets" that the nations of the world and their taxpayers are now being asked to clean up

As one blogger wrote:

Agribusiness needs to be held accountable. They are following the same rules as bankers; keep the profits and dump losses (in the form of mad cow or now swine flu) on the public. Factor in a few million dead and maybe locally produced food from small farms is not so expensive after all.

Former Senior Intelligence Officer Dismantles Arguments for Covering Up CIA Torture

Melvin Goodman is a former high-level intelligence officer. He was the Division Chief of the CIA’s Office of Soviet Affairs, who served as Senior Analyst from 1966 - 1990. He also served as Professor of International Security at the National War College from 1986 - 2004.

Goodman says that the arguments for covering up the extent of torture by the CIA are all bogus:

[Advocates for keeping the information classified] argue that foreign intelligence services will not share sensitive intelligence with the United States and the CIA because of the declassification and release of the torture memoranda. That is nonsense!

European liaison services as well as other intelligence services have tempered their cooperation with the CIA because of the use of torture and abuse as well as the extraordinary rendition of innocent individuals from their countries to intelligence services in the Middle East. The CIA’s extra-legal activities have complicated and undermined the task of maintaining credible relations with our allies in the battle against terrorism...

[The torture apologists also] argue that, because of the release of the memos, CIA clandestine operatives will keep their heads down and avoid assignments that carry political risk, and that the decline in CIA “morale and effectiveness” will harm American national security. More nonsense! CIA operatives and analysts are professionals who pride themselves on service to the country and their oath to the Constitution.

Very few of them took part in the corruption of intelligence on Iraqi weapons of mass destruction and very few participated in the policies of torture and abuse. They know that the law should not be broken and they want to get these issues behind them so that they can continue to serve the national interests of the United States. They know that painful truths must be acknowledged and that some price must be paid by all for the chicanery of a few.

If Agency personnel were permitted to share their opinions about torture and abuse with the press, a large majority would oppose the practices. Unfortunately, only those officers seeking to cover-up their own activities have the temerity to talk to reporters. The notion that the declassification of these memoranda have given the “enemy invaluable information about the rules by which we operate” is particularly ludicrous.

The enemy has had this information for more than five years, ever since every major newspaper in the world published the unconscionable images from Abu Ghraib. General officers who have served in Iraq and Afghanistan have testified that these images are the most important recruitment tool in the hands of terrorists and fundamentalists and have contributed to the deaths of many American men and women.

Goodman's article is worth reading in full.

Monday, April 27, 2009

The Bush Administration Used Communist Intimidation and Torture Tactics

The communist tyrant launches an "investigation" into a nuclear accident in his country.

But to make sure that nothing critical is said about the way the government operated the nuclear power plant or how it responded to the accident, the government places "minders" in every interview.

The minders loom over the witnesses in an intimidating fashion, tell the witnesses that everything they say will be reported to the central government, and they even jump in an answer some of the questions directed at the witnesses.

Would the Western nations accept the results of the investigation that the government "could not have known" of the dangers from the nuclear power plant, and that the government did everything it could to minimize the damage?

Of course not.

For example, 9/11 Commission chair Thomas Kean points out that if "minders" had been present during the Commission's investigation, that would have been intimidation, which would have stemmed the flow of testimony from the witnesses:

I think the commission feels unanimously that it’s some intimidation to have somebody sitting behind you all the time who you either work for or works for your agency. You might get less testimony than you would.

However, that's exactly what happened to Kean's own 9/11 Commission.

Specifically:

A recently released 9/11 Commission memo [released in January 2009 from the Commission to the National Archives; referenced in the The National Commission on Terrorist Attacks Upon the United States, Finding Aid: Series Descriptions and Folder Title Lists, page 52, "Memo Concerning Minders Conduct" *] highlights the role of government “minders” who accompanied witnesses interviewed by the commission. It was added to the National Archives’ files at the start of the year and discovered there by History Commons contributor paxvector.

The memo, entitled “Executive Branch Minders’ Intimidation of Witnesses,” complains that:

Minders “answer[ed] questions directed at witnesses;”
Minders acted as “monitors, reporting to their respective agencies on Commission staffs lines of inquiry and witnesses’ verbatim responses.” The staff thought this “conveys to witnesses that their superiors will review their statements and may engage in retribution;” and
Minders “positioned themselves physically and have conducted themselves in a manner that we believe intimidates witnesses from giving full and candid responses to our questions.”

The memo was drafted by three staffers on the commission’s Team 2, which reviewed the overall structure of the US intelligence community. One of the drafters was Kevin Scheid, a senior staffer who led the team. His co-writers were Lorry Fenner, an air force intelligence officer, and lawyer Gordon Lederman. The complaint was sent to the commission’s counsels, Daniel Marcus and Steve Dunne, in October 2003, about halfway through the commission’s 19-month life.

The memo makes clear that the problems were not occurring only with witnesses talking to Team 2, but also in “other teams’ interviews.” A hand-written note on a draft of the memo says, “not one agency or minder – also where we’ve sat in on other Teams’ interviews.”

According to the memo, some minders merely policed prior agreements between the commission and their parent agency about what the commission could ask witnesses, and others were simply there to make a list of documents the commission might want based on a witness’ testimony. However, some minders saw their role differently.

Intimidation through Physical Positioning

The three staffers argued minders should not answer questions for witnesses because they needed to understand not how the intelligence community was supposed to function, but “how the Intelligence Community functions in actuality.” However: “When we have asked witnesses about certain roles and responsibilities within the Intelligence Community, minders have preempted witnesses’ responses by referencing formal polices and procedures. As a result, witnesses have not responded to our questions and have deprived us from understanding the Intelligence Community’s actual functioning and witnesses’ view of their roles and responsibilities.”

The memo also describes the minders’ conduct in detail: “… [M]inders have positioned themselves physically and have conducted themselves in a manner that we believe intimidates witnesses from giving full and candid responses to our questions. Minders generally have sat next to witnesses at the table and across from Commission staff, conveying to witnesses that minders are participants in interviews and are of equal status to witnesses.”

The staffers also worried about minders taking “verbatim notes of witnesses’ statements,” as they thought this “conveys to witnesses that their superiors will review their statements and may engage in retribution.” They believed that “the net effect of minders’ conduct, whether intentionally or not, is to intimidate witnesses and to interfere with witnesses providing full and candid responses.”

Another problem with the verbatim notetaking was that it “facilitates agencies in alerting future witnesses to the Commission’s lines of inquiry and permits agencies to prepare future witnesses either explicitly or implicitly.”

Proposals

In response to this, the three staffers proposed not that minders be banned from interviews, but a set of rules governing minders’ conduct. For example, minders were to keep a “low profile,” sit out of witnesses’ sight, not take verbatim notes and not answer any questions directed at the witnesses.

Perhaps the most remarkable proposal is that the number of minders be limited to one per witness. The memo indicates that where an interviewee had served in multiple agencies, more than one minder would accompany the witness. The memo therefore requests, “Only one minder may attend an interview even if the witness served in multiple agencies,” meaning a witness would at least not be outnumbered by his minders.

As the Family Steering Committee (made up of 9/11 victims' family members) wrote in 2003:

The FSC [Family Steering Committee] is shocked with the use of “minders” in the interrogatory process. And, despite the Commissioner's similar objection to “minders”, as stated at the last press conference, “minders” continue to be present during witness examination and questioning. The FSC does not want “minders” present during any witness examination and questioning; it is a form of intimidation and it does not yield the unfettered truth.

Indeed, even 9/11 Commission co-chair Lee Hamilton admitted that "it is very difficult to tell when a witness is being intimidated by a minder."

Not only did the Bush administration adopt Communist torture techniques geared towards extracting false confessions, it also appears to have adopted Communist intimidation tactics.

And see this.

Witness Who Fingered 9/11 "Mastermind" Was Himself Crazy

I have previously pointed out that the self-confessed 9/11 "mastermind" Khalid Sheikh Mohammed also falsely confessed to crimes he didn't commit.

However, a second witness - Abu Zubaida - fingered Khalid Sheikh Mohammed as the 9/11 mastermind (Zubaida was subsequently severely tortured for many months. But he initially identified KSM even before being tortured).

So we have independent confirmation that KSM was the chief architect of 9/11, right?

Well, the New Yorker notes this week:

The F.B.I.’s point man on the Abu Zubaydah interrogation, Daniel Coleman, had read Zubaydah’s diaries and concluded that he “had a schizophrenic personality.”

Former FDIC Chair Isaac Says Bank Stress Tests Backfired, Rattled Markets

Former FDIC chairman William Isaac says that the stress tests have backfired, and only succeeded in rattling markets.

This is not surprising, given that the stress tests were a sham.

Sunday, April 26, 2009

Good Mainstream Sources of Swine Flu Information

The following are some good sources of information about the swine flu epidemic:

The Centers for Disease Control:

What's New

Key facts

Saturday, April 25, 2009

Open Thread

I'm away for most of the weekend.

So post your comments and tell me what's on your mind.

Wild New Discoveries about the Universe

Ethyl formate is the chemical compound which gives raspberries their flavor (and rum its smell).

Scientists now say that the center of our Milky Way galaxy is high in ethyl formate. In other words, an astronaut visiting the center of our galaxy - if he took off his helmet - would smell a rum smell and taste a raspberry taste.

Not weird enough for you?

Scientists say they have discovered a black hole in a distant galaxy that spouted water in a powerful jet:

Friday, April 24, 2009

John Kerry is Half-Right About Torture

In an interview today with Huffington Post, Senate foreign relations committee chairman John Kerry said that he was concerned the release of photos depicting the abusive treatment of detainees in U.S. custody could become a "propaganda tool" for terrorist organizations.

It is true that photos of barbarian acts of torture could be used by terrorists to promote anti-American sentiments.

But only to the extent that those who ordered torture go unpunished.

If Bush, Cheney, Rumsfeld, Rice and the others who ordered torture are allowed to go free, then that says loud and clear to the world:

"WE PROTECT TORTURERS. WE SAY ONE THING IN PUBLIC, BUT WE PROTECT AND NOD AND WINK AT THE BARBARIANS WHO HAVE DONE THIS TO BROWN-SKINNED PEOPLE."

But if the sickos who ordered torture are brought to justice, then the world will look at these acts as an unfortunate chapter in America's history that has been closed.

We will be looked on as a people who strayed, but have returned to our roots and to stand up for human rights and justice.

Terrorists would not be able to use the torture pictures as a recruiting tool if the U.S. political and justice systems and the American people stand up and shout "THIS IS NOT WHO WE ARE!", and if we admitted our errors.

Stress Tests Prove that Credit Default Swaps Still Pose a Huge Risk to the Economy

The stress tests reveal that credit default swaps and other credit derivatives still pose a huge risk to the economy.

The Financial Times today notes that:

US banks could be forced to hold more equity than initially expected after it emerged that "stress tests" organised by regulators take into account risks not commonly understood to be included in the assessment.
In addition to looking at potential losses on loans and securities, bank examiners are looking at so-called "counterparty risk" on derivative contracts - the chance that the party on the other end of a derivatives deal might default, depriving the bank of a payment that is due.
They want to be sure each bank has enough capital to cover this potential source of loss as well as its more traditional lending risks.
In the past regulators have focused on traditional lending risks that form the basis of bank capital requirements. The stress test provides a more rounded assessment of the amount of equity a bank needs in order to be considered well capitalised relative to the risks it is running.
This means banks that have incurred large counterparty risks in their trading books could be forced to hold more capital.

(references to "counterparty risks" usually mean that credit default swaps are involved).

And economist Martin Weiss notes (as summarized today by leading economist Nouriel Roubini in a discussion of the stress tests):

OCC [Office of the Comptroller of the Currency] data show that as of Q4, the total credit exposure with derivatives as % of risk-based capital was: 179% for Bank of America, 278% for Citibank, 382% for JPMorganChase; 1056% for GoldmanSachs. "Moreover, since JPM holds half of all the derivatives in the U.S. banking industry, JPMorgan is ground zero in the debt crisis."

In other words, contrary to what lobbyists in the credit default swap industry say, the risk of losses from CDS is still very real.

Former Chief Accountant for the SEC: Bernanke and Paulson Broke the Law and Should be Prosecuted

The New York Attorney General says that Bernanke and Paulson forced Bank of America to buy Merill Lynch:

Cuomo Letter

Publish at Scribd or explore others: Law & Government Finance career letter

American Public Radio interviewed the former chief accountant at the SEC, who said this was illegal and should be prosecuted:.

Reporter: If Henry Paulson and Ben Bernanke really told the CEO of Bank of America to keep quiet about losses at Merrill Lynch, they were probably breaking the law. That’s according to Lynn Turner, former chief accountant at the SEC.

Lynn Turner: If these allegations are proven true, both Bernanke and Paulson should be prosecuted by the SEC to the fullest extent of the law.

Will they be prosecuted? Or will it be yet another example of the high-and-mighty being above the law?

