Sunday, March 6, 2011

Everything You Need to Know About Torture


Here is a succinct executive summary of everything you need to know about torture:

Yes, Waterboarding IS Torture

  • Everyone claiming waterboarding is not torture has changed their tune as soon as they were exposed to even a small dose of it themselves. See this, this and this
Not Just Waterboarding

Children, Too No, Torture Does NOT Make Us Safer The Insanity of What Actually Happened

Other Relevant Facts
Should We Prosecute?

1 comments

Saturday, March 5, 2011

Everything the Communists Said About Their System was False ... Unfortunately, Some of What They Said About Capitalism Was True


The Russians proved that communism is a joke.

And when China moved towards a mixed capitalist-socialist system, it was the nail in the coffin for communism worldwide. Whose left? North Korea?

So more or less everything the Russians and Chinese said about communism was wrong. It failed.

Unfortunately, a lot of what they said about capitalism was right.

Specifically, while I know next to nothing about Marx, Engels or other communist thinkers, it seems pretty obvious that the U.S. is in a phase of "late stage capitalism" where financial speculation by huge companies has replaced productive investment, capital improvements, innovation, and job creation, and the financial sector has grown so big - and inequality has grown so large - that it has destroyed democracy like a malignant cancer.

As economist Kimball Corson wrote last year at Seeking Alpha:

In a nutshell and stripped of his own inflammatory terminology and technical economic errors, Marx had this to say in his book, Das Kapital.

Marx argued that at capitalism would succeed in its initial stages quite well in promoting growth by means of capital investment in new technology and improved means of production. Everyone would prosper. As capitalism developed, however, he argued that capitalists would appropriate to themselves more and more of the profits or income from the economy and that laborers would come to have increasingly less.

Over time, in time and such circumstances, Marx claimed that, first, capitalistic economies would undergo ever more vicious cyclical swings from boom to bust. These cycles and the on-going process of capitalism would, second, result in ever richer capitalists and ever poorer working classes, until, finally, at some point, laborers would revolt and take over the means of production, causing Socialism to ensue as a result. Socialism, in turn, was merely a transitional step to Communism.

***

What we observe of the American economy, at its present stage, is exceptionally close to what Marx described, whether we like it or not. Let me describe the ways:

1. Earlier in our history, up until about 30 years ago, capitalism as it was practiced in the United States did do very well and materially aided a good standard of living for most Americans.

2. Since then, real wages have stagnated and income has become seriously concentrated in the upper income households. The top 1/10 of 1%, get 6% of all income. As Harvard Professor Elizabeth Warren explains it, for long stretches of time in recent years, the growth in the nation's GDP has gone almost entirely to the top 1% or less of the population. The top 40% get about 78% of all income. Now couple this with the following fact:

3. Productivity Growth Quarter in 4Q 2009 was 6.2%. For the year, it came to 5.1%. As Brad DeLong describes this current slice of reality, “The flip side of the jobless recovery is a high productivity-growth recovery--and, with stagnant wages, a rise in the profit share (read, capitalist’s take). This is becoming more prevalent.

4. The distribution of income and wealth in the U.S. has progressively become worse over the last several decades as real wages have stagnated or declined a bit.

5. So to have our cyclical booms and busts become more severe over the last decade. We have had the dot com boom and bust and now the housing boom and bust. We are anything but stable, especially now as we are loaded up with debt and deficits.

6. The share of income or profits being generated by small business is falling and the share of total profits being generated by large businesses is increasing.

7. Government has enacted much special interest legislation contrary to the public interest, to aid the concentration of wealth and income in the hands of the wealthiest and feather representatives own beds.

8. Now, what we see with increased productivity and the maldistribution of income and wealth is a growing surplus of labor or the unemployed.

9. We are beginning to see embryonic development of reactionary grass roots political movements, such as the Tea Party crowd. While now small, without good leadership and ill-focused, grass root movements do not have to stay that way. Once started, they can change quickly and gain good focus and leadership.

10. As a matter of public policy, we are adamantly and deliberately ignoring entirely too much that is important here, all to our prospective detriment. In short, we are asking for public upheaval and revolt.

11. The public, both right and left, are truly exasperated with our federal government, frustrated with our economy, mad at Congress and the Administration and ripe for something new that offers us all a better prospect.

Indeed, polls show that the percentage of Americans who view socialism favorably has skyrocketed since the credit crisis. See this, this and this.

However, unlike Marx (or Corson), I don't think that transitioning from a broken form of capitalism to communism would be a good thing. Do you want to live under a brutal tyrant like Stalin, Mao, Pol Pot or Kim Jong Il? I don't.

As I wrote in an essay called "Don't Blame Capitalism for Wall Street's Corruption and Lawlessness":

When Mahatma Gandhi was asked what he thought about Western civilization, he answered:

I think it would be a good idea.
I feel the same way about free market capitalism.

It would be a good idea, but it is not what we have now. Instead, we have either socialism, fascism or a type of looting.

