Today's Effort-- Notes and Resources

Credi Score Computation

2011-06-28T17:23:00.000-07:00

Credit scores are calculated through complicated and proprietary algorithms that differ among scoring agencies. However, there are generally three major pieces.

The most important: your bill-paying history. It accounts for as much as 35% of your total score. Pay all your bills on time. Even if it's just the minimum payment, make sure that bill is marked paid on the designated date, or sooner.

Next, your "utilization rate," or debt-to-available-credit ratio, counts for about 30% of your score. Mr. D'Arruda says his is usually about 10% to 15%. Creditors don't want to see the ratio over 30% and consider it an important sign of your financial acumen and any money challenges you are facing.

"You don't need a lot of credit cards to have a good utilization rate," says Barry Paperno, consumer operations manager for myFICO.com, the consumer arm of credit scorer FICO. "Obtaining 25 credit cards for your score is overkill. Utilization looks at percentages more than dollars."

If you have $300,000 in available credit and a $30,000 balance, your utilization rate is 10%; if your available credit stands at $3,000 and you owe $300, your utilization rate is the same.

Be wary of your per-card rate, too. If you have a credit card with a $5,000 limit and you charge $4,750 for a home-theater system, your utilization rate on that card may set off alarms.

"It's a good idea to try to keep the balance on each card under 30% of the limit," says Steven Katz, senior director of operations for credit-management company TransUnion.

Having access to credit but not using it won't improve your score, but that doesn't mean you have to carry a balance each month. You simply need to use the card and pay it off to maximize your credit score.

"The ideal place to be is under a 10% utilization rate but over 0%," FICO's Mr. Paperno says. "There needs to be some kind of recent activity" to activate a score.

Your credit mix and history contribute about 15% to your score. Creditors like to see how you handle revolving credit, or credit cards, and installment loans, like mortgages and car and student loans. They average the age of the account divided by the number of accounts.

Opening new accounts can affect about 10% of your score. "Taking on new credit has been shown to indicate a higher level of risk," Mr. Paperno says. "People who go into default tend to have added new credit more recently than those who haven't."

http://online.wsj.com/article/SB10001424052702304451504576394093505289846.html

Declining Marginal Utility: More Workers than Unproductive Jobs

2011-04-07T23:41:00.000-07:00

The Servant Problem
In Search of the Lost Battalion of America’s Unemployed
By Lewis H. Lapham

published @ tomdispatch.com on 4/11/2011

[A longer version of this essay appears in "Lines of Work," the Spring 2011 issue of Lapham's Quarterly.]

Man must be doing something, or fancy that he is doing something, for in him throbs the creative impulse; the mere basker in the sunshine is not a natural, but an abnormal man. -- Henry George

The news media these days look to outperform one another in their showings of concern for the lost battalion of America’s unemployed. Consult any newspaper, wander the Internet or the television talk-show circuit, and at the top of the column or the hour the headline is jobs. Jobs, the bedrock of America’s world-beating prosperity, the cornerstones of its future comfort and well-being -- gone to Mexico or China, deleted from payrolls in Michigan and Ohio, mothballed in the Arizona desert.

The nation’s unemployment rate, officially pegged at 9.4% but probably nearer to 17%, in any event no fewer than 25 million Americans, a number more than equal to the entire population of North Korea, out of work or on the run. The metrics, so say President Obama, the Wall Street Journal, and A Prairie Home Companion, are not good. The stock markets may have weathered the storm of the recession, as have the country’s corporate profit margins, but unless jobs can be found, we wave goodbye to America the Beautiful.

Not being an economist and never having been at ease in the company of flow charts, I don’t question the expert testimony, but I notice that it doesn’t have much to do with human beings, much less with the understanding of a man’s work as the meaning of his life or the freedom of his mind. Purse-lipped and solemn, the commentators for the Financial Times and MSNBC mention the harm done to the country’s credit rating, deplore the trade and budget deficits, discuss the cutting back of pensions and public services. From the tone of the conversation, I can imagine myself at a lawn party somewhere in Fairfield County, Connecticut, listening to the lady in the flowered hat talk about the difficulty of finding decent help.

Speaking Tools Versus Busy Bees

The framing of the country’s unemployment trouble as an unfortunate metastasis of the servant problem should come as no surprise. The country is in the hands of an affluent oligarchy content with Voltaire’s observation that “the comfort of the rich depends upon an abundant supply of the poor.” During Ronald Reagan’s terms as president, the income that individual American families received from rents, dividends, and interest surpassed the income earned in wages. Over the last 30 years, the wealth of the emergent rentier class has been sustained by an increasingly unequal sharing of the gross domestic product; the percentage of GDP accounted for by manufacturing fell from 21% to 14%, and the percentage accounted for by finance rose from 14% to 21%.

The imbalances become greater over time; as between compensations awarded to the high-end baskers in the sunshine and those provided to the low-end squatters in the shade, the differential at last count in 2009 stood at 263 to 1. With wealth comes power in Washington, so it’s also no surprise that the government, whether graspingly Republican or scavengingly Democratic, adopts the attitudes and prejudices of the monied sultanate. So do most of the nation’s news media, their showings of concern expressed in the lawn-party voices of the caterers distributing the strawberries.

The lines of work are as numberless as the hooks in the sea, but they divide broadly into employments bent to one’s own purpose and those bound to a purpose other than one’s own. It is the former that reflects the founding idea of America. The Puritan settlers of the seventeenth-century New England wilderness arrived from an old world in which the civilizations both east and west of Suez fetched their food and shelter from the work of variously denominated slaves.

The ruling classes of antiquity, like those in medieval and early Renaissance Europe, regarded the necessity of having to earn a living as a mortification of the body and a degradation of the mind. Aristotle had classified slaves as “speaking tools,” available for every purpose except their own, and for the next 2,000 years, in Asia as in Europe, it was generally understood that the terms of a man’s employment were settled at birth. The newfound land of North America afforded an escape from the burdens of the past imposed by the divine right of inherited privilege as well as those enforced by Barbary pirates and British naval officers, the architects of the New Jerusalem bringing with them the Protestant belief that it was by a man’s work that he was known, not only to himself, but also to God and to his fellow men.

On no less an authority than that of John Calvin, they had been given to understand that there was “no employment so mean and sordid (provided we follow our own vocation) as not to appear truly respectable and be deemed highly important in the sight of God.” The thought embraced St. Benedict’s Catholic certainty that “Idleness is the enemy of the soul,” as well as the meditation of the Roman emperor Marcus Aurelius, who likens the work for which men are by their nature born to that of “craftsmen who love their trade,” equivalent in turn to that of the “sparrows, ants, spiders, bees, all busy at their own tasks, each doing his own part toward a coherent world order.”

Further searches for a coherent world order on the western shores of the Atlantic encouraged the authors of the Constitution to conceive the document as a tool turned to the making of things, of laws as well as of ships and cider mills and songs. As with the plow and the surveyor’s plumb line, the instruments of government were meant to support the liberties of the people, not the ambitions of the state. In answer to questions being asked in Europe about what sort of persons were likely to be well received in the new republic, Benjamin Franklin in 1782 published a pamphlet, Information to Those Who Would Remove to America, in which he observed that in America people “do not inquire concerning a stranger, What is he? but, What can he do? If he has a useful art, he is welcome… But a mere man of quality, who on that account wants to live upon the public by some office or salary will be despised and disregarded.”

The love of country followed from the love of its freedoms of thought and action, not from a pride in its armies, its monuments, its manners, or its debts. Thomas Jefferson, writing his Notes on the State of Virginia in 1781, envisioned a republic of free-standing husbandmen who till the earth, “the chosen people of God… whose breasts He has made His peculiar deposit for substantial and genuine virtue.” The newfound land and its newfound independence both were to be cultivated by employments bent to purposes of the individual, their joint venture resting on a democratic holding of one’s fellow citizens in thoughtful regard not because they were rich or beautiful or famous but because they were fellow citizens.

The Elephant on the Table of American Politics

So at least was the spirit and intent if not always the practice or the case. In return for the Constitution’s ratification by the Southern slave-holding states, the politicians in Philadelphia in 1789 had compromised the principle that all men are created free and equal. They assumed that slavery was soon to become extinct, certain to be swept away on the rising tide of freedom, and so they allowed the Southern planters to temporarily retain their prize collections of speaking tools.

The invention of the cotton gin in 1793 remanded the case for liberty to the higher court of money. Between 1800 and 1860 the demand for cotton on the part of Britain’s satanic textile mills furnished the newly minted United States with its richest flow of capital, serving the purpose that the Saudi Arabians now extract from oil. The opulence of the trade (60% of America’s export in 1860), in large part conducted, to their immense profit, by New York banks and New England ship owners, financed the country’s westward expansion and the early development of its commerce. Without cotton, there would have been no industry, and without slavery, no cotton.

The “darkies” said by Stephen Foster to be singing sweetly in the fields subsidized the music that Walt Whitman heard elsewhere in the country in the singing of “the carpenter,” “the deckhand,” “the mason,” “the shoemaker,” “the hatter,” “the woodcutter,” and “the plowboy” -- the voices of America’s leaves of grass, the fellow citizens in the 1830s and 1840s plying trades in Massachusetts and Ohio, felling trees and building roads in Illinois, piloting Missouri and Mississippi River steamboats, tinkering with farm equipment and firing pins, going west to Texas and California.

Victory in the war with Mexico added another 529,017 square miles â€¨to the inventory of spacious skies and purple mountain majesties acquired in the Louisiana Purchase; the population went forth and multiplied (9,638,453 in 1820; 31,443,321 in 1860), its restless collective energies geared to vocations apt to prove to be their own reward. Frontier people holding fast to what Mark Twain later claimed as “a maxim of mine that whenever a man preferred being fed by any other man to starving in independence, he ought to be shot.”

During the second half of the nineteenth century, the shooting would have needed to become extensive. The Civil War had rousted slavery from the plantations of the South, but the industrial revolution in the North required an even greater supply of hired hands bound to purposes other than their own. The employments on offer in the Kentucky coal mines and the Pennsylvania steel mills matched Karl Marx’s job description of alienated labor -- a “diabolical activity,” entailing the loss of self. “What is animal becomes human and what is human becomes animal.”

How then to accommodate both man and beast under the same beach umbrella of the American dream, make the freedom-loving argument that Franklin’s craftsmen and Jefferson’s husbandmen differ only in their angles to the sun from the hostess in the bunny costume checking coats in a Playboy club? By the turn of the twentieth century, the question of what constitutes the meaning of labor as well as a fair return on its performance was the elephant on the table of American politics.

An alienated proletariat had been imported from China to build America’s western railroads, from Ireland and Eastern Europe to service its eastern factories, and between 1870 and 1914, the bitter, often violent division between the differently purposed lines of work was made manifest in the financial markets and the streets. The great railroad strike in 1877 moved Thomas Alexander Scott, the president of the Pennsylvania Railroad, to suggest that the strikers be given “a rifle diet for a few days and see how they like that kind of bread.” State militia and federal troops complied with the suggestion, killing more than 100 strikers in Maryland and Pennsylvania. The putting down of the Haymarket Riot in Chicago in 1886, and the breaking of the Homestead Strike in Andrew Carnegie’s steel works in 1892, reinforced the rule of money; the bank panics of 1893 and 1907, preceded by heedless speculation in the stock markets, led to widespread unemployment, bankruptcy, foreclosure, and depression.

The disputes varied in their particulars (the protective tariff, the prices paid for gold and silver, the legitimacy of the labor unions), but in every instance what was at issue were the terms of service as defined on the one hand by President Teddy Roosevelt in a Labor Day speech at Syracuse, New York, in 1903: “Far and away the best prize that life offers is the chance to work hard at work worth doing”; on the other hand by Woodrow Wilson, still president of Princeton University in 1909, speaking to the New York City High School Teachers Association: “We want one class of persons to have a liberal education, and we want another class of persons, a very much larger class of necessity in every society, to forego the privilege of a liberal education and fit themselves to perform specific difficult manual tasks.”

Wilson’s way of looking at things aligns itself with what was to become America’s chrome-plated future, Roosevelt’s with its homespun past. The Rough Rider was trading in nostalgia, looking back to his days as a young man, a young man who also happened to be rich, shooting buffaloes in the Dakota Territory. The sentiment shows up in Norman Maclean’s remembrance of the way it was out among the tall trees in the summer of 1927, “As to the big thing, sawing, it is something beautiful when you are working together -- at times, you forget what you are doing and get lost in abstractions of motion and power. But when sawing isn’t rhythmical, even for a short time, it becomes a kind of mental illness -- maybe even something more deeply disturbing than that. It is as if your heart isn’t working right.”

It is here that one finds the dignity of labor and the expression of man’s humanity to man. One can illuminate the feeling on which Eugene V. Debs, president of the American Railway Union, mounted his candidacy for U.S. president in the election of 1912, attracting over 900,000 votes on the strength of his belief that “the workers are the saviors of society, the redeemers of the race.”

Wilson didn’t think so, and Wilson won the election, defeating Roosevelt as well as Debs. The establishment in 1913 of the Federal Reserve Bank overruled the prolonged objection by the instruments of labor to their uses in the hands of capital, shifting control of the nation’s currency from the public to the private sector.

The Labor of Consumption

It is man’s nature to be doing something, or at least to fancy that he’s doing something, but to what purpose, and for whom? Satisfactory answers to the questions lately have been hard to find, not only for the unemployed poor but also for the underemployed remnant of what was once a diligently aspiring middle class. It isn’t simply that the consumer markets don’t value work worth doing; it’s that the society’s ruling and possessing classes regard working for a living as the mark of inferior or damaged goods.

The attitude made its first appearance on the American scene during the Gilded Age, dancing with the newly crowned kings of finance under the ballroom chandeliers in Newport and New York. Thorstein Veblen took note of the arrival in 1899, his Theory of the Leisure Class suggesting that it is the conspicuous consumption of the product of other people’s time and effort that makes up the sum of one’s own worth and meaning. Not the doing of the work, the digesting of it. “Leisure, considered as an employment,” said Veblen, “is closely allied in kind with the life of exploit, and the achievements which characterize a life of leisure and which remain as its decorous criteria, have much in common with the trophies of exploit.”

During the years prior to the Second World War, the attitude was safely confined to a small number of people preserved in the aspic of what was then big money. The victories over Germany and Japan fostered extensions of the franchise. Rescued by force of arms from the Great Depression, America seemed blessed with the enchantments of both Croesus and Colossus, the indisputable proofs of its wealth and military power giving rise to the notion that all its children were the inheritors of a vast fortune and therefore deserving of the best of all possible worlds that money could buy. No reason not to have it all -- a new frontier, a great society, guns for a splendid little war in Asia, butter for the old folks at home, a house in the country, a boat on the lake, the face and fortune in the ad for one of Ralph Lauren’s tennis dresses.

Much of the world in 1945 was either bankrupt or in ruins, and the refurnishing of it supplied the American economy over the next 30 years with an abundance of jobs that afforded the means of independence and a measure of self-worth, while at the same time bringing forth the trophies of exploit to a consumer market more wonderful than the wonderful world of Oz, seeding ever broader acres of the nation’s human topsoil with the presumptions of entitlement favored by Veblen’s Newport heiresses. Don’t worry, be happy; go forth and shop. Leisure considered as employment.

Which was all well and good until it turned out, somewhere in the middle of the 1980s on the yellow brick road with Toto and the Gipper, that the Wizard was easy access to conspicuous credit. For how else could the American leaves of grass join their top-dressed companions on a golf course unless they borrowed money? The country’s working and middle classes discovered that it wasn’t the value of the work itself, or its manufacture of a decent living (as architect, bus driver, sales clerk, actress, lathe operator, automobile mechanic) that made up the sum of the country’s wealth and well-being.

Their great collective enterprise was the labor of consumption, and with it the derivative of debt, a byproduct, like the methane exuded by factory-farmed pigs, that funded the patriotic service owing to God, country, and the American Express card. The work was maybe mindless, a substitution of what is animal for what is human, but it fattened the gross domestic product, enriched the insurance companies and the banks, welcomed the second coming of an American Gilded Age, and now accounts for the increasingly grotesque disparity between the income earned as wages and the revenue collected as rent, interest, dividend, stock option, and year-end bonus.

Americans with jobs imagine they now work longer and harder hours than did their forebears on Mark Twain’s Missouri frontier; if so, their labor serves a purpose other than the one in hand. Finance accounted for 47% of total U.S. corporate profits in 2007; 58% of Harvard University’s male graduates in that same year (the heirs and assigns of Woodrow Wilson’s small class of persons deserving of a liberal education) took up careers as high-end traffickers in the drug of debt. It’s a lucrative trade, up to the standard of the cotton export from the dear old antebellum South. That it doesn’t add to the sum of human happiness or meaning is probably why the gentry on the lawns of Connecticut, together with their upper servants in Washington and the news media, talk about the lost battalion of America’s unemployed as a set of conveniently invisible numbers rather than as a body of fellow citizens.

How the World Really Works: Corporate Tax Burdens in a Captive Democracy

2011-03-25T17:48:00.000-07:00

G.E.’s Strategies Let It Avoid Taxes Altogether
By David Kocieniewski. nytimes.com 3/24/2011

General Electric, the nation’s largest corporation, had a very good year in 2010.

The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

That may be hard to fathom for the millions of American business owners and households now preparing their own returns, but low taxes are nothing new for G.E. The company has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.

Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

While General Electric is one of the most skilled at reducing its tax burden, many other companies have become better at this as well. Although the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.

In a regulatory filing just a week before the Japanese disaster put a spotlight on the company’s nuclear reactor business, G.E. reported that its tax burden was 7.4 percent of its American profits, about a third of the average reported by other American multinationals. Even those figures are overstated, because they include taxes that will be paid only if the company brings its overseas profits back to the United States. With those profits still offshore, G.E. is effectively getting money back.

Such strategies, as well as changes in tax laws that encouraged some businesses and professionals to file as individuals, have pushed down the corporate share of the nation’s tax receipts — from 30 percent of all federal revenue in the mid-1950s to 6.6 percent in 2009.

Yet many companies say the current level is so high it hobbles them in competing with foreign rivals. Even as the government faces a mounting budget deficit, the talk in Washington is about lower rates. President Obama has said he is considering an overhaul of the corporate tax system, with an eye to lowering the top rate, ending some tax subsidies and loopholes and generating the same amount of revenue. He has designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes.

“He understands what it takes for America to compete in the global economy,” Mr. Obama said of Mr. Immelt, on his appointment in January, after touring a G.E. factory in upstate New York that makes turbines and generators for sale around the world.

A review of company filings and Congressional records shows that one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.

Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to “green energy” credits for its wind turbines. But the most lucrative of these measures allows G.E. to operate a vast leasing and lending business abroad with profits that face little foreign taxes and no American taxes as long as the money remains overseas.

Company officials say that these measures are necessary for G.E. to compete against global rivals and that they are acting as responsible citizens. “G.E. is committed to acting with integrity in relation to our tax obligations,” said Anne Eisele, a spokeswoman. “We are committed to complying with tax rules and paying all legally obliged taxes. At the same time, we have a responsibility to our shareholders to legally minimize our costs.”

The assortment of tax breaks G.E. has won in Washington has provided a significant short-term gain for the company’s executives and shareholders. While the financial crisis led G.E. to post a loss in the United States in 2009, regulatory filings show that in the last five years, G.E. has accumulated $26 billion in American profits, and received a net tax benefit from the I.R.S. of $4.1 billion.

But critics say the use of so many shelters amounts to corporate welfare, allowing G.E. not just to avoid taxes on profitable overseas lending but also to amass tax credits and write-offs that can be used to reduce taxes on billions of dollars of profit from domestic manufacturing. They say that the assertive tax avoidance of multinationals like G.E. not only shortchanges the Treasury, but also harms the economy by discouraging investment and hiring in the United States.

“In a rational system, a corporation’s tax department would be there to make sure a company complied with the law,” said Len Burman, a former Treasury official who now is a scholar at the nonpartisan Tax Policy Center. “But in our system, there are corporations that view their tax departments as a profit center, and the effects on public policy can be negative.”

The shelters are so crucial to G.E.’s bottom line that when Congress threatened to let the most lucrative one expire in 2008, the company came out in full force. G.E. officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.

The head of its tax team, Mr. Samuels, met with Representative Charles B. Rangel, then chairman of the Ways and Means Committee, which would decide the fate of the tax break. As he sat with the committee’s staff members outside Mr. Rangel’s office, Mr. Samuels dropped to his knee and pretended to beg for the provision to be extended — a flourish made in jest, he said through a spokeswoman.

That day, Mr. Rangel reversed his opposition to the tax break, according to other Democrats on the committee.

The following month, Mr. Rangel and Mr. Immelt stood together at St. Nicholas Park in Harlem as G.E. announced that its foundation had awarded $30 million to New York City schools, including $11 million to benefit various schools in Mr. Rangel’s district. Joel I. Klein, then the schools chancellor, and Mayor Michael R. Bloomberg, who presided, said it was the largest gift ever to the city’s schools.

G.E. officials say the donation was granted solely on the merit of the project. “The foundation goes to great lengths to ensure grant decisions are not influenced by company government relations or lobbying priorities,” Ms. Eisele said.

Mr. Rangel, who was censured by Congress last year for soliciting donations from corporations and executives with business before his committee, said this month that the donation was unrelated to his official actions.

Defying Reagan’s Legacy

General Electric has been a household name for generations, with light bulbs, electric fans, refrigerators and other appliances in millions of American homes. But today the consumer appliance division accounts for less than 6 percent of revenue, while lending accounts for more than 30 percent. Industrial, commercial and medical equipment like power plant turbines and jet engines account for about 50 percent. Its industrial work includes everything from wind farms to nuclear energy projects like the troubled plant in Japan, built in the 1970s.

Because its lending division, GE Capital, has provided more than half of the company’s profit in some recent years, many Wall Street analysts view G.E. not as a manufacturer but as an unregulated lender that also makes dishwashers and M.R.I. machines.

As it has evolved, the company has used, and in some cases pioneered, aggressive strategies to lower its tax bill. In the mid-1980s, President Ronald Reagan overhauled the tax system after learning that G.E. — a company for which he had once worked as a commercial pitchman — was among dozens of corporations that had used accounting gamesmanship to avoid paying any taxes.

“I didn’t realize things had gotten that far out of line,” Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.

That pendulum began to swing back in the late 1990s. G.E. and other financial services firms won a change in tax law that would allow multinationals to avoid taxes on some kinds of banking and insurance income. The change meant that if G.E. financed the sale of a jet engine or generator in Ireland, for example, the company would no longer have to pay American tax on the interest income as long as the profits remained offshore.

Known as active financing, the tax break proved to be beneficial for investment banks, brokerage firms, auto and farm equipment companies, and lenders like GE Capital. This tax break allowed G.E. to avoid taxes on lending income from abroad, and permitted the company to amass tax credits, write-offs and depreciation. Those benefits are then used to offset taxes on its American manufacturing profits.

G.E. subsequently ramped up its lending business.

As the company expanded abroad, the portion of its profits booked in low-tax countries such as Ireland and Singapore grew far faster. From 1996 through 1998, its profits and revenue in the United States were in sync — 73 percent of the company’s total. Over the last three years, though, 46 percent of the company’s revenue was in the United States, but just 18 percent of its profits.

Martin A. Sullivan, a tax economist for the trade publication Tax Analysts, said that booking such a large percentage of its profits in low-tax countries has “allowed G.E. to bring its U.S. effective tax rate to rock-bottom levels.”

G.E. officials say the disparity between American revenue and American profit is the result of ordinary business factors, such as investment in overseas markets and heavy lending losses in the United States recently. The company also says the nation’s workers benefit when G.E. profits overseas.

“We believe that winning in markets outside the United States increases U.S. exports and jobs,” Mr. Samuels said through a spokeswoman. “If U.S. companies aren’t competitive outside of their home market, it will mean fewer, not more, jobs in the United States, as the business will go to a non-U.S. competitor.”

The company does not specify how much of its global tax savings derive from active financing, but called it “significant” in its annual report. Stock analysts estimate the tax benefit to G.E. to be hundreds of millions of dollars a year.

“Cracking down on offshore profit-shifting by financial companies like G.E. was one of the important achievements of President Reagan’s 1986 Tax Reform Act,” said Robert S. McIntyre, director of the liberal group Citizens for Tax Justice, who played a key role in those changes. “The fact that Congress was snookered into undermining that reform at the behest of companies like G.E. is an insult not just to Reagan, but to all the ordinary American taxpayers who have to foot the bill for G.E.’s rampant tax sheltering.”

A Full-Court Press

Minimizing taxes is so important at G.E. that Mr. Samuels has placed tax strategists in decision-making positions in many major manufacturing facilities and businesses around the globe. Mr. Samuels, a graduate of Vanderbilt University and the University of Chicago Law School, declined to be interviewed for this article. Company officials acknowledged that the tax department had expanded since he joined the company in 1988, and said it now had 975 employees.

At a tax symposium in 2007, a G.E. tax official said the department’s “mission statement” consisted of 19 rules and urged employees to divide their time evenly between ensuring compliance with the law and “looking to exploit opportunities to reduce tax.”

Transforming the most creative strategies of the tax team into law is another extensive operation. G.E. spends heavily on lobbying: more than $200 million over the last decade, according to the Center for Responsive Politics. Records filed with election officials show a significant portion of that money was devoted to tax legislation. G.E. has even turned setbacks into successes with Congressional help. After the World Trade Organization forced the United States to halt $5 billion a year in export subsidies to G.E. and other manufacturers, the company’s lawyers and lobbyists became deeply involved in rewriting a portion of the corporate tax code, according to news reports after the 2002 decision and a Congressional staff member.

By the time the measure — the American Jobs Creation Act — was signed into law by President George W. Bush in 2004, it contained more than $13 billion a year in tax breaks for corporations, many very beneficial to G.E. One provision allowed companies to defer taxes on overseas profits from leasing planes to airlines. It was so generous — and so tailored to G.E. and a handful of other companies — that staff members on the House Ways and Means Committee publicly complained that G.E. would reap “an overwhelming percentage” of the estimated $100 million in annual tax savings.

According to its 2007 regulatory filing, the company saved more than $1 billion in American taxes because of that law in the three years after it was enacted.

By 2008, however, concern over the growing cost of overseas tax loopholes put G.E. and other corporations on the defensive. With Democrats in control of both houses of Congress, momentum was building to let the active financing exception expire. Mr. Rangel of the Ways and Means Committee indicated that he favored letting it end and directing the new revenue — an estimated $4 billion a year — to other priorities.

G.E. pushed back. In addition to the $18 million allocated to its in-house lobbying department, the company spent more than $3 million in 2008 on lobbying firms assigned to the task.

Mr. Rangel dropped his opposition to the tax break. Representative Joseph Crowley, Democrat of New York, said he had helped sway Mr. Rangel by arguing that the tax break would help Citigroup, a major employer in Mr. Crowley’s district.

G.E. officials say that neither Mr. Samuels nor any lobbyists working on behalf of the company discussed the possibility of a charitable donation with Mr. Rangel. The only contact was made in late 2007, a company spokesman said, when Mr. Immelt called to inform Mr. Rangel that the foundation was giving money to schools in his district.

But in 2008, when Mr. Rangel was criticized for using Congressional stationery to solicit donations for a City College of New York school being built in his honor, Mr. Rangel said he had appealed to G.E. executives to make the $30 million donation to New York City schools.

G.E. had nothing to do with the City College project, he said at a July 2008 news conference in Washington. “And I didn’t send them any letter,” Mr. Rangel said, adding that he “leaned on them to help us out in the city of New York as they have throughout the country. But my point there was that I do know that the C.E.O. there is connected with the foundation.”

In an interview this month, Mr. Rangel offered a different version of events — saying he didn’t remember ever discussing it with Mr. Immelt and was unaware of the foundation’s donation until the mayor’s office called him in June, before the announcement and after Mr. Rangel had dropped his opposition to the tax break.

Asked to explain the discrepancies between his accounts, Mr. Rangel replied, “I have no idea.”

Value to Americans?

While G.E.’s declining tax rates have bolstered profits and helped the company continue paying dividends to shareholders during the economic downturn, some tax experts question what taxpayers are getting in return. Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion.

“That G.E. can almost set its own tax rate shows how very much we need reform,” said Representative Lloyd Doggett, Democrat of Texas, who has proposed closing many corporate tax shelters. “Our tax system should encourage job creation and investment in America and end these tax incentives for exporting jobs and dodging responsibility for the cost of securing our country.”

As the Obama administration and leaders in Congress consider proposals to revamp the corporate tax code, G.E. is well prepared to defend its interests. The company spent $4.1 million on outside lobbyists last year, including four boutique firms that specialize in tax policy.

“We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders,” said Gary Sheffer, a G.E. spokesman. “So we want to be sure our voice is heard.”

UPDATE: Obama's Justification for Unauthorized Military Action in Libya

2011-03-21T16:30:00.000-07:00

WASHINGTON-President Barack Obama Monday formally notified Congress the U.S. had begun military attacks on Libya, prompting complaints from lawmakers that the president waged war without congressional consent, appearing to contradict his own previous position.

In a letter to congressional leaders, the president said the U.S. had "commenced operations to assist an international effort authorized by the United Nations (U.N.) Security Council" and "to prevent a humanitarian catastrophe and address the threat posed to international peace and security by the crisis in Libya."

Presidents over the decades have conducted military operations without prior congressional approval, including Harry Truman in Korea, George H.W. Bush in Iraq and and President Bill Clinton in Serbia. Congress in 1991 approved the Iraq military action, five months after Mr. Bush deployed forces to the region in response to Iraq's invasion of Kuwait. The military action in Libya, which Congress wasn't asked to approve, irked lawmakers.

Sen. Jim Webb, (D., Va.,) said in an interview Monday with MSNBC, "We have not had a debate and I know that there was some justification put into place because of concern for civilian casualties, but this isn't the way that our system is supposed to work."

House Democrats held a conference call over the weekend to discuss Libya, and support among lawmakers was mixed, a congressional aide said. Frustration appears to be coming from rank-and-file lawmakers left out of Mr. Obama's Libya briefing to committee chairmen Friday.

In 2007, Mr. Obama, then a presidential candidate, said, "The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation."

The White House said the president's actions don't contradict his earlier views, noting that the president met with a bipartisan group of lawmakers regarding Libya before any action took place.

A senior administration official said that the 2007 comment envisioned "an invasion like we saw in Iraq. A mission of this kind, which is time-limited, well-defined, and discrete, clearly falls within the President's constitutional authority."

