Thursday, June 11, 2009

Wall Street's False Armistice

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William Greider
June 11, 2009 - The Nation

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The best names in Wall Street banking have announced victory. Their crisis is over, back to business as usual. So why isn't the Obama White House celebrating this good news? Because this may not be a lasting peace for the president and his lieutenants. They are left standing in the mudhole of financial ruin, still surrounded by the failing economy and gradually losing their control over events. The leading bankers worked out a rare deal for themselves that essentially says to the government in Washington "heads we win, tails you lose."

If Jamie Dimon of JPMorgan Chase and Lloyd Blankfein of Goldman Sachs turn out to be correct about the financial crisis, their institutions emerge unscathed and restored to their old dominance over the US economy. Minus a few old rivals who went bust.

If the bankers are wrong, Barack Obama will be the big loser--compelled to rescue them again with still more public money. The big dogs of banking know this, so does the president. That's why he didn't throw his hat in the air when ten of the largest banks were allowed to pay back the emergency aid they received from the feds, some $68 billion. The financiers could thus declare themselves free and clear of the heavy hand of government meddling. Another triumph of free-market capitalism. A brilliant success for Goldman Sachs socialism. Barack Obama is holding the bag for what happens next.

There is rough justice in his predicament. The essential bet Obama made as president was to insist on a "voluntary" approach to rescuing the financial system, picking up the main policies launched by his predecessor. An odd-lot chorus of left and right critics (myself included) urged Obama to step up and employ the full force of government's emergency powers to take charge of the troubled system and direct their behavior. Heal the wounded banks or liquidate them, use government financing to insure the lending and investing needed to finance economic recovery. Don't leave it to the bank executives who will naturally take care of themselves first, maybe the country later.

Obama rejected that option. He was most reluctant to nationalize banks or to assert full control of those zombies that government has had to keep on life support. His political logic was obvious--maintain the appearance of temporary interventions to assist private enterprise and avoid any accusations of left-wing activism. The right called him a socialist anyway.

What are the odds Obama will win his bet? Not so hot right now, despite frequent pep talks from his economic advisers. If you think back to where this crisis began last year and what the authorities described then as their emergency response, big pieces are still missing in action.

Bush's treasury secretary, Hank Paulson, stampeded the Democratic Congress into providing $750 billion to soak up the rotten assets burdening the balance sheets of the largest banks. That plan was not pursued. The rotten assets are still largely there.

Obama's treasury secretary, Timothy Geithner, came up with an alternative approach--a complicated Monopoly game in which government would underwrite private investors to buy up the bad financial paper. That didn't happen either. The bankers let it be known they would not sell the stuff--not at discounted prices, not if it meant admitting the depths of their true losses.

Meanwhile, the government has also ducked the explosive question of derivatives--the casino-like "credit default swaps" that were very, very profitable for banks like JP Morgan Chase but became the time bomb threatening to blow up the entire system. The time bomb is still ticking. The bankers don't want give up that lucrative business. The Obama officials have not yet found the nerve to go against the bankers' desires.

Finally, there is the real economy where most Americans dwell. Obama's team is counting on a recovery in the second half of this year and his advisors keep predicting it with increasing confidence. The president is betting on that too. If his optimism is not confirmed by events, his problems multiply. The stock-market restoration celebrated by the bankers will begin to look like another financial bubble, driven by false hopes. Banking problems will worsen and they will he back for still more bailouts. And President Obama will have to take a second look at his happy assumptions. He might start by replacing some of the cheerleaders.

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William Greider is national affairs correspondent for The Nation. He is author of "Secrets of the Temple: How the Federal Reserve Runs the Country" and, most recently, "Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country."

The Wheels Are Coming Off Obama's and the Democrats' Recovery Program

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Where's the Anger?

Dave Lindorff
June 11, 2009 - Smirking Chimp
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My bank, a small regional institution that was not involved in sub-prime lending, and that was not a recipient of any TARP bailout money, cut off my home equity line of credit two weeks ago. They did it abruptly, with no notice--I only discovered it had happened when I tried to get a $500 advance from it to cover a payment I was making on my credit card. When I asked what was going on, the local branch manager informed me that "we are closing out a lot of credit lines while we reassess the value of houses in this region, which have been falling."

Now, in my particular case this was ridiculous. First of all, in our county, just north of Philadelphia, property prices have been static, but not falling. Furthermore, I had taken out a $160,000 mortgage 12 years ago, and it was now paid down to $60,000, and my balance on the home equity credit line was pretty small, so there was no way that we were in any way "under water"--in fact our equity in our home is much higher than it was 12 years ago.

The bank informed me that it was no problem. I could simply take out a new credit line, at no charge, and transfer the balance on the current line over to the new one. The only hitch: Instead of paying one percent over prime as I had been, I would be paying nearly 4 percent over prime on that balance, effectively doubling the cost of borrowing money.

This kind of thing is going on all across America, as banks that once spread around credit like a Philadelphia Democratic Party ward captain on Election Day, start tightening the screws on individuals and on small businesses.