If people want to criticize capitalism and propose an alternative, that is fine . . . but only if they understand what free market capitalism is and acknowledge that America has not practiced free market capitalism for some time.
As I wrote last year:

Does this mean that free market capitalism is dead?

No. And I'm not sure that there is any better alternative.

But capitalism has to grow up and become less naive, relying less on a blind faith in "the invisible hand" and more on an understanding of human nature, including insights from the field of behavioral economics.

It must include sophisticated checks and balances to make sure that the system is not gamed, instead of childish ideas about the "inherent stability" of the market.

And it must make sure that the poker game doesn't suddenly end when one of the players gets all of the chips.

Of course, with high-frequency trading dominating the market (and see this), frontrunning, permanent bailouts (and see this), government-sponsored credit rating scams and enterprises, the creation and maintenance by the government of banks so big that their very size warps the entire system, socialism for the big boys, and all of the other shenanigans going on, we don't currently have free market capitalism.

Of course, even Adam Smith didn't believe in unrestrained free market capitalism. And a free market is not possible without strong laws against fraud.

So the bottom line is really that the communist philosophers accurately predicted that capitalism would become corrupted ... just as communism became corrupted by rulers who lived in the lap of luxury and gave themselves all the perks while they imposed poverty and extreme oppression on their people.

Indeed, anyone who assumes that any system - communism, capitalism or any other "ism" - is infallible and that its leaders don't have to be held accountable is just a useful idiot.

I think a large part of the problem with both communism and late stage capitalism is too much power in too few hands - whether in the hands of the "Party" or of the oligarchy of big banks (made enormous by the government, not by free market capitalism), the outcome is the same ... the little guy gets shafted.
9 comments

The Justice Department Plays Fast and Loose with the Law


While the Justice Department has loudly tooted its horn about it's ability to prosecute bad guys, it hasn't really done much recently.

For example,the Department's "crackdown" on Wall Street is just a P.R. stunt targeting small-time crooks.

And former counterterrorism czar Richard Clarke said of all the publicity surrounding the handful of terrorism prosecutions since 9/11:
A lot of the cases after 9/11 were manufactured or enormously exaggerated and were announced with great trumpets by the attorney general and the FBI director so that we felt that they were doing something when, in fact, what they were doing was not helpful, not relevant, not needed.

The DOJ famously refused to prosecute high-level officials who ordered torture, or illegal spying, or other criminal acts, or those who destroyed evidence and obstructed justice, even though top conservative and liberal legal scholars said that crimes had clearly been committed. It appears that Justice is playing politics to protect Bush, Cheney and the gang. See this and this.

Instead of prosecuting the big fish and protecting the little guy, the Department of Justice is bending over backwards to protect giant corporations. For example, the Justice Department - along with the Department of Homeland Security - has been using its national security powers to help big businesses. For example:

As the ACLU notes, Fusion Centers - a hybrid of military, intelligence agency, police and private corporations set up in centers throughout the country, and run by the Department of Justice and Department of Homeland Security - allow big businesses like Boeing to get access to classified information which gives them an unfair advantage over smaller competitors.

Moreover, the Justice Department has itself been playing fast and loose with justice.

For example, an ATF agent told CBS News yesterday that Justice Department ordered the ATF to let guns cross into Mexico. The guns went to the Mexican drug cartels, which have used them to terrorize the locals and kill American agents:



And see this.

And documents leaked a couple of weeks ago show that - instead of following leads showing criminal wrongdoing by the big banks - the Department of Justice is instead working to crush whistleblowers who have the goods on the white collar criminals.

For example - in an effort to protect Bank of America from the threatened Wikileaks expose of wrongdoing - the Department of Justice told Bank of America to a hire a specific hardball-playing law firm to assemble a team to take down WikiLeaks. As a leaked email states:

DOJ called the GC [general counsel] of BofA and told them to hire Hunton and Williams, specifically to hire Richard Wyatt who I'm beginning to think is the emperor. They want to present to the bank a team capable of doing a comprehensive investigation into the data leak. Currently they are recommending:
-Hire H&W as outside council on retainer

***

-Use Berico/HBGary to analyze wikileaks the organization (people, history, where they are located)....

HB Gary, of course, proposed smearing journalists with forged documents and otherwise pressuring journalists to avoid WikiLeaks. See this and this.

Of course, the Justice Department's fast and loose behavior is not new under the current administration.

As I wrote in August:

Jon Eisenberg is a very well-known California lawyer. Eisenberg literally wrote the book on California appellate practice.

In a new interview, Eisenberg ... reveals the games played by the Department of Justice:

[Interviewer] You have written "effectively ... President George W. Bush is a felon." Why, and do you ever think he'll be brought to justice?

[Eisenberg] President Bush has freely admitted that his administration committed warrantless electronic surveillance, violating the Foreign Intelligence Surveillance Act of 1978. That's a felony, according to title 50, section 1809 of the United States Code. So President Bush is a felon. It's that simple.

Will he ever be brought to justice? Evidently not by a criminal prosecution, in which the Obama administration seems to have little interest...

[Interviewer] During [a lawsuit against the Bush administration concerning illegal spying,] you wrote a response to a government brief that you were not allowed to see. How does one go about doing that?