Justice Department legal opinions support the president's power to order limited military action, according to administration lawyers, and the White House appears to be using the legal guidelines in stating the nature, duration and scope of the Libyan operation.

"As the President told the country, the US military operation in Libya will be limited in duration and scope, and conducted in partnership with an international coalition. It is aimed at preventing an imminent humanitarian catastrophe that directly implicates the national security and foreign policy interests of the United States," said Tommy Vietor, a White House spokesman.

Mr. Obama's notification letter does not satisfy the constitutional requirement that Congress approve military action, says Lou Fisher, former researcher with the Congressional Research Service and an expert on war powers. Mr. Fisher also raised objections to Mr. Obama citing United Nations authorization in his letter.

"It's impossible for Congress to take its war powers and give it to the U.N.," Mr. Fisher said. "Other than defensive actions—and there's no defensive actions here—this has to be done by Congress."

The president, with his letter, appeared to meet the requirements of the 1973 War Powers Resolution, which says only that in cases where the president doesn't seek prior approval from lawmakers, the president must notify Congress within 48 hours of committing armed forces to military action and puts a 60 day deadline on such actions.

House Speaker John Boehner doesn't believe the president always needs congressional approval to go take military action, a spokesman for the Ohio Republican said. However, "members of Congress from both parties, as well as the American people, are demanding the administration do a better job answering some basic questions about the scope and purpose of our mission in Libya, America's role, and how it will be achieved," said the spokesman, Brendan Buck.

Originally published 3/21/2011 in the Wall Street Journal online @ http://online.wsj.com/article/SB10001424052748704355304576215073989153598.html?mod=googlenews_wsj
Author Evan Perez

Remembering the Constitution: The War Power

2011-03-20T23:29:00.000-07:00

In response to President Obama’s warlike declaration of intent against Libya, Representative Dennis Kucinich issued the following statement today. Here is the statement:

Washington D.C. (March 18, 2011)—Congressman Dennis Kucinich (D-OH) today released the following statement and letter to Congressional leaders after the President announced that the United States will support a United Nations-approved attack on Libya:

While the action is billed as protecting the civilians of Libya, a no-fly-zone begins with an attack on the air defenses of Libya and Qaddafi forces. It is an act of war. The president made statements which attempt to minimize U.S. action, but U.S. planes may drop U.S. bombs and U.S. missiles may be involved in striking another sovereign nation. War from the air is still war.

It is also worth noting that the President did not comment upon nor recognize that the Libyan government had declared a ceasefire in response to UNSC Resolution 1973. It was appropriate for the UN to speak about the situation. It was appropriate to establish an arms embargo and freeze Qaddafi’s considerable financial assets. But whether the U.S. takes military action is not for the UN alone to decide. There is a constitutional imperative in the United States with respect to deciding to commit our U.S. armed forces to war.

Congress should be called back into session immediately to decide whether or not to authorize the United States’ participation in a military strike. If it does not, the action of the President is contrary to U.S. Constitution. Article 1, Section 8 of the Constitution clearly states that the United States Congress has the power to declare war. The President does not. That was the Founders’ intent.

I have sent a letter to Congressional leadership indicating that the national interest requires that Congress be called back quickly to Washington to exercise its Constitutional authority to determine whether our armed forces should participate in the UN mission. Both houses of Congress must weigh in. This is not for the President alone, or for a few high ranking Members of Congress to decide.

It is hard to imagine that Congress, during the current contentious debate over deficits and budget cutting, would agree to plunge America into still another war, especially since America will spend trillions in total for the wars in Afghanistan, Iraq and incursions into Pakistan.

The last thing we need is to be embroiled in yet another intervention in another Muslim country. The American people have had enough. First it was Afghanistan, then Iraq. Then bombs began to fall in Pakistan, then Yemen, and soon it seems bombs could be falling in Libya. Our nation simply cannot afford another war, economically, diplomatically or spiritually.

The Military-Industrial Complex: 50 years later

2011-01-27T21:37:00.000-08:00

The Tyranny of Defense Inc.
By Andrew J. Bacevich
Originally published in The Atlantic, January/February 2011 issue

In 1961, Dwight Eisenhower famously identified the military-industrial complex, warning that the growing fusion between corporations and the armed forces posed a threat to democracy. Judged 50 years later, Ike’s frightening prophecy actually understates the scope of our modern system—and the dangers of the perpetual march to war it has put us on.

American politics is typically a grimy business of horses traded and pork delivered. Political speech, for its part, tends to be formulaic and eminently forgettable. Yet on occasion, a politician will transcend circumstance and bear witness to some lasting truth: George Washington in his Farewell Address, for example, or Abraham Lincoln in his Second Inaugural.

Fifty years ago, President Dwight D. Eisenhower joined such august company when, in his own farewell address, he warned of the rise in America of the “military-industrial complex.” An accomplished soldier and a better-than-average president, Eisenhower had devoted the preponderance of his adult life to studying, waging, and then seeking to avert war. Not surprisingly, therefore, his prophetic voice rang clearest when as president he reflected on matters related to military power and policy.

Ike’s farewell address, nationally televised on the evening of January 17, 1961, offered one such occasion, although not the only one. Equally significant, if now nearly forgotten, was his presentation to the American Society of Newspaper Editors on April 16, 1953. In this speech, the president contemplated a world permanently perched on the brink of war—“humanity hanging from a cross of iron”— and he appealed to Americans to assess the consequences likely to ensue.

Separated in time by eight years, the two speeches are complementary: to consider them in combination is to discover their full importance. As bookends to Eisenhower’s presidency, they form a solemn meditation on the implications—economic, social, political, and moral—of militarizing America.

During Eisenhower’s presidency, few credited him with being a great orator. Yet, as befit a Kansan and a military professional, Ike could speak plainly when he chose to do so. The April 16 speech early in his presidency was such a moment. Delivered in the wake of Joseph Stalin’s death, the speech offered the new Soviet leadership a five-point plan for ending the Cold War. Endorsing the speech as “one of the most notable policy statements of U.S. history,” Time reported with satisfaction that Eisenhower had articulated a broad vision for peace and “left it at the door of the Kremlin for all the world to see.” The likelihood that Stalin’s successors would embrace this vision was nil. An editorial in The New Republic made the essential point: as seen from Russia’s perspective, Eisenhower was “demanding unconditional surrender.” The president’s peace plan quickly vanished without a trace.

Largely overlooked by most commentators was a second theme that Eisenhower had woven into his text. The essence of this theme was simplicity itself: spending on arms and armies is inherently undesirable. Even when seemingly necessary, it constitutes a misappropriation of scarce resources. By diverting social capital from productive to destructive purposes, war and the preparation for war deplete, rather than enhance, a nation’s strength. And while assertions of military necessity might camouflage the costs entailed, they can never negate them altogether.

“Every gun that is made,” Eisenhower told his listeners, “every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.” Any nation that pours its treasure into the purchase of armaments is spending more than mere money. “It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.” To emphasize the point, Eisenhower offered specifics:

The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities … We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.

Yet in Cold War Washington, Eisenhower’s was a voice crying in the wilderness. As much as they liked Ike, Americans had no intention of choosing between guns and butter: they wanted both. Military Keynesianism—the belief that the production of guns could underwrite an endless supply of butter—was enjoying its heyday.

At the time, the idea that militarizing U.S. policy might yield economic benefits outweighing the costs seemed eminently plausible. The authors of the National Security Council report “NSC-68,” the 1950 blueprint for U.S. rearmament, had made this point explicitly: boosting Pentagon spending would “increase the gross national product by more than the amount being absorbed for additional military and foreign assistance purposes.” Building up the nation’s defenses could serve as a sort of permanent economic stimulus program, putting people to work and money in their pockets. The experience of World War II had apparently validated this theory. Why shouldn’t the same logic apply to the Cold War?

So Americans disregarded Ike’s brooding about a “cross of iron” and a trade-off between guns and butter. The 1950s brought new bombers and new schools, fleets of warships and tracts of freshly built homes spilling into the suburbs.

Eisenhower and his fellow Republicans were more than happy to pocket the credit for this win-win outcome. Yet the president, if not his party, also sensed that beneath the appearance of Ozzie-and-Harriet prosperity, momentous and not altogether welcome changes were taking place. The postwar boom in which the American middle class took such satisfaction was reconfiguring, redistributing, and redefining American power. Washington itself ranked as a principal beneficiary of this process—and, within Washington, the several institutions comprising what some were calling the “national-security state.”

This national-security state derived its raison d’être from—and vigorously promoted a belief in—the existence of looming national peril. On one point, most politicians, uniformed military leaders, and so-called defense intellectuals agreed: the dangers facing the United States were omnipresent and unprecedented. Keeping those dangers at bay demanded vigilance, preparedness, and a willingness to act quickly and even ruthlessly. Urgency had become the order of the day.

In his 1956 book, The Power Elite, C. Wright Mills, a professor of sociology at Columbia, dubbed this perspective “military metaphysics,” which he characterized as “the cast of mind that defines international reality as basically military.” Those embracing this mind-set no longer considered genuine, lasting peace to be plausible. Rather, peace was at best a transitory condition, “a prelude to war or an interlude between wars.”

Perhaps nothing illustrates military metaphysics more vividly than the exponential growth of the U.S. nuclear stockpile that occurred during Eisenhower’s presidency. In 1952, when Ike was elected, that stockpile numbered some 1,000 warheads. By the time he passed the reins to John F. Kennedy in 1961, it consisted of more than 24,000 warheads, and it rapidly ascended later that decade to a peak of 31,000.

As commander in chief, Ike exercised only nominal control over this development, which was driven by an unstated alliance of interested parties: generals, defense officials, military contractors, and members of Congress. True, Eisenhower had established “massive retaliation”—the threat of a large-scale nuclear response to deter Soviet aggression—as the centerpiece of U.S. national-security doctrine. Yet even as this posture was intended to intimidate the Kremlin, the president expected it to offer Americans a sense of security, thereby enabling him to rein in military expenditures. In that regard, he miscalculated badly.

During the Eisenhower years, military outlays served as a seemingly inexhaustible engine of economic well-being. Keeping the Soviets at bay required the design and acquisition of a vast array of guns and missiles, bombers and warships, tanks and fighter planes. Ensuring that U.S. forces stayed in fighting trim entailed the construction of bases, barracks, depots, and training facilities. Research labs received funding. Businesses large and small won contracts. Organized labor got jobs. And politicians who delivered all these goodies to their constituents hauled in endorsements, campaign contributions, and votes. Throughout the 1950s, unemployment stayed tolerably low and inflation minimal, while budget deficits ranged from trivial to non-existent. What was not to like? As a result, Pentagon budgets remained high throughout the Eisenhower era, averaging more than 50 percent of all federal spending and 10 percent of GDP, figures without precedent in the nation’s peacetime history.

For its beneficiaries, girding for war was a gift, and one they expected would never stop giving. The presumption that military capabilities qualifying as adequate today would surely not suffice tomorrow—the Reds, after all, weren’t standing still—generated a ceaseless quest for bigger, better, and more. Every ominous advance in Russian capabilities offered a renewed rationale for opening the military-spending spigot. Whether the edge attributed to the Soviets was real or invented mattered little. The discovery during the 1950s of a “bomber gap” and later a “missile gap,” for example, provided political ammunition to air-power advocates quick to charge that the nation’s very survival was at risk. Alarm bells rang. Congressional committees summoned expert witnesses. Newspapers and magazines nervously assessed the implications of these new vulnerabilities. Ultimately, appropriations poured forth. That both “gaps” were fictitious was beside the point.

None of these developments—the excessive military outlays, the privileging of institutional goals over the national interest, the calculated manipulation of public opinion—met with Eisenhower’s approval. Knowing at the time that the United States enjoyed an edge in bomber and missile capabilities, he understood precisely who benefited from threat inflation. Yet to sustain the illusion he was fully in command, Ike remained publicly silent about what went on behind the scenes. Only on the eve of his departure from office did he inform the nation as to what Washington’s new obsession with national security had wrought.

In 1961, as in 1953, his central theme was theft. This time, however, rather than homes or schools, Ike suggested the thieves might walk off with democracy itself.

The Cold War, he emphasized, had transformed the country’s approach to defending itself. In the past, “American makers of plowshares could, with time and as required, make swords as well.” But this reliance on improvisation no longer sufficed. The rivalry with the Soviet Union had “compelled” the United States “to create a permanent armaments industry of vast proportions.” As a consequence, “we annually spend on military security alone more than the net income of all United States corporations.”

The “economic, political, even spiritual” reach of this conglomeration was immense, Eisenhower explained, extending to “every city, every statehouse, every office of the federal government.” Although the president could not bring himself to question explicitly the need for this shift in policy, he warned of its implications. “Our toil, resources, and livelihood are all involved,” he said. “So is the very structure of our society.” With corporate officials routinely claiming the Pentagon’s top posts, and former military officers hiring themselves out to defense contractors, fundamental values were at risk. “In the councils of government,” Eisenhower continued,

we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted.

Having defined the problem, Eisenhower then advanced a striking solution: ultimate responsibility for democracy’s defense, he insisted, necessarily rested with the people themselves. Rather than according Washington deference, American citizens needed to exercise strict oversight. Counting on the national-security state to police itself—on members of Congress to set aside parochial concerns, corporate chieftains to put patriotism above profit, and military leaders to hew to the ethic of their profession—wouldn’t do the trick. “Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

Reaction to the president’s speech was tepid at best. The headline in TheBoston Globe reported “Ike Says Farewell After Half Century in U.S. Service” and left it at that. With the country agog over Jack and Jackie, the mood of the moment did not invite introspection. Eisenhower’s insistence that citizens awaken to looming danger attracted little attention. His valedictory qualified, at the time, as a one-day story.

So Ike departed, but military metaphysics survived intact and found particular favor in the upper echelons of the next administration. On the campaign trail, Kennedy had promised higher defense spending, enhanced nuclear capabilities, and a reinvigorated confrontation with Communism. Once in office, he proved as good as his word.

In the five decades since Eisenhower left the White House for his retirement home in Gettysburg, much has changed. The Soviet Union has disappeared. So too, for all practical purposes, has Communism itself. Yet in Washington, an aura of never-ending crisis still prevails—and with it, military metaphysics.

The national-security state continues to grow in size, scope, and influence. In Ike’s day, for example, the CIA dominated the field of intelligence. Today, experts refer casually to an “intelligence community,” consisting of some 17 agencies. The cumulative size and payroll of this apparatus grew by leaps and bounds in the wake of the September 11 attacks. Last July, TheWashington Post reported that it had “become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.” Since that report appeared, U.S. officials have parted the veil of secrecy enough to reveal that intelligence spending exceeds $80 billion per year, substantially more than the budget of either the Department of State ($49 billion) or the Department of Homeland Security ($43 billion).

The spending spree extends well beyond intelligence. The Pentagon’s budget has more than doubled in the past decade, to some $700 billion per year. All told, the ostensible imperatives of national security thereby consume roughly half of all federal discretionary dollars. Even more astonishing, annual U.S. military outlays now approximate those of all other nations, friends as well as foes, combined.

In Ike’s day, competition with the Soviet Union provided the rationale for such outsized expenditures. Today, with no remotely comparable competitor at hand, devotees of military metaphysics conjure a variety of arguments to justify the Pentagon’s budgetary demands. One such, usually made with an eye toward China, is that relentlessly outspending any and all would-be challengers to U.S. preeminence will dissuade them from even mounting an attempt. A second transforms modest threats into existential ones, with the mere existence of a Mahmoud Ahmadinejad or Osama bin Laden mandating extraordinary exertions until the United States eliminates every last such miscreant—a day that will never come.

The threat inflation that led to the bomber and missile “gaps” of the 1950s remains a cherished Washington tradition. In memos written after September 11, then–Defense Secretary Donald Rumsfeld urged his staff to “keep elevating the threat” and demanded “bumper sticker statements” to gin up public enthusiasm for the global war on terror. The key, he wrote, was to “make the American people realize they are surrounded in the world by violent extremists.” What worked during the Cold War still works today: to get Americans on board with your military policy, scare the hell out of them.

In the meantime, the revolving door connecting the world of soldiering to the world of arms purveyors continues to turn. For those at the top, the American military profession is that rare calling where retirement need not imply a reduced income. On the contrary: senior serving officers shed their uniforms not merely to take up golf or go fishing but with the reasonable expectation of raking in big money. In a recent e-mail, a serving officer who is a former student of mine reported that on a visit to the annual meeting of the Association of the United States Army—in his words, “the Sodom and Gomorrah of the Military Industrial Complex”—he was “accosted by two dozen former bosses, now in suits with fancy ties and business cards, hawking the latest defense technologies.”

If anything, Eisenhower’s characterization of the cozy relations between the military and corporate worlds understates the contemporary reality. C. Wright Mills came closer to the mark when he wrote of “a coalition of generals in the roles of corporation executives, of politicians masquerading as admirals, of corporation executives acting like politicians.” Add to that list the retired senior officers passing as pundits (often while simultaneously cashing the checks of weapons manufacturers), policy wonks pretending to be field marshals, and journalists eagerly competing to carry water for heroic field commanders. Throw in the former members of Congress who lobby their successors on behalf of defense contractors, and the serving members who vote in favor of any defense appropriations that send money to their districts, and one begins to get a sense of the true topography.

With what result? Not peace, and not prosperity. Instead, American soldiers traipse wearily from one conflict to the next while the nation as a whole suffers from acute economic distress. What has gone amiss?

In the wake of 9/11, when the George W. Bush administration committed the United States to a global war on terror, it was blithely confident that the U.S. military could win such a conflict handily. Events in Iraq and Afghanistan have since demolished such expectations. The irrefutable lesson of the past decade is this: we know how to start wars, but don’t know how to end them. During the well-armed Eisenhower era, American weapons were largely silent. Today, engagement in actual hostilities has become the new normal, exacting a steep price. The wars in Iraq and Afghanistan have cost at least $1 trillion—with the meter still running. Some observers estimate that total costs will eventually reach $2 trillion or even $3 trillion.

Furthermore, military Keynesianism has proved to be a bust. In contrast to the 1950s, military extravagance is depleting rather than adding to the nation’s wealth. In the Eisenhower era, the United States, a creditor nation, produced at home the essentials defining the American way of life—everything from oil to cars to televisions. Today, we import far more than we export, with ever-increasing debt as one result. Furthermore, in the 1950s, we were mostly at peace; today we are mostly at war—and, as a result, more of the resources provided to the military go abroad and stay there.

Certain enterprises flourish, notably private security firms such as DynCorp, MPRI, and, of course, the notorious Blackwater (now known as Xe). At MPRI, they like to say “We’ve got more generals per square foot here than in the Pentagon.” But even if those generals are doing fine, the grandchildren of Ozzie and Harriet, coping with 9.8 percent unemployment and contemplating the implications of trillion-dollar deficits, see little benefit from our exorbitant Pentagon outlays. If paying Pashtun drivers to truck fuel from Pakistan into Afghanistan is producing any positive economic side effects, the American worker is not among the beneficiaries.

In short, the guns-and-butter trade-off that Eisenhower foresaw in 1953 has become reality. To train, equip, and maintain one American soldier in Iraq or Afghanistan for just one year costs a cool million dollars. Meanwhile, according to 2010 census figures, the number of Americans falling below the poverty line has swollen to one in every seven.

Thanks to its allies and abettors, the military-industrial-legislative war complex remains stubbornly resistant to change—a fact President Barack Obama himself learned during his first year in office. While reviewing his administration’s policy in Afghanistan, the president repeatedly asked for a range of policy alternatives. He wanted choices. According to Bob Woodward of TheWashington Post, however, the Pentagon offered Obama a single path—the so-called McChrystal “surge” of additional troops. As recounted in Woodward’s book Obama’s Wars, the president complained: “So what’s my option? You’ve given me only one option.” The military’s own preferred option was all he was going to get. (Just months before, Woodward himself had helpfully promoted that very option, courtesy of a well-timed leak.)

No doubt Dwight Eisenhower would sympathize with President Obama, having himself struggled to exercise the prerogatives ostensibly reserved to the chief executive. Yet Ike would hardly be surprised. He would reserve his surprise—and his disappointment—for the American people. A half century after he summoned us to shoulder the responsibilities of citizenship, we still refuse to do so. In Washington, military metaphysics remains sacrosanct. No wonder we continue to get our pockets picked.

Foreign Affairs: Sad View of Arab Potentates Controlled by the West

2011-01-16T22:53:00.000-08:00

The brutal truth about Tunisia

Bloodshed, tears, but no democracy. Bloody turmoil won’t necessarily presage the dawn of democracy

By Robert Fisk, Middle East Correspondent
Published @ http://www.independent.co.uk/news/world/africa/the-brutal-truth-about-tunisia-2186287.html

The end of the age of dictators in the Arab world? Certainly they are shaking in their boots across the Middle East, the well-heeled sheiks and emirs, and the kings, including one very old one in Saudi Arabia and a young one in Jordan, and presidents – another very old one in Egypt and a young one in Syria – because Tunisia wasn't meant to happen. Food price riots in Algeria, too, and demonstrations against price increases in Amman. Not to mention scores more dead in Tunisia, whose own despot sought refuge in Riyadh – exactly the same city to which a man called Idi Amin once fled.

If it can happen in the holiday destination Tunisia, it can happen anywhere, can't it? It was feted by the West for its "stability" when Zine el-Abidine Ben Ali was in charge. The French and the Germans and the Brits, dare we mention this, always praised the dictator for being a "friend" of civilised Europe, keeping a firm hand on all those Islamists.

Tunisians won't forget this little history, even if we would like them to. The Arabs used to say that two-thirds of the entire Tunisian population – seven million out of 10 million, virtually the whole adult population – worked in one way or another for Mr Ben Ali's secret police. They must have been on the streets too, then, protesting at the man we loved until last week. But don't get too excited. Yes, Tunisian youths have used the internet to rally each other – in Algeria, too – and the demographic explosion of youth (born in the Eighties and Nineties with no jobs to go to after university) is on the streets. But the "unity" government is to be formed by Mohamed Ghannouchi, a satrap of Mr Ben Ali's for almost 20 years, a safe pair of hands who will have our interests – rather than his people's interests – at heart.

For I fear this is going to be the same old story. Yes, we would like a democracy in Tunisia – but not too much democracy. Remember how we wanted Algeria to have a democracy back in the early Nineties?

Then when it looked like the Islamists might win the second round of voting, we supported its military-backed government in suspending elections and crushing the Islamists and initiating a civil war in which 150,000 died.

No, in the Arab world, we want law and order and stability. Even in Hosni Mubarak's corrupt and corrupted Egypt, that's what we want. And we will get it.

The truth, of course, is that the Arab world is so dysfunctional, sclerotic, corrupt, humiliated and ruthless – and remember that Mr Ben Ali was calling Tunisian protesters "terrorists" only last week – and so totally incapable of any social or political progress, that the chances of a series of working democracies emerging from the chaos of the Middle East stand at around zero per cent.

The job of the Arab potentates will be what it has always been – to "manage" their people, to control them, to keep the lid on, to love the West and to hate Iran.

Indeed, what was Hillary Clinton doing last week as Tunisia burned? She was telling the corrupted princes of the Gulf that their job was to support sanctions against Iran, to confront the Islamic republic, to prepare for another strike against a Muslim state after the two catastrophes the United States and the UK have already inflicted in the region.

The Muslim world – at least, that bit of it between India and the Mediterranean – is a more than sorry mess. Iraq has a sort-of-government that is now a satrap of Iran, Hamid Karzai is no more than the mayor of Kabul, Pakistan stands on the edge of endless disaster, Egypt has just emerged from another fake election.

And Lebanon... Well, poor old Lebanon hasn't even got a government. Southern Sudan – if the elections are fair – might be a tiny candle, but don't bet on it.

It's the same old problem for us in the West. We mouth the word "democracy" and we are all for fair elections – providing the Arabs vote for whom we want them to vote for.

In Algeria 20 years ago, they didn't. In "Palestine" they didn't. And in Lebanon, because of the so-called Doha accord, they didn't. So we sanction them, threaten them and warn them about Iran and expect them to keep their mouths shut when Israel steals more Palestinian land for its colonies on the West Bank.

There was a fearful irony that the police theft of an ex-student's fruit produce – and his suicide in Tunis – should have started all this off, not least because Mr Ben Ali made a failed attempt to gather public support by visiting the dying youth in hospital.

For years, this wretched man had been talking about a "slow liberalising" of his country. But all dictators know they are in greatest danger when they start freeing their entrapped countrymen from their chains.

And the Arabs behaved accordingly. No sooner had Ben Ali flown off into exile than Arab newspapers which have been stroking his fur and polishing his shoes and receiving his money for so many years were vilifying the man. "Misrule", "corruption", "authoritarian reign", "a total lack of human rights", their journalists are saying now. Rarely have the words of the Lebanese poet Khalil Gibran sounded so painfully accurate: "Pity the nation that welcomes its new ruler with trumpetings, and farewells him with hootings, only to welcome another with trumpetings again." Mohamed Ghannouchi, perhaps?

Of course, everyone is lowering their prices now – or promising to. Cooking oil and bread are the staple of the masses. So prices will come down in Tunisia and Algeria and Egypt. But why should they be so high in the first place?

Algeria should be as rich as Saudi Arabia – it has the oil and gas – but it has one of the worst unemployment rates in the Middle East, no social security, no pensions, nothing for its people because its generals have salted their country's wealth away in Switzerland.

And police brutality. The torture chambers will keep going. We will maintain our good relations with the dictators. We will continue to arm their armies and tell them to seek peace with Israel.

And they will do what we want. Ben Ali has fled. The search is now on for a more pliable dictator in Tunisia – a "benevolent strongman" as the news agencies like to call these ghastly men.

And the shooting will go on – as it did yesterday in Tunisia – until "stability" has been restored.

No, on balance, I don't think the age of the Arab dictators is over. We will see to that.

More Wisdom from Peter Schiff

2011-01-09T14:57:00.000-08:00

Home Prices Are Still Too High: They would have to decline another 20% just to get back to the historical trend line.

By Peter D. Schiff
Wall Street Journal
online.wsj.com/article/SB10001424052702304173704575578190261574342.html

Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today's already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders "underwater." As a result, the trajectory of home prices has tremendous economic significance.

Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.

Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.

By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that set off a national mania for real-estate wealth and a torrent of temporarily easy credit.

If we assume the bubble was artificial, we can instead imagine that home prices should have followed a more traditional path during that time. In stock-market terms, prices should have followed a trend line. When you do these extrapolations (see lower line in the nearby chart), a sobering picture emerges. In his book "Irrational Exuberance," Yale economist Robert Shiller (co-creator of the Case-Shiller indices along with economists Karl Case and Allan Weiss), determined that in the 100 years between 1900 and 2000, home prices in the U.S. increased an average 3.35% per year, just a tad above the average rate of inflation. This period includes the Great Depression when home prices sank significantly, but it also includes the frothy postwar years of the 1950s and '60s, as well as the strong market of the early-to-mid 1980s, and the surge in the late '90s.

In January 1998 the 10-City Index was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010. This week, Case-Shiller announced that figure to be 159.0. This would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line.

How has the market found the strength to stop its descent? No one is making the case that fundamentals have improved. Instead, there is widespread agreement that government intervention stopped the free fall. The home buyer's tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices. Without these artificial props, prices would have likely continued to fall.

Where would prices go if these props were removed? Given the current conditions in the real-estate market, with bloated inventories, 9.8% unemployment, a dysfunctional mortgage industry and shattered illusions of real-estate riches, does it makes sense that prices should simply fall back to the trend line? I would argue that they should overshoot on the downside.

With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put the index at 114.02, or prices 28.3% below where we are now. Even a 5% dip would put us at 120.36, or 24.32% below current prices. If rates stay low, price dips may be less severe, but inflation will be higher.

From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.

In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.

Mr. Schiff is president of Euro Pacific Capital and author of "How an Economy Grows and Why it Crashes" (Wiley, 2010).

Thoughts on Wikileaks

2010-12-21T16:18:00.000-08:00

And to think this author lives in a country where libel is easily (and frequently) prosecuted...

US embassy cables: The job of the media is not to protect the powerful from embarrassment. It is for governments – not journalists – to guard public secrets, and there is no national jeopardy in WikiLeaks' revelations

by Simon Jenkins
guardian.co.uk, Sunday 28 November 2010 18.30 GMT
published @ http://www.guardian.co.uk/commentisfree/2010/nov/28/us-embassy-cables-wikileaks

Is it justified? Should a newspaper disclose virtually all a nation's secret diplomatic communication, illegally downloaded by one of its citizens? The reporting in the Guardian of the first of a selection of 250,000 US state department cables marks a recasting of modern diplomacy. Clearly, there is no longer such a thing as a safe electronic archive, whatever computing's snake-oil salesmen claim. No organisation can treat digitised communication as confidential. An electronic secret is a contradiction in terms.

Anything said or done in the name of a democracy is, prima facie, of public interest. When that democracy purports to be "world policeman" – an assumption that runs ghostlike through these cables – that interest is global. Nonetheless, the Guardian had to consider two things in abetting disclosure, irrespective of what is anyway published by WikiLeaks. It could not be party to putting the lives of individuals or sources at risk, nor reveal material that might compromise ongoing military operations or the location of special forces.

In this light, two backup checks were applied. The US government was told in advance the areas or themes covered, and "representations" were invited in return. These were considered. Details of "redactions" were then shared with the other four media recipients of the material and sent to WikiLeaks itself, to establish, albeit voluntarily, some common standard.

The state department knew of the leak several months ago and had ample time to alert staff in sensitive locations. Its pre-emptive scaremongering over the weekend stupidly contrived to hint at material not in fact being published. Nor is the material classified top secret, being at a level that more than 3 million US government employees are cleared to see, and available on the defence department's internal Siprnet. Such dissemination of "secrets" might be thought reckless, suggesting a diplomatic outreach that makes the British empire seem minuscule.

The revelations do not have the startling, coldblooded immediacy of the WikiLeaks war logs from Iraq and Afghanistan, with their astonishing insight into the minds of fighting men seemingly detached from the ethics of war. These disclosures are largely of analysis and high-grade gossip. Insofar as they are sensational, it is in showing the corruption and mendacity of those in power, and the mismatch between what they claim and what they do.

Few will be surprised to know that Vladimir Putin runs the world's most sensational kleptocracy, that the Saudis wanted the Americans to bomb Iran, or that Pakistan's ISI is hopelessly involved with Taliban groups of fiendish complexity. We now know that Washington knows too. The full extent of American dealings with Yemen might upset that country's government, but is hardly surprising. If it is true that the Pentagon targeted refugee camps for bombing, it should be of general concern. American congressmen might also be interested in the sums of money given to certain foreign generals supposedly to pay for military equipment.