While the Obama administration and the Treasury and the Fed are bulldozing funds into the coffers of the big banks, allegedly to get them to lend, the banks, from the largest to the smallest, are pulling back, afraid that borrowers will end up going bust on them. So much for economic stimulus efforts.

Not that borrowers have been lining up to get credit. Rather, most people, if they aren't simply going bankrupt or letting collection agents harass them for nonpayment, are trying to pay off credit card balances, and to cut expenses. In April, the savings rate of Americans, which has been negative in recent years as people tried to maintain living standards by borrowing on their credit cards and their homes, boosted their savings rate to a 14-year high of 5.7%. With official unemployment approaching 10%--a level it may hit this month--and real unemployment, as measured the way it used to be back in 1980, at closer to 20 percent, the majority of Americans not only have friends and family members who are unemployed or working part-time or at odd jobs involuntarily, but are worried about getting the axe themselves.

Meanwhile, the short-lived but incredibly expensive Obama rescue program, like a stagecoach at the end of a spaghetti western chase scene, is about to have the wheels fall off and go sliding over a cliff.

Bond yields and commodity prices are spiking as investors are waking up to the reality that massive borrowing by the US Treasury and massive printing of money by the Federal Reserve are going to lead to serious, perhaps even hyper inflation of the dollar. That in turn will force the Fed at some point, probably fairly soon, to raise interest rates, choking off not only those so-called economic "green shoots" that the cheerleading media have been citing as evidence that the recession is "bottoming out," but also even the recent stock market rise, which was being touted as one of those signs of economic "spring." On Tuesday, the interest rate or "yield" on the benchmark 10-year Treasury Bill jumped from 3.86% to 3.98 percent, and at one point went over 4%. Meanwhile, crude oil prices rose to over $70/barrel--an odd thing given the significant decline in demand caused by the global recession, but evidence that investors are anticipating a dollar slump and
aren't interested in supply and demand issues. Other commodity prices are also jumping for the same reason.

News that the big banks that were recipients of hundreds of billions of dollars in federal TARP loans were paying some of that money back to the government in order to be able to go back to their old ways was hardly reassuring. Those banks, like Bank of America and Citibank and Goldman Sachs, are not suddenly healthy. They have used accounting gimmicks to disguise the fact that they are what some economists have dubbed "zombies," with bad debts far in excess of their assets. And they will stay that way, while enriching their top managers with bloated salaries and "bonus" payments, while keeping credit tight and available only to the absolutely best corporate borrowers.

Obama's wars in Iraq and Afghanistan are going from bad to worse. There is no savings coming out of Iraq, as he had claimed would happen during last year's presidential campaign, and even if there were, it's all simply being transferred over to Iraq, where the US war effort is morphing from a small special forces operation into a full-scale war, destined to rival or even surpass the one in Iraq in terms of human and financial costs.

It's all coming unglued, just as the president puts forward his signature program--a health care reform scheme that is supposed to guarantee health care for everyone in the country.

Fat chance that one has. When America's economic house of cards finally really collapses, which looks to be starting to happen now, there simply won't be any cash in the till for health care.

So far, most Americans remain unaware of the scale of this crisis. The news media continue to tout shamelessly whatever signs of recovery they can detect, leaving all those whose personal finances are falling apart to feel like it's just their problem. Astonishingly, given the extent of the joblessness, there has been no national jobs march on Washington, no mass protests over the inadequacy of unemployment benefits, which reach only a minority of workers and are at levels far below what they were in prior recessions, no sit-down strikes at companies that are laying workers off or cutting salaries. The labor movement, such as it is at this point, is so wedded to Obama and the ruling Democrats, and so narrowly focused on trying to win passage of the seemingly doomed Employee Free Choice labor law reform bill, that the unions aren't trying to organize any mass actions to demand economic justice.

Maybe this public passivity in the face of rampant corporate welfare and corporate pillage will come to an end as unemployment benefits begin to run out and unemployment rates continue to climb.

The coach is heading for the cliff, but there is still time for people to jump out.

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Dave Lindorff is the author of Killing Time: an Investigation into the Death Row Case of Mumia Abu-Jamal. His new book of columns titled "This Can't be Happening!" is published by Common Courage Press. Lindorff's new book is "The Case for Impeachment," co-authored by Barbara Olshansky.

Is Israel's Aggression a Question of Pride?

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Ira Chernus
June 11, 2009 - Smirking Chimp

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Suppose Barack Obama really does want to herd the Israelis and Palestinians into serious, fruitful peace negotiations. How could he, or anyone, hope to get an agreement from these seemingly intractable enemies? Two researchers think they've found at least the beginning of an answer.

They asked nearly 4,000 Israelis and Palestinians what kind of peace deal they would accept. When they proposed "rational" bargains, like land for peace or sharing control of Jerusalem, the answers were generally negative. For both sides, the researchers found, the real sticking points are about values that people hold sacred. The tangible issues -- land, resources, political control, and the like -- are only symbols of these sacred values.