[Eisenberg] It was quite a challenge. It wasn't just that we had to speculate as to what might be in the secret DOJ brief; the conditions under which we wrote our secret response were onerous, approaching the bizarre: We were required to write the brief under guard in the U.S. Attorney's office in San Francisco; we were forbidden from preparing any notes for the brief-writing session; the DOJ retained sole possession of the brief we produced; and the DOJ has refused to allow us to review the brief since we wrote it. Litigation doesn't get any weirder than that.

There is no justifiable reason why the Department of Justice would refuse to allow the opposing counsel to see DOJ's brief, force the attorney to write his response brief under armed guard and without being able to use any notes, and then bury that brief without even letting the attorney who wrote it have a copy.

Attorney General Ashcroft approved torture, as did high-level Justice Department officials such as Assistant deputy Attorney General John Yoo. Promotion of torture is not just an ethical breach: it also constitutes a war crime under U.S. and international law. See this, this, this, and this. Yoo xsxseealso wrote memos defending illegal spying.

Former Attorney General Michael Mukasey supported illegal wiretapping, torture and indefinite detention (and see this).

Congressional Quarterly, Glenn Greenwald, Raw Story, FireDogLake and others point out that Attorney General Alberto Gonzales virtually blackmailed Congresswoman Harman into support illegal warrantless spying on Americans by threatening to prosecute her for her AIPAC shenanigans if she didn't play ball.

And former constitutional law teacher Glenn Greenwald says that - in it's defense of state secrecy, illegal spying, preventative detention, and other positions - Obama's Department of Justice under Eric Holder is even worse than under Bush.

Given the above, it's worth asking: how much justice does the DOJ actually dispense?

0 comments

Friday, March 4, 2011

Head of World's Largest Asset Manager: "Markets Like Totalitarian Governments"


Blackrock is the world's largest investment manager.

As Wikipedia notes:

BlackRock is the largest global investment management firm headquartered in New York City. It is one of the most prominent financial institutions in the US. The company acquired Barclays Global Investors in December 2009 under the BlackRock name, making it the largest money manager in the world.

But BlackRock isn't just the largest money manager ... it is also the larges asset manager in the world.

As Wikipeda notes:

As of December 31, 2010, BlackRock’s assets under management total $3.56 trillion across equity, fixed income, alternative investments, real estate, risk management, and advisory strategies. Through BlackRock Solutions, it offers risk management, strategic advisory, and enterprise investment system services to a broad base of clients with portfolios totaling approximately $9 trillion.

And see this and this.

So it is stunning that Blackrock's Chairman and CEO - Larry Fink - said on Bloomberg TV:

Markets like totalitarian governments.


Investors can determine whether a nation prospers or starves.

Investors can determine the course of nations, including who gets elected and who gets the boot.

No wonder there are so many totalitarian governments in the Middle East, North Africa and around the world.

No wonder totalitarianism has been creeping into America's politics and economics. See this and this.

Because big investors (or at least big asset managers) like totalitarian governments. If they instead preferred democracy, democracy would flourish.

H/t: Tyler Durden.

3 comments

Wednesday, March 2, 2011

China Takes Giant Step Towards Making Yuan the World's Reserve Currency


For years, I've been writing about the long-term decline of the Dollar, and the rise of the Chinese Yuan ... and it's potential to become the world's next reserve currency.

As I pointed out in 2007, many countries have started moving out of the Dollar as the basis for international trade settlements, including:

  • Venezuela and 12 other Latin American countries as well as Cuba
  • Many other countries

In 2008, I wrote:

Assistant Secretary of the Treasury, and the "Father of Reagonomics", recently said: "The dollar’s reserve currency role is drawing to an end". See also this article, this article, this report, this essay, this roundup, and this one.

I also noted:

There are numerous hints that the dollar will not remain the world's reserve currency for long:

  • Russia's Putin is suggesting that Russia and China ditch the dollar and use their own currencies in trade deals
  • Thailand's Deputy Prime Minister, Olarn Chaipravat, told Bloomberg News:
    "The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world."
  • The Wall Street Journal writes that China is being asked to play America's role of being at the center of the world financial system

In May 2009, I pointed out:

Nouriel Roubini says that the Yuan will eventually take over from the dollar as reserve currency:

What could replace [the dollar]? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.
Roubini provides advice which the American economic policy-makers ignore at their peril:
This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles...

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar...

A couple of days later, I reported:

According to the Financial Times:

Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president...

In June 2009, I wrote:

George Soros said a couple of days ago that China’s global influence is set to grow faster than most people expect.

He might be right.

As the Telegraph writes today:

The head of China's second-largest bank has said the United States government should start issuing bonds in yuan, rather than dollars, in the latest indication of the increasing importance of the Chinese currency.

The same month, I noted:

Yesterday, the BRIC countries said they might be each others' bonds (and not just U.S. Treasury bonds). As Bloomberg writes:

Brazil, Russia, India and China are considering buying each other’s bonds and swapping currencies to lessen dependence on the U.S. dollar....