Fed Admits "Stress Tests" Are a Sham

The "stress tests" were supposed to triage those banks worth saving from those which were already too far gone to save.

But as Nouriel Roubini, FDIC chief Sheila Bair, Nobel economist Paul Krugman, former senior S&L regulator William Black and many others said, the "stress tests" are a sham.

Well, they've been proven right.

The Fed said today that - instead of letting the insolvent banks fail - which is what virtually all of the independent experts are recommending (see this for example), the Fed will rescue all banks which fail the stress test.

Indeed, the Fed itself says:

Even if the tests showed a bank needs more capital, that "is not a measure of the current solvency or viability of the firm," the Fed said in Friday's announcement about the test methodology.

So the stress tests have nothing to do with solvency or viability, the advertised purpose behind the tests.

As the above-linked article from Huffington Post points out:

The announcement reinforced the Fed's view that major financial firms are "too big to fail," and that the government must do whatever is necessary to save them, said former Fed examiner Mark Williams.

"It appears 'too big to fail' is a fundamental philosophy _ it's a philosophical principle," said Williams, a finance professor at Boston University.

In extreme cases, a rescue could include a government-backed merger, similar to what regulators did in helping Bank of America to buy Merrill Lynch and JPMorgan Chase & Co. to buy Bear Stearns.

Critics say that policy has put taxpayer money at risk to give banks billions in government bailouts and guarantees.

Indeed.

Torture REDUCES National Security

Torture REDUCES, rather than protects, American national security:

The head of all U.S. intelligence said:
"The bottom line is these techniques have hurt our image around the world," [Director of National Intelligence Dennis] Blair said in the statement. "The damage they have done to our interests far outweighed whatever benefit they gave us and they are not essential to our national security."

A top counter-terrorism expert says torture increases the risk of terrorism (and see this).

One of the top military interrogators said that torture by Americans of innocent Iraqis is the main reason that foreign fighters started fighting against Americans in Iraq in the first place (and see this).

Former counter-terrorism czar Richard A. Clarke says that America's indefinite detention without trial and abuse of prisoners is a leading Al Qaeda recruiting tool

A former FBI interrogator -- who interrogated Al Qaeda suspects -- says categorically that torture actually turns people into terrorists

A 30-year veteran of CIA’s operations directorate who rose to the most senior managerial ranks, says:
"This is not just because the old hands overwhelmingly believe that torture doesn’t work — it doesn’t — but also because they know that torture creates more terrorists and fosters more acts of terror than it could possibly neutralize.”

A former US Air Force interrogator said that torture just creates more terrorists

A former U.S. interrogator and counterintelligence agent, and Afghanistan veteran said, “Torture puts our troops in danger, torture makes our troops less safe, torture creates terrorists. It’s used so widely as a propaganda tool now in Afghanistan. All too often, detainees have pamphlets on them, depicting what happened at Guantanamo.”

The Senate Armed Services Committee unanimously stated:

"The administration’s policies concerning [torture] and the resulting controversies ... strengthened the hand of our enemies."

Two professors of political science have demonstrated that torture increases, rather than decreases, terrorism

The reporter who broke Iran-Contra and other stories says that torture actually helped Al Qaeda, by giving false leads to the U.S. which diverted its military, intelligence and economic resources into wild goose chases

Raw Story says that torture might have resulted in false terror alerts

Hundreds of other experts have said the same things

As Andrew Sullivan writes:

We have expended enormous resources in fighting threats that are not there, while failing to expend the necessary resources and time to figure out accurately what exact threats we do face. When you hear of the intelligence extracted by torture, remember that it was the intelligence that "proved" that Saddam and WMDs and links to al Qaeda.

And remember, our military and intelligence leaders say that the economic crisis is now the biggest threat to America's national security.

Guess what one of the major causes of the economic crisis was? According to a Nobel prize-winning economist, the head of JP Morgan and others, the Iraq war and the war on terror in general were huge factors in destroying our economy.

The Senate Armed Services Committee concluded that creating a link between Al Qaeda and Iraq was one of the main purposes of the torture program. And the fake connection between Al Qaeda and Iraq was - in fact - one of the main justifications for the Iraq war.

Thursday, April 23, 2009

Pelosi Feigns Ignorance of Torture

Nancy Pelosi said today:

The Bush administration did not inform Congress that it had waterboarded detainees in classified briefings, after the agency had already done so...

Pelosi told reporters that the administration officials only told her and those in a classified briefing in the fall of 2002 that they believed they had the legal authority to do so, based on Office of Legal Counsel memos which have recently been released by the Obama administration.

"In that or any other briefing...we were not, and I repeat, were not told that waterboarding or any of these other enhanced interrogation techniques were used," said Pelosi. "What they did tell us is that they had some legislative counsel...opinions that they could be used, but not that they would."

However, that is likely untrue.

As noted by the above-linked article at Huffington Post:

Her assertion contradicts a recently released Senate committee report that cited CIA records to claim that senior members of Congress in both parties were briefed on the waterboarding, which had already been done to detainee Abu Zubaydah.

Moreover, the Washington Post wrote in 2007:

Four members of Congress met in secret for a first look at a unique CIA program designed to wring vital information from reticent terrorism suspects in U.S. custody. For more than an hour, the bipartisan group, which included current House Speaker Nancy Pelosi (D-Calif.), was given a virtual tour of the CIA's overseas detention sites and the harsh techniques interrogators had devised to try to make their prisoners talk.
Among the techniques described, said two officials present, was waterboarding, a practice that years later would be condemned as torture by Democrats and some Republicans on Capitol Hill. But on that day, no objections were raised. Instead, at least two lawmakers in the room asked the CIA to push harder, two U.S. officials said.
"The briefer was specifically asked if the methods were tough enough," said a U.S. official who witnessed the exchange...
The CIA gave key legislative overseers about 30 private briefings, some of which included descriptions of that technique and other harsh interrogation methods, according to interviews with multiple U.S. officials with firsthand knowledge. With one known exception, no formal objections were raised by the lawmakers briefed about the harsh methods during the two years in which waterboarding was employed, from 2002 to 2003, said Democrats and Republicans with direct knowledge of the matter. The lawmakers who held oversight roles during the period included Pelosi...
"Among those being briefed, there was a pretty full understanding of what the CIA was doing," said Goss, who chaired the House intelligence committee from 1997 to 2004 and then served as CIA director from 2004 to 2006. "And the reaction in the room was not just approval, but encouragement."...
Abu Zubaida, the first of the "high-value" detainees in CIA custody, was subjected to harsh interrogation methods beginning in spring 2002 after he refused to cooperate with questioners, the officials said. CIA briefers gave the four intelligence committee members limited information about Abu Zubaida's detention in spring 2002, but offered a more detailed account of its interrogation practices in September of that year, said officials with direct knowledge of the briefings.

The CIA provided another briefing the following month, and then about 28 additional briefings over five years, said three U.S. officials with firsthand knowledge of the meetings. During these sessions, the agency provided information about the techniques it was using as well as the information it collected.

Given these facts, how plausible is Pelosi's claimed ignorance?

Top Interrogation Experts Agree: Torture Doesn't Work

Apologists for torture say that it was a "necessarily evil" to stop future terror attacks.

However, the top interrogation experts all say torture that doesn't work:

The military agency which actually provided advice on harsh interrogation techniques for use against terrorism suspects warned the Pentagon in 2002 that those techniques would produce "unreliable information."

Army Field Manual 34-52 Chapter 1 says:
"Experience indicates that the use of force is not necessary to gain the cooperation of sources for interrogation. Therefore, the use of force is a poor technique, as it yields unreliable results, may damage subsequent collection efforts, and can induce the source to say whatever he thinks the interrogator wants to hear."

A declassified FBI e-mail dated May 10, 2004, regarding interrogation at Guantanamo states "[we] explained to [the Department of Defense], FBI has been successful for many years obtaining confessions via non-confrontational interviewing techniques." (see also this)

Brigadier General David R. Irvine, retired Army Reserve strategic intelligence officer who taught prisoner interrogation and military law for 18 years with the Sixth Army Intelligence School, says torture doesn't work

The CIA's own Inspector General wrote that waterboarding was not "efficacious" in producing information

A former FBI interrogator -- who interrogated Al Qaeda suspects -- says categorically that torture does not help collect intelligence. On the other hand he says that torture actually turns people into terrorists

A 30-year veteran of CIA’s operations directorate who rose to the most senior managerial ranks, says:
“The administration’s claims of having ‘saved thousands of Americans’ can be dismissed out of hand because credible evidence has never been offered — not even an authoritative leak of any major terrorist operation interdicted based on information gathered from these interrogations in the past seven years. … It is irresponsible for any administration not to tell a credible story that would convince critics at home and abroad that this torture has served some useful purpose.

This is not just because the old hands overwhelmingly believe that torture doesn’t work — it doesn’t — but also because they know that torture creates more terrorists and fosters more acts of terror than it could possibly neutralize.”

The FBI interrogators who actually interviewed some of the 9/11 suspects say torture didn't work

A former US Air Force interrogator said that information obtained from torture is unreliable, and that torture just creates more terrorists

The number 2 terrorism expert for the State Department says torture doesn't work, and just creates more terrorists

A former high-level CIA officer states:

Many governments that have routinely tortured to obtain information have abandoned the practice when they discovered that other approaches actually worked better for extracting information. Israel prohibited torturing Palestinian terrorist suspects in 1999. Even the German Gestapo stopped torturing French resistance captives when it determined that treating prisoners well actually produced more and better intelligence.

The Senate Armed Services Committee unanimously found that torture doesn't work.

A former CIA station chief in Pakistan who served at the agency for three decades doubts that torture saved any lives

Still don't believe it? These people also say torture doesn't produce usable intelligence:

Former high-level CIA official Bob Baer said "And torture -- I just don't think it really works ... you don't get the truth. What happens when you torture people is, they figure out what you want to hear and they tell you."

Rear Admiral (ret.) John Hutson, former Judge Advocate General for the Navy, said "Another objection is that torture doesn't work. All the literature and experts say that if we really want usable information, we should go exactly the opposite way and try to gain the trust and confidence of the prisoners."

Michael Scheuer, formerly a senior CIA official in the Counter-Terrorism Center, said "I personally think that any information gotten through extreme methods of torture would probably be pretty useless because it would be someone telling you what you wanted to hear."

Dan Coleman, one of the FBI agents assigned to the 9/11 suspects held at Guantanamo said "Brutalization doesn't work. We know that. "

Many other professional interrogators say the same thing (see this, this, and this).

In fact, one of the top interrogators in Iraq got information from a high-level Al Qaeda suspect not through torture, but by giving him cookies.

And top American World War 2 interrogators got more information using chess or Ping-Pong instead of torture than those who use torture are getting today.

And the head of Britain's wartime interrogation center in London said:

“Violence is taboo. Not only does it produce answers to please, but it lowers the standard of information.”

Indeed, one of the top military interrogators said that torture does not work, that it has resulted in hundreds or thousands of deaths of U.S. soldiers, and that torture by Americans of innocent Iraqis is the main reason that foreign fighters started fighting against Americans in Iraq in the first place (in fact, the experts agree that torture reduces national security).

And - according to the experts - torture is unnecessary even to prevent "ticking time bombs" from exploding (see this, this and this). Indeed, a top expert says that torture would fail in a real 'ticking time-bomb' situation

Self-Confessed 9/11 "Mastermind" Also Falsely Confessed to Crimes He Didn't Commit

As the Washington Post writes of Guantanamo Bay detainee Abu Zubaida:

President George W. Bush had publicly described him as "al-Qaeda's chief of operations," and other top officials called him a "trusted associate" of al-Qaeda leader Osama bin Laden and a major figure in the planning of the Sept. 11, 2001, terrorist attacks. None of that was accurate, the new evidence showed.

Okay, maybe they got that one wrong.

But certainly Khalid Sheikh Mohammed's confession that he was the mastermind of 9/11 proves his guilt, right?

Well, as the Telegraph notes today:

Khalid Sheikh Mohammed, the self-confessed mastermind of 9/11, was waterboarded 183 times in one month, and “confessed” to murdering the journalist Daniel Pearl, which he did not. There could hardly be more compelling evidence that such techniques are neither swift, nor efficient, nor reliable

If one of Khalid Sheikh Mohammed's major confessions (Pearl murder) was false, why should we believe his confession about 9/11?

After all, tough-as-nails Navy Seals usually become hysterical when waterboarded once in training sessions. After 183 waterboarding sessions in a month, I wouldn't be surprised if KSM also confessed to murdering Lincoln and Kennedy.

Wednesday, April 22, 2009

Morgan Stanley Follows Goldman's Lead And "Skips" Reporting December Losses

Goldman Sachs posted a profitable quarter by skipping December, during which it realized huge losses.

Now Morgan Stanley is doing the same thing.

Specifically, Morgan's first quarter results report states:

As a result of the change in the Company's fiscal year end from November 30^th to December 31^st, the Company had a December 2008 fiscal month transition period. The results for this period, which reflected a net loss applicable to Morgan Stanley of $1.3 billion, are presented on page 19 of the financial supplement accompanying this release.