That's the best way for the U.S. to understand -- Israeli relations emerging over "natural growth" in the West Bank settlements. In itself it's a relatively small matter. "Natural growth" boosted the settler population by only 3 percent in 2007. Settler families that expand could easily move and find housing elsewhere, as all other expanding Israeli families do.

But the Obama administration has chosen this particular issue as the symbolic gesture Israel must make. And the Israeli government has responded by making "natural growth" the new symbol of all Israel's sacred values.

If they have to give up settlement expansion, what will they have to give up next, they ask. Jerusalem? The Jews' right to have their own state? Perhaps even the state of Israel itself? A people with such a long history of persecution might very well be afraid of losing everything the Jews hold dear. That fear could well explain their intransigence.

Except that's not quite what the research shows. For Israelis -- and for Palestinians -- the crux of the conflict is not about what values each side is afraid of losing and wants to protect. It's about how much they can force the other side to give up.

Most of the respondents on each side demanded a settlement "that involved their enemies making symbolic but difficult gestures." The respondents said they would make concessions as long as "the other side agreed to a symbolic sacrifice of one of its sacred values."

What sacred values? The researchers offered only examples of actions: Palestinians want an apology from the Jews, while Jews want recognition of Israel's right to exist. But what are the deeper values symbolized by these actions? And why is forcing sacrifice from the other side the crucial goal?

I don't know much about the Palestinians. But having grown up in an observant Jewish home, been active in Jewish community life, studied and taught the history of Judaism for decades, and had close relatives living in Israel for decades, I have a pretty good idea of the values driving the Jewish side of the conflict.

One of the key values, perhaps the most important of all, is national pride. And the most cherished symbol of pride is a victory over an enemy -- forcing it to give up something, anything, that symbolizes a loss of its pride.

I first saw this clearly on Yom Kippur 1973. I was in synagogue, observing the holiest day of the Jewish year, when I heard that the Egyptians had crossed the Suez Canal and attacked the Israeli troops stationed on the other side. My immediate response was something like this:

The Israelis are at the Suez Canal because they captured the Sinai Peninsula in the Six Day War in 1967. Why do the Egyptians want the Sinai back? It's a barren desert with no resources of any value. So I jumped to the conclusion (as a young man I was quicker to make assumptions about people I didn't know or understand) that the Egyptians did not want the land back. They wanted their national pride back. They had been humiliated in '67, and now they were going to recoup their self-esteem.

Therefore, I said, the Israelis can gain a huge advantage by withdrawing to the 1967 border, letting Egypt have the Sinai, throwing up their hands and crying "We lost!" They would have lost nothing of value. The Egyptians would be content. The way would be open for peace and security.

A few years later, the Israelis did give Sinai back to Egypt as part of a peace deal, and few Israelis expressed any regrets. How much easier to have done it on Yom Kippur 1973 and saved all that bloodshed.

But when I shared my logical solution with others in the synagogue, they simply didn't get it. I had no more success with my best friend, as I drove him to JFK Airport so he could fly back to Israel and rejoin his army unit for the Sinai war. To most Jews then, as to most Jews now, it was just obvious that when the enemy attacks, you fight back and inflict a loss on the attacker. That's how you bolster your national pride.

Is national pride a truly sacred value? Few Jews will say so directly. But for many Israeli Jews, and for most American Jews since the Six Day War, religion and nationalism have been intertwined. The theologian Emil Fackenheim fused them in his very influential idea that, since the Holocaust, God has given the Jews a new commandment that trumps all others: The Jewish people must survive as a distinct people, or else Hitler's goal of a Jew-free world will be realized.

Now Israel is the fundamental symbol of Jewish survival. So Israel's war victories have an "inescapably religious dimension" because they keep Israel safe from destruction.

But when I heard Fackenheim speak a few years after the Yom Kippur war, I discovered that his real belief was rather different. Someone in the audience asked a question: "You say that Israel must fight its enemies to insure Jewish survival. Yet what guarantee is there that Israel will win every war and always insure Jewish survival?"

The distinguished theologian gave this rather shocking reply: "There is no guarantee. Israel may indeed be destroyed. But the important point is that next time we will go down fighting."

There was no need to spell out the obvious implication: If we go down fighting, we can feel proud of ourselves, even if the last Jew disappears from the earth. Survival is not as sacred to us as pride, and pride comes from fighting the enemy. "Never Again" means never again will we let ourselves be shamefully herded to slaughter without resisting to the last woman and man.

This commitment has always been a central pillar of Israeli life. The widely admired, recently deceased Israeli author Amos Elon wrote (in his 1971 best-seller, The Israelis) that the memory of the Holocaust "explains the obsessive suspicion [and] the towering urge for self-reliance" that marks Israeli Jews. But he added that the same memory also plagues Israelis with "a suspended confusion, a neurotic constriction ... compounded by pangs of conscience, guilt and shame."