The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries.

In August 2009, I reported that Pimco was warning it's clients to diversify out of dollars, as the dollar is losing it's global reserve currency.

In October 2009, I noted:

The Wall Street Journal reported yesterday:

China and Russia are working on ways to eventually settle their trade with the Chinese yuan and Russian ruble, senior government officials from the two countries said Tuesday.

In January, it was reported that China had reached a similar arrangement with Brazil:

The Brazilian Central Bank announced it had reached an initial understanding with China for the gradual elimination of the US dollar in bilateral trade operations which in 2009 are estimated to reach 40 billion US dollars.

***

As I and many others have argued for years, everyone wants to get out of the dollar, but not all at once. Foreign central banks want to move out of dollars gradually so they are not left holding worthless paper.

But the process actually started a while back.

Last August, I noted that - for 100 years - the dollar has been losing it's value, one of the main disqualifications for a reserve currency:

Here's a chart of the trade weighted US Dollar from 1973-2009.

US_dollar

And here's a bonus chart showing the decline in the dollar's purchasing power from 1913 to 2005:
US_dollar

Last September, I noted:

China will issue a non-Dollar denominated Renminbi bond sale on September 28th (6 Billion Renminbi worth).

Last November, I wrote:

These are headlines from the past 2 days:

It's not yet clear whether the Renminbi, gold, SDR, Bancor or something else will eventually take the throne of the new world's reserve currency. See this and this.

And many settlements are still, obviously, being made in dollars.

But there is at least an argument that the dollar has already lost its status as world reserve currency, even if there is no ready replacement to jump into the breach.

In November, the Yuan actually started trading against the Ruble.

Last week, the Bank of India (a state-owned bank, India's 4th biggest) started trading Yuan for Rupees. See this, this and this.

China Takes Giant Step Towards Making Yuan the World's Reserve Currency

But all of the foregoing is just background for what happened today.

Specifically, as Tyler Durden reports:

Today's biggest piece of news received a mere two paragraph blurb on Reuters, and was thoroughly ignored by the broader media. An announcement appeared shortly after midnight on the website of the People's Bank of China.

***

Reuters provides a simple translation and summary of the announcement: "China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency's international role. In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily." To all those who claim that China is perfectly happy with the status quo, in which it is willing to peg the Renmibni to the Dollar in perpetuity, this may come as a rather unpleasant surprise, as it indicates that suddenly China is far more vocal about its intention to convert its currency to reserve status, and in the process make the dollar even more insignificant.

International Business Times provides further insight:

This is all part of China’s plan for the internationalization of its currency, which may, in the decades to come, threaten the global ‘market share’ of other currencies like the US dollar.

Previously, China also announced that bilateral trades with Russia and Malaysia will begin to be conducted with the yuan and the ruble and ringgit, respectively.

Other moves on the part of China to internationalize its currency include allowing foreign companies to issue yuan-denominated bonds and relaxing rules for foreign financial institutions to access the yuan.

Aside from the efforts of the Chinese government, fundamentals also point to the increasing international popularity of the Chinese currency.

China is already the leading trade partner with Australia and Japan. It’s also the leading or a large trade partner with many of its smaller neighbors. The purpose of having foreign currencies is to conduct foreign trade and investment, so the yuan is expected to become a more attractive currency for China’s trade partners, espeically as the government continues to relax restrictions.

The reason for this dramatic move may be found in what Stephen Roach [former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia] wrote a few days ago in Project Syndicate:

In early March, China’s National People’s Congress will approve its 12th Five-Year Plan. This Plan is likely to go down in history as one of China’s boldest strategic initiatives.

In essence, it will change the character of China’s economic model – moving from the export- and investment-led structure of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers. This shift will have profound implications for China, the rest of Asia, and the broader global economy.

Like the Fifth Five-Year Plan, which set the stage for the “reforms and opening up” of the late 1970’s, and the Ninth Five-Year Plan, which triggered the marketization of state-owned enterprises in the mid-1990’s, the upcoming Plan will force China to rethink the core value propositions of its economy. Premier Wen Jiabao laid the groundwork four years ago, when he first articulated the paradox of the “Four ‘Uns’” – an economy whose strength on the surface masked a structure that was increasingly “unstable, unbalanced, uncoordinated, and ultimately unsustainable.”

The Great Recession of 2008-2009 suggests that China can no longer afford to treat the Four Uns as theoretical conjecture. The post-crisis era is likely to be characterized by lasting aftershocks in the developed world – undermining the external demand upon which China has long relied. That leaves China’s government with little choice other than to turn to internal demand and tackle the Four Uns head on.

The 12th Five-Year Plan will do precisely that, focusing on major pro-consumption initiatives. China will begin to wean itself from the manufacturing model that has underpinned export- and investment-led growth. While the manufacturing approach served China well for 30 years, its dependence on capital-intensive, labor-saving productivity enhancement makes it incapable of absorbing the country’s massive labor surplus.