Presto, Morgan's performance massaged to look better than it really was.

Torture, Iraq and 9/11

5 hours after the 9/11 attacks, Donald Rumsfeld said "my interest is to hit Saddam".

He also said "Go massive . . . Sweep it all up. Things related and not."

And at 2:40 p.m. on September 11th, in a memorandum of discussions between top administration officials, several lines below the statement "judge whether good enough [to] hit S.H. [that is, Saddam Hussein] at same time", is the statement "Hard to get a good case." In other words, top officials knew that there wasn't a good case that Hussein was behind 9/11, but they wanted to use the 9/11 attacks as an excuse to justify war with Iraq anyway.

Moreover, "Ten days after the September 11, 2001, terrorist attacks on the World Trade Center and the Pentagon, President Bush was told in a highly classified briefing that the U.S. intelligence community had no evidence linking the Iraqi regime of Saddam Hussein to the [9/11] attacks and that there was scant credible evidence that Iraq had any significant collaborative ties with Al Qaeda".

And a Defense Intelligence Terrorism Summary issued in February 2002 by the United States Defense Intelligence Agency cast significant doubt on the possibility of a Saddam Hussein-al-Qaeda conspiracy.

And yet Bush, Cheney and other top administration officials claimed repeatedly for years that Saddam was behind 9/11. See this analysis. Indeed, Bush administration officials apparently swore in a lawsuit that Saddam was behind 9/11.

Moreover, President Bush's March 18, 2003 letter to Congress authorizing the use of force against Iraq, includes the following paragraph:

(2) acting pursuant to the Constitution and Public Law 107-243 is consistent with the United States and other countries continuing to take the necessary actions against international terrorists and terrorist organizations, including those nations, organizations, or persons who planned, authorized, committed, or aided the terrorist attacks that occurred on September 11, 2001.

Therefore, the Bush administration expressly justified the Iraq war to Congress by representing that Iraq planned, authorized, committed, or aided the 9/11 attacks. See this.

Tortured Logic

Yesterday, Seator Levin revealed that the U.S. used torture techniques aimed at extracting false confessions.

Today, McClatchy fills in some of the details:

Former senior U.S. intelligence official familiar with the interrogation issue said that Cheney and former Defense Secretary Donald H. Rumsfeld demanded that the interrogators find evidence of al Qaida-Iraq collaboration...
For most of 2002 and into 2003, Cheney and Rumsfeld, especially, were also demanding proof of the links between al Qaida and Iraq that (former Iraqi exile leader Ahmed) Chalabi and others had told them were there."
It was during this period that CIA interrogators waterboarded two alleged top al Qaida detainees repeatedly — Abu Zubaydah at least 83 times in August 2002 and Khalid Sheik Muhammed 183 times in March 2003 — according to a newly released Justice Department document...
When people kept coming up empty, they were told by Cheney's and Rumsfeld's people to push harder," he continued."Cheney's and Rumsfeld's people were told repeatedly, by CIA . . . and by others, that there wasn't any reliable intelligence that pointed to operational ties between bin Laden and Saddam . . .
A former U.S. Army psychiatrist, Maj. Charles Burney, told Army investigators in 2006 that interrogators at the Guantanamo Bay, Cuba, detention facility were under "pressure" to produce evidence of ties between al Qaida and Iraq.
"While we were there a large part of the time we were focused on trying to establish a link between al Qaida and Iraq and we were not successful in establishing a link between al Qaida and Iraq," Burney told staff of the Army Inspector General. "The more frustrated people got in not being able to establish that link . . . there was more and more pressure to resort to measures that might produce more immediate results."
"I think it's obvious that the administration was scrambling then to try to find a connection, a link (between al Qaida and Iraq)," [Senator] Levin said in a conference call with reporters. "They made out links where they didn't exist."
Levin recalled Cheney's assertions that a senior Iraqi intelligence officer had met Mohammad Atta, the leader of the 9/11 hijackers, in the Czech Republic capital of Prague just months before the attacks on the World Trade Center and the Pentagon.
The FBI and CIA found that no such meeting occurred.

In other words, top Bush administration officials not only knowingly lied about a non-existent connection between Al Qaida and Iraq, but they pushed and insisted that interrogators use special torture methods aimed at extracting false confessions to attempt to create such a false linkage.

Writing about this today, Paul Krugman says:

Let’s say this slowly: the Bush administration wanted to use 9/11 as a pretext to invade Iraq, even though Iraq had nothing to do with 9/11. So it tortured people to make them confess to the nonexistent link.
There’s a word for this: it’s evil.

What Does That Say About the Persuasiveness of the 9/11 Commission Report?

As noted by Newsweek:

The commission appears to have ignored obvious clues throughout 2003 and 2004 that its account of the 9/11 plot and Al Qaeda's history relied heavily on information obtained from detainees who had been subjected to torture, or something not far from it.

The panel raised no public protest over the CIA's interrogation methods, even though news reports at the time suggested how brutal those methods were. In fact, the commission demanded that the CIA carry out new rounds of interrogations in 2004 to get answers to its questions.

That has troubling implications for the credibility of the commission's final report. In intelligence circles, testimony obtained through torture is typically discredited; research shows that people will say anything under threat of intense physical pain.

And yet it is a distinct possibility that Al Qaeda suspects who were the exclusive source of information for long passages of the commission's report may have been subjected to "enhanced" interrogation techniques, or at least threatened with them, because of the 9/11 Commission....
Information from CIA interrogations of two of the three—KSM and Abu Zubaydah—is cited throughout two key chapters of the panel's report focusing on the planning and execution of the attacks and on the history of Al Qaeda.

Footnotes in the panel's report indicate when information was obtained from detainees interrogated by the CIA. An analysis by NBC News found that more than a quarter of the report's footnotes—441 of some 1,700—referred to detainees who were subjected to the CIA's "enhanced" interrogation program, including the trio who were waterboarded.

Commission members note that they repeatedly pressed the Bush White House and CIA for direct access to the detainees, but the administration refused. So the commission forwarded questions to the CIA, whose interrogators posed them on the panel's behalf.

The commission's report gave no hint that harsh interrogation methods were used in gathering information, stating that the panel had "no control" over how the CIA did its job; the authors also said they had attempted to corroborate the information "with documents and statements of others."

But how could the commission corroborate information known only to a handful of people in a shadowy terrorist network, most of whom were either dead or still at large?

Former senator Bob Kerrey of Nebraska, a Democrat on the commission, told me last year he had long feared that the investigation depended too heavily on the accounts of Al Qaeda detainees who were physically coerced into talking. ...

Kerrey said it might take "a permanent 9/11 commission" to end the remaining mysteries of September 11. Those now calling for more 9/11-style panels would be wise to heed his words.

Constitutional Expert Slams 9/11 Commission

Constitutional expert Jonathan Turley said yesterday:

[The 9/11 Commission] was a commission that was really made for Washington - a commission composed of political appointees of both parties that ran interference for those parties - a commission that insisted at the beginning it would not impose blame on individuals. So it's the ideal Washington commission - a commission that would investigate without any reprecussions.

Indeed, the 9/11 Commission itself admitted as much:

The co-chairs of the 9/11 Commission (Thomas Keane and Lee Hamilton) now admit that the Commission largely operated based upon political considerations

9/11 Commissioner John Lehman said that “We purposely put together a staff that had – in a way - conflicts of interest" (and see this).

The Senior Counsel to the 9/11 Commission (John Farmer) who led the 9/11 staff's inquiry, said "At some level of the government, at some point in time...there was an agreement not to tell the truth about what happened" and says that " the official version not only is almost entirely untrue but serves to create a false impression of order and security".

Former 9/11 Commissioner Max Cleland resigned from the Commission, stating: "It is a national scandal"; "This investigation is now compromised"; and "One of these days we will have to get the full story because the 9-11 issue is so important to America. But this White House wants to cover it up"

Additionally, as explored in the book The Commission by respected journalist Philip Shenon , the Executive Director of the 9/11 Commission was an administration insider whose area of expertise is the creation and maintenance of "public myths" thought to be true, even if not actually true. He controlled what the Commission did and did not analyze, then limited the scope of the Commission's inquiry so that the overwhelming majority of questions about 9/11 remained unasked (see this article and this article).

Combined with the fact that the evidence the government presented to the Commission lacked any credibility, and that the Commission itself believes the government misled it, it is obvious to anyone paying attention that the 9/11 Commission Report should be treated solely as a work of fiction.

And see this and this.

Tuesday, April 21, 2009

Senator: Government Used Communist Torture Techniques Aimed at Extracting FALSE Confessions

Senator Levin, in commenting on the Senate Armed Services Committee report on torture declassified today, drops the following bombshell:

With last week's release of the Department of Justice Office of Legal Counsel (OLC) opinions, it is now widely known that Bush administration officials distorted Survival Evasion Resistance and Escape "SERE" training - a legitimate program used by the military to train our troops to resist abusive enemy interrogations - by authorizing abusive techniques from SERE for use in detainee interrogations. Those decisions conveyed the message that abusive treatment was appropriate for detainees in U.S. custody. They were also an affront to the values articulated by General Petraeus.
In SERE training, U.S. troops are briefly exposed, in a highly controlled setting, to abusive interrogation techniques used by enemies that refuse to follow the Geneva Conventions. The techniques are based on tactics used by Chinese Communists against American soldiers during the Korean War for the purpose of eliciting false confessions for propaganda purposes. Techniques used in SERE training include stripping trainees of their clothing, placing them in stress positions, putting hoods over their heads, subjecting them to face and body slaps, depriving them of sleep, throwing them up against a wall, confining them in a small box, treating them like animals, subjecting them to loud music and flashing lights, and exposing them to extreme temperatures. Until recently, the Navy SERE school also used waterboarding. The purpose of the SERE program is to provide U.S. troops who might be captured a taste of the treatment they might face so that they might have a better chance of surviving captivity and resisting abusive and coercive interrogations.

Senator Levin then documents that SERE techniques were deployed as part of an official policy on detainees, and that SERE instructors helped to implement the interrogation programs.

The senior Army SERE psychologist warned in 2002 against using SERE training techniques during interrogations in an email to personnel at Guantanamo Bay, because:

[T]he use of physical pressures brings with it a large number of potential negative side effects... When individuals are gradually exposed to increasing levels of discomfort, it is more common for them to resist harder... If individuals are put under enough discomfort, i.e. pain, they will eventually do whatever it takes to stop the pain. This will increase the amount of information they tell the interrogator, but it does not mean the information is accurate. In fact, it usually decreases the reliability of the information because the person will say whatever he believes will stop the pain... Bottom line: the likelihood that the use of physical pressures will increase the delivery of accurate information from a detainee is very low. The likelihood that the use of physical pressures will increase the level of resistance in a detainee is very high... (p. 53).

Given that Bush, Cheney, Rumsfeld, Rice and other high-ranking Bush officials insisted that SERE techniques used by the communists to extract false confessions be used - even after the head psychologist and others warned that it would not provide accurate information - does this mean that the torture program was geared towards obtaining false confessions?

This question is bolstered by the fact that all of the top experts on interrogation say that torture doesn't work.

And why else would the U.S. waterboard Khalid Sheikh Mohammed 183 times in one month (about 6 times a day for 31 days straight)?

Scientists Have No Idea What's Up With the Sun

Last October, the Telegraph reported:

The protective shield of energy that surrounds our solar system, has weakened by 25 per cent over the past decade and is now at it lowest level since the space race began 50 years ago.

Scientists are baffled at what could be causing the barrier to shrink in this way and are to launch mission to study the heliosphere.

Today, BBC is reporting:

The Sun is the dimmest it has been for nearly a century.

There are no sunspots, very few solar flares - and our nearest star is the quietest it has been for a very long time.

The observations are baffling astronomers, who are due to study new pictures of the Sun, taken from space, at the UK National Astronomy Meeting.

The Sun normally undergoes an 11-year cycle of activity. At its peak, it has a tumultuous boiling atmosphere that spits out flares and planet-sized chunks of super-hot gas. This is followed by a calmer period.

Last year, it was expected that it would have been hotting up after a quiet spell. But instead it hit a 50-year year low in solar wind pressure, a 55-year low in radio emissions, and a 100-year low in sunspot activity.
According to Prof Louise Hara of University College London, it is unclear why this is happening or when the Sun is likely to become more active again...
No-one knows how the centuries-long waxing and waning of the Sun works.

The bottom line is that scientists really have no idea what's up with the sun.

There's a lot we don't understand about our galactic neighborhood, either.

Were Other Congress People - Besides Harman - Also Blackmailed by the Bush Administration?

We know that Jane Harman was blackmailed by the Bush Administration into supporting illegal spying on Americans.

But Dave Lindorff asks a really good question: was Harman the only Congress person blackmailed by the Bush Administration? Or were others blackmailed as well?