Israeli children are taught in school about "the disgraceful shame and cowardice" of all victims of anti-Semitic massacres in the Diaspora, to convince them that only a Jewish state with an invincible army could take away the shame. And Israelis exaggerate the degree of Jewish resistance to the Nazis because it "seems essential to their dignity as a group."

Elon knew that the theme of shame and pride lay at the very root of Zionism. In his biography of Theodore Herzl, he claimed that the father of the Zionist movement was motivated, above all, by "wounded pride" -- being denied what he thought was his rightful place among the elite of European society, simply because he was Jewish. Herzl was well aware that he was making national pride a sacred symbol. He urged the early Zionists to "turn the Jewish question into a question of Zion."

Even earlier, the first important Zionist writer, Leo Pinsker, told the Jews (in his famous tract "Self-Emancipation"): "You are foolish, because you expect of human nature something which it has never had -- humanity. You are also contemptible, because you have no real self-esteem and no national self-respect. National self-respect! Where can we find it?" Pinsker's answer, the answer of most Zionists ever since, was: only in a nation-state of our own.

Pinsker's words and Herzl's wounded pride reveal one root of the profound dilemma that has kept Israel trapped in a seemingly irrational cycle of intransigence and conflict for all these years. It is shameful and contemptible to let oneself fall victim to persecution, the argument goes. But Gentiles will always be persecutors. So Jews living in Diaspora will always feel shame and self-contempt. The mistake that Pinsker, Herzl and most other Zionists made was to assume that a state of their own would free them from this trap.

Instead, the state became a projection of the individual Jew, writ large. And the surrounding Arab nations became projections of individual Gentiles. Since Gentiles were by definition persecutors (according to the dominant Zionist worldview), the inevitable political conflicts between Israel and neighboring Arab peoples were bound to be seen as merely more of the same old persecution and victimization, bringing with it the same sense of shame.

Every tangible goal of Israeli policy became a symbol of the ultimate goal: defeating the Gentiles in order to escape from shame, to gain pride and self-respect.

Today, Israel pursues that aim by demanding the right of "natural growth" in its West Bank settlements. In other words, Israel wants the Palestinians to accept not merely the settlements that exist, but the larger settlements planned for the future, along with abandoning Jerusalem and the right of return. Inevitably, the Palestinians balk at such drastic sacrifices.

For most Jews, every such refusal becomes further "evidence" that the Palestinians are moved by the same irrational anti-Semitism that Jews suffered in Diaspora. To fail to resist it would only increase the sense of shame. So resist the Jews must, no matter what the rest of the world thinks of such intransigence. Indeed, since the rest of the world is Gentile, defying world opinion reaps the benefit of added pride.

And what if the other side does accede to Israeli demands? When the researchers asked Prime Minister Benjamin Netanyahu about a rational bargain -- accepting a two-state solution in return for all major Palestinian factions (including Hamas) recognizing Israel as a Jewish state -- he answered by demanding further sacrifice: "O.K., but the Palestinians would have to show that they sincerely mean it, change their textbooks and anti-Semitic characterizations."

There's more here than distrust of the enemy. Since the whole process is in the realm of symbolism, no tangible gain may ever be enough.

The ideology formulated by Pinsker has become a viciously self-confirming cycle. Israeli leaders fear that anything less than intransigence will cost them dearly at the polls. Unable to turn from resistance to reconciliation, they lock their nation into ongoing conflict and all the insecurity it brings.

Most Israelis do feel insecure. They fear that Palestinians and other Arabs will attack them, if given a chance. But a mere glance at the immense military advantage Israel has over all its neighbors makes that fear seem irrational.

It all becomes far more understandable if we recognize that what most Israelis fear, above all, is losing not their land or even their lives, but their very tenuous sense of national pride. Couple that with a natural desire to blame all the problems on the other side, so that Jews can feel morally pure and innocent, and it's hard to see how they can break out of this vicious cycle.

Are Palestinians caught in the same trap? The researchers who studied both sides found them equally focused on inflicting symbolic defeats on the other side. Perhaps Palestinians are as afraid, as are Israelis, of losing their pride. Perhaps that's why Hamas leaders resist formal recognition of Israel, even though they have clearly signaled their de facto acceptance of the Jewish state for several years and affirm the same view now. But that is for Palestinians and those who know them well to say. If it does turn out that the two sides are mirror images of each other, the conflict might seem even more insoluble.

Yet, the researchers who collected all this data suggest a more hopeful view. Once mediators from outside, like George Mitchell, the U.S. special envoy to the Middle East, and former British Prime Minister Tony Blair, understand that all the tangible issues in dispute are basically counters in a symbolic contest, they can begin to work with both sides more constructively.

In principle, anything can serve equally well as a symbolic counter. So no specific issue need be a sticking point. A truly skilled mediator could identify assets that each side could afford to lose, from a practical point of view, and suggest that they be sacrificed in a show of graceful concession.

Then each side could do what I wish the Israelis had done way back in 1973: throw up its hands, cry "We lost!" this or that or some other thing, and give the other side a reason to feel proud of its victory. As implausible as it sounds, that may be the only way to Middle East peace.