Instead, under the new Plan, China will adopt a more labor-intensive services model. It will, one hopes, provide a detailed blueprint for the development of large-scale transactions-intensive industries such as wholesale and retail trade, domestic transport and supply-chain logistics, health care, and leisure and hospitality.

Obviously, a reserve currency would be not only extremely useful, but quite critical in achieving the goal of China's conversion to an inwardly focused, middle-class reliant society. And even that would not guarantee a smooth transition. However, should China really be on a path to a step function in its evolution, the shocks to the system will be massive. Roach puts this diplomatically as follows:

But there is a catch: in shifting to a more consumption-led dynamic, China will reduce its surplus saving and have less left over to fund the ongoing saving deficits of countries like the US. The possibility of such an asymmetrical global rebalancing – with China taking the lead and the developed world dragging its feet – could be the key unintended consequence of China’s 12th Five-Year Plan.

A less diplomatic version implies that the relationship between China and the US would suffer a seismic shift in which the game theoretical model of Mutual Assured Destruction, and symbiotic monetary and fiscal policies, would no longer exist, allowing China to pursue its fate completely independent of any economic shocks that the increasingly distressed United States may be going through.

And confirming that the PBoC announcement is far more serious than the amount of airtime allotted to it by the mainstream [U.S.] media, is the just released article in Spiegel "China Attacked the Dollar" (google translated):

The Chinese central bank surprised with a spectacular announcement: The would-be superpower wants to handle their entire future foreign trade in yuan, not in dollars. Beijing shakes America's claim to represent the key currency - with serious consequences for the U.S..

The announcement was inconspicuous , but it has the potential, to permanently change the balance of power on the world currency market: China strengthens the international role of the yuan. All exporters and importers will, this year, be allowed to settle their business with their foreign partners in Yuan, the central bank said on Wednesday in Beijing.

This will respond to the growing importance of the yuan as a global reserve currency. "The market demand for cross-border use of the yuan rises," said the central bank. The PBoC had previously tested this plan by allowing 67 000 enterprises in 20 provinces to run their business abroad in yuan. The trade volume amounted to the equivalent of €56 billion.

Now the amount of yuan to be extended, it should be handled much more business in Chinese currency - and less in the U.S. Chinese companies trade at present often in dollars, they are thus dependent on the decisions of the U.S. Federal Reserve to pay on it in a rising oil price and will have pay higher transaction fees than necessary. That should change now.

Currently, the People's Republic can hardly take yuan out of the country and even that is monitored within the boundary of all legitimate capital flows. Chinese exporters have to change a large part of their euro, yen or dollars at a fixed rate revenue in yuan. Foreign companies wishing to do business in China must do so in Yuan, they can exchange their money in the People's Republic. Tourists are allowed a maximum of 20,000 yuan and exporting. Yuan an international market can not occur - and not on supply and demand-based exchange rate.

Needless to say, should the yuan be seen increasingly as a reserve currency, all of this, and virtually everything else is about to change.

The only question is whether or not the Yuan will cement its status at the top of the currency pyramid by allowing the backing of the currency with individual or a basket of commodities. If that were to happen, it would be the last nail in the coffin of the already terminally ill dollar.

See this for background on the possibility of a currency pegged to a basket of commodities.
3 comments

97% of All U.S. Mortgages are Backed by the Government


I heard a recent talk by Richard Wolff - Professor of Economics Emeritus at the University of Massachusetts in Amherst (PhD in Economics from Yale) - where Wolff said that 97% of all U.S. mortgages are either written or guaranteed by the government.

As Bloomberg explained last August:

Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backed nearly 97 percent of U.S. mortgages in 2009.
And Dwight M. Jaffee, Lawrence J. White, Peter Wallison, Arnold Kling, Anthony B. Sanders, Michael Lea note:
During 2009 and 2010, GSEs guaranteed as much as 70 percent of mortgage market activity. Other government programs guaranteed an additional 25 percent.
There are supposedly plans in Washington to wind down Fannie and Freddie. Critics say that would destroy the "recovery" in housing.

If continuing to throw money at Fannie and Freddie would stabilize the economy, I might be for it - even though it is not free market capitalism. I am not wed to either liberal or conservative ideologies, and am instead simply motivated to do whatever will work to stabilize the economy and help the most people.

But as I noted in January:

Most independent experts say that the government's housing programs have been a failure. That's too bad, given that the housing slump is now - according to Zillow's - worse than during the Great Depression.

Indeed, PhD economists John Hussman and Dean Baker, fund manager and financial writer Barry Ritholtz and New York Times' writer Gretchen Morgenson say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.

Many also accuse Obama's foreclosure relief programs as being backdoor bailouts for the banks. (See this, this, this and this).

***

And Freddie and Fannie's recent settlement with Bank of America - a couple of billion - has been criticized by many as being a bailout.

In "BofA Freddie Mac Putbacks Resolved for 1¢ on $", Barry Ritholtz notes:

Bank of America settled numerous claims with Fannie Mae for an astonishingly cheap rate, according to a Bloomberg report.

A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac.

In "Is Fannie bailing out the banks?", Forbes' Colin Barr writes:

Someone must be getting bailed out, right?