It is worth quoting Lindorff at some length:

According to reports in CQ and in the New York Times, which ran a story on the scandal as its lead news item on Tuesday, then Attorney General Alberto Gonzales subsequently intervened with the FBI to prevent any prosecution of Harman, a key member of Congress on whom the administration was relying to help it persuade the Times to withhold its NSA wiretapping exposé until after the 2006 election. In the event, Rep. Harman did later make calls to a Times, editor, the paper did hold its story until after the election, and Harman later was a leading backer of the administration’s controversial (and, according to a federal district judge, illegal) NSA spying program.

There are several serious issues here. One is the extraordinary glimpse it offers into the extent to which Israel has penetrated the centers of power in Washington. It is illegal for foreign governments to directly lobby and to offer to arrange financial contributions for members of the US government, but here, clearly, Israeli agents were doing just that. The role of AIPAC as a front for the Israeli government in Washington, as exposed here, is simply stomach-turning, and should make it a toxic organization to politicians. Instead, they flock enmasse to its annual meetings, as President Obama did almost immediately upon winning the November election, and a large proportion of both houses from both parties happily accept its campaign largesse.

A second, even bigger, issue is the NSA’s spying activities themselves. According to CQ, the particular wiretap that caught Rep. Harman inflagrante with an Israeli agent was a court-approved tap—part of an investigation into Israeli government spying activities. But even if this is true—and at this point, we’re relying on what the government is telling us about it—it shows how dangerous the broader unwarranted monitoring program of the NSA has been, and remains. Back in 1978, Congress passed the Foreign Intelligence Surveillance Act FISA) in direct response to the disclosure during the Watergate hearings and subsequent investigations that the Nixon Administration had been using the NSA to conduct illegal monitoring of the communications of anti-war activists, and of members of Congress. To prevent such police-state outrages in the future, Congress passed the FISA legislation, establishing a secret court staffed by a panel of top-security-cleared federal judges, whose sole responsibility was to consider and grant requests from the NSA for warrants to conduct secret electronic surveillance within the US or involving American citizens abroad.

President Bush used the pretext of the 9-11 attacks to secretly order the NSA to begin a massive compaign of surveillance without going through the FISA Court for warrants, even secretly soliciting the cooperation of the nation’s several telecom companies in splicing in routers at their switching hubs to make it possible to monitor all conversations moving across the wires and the internet. It seemed to some observers, myself included, that the only reason the administration could have had for bypassing the FISA court (which over 30 years of operation has been incredibly accommodating of government spying requests) was that it was planning to engage in spying that would outrage the public and the Congress and even the FISA judges. It also seemed likely, given the Bush/Cheney administration’s public stance that everyone was either “with us or against us,” and that critics of the administration’s “War on Terror” or of its plans to invade Iraq, were “unpatriotic” or “soft on terror,” that congressional opponents of the administration would be obvious—and indeed irresistible--targets of that surveillance.

Now that we have seen proof that the administration was not above using its NSA-acquired knowledge to pressure a member of Congress, it becomes absolutely essential that Congress and the Justice Department investigate to see whether other members of Congress were also victims of agency spying, and whether others besides Rep. Harmon were similarly extorted or otherwise compromised.

The American public can, at this point, have zero confidence in the integrity of the Congress or of their own representatives, knowing that politicians and government officials may be acting not in the public interest but rather under duress in the interest of those who control the National Security Agency. We can have zero confidence either in the integrity of the president, who likewise may well have been compromised by NSA surveillance conducted on him before he became president.

The only possible position for the public to adopt as of today is to be suspicious of any politician who opposes a full and public investigation into the NSA’s seven-year-long campaign of sweeping, warrantless electronic eavesdropping, since opposition to such an investigation, in the wake of the Harman episode, could well be an indication that the political figure in question is afraid she or he has been monitored, or worse, that she or he has been threatened by those who have the records. Every citizen concerned about the fate of American democracy should demand that his or her senators and representative promptly call for such a public probe.

Monday, April 20, 2009

Harman Is A Poster Child For What Has Been Wrong With Congress For The Last 8 Years

In a stunning development, powerful Democratic congresswoman Jane Harman has been busted via wiretap for promising the AIPAC lobbying group that she would get a couple of spies off the hook.

As Congressional Quarterly's Jeff Stein, Glenn Greenwald, Raw Story and others point out, Attorney General Alberto Gonzales blackmailed Harman into support warrantless spying on Americans by threatening to prosecute her for her little AIPAC episode if she didn't play ball.

As dramatic as that is, that's not Harman's only scandal.

For example, Harman was briefed on the use of waterboarding in 2002, and yet did nothing to stop it.

Moreover, she knew by 2003 that the CIA had videotapes of the torture of alleged 9/11 plotters, and yet covered up that fact as well. She not only failed to tell the public, but she also hid the existence of the videotapes from the 9/11 Commission.

In other words, the official investigative body - which would have liked to have judge for itself what the detainees said and judged their credibility as witnesses for itself - was denied that opportunity by Harman and others. Because the Commission did not know about - let alone have access to - the videotapes, the 9/11 Commission Report was based almost entirely on a third-hand account of what tortured detainees said, with two of the three parties in the communication being government employees.

Finally, Harman chaired the hearing of the House Subcommittee on Homeland Security which pushing for the labeling any website which questioned the official version of 9/11 truth as terrorist incubators.

This is a little over-the-top, given that the senior counsel to the Commission says:

At some level of the government, at some point in time...there was an agreement not to tell the truth about what happened.

And the rest of the Commission doesn't have much faith in the government's story either.

Harman is a poster child for what has been wrong with Congress for the last 8 years.

Instead of Bailing Out Mainstream Newspapers, How About Bailing Out Real Journalists?

Congress is again making noises about bailing out the newspaper industry.

But the mainstream papers - other than a select few, such as McClatchy - were largely cheerleaders for the Iraq war, and covered up (or - as in the case of the New York Times - delayed for a year so the story would not effect elections) crimes like illegal spying on Americans.

Instead of bailing out lapdogs for the government and mouthpieces for the wealthy, how about giving seed money to alternative journalists who actually report the news without pulling punches?

There are hundreds of alternative news sites and thousands of hard-hitting investigative journalists who are struggling to make ends meet (you've seen their "please contribute" posts), who put out more real "news" than all of the mainstream papers put together.

Saturday, April 18, 2009

It Is Time to Dissolve All Central Banks

As previously noted, the Federal Reserve has failed on its own terms. Specifically, it has failed to provide the counter-cyclical influence on the economy which is its very justification for existing in the first place.

Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:

"I am convinced that the misbehavior of some would have been much rarer -- and far less damaging to our economy -- if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities ...

Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.

"Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior," Kaufman said. "It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective."

Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were "too big to fail" have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.

"Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities," he said. "The Fed failed to rein in the problem."...

"Much of the recent extreme financial behavior is rooted in faulty monetary policies," he said. "Poor policies encourage excessive risk taking."

Even the head of the Federal Reserve bank of San Francisco - during a talk on how runaway bubbles can lead to depressions - admitted:

Fed monetary policy may also have contributed to the U.S. credit boom and the associated house price bubble ...

This is on top of the widely recognized fact that the Fed helped cause the Great Depression with its faulty monetary policy.

Indeed, if even half of what financial writer Ellen Brown says is true, central banks in all countries are parasitic organizations which do not have the best interest of their host nation in mind.

The central bank experiment has failed.

It is time to dissolve not only the Fed (as Ron Paul, Dennis Kucinich, Austrian school economists, and many others have demanded), but all central banks.

Whatever their motivation - whether selfish or altruistic - they have proven to be a net detriment to their respective economies.

“The Earnings Boom is a False Spring”

The Washington Post is saying the emperor has no clothes, and calling the Obama administration's bluff that the winter of the financial crisis has given way to a spring of bank stability and profitability:

The earnings bloom, however, is probably a false spring, according to bank executives and financial analysts...

"We don't see the light at the end of the tunnel," Edward "Ned" Kelly, Citigroup's chief financial officer, said in an interview, referring to the state of the economy....

[JP Morgan’s chief said] "Eventually [loan losses] will peak, but they've been going up consistently. We've shown you here that they're going to go up even more. They're going to continue going up in all the home lending areas, mortgage and home equity and credit cards."...

Large banks have profited despite their problems because of accounting maneuvers and earnings from investment banking...

Citigroup recorded revenue of $2.5 billion from a decline in the value of its own bonds. A 2007 change in accounting rules allowed the company to gain from its investors' loss because the company conceivably could buy back the debt at the lower value, paying less than it originally expected.

Earlier this year, accounting rule-makers also loosened the rules that determine when a company must recognize a decline in an asset's value as a permanent loss. Citigroup said that change added about another $600 million to its bottom line. ...

Analysts also caution that the combination of unusual investment banking profits and accounting benefits make it unlikely that banks can sustain profits at this level.

"I think we knew all along that the first quarter might not be indicative," said Nancy Bush, a financial analyst with NAB Research. She noted that investment banks benefited from demand for services that built up during the fall, when the capital markets largely were shuttered. Competition on Wall Street also was diminished by the collapse of Bear Stearns and the bankruptcy of Lehman Brothers, leaving more pie for the surviving firms.

Those talking heads saying the crisis is over our wrong.

Friday, April 17, 2009

Sick To My Stomach, I Have A Duty To Report On the Torture of Children

As I wrote almost a year ago, the United States has apparently been torturing children.

Thinking about this, let alone writing about it, makes me sick to my stomach. But it is my moral duty to help expose this monstrous truth so that it is less likely to happen again.

Since I wrote the essay, respected political scientist Michael Haas has confirmed that children were tortured, and Raw Story has explained that the newly-release Bush torture memos may corroborate claims that at least some detainees' children were tortured using insects.

The number two man at the State Department, Colonel Lawrence B. Wilkerson, said that many of those tortured at Guantanamo Bay were innocent, but that the Bush administration did not really care whether they were innocent or not.

But children are - by definition - innocent.

Torturing children is not only a war crime, it is a crime against humanity and the most barbaric action of all.

And the torture was not the act of a couple of "bad apples", but was approved by Bush's top advisors. It was, in other words, a policy of monstrous wrongdoing.

"Hope Has Never Trickled Down. It Has Always Sprung Up"

With this sentence, Studs Terkel summarized an important point:

Hope has never trickled down. It has always sprung up.

Obama can't give us hope from above. Each and every one of us have to create hope for ourselves, and then demand change.

As Naomi Klein writes, coining a new word in the process:

It's time to stop waiting for hope to be handed down, and start pushing it up, from the hoperoots.

Thursday, April 16, 2009

Blogger.com Being Inundated With Spam

Blogger.com is being inundated with spam.

For example, 133,000 blog postings on the Blogger service - blogspot.com - have been hit with a spam advertisement which contains the words "wow gold".

Well over 43,000 blog postings have been hit with spam containing asian characters.

Can't Google lift a finger to have one of its programmers stop this attack of the spammers?

Bush Authorized the Use of Insects on Prisoners, Banging Prisoners' Heads Against the Wall

Torture memos just declassified today show that the Bush administration authorized placing prisoners in confinement boxes with insects and "walling", which means banging their heads against the wall.

You can read the memos themselves here.

Remember that all Bush administration officials - including Bush, Cheney, Rice, Rumsfeld, Gonzales, and Justice department lawyers - who authorized, promoted or even failed to stop the torture program are guilty of war crimes.

And remember that all of the top experts on interrogation say that torture doesn't work.

Wednesday, April 15, 2009

Will Texas Secede?

I previously warned that the financial crisis might cause the U.S. to break apart like the Soviet Union.

The governor of Texas, Rick Perry, said today:

Texans might at some point get so fed up they would want to secede from the union, though he said he sees no reason why Texas should do that.
"There's a lot of different scenarios," Perry said. "We've got a great union. There's absolutely no reason to dissolve it. But if Washington continues to thumb their nose at the American people, you know, who knows what might come out of that. But Texas is a very unique place, and we're a pretty independent lot to boot."

Perry is running for re-election, and so its difficult to know whether this is a genuine threat or an election stunt.

Don't Fall For the Old Divide And Conquer Trick

The powers-that-be are trying to distract us from the looting of our wallets by the big banks by creating a left-versus-right, us-versus-them drama.

You know, the old divide-and-conquer schtick.

Americans from across the political spectrum are furious at the financial elite who have robbed us blind, and their enablers in government.

While at the moment, conservatives are getting more press, those on the left are just as angry. For example, leading progressive Glenn Greenwald wrote an essay entitled "The virtues of public anger and the need for more" cheering the fact that Americans are starting to get in touch with their righteous anger at being ripped off.

Liberals have launched their own version of the tea party protests calling for the big banks to be broken up.

And many leading economists and policy experts have thunderously railed against Obama's continuation of Bush's cover-up-the-truth, too-big-to-fail, stick-it-to-the-taxpayers approach to the economic crisis.