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Ira Chernus is Professor of Religious Studies at the University of Colorado at Boulder and author of American Nonviolence: The History of an Idea and the forthcoming book "Monsters to Destroy: The Neoconservative War on Terror and Sin."

Zen Proverb of the Day

Will there be Zimbabwe-type Hyperinflation in the U.S.A.?

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Mike Whitney
June 10, 2009 - Smirking Chimp

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The Republicans are convinced that hyperinflation is just around the corner, but don't bet on it. The real enemy is deflation, which is why Fed chief Bernanke has taken such extraordinary steps to pump liquidity into the system. The economy is flat on its back and hemorrhaging a half a million jobs per month. The housing market is crashing, retail sales are in a funk, manufacturing is down, exports are falling, and consumers have started saving for the first time in decades. There's excess capacity everywhere and aggregate demand has dropped off a cliff. If it wasn't for the Fed's monetary stimulus and myriad lending facilities, the economy would be stretched out on a marble slab right now. So, where's the inflation? Here's Paul Krugman with part of the answer:

"It's important to realize that there's no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger....

Is there a risk that we'll have inflation after the economy recovers? That's the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt - that is, drive up prices so that the real value of the debt is reduced....Such things have happened in the past....

Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens (but)... there's no sign it's getting traction with U.S. policy makers now." ("The Big Inflation Scare" Paul Krugman New York Times)

Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama's recovery plan off-course. But even he's mistaken, there's little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed's liquidity is sitting idle in bank vaults instead of churning through the system as Bernanke it could do some good. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can't get it; while the people who qualify, don't want it. It's just more proof that the slowdown is spreading.

That doesn't mean that the dollar won't tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly 3 month Treasuries. If Bernanke steps up his quantitative easing (QE) and continues to monetize the debt, there's a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if keeps printing money like he has been, there's going to be a run on the dollar.

Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That's pushing up yields on long-term notes which could potentially short-circuit Bernanke's plans for reviving the economy. Mortgage rates are set off the 10 year Treasury, which shot up to 3.90% by market's close on Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week's auctions will be a good test of how much interest there really is in US debt.

At some point in the next year, the dollar will lose ground and commodities will surge, causing uneven inflation. But for how long? That depends on the state of the economy. Dollar weakness and speculation can drive up the price of oil, (oil is up 100% in the last two and a half months, from $34. to $68.) but falling demand will eventually bring prices back to earth. Presently, there's a bigger glut of oil sitting in tankers offshore than anytime in the last 15 years. Which brings us back to the original question; how bad is the economy?

The answer is, really bad! Here's a short blurp from economist Dean Baker in an article in the UK Guardian:

"The decline in house prices since the peak in 2006 has cost homeowners close to $6 trillion in lost housing equity. In 2009 alone, falling house prices have destroyed almost $2 trillion in equity. People were spending at an incredible rate in 2004-2007 based on the wealth they had in their homes. This wealth has now vanished.

Housing is weak and falling, consumption is weak and falling, new orders for capital goods in April, the main measure for investment demand, is down 35.6 percent from its year ago level. And, state and local governments across the country, led by California, are laying off workers and cutting back services.

If there is evidence of a recovery in this story it is very hard to find. The more obvious story is one of a downward spiral as more layoffs and further cuts in hours continue to reduce workers' purchasing power. Furthermore, the weakness in the labor market is putting downward pressure on wages, reducing workers' purchasing power through a second channel. (Dean Baker "Cheerleading the Economy" UK Guardian)

Don't be fooled by the cheery news in the media. The economy is hanging by a thread and recovery is still a long way off. The only way to dig out of this mess is to address the underlying problems head-on. That means removing the toxic assets from the banks, revamping the credit system, and rebuilding battered household balance sheets. If these issues aren't resolved, the problems will drag on for years to come. And even if they are fixed, the economy is still facing a long period of deleveraging and retrenching followed by an anemic recovery. Obama's fiscal stimulus might give GDP a jolt in the third quarter, but without help from the government checkbook, economic activity will stay in the doldrums.

Last month, personal savings increased to nearly 6 percent while consumer credit fell by $15.7 billion, the second largest decline in debt on record. According to Brad Setser of the Council on Foreign Relations, "Total borrowing by households and firms fell from over 15% of GDP in late 2007 to a negative 1% of GDP in q4 2008." How can these losses to GDP be made up when private borrowing has vanished without a trace? Consumers have shut their wallets, locked their purses and are refusing to take on any more debt. Despite government efforts to restart the credit markets by backing up loans for 0% financing on auto sales and $8,000 tax credit on the purchase of a new home, (which is tantamount to subprime lending) consumers are digging in their heels. All the hype about inflation hasn't sent them racing back to the shopping malls or the auto showrooms. Consumers have reached their saturation point and they are not budging. It's the end of an era.