Why yes, say critics of the giant banks. They charge that Monday's rally-stoking mortgage-putback deal between Bank of America (BAC) and Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of the nation's largest lender. It comes courtesy, they say, of an administration struggling to find a fix for the housing market while quaking at the prospect of another housing-fueled banking meltdown.

Monday's arrangement, according to this view, will keep the banks standing -- but leave taxpayers on the hook for an even bigger tab should a weak economic recovery falter. Sound familiar?

***

[Edward] Pinto says truly holding BofA responsible for all the mortgage mayhem tied to its 2008 purchase of subprime lender Countrywide would likely drive it into the arms of the Federal Deposit Insurance Corp., which has enough problems to deal with. Though BofA would surely dispute that analysis, it's easy enough to see where the feds don't want that outcome.

***

But how sharp is Freddie if all it can do is squeeze a $1.28 billion payment out of a giant customer in exchange for relinquishing fraud claims on $117 billion worth of outstanding loans? The very best its million-dollar executives can do is claw back a penny on each bubbly subprime dollar?

That seems pretty weak even given that this is Congress' favorite subsidy dispenser we're talking about.

"How Freddie can justify this decision to settle 'all outstanding and potential' claims before any of the private-label putback lawsuits have been resolved is beyond comprehension," says Rebel Cole, a real estate and finance professor at DePaul University in Chicago. "This smells to high heaven and they should be called out."

In "Bank Of America Just Admitted That Its Fannie And Freddie Settlement Was A Bailout", Business Insider's Joe Weisenthal writes:

Bank of America has basically confirmed that the critics are correct: It was the beneficiary of a bailout.

According to Bloomberg, BofA's Jerry Dubrowski said: “Our agreements with Fannie Mae and Freddie Mac are a necessary step toward the ultimate recovery of the housing market.”

Get it? This was not about settling mortgage putback exposure at the legal level. It was about helping the greater good. It's the same too-big-to-fail logic all over again: What's good for Bank of America is good for America.

As the Washington post notes:

“This is a gift” from the government to the bank, said Christopher Whalen of Institutional Risk Analytics. “We’re all paying for this because it will show up in the losses from Fannie and Freddie,” he said.
Congresswoman Waters said:

I’m concerned that the settlement between Fannie Mae, Freddie Mac and Bank of America over misrepresentations in the mortgages BofA originated may amount to a backdoor bailout that props up the bank at the expense of taxpayers. Given the strong repurchase rights built into Fannie Mae and Freddie Mac’s contracts with banks, and the recent court setback for Bank of America in similar litigation with a private insurer, I’m fearful that this settlement may have been both premature and a giveaway. The fact that Bank of America’s stock surged after this deal was announced only serves to fuel my suspicion that this settlement was merely a slap on the wrist that sets a bad example for other negotiations in the future.

And see this, this and this.
And Chris Whalen - who has been hailed by Nouriel Roubini as one of the leading independent analysts of the U.S. banking system - points out that Fannie and Freddie helped to create the epidemic of mortgage fraud in the first place, and Whalen argues that Fannie and Freddie must be restructured:
The invidious cowards who inhabit Washington are unwilling to restructure the largest banks and GSEs. The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.

Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile. As Alan Meltzer noted to Tom Keene on Bloomberg Radio earlier this year: "This is not a monetary problem."

***
The policy of the Fed and Treasury with respect to the large banks is state socialism writ large, without even the pretense of a greater public good.

***
The fraud and obfuscation now underway in Washington to protect the TBTF banks and GSEs totals into the trillions of dollars and rises to the level of treason.

***
And in the case of the zombie banks, the GSEs and the MIs, the fraud is being actively concealed by Congress, the White House and agencies of the U.S. government led by the Federal Reserve Board. Is this not tyranny?
But the bottom line is that money given to the big banks and government-sponsored entities like Fannie and Freddie does not trickle down to Main Street or the bulk of the American people. See this and this.

As Steve Keen points out, money given to debtors (i.e. the American citizen) provides much more bang for the buck than money given to the creditors (i.e. the big banks) or GSEs.
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Tuesday, March 1, 2011

Poll: Most Americans Strongly Oppose U.S. Intervention in Arab Countries


The U.S. started mobiliziling forces in the Middle East/Northern Africa area during the Egyptian protests, and American forces have grown larger in response to Gaddafi's murderous attacks on his own people. And see this.

The Pakistan Observer reports today:

The United States, Britain and France have sent several hundred “defence advisors” to train and support the anti-Gadhafi forces in oil-rich Eastern Libya where “rebels armed groups” have apparently taken over.

According to an exclusive report confirmed by a Libyan diplomat in the region “the three Western states have landed their “special forces troops in Cyrinacia and are now setting up their bases and training centres” to reinforce the rebel forces who are resisting pro-Qaddafi forces in several adjoining areas.

A Libyan official who requested not to be identified said that the U.S. and British military gurus were sent on February 23 and 24 night through American and French warships and small naval boats off Libyan ports of Benghazi and Tobruk.