The job of the media is not to protect power from embarrassment. If American spies are breaking United Nations rules by seeking the DNA biometrics of the UN director general, he is entitled to hear of it. British voters should know what Afghan leaders thought of British troops. American (and British) taxpayers might question, too, how most of the billions of dollars going in aid to Afghanistan simply exits the country at Kabul airport.

No harm is done by high-class chatter about President Nicolas Sarkozy's vulgarity and lack of house-training, or about the British royal family. What the American embassy in London thinks about the coalition suggests not an alliance at risk but an embassy with a talent problem.

Some stars shine through the banality such as the heroic envoy in Islamabad, Anne Patterson. She pleads that Washington's whole policy is counterproductive: it "risks destabilising the Pakistani state, alienating both the civilian government and the military leadership, and provoking a broader governance crisis without finally achieving the goal". Nor is any amount of money going to bribe the Taliban to our side. Patterson's cables are like missives from the Titanic as it already heads for the bottom.

The money‑wasting is staggering. Aid payments are never followed, never audited, never evaluated. The impression is of the world's superpower roaming helpless in a world in which nobody behaves as bidden. Iran, Russia, Pakistan, Afghanistan, Yemen, the United Nations, are all perpetually off script. Washington reacts like a wounded bear, its instincts imperial but its power projection unproductive.

America's foreign policy is revealed as a slave to rightwing drift, terrified of a bomb exploding abroad or of a pro-Israeli congressman at home. If the cables tell of the progress to war over Iran or Pakistan or Gaza or Yemen, their revelation might help debate the inanity of policies which, as Patterson says, seem to be leading in just that direction. Perhaps we can now see how catastrophe unfolds when there is time to avert it, rather than having to await a Chilcot report after the event. If that is not in the public's interest, I fail to see what is.

Clearly, it is for governments, not journalists, to protect public secrets. Were there some overriding national jeopardy in revealing them, greater restraint might be in order. There is no such overriding jeopardy, except from the policies themselves as revealed. Where it is doing the right thing, a great power should be robust against embarrassment.

What this saga must do is alter the basis of diplomatic reporting. If WikiLeaks can gain access to secret material, by whatever means, so presumably can a foreign power. Words on paper can be made secure, electronic archives not. The leaks have blown a hole in the framework by which states guard their secrets. The Guardian material must be a breach of the official secrets acts. But coupled with the penetration already allowed under freedom of information, the walls round policy formation and documentation are all but gone. All barriers are permeable. In future the only secrets will be spoken ones. Whether that is a good thing should be a topic for public debate.

A New Brand of Austerity

2010-12-21T15:51:00.000-08:00

Alternatives to Austerity
by Joseph E. Stiglitz
published @ http://www.neurope.eu/articles/Alternatives-to-Austerity/103854.php

NEW YORK – In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts. In many countries, this is leading to a new round of austerity – policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery. Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits.

The attempt to restrain the growth of debt does serve to concentrate the mind – it forces countries to focus on priorities and assess values. The United States is unlikely in the short term to embrace massive budget cuts, à la the United Kingdom. But the long-term prognosis – made especially dire by health-care reform’s inability to make much of a dent in rising medical costs – is sufficiently bleak that there is increasing bipartisan momentum to do something. President Barack Obama has appointed a bipartisan deficit-reduction commission, whose chairmen recently provided a glimpse of what their report might look like. Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible.

In the US (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade:

• a massive increase in defense expenditures, fueled by two fruitless wars, but going well beyond that;
• growth in inequality, with the top 1% garnering more than 20% of the country’s income, accompanied by a weakening of the middle class – median US household income has fallen by more than 5% over the past decade, and was in decline even before the recession;
• underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans’ levies; and
• growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization.

As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality. Five core ingredients are required. First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest?

Second, military expenditures must be cut – not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist. We’ve continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined. Following this is the need to eliminate corporate welfare. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks. Corporate welfare accounts for nearly one-half of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world. An especially egregious form of corporate special treatment is that afforded to the drug companies. Even though the government is the largest buyer of their products, it is not allowed to negotiate prices, thereby fueling an estimated increase in corporate revenues – and costs to the government – approaching $1 trillion dollars over a decade.

Another example is the smorgasbord of special benefits provided to the energy sector, especially oil and gas, thereby simultaneously robbing the treasury, distorting resource allocation, and destroying the environment. Then there are the seemingly endless giveaways of national resources – from the free spectrum provided to broadcasters to the low royalties levied on mining companies to the subsidies to lumber companies. Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)?

Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in more than $1 trillion over the course of a decade.

A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands. It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class. There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.

Lies in Faith and Faith in Lies

2010-12-19T22:36:00.000-08:00

A Holiday Message from Ricky Gervais: Why I’m An Atheist
published @ http://blogs.wsj.com/speakeasy/2010/12/19/a-holiday-message-from-ricky-gervais-why-im-an-atheist/

Why don’t you believe in God? I get that question all the time. I always try to give a sensitive, reasoned answer. This is usually awkward, time consuming and pointless. People who believe in God don’t need proof of his existence, and they certainly don’t want evidence to the contrary. They are happy with their belief. They even say things like “it’s true to me” and “it’s faith”. I still give my logical answer because I feel that not being honest would be patronizing and impolite. It is ironic therefore that “I don’t believe in God because there is absolutely no scientific evidence for his existence and from what I’ve heard the very definition is a logical impossibility in this known universe”, comes across as both patronizing and impolite.

Arrogance is another accusation. Which seems particularly unfair. Science seeks the truth. And it does not discriminate. For better or worse it finds things out. Science is humble. It knows what it knows and it knows what it doesn’t know. It bases its conclusions and beliefs on hard evidence -‐ evidence that is constantly updated and upgraded. It doesn’t get offended when new facts come along. It embraces the body of knowledge. It doesn’t hold on to medieval practices because they are tradition. If it did, you wouldn’t get a shot of penicillin, you’d pop a leach down your trousers and pray. Whatever you “believe”, this is not as effective as medicine. Again you can say, “It works for me”, but so do placebos. My point being, I’m saying God doesn’t exist. I’m not saying faith doesn’t exist. I know faith exists. I see it all the time. But believing in something doesn’t make it true. Hoping that something is true doesn’t make it true. The existence of God is not subjective. He either exists or he doesn’t. It’s not a matter of opinion. You can have your own opinions. But you can’t have your own facts.

Why don’t I believe in God? No, no no, why do YOU believe in God? Surely the burden of proof is on the believer. You started all this. If I came up to you and said, “Why don’t you believe I can fly?” You’d say, “Why would I?” I’d reply, “Because it’s a matter of faith”. If I then said, “Prove I can’t fly. Prove I can’t fly see, see, you can’t prove it can you?” You’d probably either walk away, call security or throw me out of the window and shout, ‘’F—ing fly then you lunatic.”

This, is of course a spirituality issue, religion is a different matter. As an atheist, I see nothing “wrong” in believing in a god. I don’t think there is a god, but belief in him does no harm. If it helps you in any way, then that’s fine with me. It’s when belief starts infringing on other people’s rights when it worries me. I would never deny your right to believe in a god. I would just rather you didn’t kill people who believe in a different god, say. Or stone someone to death because your rulebook says their sexuality is immoral. It’s strange that anyone who believes that an all-‐powerful all knowing, omniscient power responsible for everything that happens, would also want to judge and punish people for what they are. From what I can gather, pretty much the worst type of person you can be is an atheist. The first four commandments hammer this point home. There is a god”, I’m him, no one else is, you’re not as good and don’t forget it. (Don’t murder anyone, doesn’t get a mention till number 6.)

When confronted with anyone who holds my lack of religious faith in such contempt, I say, “It’s the way God made me.”

But what are atheists really being accused of?

The dictionary definition of God is “a supernatural creator and overseer of the universe”. Included in this definition are all deities, goddesses and supernatural beings. Since the beginning of recorded history, which is defined by the invention of writing by the Sumerians around 6000 years ago, historians have cataloged over 3700 supernatural beings, of which 2870 can be considered deities.

So next time someone tells me they believe in God, I’ll say “Oh which one? Zeus? Hades? Jupiter? Mars? Odin? Thor? Krishna? Vishnu? Ra?…” If they say “Just God. I only believe in the one God”, I’ll point out that they are nearly as atheistic as me. I don’t believe in 2,870 gods, and they don’t believe in 2,869.

I used to believe in God. The Christian one that is.

I loved Jesus. He was my hero. More than pop stars. More than footballers. More than God. God was by definition omnipotent and perfect. Jesus was a man. He had to work at it. He had temptation but defeated sin. He had integrity and courage. But He was my hero because He was kind. And He was kind to everyone. He didn’t bow to peer pressure or tyranny or cruelty. He didn’t care who you were. He loved you. What a guy. I wanted to be just like Him.

One day when I was about 8 years old, I was drawing the crucifixion as part of my Bible-‐studies homework. I loved art too. And nature. I loved how God made all the animals. They were also perfect. Unconditionally beautiful. It was an amazing world.

I lived in a very poor, working-‐class estate in an urban sprawl called Reading, about 40 miles west of London. My father was a laborer and my mother was a housewife. I was never ashamed of poverty. It was almost noble. Also, everyone I knew was in the same situation, and I had everything I needed. School was free. My clothes were cheap and always clean and ironed. And mum was always cooking. She was cooking the day I was drawing on the cross.

I was sitting at the kitchen table when my brother came home. He was 11 years older than me, so he would have been 19. He was as smart as anyone I knew, but he was too cheeky. He would answer back and get into trouble. I was a good boy. I went to church and believed in God – what a relief for a working-‐class mother. You see, growing up where I did, mums didn’t hope as high as their kids growing up to be doctors; they just hoped their kids didn’t go to jail. So bring them up believing in God and they’ll be good and law abiding. It’s a perfect system. Well, nearly. 75 percent of Americans are God-‐fearing Christians; 75 percent of prisoners are God-‐fearing Christians. 10 percent of Americans are atheists; 0.2 percent of prisoners are atheists.

But anyway, there I was happily drawing my hero when my big brother Bob asked, “Why do you believe in God?” Just a simple question. But my mum panicked. “Bob” she said in a tone that I knew meant, “Shut up.” Why was that a bad thing to ask? If there was a God and my faith was strong it didn’t matter what people said.

Oh … hang on. There is no God. He knows it, and she knows it deep down. It was as simple as that. I started thinking about it and asking more questions, and within an hour, I was an atheist.

Wow. No God. If mum had lied to me about God, had she also lied to me about Santa? Yes, of course, but who cares? The gifts kept coming. And so did the gifts of my new found atheism. The gifts of truth, science, nature. The real beauty of this world. I learned of evolution – a theory so simple that only England’s greatest genius could have come up with it. Evolution of plants, animals and us – with imagination, free will, love, humor. I no longer needed a reason for my existence, just a reason to live. And imagination, free will, love, humor, fun, music, sports, beer and pizza are all good enough reasons for living.

But living an honest life – for that you need the truth. That’s the other thing I learned that day, that the truth, however shocking or uncomfortable, in the end leads to liberation and dignity.

So what does the question “Why don’t you believe in God?” really mean. I think when someone asks that; they are really questioning their own belief. In a way they are asking “what makes you so special? “How come you weren’t brainwashed with the rest of us?” “How dare you say I’m a fool and I’m not going to heaven, f— you!” Let’s be honest, if one person believed in God he would be considered pretty strange. But because it’s a very popular view it’s accepted. And why is it such a popular view? That’s obvious. It’s an attractive proposition. Believe in me and live forever. Again if it was just a case of spirituality this would be fine. “Do unto others…” is a good rule of thumb. I live by that. Forgiveness is probably the greatest virtue there is. Buts that’s exactly what it is -‐ a virtue. Not just a Christian virtue. No one owns being good. I’m good. I just don’t believe I’ll be rewarded for it in heaven. My reward is here and now. It’s knowing that I try to do the right thing. That I lived a good life. And that’s where spirituality really lost its way. When it became a stick to beat people with. “Do this or you’ll burn in hell.”

You won’t burn in hell. But be nice anyway.

An Interview with Chalmers Johnson

2010-12-15T21:40:00.000-08:00

The piece below is from tomdispatch.com, an invaluable source for intriguing opinions on foreign policy and American Empire. In the interview, celebrated author Chalmers Johnson (now deceased) provided incredible insight into consequences of the American Empire. Enjoy reading this, and then go find copies of his other work!

Tomdispatch Interview: Chalmers Johnson on Our Fading Republic
By Tom Engelhardt
Posted on March 22, 2006, Printed on December 16, 2010
http://www.tomdispatch.com/blog/70576/

In Part 1 of his interview, Chalmers Johnson suggested what that fall-of-the-Berlin-Wall, end-of-the-Cold-War moment meant to him; explored how deeply empire and militarism have entered the American bloodstream; and began to consider what it means to live in an unacknowledged state of military Keynesianism, garrisoning the planet, and with an imperial budget -- a real yearly Pentagon budget -- of perhaps three-quarters of a trillion dollars. Tom

What Ever Happened to Congress? A Tomdispatch Interview with Chalmers Johnson (Part 2)

Tomdispatch: You were discussing the lunacy of the 2007 Pentagon budget

Chalmers Johnson:What I don't understand is that the current defense budget and the recent Quadrennial Defense Review (which has no strategy in it at all) are just continuations of everything we did before. Make sure that the couple of hundred military golf courses around the world are well groomed, that the Lear jets are ready to fly the admirals and generals to the Armed Forces ski resort in Garmisch in the Bavarian Alps or the military's two luxury hotels in downtown Seoul and Tokyo.

What I can't explain is what has happened to Congress. Is it just that they're corrupt? That's certainly part of it. I'm sitting here in California's 50th district. This past December, our congressman Randy Cunningham confessed to the largest single bribery case in the history of the U.S. Congress: $2.4 million in trinkets -- a Rolls Royce, some French antiques -- went to him, thanks to his ability as a member of the military subcommittee of the House Appropriations Committee to add things secretly to the budget. He was doing this for pals of his running small companies. He was adding things even the Department of Defense said it didn't want.

This is bribery and, as somebody said the other day, Congress comes extremely cheap. For $2.4 million, these guys got about $175 million in contracts. It was an easy deal.

The military is out of control. As part of the executive branch, it's expanded under cover of the national security state. Back when I was a kid, the Pentagon was called the Department of War. Now, it's the Department of Defense, though it palpably has nothing to do with defense. Hasn't for a long time. We even have another department of the government today that's concerned with "homeland security." You wonder what on Earth do we have that for -- and a Dept of Defense, too!

The government isn't working right. There's no proper supervision. The founders, the authors of the Constitution, regarded the supreme organ to be Congress. The mystery to me -- more than the huge expansion of executive branch powers we've seen since the neoconservatives and George Bush came to power -- is: Why has Congress failed us so completely? Why are they no longer interested in the way the money is spent? Why does a Pentagon budget like this one produce so little interest? Is it that people have a vested interest in it, that it's going to produce more jobs for them?

I wrote an article well before Cunningham confessed called The Military-Industrial Man in which I identified a lot of what he was doing, but said unfortunately I didn't know how to get rid of him in such a safe district. After it appeared on the Los Angeles Times op-ed page, the paper got a couple of letters to the editor from the 34th district in downtown LA saying, I wish he was my congressman. If he'd bring good jobs here, I wouldn't mind making something that just gets blown up or sunk in the ground like missile defense in Alaska. I mean, we've already spent $100 billion on what amounts to a massive high-tech scarecrow. It couldn't hit a thing. The aiming devices aren't there. The tests fail. It doesn't work. It's certainly a cover for something much more ominous -- the expansion of the Air Force into outer space or "full spectrum dominance," as they like to put it.

We need to concentrate on this, and not from a partisan point of view either. There's no reason to believe the Democrats would do a better job. They never have. They've expanded the armed forces just as fast as the Republicans.

This is the beast we're trying to analyze, to understand, and it seems to me today unstoppable. Put it this way: James Madison, the author of our Constitution, said the right that controls all other rights is the right to get information. If you don't have this, the others don't matter. The Bill of Rights doesn't work if you can't find out what's going on. Secrecy has been going crazy in this country for a long time, but it's become worse by orders of magnitude under the present administration. When John Ashcroft became attorney general, he issued orders that access to the Freedom of Information Act should be made as difficult as possible.

The size of the black budget in the Pentagon has been growing ever larger during this administration. These are projects no one gets to see. To me, one of the most interesting spectacles in our society is watching uniformed military officers like General Michael Hayden, former head of the National Security Agency, sitting in front of Congress, testifying. It happened the other day. Hillary Clinton asked him: Tell us at least approximately how many [NSA warrantless spying] interventions have you made? "I'm not going to tell you" was his answer. Admiral Jacoby, head of the Defense Intelligence Agency, was asked directly about a year ago, are we still paying Ahmed Chalabi $340,000 a month? And his reply was, "I'm not going to say."

At this point, should the senator stand up and say: "I want the U.S. Marshall to arrest that man." I mean, this is contempt of Congress.

TD: You're also saying, of course, that there's a reason to have contempt for Congress.

Johnson: There is indeed. You can understand why these guys do it. Richard Helms, the Director of the CIA back in 1977, was convicted of a felony for lying to Congress. He said, no, we had nothing to do with the overthrow of [Chilean President] Salvador Allende when we had everything to do with it. He gets a suspended sentence, pays a small fine, walks into the CIA building at Langley, Virginia and is met by a cheering crowd. Our hero! He's proudly maintained the principles of the secret intelligence service, which is the private army of the president and we have no idea what he's doing with it. Everything they do is secret. Every item in their budget is secret.

TD: And the military, too, has become something of a private army

Johnson: Exactly. I dislike conscription because it's so easily manipulated, but I do believe in the principle of the obligation of citizens to defend the country in times of crisis. Now, how we do that is still an open question, but at least the citizens' army was a check on militarism. People in the armed forces knew they were there involuntarily. They were extremely interested in whether their officers were competent, whether the strategy made sense, whether the war they might have to fight was justified, and if they began to believe that they were being deeply lied to, as in Vietnam, the American military would start to come apart. The troops then were fragging their officers so seriously that General Creighton Abrams said, we've got to get them out of there. And call it Vietnamization or anything else, that's what they did.

I fear that we're heading that way in Iraq. You open the morning paper and discover that they're now going to start recruiting down to level four, people with serious mental handicaps. The terrible thing is that they'll just be cannon fodder.

It's not rocket science to say that we're talking about a tragedy in the works here. Americans aren't that rich. We had a trade deficit in 2005 of $725.8 billion. That's a record. It went up almost 25% in just over a year. You can't go on not making things, fighting these kinds of wars, and building weapons that are useless. Herb Stein, when he was chairman of the council of economic advisers in a Republican administration very famously said, "Things that can't go on forever don't."

TD:: So put our problems in a nutshell.

Johnson: From George Bush's point of view, his administration has achieved everything ideologically that he wanted to achieve. Militarism has been advanced powerfully. In the minds of a great many people, the military is now the only American institution that appears to work. He's enriched the ruling classes. He's destroyed the separation of powers as thoroughly as was possible. These are the problems that face us right now. The only way you could begin to rebuild the separation of powers would be to reinvigorate the Congress and I don't know what could shock the American public into doing that. They're the only ones who could do it. The courts can't. The President obviously won't.

The only thing I can think of that might do it would be bankruptcy. Like what happened to Argentina in 2001. The richest country in Latin America became one of the poorest. It collapsed. It lost the ability to borrow money and lost control of its affairs, but a great many Argentines did think about what corrupt presidents had listened to what corrupt advice and done what stupid things during the 1990s. And right now, the country is on its way back.

TD: But superpower bankruptcy? It's a concept nobody's really explored. When the British empire finally went, we were behind them. Is there somebody behind us?

Johnson: No.

TD: So what would it mean for us to go bankrupt?. After all, we're not Argentina.

Johnson: It would mean losing control over things. All of a sudden, we would be dependent on the kindness of strangers. looking for handouts. We already have a $725 billion trade deficit; the largest fiscal deficit in our history, now well over 6% of GDP. The defense budgets are off the charts and don't make any sense, and don't forget that $500 billion we've already spent on the Iraq war -- every nickel of it borrowed from people in China and Japan who saved and invested because they would like to have access to this market. Any time they decide they don't want to lend to us, interest rates will go crazy and the stock exchange will collapse.

We pour about $2 billion a day just into servicing the amounts we borrow. The moment people quit lending us that money, we have to get it out of domestic savings and right now we have a negative savings rate in this country. To get Americans to save 20% of their income, you'd have to pay them at least a 20% interest rate and that would produce a truly howling recession. We'd be back to the state of things in the 1930s that my mother used to describe to me -- we lived in the Arizona countryside then -- when someone would tap on the rear door and say, "Have you got any work? I don't want to be paid, I just want to eat." And she'd say, "Sure, we'll find something for you to do and give you eggs and potatoes."

A depression like that would go on in this country for quite a while. The rest of the world would also have a severe recession, but would probably get over it a lot faster.

TD: So you can imagine the Chinese, Japanese, and European economies going on without us, not going down with us.

Johnson: Absolutely. I think they could.

TD: Don't you imagine, for example, that the Chinese bubble economy, the part that's based on export to the United States might collapse, setting off chaos there too?

Johnson: It might, but the Chinese would not blame their government for it. And there is no reason the Chinese economy shouldn't, in the end, run off domestic consumption. When you've got that many people interested in having better lives, they needn't depend forever on selling sweaters and pajamas in North America. The American economy is big, but there's no reason to believe it's so big the rest of the world couldn't do without us. Moreover, we're kidding ourselves because we already manufacture so little today -- except for weapons.

We could pay a terrible price for not having been more prudent. To have been stupid enough to give up on infrastructure, health care, and education in order to put 8 missiles in the ground at Fort Greeley, Alaska that can't hit anything. In fact, when tested, sometimes they don't even get out of their silos.

TD: How long do you see the dollar remaining the international currency? I noticed recently that Iran was threatening to switch to Euros.

Johnson: Yes, they're trying to create an oil bourse based on the Euro. Any number of countries might do that. Econ 1A as taught in any American university is going to tell you that a country that runs the biggest trade deficits in economic history must pay a penalty if the global system is to be brought back into equilibrium. What this would mean is a currency so depreciated no American could afford a Lexus automobile. A vacation in Italy would cost Americans a wheelbarrow full of dollars.

TD: At least it might stop the CIA from kidnapping people off the streets of Italy in the style to which they've grown accustomed.

Johnson: [Laughs.] Their kidnappers would no longer be staying in the Principe di Savoia [a five-star hotel] in Milano, that's for sure.

The high-growth economies of East Asia now hold huge amounts in American treasury certificates. If the dollar loses its value, the last person to get out of dollars loses everything, so you naturally want to be first. But the person first making the move causes everyone else to panic. So it's a very cautious, yet edgy situation.

A year ago, the head of the Korean Central Bank, which has a couple of hundred billion of our dollars, came out and said: I think we're a little heavily invested in dollars, suggesting that maybe Dubai's currency would be better right now, not to mention the Euro. Instantaneous panic. People started to sell; presidents got on the telephone asking: What in the world are you people up to? And the Koreans backed down -- and so it continues.

There are smart young American PhDs in economics today inventing theories about why this will go on forever. One is that there's a global savings glut. People have too much money and nothing to do with it, so they loan it to us. Even so, as the very considerable economics correspondent for the Nation magazine, William Greider, has written several times, it's extremely unwise for the world's largest debtor to go around insulting his bankers. We're going to send four aircraft-carrier task forces to the Pacific this summer to intimidate the Chinese, sail around, fly our airplanes, shoot off a few cruise missiles. Why shouldn't the Chinese say, let's get out of dollars. Okay, they don't want a domestic panic of their own, so the truth is they would do it as subtly as they could, causing as little fuss as possible.

What does this administration think it's doing, reducing taxes when it needs to be reducing huge deficits? As far as I can see, its policies have nothing to do with Republican or Democratic ideology, except that its opposite would be traditional, old Republican conservatism, in the sense of being fiscally responsible, not wasting our money on aircraft carriers or other nonproductive things.

But the officials of this administration are radicals. They're crazies. We all speculate on why they do it. Why has the President broken the Constitution, let the military spin virtually out of control, making it the only institution he would turn to for anything -- another Katrina disaster, a bird flu epidemic? The whole thing seems farcical, but what it does remind you of is ancient Rome.

If a bankruptcy situation doesn't shake us up, then I fear we will, as an author I admire wrote the other day, be "crying for the coup." We could end the way the Roman Republic ended. When the chaos, the instability become too great, you turn it over to a single man. After about the same length of time our republic has been in existence, the Roman Republic got itself in that hole by inadvertently, thoughtlessly acquiring an empire they didn't need and weren't able to administer, that kept them at war all the time. Ultimately, it caught up with them. I can't see how we would be immune to a Julius Caesar, to a militarist who acts the populist.

TD: Do you think that our all-volunteer military will turn out to be the janissaries of our failed empire?

Johnson: They might very well be. I'm already amazed at the degree to which they tolerate this incompetent government. I mean the officers know that their precious army, which they worked so hard to rebuild after the Vietnam War, is coming apart again, that it's going to be ever harder to get people to enlist, that even the military academies are in trouble. I don't know how long they'll take it. Tommy Franks, the general in charge of the attack on Baghdad, did say that if there were another terrorist attack in the United States comparable to 9/11, the military might have no choice but to take over. In other words: If we're going to do the work, why listen to incompetents like George Bush? Why take orders from an outdated character like Donald Rumsfeld? Why listen to a Congress in which, other than John McCain, virtually no Republican has served in the armed forces?

I don't see the obvious way out of our problems. The political system has failed. You could elect the opposition party, but it can't bring the CIA under control; it can't bring the military-industrial complex under control; it can't reinvigorate the Congress. It would be just another holding operation as conditions got worse.

Now, I'll grant you, I could be wrong. If I am, you're going to be so glad, you'll forgive me. [He laughs.] In the past, we've had clear excesses of executive power. There was Lincoln and the suspension of habeas corpus. Theodore Roosevelt virtually invented the executive order. Until then, most presidents didn't issue executive orders. Roosevelt issued well over a thousand. It was the equivalent of today's presidential signing statement. Then you go on to the mad Presbyterian Woodrow Wilson, whom the neocons are now so in love with, and Franklin Roosevelt and his pogrom against Americans of Japanese ancestry. But there was always a tendency afterwards for the pendulum to swing back, for the American public to become concerned about what had been done in its name and correct it. What's worrying me is: Can we expect a pendulum swing back this time?

TD: Maybe there is no pendulum.

Johnson: Today, Cheney tells us that presidential powers have been curtailed by the War Powers Act [of 1973], congressional oversight of the intelligence agencies, and so on. This strikes me as absurd, since these modest reforms were made to deal with the grossest violations of the Constitution in the Nixon administration. Moreover, most of them were stillborn. There's not a president yet who has acknowledged the War Powers Act as legitimate. They regard themselves as not bound by it, even though it was an act of Congress and, by our theory of government, unless openly unconstitutional, that's the bottom line. A nation of laws? No, we are not. Not anymore.

TD: Usually we believe that the Cold War ended with the Soviet Union's collapse and, in essence, our victory. A friend of mine put it another way. The United States, he suggested, was so much more powerful than the USSR that we had a greater capacity to shift our debts elsewhere. The Soviets didn't and so imploded. My question is this: Are we now seeing the delayed end of the Cold War? Perhaps both superpowers were headed for the proverbial trash bin of history, simply at different rates of speed?

Johnson: I've always believed that they went first because they were poorer and that the terrible, hubristic conclusion we drew -- that we were victorious, that we won -- was off the mark. I always felt that we both lost the Cold War for the same reasons -- imperial overstretch, excessive militarism, things that have been identified by students of empires since Babylonia. We've never given Mikhail Gorbachev credit. Most historians would say that no empire ever gave up voluntarily. The only one I can think of that tried was the Soviet Union under him.

TD: Any last words?

Johnson: I'm still working on them. My first effort was Blowback. That was well before I anticipated anything like massive terrorist attacks in the United States. It was a statement that the foreign-policy problems -- I still just saw them as that -- of the first part of the 21st century were going to be left over from the previous century, from our rapacious activities in Latin America, from our failure to truly learn the lessons of Vietnam. The Sorrows of Empire was an attempt to come to grips with our militarism. Now, I'm considering how we've managed to alienate so many rich, smart allies -- every one of them, in fact. How we've come to be so truly hated. This, in a Talleyrand sense, is the sort of mistake from which you can't recover. That's why I'm planning on calling the third volume of what I now think of as "The Blowback Trilogy," Nemesis. Nemesis was the Greek goddess of vengeance. She also went after people who became too arrogant, who were so taken with themselves that they lost all prudence. She was always portrayed as a fierce figure with a scale in one hand -- think, Judgment Day -- and a whip in the other

TD: And you believe she's coming after us?

Johnson: Oh, I believe she's arrived. I think she's sitting around waiting for her moment, the one we're coming up on right now.

Copyright 2006 Tomdispatch

Oregon Public Employee Pay & the Recession

2010-10-26T00:30:00.000-07:00

Oregonian 10/24/2010

Imagine for a moment the owners of a business sitting down to hash out an emergency bailout for their firm.

Income has plummeted, and lines of credit are tapped out. Customers clamor for more services, but the cost of employees' health and retirement benefits is growing faster than the company can raise prices.

What do they do?

Many employers already have made those tough calls. But the grim scenario still awaits Oregon's next governor and the 2011 Legislature. Tax revenues are down, demand for services is up and total compensation for the average state employee is slated to grow by 15 percent over the next two years.

Raising taxes isn't on the table. Services already have been cut, and further reductions to schools, prisons and the poor will spark great debates and surgical strikes.

What hasn't been permanently cut is state employee compensation. Yes, workers sustained pay freezes and furlough days that amounted to pay cuts. All were effectively temporary measures.

As the Nov. 2 election nears, public employee pay is the elephant in the room.

Discussing the subject in detail is tough for Democrats, who derive much of their financial support from public employee unions. And while Republicans have been more forthcoming on the subject, it's not clear yet how much influence they'll wield in the process.

While a projected "decade of deficits" seems to call for fundamental changes, that prospect raises basic questions about what's fair for public employees, whether the state can continue to attract and retain good employees, and what services state government needs to provide to residents.

Gov. Ted Kulongoski's so-called Reset Cabinet report recommended limiting the increase in state employee compensation to the same level as the private sector -- about 6.5 percent over the two-year budget cycle. But that would leave the state far short of its ultimate cost cutting goal.