On the conservative side of the aisle, Ron Paul's media coordinator said that the mainstream Republican party has tried to hijack the tea party movement and has "co-opted" its message. He warns against letting the movement be diverted:

It's important the people at the grassroots level stick to our guns and say no when they try to co-opt our message....

Bringing in someone like Gingrich takes away from the message. Newt Gingrich enabled George W. Bush, he enabled the big spending...

And as Michael Rivero has written:

Beware this "left wing versus right wing" dichotomy. This is an attempt to trick us into arguing with each other instead of uniting against the common cause of our problems...

The only real divide is the one mentioned at the very top of this article. The one percent that owns it all against the 99% of us being driven into poverty. The poor against the oligarchs.

To my friends on both the left and the right, I urge you to remember that folks on the other side of the aisle are not the problem. As honest people on both the left and the right agree, the real problems are:

Lack of honest disclosure about the shenanigans of the financial giants

Failing to prosecute the criminal actions of those companies and their big wigs

Failing to break up zombie insolvent companies

Slipping trillions of dollars into the hands of the richest and most powerful companies under the table

Gaming the numbers

And continuing to pursue failed economic policies even after they've been proven counterproductive

Deflation Returns to the United States

The Guardian says the U.S. in a deflationary period, and politely points out that Bernanke and the Obama administration are being less-than-honest about it:

The US economy has begun to deflate for the first time in more than half a century as a slump in demand pushes energy and food costs lower.
The consumer price index fell at an annual rate of 0.4% in March, the first decline since August 1955, figures from the US labour department showed today. It was bigger than the 0.1% drop expected by economists....
"It reinforces the deflationary fears that the Fed has been voicing," said George Davis, currency strategist at RBC Capital Markets...
Certainly, inflation is no longer an issue.
"The notion that inflation will pick up in the near-term is completely out of the picture," said Peter Kenny at Knight Equity Markets in New Jersey. "Now we're looking at numbers that speak to recession without the prospect of inflation."
The figures came as the head of Wal-Mart said that he still saw a "lot of stress" in the economy and did not anticipate a quick end to the recession. "It's not a 'V' recession, where we're just going to bounce out and come back," Mike Duke said on NBC's Today Show.
His comments contrasted with those of Barack Obama and Ben Bernanke, the head of the US central bank, who made a concerted effort yesterday to talk up the prospects for the American economy despite fresh evidence of the squeeze on consumer spending. US retail sales unexpectedly fell last month.
"With the unemployment rate and the output gap both headed for 10% and the financial system still crippled, the risk of a pernicious debt-deflation emerging [where the collateral on loans decreases damagingly in value] is still much bigger than the risk that the Fed's quantitative easing actions will lead to runaway inflation," said Paul Ashworth, senior US economist at Capital Economics.

For more on deflation and potential runaway inflation sometime in the future, see this.

How Goldman Posted a Profitable Quarter: They "Skipped" December

Nouriel Roubini wrote in March that Goldman Sachs was insolvent:

So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.

Yet Goldman reported a $1.7 billion dollar profit for last quarter.

How did Goldman do it?

Well, as Floyd Norris - chief financial correspondent for the New York Times - explains, Goldman simply didn't report results for December 2008, a month in which it took huge write-downs.

Its easy to look profitable when you can cook the books . . .

Update: Congressman Grayson is talking about this as well.

Chair of Congressional Oversight Panel on Bailouts: U.S. Following Japan's Model of Hiding the Truth, Which Extended Financial Crisis for 14 Years

The Chair of the Congressional Oversight Panel on the TARP bailout, Elizabeth Warren, gave an interview on NBC's Morning Joe this morning, where she talked truth to power concerning Treasury and the Fed's response to the economic crisis.

Warren said that instead of responding like Sweden responded to its financial crisis, with accountability, closing down insolvent banks, and holding wrongdoers accountable, which ended the banking crisis quickly, the U.S. is acting much more like Japan, where the failure to close insolvent banks, reveal wrongdoing and hold bad actors accountable prolonged the crisis for 14 years.

This is exactly the same thing that former senior S&L regulator William Black is saying.

Warren also said:

I want to look at the stress test itself. I want to make sure it is not a two-mile-an-hour walk on a treadmill. What I want to do, what I want our panel to do, is an independent evaluation of the stress test. That's what we are looking for... And look, ultimately I hope I come back to you and say 'hey, guys, fabulous stress test.'

Warren ended by saying that we have to publicly debate what is really going on, or else the government will make decisions which are not in the best interests of the American people.

Visit msnbc.com for Breaking News, World News, and News about the Economy

Tuesday, April 14, 2009

Roubini: "Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded"

PhD economist Nouriel Roubini says that the stress tests are a sham:

Stress Testing the Stress Test Scenarios: Actual Macro Data Are Already Worse than the More Adverse Scenario for 2009 in the Stress Tests. So the Stress Tests Fail the Basic Criterion of Reality Check Even Before They Are Concluded

The spin machine about the banks’ stress test is already in full motion; some banking regulators have already leaked to the New York Times the spin that all 19 banks who are subject to the stress test will pass it, i.e. none of them will fail it.

But if you look at the actual data today macro data for Q1 on the three variables used in the stress tests – growth rate, unemployment rate, and home price depreciation – are already worse than those in FDIC baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario...

In other terms, the results of the stress test – even before they are published – are not worth the paper they are written on as they make assumptions on the economy that are much more optimistic –even in the worst scenarios that the FDIC has designed - than the actual figures for Q1 of 2009.

Roubini joins FDIC chief Sheila Bair, Nobel economist Paul Krugman, former senior S&L regulator William Black, and many others in calling the "stress tests" a sham.

Can the Swiss Model of Alternative Currency Help Americans (and Others) Weather the Economic Crisis?

Most people don't know it, but one of the main reasons Switzerland's economy remained stable for so long is that the Swiss maintained an alternative currency system.

Specifically, during the depths of the Depression, when the banks were not lending, 16 Swiss business people got together and formed the Swiss Economic Circle or Wirtschaftsring-Genossenschaft ("WIR" for short). The circle was an alternative system of credit, so that the businessmen and their clients, suppliers, and others in the chain of distribution could keep on doing business with one another.

WIR still operates as a not-for-profit bank in Switzerland. One-quarter of all Swiss businesses now participate in the circle, accounting for approximately $2 billion per year. See this.

While WIR has changed over the years, the initial interest rate for members of the circle to borrow credit was between 1 and 1.5 percent.

As Belgian economist Bernard Lietaer writes in an article entitled "A new form of currency could help us in economic crisis":

The secret of the nation’s legendary economic stability was that strange little unofficial currency.

Whenever there was a recession, the volume of business in this currency grew significantly, thereby reducing the negative impact on sales and employment. Whenever there was a boom, business in national currency expanded, while activity in the alternative currency dropped again. The spontaneous counter-cyclical behavior of this little system helped the central bank of the country stabilize the economy...

I propose businesses create such systems at whatever scale makes sense. This approach will prevent or reduce the strangulation of the real economy by the credit contraction. It will avoid duplicating the worst of the 1930s: massive bankruptcies, intolerably high unemployment and untold suffering. Such a system, scaled to make a real difference, can be set up in a fraction of the time it took in the 1930s.

Time is of the essence, if we want to avoid the social and economic ravages unleashed by the unraveling of today’s complex business supply chains. As the rot spreads from the banking system to non-financial businesses, a lot of the damage will be done quickly. We shouldn’t wait to act until suppliers or clients are in trouble. Why wait to grab a candle until it’s too dark to find one? Why should we be any less entrepreneurial than the Swiss in 1934?

Can the Swiss idea of a credit circle help Americans and others weather the financial crisis by allowing us to create our own systems of credit?

Monday, April 13, 2009

Senior Counsel to the 9/11 Commission: "At Some Level of the Government, at Some Point in Time...There Was an Agreement Not to Tell the Truth"

On April 14th, the senior counsel to the 9/11 Commission - John Farmer - will publish a book called The Ground Truth: The Story Behind America's Defense on 9/11.

The book has not yet been released, and I'm not sure what Farmer will say. But here is a quote available on Amazon:

At some level of the government, at some point in time...there was an agreement not to tell the truth about what happened.

Farmer's publisher, Houghton Mifflin Harcourt, says of the book:

Farmer builds the inescapably convincing case that the official version not only is almost entirely untrue but serves to create a false impression of order and security.

Farmer has previously said:

I was shocked at how different the truth was from the way it was described .... The [Norad air defense] tapes told a radically different story from what had been told to us and the public for two years.... This is not spin. This is not true.

Obama Maintains His Perfect Batting Average for Appointing Failed Insiders to Key Economic Posts

Other than Paul Volcker, who Obama has already sidelined (and I know not everyone likes Volcker), all of his economic advisors have been insiders who directly helped to create the current economic crisis.

Summers failed as the main guy who pushed for deregulation of derivatives, lowered bank fractional reserve lending requirements, etc.

Geithner is the guy who - as chief overseer of the banks located in Manhattan when he was head of the New York Fed bank - gave the big banks a free pass.

You can go through the entire list of appointees and the story is the same.

Now, Obama is naming the current head of Fannie Mae, Herb Allison, as the new head of the TARP bailout program. Allison has done such a great job at Fannie Mae that it has only required hundreds of billions in taxpayer bailouts.

Obama is certainly giving us change.

The Real Meaning of "Not Politically Feasible"

Noam Chomsky addressed an issue I've been meaning to write about for a while: what it really means when a political pundit says that something is "not politically feasible".

Chomsky explains that "not politically feasible" means that the powers-that-be don't want it, even if the people overwhelmingly and passionately support it:

Up until the year 2004, that idea was described, for example, by the New York Times as politically impossible and lacking political support. So, maybe the public wants it, but that’s not what counts as political support. The financial institutions are opposed, the pharmaceutical institutions are opposed, so it’s not—no political support...

This is very revealing insight into how American democracy functions and what is meant by the term “political support” and “politically possible.” Again, this should be headlines. Will a proposal come that approaches what the public wants?...

It is not politically possible and lacks political support—[no one important wants it, ] just the population...

Chomsky was talking about healthcare, but this applies to every other area of politics as well.

For example, after the TARP bailouts were exposed as a waste of money which did not address the real economic problems, I saw a tv news pundit say that the bailouts were a bad idea, but at the time, "it was not politically feasible" to do anything else. I bet you've heard similar things said about any constructive proposal which would address the real problems with our economy.

Spread the Word

I've posted a script allowing translation on the right (under "Followers"). If you click on the flag of any country, you will obtain an automatic translation in that country's language. This works for the main page or individual essays.

Take it for a spin . . . it works pretty well (if you see question marks, it is because you do not have that particular language enabled on your computer).

Please feel free to post foreign language translations of the site or any of my essays (just credit the blog) to help spread the word in foreign languages. The same is true for the original English versions - please post and distribute widely, just credit Washington's Blog.

AIG Credit Default Swap Unit - After Destroying World Economy - Refuses to Participate in Voluntary Derivatives Regulation

AIG's credit default swaps brought down the company, and has helped bring not only the American - but the world - economy to its knees.

Yet these criminals are now refusing to join a group of 2,000 other companies in voluntarily agreeing to a little bit of self-regulation. As I have previously written, self-regulation does not go nearly far enough.

Indeed, the fact that AIG - which is now owned by the U.S. and foreign governments - is not participating in the psuedo change of self-regulation means that the the governments are telling AIG it doesn't have to participate. Governments own AIG (and keep throwing money at it), so they have the power to control AIG.

In other words, Bernanke, Geithner, Summers and the gang are telling AIG that its CDS trades won't be subject to government regulation or self-regulation. In essence, they are telling AIG to keep doing the same thing which brought down the economy.

Sunday, April 12, 2009

Invest in Mongolia?

Bloomberg is running an interesting essay about the potential of investing in Mongolia:

Mongolia, which possesses what Rio Tinto Group called “the world’s largest undeveloped copper-gold resource,” is luring investors who are betting that China’s hunger for resources will help the nation sustain growth amid a global financial turmoil.

Foreign investors are eyeing Mongolia’s rich mineral deposits as it helped the economy grow at an average rate of 8.5 percent in the last three years, Deputy Prime Minister Miyeegombo Enkhbold said last month. The nation attracted about $1 billion of private equity in the past 24 months, according to Robert Lepsoe, honorary consul of Mongolia.

Marc Faber, the publisher of the Gloom, Boom & Doom report, said Mongolia is “torn between two lovers -- China and Russia,” and is a country with huge potential. He is a director of Vancouver-based Ivanhoe Mines Ltd., which is developing the Oyu Tolgoi copper and gold deposit in Mongolia with Rio Tinto...

“The country is incredibly resource rich, another Saudi Arabia, next to the largest population in the world,” Faber said in an e-mail.

Read the full essay for contrary views.

Note: I am not an investment advisor and this should not be taken as investment advice.

Leading Credit Default Swap Trader: Justifications for CDS are Phony

Leading derivatives trader and expert Satiyajit Das wrote a must-read article today pointing out the falsity of the justifications used by both buyers and sellers of credit default swaps and other complex forms of "financial innovation".