The Western forces are reportedly preparing to set-up training bases for local militias set-up by the rebel forces for an effective control of the oil-rich region and counter any push by pro- Qaddafi forces from Tripoli.

Other reports claim that efforts to “neutralize” the Libyan Air Force were also underway to limit Qaddafi’s rule in Tripoli if not fully uprooted from the country.

Meanwhile, three Indian Navy warships, are also being dispatched to be deployed in the rebel-held areas of Libya.

According to reports the Indian Navy has already sent two warships plus one its largest amphibious vessel INS Jalashwa. According to defence experts “Jalshwa” is the largest ship of Indian Navy which was delivered by the U.S. four years ago. Jalashwa, formaly the USS Trenton, has the capability to embark, transport & land various elements of an amphibious force & its equipped with mechanised landing craft, Sea King helicopters & armed with raders, ship to air missiles & rapid firing guns.

Experts say that Indian ship Jalashwa has a Landing Platform Dock with a capability 1000 fully armed troops. The warship is also used for maritime surveillance, special operations, search & rescue and to undertake other tasks.
But - as Rasmussen notes - Americans are strongly opposed to military or other types of intervention:

As with the recent turmoil in Egypt, most Americans (67%) say the United States should leave the situation in the Arab countries alone. Just 17% say the United States should get more directly involved in the political situation there, but another 17% are not sure.
If America invades Libya, the excuse will no doubt be that it is a humanitarian mission to save the Libyan people from their insane, genocidal leader. The U.S. said the same thing about Saddam Hussein (who - like Gaddafi - was an insane, genocidal leader).

But remember that Alan Greenspan, John McCain, George W. Bush, Sarah Palin, a high-level National Security Council officer and others all say that the Iraq war was really about oil.

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Pentagon Tries to Blame Financial Crisis on Foreign Financial Terrorists


The Pentagon is paying contractors to claim that it was foreign financial terrorists - instead of fraud by American financial executives - which caused the 2008 financial crisis.

While a Pentagon contractor said, “This is the equivalent of box cutters on an airplane,” Paul Backen - a Yale University professor who has studied economic warfare - said he saw “no convincing evidence that ‘outside forces’ colluded to bring about the 2008 crisis.”

Indeed, the claim that terrorism caused the financial crisis is about as believable as Gaddafi trying to blame the Libyan protests on Osama Bin Laden, or al-Maliki blaming Al Qaeda for the Iraqi protests.

But it's not an isolated incident. In fact, the government is trying in many ways to convince us that financial fraud is isolated, not systemic, and - most of all - not important to rein in.

For example, the U.S State Department's website says (click on link entitled "economic")"

Economic conspiracy theories are often based on the false, but popular, idea that powerful individuals are motivated overwhelmingly by their desire for wealth, rather than the wide variety of human motivations we all experience.

This one-dimensional, cartoonish view of human nature is at the heart of Marxist ideology, which once held hundreds of millions under its sway.)

If I didn't know better, I would say that the State Department is implying that anyone that questions the intent behind even one particular powerful individual's actions is a conspiracy theorist or a Marxist.

Similarly, Obama's current head of the Office of Information and Regulatory Affairs - and a favored pick for the Supreme Court (Cass Sunstein) - previously:

Defined a conspiracy theory as "an effort to explain some event or practice by reference to the machinations of powerful people, who have also managed to conceal their role."

William K. Black - professor of economics and law, and the senior regulator who put 1,000 top executives in jail during the S & L crisis - says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are: "the entire strategy is to keep people from getting the facts".

Similarly , 7 out of the 8 giant, money center banks went bankrupt in the 1980's during the "Latin American Crisis", and the government's response was to cover up their insolvency.

So powerful people have conspired to try to downplay the severity of various economic crises.

And - as Matt Taibbi notes that the government is doing more to protect them than to prosecute them:
Federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice.

***

A veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.

The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street," he says.

A wild conspiracy theory?

Kansas City Fed President Thomas Hoenig doesn't think so. He recommends Taibbi's article.

Indeed, Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky, the Wall Street Journal and Bernie Madoff all say that the U.S. economy is a giant Ponzi scheme.

They Didn't MEAN to Cause a Depression

Sunstein argues:
Many social effects, including large movements in the economy, occur as a result of the acts and omissions of many people, none of whom intended to cause those effects. The Great Depression of the 1930s was not self-consciously engineered by anyone; increases in the unemployment or inflation rate, or in the price of gasoline, may reflect market pressures rather than intentional action.
However, Sunstein is neither an economist nor a criminologist, and - as such - is completely out of his depth.

Whether or not anyone intended to cause the Great Depression, top economists - including Robert Shiller, Robert Kuttner, William Black and John Kenneth Galbraith, and the former chief accountant of the S.E.C. ( Lynn Turner) - have said that criminal fraud led to the Great Depression (and to the current crisis). Even Alan Greenspan says fraud caused the current crisis.

Economics professor James K. Galbraith testified as follows to the Senate Judiciary Committee's Subcommittee on Crime:
I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. ... Economists [argued that] widespread fraud therefore could not occur. Not all economists believed this – but most did.

Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft-pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word “naughtiness.” This was on the day that the SEC charged Goldman Sachs with fraud. ..."

***

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

***

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

***

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.
William K. Black has made the same points.

Sunstein is Using the Wrong Standard

Of course, "intent to cause" harm is not the standard. If two criminals disable the power to a nuclear power plant in order to steal a computer containing valuable information (to sell it to a foreign country), and if the lack of power to the cooling systems causes a core meltdown which releases radioactivity into the surrounding town, they are guilty of mass murder, even if they didn't intentionally try to expose anyone to radioactivity.

Similarly, if two robbers unplug an old tycoon's dialysis machine so that they can steal his wallet, ring and watch, and don't bother to plug it back in, they are guilty of murder even if they didn't actually intend to kill him.

Likewise, as Nobel prize winning economist George Akerloff demonstrated in 1993, big financial players intentionally loot the economy time and again, knowing that could very well lead to an economic crisis.

This is not rocket science. It is a dynamic which has been understood for "hundreds of years".

Therefore, Sunstein's argument that - because the heads of the giant financial companies probably didn't intend to cause a depression - that shows that there was no conspiracy to commit fraud makes as little sense as saying that the criminals who caused a nuclear meltdown or killed the old tycoon couldn't have engaged in a conspiracy.

In fact, nobel prize winning economist Joseph Stiglitz, PhD economists Dean Baker, Michael Hudson, Paul Craig Roberts and Michel Chossudovsky and Time Magazine's Justin Fox all say that financial conspiracies have been committed by big American financial players. Leading Austrian economist Murray Rothbard agreed.

The REAL Conspiracy

Indeed, the real conspiracy is that the government is trying to hide the fact that massive conspiracy to commit fraud by Wall Street's biggest players is a prime cause of the financial crisis.

As I noted a year ago:

The label "conspiracy theory" is commonly used to try to discredit criticism of the powerful in government or business.

***

Acceptable Versus Unacceptable Conspiracy Theories

Bernie Madoff's Ponzi scheme was a conspiracy. The heads of Enron were found guilty of conspiracy, as was the head of Adelphia. Numerous lower-level government officials have been found guilty of conspiracy. See this, this, this, this and this.

Time Magazine's financial columnist Justin Fox writes:

Some financial market conspiracies are real ...

Most good investigative reporters are conspiracy theorists, by the way.

Indeed, conspiracies are so common that judges are trained to look at conspiracy allegations as just another legal claim to be disproven or proven by the evidence.

But - while people might admit that corporate executives and low-level government officials might have engaged in conspiracies - they may be strongly opposed to considering that the wealthiest or most powerful might possibly have done so.

Indeed, those who most loudly attempt to ridicule and discredit conspiracy theories tend to focus on defending against criticism involving the powerful.

This may be partly due to psychology: it is scary for people to admit that those who are supposed to be their "leaders" protecting them may in fact be human beings with complicated motives who may not always have their best interests in mind. And see this.

***

Similarly:

Michael Kelly, a Washington Post journalist and neoconservative critic of anti-war movements on both the left and right, coined the term "fusion paranoia" to refer to a political convergence of left-wing and right-wing activists around anti-war issues and civil liberties, which he claimed were motivated by a shared belief in conspiracism or anti-government views.

In other words, prominent neocon writer Kelly believes that everyone who is not a booster for government power and war is a crazy conspiracy theorist.

Similarly, psychologists who serve the government eagerly label anyone "taking a cynical stance toward politics, mistrusting authority, endorsing democratic practices, ... and displaying an inquisitive, imaginative outlook" as crazy conspiracy theorists.

This is not really new. In Stalinist Russia, anyone who criticized the government was labeled crazy, and many were sent to insane asylums.

Using the Power of the State to Crush Criticism of the Government

The bottom line is that the power of the state is used to crush criticism of major government policies and actions (or failures to act) and high-level government officials.

Pay attention, and you'll notice that criticism of "conspiracy theories" is usually aimed at attempting to protect the state and key government players. The power of the state is seldom used to crush conspiracy theories regarding people who are not powerful . . . at least to the extent that they are not important to the government.
Sunstein has called for the use of state power to crush conspiracy allegations of state wrongdoing. See this, this and this.

And as I've previously noted, the government is using massive state power to try to redirect people away from even questioning the financial system. See this, this, this and this. Indeed, claims of "national security" are being used to keep criminal fraud hidden and out of public view.

And as Glenn Greenwald points out, the government is already implementing Sunstein's program (starting around 20 minutes into video):


And the government is gaming many of the economic indicators - such as unemployment - and allowing the big financial players to use ipse dixit accounting and sleights of hand, in order to try to convince everyone that things are not that bad, that everything is returning to normal, that the fraud isn't really that widespread. As Warren Buffet noted, when the water level drops, the rocks at the bottom of the river are exposed. In other words, if the true financial conditions of the big financial players - and the U.S. economy - were reported, the massive fraud would be exposed.
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