Compounding the problem: The state has no seat at the table when schools bargain with teacher unions, meaning its own negotiations will cover only one-third of the general fund dollars that go toward labor costs.

At a minimum, observers say budget realities should force a change in the way labor negotiators and lawmakers approach collective bargaining, which begins for state employees in December.

"The problem has been that, over the long term, management has been too timid," said Mike Greenfield, who served as Oregon Department of Administrative Services director for the last 18 months of John Kitzhaber's second term. "The union has done a very good job of representing employees. The management ... has been a weenie."

For their part, unions acknowledge that the labor cost dilemma is daunting and real. But they want to focus on fairness: The current economic crisis was largely a Wall Street creation, and their members are being scapegoated for a revenue problem that is a product of an unbalanced state tax system.

Focusing on pay cuts, the unions say, is a race to the bottom of the pay barrel. Now that private sector workers have been stripped of reasonable retirement and medical benefits, the next corporate effort is to privatize the public sector, they say.

Unlike most private sector employees, most state union workers can strike. That hasn't happened in Oregon since 1995, but union leaders say their members are willing if pushed too far.

"In the past, we have heard the benefits are a strike issue," said Heather Conroy, incoming executive director of the Service Employees International Union Local 503, which represents 18,000 state-agency employees and 4,500 university workers.

Here's a menu of potential costs cuts and some of the potential challenges:

1. Freeze cost-of-living increases. State workers usually receive increases to reflect inflation, or annual increases in prices of consumer goods. Since 1992, they've ranged from 2 to 3 percent a year, though state workers gave up such increases in eight of those years, including the past two. Freezing so-called COLAs again for two years would save the state $114 million.

State employees' base pay is already low compared to the private sector, though it still exceeds neighboring states except California. A long string of pay freezes could exacerbate the public-private imbalance, making Oregon's pay rates less competitive.

2. Freeze step increases indefinitely. Step increases are like credits for experience. Each step represents a 4.75 percent raise, and most state jobs grant nine over time, for a total salary increase of more than 40 percent from the bottom to top step. State workers view them as boosts on a salary scale promised them as part of their job offer. Critics see them as automatic raises in addition to cost-of-living adjustments.

Unions point out they've agreed to no step increases in three of the past eight years, mostly to preserve health benefits. Freezing them again would save the state about $53 million through 2013, Kulongoski's office estimates. But it would also set about two-thirds of state employees back compared to private-sector pay rates.

Even eliminating all pay increases -- steps and COLAs -- for two years would address less than half the projected 15 percent growth in labor costs, state officials say.

3. Reduce or eliminate the state's 6 percent retirement contribution. In 1979, with the state mired in a recession and double-digit inflation wreaking havoc on family budgets, state workers agreed to give up a pay increase. In return, the state agreed to pick up its employees' required 6 percent contribution to the Public Employees Retirement System.

That 6 percent contribution, called the pickup, remains today, though the contribution is now directed into an individual member account that supplements the state's regular defined benefit retirement program. It's a benefit rarely seen in the private sector -- an employer contributing 6 percent of pay to a 401(k) plan, with no matching contribution demanded from workers.

At the time, "it wasn't an easy thing to get the workers to agree to" said Ken Allen, executive director of the American Federation of State, County and Municipal Employees Council 75, which represents 6,650 state workers. "We had to really explain this was a good thing."

That pickup looms as an easy target for the next governor to extract concessions. It's not a legally required payment, and some school districts have cut it. Altering it wouldn't change the health of the pension fund, as the pickup goes into supplemental accounts. But it would be a substantial savings.

This summer, Kulongoski talked about cutting half the pickup, which would save state agencies some $134 million over two years. Lately, his office has taken a harder line.

"We're saying that should go away," said Tim Nesbitt, chief of staff for Kulongoski, who was the service employee union's lead negotiator with the state during the 1995 strike. Such a reduction would save about $260 million for state agencies and schools.

"We can't afford to have two pension plans," Nesbitt said.

4. Require workers to help pay the premiums for their medical insurance. Oregon is the only state that doesn't ask full-time workers to pay part of the health insurance premiums or deductibles for themselves or family members. Most school employees in the state do. Private-sector workers chip in 20 to 30 percent of their pay, on average, toward premiums for single and family coverage respectively, according to a 2010 U.S. Department of Labor survey. Government workers elsewhere chip in 11 to 27 percent.

Oregon public employee unions say fully paid health benefits are so important, they've taken repeated pay freezes to maintain them. AFSCME's Allen notes those benefits equate to tax-free pay.

Yet health benefits now represent one-fifth of the average state employee's compensation. Those costs are expected to increase 9 percent a year.

So far, examples put forth by Kulongoski's office call for modest employee contributions -- only 1.5 percent of salary, with offsets for healthy behaviors and employees making less than $60,000 a year. The estimated savings: only $8 million.

Union leaders and Nesbitt say other savings can be made by improving healthy behaviors, increasing costs for nonessential procedures and other tweaks to the plan. But estimates on those savings aren't clear.

5. Extend pay cuts to schools. State and university employees only account for one-third of the $7.3 billion general fund money expended on payroll. The rest goes for pay and benefits at K-12 school and community colleges around the state.

But the state doesn't control how that money is spent or have any role in the collective bargaining process.

Lawmakers will have to rely on school districts to make a chunk of their general fund cuts. One recommendation from the governor's reset report is to ensure any compensation reductions negotiated with state workers carry over to school employees, perhaps by placing conditions on the release of general fund dollars.

The problem with that scenario is that school employees have significantly different pay and benefits. Becca Uherbelau, spokeswoman for the Oregon Education Association, which represents 47,000 school employees around the state, said the majority of school employees pay out-of-pocket costs for health insurance. Moreover, employees in at least 80 districts pay their own 6 percent retirement contribution.

Oregon's average teacher salary ranks 17th nationally, according to the National Education Association. At $55,000, it sits just above the national average.

Uherbelau cited national studies concluding that teachers are underpaid relative to other workers with comparable education and experience levels. Meanwhile, she said, Oregon's teachers have consistently made concessions to help the state balance past budgets.

One-size-fits-all mandates to deal with compensation issues that differ widely by location simply won't work, she said.

"We are realistic. We recognize there's more to do, sacrifices will have to be made and shared," she said. "But we want to ensure that local school districts, leaders and teachers can make the choices that are best for their schools and their communities.

Where John Kitzhaber stands on public pay
Kitzhaber -- the union-Democratic endorsed candidate -- presided over the service employee union's last strike, a weeklong event in 1995 that shuttered DMV and other services. It came after voter-approved Measure 8 eliminated the 6 percent contribution to worker retirement accounts. State workers wanted a 6.5 percent pay hikes in its place.

It's not clear what role the strike played in resolving the dispute. The union ended the walkout a week before both sides reached an initial agreement on a phased-in 7 percent pay increase. Weeks later, a state judge ruled Measure 8 unconstitutional, and Kitzhaber and Republican legislators demanded the union renegotiate for lower pay increases.

Kitzhaber has said he'll get tough at the bargaining table this time around.
He frequently notes that the two largest employee unions supported his opponent in the primary.

"Quite frankly I think they understand this is coming," Kitzhaber said in a talk this month to the Oregon Medical Association. But he's not offered specifics on what concessions he'll seek. Kitzhaber has said the state's 6 percent retirement contribution, salary step increases, cost of living adjustments and health benefit costs will all be on the table.

His plan calls for "value-base cost sharing" of health benefits, but is not clear on whether that means state workers must contribute toward premiums. "That conversation happens around the negotiating table," spokeswoman Jillian Schoene said. Kitzhaber declined, through Schoene, to be interviewed for this story.

Where Chris Dudley stands on public pay

The Republican candidate for governor has accused Kitzhaber of being too close to unions to make hard, specific recommendations on compensation cuts. Dudley says he doesn't want to demonize state employees, or take away from their hard work, but the state faces a simple reality at the bargaining table.

"It's a tradeoff," Dudley said in an interview Friday. "Either you're keeping more employees at a lower amount, or you have fewer employees through some form of layoff. My preference is to have a shared sacrifice and keep more employees in their jobs, especially in this economic climate." That's not the way unions have typically reacted to budget cuts, preferring layoffs, which are temporary, to big pay or benefit cuts, which can be permanent.

Dudley says he'd be looking for state employees to share in paying their health insurance premiums. He has mentioned a 16 percent figure in the past, but said Friday that whatever the amount ends up being, it could kick in progressively, with higher-paid employees paying more. He also wants to explore a "cafeteria plan," where employees can choose among a variety of options, and participate in managing their own costs through a health spending account.

On PERS, he wants to eliminate some or all of the 6 percent pickup. For PERS beneficiaries who live out of state, he wants to eliminate extra benefits meant to offset the impact of state taxation. He also likes the idea of changing the system's service crediting rules so employees who work part time for years, such as legislators, can't suddenly qualify for a gold-plated pension by serving a three-year stint in a fulltime job at the end of a career.

While his experience as a labor negotiator for the NBA players union doesn't directly translate to the state's collective bargaining process, Dudley says all negotiations come down to trust, and establishing the notion that everyone is looking for a sustainable package going forward. In that light, he wants the state to put everything on the table, and keep the focus on total compensation.
"We have to get away from the idea that we're going to negotiate salary, but allow medical and retirement to run off on their own," Dudley said. "We have to bring it all under the same umbrella and try to craft the best win-win solution possible."

2010-08-21T12:00:00.000-07:00

Below is an excellent article by Bob Adelmann in The New American on the next financial crisis: state and municipal spending and pension obligations. While every politician running for office this year will declare that state spending must be "controlled," few (if any) will address the true scope problem, and even fewer will actually do something about it once in office. Whether it is the stranglehold that public employee unions have over our politicians, or the simple greed of protecting their own pet projects or livelihood, it is highly unlikely that the coming crisis will be averted. Instead, expect states to plead for increased federal assistance while concurrently cutting programs that benefit the least powerful constituents, whose complaints will be muffled by speeches decrying the overall economic despair while ignoring the disproportionate impact of the few cuts made by government. No, the most likely result won't be the difficult or responsible choice. The federal government will instead kick the can further down the road by printing additional dollars to support continued profligate spending, eventually spurring the inflationary crisis that will ultimately destroy the domestic economy.

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The first warning about the possible bankruptcy of the town of Vallejo, California, was reported by the Associated Press on February 28, 2008, when Councilwoman Stephanie Gomes said, “Our financial situation is getting worse every single day. No city or private person wants to declare bankruptcy, but if you’re facing insolvency, you have no choice but to seek protection.”

Marci Fritz, vice president of the California Foundation for Fiscal Responsibility, blamed the action on promises made earlier by the council to the city’s employees concerning salaries and retirement benefits that the city no longer can afford. According to Fritz, these were promises made during economically flush times, and were due to the city council’s unrealistic expectations that those times would continue indefinitely. She said, “It’s a nightmare for city governments because they have to continue to pay these benefits that were granted when they had extra money from real estate and sales tax[es].”

Vallejo, a city of 120,000 across the bay from San Francisco, faced a $9 million budget shortfall at the time, owing to soaring payroll costs for its firefighters and police officers whose pay and pension costs make up almost 80 percent of the city’s budget. Those pay packages were negotiated with the unions representing those workers, and were necessary, according to spokesmen for the city, to be competitive with surrounding towns.

In May of 2008, the council voted 7-0 to declare Chapter 9 bankruptcy to “reorganize its finances,” which meant attempting to break the promises it had made earlier to the unions through the bankruptcy court. By this time, the budget shortfall had increased from $9 million to $15 million, despite efforts to cut expenses for museums, public works, senior centers, and libraries. The bankruptcy process allows the judge to void the union contracts, which essentially forces the city workers to accept a pay package that the city can afford, in light of declining tax revenues. But city employees weren’t the only ones at risk: The city had sold tax-exempt general obligation bonds whose interest payments would also be reduced or even eliminated. With an annual budget of $80 million, the city owed $53 million to those bondholders, and another $220 million in unfunded pension and retirement health benefits, totaling more than three times the city’s annual revenues.

When Judge Michael McManus determined that labor contracts can be broken in the Chapter 9 bankruptcy, union spokesmen said this set a dangerous precedent for other cities and townships in similar trouble to “do a Vallejo.” However, because of a binding arbitration clause inserted into the city charter in 1970, unions were able to renegotiate another contract with the city and, starting in July, 2010, police officers are getting a seven-percent pay raise. New Vallejo Councilwoman Marti Brown was appalled: “No one is getting a 7 percent increase, even in cities not in bankruptcy.” This raise takes place when the city’s budget has decreased from over $80 million in 2008 to just over $63 million in 2010.

The city of Maywood, California, took a different approach to its fiscal difficulties. On July 1, 2010, everyone on the payroll was fired. The Los Angeles Times said that by laying off an estimated 100 workers and contracting the remaining essential services such as finance, rec-ords management, parks and recreation, and street maintenance to a nearby town, Maywood would save the city $165,000 a year. On July 1, “We will become a 100 percent contracted city,” said interim City Manager Angela Spaccia.

San Diego is considering bankruptcy as a result of a report by the San Diego Grand Jury that “such a step could help the city cut its onerous retirement and health benefits.” At present the city has an unfunded pension obligation of $2.2 billion and another unfunded retiree healthcare liability of $1.3 billion. And MoneyNews said that San Diego is the fifth major city in the state to consider such a move, along with Los Angeles.

The recent exposure by the Los Angeles Times of the outrageous salary and retirement benefits being provided by Bell City to its City Manager and Chief of Police confirms the attitude of entitlement and disregard for fiscal responsibility that appears to be rampant in cities across the state and the country.

Papering Over Problems
All of this is putting the state of California on the “verge of system failure,” warns Jean Ross, executive director of the California Budget Project. With an annual budget of about $125 billion, California faces a $19 billion shortfall this year, and an expected $37 billion gap next year. But that’s just the tip of the iceberg. A recent Stanford University study concluded that the state’s pension fund is short by roughly $500 billion. The study urged Governor Schwarzenegger “to inject $360 billion into its public benefit systems … [just to] have an 80 percent chance of meeting 80 percent of [the state’s] obligations over the next 16 years.”

As Agora Financial put it,

The problem, just like with the subprime [meltdown], is an irrational form of leverage. In essence, municipalities borrow current earnings of public employees in exchange for some of the most favorable retirement plans in the world. That borrowed money is invested aggressively, just like a private-sector employee would in his 401(k).

Except if the fund loses money, which they all have over the last 10 years, pension funds don’t adjust payouts. The social and political pressure to maintain the status quo — keeping our public employees comfortably retired — is just too strong. So municipalities kick the can down the road. New employees buy into the funds. Fund managers maintain their projections of endless 8 percent annual returns. Retirees keep taking out the funds they were promised … and no one pays the tab.

And it’s not just California. Orin Kramer of New Jersey’s pension program estimates a national funding gap among all the states of around $2 trillion. The Center on Budget and Policy Priorities, a Washington research institution, announced that “finances in Arizona, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June [2011].” The May/June issue of Chief Executive magazine published its annual “Best and Worst States for Business 2010” and gave its “booby” prize for worst state to California, with New York, Michigan, New Jersey, and Massachusetts rounding out the bottom five.

Hugo Tassone, a retired Yonkers, New York, policeman, recently received a lot of unwanted attention when it was revealed that when he retired three years ago, at age 44, his pension was $74,000 a year. Now 47, his pension is $101,333 a year. He is just one of over 100 retired Yonkers police officers and firefighters who are collecting more in retirement than they did while they were working. Statewide, more than 3,700 retired public workers are getting pensions of more than $100,000 a year. The problem, according to David Simpson, a spokesman for the Mayor of Yonkers, is that “once you give something, you can’t take it away.”

This fades into relative insignificance in light of Bell City, California’s problems. When City Manager Robert Rizzo’s pension kicks in, he will receive “at least $600,000 a year for the rest of his life,” according to the Los Angeles Times. This would make him the highest-paid retiree in the California Public Employees Retirement System (CalPERS). Third on that list would be Bell City’s Police Chief Randy Adams, who will receive more than $400,000 annually.

Bell City’s misfortunes will be shared with 140 other cities and districts such as Norco, La Canada, Flintridge, and Goleta because they are in the same pension “liability pool” as Bell. And there appears to be no way out. As the Times put it, “Public pensions are difficult to rescind. Courts have repeatedly upheld the [pension benefits] in favor of employees.” A slight glimmer of hope was offered by Stephen Silver, a Santa Monica attorney specializing in pension law, who said that “investigators [would have to] show that Bell’s high salaries were an unlawful expenditure of public funds.”

In June, New York’s cash crunch was so severe that Governor David Paterson said the state might have to start paying its bills with I.O.U.s, much like California did last year. The very next day, however, the New York State legislature came up with an ingenious way to kick the can: borrow from itself. By borrowing from the state’s own pension fund, the state could help close its current $9 billion budget gap, in exchange for a promise to pay back the loan starting three years from now. But don’t call it borrowing. Robert Megna, New York’s budget director, said, “We’re not borrowing. We would view it more as an extended-payment plan.” Lt. Governor Richard Ravitch challenged that characterization: “Call it what you will, it’s taking money from future budgets to help solve this year’s budget.”

Legislators in other states have promoted similar budgetary sleight of hand. One way to “fix” the pension shortfalls has been to take more risks with the invested funds in the hopes of getting higher returns. A New York Times article quoted Frederick Rose, former chairman of the Texas Pension Review Board, “In effect, they’re going to Las Vegas [to play] ‘double up to catch up.’” Naturally, the money managers disagree, saying that such strategies are merely aimed at “diversification,” which now includes investing in commodity futures, junk bonds, foreign stocks, and deeply discounted mortgage-backed securities, as well as investing on margin. In addition, some managers are betting on hedge funds to help enhance their returns. According to the Times: “The problem now is that bond rates have been low for years, and stocks have been prone to such wild swings that [the usual] 60-40 mixture of stocks and bonds is not paying 8 percent. Many public pension funds have been averaging a little more than 3 percent a year for the last decade, so they have fallen behind where their planning models say they should be.” Some states, like New Jersey, “have fallen so far behind they may never catch up again.”

Any attempt to lower the estimated or projected rate of return, however, would only exacerbate the problem because it would increase the contributions required to be made by the states. In Colorado, for instance, its $30 billion pension fund requires that the fund earn no less than 8 ½ percent annually. At present, because of much lower real returns, the plan is underfunded by nearly $18 billion. But if that projected return were adjusted downward by just one-half of one percent, the plan’s shortfall would jump to more than $21 billion, requiring the state to increase its contribution. But Colorado cannot even make the contribution currently required and has fallen several billion dollars behind, despite reducing current retirees’ cost-of-living adjustment down to 2 percent from the previous 3 ½ percent. And employees’ unions are threatening to sue to have that downward adjustment reversed.

Exacerbating the Problems
California’s problem isn’t just fiscal. Chief Executive magazine’s recent survey quoted one CEO: “Texas is pro-business with reasonable regulations, while California is anti-business with anti-business regulations.” Another respondent agreed: “California is terrible. Even when we’ve paid their high taxes in full, they still treat every conversation as adversarial. It’s the most difficult state in the nation. We have actually walked away from business rather than deal with the government in Sacramento.” A third complained, “The leadership of California has done everything in its power to kill manufacturing jobs in this state. As I stated at our annual meeting, if we could grow our crops in Reno, we’d move our plants [there] tomorrow.”

Texas, on the other hand, is where 70 percent of all new U.S. jobs have been created since 2008, and has gained nearly a million new residents over the last 10 years. By comparison, California lost 1½ million residents, and New York lost even more than California. New Jersey lost so many residents that it has dropped from 10th to 11th place in population. Part of the attractiveness of the top states in the Chief Executive survey is that their budgets are relatively under control. For example, Montana Governor Brian Schweitzer said recently, “It gives us a great deal of pride that when 48 states zigged, we zagged. We were certainly not visionaries, but when times were good, we put money aside to get through the current downturn. Do we have enough money set aside to get us through this? I don’t know. I think so. I hope so, but I know this: We did a better job than 48 other states.”

Forbes magazine did a “Political Litmus Test” and discovered that the states in the worst financial condition were also heavily Democratic. Said Forbes: “The five states in the worst financial condition — Illinois, New York, Connecticut, California and New Jersey — are all among the bluest of blue states [while three of] the five most fiscally fit states — Utah, Nebraska and Texas — boast Republican majorities.” Kent Redfield, former professor at the University of Illinois, concluded that the difference “comes down to stronger unions and a larger appetite for public programs. Unions in general have more influence in Democratic-controlled states. This isn’t to say that unions are bad, but where they’re strong you have bigger demands for social services and coalitions with construction companies, road builders and others that push up debt.” Utah, according to Forbes, is the most fiscally responsible state in the union, with just $442 of debt per resident and unfunded pension obligations of $7,272 per resident. It is also the reddest state in the Union, with a 21 percentage point advantage for Republicans. And it boasts a triple-A credit rating from Moody’s. By contrast, Illinois, a blue state, has a per resident debt of $1,877 and unfunded pension liabilities of $17,230. Moody’s rates its general obligation debt second lowest in the country, just ahead of California.

Added together, 46 states face budget shortfalls this year of more than $110 billion. Dean Banker of the Center for Economic and Policy Research concludes that the states have few options: “States are going to have to cut back spending and raise taxes, the same way Greece and Spain are.” Former New Jersey Governor Christine Todd Whitman was more direct: “States don’t have a choice anymore. These problems are going to require major surgery.”

Not if the politicians themselves can avoid facing the music, however. Illinois Governor Pat Quinn recently signed legislation that would slash retirement benefits for state workers, saying, “We can’t afford to deny reality or delay action any longer.” But the New York Times exposed Quinn’s deceit: “That vaunted $300 million in immediate savings? [Quinn] produced it by giving [Illinois] credit [today] for the much smaller checks it will send to retirees many years in the future — people who must first be hired and then, for full benefits, work until age 67.” (Emphasis added.) In other words, through the magic of accounting and obfuscation, Quinn’s savings are coming from workers who haven’t even been hired yet!

Not Saying No to Constituents
The creativity of politicians trying to stay in office and avoid making hard decisions is something to behold. The city of Wichita, Kansas, will soon begin imposing a “false alarm fee” that applies to residents whose security alarms go off by accident. San Francisco has decided to charge a euthanasia tax of $25 per pet, and another $20 if residents want the city to dispose of the newly deceased pet. Residents in Washington, D.C., are now charged $51 a month to keep the streetlights on at night. Las Vegas will start taxing amateur sports, and fees will double for all youth and adult sports leagues and summer camps. Smokers in New York get to pay an additional $1.60 per pack of cigarettes, while Baltimore just passed a “beverage tax” of 2 cents per bottle, which includes water as well as soda. Probably the most notorious was New York State’s “borrowing from itself” but not calling it borrowing, just “smoothing” out the revenue stream. New Hampshire was recently ordered by the courts to “put back $110 million that it took from a medical malpractice pool [in order to] balance its budget,” according to the New York Times. Connecticut tried to revise its accounting rules to reduce the impact of its budget shortfall. Hawaii has already initiated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by April 15. And many states have attempted to balance their budgets using federal healthcare dollars that Congress has not yet even appropriated. Colorado tried unsuccessfully to raid that state’s worker’s compensation program in the amount of $500 million.

The audacity is breathtaking. According to MoneyNews, seven states that are in financial trouble continue to hire new workers. Joshua Rauh, a finance professor at Northwestern University, released a study showing that Illinois, Connecticut, Indiana, New Jersey, Hawaii, Louisiana, and Oklahoma have hired 9,700 new workers during the Great Recession. Says Bloomberg columnist Joe Mysak, “Politicians have talked a lot about layoffs during this recession. In most cases, that talk is … empty.” Politicians have an “attitude of entitlement and arrogance,” he adds.

Pension Fairies
Some despair that politicians and pensioners will continue to believe in “the pension fairy,” as Gary North put it recently. He says that “voters are poorly informed but [they are] not stupid. They know that some future group of voters will simply stop funding the pension program[s]. They know that when things get tough there will be a new Legislature, and there will be a new Governor, and these faithful politicians will do whatever is necessary to get themselves re-elected.” North compares the states’ situations to that of General Motors before the government takeover. The company’s debt was restructured [read: defaulted] which “stiffed all of the pensioners [and] stiffed all of the bondholders.... What happened to General Motors is going to happen to most pension funds in most municipal governments and most state governments … one by one, they are going to go belly up.”

Others are making “zero-sum” recommendations, such as selling digital ads on state-issued license plates; selling off state-owned properties, as was proposed in Minnesota when they suggested selling the Minneapolis-St. Paul International Airport to private businesses; or offering statewide, private vouchers for education, as was recently tried in the District of Columbia, generating some savings. Writing for the Los Angeles Times, columnist Michael Hiltzik complained about all the “corporate welfare” in which California engages. He referred to the “Hollywood” subsidy, currently $100 million annually in tax credits and “enterprise zones,” which costs the state upwards of $500 million. He further complains that “California is the only major oil-producing state that doesn’t levy a severance tax on oil taken from the ground, even though such a tax could yield billions of dollars a year.”

But all of these “raids” and “adjustments” and sleight-of-hand accounting tricks are simply nibbling at the edges of the problem. Joshua Rauh, quoted earlier, recently recalculated the pension obligations of all the states using the rules followed by bond issuers. The states’ unfunded liability is $3.23 trillion (with a T).

The reality is that with politicians’ interest in kicking the can down the road, the vested “entitlement” interests of the retirees, and belief in the “pension fairy,” bankruptcies will continue to claim victims. States are already looking to the federal government for “assistance.” If General Motors is too big to fail, what about California? And if California, why not New York? If New York, why not Illinois? The irony is, as always, the federal government has no money of its own. It’s already past the “tipping point,” and is taking on water faster every day. The future appears to many to be grim indeed.

Article originally published @ http://www.thenewamerican.com/index.php/economy/sectors-mainmenu-46/4323-conjuring-magic-to-cover-states-debts-fiscal-reality-sets-in

Tip of the Iceberg

2010-07-30T02:25:00.000-07:00

The Opposites Game
All the Strangeness of Our American World in One Article
By Tom Engelhardt

Have you ever thought about just how strange this country’s version of normal truly is? Let me make my point with a single, hardly noticed Washington Post news story that’s been on my mind for a while. It represents the sort of reporting that, in our world, zips by with next to no reaction, despite the true weirdness buried in it.

The piece by Craig Whitlock appeared on June 19th and was headlined, “U.S. military criticized for purchase of Russian copters for Afghan air corps.” Maybe that’s strange enough for you right there. Russian copters? Of course, we all know, at least vaguely, that by year's end U.S. spending on its protracted Afghan war and nation-building project will be heading for $350 billion dollars. And, of course, those dollars do have to go somewhere.

Admittedly, these days in parts of the U.S., state and city governments are having a hard time finding the money just to pay teachers or the police. The Pentagon, on the other hand, hasn’t hesitated to use at least $25-27 billion to “train” and “mentor” the Afghan military and police -- and after each round of training failed to produce the expected results, to ask for even more money, and train them again. That includes the Afghan National Army Air Corps which, in the Soviet era of the 1980s, had nearly 500 aircraft and a raft of trained pilots. The last of that air force -- little used in the Taliban era -- was destroyed in the U.S. air assault and invasion of 2001. As a result, the "Afghan air force” (with about 50 helicopters and transport planes) is now something of a misnomer, since it is, in fact, the U.S. Air Force.

Still, there are a few Afghan pilots, mostly in their forties, trained long ago on Russian Mi-17 transport helicopters, and it’s on a refurbished version of these copters, Whitlock tells us, that the Pentagon has already spent $648 million. The Mi-17 was specially built for Afghanistan’s difficult flying environment back when various Islamic jihadists, some of whom we’re now fighting under the rubric of “the Taliban,” were allied with us against the Russians.

Here’s the first paragraph of Whitlock’s article: “The U.S. government is snapping up Russian-made helicopters to form the core of Afghanistan's fledgling air force, a strategy that is drawing flak from members of Congress who want to force the Afghans to fly American choppers instead.”

So, various congressional representatives are upset over the lack of a buy-American plan when it comes to the Afghan air force. That’s the story Whitlock sets out to tell, because the Pentagon has been planning to purchase dozens more of the Mi-17s over the next decade, and that, it seems, is what’s worth being upset about when perfectly good American arms manufacturers aren’t getting the contracts.

But let’s consider three aspects of Whitlock’s article that no one is likely to spend an extra moment on, even if they do capture the surpassing strangeness of the American way of war in distant lands -- and in Washington.

1. The Little Training Program That Couldn’t: There are at present an impressive 450 U.S. personnel in Afghanistan training the Afghan air force. Unfortunately, there’s a problem. There may be no “buy American” program for that air force, but there is a “speak American” one. To be an Afghan air force pilot, you must know English -- “the official language of the cockpit,” Whitlock assures us (even if to fly Russian helicopters). As he points out, however, the trainees, mostly illiterate, take two to five years simply to learn the language. (Imagine a U.S. Air Force in which, just to take off, every pilot needed to know Dari!)

Thanks to this language barrier, the U.S. can train endlessly and next to nothing is guaranteed to happen. “So far,” reports Whitlock, “only one Afghan pilot has graduated from flight school in the United States, although dozens are in the pipeline. That has forced the air corps to rely on pilots who learned to fly Mi-17s during the days of Soviet and Taliban rule.” In other words, despite the impressive Soviet performance in the 1980s, the training of the Afghan Air Force has been re-imagined by Americans as a Sisyphean undertaking.

And this offers but a hint of how bizarre U.S. training programs for the Afghan military and police have proven to be. In fact, sometimes it seems as if exactly the same scathing report, detailing the same training problems and setbacks, has been recycled yearly without anyone who mattered finding it particularly odd -- or being surprised that the response to each successive piece of bad news is to decide to pour yet more money and trainers into the project.

For example, in 2005, at a time when Washington had already spent $3.3 billion training and mentoring the Afghan army and police, the U.S. Government Accounting Office (GAO) issued a report indicating that “efforts to fully equip the increasing number of [Afghan] combat troops have fallen behind, and efforts to establish sustaining institutions, such as a logistics command, needed to support these troops have not kept pace.” Worse yet, the report fretted, it might take “up to $7.2 billion to complete [the training project] and about $600 million annually to sustain [it].”

In 2006, according to the New York Times, “a joint report by the Pentagon and the State Department... found that the American-trained police force in Afghanistan is largely incapable of carrying out routine law enforcement work, and that managers of the $1.1 billion training program cannot say how many officers are actually on duty or where thousands of trucks and other equipment issued to police units have gone.” At best, stated the report, fewer than half of the officially announced number of police were “trained and equipped to carry out their police functions.”