Here's the most important excerpt:

The unpalatable reality that very few, self interested industry participants are prepared to admit is that much of what passed for financial innovation was specifically designed to conceal risk, obfuscate investors and reduce transparency. The process was entirely deliberate. Efficiency and transparency are not consistent with the high profit margins that are much sought after on Wall Street. Financial products need to be opaque and priced inefficiently to produce excessive profits or economic rents.

The High Priests of Deception

The Church lost a lot of its power during the plague.

The clergy not only failed to stop the pandemic, but they tried to suppress its severity. In other words, many people saw that the clergy were both impotent and dishonest. So people lost faith in the medieval Church.

Bernanke, Geithner and Summers are the high priests of high-leverage speculative finance.

They pretend that they can stop the worldwide depression with their oracular powers, and that the financial plague is not that bad.

But the facts say otherwise:

Paul Krugman notes that even during the Great Depression, there were occasional upturns, which people touted (incorrectly) as the beginning of a recovery

Krugman also calls the bank stress tests a mere "self-esteem class" for banks that no bank will be allowed to actually fail

Former labor secretary Robert Reich blasts the whole notion that the crisis is over:
But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy...So much money is sloshing around the economy that [mortgage prices are] bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.

Cheap money, you may remember, got us into this mess. Six years ago, the Fed (Alan Greenspan et al) lowered interest rates to 1 percent. Adjusted for inflation, this made money essentially free to large lenders. The large lenders did exactly what they could be expected to do with free money -- get as much of it as possible and then lent it out to anyone who could stand up straight (and many who couldn't). With no regulators looking over their shoulders, they got away with the financial equivalent of murder...

Some of the big banks will claim to be profitable, but don't bank on it. Neither they nor anyone else knows what their assets are really worth. Besides, the big banks are sitting on over $500 billion over taxpayer equity and loans. Who knows how they're calculating profits? Most importantly, there's still a yawning gap between the economy's productive capacity and what it's now producing, and absolutely nothing will turn the economy around until that gap begins to close.

Tyler Durden points out that Americans are rapidly being divided into 2 separate worldviews - investors versus taxpayers - in the same way that the plague divided the world into "true believers" and those who saw that things were getting worse and that the Church could not do anything to stop it:
The taxpayers are becoming angrier and angrier at the net present value destruction of future opportunities of being a U.S. citizen, while investors cheer every piece of information (whether or not supported by facts) that provides a push to their current net worth, ignorant of what this may mean for the future. There will come a point where this schism reaches a boiling point, in the meantime, the paradox is that so many of the taxpayers are also investors, who are caught in a tug of war with themselves on what the proper response to the crisis should be: happy as a result of bear market rallies, or sad when they put the facts into perspective...

The disinformation rift between the American taxpayers and investors will keep growing until inevitably, one day, it will escalate to the point where empty promises on prime time TV by the administration's photogenic representatives will not suffice, and real actions that benefit future American generations will be demanded...

Just as the clergy were able - during the initial stages of the plague - to reassure people that everything was normal, Bernanke, Geithner and Summers might be able - for a short while - to reassure gullible investors that the stock market and the economy as a whole is starting to bounce back. Indeed, the trillions of dollars they have thrown at the financial giants are partially intended to do just that - make things seem okay for a short while.

In reality, as leading trend forecaster Gerald Calente puts it, the main accomplishment of the government's response to the economic crisis has been to enable the wealthiest and most powerful to secure their own personal life rafts. But the government is doing nothing to plug the hole that is sinking the ship which the rest of us are on.

Note: I am not anti-faith or anti-spirituality (I am only talking about the medieval church). I am simply anti-lies and anti-ignorance.

Saturday, April 11, 2009

Ultimate Insider: We Need At Least TEN MORE Years of War and 100,000 Plus Troops in Afghanistan

The End Run blog just sent me an interesting video of a recent speech by Lawrence Korb.

Korb is a consummate insider - Assistant Secretary of Defense from 1981-1985 during the Reagan Administration, Vice President of the Council of Foreign Relations (CFR) from 1998-2002, CFR’s director of National Security Studies, Vice President of Corporate Operations at Raytheon, and advisor to Barack Obama during Obama's presidential campaign.

Korb said that we need to keep fighting the war in Afghanistan for at least 10 more years, and that we need 100,000 plus troops.

Korb all but admitted that Americans are opposed to a long war in Afghanistan and that the U.S was grasping at straws for a rationale for still being there.

He also said some interesting things about 9/11

Read the End Run's write up or watch Korb's speech here.

Friday, April 10, 2009

Tyler Durden on Quant Dynamics

Given that I frequently lambast credit default swaps, you might be surprised to see me sing the praises of a CDS trader.

But Tyler Durden of ZeroHedge - whose day job was as a CDS trader - is well worth reading. Durden is sharp as a tack, has access to technical info, and has good industry contacts.

SeekingAlpha and NakedCapitalism have started running Durden's blogs, and now even Nouriel Roubini is linking to Durden's blog entitled "The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans".

I urgently believe that over-the-counter CDS should be cancelled and "naked CDS' should be banned. But I also recommend reading Durden's analysis at ZeroHedge.

The Law of Unintended Consequences

The mongoose was introduced to Hawaii in order to control the rats (which were eating the sugar cane used to make rum). It didn't work out very well - mongeese are daylight-loving creatures while rats are nocturnal - and the mongeese trashed the native species in Hawaii.

Likewise, the U.S. government has subsidized ethanol production for years. But the Congressional Budget Office says this week that increased ethanol use is responsible for about 10 to 15 percent of the rise in food prices from 2007 to 2008, and only reduced greenhouse gas emissions from the transportation sector by less than 1 percent.

Given that implementing "solutions" without fully understanding the consequences often cause more harm than good, Obama 's consideration of geoengineering the planet to fight global warming should be subjected to rigorous debate to make sure that it will actually be a good thing.

You Know Things Are Bad When Even Newsweek Is Slamming the Obama Administration for Caving in to the Financial Status Quo

You know things are bad when even one of the most mainstream publications - Newsweek - is slamming the Obama administration for caving to the financial status quo, and sounding the same themes that I and other "alternative" writers have been shouting into the wind about for many months.

After recounting a meeting in which Senators Sanders, Cantwell, Dorgan, Feinstein, Levin and Webb met with Obama, Geithner and Summers and expressed their dismay that the administration was just going to keep doing the same old thing which got us into this mess, Newsweek writer Michael Hersh writes:

Major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression.
At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it's very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month.
The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange...
Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges...
the old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show. Among the outsiders is Nassim Nicholas Taleb, the trader and professor who wrote "The Black Swan: The Impact of the Highly Improbable." Taleb wrote in the Financial Times this week that a fundamental new approach is needed. Not only should firms be prevented from growing too big to fail, "complex derivatives need to be banned because nobody understands them and few are rational enough to know it," he said. Yet even as we are still picking up the debris, we seem to be ready to embrace that world once again.

Confusing Headline of the Day

Bloomberg is currently running the following headline on its front page:

"Detectives Find Chickens in Hunt for $63 Billion in Lost Diapers, Bleach"

Maybe I've had too much coffee, but this seems a little confusing.

Wells Fargo's Turnaround: A Mirage?

Wells Fargo is projecting a $3 billion dollar first quarter profit.

But since the Fed is ordering banks to keep the results of the "stress tests" secret, and given the suspension of mark-to-market accounting, can we be sure that Wells has really turned a corner?

Well, Wells was effectively insolvent a short time ago, drowning in toxic derivatives debt. And Geithner's toxic asset plan is a charade, merely shuffling bad debt between the biggest derivatives holders. So its hard to see how Wells could have turned around so quickly.

And as HousingWire writes:

“We believe that credit quality materially deteriorated in the first quarter, and that Wells Fargo is under-reserving for expected future losses,” FBR’s Miller wrote in a Wednesday research brief. “We reiterate our Underperform rating.”
More questions from Miller: “[W]e remain cautious based on what we don’t know. Most importantly, what happened to nonperforming loans and what would have been net charge-offs excluding purchase accounting adjustments? What are the trends in WFC’s Option ARM portfolio? Did the company write up the MSR and what was the new capitalized cost of servicing? Was there any benefit from an increase in level 3 assets given recent accounting guidance?”...
This chart ... should speak volumes about the value of skepticism here:

This shows the ratio of loan loss reserves/total loans at the four major U.S. banks still standing. Wells Fargo is in white. Notice anything? You know, like which bank is comparatively weakest on reserving activity against its loan book?

This chart doesn’t include updated Q1 numbers for Wells, as the bank did not provide an updated loan total on Wednesday — meaning it doesn’t include Wachovia. Historically, Wells has justified its lower reserves by maintaining a comparatively higher-quality loan book; can the same argument really be made now? With Wachovia’s option ARMs lurking? Because there’s an ugly truth about credit costs: they come home to roost eventually, irrespective of any games played with loss reserves in the interim.

I wish that Wells' turnaround was for real. But given that the Fed and Treasury are suppressing the results of the phony stress tests (if you don't know that they are phony, see this and this), given that mark-to-market has been suspended, given that Wells was one of the banks previously judged insolvent because of its huge derivatives holdings, and given that Wells appears to have very little reserves, I'd be a little skeptical of its amazing turn around.

Thursday, April 9, 2009

Internet Rankings are Massively Gamed

Alexa is the most popular free website ranking service. It has been described as "a Nielson rating for the popularity of the website you are visiting."

With a higher Alexa rank, more people will be attracted to reading your website (on the theory that if its a popular site, it must be good), and advertisers will be more interested in paying to run ads on your site.

Those in the know have realized for some time that Alexa isn't perfectly accurate.

But it turns out that many people are also intentionally gaming the Alexa rankings.

How?

Well, Alexa supposedly ranks the popularity of websites by how many people with Alexa the toolbar installed on their computer surf to a particular site.

Many techies have figured out tricks for increasing Alexa ranking.

More amusingly, people all over the world will happily surf to your site manually - or using automatic scripts - to make it look like you have more readers than you really do.

For example, the folks at Alexa Rank Team provide the following informative price list:

If you want your site ranks within 500, we will make your site's ranking listed within 500 everyday. And after 3 months, your site will be ranked within 500.

What is the price?

Alexa Rank(daily) Price

60,000-100,000 $488 per month

50,000 $499 per month

40,000 $550 per month

30,000 $555 per month

20,000 $600 per month

10,000 $700 per month

8,000 $720 per month

7,000 $750 per month

6,000 $780 per month

5,000 $800 per month

4,000 $960 per month

3,000 $1,100 per month

2,000 $1,650 per month

1,000 $2,000 per month

900 $2,500 per month

800 $3,000 per month

700 $3,500 per month

600 $4,000 per month

500 $5,000 per month

400 $5,500 per month

300 $6,000 per month

200 $7,000 per month

100 $14,000 per month

And the folks at Alexa Rank Team provide a very logical explanation for why they don't let their own website get ranked by Alexa:

Q: Why not ranking your own site?

A: We do not want to be tracked by ALEXA , which will bring risks to our clients

If you can't afford even the lowest-price services of the Rank Team, no problem ... UpMyRank has something for free:

Webmasters, raise your Alexa Ranking and start enjoying free traffic instantly! We will send up to 1,000 visitors to your website everyday, just for participating in the UpMyRank TrafficExchange Program...
Best of all you can leave the AutoSurf program on all night and all day and earn credits while you sleep!

I'm not trying to pick on these 2 companies. In fact, there are more than 29,000 websites devoted to "auto surfing" programs which will increase your Alexa ranking.

Unlike the governmental propaganda wars which are apparently being fought on the Internet, everything I've run across so far indicates that this is just a commercially-driven turf war for advertising revenue and a wider audience.

Former Head of Structured Products at UBS: Game Theory Exposes Toxic Asset Plan As Fraudulent

I wasn't very interested in reading yet another exposé on Geithner's toxic asset plan until I saw who the author was: James Keller, the former head of structured products at UBS.

A structured product is basically a pre-packaged investment strategy which is based on derivatives or other items. Derivatives are the core "toxic asset" of the big banks.

Keller presumably understands financial markets, toxic assets and game theory quite well. And he is calling Geithner's toxic asset plan "fraudulent.

In an essay entitled "Game Theory Exposes PPIP As Fraudulent", Keller writes:

The Public-Private Investment Program (PPIP) is intended to ... create an incentive for investors to pay $90 for a bet that is only worth $50. It is bad economics and bad public policy and it is probably fraudulent. Congress should act pre-emptively to halt Treasury Secretary Tim Geithner’s latest scheme...
Many commentators have pointed out the obvious: that the PPIP is another welfare program for the big banks, funded by the taxpayer.

It is interesting because the legislation governing the FDIC does not allow it to take expected losses above its capital base, and that capital base is now just $30 billion. Against a $500 billion PPIP, it only requires a 6% overpayment to wipe out the FDIC’s capital.