The unemployment picture is getting bleaker and bleaker. Last week's report from the Bureau of Labor Statistics concealed the real magnitude of the job losses by using the discredited "Birth-Death" model which exaggerates the number of people reentering the workforce. Here's what former Merrill Lynch chief economist David Rosenberg had to say about Friday's BLS report:

"The headline nonfarm payroll figure came in above expectations at -345,000 in May - the consensus was looking for something closer to -525,000. The markets are treating this as yet another in the line-up of 'green shoots' because the decline was less severe than it was in April (-504,000), March (-652,000), February (-681,000) and January (-741,000). However, let's not forget that the fairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added 220,000 to the headline - so adjusting for that, we would have actually seen a 565,000 headline job decline."

The BLS figures have been denounced by every econo-blogger on the Internet. The figures are another example of the government's determination to airbrush any unpleasant news about the recession. Here's a better summary of the unemployment numbers from Edward Harrison at credit writedowns:

The Business Birth-Death Model added 220,000 jobs to the headline seasonally-adjusted number. Without this number, we are looking at a loss of 565,000 jobs....The number of jobs lost in the last 12 months increased from 5.34 million in April to 5.51 million in May....Other indicators suggest that the shadow supply of discouraged workers not counted in the numbers will now return to the labor force, pushing up the unemployment number. For example, the U-6 unemployment number was a gargantuan 16.4 %, the highest ever."(Edward Harrison credit writedowns)

Unemployment now stands at 9.4% (16.4%?) and will continue to rise whether there's an uptick in economic activity or not. Businesses are shedding jobs at record pace, and slashing hours at the same time. The average workweek slipped to 33.1 hours (down 2 hours from April) a new low. It goes without saying, that unemployment is highly deflationary because jobless people have to cut out all unnecessary spending. Beyond the 500,000 layoffs per month; wages and benefits are also under pressure, making a rebound in consumer spending even less probable. This is from Brian Pretti's article "Place Your Wagers":

"The year over year change in the Employment Cost Index (ECI) is the lowest number in the history of the data.... in the absence of household credit acceleration... aggregate demand (will fall)

The year over year change in wages has never been this low in the records of the data. .. Wages and salaries.... are all in negative rate of change territory. They are ALL contracting year over year.

Absent household balance sheet reacceleration in leverage it sure seems a good bet forward corporate earnings are now as dependent on household wages, salaries and broader personal income as at any time in recent memory. And corporations to protect margins and nominal profits are pressuring wages and salaries downward." ("Place Your Wagers" Brian Pretti, Financial Sense Observations)

From a workers point of view, things have never been worse. Demand is falling, employers are slashing inventory and handing out pink slips, and entire industries are being boarded up and shut down or shipped overseas. Economists Barry Eichengreen and Kevin O'Rourke make the case that, in many respects, conditions are deteriorating faster now than they did in the 1930s. Here's what they found:

*1  World industrial production continues to track closely the 1930s fall, with no clear signs of 'green shoots'.

*2  World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.

*3  The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around. (A Tale of Two Depressions" Barry Eichengreen and Kevin O'Rourke VOX) http://www.voxeu.org/index.php?q=node/3421

Their conclusion: "Today's crisis is at least as bad as the Great Depression."

Yeah, times are tough, but what happens when housing prices stabilize and the jobs market begins to pick up; won't that put the Fed's trillions of dollars into circulation and create Wiemar-type hyperinflation?

Many people think so, but Edward Harrison anticipates a completely different scenario. The author takes into account the psychological effects of a deep recession and shows how trauma can have a lasting effect on consumer habits, thus, minimizing the chance of inflation. It's a persuasive thesis. Here's what he says:

"Richard Koo goes further in his book "The Holy Grail of Macro Economics". Here, he argues that the unwind of great bubbles suffers from what he labels a 'balance sheet recession.' In essence, companies go from maximizing profits, as they had done in normal times, to a post-bubble concern of reducing debt. Regardless of how much priming of the pump monetary authorities do, the psychology of debt reduction will limit the effectiveness of monetary policy as a policy tool.

In my view, the catalyst for this change of psychology is the 'debt revulsion' that ushers in the panic phase of an asset bubble collapse. (Charles Kindleberger highlights the various stages of a bubble and its implosion in his seminal book "Manias, Panics and Crashes". In this particular bubble, debt revulsion began post-Lehman Brothers. What we have seen, therefore, is a reduction in leverage and debt as the most leveraged players have gone to the wall. But, more than that, the household sector has gotten religion about debt reduction as the savings rate has increased dramatically since Lehman. In fact, I would argue that companies learned their lesson about debt from the aftermath of the tech bubble. It is the household sector in the U.S. (and the U.K.) which is heavily indebted. Therefore, if the psychology of a balance sheet recession does take form, it will be the household sector leading the charge.