In 2008, by which time $16.5 billion had been spent on Army and police training programs, the GAO chimed in again, indicating that only two of 105 army units were "assessed as being fully capable of conducting their primary mission," while "no police unit is fully capable." In 2009, the U.S. Special Inspector General for Afghan Reconstruction reported that “only 24 of 559 Afghan police units are considered ready to operate without international help.” Such reports, as well as repeated (and repetitive) news investigations and stories on the subject, invariably are accompanied by a litany of complaints about corruption, indiscipline, illiteracy, drug taking, staggering desertion rates, Taliban infiltration, ghost soldiers, and a host of other problems. In 2009, however, the solution remained as expectable as the problems: “The report called for more U.S. trainers and more money.”

This June, a U.S. government audit, again from the Special Inspector General, contradicted the latest upbeat American and NATO training assessments, reporting that “the standards used to appraise the Afghan forces since 2005 were woefully inadequate, inflating their abilities.” The usual litany of training woes followed. Yet, according to Reuters, President Obama wants another $14.2 billion for the training project “for this year and next.” And just last week, the Wall Street Journal’s Julian Barnes reported that new Afghan war commander General David Petraeus is planning to “retool” U.S. strategy to include “a greater focus on how Afghanistan’s security forces are being trained.”

When it comes to U.S. training programs then, you might conclude that Afghanistan has proved to be Catch-22-ville, the land where time stood still -- and so, evidently, has the Washington national security establishment’s collective brain. For Washington, there seems to be no learning curve in Afghanistan, not when it comes to “training” Afghans anyway.

And here is the oddest thing of all, though no one even bothers to mention it in this context: the Taliban haven’t had tens of billions of dollars in foreign training funds; they haven’t had years of advice from the best U.S. and NATO advisors that money can buy; they haven’t had private contractors like DynCorp teaching them how to fight and police, and strangely enough, they seem to have no problem fighting. They are not undermanned, infiltrated by followers of Hamid Karzai, or particularly corrupt. They may be illiterate and may not be fluent in English, but they are ready, in up-to platoon-sized units, to attack heavily fortified U.S. military bases, Afghan prisons, a police headquarters, and the like with hardly a foreign mentor in sight.

Consider it, then, a modern miracle in reverse that the U.S. has proven incapable of training a competent Afghan force in a country where arms are the norm, fighting has for decades seldom stopped, and the locals are known for their war-fighting traditions. Similarly, it’s abidingly curious that the U.S. has so far failed to train a modest-sized air force, even flying refurbished Italian light transport planes from the 1980s and those Russian helicopters, when the Soviet Union, the last imperial power to try this, proved up to creating an Afghan force able to pilot aircraft ranging from helicopters to fighter planes.

2. Non-Exit strategies: Now, let’s wade a little deeper into the strangeness of what Whitlock reported by taking up the question of when we’re actually planning to leave Afghanistan. Consider this passage from the Whitlock piece: “U.S. military officials have estimated that the Afghan air force won't be able to operate independently until 2016, five years after President Obama has said he intends to start withdrawing U.S. troops from Afghanistan. But [U.S. Air Force Brig. Gen. Michael R.] Boera said that date could slip by at least two years if Congress forces the Afghans to fly U.S. choppers.”

In other words, while Americans argue over what the president’s July 2011 drawdown date really means, and while Afghan President Hamid Karzai suggests that Afghan forces will take over the country’s security duties by 2014, Whitlock’s anonymous “U.S. military officials” are clearly operating on a different clock, on, in fact, Pentagon time, and so are planning for a 2016-2018 target date for that force simply to “operate independently” (which by no means indicates “without U.S. support.”)

If you were of a conspiratorial mind, you might almost think that the Pentagon preferred not to create an effective Afghan air force and instead -- as has also been the case in Iraq, a country that once had the world’s sixth largest air force and now, after years of U.S. mentoring, has next to nothing -- remain the substitute Afghan air force forever and a day.

3. Who Are the Russians Now?: Okay, let’s move even deeper into American strangeness with a passage that makes up most of the 20th and 21st paragraphs of Whitlock’s 25-paragraph piece: “In addition,” he reports, “the U.S. Special Operations Command would like to buy a few Mi-17s of its own, so that special forces carrying out clandestine missions could cloak the fact that they are American. ‘We would like to have some to blend in and do things,’ said a senior U.S. military official, speaking on condition of anonymity to discuss the clandestine program.”

No explanation follows on just how -- or where -- those Russian helicopters will help “cloak” American Special Operations missions, or what they are to “blend” into, or the “things” they are to do. There’s no further discussion of the subject at all.

In other words, the special op urge to Russianize its air transport has officially been reported, and a month later, as far as I know, not a single congressional representative has made a fuss over it; no mainstream pundit has written a curious, questioning, or angry editorial questioning its appropriateness; and no reporter has, as yet, followed up.

As just another little factoid of no great import buried deep in an article focused on other matters, undoubtedly no one has given it a thought. But it’s worth stopping a moment and considering just how odd this tiny bit of news-that-won’t-ever-rise-to-the-level-of-news actually is. One way to do this is to play the sort of opposites game that never quite works on this still one-way planet of ours.

Just imagine a similar news item coming out of another country.

*Hot off the wires from Tehran: Iranian special forces teams are scouring the planet for old American Chinook helicopters so they can be well “cloaked” in planned future forays into Afghanistan and Pakistan’s Baluchistan Province.

*The People’s Daily reports: Chinese special forces operatives are buying relatively late model American helicopters so that... Well, here’s one problem in the opposites game, and a clue to the genuine strangeness of American activities globally: why would the Chinese need to do such a thing (and, in fact, why would we)? Where might they want to venture militarily without being mistaken for Chinese military personnel?

That might be a little hard to imagine right now, but I guarantee you one thing: had some foreign news source reported such a plan, or had Craig Whitlock somehow uncovered it and included it in a piece -- no matter how obscurely nestled -- there would have been pandemonium in Washington. Congress would have held hearings. Pundits would have opined on the infamy of Iranian or Chinese operatives masking themselves in our choppers. The company or companies that sold the helicopters would have been investigated. And you can imagine what Fox News commentators would have had to say.

When we do such things, however, and a country like Pakistan reacts with what’s usually described as “anti-Americanism,” we wonder at the nationalistic hair-trigger they’re on; we comment on their over-emotionalism; we highlight their touchy “sensibilities”; and our reporters and pundits then write empathetically about the difficulties American military and civilian officials have dealing with such edgy natives.

Just the other day, for instance, the Wall Street Journal’s Barnes reported that U.S. Special Operations Forces are expanding their role in the Pakistani tribal borderlands by more regularly “venturing out with Pakistani forces on aid projects, deepening the American role in the effort to defeat Islamist militants in Pakistani territory that has been off limits to U.S. ground troops.” The Pakistani government has not been eager to have American boots visibly on the ground in these areas, and so Barnes writes: “Because of Pakistan’s sensitivities, the U.S. role has developed slowly.”

Imagine how sensitive they might prove to be if those same forces began to land Russian helicopters in Pakistan as a way to “cloak” their operations and blend in? Or imagine just what sort of hair-trigger the natives of Montana might be on if Pakistani special operations types were roaming Glacier National Park and landing old American helicopters outside Butte.

Then consider the sensitivities of Pakistanis on learning that the just appointed head of the CIA’s National Clandestine Service turns out to be a man of “impeccable credentials” (so says CIA Director Leon Panetta). Among those credentials are his stint as the CIA station chief in Pakistan until sometime in 2009, his involvement in the exceedingly unpopular drone war in that country’s tribal borderlands, and the way, as the Director put it a tad vaguely, he “guided complex operations under some of the most difficult circumstances imaginable."

Here’s the truth of the matter, as Whitlock’s piece makes clear: we carry on in the most bizarre ways in far-off lands and think nothing of it. Historically, it has undoubtedly been the nature of imperial powers to consider every strange thing they do more or less the norm. For a waning imperial power, however, such an attitude has its own dangers. If we can’t imagine the surpassing strangeness of our arrangements for making war in lands thousands of miles from the U.S., then we can’t begin to imagine how the world sees us, which means that we’re blind to our own madness. Russian helicopters, that’s nuthin’ by comparison.

Tom Engelhardt, co-founder of the American Empire Project, runs the Nation Institute's TomDispatch.com. His latest book, The American Way of War: How Bush’s Wars Became Obama’s (Haymarket Books), has just been published. You can catch him discussing it on a TomCast video by clicking here.

[Note for readers: On the folly of American training programs for the Afghanistan Army, TomDispatch had an on-the-spot report that still shouldn’t be missed, Ann Jones’s September 20, 2009, piece “Meet the Afghan Army, Is It a Figment of Washington’s Imagination?”]

Wikileak's Afghan Disclosure: A plot engineered by the White House?

2010-07-27T20:54:00.000-07:00

A thought-provoking piece in the Post today, saturated with allegations by Hamid Gul (former head of the Pakistani ISI), exposes potential U.S. complicity in the leaking of U.S. intelligence data from the occupation of Afghanistan. The MSM angle on the leak is to excoriate Pakistan and (of course) Iran for allegedly aiding the Taliban/Al Qaeda/Haqquani bogeymen that frustrate the efforts of the U.S. in Afghanistan. As reported in the story, Gul does not disguise his opposition to the U.S. occupation, and does not deny his past existence as a tool of the CIA (along with bin Laden, Haqquani, and countless others) in its covert support of the mujhadeen's resistance of the Soviets. Without doubt, Gul knows the design of the great game in Afghanistan, so it's worthwhile to evaluate his opinion. Gul's opinion is that many of the intelligence reports disclosed in the data leak originated from Indian operatives who manufactured the reports for two reasons: (1) to implicate Pakistan and alienate it from the U.S., and (2) the most basic human need of greed, as Gul alleges that operatives are paid for each report they submit regardless of the quality of veracity of the intelligence reported. Contrary to Gul's assertions, I had surmised that many of these same intelligence reports had originated from operatives in the Afghanistan region who were reporting Pakistani and Iranian involvement as a means to give the U.S. a casus belli for planned action against Iran. Perhaps both assertions or true, and perhaps neither. In any event, Gul's statements are thought-provoking, and again reveal the many prisms through which a single event can be viewed.

The more important context overlaying the entire Afghanistan debate is: what the hell are we trying to doing there? What is victory? At best, victory in Afghanistan seems be that "we would be in minimalist possession of a fractious, ruined land, at war for three decades, and about as alien to, and far from, the United States as it’s possible to be on this planet. We would be in minimalist possession of the world’s fifth poorest country. We would be in minimal possession of the world’s second most corrupt country. We would be in minimal possession of the world’s foremost narco-state, the only country that essentially produces a drug monocrop, opium. In terms of the global war on terror, we would be in possession of a country that the director of the CIA now believes to hold 50 to 100 al-Qaeda operatives (“maybe less”) -- for whom parts of the country might still be a “safe haven.” And for this, and everything to come, we would be paying, at a minimum, $84 billion a year." Source for quote: http://www.tomdispatch.com/post/175272/tomgram%3A_engelhardt%2C_the_petraeus_syndrome/#more

Document leak part of U.S. plot, says Pakistani ex-general with ties to Taliban

By Karin Brulliard for the Washington Post
Wednesday, July 28, 2010; pg. A08

RAWALPINDI, PAKISTAN -- From the deluge of leaked military documents published Sunday, a former Pakistani spy chief emerged as a chilling personification of his nation's alleged duplicity in the Afghan war -- an erstwhile U.S. ally turned Taliban tutor.

Now planted squarely in the cross hairs, retired Lt. Gen. Hamid Gul seems little short of delighted.

In an interview Tuesday, Gul dismissed the accusations against him as "fiction" and described the documents' release as the start of a White House plot. It will end, he posited, with an early U.S. pullout from Afghanistan -- thus proving Gul, an unabashed advocate of the Afghan insurgency, right.

President Obama "is a very good chess player. . . . He says, 'I don't want to carry the historic blame of having orchestrated the defeat of America, their humiliation in Afghanistan,' " said Gul, 74, adding that the plot incorporates a troop surge that Obama knows will fail. "It doesn't sell to a professional man like me."

That sort of theory makes Gul an incarnation of some of the United States' greatest challenges in dealing with Pakistan, a U.S. ally. Here, prominent figures closely linked to the security establishment not only trumpet what they view as vast American scheming but also, U.S. officials and the leaked documents allege, provide support to Afghan rebels.

Gul did that in an official capacity as head of Pakistan's Inter-Services Intelligence (ISI) agency from 1987 to 1989, when he helped the CIA funnel Islamist fighters into Afghanistan to fight the Soviets. Eloquent and polished, he was viewed by his American partners as pro-Western and moderate, while his Saudi benefactors saw him as a pious, conservative Muslim.

After the Soviet withdrawal, the Saudis' characterization seemed to prevail. Gul continued to support the rebels in a semiofficial capacity, as did other elements of Pakistan's security forces that view the Taliban as a tool for influence in Afghanistan, U.S. officials say.

With the greatest detail yet made public, the leaked documents depict American views of Gul as a murderous terrorist agent. According to some of the documents, he possessed dozens of bombs for Taliban fighters to detonate in Kabul, instructed militants to kidnap United Nations workers, hatched a plan for a suicide bombing in Afghanistan to avenge an insurgent and assured fighters that Pakistan would provide them haven.

The reports are unconfirmed. But they are hardly surprising to those closely following the Afghan war, or to Gul himself. On Monday, he described himself as a "whipping boy" for the United States.

Current and former U.S. officials, speaking on the condition of anonymity, variously described him as "very dirty" and a man with a "horrible reputation."

"There's no doubt where his sympathies lie," a U.S. official said, echoing the views of many Pakistani defense analysts. "Even though Gul may not be a card-carrying member of a terrorist group, he stays in touch with militants, offering his insights and advice on their activities."

Obama said Tuesday that the documents do not reveal any issues that weren't already part of the public debate on Afghanistan and that they "point to the same challenges that led me to conduct an extensive review of our policy last fall."

Gul, one of several former Pakistani military officials whom the United States accuses of fueling the Afghan insurgency, has deemed the war a "war against Muslims." He has acknowledged being a member of a militant organization banned by Pakistan.

Former prime minister Benazir Bhutto, who had fired Gul as ISI chief on suspicion that he wanted to overthrow her, fingered him as a threat shortly before her assassination in 2007. Gul has since publicly shared what he calls his "assessment" that the United States was behind Bhutto's slaying, an allegation U.S. officials vehemently deny.

Gul and a senior ISI official say he cut ties with the agency upon retiring two decades ago. But he remains a major figure in Pakistan, where he regularly airs his anti-American views on talk shows. Gul said talking to the media is one of his hobbies, as are horticulture and trying to lower his golf handicap of 18.

His support for the Taliban is purely "academic," he said.

"There is not physical input to it. I don't have the means. I don't have the will," Gul said, speaking in his living room in the garrison city of Rawalpindi. "I am not an enemy of America. I am against their policy, much as many very patriotic Americans are against the policies."

To that end, Gul said, he holds Taliban leader Mohammad Omar in high regard for his "resistance" to U.S. invaders, though he said he has never met the man. He readily acknowledged that he has maintained friendships with former mujaheddin such as Jalaluddin Haqqani, a onetime CIA-backed fighter whose network is now viewed as the coalition forces' most lethal foe.

"The Americans dropped him like a hot brick," Gul said. "Why should I discard him just because he is doing the same thing . . . that they did against the Soviet occupation? They are fighting for the liberation of their country."

A conversation with Gul is a journey into the dense web of suspicion in this region, where Americans detect Pakistani and Iranian involvement in attacks in Afghanistan, Afghans see the ISI under every rock, and Pakistanis sense nefarious Indian designs all around them.

In Gul's version, India is where the leaked documents implicating Pakistani aid to the Taliban originated. The reports, he said, were fed by Indians to Afghan intelligence agents and intelligence "contractors" who are paid for each report they file. The reports are meant to pressure Pakistan to toe the American line, he said, a view widely shared here.

Gul said he was singled out in the reports because of American fears that he will expose U.S. "cavities" -- corruption, poor planning and complicity in the opium trade -- in the Afghan conflict. Pakistan's cooperation with the United States, he said, has "ravaged" its economy and social fabric.

"My future generations are going to be proud when they read about their ancestors," Gul said. "What about the American children, when they read about this -- that a retired 74-year-old general brought about the defeat of America in Afghanistan? What were their generals doing?"

But Gul reserved praise for Obama, who, he said, was expertly playing this game of intrigue. The document leak was orchestrated to indict Bush-era war policy, and the troop surge to expose Pentagon follies; soon a massive antiwar movement will rise, Gul said.

"I am sitting here understanding your politics better," he said, almost giddily. "Obama has been given the peace prize, the Nobel Peace Prize, in anticipation of what he is going to do. Somebody has read his mind. And I have read his mind, too."

Staff writer Peter Finn in Washington contributed to this report.

9/11 Followup: Sweeping the (Toxic) Dust Under the Rug

2010-07-07T13:26:00.000-07:00

According to the article below a settlement proposal between the City/World Trade Center insurance carrier parties and emergency workers who claimed damages resulting from their work at or near near Ground Zero has been approved by the federal district judge. 95% of the workers must accept the approved settlement for it to become effective. The article notes that the lawyers for all parties now encourage the settlement, but fails to disclose the plaintiffs' attorney fees (usually 30-40% of the total settlement amount, plus expenses-- so likely in the ballpark of $300M) as a likely inducement for plaintiffs' counsel. The article also does not address whether the plaintiffs waive any further right to sue if they accept the settlement, but this is typically a basic element of any such settlement. Notably, the Court has made no findings of fact on the toxicity of the WTC dust, and in fact seems to have encouraged plaintiffs to accept the settlement so that this admittedly difficult scientific evidence would not have to be approved in Court. Depending on your perspective, the proposed settlement and waiver either represents a long-sought, judicially efficient victory for the plaintiffs or, to the cynic, a relative bargain for the WTC insurers, City of New York and other government types in avoiding any true scientific or judicial evaluation of how so many people developed such terrible diseases through exposure to the WTC dust, usually days after the bombing/demolition/attack. All of this begs the question, what was in the aerosol/dust that allegedly caused cancers and other alleged ailments? If this settlement is approved, we may never know.

Hellerstein Approves Respiratory Illness Settlement for 9/11 Workers

Mark Hamblett
06-24-2010
Originally printed in the New York Law Journal

Southern District Judge Alvin K. Hellerstein yesterday approved the settlement in the 9/11 respiratory illness litigation at the end of a nearly seven-hour long hearing.

The judge and lawyers for the parties in the litigation pushed hard to persuade World Trade Center rescue and cleanup workers exposed to allegedly toxic dust at the site to accept a settlement that could run as high as $716 million.

Although billed as a "fairness hearing," the session was clearly an effort to convince at least 95 percent of 10,000 claimants to opt into the settlement. The deal requires 95 percent acceptance in order to go into effect.

Kenneth R. Feinberg, who was appointed by Judge Hellerstein to hear appeals from compensation decisions, spoke by conference call from Washington, D.C., and addressed the principal uncertainty confronting plaintiffs—legislation being negotiated on Capitol Hill to provide more money to 9/11 first responders and cleanup workers.

"If you opt out in the hope that there will be a better legislative alternative down the road, I believe personally, you will be making a mistake," said Mr. Feinberg. "The legislative process grinds slowly and after waiting over five years for the legislation to be enacted, it is still not enacted."

Judge Hellerstein had rejected an initial settlement on March 19 as providing inadequate compensation to those injured at Ground Zero.

Yesterday, he defended the latest deal during the seven-hour session that included emotional testimony from some plaintiffs as well as presentations by lawyers.

Retired NYPD Detective Candace Baker, who claims the 400 hours of overtime she put at Ground Zero caused her breast cancer, and retired firefighter Kenneth Specht, who claims his cancer was caused by exposure to toxic dust, both criticized the settlement for not providing enough money for solid tumor cancers.

The judge told Ms. Baker he understood her frustration. But, he said, "This is a settlement system and not a compensation system, so I have to pay attention, and the lawyers have to pay attention, to what is provable."

Later, he added, "I hope that when Ms. Baker and Mr. Specht go home and think about this, they vote to approve the settlement and opt in—not because it's perfect, it's far from perfect. It's good. It's the best we could do."

In the morning, Judge Hellerstein praised Margaret Warner of McDermott Will & Emery, the lawyer for the entity that holds the purse strings, the World Trade Center Captive Insurance Company. The judge said Ms. Warner's "indefatigable energy and intelligence really drove the settlement."

The lead lawyers, including Ms. Warner, although described by the judge as "protagonists," are now united in their interest in having the settlement approved.

Plaintiffs' co-liaison counsel Paul Napoli, of Worby Groner Edelman & Napoli, Bern, and James Tyrrell of Patton Boggs, lead lawyer for the city and its contractors, both worked hard to close the deal.

Under the agreement, plaintiffs could receive anywhere from a few thousand dollars to almost $2 million, depending on the severity of their injury and the degree of exposure at Ground Zero.

Mr. Napoli said that the amount was "fair, reasonable and more than adequate." He added that the legislation in Congress was "the elephant in the room," but he cautioned plaintiffs that "very few bills," between 2 percent and 3 percent, that are proposed in Congress actually become law.

'Potent' Defense

Mr. Tyrrell laid out the obstacles for those who choose to litigate rather than settle, including the possible immunity afforded the city and its contractors in responding to a civil emergency.

Mr. Tyrrell said plaintiffs would have an enormous hurdle in establishing a causal link between the allegedly toxic dust and injuries suffered by those at the site.

"In the federal courts, only good science gets to go to the jury," Mr. Tyrrell said, and Judge Hellerstein as "the gatekeeper" would "have to look, in advance, at the science both sides have offered."

This would mean, "very difficult, lengthy hearings on the different evidence" with respect to 383 separate diseases claimed to have been caused by the conditions at the disaster site.

Judge Hellerstein agreed, saying Mr. Tyrrell was prepared to present "extraordinarily potent defenses" against the claims.

Mr. Specht later said he was "shocked to the core" to hear the defenses Mr. Tyrrell would present in litigation.

But Judge Hellerstein stopped him.

"You have to understand we have an adversary system of justice and Mr. Tyrrell is doing his job and it's his job to present the defense as vigorously as he can," just as it is Mr. Napoli's job "to present the conditions of the plaintiffs."

If Mr. Tyrrell did not do the job he did, the judge said, the city "would have been eaten alive with all kinds of claims," legitimate and illegitimate.

Corporation Counsel Michael A. Cardozo spoke in favor of the settlement.

"How do we fairly compensate the heroes who went down to the pile who worked tirelessly to put this city back on its feet?" Mr. Cardozo said. "It wasn't the fault of the contractors or New York City, at least, in our view, that these people were injured, but there is no question that some people were injured and they suffered damages."

Tiered System

The settlement calls for the slotting of plaintiffs along four tiers based on the severity of their injuries, with tier four including the most serious health problems, such as lung cancer.

Ms. Warner explained that 50 percent of the 10,000 plaintiffs are expected to qualify for tier four and will received 94 percent of the cash in the settlement that will range between $625 million and $716 million, depending on the number of people who opt in and future claims made over the next five years.

Ironworker Richard Prager angrily told the judge the $10,000 he would receive for a physical injury he suffered at the site does not begin to compensate him for his health problems, including respiratory difficulties.

"This isn't fair to me, this is not fair to my family," he said. "I'm insulted. I didn't go to Ground Zero to sue. I went there because this is my home."

Mr. Napoli rose to say that Mr. Prager is an example of "one size does not fit all" in the settlement and Mr. Prager may well be one of those people who opt out.

Retired NYPD Detective Joseph Greco rose to speak in praise of the settlement. Mr. Greco, who has severe asthma, said he was one of the initial test cases set for trial in May before the parties reached a settlement.

Mr. Greco, who said he is on steroid medication, said his young son recently asked him how the family would pay the bills if something happened to him. The settlement, Mr. Greco said, "puts my mind at ease."

Judge Hellerstein approved the settlement despite familiar opening remarks by Mr. Tyrrell that the settlement was private and did not need judicial approval.

The deal still leaves several defendants in the case, including the Port Authority of New York and New Jersey; insurers of workers who toiled at the Fresh Kills landfill on Staten Island, where the debris was shipped; and insurers for the barges that transported the debris from lower Manhattan.

Judge Hellerstein expressed hope that the current settlement would lead to the resolution of the claims against those defendants.

UPDATE:

House rejects bill to aid sick 9/11 responders

By ANDREW MIGA and DAVID B. CARUSO, Associated Press

A bill that would have provided up to $7.4 billion in aid to people sickened by World Trade Center dust fell short in the House on Thursday, raising the possibility that the bulk of compensation for the ill will come from a legal settlement hammered out in the federal courts.

The bill would have provided free health care and compensation payments to 9/11 rescue and recovery workers who fell ill after working in the trade center ruins.

It failed to win the needed two-thirds majority, 255-159. The vote was largely along party lines, with 12 Republicans joining Democrats supporting the measure.

For weeks, a judge and teams of lawyers have been urging 10,000 former ground zero workers to sign on to a court-supervised settlement that would split $713 million among people who developed respiratory problems and other illnesses after inhaling trade center ash.

The court deal shares some similarities with the aid program that the federal legislation would have created, but it involves far less money. Only the most seriously ill of the thousands of police officers, firefighters and construction workers suing New York City over their exposure to the dust would be eligible for a hefty payout.

But supporters of the deal have been saying the court settlement is the only realistic option for the sick, because Congress will never act.

"Ladies and gentlemen, you can wait and wait and wait for that legislation ... it's not passing," Kenneth Feinberg, the former special master of the federal 9/11 victim compensation fund, told an audience of ground zero responders Monday in a meeting on Staten Island.

Democratic leaders opted to consider the House bill under a procedure that requires a two-thirds vote for approval rather than a simple majority. Such a move blocked potential GOP amendments to the measure.

A key backer of the bill, U.S. Rep. Peter King, a Long Island Republican, accused Democrats of staging a "charade."

King said Democrats were "petrified" about casting votes as the fall elections near on controversial amendments, possibly including one that could ban the bill from covering illegal immigrants who were sickened by trade center dust.

If Democrats brought it to the floor as a regular bill, King said, it would have passed with majority support.

GOP critics branded the bill as yet another big-government "massive new entitlement program" that would have increased taxes and possibly kill jobs.

To pay the bill's estimated $7.4 billion cost over 10 years, the legislation would have prevented foreign multinational corporations incorporated in tax haven countries from avoiding tax on income earned in the U.S.

Bill supporters said that would close a tax loophole. Republicans branded it a corporate tax increase.

New York City Mayor Michael Bloomberg called the vote an "outrage." He said it was clearly a tactic designed to stall the bill.

"This is a way to avoid having to make a tough decision," Bloomberg said, adding that the nation owes more to "the people who worked down at 9/11 whose health has fallen apart because they did what America wanted them to do."

John Feal, a ground zero demolition worker who has lobbied extensively for the legislation, expressed disgust.

"They pulled the rug out from beneath our feet," Feal said. "Whatever member of Congress vote against this bill, whether Republican or Democrat, should go to jail for manslaughter."

The bill would have provided up to $3.2 billion to cover the medical treatment of people sickened by trade center dust and an additional $4.2 billion for a new fund that would have compensated them for their suffering and lost wages.

The potential promise of a substantial payout from the federal government had caused some ground zero workers to balk at participating in the proposed legal settlement, which would resolve as many as 10,000 lawsuits against the city.

Initially, the bill would have prohibited people from participating in the new federal compensation program if they had already been compensated for their injuries through a lawsuit, but a change was made in recent days eliminating that restriction.

Nevertheless, with the House rejecting the bill and no vote scheduled on a similar Senate version, it appears almost guaranteed that there will be no new federal law by Sept. 8, the date by which ground zero workers involved in the lawsuits must decide whether to accept the settlement offer.

Under the terms of the deal, 95 percent of those workers must say yes for the court settlement to take effect.

The compensation system set up by the court would make payments ranging from $3,250 for people who aren't sick but worry they could fall ill in the future to as much as $1.5 million to the families of people who have died. Nonsmokers disabled by severe asthma might get between $800,000 and $1 million.

About 25 percent of the money would go to pay legal fees. Contested claims would be heard by Feinberg, who would act as an appeals officer.

Researchers have found that thousands of New Yorkers exposed to trade center dust are now suffering from breathing difficulties similar to asthma. Many have also complained of heartburn or acid reflux, and studies have shown that firefighters who worked on the debris pile suffer from elevated levels of sarcoidosis, an inflammatory disease.

Many of the workers also fear that the dust is giving people cancer, although scientific studies have failed to find evidence of such a link.

The exact number of sick is unclear. Nearly 15,900 people received treatment last year through medical programs set up to treat Sept. 11-related illnesses, but doctors say many of those people suffered from conditions that are common in the general public.

The House bill is named for James Zadroga, a police detective who died at age 34. His supporters say he died from respiratory disease contracted at ground zero, but New York City's medical examiner said Zadroga's lung condition was caused by prescription drug abuse.

More Evidence of True Motives of the AIG Bailout

2010-06-29T23:11:00.001-07:00

In U.S. Bailout of A.I.G., Forgiveness for Big Banks
By LOUISE STORY and GRETCHEN MORGENSON
At the end of the American International Group’s annual meeting last month, a shareholder approached the microphone with a question for Robert Benmosche, the insurer’s chief executive.

“I’d like to know, what does A.I.G. plan to do with Goldman Sachs?” he asked. “Are you going to get — recoup — some of our money that was given to them?”

Mr. Benmosche, steward of an insurer brought to its knees two years ago after making too many risky, outsize financial bets and paying billions of dollars in claims to Goldman and other banks, said he would continue evaluating his legal options. But, in reality, A.I.G. has precious few.

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.

This month, an Australian hedge fund sued Goldman on similar grounds. Goldman is contesting the suit and denies any wrongdoing. A spokesman for A.I.G. declined to comment about any plans to sue Goldman or any other banks with which it worked. A Goldman spokesman said that his firm believed that “all aspects of our relationship with A.I.G. were appropriate.”

A Legal Waiver

Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.

The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2008 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.

As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldman’s relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout — signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.

“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”

“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.

Regulators at the New York Fed declined to comment on the legal waiver but disagreed with that viewpoint.

“This was not about the banks,” said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G. “This was about stabilizing the system by preventing the disorderly collapse of A.I.G. and the potentially devastating consequences of that event for the U.S. and global economies.”

This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the A.I.G. bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into A.I.G. “It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.

About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Société Générale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G.