The New York Times’ Andrew Ross Sorkin pressed the FDIC’s Shelia Bair on this point and she apparently claimed that the accountants “signed off on no net losses.” But we are now in zero sum territory. There are only the assets, the banks, and the government. The windfall to the banks is offset by the expected loss to the government. Convincing one’s accountants that a transaction with a high expected loss has no expected loss is fraud...
The accountants for the FDIC were convinced that the loans would be purchased at a fair price because they would be sold through an auction mechanism. But if every bidder in the auction has the same incentive to overbid, it is no longer a fair auction. A naïve accountant might equate “auction” with “fair” and ignore the distortion built in to the process.
Jeffrey Sachs did a fine job pointing out that the incentive is actually to massively overbid, and perhaps even collude. Paul Krugman pointed out that the plan is a “disguised way to subsidize purchases of bad assets.” Josef Stiglitz commented that Geithner’s plan “only works if the taxpayer loses big time.”...
It is disturbing that the Treasury Secretary’s long awaited plan to solve the toxic assets dilemma relies on an overly contrived scheme to obscure its risk to the taxpayer. Either the disguise is intentional or it has not occurred to the Secretary that the plan jeopardizes the soundness of the FDIC. Neither answer is acceptable.

Fiat Currencies May be Replaced by Gold Standard

Gillian Tett is the head financial writer for the Financial Times, one of the leading mainstream financial publications. Investment analyst and financial writer Yves Smith says of Tett:

[Whatever] Tett is writing about ... will be taken seriously, since Tett is read by central bankers.

So it is newsworthy that Tett writes today that the odds of a return to the gold standard are increasing:

A panel at the World Economic Forum meeting in Davos ... was asked to produce one concrete recommendation to fix the global financial crisis.
The top pick? ... a new reserve currency, akin to an old-style gold standard....
Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today's elevated prices.
"The logical conclusion of where we will end up eventually is with some type of gold standard," he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.
Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.
Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.
But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues - but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.
Hence that chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even e-mailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called "Gold and Economic Freedom"*....
"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets . . . [but] in the absence of the gold standard . . . there is no safe store of value," Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."...
Shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.

Bottom line? Even mainstream financial players are starting to mull a return to the gold standard. While it would not happen any time soon, it might happen in the medium-term future.

Note: I am not an investment advisor and this should not be taken as investment advice.

Wednesday, April 8, 2009

Marc Faber: Buy Banks and Asian Stocks

Marc Faber has a couple of interesting buy recommendations:

Bank stocks like Citigroup. He thinks that they will go up short-term due to government bailout programs, but eventually go to zero. So he's talking about a short-term trade, not a buy-and-hold play

Asian stocks are undervalued, and he recommends people allocate 10-20% of their portfolio in emerging market stocks

Note: I am not an investment advisor and this should not be taken as investment advice.

Constitutional Law Expert: "It Appears the ‘Yes We Can’ Means ‘Yes We Can Do Most Anything That We Want’ When it Comes to Unlawful Programs."

Constitutional law professor Jonathan Turley is slamming the Obama administration on its continuation of Bush spying policy:

In yet another break with its campaign promise to fight to restore civil liberties and privacy, the Obama Administration has made a breathtaking claim of state secrets to block a public interest organization from suing the government for illegal surveillance. There is not a scintilla of difference in the legal position of President Obama and the position of President Bush in trying to quash any effort to challenge unlawful surveillance by the government. It appears the “yes we can” means “yes we can do most anything that we want” when it comes to unlawful programs.

Here is Turley talking with Keith Olbermann:

I voted for Obama, and had high hopes that - as a former constitutional law teacher - Obama would restore the Constitution and rule of law in America. I am sorely disappointed.

Credit Downgrades Everywhere

Everywhere you look today, credit is being downgraded:

Warren Buffet's Berkshire Hathaway lost its AAA rating

Fitch's stripped Ireland of its AAA rating

Municipalities across America are being put on a watchlist to be downgraded

Who's next?

The Only Way to Save the Economy is to Break Up Insolvent Banks In an Orderly Manner

The Congressional panel overseeing the bailout is blasting the government's approach, saying that the government has to close insolvent banks. Some quotes from the panel's new report:

All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets...
[Bank liquidation would be] least likely to sap the patience of taxpayers [and] provides clarity relatively quickly [to the markets]....
Allowing institutions to fail in a structured manner supervised by appropriate regulators offers a clearer exit strategy than allowing those institutions to drift into government control piecemeal.

(see this).

The following experts agree that the insolvent banks should be liquidated to save the broader economy:

The head of the FDIC, Sheila Bair

President of the Kansas City Federal Reserve Bank Thomas Hoenig

The recently retired President of the St. Louis Fed, William Poole.

Nobel prize-winning economist Ed Prescott

Nobel prize-winning economist Joseph Stiglitz

The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz.

Economics professor and senior regulator of the S & L crisis, William K. Black

Leading economist Nouriel Roubini

Highly-regarded PhD economist Michael Hudson

Well-known economist Marc Faber

Liberal billionaire investor George Soros

Republican congressmen McCain and Shelby

And many others on both the left and the right

The choice could not be more clear: Break up the insolvent banks in an orderly manner, or the economy will not recover for many, many years.

Tuesday, April 7, 2009

Secretary of Labor Reich: Unemployment Numbers Show We're Already In a Depression

Robert Reich was Secretary of Labor under Bill Clinton, and is an economics professor at U.C. Berkeley.

Reich has every incentive to paint a rosy picture of the economy, because:

Committed Democrats want Obama to succeed in turning the economy around, and worry that "gloomy talk" about the economy could make that difficult

The Labor Department has traditionally used a reduced unemployment figure (called "U-3") to hide the extent of job losses

So it is news that Reich, citing the real unemployment numbers (called "U-6") says we're already in a depression:

This is still not the Great Depression of the 1930s, but it is a Depression.

For more on the real unemployment numbers, see this and this. For more on high-level experts who have said we're already in a depression, see this.

Geithner Hoses Economy to Help Banks

CNN says that Geithner will delay the results of the "stress tests" on banks "until after the first-quarter earnings season [ends for most banks on April 24] to avoid complicating stock market reaction".

In other words, instead of closing the insolvent zombie banks in order to save the economy (leading economists say that we have to let the banks fail or the economy will not recover), Geithner will delay announcing that the banks are broke so that their stock remains artificially high. Indeed, in Washington parlance, "delaying" the release of information often means burying them forever.

We may never see the results of the stress tests. This could just be a ploy from Geithner to buy time, just like the tobacco company scientists said they had to conduct further studies on whether or not cigarettes were harmful, and that they would announce the results as soon as the studies were complete.

Best Quotes on the Financial Crisis

In case you missed them, here are some of the best quotes from the last few weeks on the financial crisis:

"The way Tim Geithner has structured the banking plan, the Obama Administration will, sooner or later, almost certainly be facing another AIG bonuses-type of outrage."

“Worsening economic figures are being used to confirm that more bailouts are needed rather than that previous ones might be failing. The logic is much like medieval blood letting: The patient died because we didn't drain Enough of his blood.”

Senior S&L Regulator Says Government Engaging in Massive Cover-Up of Economic Crisis: "The entire strategy is to keep people from getting the facts"

Nobel economist Paul Krugman: "These days America is looking like the Bernie Madoff of economies: For many years it was held in respect, even awe, but it turns out to have been a fraud all along"

Nobel economist Joseph Stiglitz: "Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

Congress Grayson: "Stop stealing our money"

Economist: "What we have is something perilously close to a dictatorship of the Fed and the Treasury, acting in the interests of Wall Street"

"The real AIG scandal is that the company's trading partners are getting fully paid rather than taking a haircut."

Former AIG chief: Government used AIG "to funnel money to other institutions, including foreign banks"

Analyst: "Technically, the U.S. is already bankrupt because it has a debt that is almost four times the size of its economy"

Leading economist: ""The Treasury is spreading the fire, not putting it out"

Nobel Economist Ed Prescott: ""Don’t subsidize inefficiency.... let these businesses go bankrupt. They gambled, they lost. That’s part of life"

Nobel economist Myron Scholes: Existing over-the-counter CDS should be ""blown up" and closed out"

TARP watchdog: "We do not seem to be a priority for the Treasury Department"

TARP watchdog: "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

Obama to Bankers: "“My administration is the only thing between you and the pitchforks."

Monday, April 6, 2009

Economics Professors: Global Crash Worse Than During First Year of Great Depression

Many people (including me) have pointed out that the crash in the U.S. has arguably been worse than during the first year of the Great Depression.

But the Great Depression was a global, not just a U.S. crash. So how does the last year compare to the 1929 depression on a world-wide basis?

Economics professors Barry Eichengreen and and Kevin H. O'Rourke have written a paper conclusively showing that the global crash has been worse in the last year than during the first year of the Great Depression.

Because a picture is worth a thousand words, you can quickly see what they're talking about by looking at the following 4 graphs:

Figure 1. World Industrial Output, Now vs Then

Figure 2. World Stock Markets, Now vs Then

Figure 3. The Volume of World Trade, Now vs Then

Figure 6. Government Budget Surpluses, Now vs Then

(Note: In the last chart, the colors are reversed, and the blue line is from the 1920's.)

Law School Professor: Republicans Are Blackmailing Obama on Torture

Law school professor and torture critic Scott Horton has dropped a bombshell: the Republicans are blackmailing Obama from releasing new torture documents.

Horton points out that:

The memos, authored by then-administration officials and now University of California law professor John Yoo, federal appellate judge Jay Bybee and former Justice Department lawyer Stephen Bradbury, apparently grant authority for the brutal treatment of prisoners, including waterboarding, isolated confinement in coffin-like containers, and “head smacking.”...
Unlike the torture memos that are already public, these memos directly approve specific torture techniques and therefore present a far graver problem for their authors ...

Horton also gets into specifics about the blackmail:

The release of the memos that the Senate Republicans want to suppress was cleared by Attorney General Eric Holder and White House counsel Greg Craig, and then was stopped when “all hell broke loose” inside the Obama administration . . .
Senate Republicans are now privately threatening to derail the confirmation of key Obama administration nominees for top legal positions by linking the votes to suppressing critical torture memos from the Bush era. A reliable Justice Department source advises me that Senate Republicans are planning to “go nuclear” over the nominations of Dawn Johnsen as chief of the Office of Legal Counsel in the Department of Justice and Yale Law School Dean Harold Koh as State Department legal counsel if the torture documents are made public. The source says these threats are the principal reason for the Obama administration’s abrupt pullback last week from a commitment to release some of the documents. A Republican Senate source confirms the strategy. It now appears that Republicans are seeking an Obama commitment to safeguard the Bush administration’s darkest secrets in exchange for letting these nominations go forward.

The most important part of this story isn't that the republicans are making threats, but that Obama is caving in to them.

In Depression-Era Move, Communities Print their Own Currency to Keep Cash Flowing

As USA Today points out, in another important story about alternatives to the dollar, local communities are printing their own currencies:

A small but growing number of cash-strapped communities are printing their own money.
Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.

Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash....
About a dozen communities have local currencies, says Susan Witt, founder of BerkShares in the Berkshires region of western Massachusetts. She expects more to do it....

During the Depression, local governments, businesses and individuals issued currency, known as scrip, to keep commerce flowing when bank closings led to a cash shortage.

By law, local money may not resemble federal bills or be promoted as legal tender of the United States, says Claudia Dickens of the Bureau of Engraving and Printing.

"We print the real thing," she says.

The IRS gets its share. When someone pays for goods or services with local money, the income to the business is taxable, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. "It's not a way to avoid income taxes, or we'd all be paying in Detroit dollars," he says.

Pittsboro, N.C., is reviving the Plenty, a defunct local currency created in 2002. It is being printed in denominations of $1, $5, $20 and $50. A local bank will exchange $9 for $10 worth of Plenty.

"We're a wiped-out small town in America," says Lyle Estill, president of Piedmont Biofuels, which accepts the Plenty. "This will strengthen the local economy. ... The nice thing about the Plenty is that it can't leave here."

The use of local currencies will mushroom as the economic crisis worsens. Barter will also be big.

Was the SDR Just Chosen as the New World Reserve Currency?

The Telegraph's lead financial writer Ambrose Evans-Pritchard argues that "the world is a step closer to a global currency, backed by a global central bank, running monetary policy for all humanity."

He's referring to the G-20's authorization of $250 billion in IMF Special Drawing Rights:

A single clause in Point 19 of the communiqué issued by the G20 leaders amounts to revolution in the global financial order.

"We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity," it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century.
In effect, the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body.
***
President Barack Obama [commented] "I think we did OK," he said. Bretton Woods in 1944 was a simpler affair. "Just Roosevelt and Churchill sitting in a room with a brandy, that's an easy negotiation, but that's not the world we live in."
***
The Russians had hoped their idea to develop SDRs as a full reserve currency to challenge the dollar would make its way on to the agenda, but at least they got a foot in the door.