In sum, the psychology after a major bubble is very different than the psychology before its collapse. The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some to come." (Edward Harrison, "Central banks will face a Scylla and Charybdis flation challenge for years" Credit Writedowns)

Seductive interest rates, lax lending standards and nonstop public relations campaigns, persuaded millions of people that they could live beyond their means by simply filling out a credit app. or fudging a few numbers on a mortgage loan. These are the real victims of Wall Street's speculative bubble-scam. For many of them, the agony of losing their home, or their job, or filing for personal bankruptcy will be felt for years to come. At the same time, the experience will keep many of them from getting in over their heads again. The same phenomenon occurred during the Great Depression. The pain of losing everything shapes behavior for a lifetime, which is why the savings rate has spiked so dramatically in the last few months. There's been a tectonic shift in attitudes towards consumption and there's no going back to the pre-bubble era.

If Harrison is right, our decades-long spending-spree is over and people will be looking for ways to live more modestly, pay-as-they-go and avoid red ink. This is good news for the economy's long-term strength, but bad for short-term recovery. Deflation will persist even while savings grow and consumption comes more into line with personal income. The dollar will fall hard if Bernanke continues to load up on Treasuries, but with a few slight adjustments, he should be able to avoid a full-blown currency crisis. Thus, Zimbabwe-type hyperinflation is unlikely; the ongoing slowdown should keep inflation in check.

U.S. War Privatization Results in Billions Lost in Fraud, Waste and Abuse--Report

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Half of the personnel the US has working on its wars in Iraq and Afghanistan are private contractors. A new report reveals how much of a rip-off this system has been to US taxpayers.

Jeremy Scahill
June 10, 2009 - RebelReports

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At a hearing in Washington today, the federal Commission on Wartime Contracting in Iraq and Afghanistan is releasing a 111-page report that represents its "initial investigations of the nation's heavy reliance on contractors." According to a release on the hearing:

More than 240,000 contractor employees, about 80 percent of them foreign nationals, are working in Iraq and Afghanistan to support operations and projects of the U.S. military, the Department of State, and the U.S. Agency for International Development. Contractor employees outnumber U.S. troops in the region. While contractors provide vital services, the Commission believes their use has also entailed billions of dollars lost to waste, fraud, and abuse due to inadequate planning, poor contract drafting, limited competition, understaffed oversight functions, and other problems.

These statistics support a recent DoD report on the extent of the US reliance on contractors. That report also found that there has been a 23% increase in the number of "Private Security Contractors" working for the Department of Defense in Iraq in the second quarter of 2009 and a 29% increase in Afghanistan, which "correlates to the build up of forces" in the country. In Iraq, the Pentagon attributes the increase to better accounting. There are currently more private contractors (counting both armed and unarmed) in Afghanistan (68,197) than US troops (40,000). In Iraq, the number of contractors (132,610) is basically equal to the number of US troops.

(NOTE: I recently discussed this issue on Bill Moyers Journal)

The single greatest beneficiary of the US wars in Iraq and Afghanistan is KBR, the former Halliburton subsidiary. KBR has been paid nearly $32 billion since 2001. In May, April Stephenson, director of the Defense Contract Audit Agency, testified that KBR was linked to "the vast majority" of war-zone fraud cases and a majority of the $13 billion in "questioned" or "unsupported" costs. According to Agency, it sent the inspector general "a total of 32 cases of suspected overbilling, bribery and other violations since 2004."

According to the Associated Press, which obtained an early copy of the commission's report, "billions of dollars" of the total paid to KBR "ended up wasted due to poorly defined work orders, inadequate oversight and contractor inefficiencies."

KBR is at the center of a lethal scandal involving the electrocution deaths of more than a dozen US soldiers, allegedly as a result of faulty electrical work done by the company. The DoD paid KBR more than $80 million in bonuses for the very work that resulted in the electrocution deaths.

Among the other scandals involving KBR that the commission is investigating is a questionable contract to rebuild a large dining facility at Camp Delta in Iraq:

In July 2008, the Army said a new dining facility was badly needed at the Camp Delta forward operating base because the existing one was too small, had a saggy ceiling, poor lighting and an unsanitary wooden floor.

KBR was awarded a contract in September. Work began in late October as American and Iraqi officials negotiated the agreement setting the dates for the U.S. troop withdrawal.

But during an April visit to Camp Delta, the commission learned that the existing mess hall had just been renovated. The $3.36 million job was done by KBR and completed in June 2008. Commission staff toured the renovated hall "without seeing or hearing of any problems or shortfalls," the report says.

Here's the kicker:

The decision to push ahead with the new hall was based on paperwork that was never updated and a failure to review the need for the project after the security agreement was signed. Most of the materials have been ordered and construction is well under way. That means canceling the project would save little money because KBR would have a legitimate claim for payment based on the investment it has already made.

So, are all these investigations and scandals hurting KBR? Apparently not:

Today, neither Halliburton nor KBR are suffering from their divorce. Halliburton reported $4 billion in operating profits in 2008, while KBR recently said its first quarter revenues in 2009 were up 27%, for a total of $3.2 billion. Its sales in 2008 were up 33%, and according to the Financial Times, the company had $1 billion in cash, no debt, and was looking for acquisitions.