A Goldman spokesman said that he did not agree with that report’s assertion, noting that his firm considered itself to be insulated from possible losses on its A.I.G. deals.

Even with the financial reform legislation that Congress introduced last week, David A. Moss, a Harvard Business School professor, said he was concerned that the government had not developed a blueprint for stabilizing markets when huge companies like A.I.G. run aground and, for that reason, regulators’ actions during the financial crisis need continued scrutiny. “We have to vet these things now because otherwise, if we face a similar crisis again, federal officials are likely to follow precedents set this time around,” he said.

Under the new legislation, the Federal Deposit Insurance Corporation will have the power to untangle the financial affairs of troubled entities, but bailed-out companies will pay most of their trading partners 100 cents on the dollar for outstanding contracts. (In some cases, the government will be able to recoup some of those payments later on, which the Treasury Department says will protect taxpayers’ interest. )

Sheila C. Bair, the chairwoman of the F.D.I.C., has said that trading partners should be forced to accept discounts in the middle of a bailout.

Regardless of the financial parameters of bailouts, analysts also say that real financial reform should require regulators to demonstrate much more independence from the firms they monitor.

In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system to rescue bankers from their own mistakes. While Wall Street deal-making is famously hard-nosed with participants fighting for every penny, during the A.I.G. bailout regulators negotiated with the banks in an almost conciliatory fashion.

On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.

From the moment the government agreed to lend A.I.G. $85 billion on Sept. 16, 2008, the New York Fed, led at the time by Timothy F. Geithner, and its outside advisers all acknowledged that a rescue had to achieve two goals: stop the bleeding at A.I.G. and protect the taxpayer money the government poured into the insurer.

One of the regulators’ most controversial decisions was awarding the banks that were A.I.G.’s trading partners 100 cents on the dollar to unwind debt insurance they had bought from the firm. Critics have questioned why the government did not try to wring more concessions from the banks, which would have saved taxpayers billions of dollars.

Mr. Geithner, who is now the Treasury secretary, has repeatedly said that as steward of the New York Fed, he had no choice but to pay A.I.G.’s trading partners in full.

But two entirely different solutions to A.I.G.’s problems were presented to Fed officials by three of its outside advisers, according to the documents. Under those plans, the banks would have had to accept what the advisers described as “deep concessions” of as much as about 10 percent on their contracts or they might have had to return about $30 billion that A.I.G. had paid them before the bailout.

Had either of these plans been implemented, A.I.G. may have been left in a far better financial position than it is today, with taxpayers at less risk and banks forced to swallow bigger losses.

A spokesman for Mr. Geithner, Andrew Williams, said it was easy to speculate about how the A.I.G. bailout might have been handled differently, but the government had limited tools. “At that perilous moment, actions were chosen that would have the greatest likelihood of protecting American families and businesses from a catastrophic failure of another financial firm and an accelerating panic, Mr. Williams said.

For its part, the Treasury appeared to be opposed to any options that did not involve making the banks whole on their A.I.G. contracts. At Treasury, a former Goldman executive, Dan H. Jester, was the agency’s point man on the A.I.G. bailout. Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout. Mr. Paulson previously served as Goldman’s chief executive before joining the government.

A Close Association

Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury’s response to the A.I.G. crisis. According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. Nothing in the documents indicates that Mr. Jester advocated forcing Goldman and the other banks to accept a discount on the deals.

Although the value of Goldman’s shares could have been affected by the terms of the A.I.G. bailout, Mr. Jester was not required to publicly disclose his stock holdings because he was hired as an outside contractor, a job title at Treasury that allowed him to forgo disclosure rules applying to appointed officials. In late October 2008, he stopped overseeing A.I.G. after others were given that responsibility, according to Michele Davis, a spokeswoman for Mr. Jester.

Ms. Davis said that Mr. Jester fought hard to protect taxpayer money and followed an ethics plan to avoid conflict with all of his stock holdings. Ms. Davis is also a spokeswoman for Mr. Paulson, and said that he declined to comment for this article.

The alternative bailout plans that regulators considered came from three advisory firms that the New York Fed hired: Morgan Stanley, Black Rock, and Ernst & Young.

One plan envisioned the government guaranteeing A.I.G.’s obligations in various ways, in much the same way the F.D.I.C. backs personal savings accounts at banks facing runs by customers. On Oct. 15, Ms. Dahlgren wrote to Mr. Geithner that the Federal Reserve board in Washington had said the New York Fed should try to get Treasury to do a guarantee. “We think this is something we need to have in our back pockets,” she wrote.

Treasury had the authority to issue a guarantee but was unwilling to do so because that would use up bailout funds. Once the guarantee was off the table, Fed officials focused on possibly buying the distressed securities insured by A.I.G. From the start, the Fed and its advisers prepared for the banks to accept discounts. A BlackRock presentation outlined five reasons why the banks should agree to such concessions, all of which revolved around the many financial benefits they would receive. BlackRock and Morgan Stanley presented a number of options, including what BlackRock called a “deep concession” in which banks would return $6.4 billion A.I.G. paid them before the bailout.

The three banks with the most to lose under these options were Société Générale, Deutsche Bank and Goldman Sachs. Société Générale would have had to give up $322 million to $2.1 billion depending on which alternative was used; Deutsche Bank would have had to forgo $40 million to $1.1 billion, while Goldman would have had to give up $271 million to $892 million, according to the documents.

Société Générale and Deutsche Bank both declined to comment.

Ultimately, the New York Fed never forced the banks to make concessions. Thomas C. Baxter Jr., general counsel at the New York Fed, explained that a looming downgrade of A.I.G. by the credit rating agencies on Nov. 10 forced the regulator to move quickly to avoid a default, which would have unleashed “catastrophic systemic consequences for our economy.”

“We avoided that horrible result, got the job done in the time available, and the Fed will eventually get out of this rescue whole,” he said in an interview.

And yet two Fed governors in Washington were concerned that making the banks whole on the A.I.G. contracts would be “a gift,” according to the documents.

Gift or not, the banks got 100 cents on the dollar. And on Nov. 11, 2008, a New York Fed staff member recommended that documents for explaining the bailout to the public not mention bank concessions. The Fed should not reveal that it didn’t secure concessions “unless absolutely necessary,” the staff member advised. In the end, the Fed successfully kept most of the details about its negotiations with banks confidential for more than a year, despite opposition from the media and Congress.

During the A.I.G. bailout, New York Fed officials prepared a script for its employees to use in negotiations with the banks and it was anything but tough; it advised Fed negotiators to solicit suggestions from bankers about what financial and institutional support they wanted from the Fed. The script also reminded government negotiators that bank participation was “entirely voluntary.”

The New York Fed appointed Terrence J. Checki as its point man with the banks. In e-mail messages that November, he was deferential to bankers, including the e-mail message in which he thanked Mr. Blankfein for his patience.

Many Thank-Yous

After UBS, a Swiss bank, received details about the Fed’s 100-cents-on-the-dollar proposal, Mr. Checki thanked Robert Wolf, a UBS executive, for his patience as well. “Thank you for your responsiveness and cooperation,” he said in an e-mail message. “Hope the benign outcome helped offset any aggravation. Thank you again.”

The Congressional Oversight Panel, which interviewed A.I.G.’s trading partners about how tough the government was during the negotiations, concluded that many of the governments efforts were merely “desultory attempts.”

All of this was quite different from the tack the government took in the Chrysler bailout. In that matter, the government told banks they could take losses on their loans or simply own a bankrupt company; the banks took the losses.

During the A.I.G. bailout, the Fed seemed more focused on extracting concessions from A.I.G. than from the banks. Mr. Baxter, in an interview, conceded that the way that the New York Fed handled the negotiations meant that any resulting deal “took most of the upside potential away from A.I.G.”

The legal waiver barring A.I.G. from suing the banks was not in the original document that regulators circulated on Nov. 6, 2008 to dissolve the insurer’s contracts with the banks. A day later a waiver was added but the Congressional documents show no e-mail traffic explaining why that occurred or who was responsible for inserting it. The New York Fed declined to comment.

Policy experts say it is not unusual for parties to waive legal rights when public money is involved. Mr. Moss, the Harvard professor, said the government might have been concerned that the insurer would use taxpayer money to sue banks. “The question is: was this legitimate?” he asked. “The answer depends on the motivation. If the reason was to avoid a slew of lawsuits that could have further destabilized the financial system in the short term, this may have been reasonable.”

But two people with direct knowledge of the negotiations between A.I.G. and the banks, who requested anonymity because the talks were confidential, said the legal waiver was not a routine matter — and that federal regulators forced the insurer to accept it.

Even if the waiver was warranted, experts say it unfairly handcuffed A.I.G. and has undermined the financial interests of taxpayers. If, for example, the banks misled A.I.G. about the mortgage securities A.I.G. insured, taxpayer money could be recouped from the banks through lawsuits.

Unless A.I.G. can prove it signed the legal waiver under duress, it cannot sue to recover claims it paid on $62 billion of about $76 billion of mortgage securities that it insured. (A.I.G. retains the right to sue on about $14 billion of the mortgage securities that it insured.)

If A.I.G. had the right to sue, and if banks were found to have misrepresented the deals or used improper valuations on securities A.I.G. insured to extract heftier payouts from the firm, the insurer’s claims could yield tens of billions of dollars in damages because of its shareholders’ lost market value, according to Mr. Skeel.

A.I.G. still has the right to sue in connection with exotic securities it insured called “synthetic collateralized debt obligations,” which are known as C.D.O.’s. Such instruments do not contain actual bonds, which is why they were not accepted as collateral by the Fed.

A.I.G. had insured $14 billion of synthetic C.D.O.’s,, including seven Goldman deals known as Abacus. One of the Abacus deals is the subject of the S.E.C.’s suit against Goldman. A.I.G. did not insure that security, but A.I.G.’s deals with Goldman are similar to the one in the S.E.C. case.

Throughout the A.I.G. bailout, as Congressional leaders and the media pressed for greater disclosure, regulators fought fiercely for confidentiality.

Even after the New York Fed released a list of the banks made whole in the bailout, it continued to resist disclosing information about the actual bonds in the deals, including codes known as “cusips” that label securities. “We need to fight hard to keep the cusips confidential,” one New York Fed official wroteon March 12, 2009.

Regulators said they wanted confidentiality because they did not want investors trading against the government’s portfolio. Others dispute that, saying that Wall Street insiders already knew what bonds were in the portfolio. Only the public was left in the dark.

“The New York Fed recognizes the public’s interest in transparency and has over time made more information available about the A.I.G. transactions,” a Fed spokesman said about the matter.

It was not until a Congressional committee issued a subpoena in January that the New York Fed finally turned over more comprehensive records. The bulk remained private until May, when some committee staff members put them online, saying they lacked the resources to review them all.

Stroking Myself

2010-06-25T00:12:00.000-07:00

Comment on: Two cheers for Harry Reid at 12/28/2009 4:05 PM EST
EJD wrote: "The simple truth is that Reid did what much of wise Washington thought was impossible: He united the entire Democratic caucus... to support a health-care bill that is the most far-reaching piece of social legislation since the 1960s."

A re-write from my perspective: The simple truth is that Reid did what much of wise Washington knew was possible: taking a well-meaning executive policy idea and using it to shake down the targeted industry for campaign contributions, all while drafting legislation that guarantees future profits for that industry by forcing all Americans to purchase a policy from it: the most far-reaching exercise of extraconstitutional authority by the federal government since the Bush administration.

Bravo, Harry. Bravo.

Funemployment

2010-04-14T12:41:00.001-07:00

Incentives Not to Work
Larry Summers v. Senate Democrats on jobless benefits.
wsj.com, 4/13/10

"The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer."

Any guess who wrote that? Milton Friedman, perhaps. Simon Legree? Sorry.

Full credit goes to Lawrence H. Summers, the current White House economic adviser, who wrote those sensible words in his chapter on "Unemployment" in the Concise Encyclopedia of Economics, first published in 1999.

Mr. Summers should give a tutorial to the U.S. Senate, which is debating whether to extend unemployment benefits for the fourth time since the recession began in early 2008. The bill pushed by Democrats would extend jobless payments to 99 weeks, or nearly two full years, at a cost of between $7 billion and $10 billion. As Mr. Summers suggests, rarely has there been a clearer case of false policy compassion.

Mr. Summers is merely reflecting what numerous economic studies have shown. Alan Reynolds of the Cato Institute has found that the average unemployment episode rose from 10 weeks before the recession to 19 weeks after Congress twice previously extended jobless benefits—to 79 from 26 weeks. Even as initial unemployment claims have fallen in recent months, the length of unemployment has risen. Mr. Reynolds estimates that the extensions of unemployment insurance and other federal policies have raised the official jobless rate by nearly two percentage points.

Or consider the Brookings Institution, whose panel on economic activity reported this March that jobless insurance extensions "correspond to between 0.7 and 1.8 percentage points of the 5.5 percentage point increase in the unemployment rate witnessed in the current recession."

Or perhaps the Senate should listen to another Obama Administration economist, Alan Krueger of the Treasury Department, who concluded in a 2008 study that "job search increases sharply in the weeks prior to benefit exhaustion." In other words, many unemployed workers don't start seriously looking for a job until they are about to lose their benefits.

And, sure enough, the share of unemployed workers who don't have a job for more than 26 weeks has steadily increased, reaching a record 44.1% in March. The average spell of unemployment is now 31 weeks, even though the economy is once again creating more new jobs than it is losing. Democrats are slowly converting unemployment insurance into a welfare program.

Despite all of this evidence, Democrats seem to think that extending jobless benefits for another 20 weeks is a big political winner. Iowa Senator Tom Harkin recently roared, "Is there any compassion at all left with Republicans for people whose checks are going to run out?" New York's Chuck Schumer calls Republicans "inhumane."

But do these Senators really think it's compassionate to give people an additional incentive to stay out of the job market, losing crucial skills and contacts? And how politically smart is it for Democrats to embrace policies that keep the jobless rate higher than it would otherwise be? How many Democrats share Mr. Harkin's apparent desire to defend a jobless rate near 9% (today it is 9.7%) in the fall election campaign.

We should add that Republicans would rather not fight on these incentive grounds and are instead opposing the new benefits only because Democrats refuse to pay for them and want to add to the deficit. In other words, the GOP is merely asking Democrats to live up to their own "pay as you go" fiscal promises, since the total bill for these jobless benefits has now hit nearly $90 billion.

If Republicans were really cynical, they'd let the new benefits pass and run against the higher jobless rate in the fall. In any case, no one should be surprised that when you subsidize people for not working, more people will choose not to work.

Tax and Sell: An Alleged solution to the State and Municipal Financial Crisis

2010-03-29T12:47:00.000-07:00

The article below attempts to defuse the coming (and in some case existing) financial crisis affecting the states and their political subdivisions. The author believes that states and municipalities can overcome this crisis by raising taxes and liquidating assets. What the author does not seem to understand is that while residents demand the continuation of existing (if not greater) government services, the average taxpayer will not accept higher tax rates and buyers will not show up for state asset sales and pay a fair price, let alone be able to qualify for or find financing. Instead of the rosy picture painted by this author, I foresee municipal defaults and significant austerity measures as the coming trend, meaning numerous layoff for state and city workers and even lower tax collections for the political subdivisions. Until the private economy begins returning jobs to the local economies, more pain is sure to follow. To that end, I would not follow this author's investment advice. Selling munis now might not get you a good return, but it'll be better than waiting five or ten years for the full return of your money on a bond refi-d out of a chapter 9 bankruptcy or self-imposed forebearance.

States Aren’t About to Default on Debt
March 29, 2010, 12:57 PM ET (wsj.com)

Everybody thinks municipal debt is “the next shoe to drop.” That’s the phrase I keep hearing. We’re all holding these mysterious “shoes” (why we aren’t wearing them is not clear) and we’ve dropped one shoe already: subprime debt. And now our other shoe will drop.

It’s not commercial real estate or credit-card debt or Greece. It’s the wave of municipal defaults that are expected to hit as tax revenues slow down and cities will be forced to declare bankruptcy. And now that we are a country of debt experts (people are coming out of the woodwork to say they could have easily predicted the subprime fiasco), everyone has an opinion.

There are big differences, however, between municipal debt and subprime debt. Subprime debt in the later vintages (2004-2007) was often lent out fraudulently and with few assets to back up the debt. Municipalities have assets and the ability to collect taxes to create revenue. Homeowners don’t.

Also, states legally cannot declare bankruptcy. There are bankruptcy laws for cities but not states. When a state can’t pay its bondholders it has only two choices: sell assets or increase taxes. It has no other choice.

Let’s take my friend’s example of California as a case study.

The California constitution mandates that education costs be paid first out of any revenue coming in. California has about $90 billion in revenue. About 40% of that goes to education. After that, as per the California constitution, all debt payments have to be made. After that, California can spend on whatever it wants: police, landscaping, random buildings, etc. Debt service payments come to about $5.5 billion per year. In other words, each year California makes its debt payments, with an extra $50 billion to spare. This is why it has no problems refinancing and why municipal bond yields are at record lows. Most states have similar clauses in their state constitutions: that debt service payments come before anything else.

Well, what about cities? Cities can go bankrupt, can’t they? Yes, cities can file for Chapter 9 bankruptcy. But even then, cities are different from corporations. Cities don’t get liquidated. They still have to figure out how to pay off their debts (so they can borrow again in the future) and raise revenue.

Let’s look at the worst municipal bankruptcy in U.S. history: the 1994 bankruptcy of Orange County. The county made a disastrous bet on derivatives (sound familiar) and lost $1.6 billion. It filed Chapter 9 bankruptcy. In 1995 and 1996 it drastically cut back on spending. It then issued long-term recovery bonds and paid back the municipal-bond holders 100 cents on the dollar.

Before a municipality will default on its debts it will cut salaries (as happened in the Vallejo, Calif., bankruptcy in 2008 where it paid out less than contacted salaries to police officers and union workers), cut other spending, raise taxes, and do whatever it can to pay down debt. Its also not easy, legally, for a city to declare bankruptcy. It has to obtain permission from the state, for instance, and only 24 states have laws describing how the Chapter 9 process can occur. Georgia specifically prohibits Chapter 9. This is why more than 15,000 corporations have been able to declare bankruptcy but only 614 municipalities have filed for Chapter 9 since 1937. Even Harrisburg, Penn., which has become perilously close to not paying its debts, has tapped into a reserve fund it had for this purpose and has called talk of bankruptcy “premature.”

Unlike for corporations, a trip to bankruptcy court is no panacea to eliminate or reduce debt. A municipal issuer that files for bankruptcy hinders its access to capital. Since issuing new debt is often part of the resolution, defaulting is generally ill-advised and contraindicated. One may certainly question the wisdom of papering over every shortfall with ever more debt, but it will be some time before debt service itself is the problem, especially in this low interest rate environment. Municipal defaults right now are at about 0.1%. At worst they go to 0.2%, but even this is unlikely due to all the mechanisms in place that municipalities have to cover their debt service.

How to take advantage of this? There are two major players in the space. The smaller player is a little company called Berkshire Hathaway (BRKA, BRKB), run by a curmudgeonly speculator named Warren Buffett. He entered the space when the two biggest players, MBIA and Ambac, ran into trouble by dabbling too much in subprime debt. The other player is Assured Guaranty (disclosure: I own the stock) which counts as its largest investor, the very successful investor Wilbur Ross. These super investors, plus the fact that municipal bond yields are trading at a meager 3.89%, suggest that the smart money is completely aware of the potential for municipal defaults and they are eagerly letting panicked investors insure municipal bonds.

Will more municipalities default? Maybe. Maybe it goes up from a 0.1% rate to a 0.2% rate. But if the bears are looking for something to point at as the “next shoe” to drop then they will have to look elsewhere. States have the assets, the tax-raising ability, and the incentive to meet their debt obligations so they can survive and thrive in the future. And the companies that are right now taking advantage of this will prosper.

James Altucher, a contributor to Dow Jones Adviser, is a managing partner of Formula Capital, an alternative asset management firm, and an author on investment strategies. Unlike Dow Jones reporters, he may have positions in the stocks he writes about.

The Issue of Guaranteed Issue in the New Health Care Law

2010-03-28T21:39:00.000-07:00

This is a great piece printed just days after P. Obama signed the new health care legislation into law. Not only does it touch upon the relatively narrow issue of guaranteed issue for children of policy holders, but strongly foreshadows the mountains of rules, interpretations and, ultimately, systems that will be born from the complex new law. From a personal perspective, I wonder how anyone in Congress could have been educated sufficiently on the costs or multiple, significant consequences that the new law will have on the health care system, especially when regulations to enforce the law have yet to be written by bureaucrats. The devil is indeed in the details-- both those in the legislation, and those that are created from it. Be warned, the new law is a budget buster, and functionally cannot be the panacea for a modern health care system. While certain aspects of the law are both noble and needed (i.e. the reforms on policy cancellation and p-x condition-- but see below on that), the trade-offs to industry (i.e. individual mandate) and labor (tax on Cadillac plans suspended until 2018) were simply too generous, and have cratered any present chance for reform.

Sunday, March 28, 2010 nytimes.com
Coverage Now for Sick Children? Check Fine Print
By ROBERT PEAR

WASHINGTON — Just days after President Obama signed the new health care law, insurance companies are already arguing that, at least for now, they do not have to provide one of the benefits that the president calls a centerpiece of the law: coverage for certain children with pre-existing conditions.

Mr. Obama, speaking at a health care rally in northern Virginia on March 19, said, “Starting this year, insurance companies will be banned forever from denying coverage to children with pre-existing conditions.”

The authors of the law say they meant to ban all forms of discrimination against children with pre-existing conditions like asthma, diabetes, birth defects, orthopedic problems, leukemia, cystic fibrosis and sickle cell disease. The goal, they say, was to provide those youngsters with access to insurance and to a full range of benefits once they are in a health plan.

To insurance companies, the language of the law is not so clear.

Insurers agree that if they provide insurance for a child, they must cover pre-existing conditions. But, they say, the law does not require them to write insurance for the child and it does not guarantee the “availability of coverage” for all until 2014.

William G. Schiffbauer, a lawyer whose clients include employers and insurance companies, said: “The fine print differs from the larger political message. If a company sells insurance, it will have to cover pre-existing conditions for children covered by the policy. But it does not have to sell to somebody with a pre-existing condition. And the insurer could increase premiums to cover the additional cost.”

Congressional Democrats were furious when they learned that some insurers disagreed with their interpretation of the law.

“The concept that insurance companies would even seek to deny children coverage exemplifies why we fought for this reform,” said Representative Henry A. Waxman, Democrat of California and chairman of the Energy and Commerce Committee.

Senator John D. Rockefeller IV, Democrat of West Virginia and chairman of the Senate commerce committee, said: “The ink has not yet dried on the health care reform bill, and already some deplorable health insurance companies are trying to duck away from covering children with pre-existing conditions. This is outrageous.”

The issue is one of many that federal officials are tackling as they prepare to carry out the law, with a huge stream of new rules, official guidance and brochures to educate the public. Their decisions will have major practical implications.

Insurers say they often limit coverage of pre-existing conditions under policies sold in the individual insurance market. Thus, for example, an insurer might cover a family of four, including a child with a heart defect, but exclude treatment of that condition from the policy.

The new law says that health plans and insurers offering individual or group coverage “may not impose any pre-existing condition exclusion with respect to such plan or coverage” for children under 19, starting in “plan years” that begin on or after Sept. 23, 2010.

But, insurers say, until 2014, the law does not require them to write insurance at all for the child or the family. In the language of insurance, the law does not include a “guaranteed issue” requirement before then.

Consumer advocates worry that instead of refusing to cover treatment for a specific pre-existing condition, an insurer might simply deny coverage for the child or the family.

“If you have a sick kid, the individual insurance market will continue to be a scary place,” said Karen L. Pollitz, a research professor at the Health Policy Institute at Georgetown University.

Experts at the National Association of Insurance Commissioners share that concern.

“I would like to see the kids covered,” said Sandy Praeger, the insurance commissioner of Kansas. “But without guaranteed issue of insurance, I am not sure companies will be required to take children under 19.”

A White House spokesman said the administration planned to issue regulations setting forth its view that “the term ‘pre-existing’ applies to both a child’s access to a plan and his or her benefits once he or she is in a plan.” But lawyers said the rules could be challenged in court if they went beyond the law or were inconsistent with it.

Starting in January 2014, health plans will be required to accept everyone who applies for coverage.

Until then, people with pre-existing conditions could seek coverage in high-risk insurance pools run by states or by the secretary of health and human services. The new law provides $5 billion to help pay claims filed by people in those pools.

Federal officials will need to write rules or guidance to address a number of concerns. The issues to be resolved include defining the “essential health benefits” that must be offered by all insurers; deciding which dependents are entitled to stay on their parents’ insurance; determining who qualifies for a “hardship exemption” from the requirement to have insurance; and deciding who is eligible for a new long-term care insurance program.

As originally conceived, most of the new federal requirements would have taken effect at the same time, in three or four years. The requirements for people to carry insurance, for employers to offer it and for insurers to accept all applicants were tied together.

But as criticism of their proposal grew, Democrats wanted to show that the legislation would produce immediate, tangible benefits. So they accelerated the ban on “pre-existing condition exclusions” for children.

Consumers will soon gain several other protections. By July 1, the health secretary must establish a Web site where people can identify “affordable health insurance coverage options.” The site is supposed to provide information about premiums, co-payments and the share of premium revenue that goes to administrative costs and profits, rather than medical care.

In addition, within six months, health plans must have “an effective appeals process,” so consumers can challenge decisions on coverage and claims.

Rejoice America! Health Care Passes the House, Only to Later Bankrupt the Nation.

2010-03-21T23:18:00.000-07:00

[Note: The Senate version of the health care reform bill was approved by the House tonight by a 219-212 vote. The Senate bill will now be sent to the President. The "reconciliation" portion of the health care bill was also approved by the House with 222 votes, sending that portion of the legislation back to the Senate for final consideration by the Senate. The calculations for the bill's spending and revenue provisions, detailed and discussed in the article below, were not altered by the House vote.]

The Real Arithmetic of Health Care Reform

By Douglas Holtz-Eakin
nytimes.com, March 21, 2010
Arlington, Va.

ON Thursday, the Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, cost about $950 billion, but because it would raise some revenues and lower some costs, it would also lower federal deficits by $138 billion. In other words, a bill that would set up two new entitlement spending programs — health insurance subsidies and long-term health care benefits — would actually improve the nation’s bottom line.

Could this really be true? How can the budget office give a green light to a bill that commits the federal government to spending nearly $1 trillion more over the next 10 years?

The answer, unfortunately, is that the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.

In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.

Gimmick No. 1 is the way the bill front-loads revenues and backloads spending. That is, the taxes and fees it calls for are set to begin immediately, but its new subsidies would be deferred so that the first 10 years of revenue would be used to pay for only 6 years of spending.

Even worse, some costs are left out entirely. To operate the new programs over the first 10 years, future Congresses would need to vote for $114 billion in additional annual spending. But this so-called discretionary spending is excluded from the Congressional Budget Office’s tabulation.

Consider, too, the fate of the $70 billion in premiums expected to be raised in the first 10 years for the legislation’s new long-term health care insurance program. This money is counted as deficit reduction, but the benefits it is intended to finance are assumed not to materialize in the first 10 years, so they appear nowhere in the cost of the legislation.

Another vivid example of how the legislation manipulates revenues is the provision to have corporations deposit $8 billion in higher estimated tax payments in 2014, thereby meeting fiscal targets for the first five years. But since the corporations’ actual taxes would be unchanged, the money would need to be refunded the next year. The net effect is simply to shift dollars from 2015 to 2014.

In addition to this accounting sleight of hand, the legislation would blithely rob Peter to pay Paul. For example, it would use $53 billion in anticipated higher Social Security taxes to offset health care spending. Social Security revenues are expected to rise as employers shift from paying for health insurance to paying higher wages. But if workers have higher wages, they will also qualify for increased Social Security benefits when they retire. So the extra money raised from payroll taxes is already spoken for. (Indeed, it is unlikely to be enough to keep Social Security solvent.) It cannot be used for lowering the deficit.

A government takeover of all federally financed student loans — which obviously has nothing to do with health care — is rolled into the bill because it is expected to generate $19 billion in deficit reduction.

Finally, in perhaps the most amazing bit of unrealistic accounting, the legislation proposes to trim $463 billion from Medicare spending and use it to finance insurance subsidies. But Medicare is already bleeding red ink, and the health care bill has no reforms that would enable the program to operate more cheaply in the future. Instead, Congress is likely to continue to regularly override scheduled cuts in payments to Medicare doctors and other providers.

Removing the unrealistic annual Medicare savings ($463 billion) and the stolen annual revenues from Social Security and long-term care insurance ($123 billion), and adding in the annual spending that so far is not accounted for ($114 billion) quickly generates additional deficits of $562 billion in the first 10 years. And the nation would be on the hook for two more entitlement programs rapidly expanding as far as the eye can see.

The bottom line is that Congress would spend a lot more; steal funds from education, Social Security and long-term care to cover the gap; and promise that future Congresses will make up for it by taxing more and spending less.

The stakes could not be higher. As documented in another recent budget office analysis, the federal deficit is already expected to exceed at least $700 billion every year over the next decade, doubling the national debt to more than $20 trillion. By 2020, the federal deficit — the amount the government must borrow to meet its expenses — is projected to be $1.2 trillion, $900 billion of which represents interest on previous debt.

The health care legislation would only increase this crushing debt. It is a clear indication that Congress does not realize the urgency of putting America’s fiscal house in order.

Douglas Holtz-Eakin, who was the director of the Congressional Budget Office from 2003 to 2005, is the president of the American Action Forum, a policy institute.

The Emperor Will Be Purchasing His Clothes From A Thrift Shop

2010-03-17T18:37:00.000-07:00

The Perils of Pay Less, Get More
By David Leonhardt, nytimes.com, March 16, 2010

As a society gets richer, its tax rates tend to rise.

This idea is known as Wagner’s Law, named for the 19th-century economist who came up with it. Citizens of richer societies generally prefer more government services, Adolf Wagner explained. With their basic needs met, they want a military to protect them, good schools for their children, comfortable retirement for the elderly, medical care even when it isn’t profitable and a strong social safety net.

Sure enough, the United States followed this path for most of the last century. In 1900, federal taxes amounted to just 2 percent of gross domestic product. By 2000, the share had risen to 21 percent.

Over the last couple of decades, though, we have repealed Wagner’s Law — or, more to the point, only partly repealed it. Taxes are no longer rising. They fell to 18 percent of G.D.P. in 2008 and, because of the recession, to a 60-year low of 15.1 percent last year.