There is now a world currency in waiting. In time, SDRs are likely evolve into a parking place for the foreign holdings of central banks, led by the People's Bank of China. Beijing's moves this week to offer $95bn in yuan currency swaps to developing economies show how fast China aims to break dollar dependence.

Has the SDR already quietly won out against competing world reserve currencies? Evans-Pritchard seems to think so.

If correct, it will take some time to replace the dollar as reserve currency. But it may be starting.

Sunday, April 5, 2009

Bush and Obama Administrations Both Broke Law By Refusing to Close Insolvent Banks

Geithner's statements that he didn't have the power to close down the big banks are false. Moreover, Geithner and Paulson actually broke the law which requires the government to close down insolvent banks, no matter how big.

The Prompt Corrective Action Law (PCA) - 12 U.S.C. § 1831o - not only authorizes the government to seize insolvent banks, it mandates it.

As William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri - told Bill Moyers in their recent interview:

[Question] In other words, they could have closed these banks without nationalizing them?

[Black] Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.

[Question] And that's a law?

[Black] That's the law.

[Question] So, Paulson could have done this? Geithner could do this?

[Black] Not could. Was mandated ....

Black provided the historical background to the PCA in a little-noticed essay last month:

PCA's premise was that regulatory discretion led to cover-ups of failed banks and excessive losses to the taxpayers. The PCA solution was to require higher capital requirements and to mandate that the regulators take over troubled banks before they deteriorated to the point that the failure would impose a cost on the Federal Deposit Insurance Corporation (FDIC). PCA also recognized that failing bankers had perverse incentives to "live large" and cause larger losses to the FDIC and taxpayers. PCA's answer was to mandate that the regulators stop these abuses by, for example, strictly limiting executive compensation and forbidding payments on subordinated debt.

Black then pointed out how the Bush and Obama administration's agenda has been the exact opposite of that of the PCA, and that both administrations have blatantly violated both the letter and the spirit of the law:

The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.
Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. He was supposed to regulate many of the largest bank holding companies in the United States. Far too many of these institutions are now deeply insolvent because the banks they own are deeply insolvent. The law mandated that Geithner and his colleagues place troubled banks in receivership long before they became insolvent. Why are the banking regulators, particularly Treasury Secretary Geithner, continuing to disobey the law?...

PCA's purpose is "to resolve... problems... at the least possible long-term cost to the [FDIC]." That means the least possible cost to taxpayers. Secretary Geithner's priority is [instead] protecting private shareholders....
Receiverships end unnecessary bailouts of private shareholders, reducing the cost to the FDIC, as the law requires. Receiverships place banks back in the hands of new shareholders. Geithner has so twisted the framing of this issue that he is warning that a cheaper, more effective means of resolving failed banks used under President Reagan is some alien form of socialism that President Obama must slay before it destroys capitalism. Geithner is channeling Rove when he conflates receiverships with "nationalization."
Secretaries Paulson and Geithner subverted the PCA law by allowing failed banks to engage in massive accounting fraud (which also means they are engaged in securities fraud). Treasury is telling the world that resolving the failed banks will require roughly $2 trillion dollars. That has to mean that the failed banks are insolvent by roughly $2 trillion. The failed banks, however, are reporting that they are not simply solvent, but "well capitalized." The regulators flout PCA by permitting this massive accounting and securities fraud.

Update: This writer purports to rebut Black's claims. But see this.

Economist: "What We Have Is Something Perilously Close To A Dictatorship Of The Fed And The Treasury, Acting In The Interests Of Wall Street"

Prominent economist Robert Kuttner said recently:

What we have is something perilously close to a dictatorship of the Fed and the Treasury, acting in the interests of Wall Street.

Mussolini described fascism as the "merger of state and corporate power", and this seems to be what is happening in the merger of the interests of the big financial companies with the government.

Scientists Publish 3 Papers Raising Evidence Contradicting the Official Story of 9/11

You have probably heard that scientists have found "super-thermite" in the debris of the World Trade Centers (original scientific article).

In fact, two previous scientific papers have also found evidence contradicting the official story about 9/11:

Fourteen Points of Agreement with Official Government Reports on the World Trade Center Destruction, The Open Civil Engineering Journal, pp.35-40, Vol 2

Environmental anomalies at the World Trade Center: evidence for energetic materials, The Environmentalist, August, 2008

Indeed, numerous world-class scientists have found evidence contradicting the official story.

If you don't buy the scientists' arguments, that's fine. You can instead look at what the following highly-credible experts say about 9/11:

The 9/11 Commission

Intelligence professionals

Military leaders

Legal scholars

And other credible people

Saturday, April 4, 2009

Senior S&L Regulator Says Government Engaging in Massive Cover-Up of Economic Crisis: “The Entire Strategy Is to Keep People from Getting the Facts”

William K. Black was the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri (bio).

Black says that massive fraud is what caused the economic crisis. As one example, he explains that everyone involved knew that the CDOs which packaged subprime loans were not AAA credit-worthy (which means that they are completely risk-free). He also said that the exotic instruments (CDOs, CDS, etc.) which spun the mortgages into more and more abstract investments were intentionally created to defraud investors.

Moreover, Black says that the government's entire strategy in dealing with the economic crisis is a massive cover-up:

[They] don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up....
Geithner is ... covering up. Just like Paulson did before him....
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed....
Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts....
[Question] Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

[Black] Absolutely....

They're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.
[Question] So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?
That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse."

Watch the interview here.

Friday, April 3, 2009

Toxic Asset Plan Will Leave The Same Amount Of Toxic Assets In The System, But With the Taxpayers Now Liable For Most Of The Losses

The most succinct description of what is wrong with Geithner's PPIP toxic asset plan comes from the Financial Times:

Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

That's exactly right. American banks that have received billions in bailout funds, including Citigroup Inc, Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co, are considering buying toxic assets to be sold by rivals under the Treasury's trillion dollar plan (and Bank of America - another big bailout recipient - is buying toxic assets as well).

The amount of toxic assets isn't going to be meaningfully reduced - the assets will just be shuffled from one bailout buddy to another.

But the government is guaranteeing 85% of the value of the toxic assets.

So the taxpayers (who anteed up for the bailout funds which the banks are now using to purchase the assets) will again pick up the tab when the assets turn out to not be worth as much as the banks are paying for them.

But why would the banks overpay for the other guy's toxic assets?

Some financial writers have speculated that these banks are giving each other kickbacks under the table. But we don't even have to go there.

If all of the big banks holding the lion's share of toxic assets (about 5 banks, as discussed below) have a gentleman's agreement to overpay for the other guy's toxic assets, then they will end up in the same position as if they had all paid fair market value. You overpay for mine, I'll overpay for yours . . .

But since they can then say that they naively overvalued the assets, the government will pay them back for their "losses".

Get it?

It is well-known that JP Morgan , B of A, Citigroup, HSBC and Wells Fargo have by far the largest derivatives holdings (and see this). Their derivatives exposure - especially credit default swaps - are the core type of toxic asset (and one of the main causes of the financial crisis). These are really the players which would need to agree to play this game for it to work.

Obama to Bankers: “My Administration Is The Only Thing Between You And The Pitchforks.”

When the big bank CEOs tried to convince Obama that they deserved big bonuses, he reminded them that the public wanted their heads on a platter:

“These are complicated companies,” one CEO said. Offered another: “We’re competing for talent on an international market.”

But President Barack Obama ... stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. “Be careful how you make those statements, gentlemen. The public isn’t buying that.”

“My administration,” the president added, “is the only thing between you and the pitchforks.”

Tough talk which accurately reflects the righteous fury of the American people. Too bad Obama is just throwing our money at the banks and allowing them to game the system, and isn't actually doing anything to ensure that the banks act in the interests of the American people.

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Thursday, April 2, 2009

IMF To Issue $250 Billion in Special Drawing Rights Currency

Today, the G20:

Agreed to an allocation of $250 billion in Special Drawing Rights, the artificial currency that the IMF uses to settle accounts among its member nations. The move is akin to a central bank such as the Federal Reserve effectively creating money out of thin air, except it’s on a global scale.

It will be interesting to see whether or not special drawing rights will take on further importance in the future.

Former AIG Chief: Government Used AIG "To Funnel Money to Other Institutions, Including Foreign Banks"

Even the former chief of AIG, Hank Greenberg, said:

the government used AIG "to funnel money to other institutions, including foreign banks" ....
He also said that the government should "wall off" AIG Financial Products division, which was responsible for backing risky financial transactions that led to the company's downfall, from the rest of the group.

In other words, even the former head of the disgraced, bailed-out criminal enterprise is saying that the government has misrepresented and gamed the bailout and that Obama's economic team is doing it all wrong.

Is Abandonment of Mark-to-Market Bullish for Gold?

When people don't trust their government, gold prices rises.

Similarly, lack of trust in the stability of the financial system leads to increased "save haven" gold buying.

The abandonment of mark-to-market, which will undermine the credibility of the financial system and the governments which [fail to] regulate them, may therefore be bullish for gold in the years ahead.

Wednesday, April 1, 2009

Outstanding Credit Default Swaps Down to "Only" About Twice America's GDP

Over-the-counter credit default swap contracts - you know, the kind which brought down Bear, Lehman, AIG, etc. - totaled as much as $62 trillion at the end of 2007.

The New York Fed bragged today about how much the CDS totals have been reduced:

Market participants have significantly reduced levels of outstanding CDS trades via multilateral trade terminations (tear-ups) to lower outstanding notional amounts, reducing counterparty credit exposures and operational risk. To date in 2009, tear-ups have eliminated approximately $7 trillion of CDS trade notional amounts, in addition to the $32 trillion eliminated in 2008.

Indeed, DTCC confirms that there are now approximately $25 trillion in outstanding CDS. That's still almost twice the size of America's gross domestic product.

And if the CDS numbers have been reduced from their astronomical 2007 peaks, it is partly because the American taxpayer has paid a pretty penny to make some of the CDS "go away".

Congressional Committee on Financial Services: AIG Paid Full Amount to Foreign CDS Counterparties, But Demanded 70% Haircut of U.S. Counterparties

In a stunning development, Representatives Frank and Bachus are alleging that AIG might have paid the full amount of credit default swap contracts to foreign counterparties, but demanded that U.S. counterparties take a haircut of up to 70%:
AIG Payments

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I'm glad that haircuts were given. But if only American companies are taking haircuts - and not foreign companies - that is blatantly unfair, since the money came from American taxpayers.

GAO Recommends that Treasury Demand “Concessions” from AIG’s Counterparties “Including Seeking to Renegotiate Existing Contracts"

According to the Financial Times:

The Government Accountability Office on Tuesday recommended the Treasury should demand “concessions” from AIG’s counterparties and executives “including seeking to renegotiate existing contracts”.

Yes! This is what I and others have been urging for months.

This is what the nobel economist who helped created the pricing structures used in credit default swaps is suggesting.

Force the credit default swap counterparties to take a huge haircut. This is the only way to save the economy.

In related news, the Financial Times article also notes:

The special inspector-general for the troubled assets relief programme told Congress on Tuesday ... he was to prepare an audit of the decision to repay in full counterparties of AIG.

The audit - if allowed to proceed without interference - will prove very interesting.

The Scoop on Reserve Currencies

You've heard that the IMF is considering printing hundreds of billions of dollars worth of its own currency - called "Special Drawing Rights" or SDRs. Currently, the SDR is pegged to four currencies: the dollar, yen, euro and sterling.

You've heard that China's central bank proposed making SDRs the world's reserve currency.

You've likely heard that Tim Geithner has said that he supports the IMF's proposal to issue large amounts of SDRs (and that some people say that Geithner also supports making SDR the world's reserve currency).

You may even have heard that Russia also backs making the SDR the world's reserve currency, and that Russia wants the SDR to be pegged to a basket of yuans, rubles and gold.

But you probably have not heard that:

China's government has floated a variant of this idea, suggesting a currency based on 30 commodities along the lines of the "Bancor" proposed by John Maynard Keynes in 1944.

Indeed, the head of the China's central bank wrote recently:

Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.

Keynes proposed that the Bancor was to be fixed in terms of 30 commodities, of which one would be gold. The arguments for currency fixed on a basket of commodities was that it would stabilize the average prices of commodities, and with them the international medium of exchange and a store of value.

As China's central banker said, the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

But Keynes' Bancor proposal did not only entail pegging SDR's to a basket of currencies:

He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency - the bancor - which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country's trade deficit or trade surplus.
Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period. To make the system work, the members of the union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be?
Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But - and this was the key to his system - he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations' deficits.

Given that it is impossible to predict whether the IMF will actually issue large amounts of SDRs, whether SDR's will become the world's reserver currency, or even the basket upon which SDRs will be pegged in the future, the investor cannot confidently purchase items in a hypothetical basket in advance in order to profit from a potential boom in SDRs.

Moreover, given that the World Bank has just come out in support of the continuation of the dollar as the world's reserve currency, the political fight over reserve currency issues has just begun.