One last note for context: While the Wartime Contracting Commission is doing very important work revealing the scope of the corruption, shoddy work and abuses within this system, it also includes several members who are either pro-war or have worked for major war contractors. This is the composition of the commissioners:

Co-chair Michael J. Thibault, a former deputy director of the Defense Contract Audit Agency, was appointed by Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi. Former Republican Congressman Co-Chair Shays was appointed by House Minority Leader John Boehner. The other six commissioners are Clark Kent Ervin, Grant S. Green, Linda J. Gustitus, Robert J. Henke, Charles Tiefer, and Dov S. Zakheim.

Blackwater Still Working in Iraq for the International Republican Institute, According to New Lawsuit

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As Blackwater gets sued again today for an alleged civilian killing in Iraq, new allegations surface about the company's continued presence there—using different corporate names.

Jeremy Scahill
June 10, 2009 - RebelReports

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It seems as though every week there is a new lawsuit filed against Blackwater for the killing of civilians in Iraq. While the Justice Department has failed to prosecute most of these cases (the September 2007 Nisour Square massacre being an exception), attorney Susan Burke has dedicated a substantial part of her practice to holding the company responsible for its crimes. She works in cooperation with the Center for Constitutional Rights.

Not only is Burke representing the victims of Nisour Square in their civil suit, and the family of an Iraqi guard allegedly murdered by a drunken Blackwater operative, but she has filed at least a half a dozen other cases against the company. "Erik Prince, a modern-day merchant of death, acts as if he is above the rule of law," charges Burke.

But beyond the specifics of her lawsuits, Burke is also alleging Blackwater/Xe remains firmly entrenched in Iraq, using affiliate companies like Greystone. She also says Blackwater is working for a "non-profit" organization, started under the Reagan administration, with a history of interference in internal affairs and elections of various nations, including allegations it helped foment a coup in Haiti: the International Republican Institute.

"The Iraqi government has barred Xe-Blackwater from operating in Iraq, and has refused to grant the licenses needed to carry weapons in Iraq," Burke says.  "Yet Prince continues to provide armed personnel to the International Republican Institute. Such repeated illegal conduct by Prince must be stopped."

According to SourceWatch:

Loosely affiliated with the Republican Party, the International Republican Insitute (IRI) works closely with the the National Endowment for Democracy and United States foreign policy instruments, including the U.S. Department of State and U.S. Agency for International Development, to support economic and political development programs around the world. The organization is almost exclusively funded by the U.S. government and related agencies.

IRI is also closely linked to Sen. John McCain. According to IRI's vice president, "Since the summer of 2003, IRI has conducted a multi-faceted program aimed at promoting democracy in Iraq. Toward this end, IRI works with political parties, civil society groups, and government officials and administrators. In support of these efforts, IRI also conducts numerous public opinion research projects and assists its Iraqi partners in the production of radio and television ads and programs." One IRI grant recipient in Iraq told author Nikolas Kozloff, "Instead of promoting impartial, better understanding of certain ideas and concepts, they [the IRI] are actually trying to further the cause of the Republican administration." Kozloff notes that in 2005-6 Blackwater donated $30,000 to IRI.

These new allegations surfaced today as Burke filed yet another lawsuit against Blackwater-Xe—this one over a 2007 civilian shooting in Iraq. Burke alleges that "Xe-Blackwater 'shooters' operating in Hilla, Iraq unnecessarily fired shots, killing Husain Salih Rabea and traumatizing Ali Kareem Fakhri, a student at the Babylon University College of Biology."

According to the lawsuit, the men were shot at as they drove in separate vehicles on a public roadway on August 13, 2007. Mr. Rabea died from the gunshot wound, leaving behind five sons and three daughters.

The complaint, which was filed today in U.S. District Court for the Eastern District of Virginia, alleges that Blackwater/Xe:

• continues to flout Iraqi law and operate without a license by continuing to provide armed men  under contract to protect employees of the International Republican Institute, an American government-funded organization,

• tries to hide its continued illegal operations in Iraq by using the Greystone name rather than the Blackwater or Xe name,

• captured illegal conduct of personnel on videotape and audiotape, but did not report or punish the illegal conduct of "shooters" and instead intentionally destroyed the evidence of illegal conduct, and encouraged the "shooters" to do the same.

Blackwater affiliate, Greystone, which Burke alleges is still operating in Iraq, is covered in-depth in my book, Blackwater: The Rise of the World's Most Powerful Mercenary Army, is registered offshore in Barbados. It is an old-fashioned mercenary operation offering "personnel from the best militaries throughout the world" for hire by governments and private organizations. It also boasts of a "multi-national peacekeeping program," with forces "specializing in crowd control and less than lethal techniques and military personnel for the less stable areas of operation."

The most recent lawsuit names as defendants 12 companies or entities owned by Erik Prince. It alleges "war crimes, assault and battery, wrongful death, intentional infliction of emotion distress, negligent infliction of emotional distress, negligent hiring, training and supervision, and tortious spoliation of evidence."