Yet our desire for government services just keeps growing. We added a prescription drug benefit to Medicare. Farm subsidies are sacrosanct. Social Security is the third rail of politics.

This disconnect is, far and away, the main reason for our huge budget problems. Yes, the wars in Iraq and Afghanistan, the recession and the stimulus have all added to the deficit. But they are minor issues in the long run. By 2020, government spending is projected to equal 26 percent (and rising) of G.D.P., mostly because of Medicare and Social Security. Taxes are on pace to equal just 19 percent.

On Friday, Congressional Republicans named six members of a deficit commission that President Obama created last month. In all, the commission will have 10 Democratic members and eight Republicans. It is scheduled to issue its recommendations late this year.

“By any reasonable projection, we’re on an utterly unsustainable path,” Peter Orszag, the White House budget director, told me last week. “And the fiscal commission, while not guaranteed to succeed, offers the best hope of getting ahead of this problem before it becomes a true crisis.”

The commission can succeed, of course, only if it comes up with solutions that Congress and the White House accept. For now, political leaders in both parties are still in denial about what the solution will entail. To be fair, so is much of the public.

What needs to happen? Spending will need to be cut, and taxes will need to rise. They won’t need to rise just on households making more than $250,000, as Mr. Obama has suggested. They will probably need to rise on your household, however much you make.

A solution that relied only on spending cuts would dismantle some bedrock parts of modern American society. Paul Ryan, the ranking Republican on the House Budget Committee, recently released such a plan, and it got rid of Medicare for everyone now under 55.

A solution that relied only on taxes would muzzle economic growth. To cover the costs of future spending — the retirement of the baby boomers and everything else — federal taxes would have to rise by almost 50 percent, immediately and permanently, according to a recent analysis by the economists Alan Auerbach and William Gale.

A solution that combined spending cuts and tax increases would not need to be ruinous — or start in the next couple of years, when unemployment is likely to remain high. But the federal government does have a decent amount of fat in it. And, just as Wagner pointed out, tax increases are not inherently bad. Done right, they do not even have to reduce economic growth by much.

In recent years, economic research has suggested that moderate changes in the tax law don’t actually have a huge impact on growth. You don’t need econometrics to grasp this, either. Just look at the last 20 years. Economic growth after Bill Clinton’s tax increases was far more rapid than economic growth after George W. Bush’s tax cuts. Despite the Bush tax cuts, average annual growth over the last decade — even before the Great Recession began — was slower than in any decade since World War II.

The biggest hurdle to solving the deficit problem will be politics, not economics. Even if the tax increases and spending cuts don’t need to be ruinous, they will not be popular. None of us like the idea of losing benefits or paying more taxes. That’s why Mr. Obama and Congress have outsourced the first stage of the process to a commission.

On the spending side, health care is easily the biggest item. Not only will many people in their 50s and 60s live into their 80s, but technological advances will make medical care for any individual person much more expensive in the future.

A crucial aspect of the final health reform bills is that they take early steps toward trying to distinguish between care that makes people healthier and care that does not. These steps, along with some Medicare cuts, are the reason that many economists think the bills will reduce the deficit. The bills will also make it easier for Medicare to make further changes in the future.

Beyond heath care, Social Security benefits could be reduced for high-income households, and the annual inflation adjustment could be trimmed (making it more accurate, some economists believe). Many corporate subsidies — for agribusinesses and banks, among others — serve no useful economic function. Some military contractors could also stand to be squeezed.

Don’t expect that any one program can close the deficit, though. Military spending, for example, already takes up a much smaller share of the budget than a few decades ago, as Douglas Elmendorf, the head of the Congressional Budget Office, said last week. Without the end of the cold war, the deficit might have already soared.

On taxes, the affluent can certainly stand to pay higher rates than they have. Over the last three decades, they have received both the biggest pretax pay increases and the biggest tax cuts. But there is not enough money at the top to eliminate the long-term fiscal gap. Households making more than $250,000 pay federal taxes equal to only about 5 percent of G.D.P.

The ideal way to raise taxes for everyone else is not through the income tax code — which can affect people’s incentive to work — but through another means. As Victoria Perry of the International Monetary Fund points out, every industrialized country in the world except Saudi Arabia and the United States has some kind of consumption tax. A modest consumption tax would give households more incentive to save and could raise significant revenue. Another option is to reduce some big deductions, like the one for mortgage interest.

I’ll confess that I have a hard time seeing how any of this will happen in the next few years, no matter what the deficit commission recommends. Congressional Republicans have shown little willingness to consider any tax increases, and Mr. Obama has shown no indication of breaking his $250,000-and-under pledge. We voters, meanwhile, tend to oppose government spending in general while supporting the government programs that the spending pays for.

But a lot can happen in a few years. For one thing, interest rates on government bonds are likely to rise, making the need to reduce the deficit more pressing. “It doesn’t seem like policy makers are currently afraid of the bond market,” Mr. Orszag says, “and I wish that weren’t the case.” Someday soon, they may have to be.

Good Questions for the Nation's MegaBanks

2010-01-12T14:41:00.000-08:00

From the 1/11/10 New York Times:

"On Wednesday, the first hearing of the Financial Crisis Inquiry Commission — what many are calling this century’s equivalent of a Pecora-style investigation that scrutinized the market crash of 1929 — will take place in Washington.

Wall Street’s top brass are planning to be there (and yes, they are flying down the night before so they don’t miss it): Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of JPMorgan Chase, John J. Mack of Morgan Stanley and Brian T. Moynihan of Bank of America.

The hearing, of course, will partly be political theater. There will be finger-pointing. But if the committee uses its inquiry for its stated purpose — “hearing testimony on the causes and current state of the crisis” — it may help direct the national conversation and steer the current reform efforts.

In the spirit of trying to help start some lively discussions, here are some questions they might consider asking:

Mr. Blankfein, your firm, and others, created and sold bundles of mortgages known as collateralized debt obligations that it simultaneously sold short, or bet against. These C.D.O.’s turned out to be bad investments for the people who bought them, but your short bets paid off for Goldman Sachs.

In the process of selling them to institutional investors, however, your firm lobbied ratings agencies to assign them high ratings as solid bets — even as your firm planned on shorting them.

Could you explain how Goldman bet against these C.D.O.’s while simultaneously trying to persuade ratings agencies and investors that they were good investments? Were they designed from the outset to be shorted by Goldman and possibly select clients? And were those clients involved in helping design these transactions? What explicit disclosures did you make to Standard & Poor’s and Moody’s about your plans to short these instruments? And should we continue to allow transactions in which you’re betting against what you’re also selling?

Mr. Dimon, during the final week before Lehman Brothers collapsed, your firm asked Lehman to post billions of dollars in collateral and threatened to stop clearing Lehman’s trades if it didn’t do so. That demand had the effect of depleting Lehman’s capital base, just when it desperately needed that capital to return funds to investors who were asking for their money back.

JPMorgan clearly was trying to protect itself. But could you explain what impact you believe that “collateral call” had on Lehman’s failure and the ensuing market crisis?

This one is for the entire group. All of your firms are involved in some form of proprietary trading, or using your own capital to make financial bets, not unlike hedge funds and other private investors. As the recent crisis has shown, these bets can go catastrophically wrong and endanger the global financial system.

Given that the government sent a clear signal in the crisis that it would not let the biggest firms fail, why should taxpayers guarantee this sort of trading? Why should the government backstop what amounts to giant hedge funds inside the walls of your firms? How is such trading helpful to the broader financial system?

A question for all the executives about bonuses: We keep hearing that you plan to pay out billions in bonuses this year. Given that they come out of profits that, to a large degree, seem to be the result of government programs to prop up and stimulate the banking sector, do you think they are deserved, even if they are in stock? And, while we’re on the topic, given the market crisis of 2008, were you all overpaid in 2007?

Again, for the group: Over the last year, your firms have actively used the Federal Reserve’s discount window to exchange various investments (including C.D.O.’s) for cash. You probably have a better idea than most about what those assets now sitting on the Fed’s balance sheet are worth.

Given the growing calls for regular audits of the Fed (an idea being resisted by the likes of the chairman, Ben Bernanke), do you think the demands for such audits are warranted?

This question is for Mr. Mack. In November, in a surprisingly candid moment, you publicly declared, “Regulators have to be much more involved.” You then added, “We cannot control ourselves.” Can you elaborate on those comments? Is Wall Street inherently incapable of policing itself — a view contrary to what most of your peers have argued?

Mr. Blankfein. Your firm, like other banks on this panel, was paid in full by the American International Group on various financial contracts, thanks to the government’s bailout. You can understand how this has whipped up no small amount of fury and questions over why A.I.G. and the government did not try to renegotiate those contracts.

Because your firm was the largest beneficiary of the government’s decision, did you or any of your employees lobby the Fed, Treasury or any other government agency for this “100 cents on a dollar” payout? If so, enlighten us about those conversations.

This is for Mr. Moynihan. Please explain — and no jargon, please — why your firm believed it didn’t have to disclose mounting losses at Merrill Lynch ahead of a shareholder vote in December 2008. After all, investigations into the matter suggest company executives knew of the $4.5 billion loss Merrill suffered in October before that vote.

And why, just a week or so after you became general counsel, did Bank of America decide to tell the government about those same losses that it chose not to tell shareholders about?

To Mr. Dimon and Mr. Moynihan: Your industry has vigorously opposed creating a consumer protection agency. But it’s clear that your millions of retail customers weren’t adequately protected, leading to hardship and heartbreak across the nation. Because you oppose creating such a regulator, what should be done to ensure these problems don’t happen again?"

You're Doing a Heckuva Job, Uncle Sam!

2010-01-12T12:49:00.000-08:00

After spending billions (if not trillions) of dollars on homeland security gadgets and employees, it seems the federal government still does not have the capacity to merge basic information or even spell correctly. I'm quite sure these new protocols and additional dollars will not fix the problems.

Fixing errors after the Christmas Day near-bombing

By Walter Pincus
Washington Post Staff Writer
Tuesday, January 12, 2010; A15

Philip J. Crowley, assistant secretary of state for public affairs, acknowledged last week at a news conference that State Department officials made two key errors in the initial reporting about Umar Farouk Abdulmutallab.

They misspelled his name -- "a one-letter difference," an intelligence official said -- in filing their first report Nov. 20, the day after Umau Mutallab, a Nigerian banker, described his concerns about his son.

And they didn't officially look for Abdulmutallab in a department database of U.S. visa-holders.

State Department officials wrote a Visa Viper cable Nov. 20 saying that Mutallab thought his son had become attached to "extremists" and might be in Yemen, and that the father wanted help in trying to locate him to reestablish family relations. The Visa Viper terrorist-reporting program calls for each Foreign Affairs post abroad to identify "potential terrorists and to develop information on those individuals," according to the State Department's Foreign Affairs Manual.

But before the Christmas Day bombing attempt aboard a Detroit-bound airliner, developing such information for a Visa Viper report apparently did not involve searching for the name of a "potential terrorist" in the State Department's database of people with visas to enter the United States. It is now.

That was the first reform announced almost immediately by Secretary of State Hillary Rodham Clinton and later by President Obama.

Back in November, it was a day or two after the initial Visa Viper report was received at the National Counterterrorism Center (NCTC) before analysts there realized the correct spelling of Abdulmutallab's name, based on data from other agencies. With the error corrected, he was listed, along with about 400,000 others, on the Terrorist Identities Datamark Environment (TIDE). That is a list of people, along with relevant information about them, who are suspected of, or known to be associated with, terrorist activities outside the United States.

At that time, NCTC analysts who worked on TIDE entries processed only nominations from the State Department, the CIA and other collection agencies. They checked the TIDE list to see if a name was on it, but they did not search other databases for more information. The NCTC also determined what further action, if any, was necessary, such as moving a person's name to the next level, the FBI's Terrorist Screening Center.

Meanwhile, back at the U.S. Embassy in Nigeria, State Department officials -- "out of curiosity" -- did check to see whether Abdulmutallab had a visa for entry into the United States, according to a department official who spoke on the condition of anonymity because the matter is under investigation. But because the misspelled name was used, the fact that Abdulmutallab had a multi-entrance, two-year tourist visa obtained in June 2008 was not sent to the NCTC or to other intelligence agencies.

As Crowley put it last week, "The initial search to determine if there was a visa did not -- one did not show, expressly because of this misspelling."

"This is a critical lesson learned," Crowley said. "The steps that we've put in the process beginning immediately after December 25 will, in fact, make sure that future reports do have visa information in them, so that this is . . . inserted into the process right from the outset."

Lack of information about Abdulmutallab's open visa affected the NCTC's determination of the threat he presented and thus the list he was put on. Apparently no other agency checked State's database of visa-holders, though they all have access to it. The assumption, one intelligence official said, was that State would have done that.

One of the major findings of the ongoing inquiry into Abdulmutallab's case deals with reviewing the names of those with outstanding visas to enter the United States. The State Department has withdrawn an unknown number of visas since Dec. 25, but Crowley refused to discuss any except Abdulmutallab's.

One of Obama's new directives requires the FBI to "conduct a thorough review of Terrorist Screening Database holdings" -- about 440,000 names -- "and ascertain current visa status of all 'known and suspected terrorists,' beginning with the no fly list" -- 4,000 names. One wonders if such a check has been done before.

And the NCTC, under the president's new directive, has been given responsibility to do more than just bring together data collected by others. It is to "establish a dedicated capability responsible for enhancing record information on possible terrorists" on the TIDE list.

In addition, it is to pursue "thoroughly and exhaustively terrorism threat threads" with a new group so it can pass on information for "followup action by the intelligence, law enforcement, and homeland security communities." For that, according to NCTC officials, they will need more personnel and equipment.

Musings on the Power of the Federal Government

2010-01-12T12:10:00.000-08:00

Excellent and brief article below from the WaPo. As for Levy's call to action on binding government, I wonder how such binding can be accomplished when the very same institutions that are to be bound are the ones who would decide/enforce those boundaries? Does anyone expect Congress to voluntarily surrender its accumulated powers? That outcome seems about as likely as Congress eliminating influence-peddlers and PAC money from the political process. The only actor that could bind the federal government is the general electorate, which just happens to be hopelessly split into ineffectual factions, endlessly warring with the others primarily over matters which are not the province of government (sexuality, abortion, etc.). Leave your comments below.

Has the Supreme Court eroded freedom?
By: Robert Levy

The power of our highest court occupies center stage in "The Dirty Dozen: How Twelve Supreme Court Cases Radically Expanded Government and Eroded Freedom" by Robert A. Levy and William Mellor, now out in paperback. Levy, chairman of the Cato Institute, and Mellor, president and general counsel of the Institute for Justice, worry that the Supreme Court has led the country away from a vision of the Constitution established by the Founding Fathers.

How did we get from the Founders' Constitution, which established strictly limited government, to our contemporary Constitution, which has expanded government and curtailed individual rights? Much of the damage can be traced to a handful of post-New Deal Supreme Court cases that changed the course of American history, with adverse effect on many of today's key policy debates.

Here are just a few of the issues:

Mandatory Health Insurance A 1942 case, Wickard v. Filburn, paved the way for the noxious notion that Congress, under the guise of regulating interstate commerce, can punish the failure to purchase a product -- health insurance -- for which there is no legal interstate market. Of course, if Congress can mandate the purchase of health insurance, why not the purchase of exercise equipment or a new fuel-efficient car? The individual mandate would extend the dominion of the federal government to virtually all manner of human conduct -- including non-conduct -- by establishing a police power that is nowhere authorized in the Constitution.

Home Foreclosures
"No State shall ... pass any ... Law impairing the Obligation of Contracts," states the Constitution. Clear enough? Not in Home Building & Loan Association v. Blaisdell (1934). The Supreme Court upheld a Minnesota statute that -- see if this sounds familiar -- postponed mortgage payments for financially troubled homeowners. Never mind the contract. We're now seeing a replay as creditors are forced to waive foreclosure on sub-prime mortgages, even if there was no fraud in the bargaining process.

Bailouts
In a series of cases culminating with Whitman v. American Trucking Associations (2001), the Court ignored the Constitution's very first sentence after the preamble: "All legislative Powers ... shall be vested in a Congress." For decades, Congress has delegated more and more lawmaking power to unelected bureaucrats in 300-plus executive departments and administrative agencies. That is how Treasury Secretaries Henry Paulson and Timothy Geithner were able to bailout banks, automobile companies, and insurance companies -- making up the rules as they went along, without input from Congress or recourse by the voters.

Eminent Domain
The infamous 2005 ruling in Kelo v. City of New London allowed private homes to be condemned by government so the property could be transferred to other private parties for economic development. The justification was not highways or traditional public uses, but rather the illusory promise of a higher tax base and more jobs. Nobody's home is safe from the government bulldozer when local planners can run roughshod over the most isolated and vulnerable members of society.

The list could go on. Whether it's political speech, economic liberties, property rights, or racial preferences, the Supreme Court has behaved in a manner that would have mystified and outraged our Founding Fathers. The federal government is now immersed in matters ranging from public schools, to welfare, retirement, medical care, family planning, and even aid to the arts -- none of which can be found among Congress's enumerated powers. It's time for the Court to bind the legislative and executive branches with the chains of the Constitution.

Important Insight on the Health Care Debate

2009-12-09T14:01:00.001-08:00

Below is an article found in the Washington Post regarding one of the hidden costs of employer-provided health care: the fact that individual employees do not have the right to negotiate their own policy and, for that matter, often do not know how much their employers pay for group plans for employees. Importantly, the author examines the correlation between rising health care costs and declining wages arguing that employers, with only one predetermined basket of money available for both wages and benefits, necessarily shaft employees on wage compensation in a highly inflationary environment for health care costs. Reader thoughts are welcome in the comments section.

The medical bill you need to see
By Ezra Klein
www.washingtonpost.com , Tuesday, December 8, 2009

We've had a pretty good discussion this year on the public option and on "death panels." But for all the hype over health-care reform, we have not done a very good job of talking about the health-care system itself -- in particular, why our system is so expensive. As a result, we're not doing a very good job of fixing it. There's still time to change that, but not much.

The doomsaying is by now familiar: Left unchecked, health-care reform will bankrupt our nation. It will grow to consume every dollar of gross domestic product. And Congress isn't contemplating anything nearly radical enough to avert the emergency.

The reason is not that people haven't heard grim warnings about the future. It's because they don't understand what's going on in the present. In 2009, the average employer-sponsored health-care plan cost a bit less than $13,500. But virtually no one cut a check for $13,500. Employers generally pay more than 70 percent of their employees' health-care costs. To employees, that seems like a good deal, particularly given how fast costs are growing. A "benefit," as it's called.

But health-care coverage is not a benefit. It's a wage deduction. When premium costs go up, wages go down. When premium costs go down, wages go up. Yet workers don't know that. In fact, the information is hidden from them. That means that cost control seems like all pain and no gain, which makes it virtually impossible for Congress to pass. It's like asking someone to diet when they don't realize it will help them lose weight.

Cost control is not, in fact, all pain and no gain. It's some pain in return for a fat raise. A 2006 study, for instance, by Harvard's Katherine Baicker and Amitabh Chandra used malpractice payments to estimate the effect of premium increases on wages. They found that a 10 percent increase in health-care premiums "results in an offsetting decrease in wages of 2.3 percent" and an increase in unemployment of 1.2 percentage points. Compensation is basically a set sum for employers, and they don't seem to care much whether it goes into wages or into health-care costs.

Workers saw this in the 1990s. This was the era of the managed-care revolution, which most remember as a horrifying failure. Famously, audiences applauded when Helen Hunt broke out into a profanity-laden rant against HMOs in the movie "As Good as It Gets." The popular backlash was so intense that by the turn of the century the managed-care experiment was virtually over. The problem with this historic failure? The data showed the experiment to be a tremendous success.

From 1989 to 1995, median wages actually fell a bit. Then, managed care kicked in. Annual growth in health-care costs fell from more than 10 percent in the early 1990s to less than 5 percent in the late '90s. Meanwhile, wages shot through the roof, rising more than 11 percent from 1995 to 2000. Then we ended the managed-care experiment, and health-care costs resumed their normal speed of growth. Predictably, wages slumped back down from 2000 to 2006. "By every observable indicator," says Harvard's David Cutler, "managed care was a huge success. It cut spending, cut the growth of spending and didn't seem to kill anyone. And yet everyone hated it."

Of course they hated it. They didn't see its benefits, only its costs. They knew they were suddenly trapped in networks and being hassled by their insurers. As for their raises, those were nice, but why are you changing the subject?

When Americans rejected managed care, in other words, they didn't know they were ending wage increases, too. But since 1990, wages have tracked changes in premiums more closely than they've tracked the growth of GDP. Maybe if more workers knew that, they would be more interested in efforts to control health-care costs.

One of the best reforms that could be made this year would be to give workers that information. So far, however, efforts have been unsuccessful. During the Senate Finance Committee's negotiations, Ron Wyden (D-Ore.) offered to give employees the option to reject their employer's offerings in return for a voucher that would help them choose their own insurance on exchanges, which meant they would save money if they chose cheaper plans. Much more modestly, Chuck Grassley (R-Iowa) floated an idea to simply require employers to report their health-care spending on workers' W-2 forms. Both were stymied by an odd-bedfellows alliance of employers and unions.

It's not too late, though. Perhaps the easiest way to dramatize the issue for workers would be to attach health-care costs to each paycheck. If employers listed the cost of health care alongside the bite taken by payroll taxes, it would be much clearer to workers that health-care coverage was coming out of their wages, not out of their employer's largess. That, at least, could help them see the costs of the system more clearly, which is, unfortunately, something that all the congressional debate isn't helping anyone do.

Why We'll Never Win the War in Afghanistan

2009-11-13T22:18:00.000-08:00

The following article appeared in the November 30, 2009 edition of The Nation. It is an excellent piece of investigative journalism, but one that is surely to get no traction in the mainstream media. how many more examples of waste, fraud and abuse of taxpayer dollars will we tolerate before pulling the plug on our government's foreign follies?

How the US Funds the Taliban

By Aram Roston

On October 29, 2001, while the Taliban's rule over Afghanistan was under assault, the regime's ambassador in Islamabad gave a chaotic press conference in front of several dozen reporters sitting on the grass. On the Taliban diplomat's right sat his interpreter, Ahmad Rateb Popal, a man with an imposing presence. Like the ambassador, Popal wore a black turban, and he had a huge bushy beard. He had a black patch over his right eye socket, a prosthetic left arm and a deformed right hand, the result of injuries from an explosives mishap during an old operation against the Soviets in Kabul.

But Popal was more than just a former mujahedeen. In 1988, a year before the Soviets fled Afghanistan, Popal had been charged in the United States with conspiring to import more than a kilo of heroin. Court records show he was released from prison in 1997.

Flash forward to 2009, and Afghanistan is ruled by Popal's cousin President Hamid Karzai. Popal has cut his huge beard down to a neatly trimmed one and has become an immensely wealthy businessman, along with his brother Rashid Popal, who in a separate case pleaded guilty to a heroin charge in 1996 in Brooklyn. The Popal brothers control the huge Watan Group in Afghanistan, a consortium engaged in telecommunications, logistics and, most important, security. Watan Risk Management, the Popals' private military arm, is one of the few dozen private security companies in Afghanistan. One of Watan's enterprises, key to the war effort, is protecting convoys of Afghan trucks heading from Kabul to Kandahar, carrying American supplies.

Welcome to the wartime contracting bazaar in Afghanistan. It is a virtual carnival of improbable characters and shady connections, with former CIA officials and ex-military officers joining hands with former Taliban and mujahedeen to collect US government funds in the name of the war effort.

In this grotesque carnival, the US military's contractors are forced to pay suspected insurgents to protect American supply routes. It is an accepted fact of the military logistics operation in Afghanistan that the US government funds the very forces American troops are fighting. And it is a deadly irony, because these funds add up to a huge amount of money for the Taliban. "It's a big part of their income," one of the top Afghan government security officials told The Nation in an interview. In fact, US military officials in Kabul estimate that a minimum of 10 percent of the Pentagon's logistics contracts--hundreds of millions of dollars--consists of payments to insurgents.

Understanding how this situation came to pass requires untangling two threads. The first is the insider dealing that determines who wins and who loses in Afghan business, and the second is the troubling mechanism by which "private security" ensures that the US supply convoys traveling these ancient trade routes aren't ambushed by insurgents.

A good place to pick up the first thread is with a small firm awarded a US military logistics contract worth hundreds of millions of dollars: NCL Holdings. Like the Popals' Watan Risk, NCL is a licensed security company in Afghanistan.

What NCL Holdings is most notorious for in Kabul contracting circles, though, is the identity of its chief principal, Hamed Wardak. He is the young American son of Afghanistan's current defense minister, Gen. Abdul Rahim Wardak, who was a leader of the mujahedeen against the Soviets. Hamed Wardak has plunged into business as well as policy. He was raised and schooled in the United States, graduating as valedictorian from Georgetown University in 1997. He earned a Rhodes scholarship and interned at the neoconservative think tank the American Enterprise Institute. That internship was to play an important role in his life, for it was at AEI that he forged alliances with some of the premier figures in American conservative foreign policy circles, such as the late Ambassador Jeane Kirkpatrick.

Wardak incorporated NCL in the United States early in 2007, although the firm may have operated in Afghanistan before then. It made sense to set up shop in Washington, because of Wardak's connections there. On NCL's advisory board, for example, is Milton Bearden, a well-known former CIA officer. Bearden is an important voice on Afghanistan issues; in October he was a witness before the Senate Foreign Relations Committee, where Senator John Kerry, the chair, introduced him as "a legendary former CIA case officer and a clearheaded thinker and writer." It is not every defense contracting company that has such an influential adviser.

But the biggest deal that NCL got--the contract that brought it into Afghanistan's major leagues--was Host Nation Trucking. Earlier this year the firm, with no apparent trucking experience, was named one of the six companies that would handle the bulk of US trucking in Afghanistan, bringing supplies to the web of bases and remote outposts scattered across the country.

At first the contract was large but not gargantuan. And then that suddenly changed, like an immense garden coming into bloom. Over the summer, citing the coming "surge" and a new doctrine, "Money as a Weapons System," the US military expanded the contract 600 percent for NCL and the five other companies. The contract documentation warns of dire consequences if more is not spent: "service members will not get food, water, equipment, and ammunition they require." Each of the military's six trucking contracts was bumped up to $360 million, or a total of nearly $2.2 billion. Put it in this perspective: this single two-year effort to hire Afghan trucks and truckers was worth 10 percent of the annual Afghan gross domestic product. NCL, the firm run by the defense minister's well-connected son, had struck pure contracting gold.

Host Nation Trucking does indeed keep the US military efforts alive in Afghanistan. "We supply everything the army needs to survive here," one American trucking executive told me. "We bring them their toilet paper, their water, their fuel, their guns, their vehicles." The epicenter is Bagram Air Base, just an hour north of Kabul, from which virtually everything in Afghanistan is trucked to the outer reaches of what the Army calls "the Battlespace"--that is, the entire country. Parked near Entry Control Point 3, the trucks line up, shifting gears and sending up clouds of dust as they prepare for their various missions across the country.

The real secret to trucking in Afghanistan is ensuring security on the perilous roads, controlled by warlords, tribal militias, insurgents and Taliban commanders. The American executive I talked to was fairly specific about it: "The Army is basically paying the Taliban not to shoot at them. It is Department of Defense money." That is something everyone seems to agree on.

Mike Hanna is the project manager for a trucking company called Afghan American Army Services. The company, which still operates in Afghanistan, had been trucking for the United States for years but lost out in the Host Nation Trucking contract that NCL won. Hanna explained the security realities quite simply: "You are paying the people in the local areas--some are warlords, some are politicians in the police force--to move your trucks through."

Hanna explained that the prices charged are different, depending on the route: "We're basically being extorted. Where you don't pay, you're going to get attacked. We just have our field guys go down there, and they pay off who they need to." Sometimes, he says, the extortion fee is high, and sometimes it is low. "Moving ten trucks, it is probably $800 per truck to move through an area. It's based on the number of trucks and what you're carrying. If you have fuel trucks, they are going to charge you more. If you have dry trucks, they're not going to charge you as much. If you are carrying MRAPs or Humvees, they are going to charge you more."

Hanna says it is just a necessary evil. "If you tell me not to pay these insurgents in this area, the chances of my trucks getting attacked increase exponentially."

Whereas in Iraq the private security industry has been dominated by US and global firms like Blackwater, operating as de facto arms of the US government, in Afghanistan there are lots of local players as well. As a result, the industry in Kabul is far more dog-eat-dog. "Every warlord has his security company," is the way one executive explained it to me.

In theory, private security companies in Kabul are heavily regulated, although the reality is different. Thirty-nine companies had licenses until September, when another dozen were granted licenses. Many licensed companies are politically connected: just as NCL is owned by the son of the defense minister and Watan Risk Management is run by President Karzai's cousins, the Asia Security Group is controlled by Hashmat Karzai, another relative of the president. The company has blocked off an entire street in the expensive Sherpur District. Another security firm is controlled by the parliamentary speaker's son, sources say. And so on.

In the same way, the Afghan trucking industry, key to logistics operations, is often tied to important figures and tribal leaders. One major hauler in Afghanistan, Afghan International Trucking (AIT), paid $20,000 a month in kickbacks to a US Army contracting official, according to the official's plea agreement in US court in August. AIT is a very well-connected firm: it is run by the 25-year-old nephew of Gen. Baba Jan, a former Northern Alliance commander and later a Kabul police chief. In an interview, Baba Jan, a cheerful and charismatic leader, insisted he had nothing to do with his nephew's corporate enterprise.

But the heart of the matter is that insurgents are getting paid for safe passage because there are few other ways to bring goods to the combat outposts and forward operating bases where soldiers need them. By definition, many outposts are situated in hostile terrain, in the southern parts of Afghanistan. The security firms don't really protect convoys of American military goods here, because they simply can't; they need the Taliban's cooperation.

One of the big problems for the companies that ship American military supplies across the country is that they are banned from arming themselves with any weapon heavier than a rifle. That makes them ineffective for battling Taliban attacks on a convoy. "They are shooting the drivers from 3,000 feet away with PKMs," a trucking company executive in Kabul told me. "They are using RPGs [rocket-propelled grenades] that will blow up an up-armed vehicle. So the security companies are tied up. Because of the rules, security companies can only carry AK-47s, and that's just a joke. I carry an AK--and that's just to shoot myself if I have to!"

The rules are there for a good reason: to guard against devastating collateral damage by private security forces. Still, as Hanna of Afghan American Army Services points out, "An AK-47 versus a rocket-propelled grenade--you are going to lose!" That said, at least one of the Host Nation Trucking companies has tried to do battle instead of paying off insurgents and warlords. It is a US-owned firm called Four Horsemen International. Instead of providing payments, it has tried to fight off attackers. And it has paid the price in lives, with horrendous casualties. FHI, like many other firms, refused to talk publicly; but I've been told by insiders in the security industry that FHI's convoys are attacked on virtually every mission.

For the most part, the security firms do as they must to survive. A veteran American manager in Afghanistan who has worked there as both a soldier and a private security contractor in the field told me, "What we are doing is paying warlords associated with the Taliban, because none of our security elements is able to deal with the threat." He's an Army veteran with years of Special Forces experience, and he's not happy about what's being done. He says that at a minimum American military forces should try to learn more about who is getting paid off.

"Most escorting is done by the Taliban," an Afghan private security official told me. He's a Pashto and former mujahedeen commander who has his finger on the pulse of the military situation and the security industry. And he works with one of the trucking companies carrying US supplies. "Now the government is so weak," he added, "everyone is paying the Taliban."

To Afghan trucking officials, this is barely even something to worry about. One woman I met was an extraordinary entrepreneur who had built up a trucking business in this male-dominated field. She told me the security company she had hired dealt directly with Taliban leaders in the south. Paying the Taliban leaders meant they would send along an escort to ensure that no other insurgents would attack. In fact, she said, they just needed two armed Taliban vehicles. "Two Taliban is enough," she told me. "One in the front and one in the back." She shrugged. "You cannot work otherwise. Otherwise it is not possible."

Which leads us back to the case of Watan Risk, the firm run by Ahmad Rateb Popal and Rashid Popal, the Karzai family relatives and former drug dealers. Watan is known to control one key stretch of road that all the truckers use: the strategic route to Kandahar called Highway 1. Think of it as the road to the war--to the south and to the west. If the Army wants to get supplies down to Helmand, for example, the trucks must make their way through Kandahar.

Watan Risk, according to seven different security and trucking company officials, is the sole provider of security along this route. The reason is simple: Watan is allied with the local warlord who controls the road. Watan's company website is quite impressive, and claims its personnel "are diligently screened to weed out all ex-militia members, supporters of the Taliban, or individuals with loyalty to warlords, drug barons, or any other group opposed to international support of the democratic process." Whatever screening methods it uses, Watan's secret weapon to protect American supplies heading through Kandahar is a man named Commander Ruhullah. Said to be a handsome man in his 40s, Ruhullah has an oddly high-pitched voice. He wears traditional salwar kameez and a Rolex watch. He rarely, if ever, associates with Westerners. He commands a large group of irregular fighters with no known government affiliation, and his name, security officials tell me, inspires obedience or fear in villages along the road.

It is a dangerous business, of course: until last spring Ruhullah had competition--a one-legged warlord named Commander Abdul Khaliq. He was killed in an ambush.

So Ruhullah is the surviving road warrior for that stretch of highway. According to witnesses, he works like this: he waits until there are hundreds of trucks ready to convoy south down the highway. Then he gets his men together, setting them up in 4x4s and pickups. Witnesses say he does not limit his arsenal to AK-47s but uses any weapons he can get. His chief weapon is his reputation. And for that, Watan is paid royally, collecting a fee for each truck that passes through his corridor. The American trucking official told me that Ruhullah "charges $1,500 per truck to go to Kandahar. Just 300 kilometers."

It's hard to pinpoint what this is, exactly--security, extortion or a form of "insurance." Then there is the question, Does Ruhullah have ties to the Taliban? That's impossible to know. As an American private security veteran familiar with the route said, "He works both sides... whatever is most profitable. He's the main commander. He's got to be involved with the Taliban. How much, no one knows."

Even NCL, the company owned by Hamed Wardak, pays. Two sources with direct knowledge tell me that NCL sends its portion of US logistics goods in Watan's and Ruhullah's convoys. Sources say NCL is billed $500,000 per month for Watan's services. To underline the point: NCL, operating on a $360 million contract from the US military, and owned by the Afghan defense minister's son, is paying millions per year from those funds to a company owned by President Karzai's cousins, for protection.

Hamed Wardak wouldn't return my phone calls. Milt Bearden, the former CIA officer affiliated with the company, wouldn't speak with me either. There's nothing wrong with Bearden engaging in business in Afghanistan, but disclosure of his business interests might have been expected when testifying on US policy in Afghanistan and Pakistan. After all, NCL stands to make or lose hundreds of millions based on the whims of US policy-makers.

It is certainly worth asking why NCL, a company with no known trucking experience, and little security experience to speak of, would win a contract worth $360 million. Plenty of Afghan insiders are asking questions. "Why would the US government give him a contract if he is the son of the minister of defense?" That's what Mahmoud Karzai asked me. He is the brother of President Karzai, and he himself has been treated in the press as a poster boy for access to government officials. The New York Times even profiled him in a highly critical piece. In his defense, Karzai emphasized that he, at least, has refrained from US government or Afghan government contracting. He pointed out, as others have, that Hamed Wardak had little security or trucking background before his company received security and trucking contracts from the Defense Department. "That's a questionable business practice," he said. "They shouldn't give it to him. How come that's not questioned?"

I did get the opportunity to ask General Wardak, Hamed's father, about it. He is quite dapper, although he is no longer the debonair "Gucci commander" Bearden once described. I asked Wardak about his son and NCL. "I've tried to be straightforward and correct and fight corruption all my life," the defense minister said. "This has been something people have tried to use against me, so it has been painful."

Wardak would speak only briefly about NCL. The issue seems to have produced a rift with his son. "I was against it from the beginning, and that's why we have not talked for a long time. I have never tried to support him or to use my power or influence that he should benefit."

When I told Wardak that his son's company had a US contract worth as much as $360 million, he did a double take. "This is impossible," he said. "I do not believe this."

I believed the general when he said he really didn't know what his son was up to. But cleaning up what look like insider deals may be easier than the next step: shutting down the money pipeline going from DoD contracts to potential insurgents.

Two years ago, a top Afghan security official told me, Afghanistan's intelligence service, the National Directorate of Security, had alerted the American military to the problem. The NDS delivered what I'm told are "very detailed" reports to the Americans explaining how the Taliban are profiting from protecting convoys of US supplies.

The Afghan intelligence service even offered a solution: what if the United States were to take the tens of millions paid to security contractors and instead set up a dedicated and professional convoy support unit to guard its logistics lines? The suggestion went nowhere.

The bizarre fact is that the practice of buying the Taliban's protection is not a secret. I asked Col. David Haight, who commands the Third Brigade of the Tenth Mountain Division, about it. After all, part of Highway 1 runs through his area of operations. What did he think about security companies paying off insurgents? "The American soldier in me is repulsed by it," he said in an interview in his office at FOB Shank in Logar Province. "But I know that it is what it is: essentially paying the enemy, saying, 'Hey, don't hassle me.' I don't like it, but it is what it is."

As a military official in Kabul explained contracting in Afghanistan overall, "We understand that across the board 10 percent to 20 percent goes to the insurgents. My intel guy would say it is closer to 10 percent. Generally it is happening in logistics."

In a statement to The Nation about Host Nation Trucking, Col. Wayne Shanks, the chief public affairs officer for the international forces in Afghanistan, said that military officials are "aware of allegations that procurement funds may find their way into the hands of insurgent groups, but we do not directly support or condone this activity, if it is occurring." He added that, despite oversight, "the relationships between contractors and their subcontractors, as well as between subcontractors and others in their operational communities, are not entirely transparent."

In any case, the main issue is not that the US military is turning a blind eye to the problem. Many officials acknowledge what is going on while also expressing a deep disquiet about the situation. The trouble is that--as with so much in Afghanistan--the United States doesn't seem to know how to fix it.

The Trial of the Century: Will it be televised? Would it matter?

2009-11-13T20:59:00.000-08:00

The following are excerpts from a Washington Post story, with my observations in bold. Enjoy.

Accused 9/11 defendants to be tried in N.Y. court
By Peter Finn, Carrie Johnson and Debbi Wilgoren
Washington Post Staff Writer
Friday, November 13, 2009
washingtonpost.com/wp-dyn/content/article/2009/11/13/AR2009111300740.html

"Khalid Sheik Mohammed -- the self-proclaimed mastermind of the Sept. 11, 2001, attacks -- and four co-defendants will be tried in federal court in New York instead of a military commission, with prosecutors likely to seek the death penalty, U.S. Attorney General Eric H. Holder Jr. announced Friday."

The writer's lede is carefully crafted not to use the standard "alleged" or"accused" language typical for normal defendants. Instead, "self-proclaimed mastermind" is just snarky enough to convey guilt by admission while still remaining factually correct. A lede tailored to fit the prevailing belief that KSM had anything to do with 9/11.

"I am absolutely convinced that Khalid Sheik Mohammed will be subject to the most exacting demands of justice," Obama said. "The American people insist on it, and my administration will insist on it."

Just like it insisted on a public option, or better yet its insistence on transparency in the bailouts of the financial and auto industry, or the stimulus dollars? Admit it, you caved to pressure from the left to wind down Gitmo and now figure a dog and pony show in Lower Manhattan will cause everyone to unite in vigilante justice and be distracted from their daily domestic woes.

"While in CIA custody, Mohammed was subjected to a series of coercive interrogation techniques, culminating in waterboarding. Asked about the prospect that defense attorneys could use the acknowledged waterboarding to derail the case, Holder said he would not have authorized the prosecutions if he were not convinced the outcome would be successful."

That's Eric holder putting his job on the line. What a gamble-- it's like wondering if an Israeli court would have found Hitler guilty and executed him. I wonder what will happen? Just don't forget, if this was any one of the tens of thousands of other capital case defendants tried in a domestic court, the acknowledged torture of a defendant would sink any chance for prosecution. How about false imprisonment-- will the defense lawyers challenge the Bush policy of indefinite detention at Gitmo for the last eight years? Because KSM was held there effectively uncharged for so long, can any statements he made at that time be considered coerced, or at least made under duress? Unless the government has evidence of KSM planning the attacks, and is willing to reveal how it obtained that evidence (which it won't-- claiming state secrets), then any conviction based on statements made by KSM at Gitmo will be illegitimate.

"Our nation has had no higher priority than bringing those who planned and carried out the attack to justice,' Holder said."

Then call in Bush, Cheney, Pataki, Guiliani, Bernie Kerik, Larry Silverstein, George Tenet, Norman Mineta and the myriad other vermin who have profited from the attacks and ensuing wars while escaping any accountability for their failures that day. Cui bono? is the first question to ask in any crime-- and it's clear to me that neither KSM nor the shady al-Quaeda gained anything from those attacks.

"We applaud the administration's recognition that both the law of war and domestic criminal law are appropriate tools" against al-Qaeda, said Kate Martin, director of the Center for National Security Studies. "It makes sense that those who killed civilians in New York face justice in federal court there. And using military tribunals to try those who attack military objectives overseas as part of a self-declared war on the United States is consistent with the law of war so long as those trials are in fact fair."

That's Juror # 1-- bitch already has him convicted before the trial starts.

Mohammed and his co-defendants have said at Guantanamo Bay they want to be executed so to achieve martyrdom.

So just let them do it-- it'll save us all time and money. Otherwise, just for fun, let them see if they can pull off a similar attack. If ten thousand unlikely, simultaneous civilian and military failures happen again and, defying all laws of physics, it's a successful attack, then we'll know we have the right guys. As an added upside, and with the proper stories planted in the proper places (is Maureen Dowd still around? Nic Kristof?), the American people could easily be led to believe that the terrorists were supported by the governments of Iran and Venezuela. Nothing better than another war to rev up the economy and cut those jobless numbers...

The Fed & Treasury Auctions: Is there any real money being paid?

2009-10-29T11:25:00.000-07:00

Interesting exchange in the comment section of MarketWatch for this article on the Fed buying T-bills at Treasury auction. Here's the exchange:

Q: Can anyone explain to me how they issuers of debt, can be the buyers of the same debt? This doesn't make sense on any kind of level.

A: (Gooby) Here's how they do it.

The Fed loans (interest free money) to the TARP minions (JP Morgan, GS, and foreign central banks that Bernanke will not reveal) so that they can drive the market and gold back up in order to sucker the ordinary investors into jumping in with their hard-earned wealth. Then the minions will play their microtrades, skim off their profits, make the market dump, pay back the Fed and buy more TREASURIES......

Ordinary investors are funding TARP minions buying US Debt. ..........so we get screwed when we get the bill for the TARP bailouts and then we'll get screwed when we also get taxed to cover the interest on the TREASURIES.

A: (Wil-E-Coyote) US Treasury issues the bonds, Federal Reserve buys them (effectively retiring them).

Magic money then credited to the US Treasury account, without the need for taxes.

(Repeat until currency is worthless).

A: (Freefall) Like Coyote said, US treasury sells the bonds, the Fed buys them with their printing press. However, these buybacks are not purchased directly from the Treasury per se as treasury floats debts through auction. The Fed purchases them through primary dealers effectively increasing liquidity(more cash available to lend). They used to control liquidity through 'temporary open market operation' or 'permanent open market operation.' However, after the crisis, the Fed only does buybacks and POMO which are effectively retiring those debt instruments off the market permanently.

A: (Woodsmoke52) A lot of people are consoling themselves that the coming inflation holocaust spawned by the Fed/Treasury collusion will push stock prices higher. Yes, inflation is likely to drive stock prices higher, but there's a catch. Stock prices rose in the 1970s, but they didn't keep pace with inflation and they won't do so this time. Stocks are not historically a good hedge against steep monetary inflation. Real estate does better, but even real estate falls short of CPI increases. And 18.8 million empty housing units say that today is not a good time to buy residential real estate. If you want to park wealth in real estate, I would suggest an old farm in the midwest. Someplace you can unload a shotgun or a 7mm mag without upsetting the neighbors.

With the big-spending 45-54 year old demographic shrinking and baby boomers beginning to retire and sell stocks out of their retirement plans, there is nothing to support stock prices for years to come. The government is increasing the money supply at a rate many times that of GDP growth. Ultimately, that can have only one outcome. It is consumer essentials that will go up the most, not paper assets.

CPI inflation is modest now (about 6%-7% according to shadowstats.com) but when the economy begins to show a real uptick in consumption, the velocity of money will pick up. As soon as that happens, inflation will run wild. Think about it: millions of unemployed people are no longer producing goods and services, but still consuming. If government keeps mailing out the food stamp cards, extending unemployment checks and granting 100% LTV mortgages through the GSE's, consumption will overwhelm actual production.

Do not sell gold when the price reaches $2000.

A Bursting Seam: Will Kurdistan Tear Iraq Apart?

2009-10-28T23:20:00.000-07:00

An excellent article from CFR on both the recent history of, and challenges currently facing, the relationship of the Kurdish regional government and the Iraqi federal government. Given the immense oil reserves at stake in and around Kirkuk, it's no wonder that the referendum on the city's status has been delayed repeatedly, and that violence pervades the city today.

The Kurdish Issue Flares Up in Iraq
Author: Daniel Senor, Adjunct Senior Fellow for Middle Eastern Studies

July 21, 2009
Wall Street Journal

At their White House meeting today, President Barack Obama and Iraqi Prime Minister Nouri al-Maliki will discuss the escalating conflict between Iraq's Arabs and Kurds. Tensions have almost turned into warfare in recent months, especially following the Iraqi Army's deployment of its 12th Division in Kirkuk late last year. It is a critical time for the U.S. to play a constructive role, but this cannot happen if Mr. Obama throws away his most potent card: a clear signal that he is prepared to slow down planned U.S. troop withdrawals.

How did Iraq arrive at this new flashpoint? Between the end of the first Gulf War in 1991 and the fall of Baghdad in April 2003, Iraqi Kurds lived in a semi-autonomous region. The informal border-called the Green Line-stretched from just north of Diyala and Kirkuk, and cut through part of Ninewa. Ever since, the Kurds have had their own parliament and ministries, control over all the cultural institutions in the region, and their own militia called the peshmerga.

Providing the Kurds with a protected region made perfect moral and geopolitical sense. Saddam had repeatedly attempted genocidal campaigns against them: the Anfal depopulation campaign in 1987-88, in which the Baathist regime killed or expelled hundreds of thousands of Kurds; the expulsion of thousands of Fayli (Shiite) Kurds from northern Iraq into Iran; and the 1988 slaughter of 5,000 Kurds with chemical weapons in Halabja.

In April 2003, the peshmerga helped the U.S. fight Saddam-not just in the Kurdish area but also south of the Green Line. When it came to Kirkuk, however, the Kurds moved in during the war and never left. With Saddam gone, the Kurds quickly set up Kurdish Regional Government (KRG) offices in the city and began to establish facts on the ground.

From the Kurdish point of view, all this was natural and just. Before Saddam's brutal expulsions during his Arabization campaign, Kirkuk had a Kurdish majority.

Iraq's post-Saddam interim constitution-which we in the Coalition Provisional Authority helped the Iraqis draft-recognized Kurdish authority only over the territories that the Kurds controlled before the fall of the regime. The permanent Iraqi Constitution went a step further in requiring a referendum to determine the future status of Kirkuk. While both articles clearly left Kirkuk outside the jurisdiction of the KRG in the near term, the language also conceded that Kirkuk and other nearby areas were "disputed territories." In the eyes of the Kurds, this ambiguity left the door open.

At that time, resolving the Kurdish issue was subordinated to the urgent need to address the Sunni insurgency and the growing power of Moqtada al-Sadr's Mahdi militia. Today the threats from Iraqi al Qaeda and the Sadrists are significantly diminished.

Two factors will drive the Kurdish-Arab issue to a boiling point over the next six months unless the Obama administration heads them off. First, oil. There is still no federal Iraqi hydrocarbons law. The KRG and the Iraqi government rely on different interpretations of Article 111 of the Iraqi Constitution, which declares that "oil and gas are the property of all the Iraqi people in all the regions and governorates."

Kirkuk's oil is a big issue for the national government in Baghdad. When Mr. Maliki's government wrote its federal budget for 2009, oil prices were hovering around $150 per barrel. And while the Iraqi government had wisely forecast prices to fall to $80 per barrel-and made budget projections accordingly-oil prices were still 50% below their projections by mid-year. This has caused panic at Iraq's Oil and Finance Ministries.

From the Kurds' standpoint, oil is part of a broader KRG strategy to draw international pressure on Baghdad to grant further Kurdish autonomy. It is no coincidence that on the eve of Mr. Maliki's visit to Washington, the KRG's Ministry of National Resources released an embarrassing document contrasting its success in attracting foreign energy investors with the national government's approach, which has been stalled.

Second, politics. On Saturday, the Kurds vote on a new parliament and president. While polls show that President Massoud Barzani and the two largest Kurdish parliamentary parties will be re-elected, the dynamic of this election is making Kurdish leaders nervous. Historically, Kurdish elections turned on the KRG's power struggle with the national government. But in this election, the Iraqi Kurds seem to be more preoccupied with local governance issues such as KRG corruption. This may be prompting KRG officials to foment tension with Baghdad in the hope that the perception of external threats will strengthen their position at the polls.

As for Mr. Maliki, he must prepare for national elections in January. Tapping into Iraqi-Arab nationalism is to his political advantage. In short, the political schedule all but ensures that there will be no grand Baghdad-Erbil bargain soon.

Kurdish leaders are deeply concerned about the withdrawal of U.S. forces. Under the current timeline, most U.S. troops will be out of Iraq by the end of the summer 2010, with 35,000 to 50,000 remaining through the end of 2011, at which point all U.S. forces must be gone. Mr. Obama should consider slowing the withdrawal schedule. The willingness of the Kurds to negotiate will decrease if they believe U.S. forces will not be there to help enforce an agreement. In addition, the U.S. government must be sensitive to the possibility that al Qaeda may see an opportunity in the north to support an Arab cause.

There is pressure building within the Pentagon to cut forces in Iraq even faster than planned to send more troops to Afghanistan. That pressure should be resisted. We must not do in Iraq what Mr. Obama, when campaigning last year for the job of commander in chief, said we did in Afghanistan: lose a key fight by focusing too intently on another theater.

Mr. Senor is an adjunct senior fellow at the Council on Foreign Relations. He served as a senior adviser to the coalition in Iraq and was based in Baghdad in 2003 and 2004.

To read about the history of Kurdistan, see an essay here from my archive.

Seeing the Forest, Not just the Trees

2009-10-23T22:24:00.000-07:00

An excellent article that, read in conjunction with Taibbi's "Counterfeit Ecomony," captures the essence of the millions of mindless securities insurance transactions that form the backbone of today's investment economy. The little guy can't even play in this game, let alone win at it.

Wall Street on the lam

By Eugene Robinson
Friday, October 23, 2009
Originally posted @ http://www.washingtonpost.com/wp-dyn/content/article/2009/10/22/AR2009102203866.html?

Slashing executive salaries, bonuses and perks at the seven bailed-out companies that gorged most gluttonously at the public trough is emotionally satisfying, but it shouldn't be. It's like arresting jaywalkers while ignoring the bank robbery that's happening in broad daylight down the block.

Don't get me wrong. The Obama administration's "pay czar," Kenneth Feinberg, is right to put a lid on compensation at the Not-So-Magnificent Seven: Citigroup, Bank of America, General Motors, Chrysler, GMAC, Chrysler Financial and the unforgettable AIG. Twenty-five of the biggest earners at each of those firms will have their overall compensation cut roughly in half, and most of that will come as restricted company stock, not cash. This means that what they ultimately reap, when they are eventually allowed to sell the stock, will depend on how well the company performs -- which will depend on how well the executives do their jobs.

Tying pay to performance: What a concept.

Feinberg even muscled outgoing Bank of America chief executive Kenneth Lewis into accepting no pay or bonus for this year. But Lewis will still have an estimated $70 million retirement package to keep him warm at night, so hold your tears.

It's nice to know that there must be some pooh-bah at B of A, Citigroup or AIG who will have to live without the new $90,000 Porsche Panamera he was planning to buy. But Feinberg's writ of imperial decree doesn't extend beyond those seven companies, and the rest of Wall Street gives no indication of remotely understanding what the big deal is about compensation. Goldman Sachs, for example, has a bonus pool this year of at least $16 billion and perhaps as much as $23 billion.

But all this is just a sideshow. The main event is the limited, far-too-modest attempt by the Obama administration and Congress to curb the irresponsible Wall Street practices that led to the financial meltdown -- and, if unaddressed, will lead inexorably to the next crisis.

Deregulation allowed the financial marketplace to devolve from an institution that served the overall economy -- by allocating capital most efficiently to the companies that could put it to best use -- into an institution whose primary mission was to serve itself.

The vast over-the-counter trade in instruments known as derivatives, nominally worth a staggering $600 trillion worldwide, is largely an exercise in make-believe. Firms make highly leveraged investments in exotic securities whose true value is opaque. Then they hedge these investments by buying insurance against potential losses, although the insurer doesn't have a fraction of the money it would need to make good on all its promises.

All this investing and hedging generate huge transaction fees and big profits, which can be skimmed off the top each year. Everything's fine, until there's some disruption in the real economy -- a downturn in the housing market, say. If the disruption is severe enough, the web of make-believe deals starts to unravel. At which point the government steps in and bails everybody out.

The White House and Treasury Department have proposed reforms that would ameliorate, but not eliminate, this ridiculous cycle. What the administration won't do is outlaw some kinds of derivative products or transactions; officials say that if they went down that road, they would always be one step behind Wall Street's inventiveness and greed. I think it would be worth a try.

The administration did propose that derivatives transactions go through clearinghouses and be conducted on transparent, regulated exchanges. But as reform legislation begins to work its way through Congress, Wall Street firms -- including companies that received bailout funds -- have boosted their spending on lobbying and political donations.

As a result, legislation approved Wednesday by the House Agriculture Committee -- which has jurisdiction over the futures markets -- would exempt up to 30 percent of derivatives transactions from new regulations. A bill approved Thursday by the House Financial Services Committee that would create a Consumer Financial Protection Agency, strongly opposed by most luminaries on Wall Street, was amended in the committee to exclude mortgage insurers, title insurers, accountants, lawyers and others.

Banks, meanwhile, are jacking up overdraft charges and instituting new kinds of credit card fees before any new limits kick in. Hey, get it while you can.

Capping salaries and bonuses is fine. But we need to pay attention to the guys in ski masks with bulging bags of money slung over their shoulders. They're about to jump into the getaway car.

A Mighty Wind: How Centralized Government Has Taken the Lead in Alternative Energy Generation and Component Manufactuing

2009-10-12T13:31:00.000-07:00

Blown away: China is set to become world's biggest wind power
By: Alex Salkever
Published here

Holland has the windmill. Will China's new cultural icon be the 21st-century version -- the wind turbine? Moves taken by the Middle Kingdom could ultimately position the country to dwarf the United States in terms of total wind power installed and would make China far and away the globe's premier wind power, according to alternative energy expert Ryan Wiser, a scientist at Lawrence Berkeley Laboratories.

Before 2009 draws to a close, China will already match or surpass the U.S. in terms of total amount of wind-power generation capacity installed, says Wiser, one of the top authorities on alternative energy development and planning. By 2011, it will definitely have surged ahead, he adds. And China's ambitions are growing. This year, the Chinese government will likely significantly expand its targets for wind-generation energy, with a goal of generating up to 150 gigawatts of wind-generated power by 2020.

I've posted before on how China is assuming leadership in the rush to green the world. China showed it was serious earlier this week when it announced plans for a pilot carbon exchange, or what is basically a platform that allows parties to trade permits to pollute. But for a better view on what is happening in China in the alternative energy space, I hung out with Wiser at this week's REFF West Conference in San Francisco.

As a point of comparison, total wind power installed in the U.S. at the end of the second quarter of 2009 was 2.9 gigawatts. Today, the U.S. is roughly on par with China. China's goals mean the country is aiming for a 50-fold increase in wind power over a mere 10 years.

And China is prepared to pay for it. In August 2009, the Chinese central government set up a national feed-in tariff for wind power. That means anyone building a wind farm can count on selling the power that the farm generates back to utilities at a set price, which is likely to be higher than the market price for power.

This made it much easier to build wind-power farms by setting a power price that can be used to calculate whether or a not a project will be profitable. To date, the U.S. has not established a national feed-in tariff for wind.

Wiser said China has done a number of things right. "China's recent leadership in wind has been driven by a number of things," said Wiser. The country has an ability and willingness to aggressively pursue manufacturing-cost advantages to drive down the cost of wind equipment. This results from a targeted industrial policy that encourages wind turbine manufacturing in China. By law, 70 percent of the materials used in China's wind farms must be manufactured in country.

This has resulted in complaints of protectionism by foreign suppliers. But China has fostered the growth of its own wind-technology sector sufficiently to allow homegrown companies not only a chance to compete with foreign suppliers, but even to break into the export market for wind gear.

The government has also been willing to require the electric transmission needed to bring wind to market. Due to its command economy, China's ability to develop sufficient electric transmission is an area where it has an inherent advantage. It has also invested in that transmission on an accelerated time scale.

By comparison, building high-capacity power transmission lines in the U.S. is a nightmare that requires huge environmental impact studies, approvals of right-of-ways by private owners, buy-in by states and regional power organizations, and sundry other approvals. The net result, says Wiser, is that it can take 10 years or more for a transmission line to be built in this country.

China faces no regulatory approval logjams. It is in the process of building out a new power grid that would make a utility engineer in the U.S. green with envy. Over the longer term, a much better grid will prove to be a powerful economic-growth driver, as the growth in an economy is closely related to power generation and electricity demand.

What's more, its pricing and regulatory system encourages the country's major, state-owned enterprises to aggressively pursue wind-energy development opportunities. Included in this system are the feed-in tariffs, tax breaks and subsidies designed to encourage utilities to build wind farms.

China has been particularly aggressive in rolling these things out, to the point of underwriting 50 percent or more of project costs and making it nearly impossible to lose money by building an alternative-energy power generation facility. The feed-in tariffs, too, make a huge difference because it makes it possible to build an economic model for a power-plant project, something that is difficult to do with fluctuating wholesale energy costs.

These steps that China has taken all go against some powerful political or business element in the more chaotic environment of the U.S. Manufacturing subsidies, while given out in many industries, are generally fought by potential competitors and are taboo in the minds of conservative politicians.

Big transmission projects inevitably draw huge fire from environmentalists, homeowners, counties and states. Feed-in tariffs are unpopular with powerful utilities, who prefer not to pay extra for power. And subsidies for construction of power plants inevitably meet resistance from competing energy lobbies for coal, natural gas, and oil.

In that light, it's no surprise China is rushing ahead and will soon blow by the U.S. in wind energy.

The Economic Implosion from 30,000 Feet

2009-10-12T02:59:00.000-07:00

What follows is a remarkably pithy yet insightful explanation of both the underpinnings of, and casual damage to, the increasingly fragile American body economic. Moreover, the snarky, tough guy tone of the author serves as an excellent mechanism for the distribution of this analysis. Enjoy-- and then go fix the world.

Source: http://master-of-none.tumblr.com/post/207991990/reprogram-the-reaganites

Reprogram the Reaganites

In BusinessWeek, a Harvard Business School (HBS) alumnus blames the MBA farms for the current crisis. I think he’s right to blame the schools, in part, but wrong about why.

The author says we went astray by orienting business education away from relationships (good managers, customer service) and towards processes (efficiency, business channel segmentation). And this supposedly leads companies to make bad decisions. I don’t buy it.

He is correct, however, when he says that ethics don’t enter into the debate: “Subordinating everything to shareholder value is, literally, anti-ethical.”

Anti-ethical, and yet this is what we require from our CEOs and management teams. By law, the CEO is required to do everything legally possible to achieve gains for his shareholders.

If we are getting bad outcomes from this arrangement, we need to make more bad stuff illegal.

And the reason we haven’t made more bad stuff illegal is because of two ideas popularized in the 1980’s:
Free markets are good (courtesy of Milton Friedman, University of Chicago)
Markets are efficient (courtesy of Eugene Fama, University of Chicago)

For the record, I do believe that free markets are usually a good thing (i.e. self-interest is a strong natural motivator), and I agree that large well-trafficked markets are usually efficient. The dangers to society (and the bad outcomes) happen when these theories are taken to the extreme, like religious fanaticism.

Some academics, many management teams, almost every bank CEO, countless right-wing think tanks, and the mainstream media (especially CNBC), will absolutely demonize any deviation from these two principles (or for that matter any deviation from the belief that stocks outperform in the long-run, which happens to be grossly inaccurate).

But, in any case, society is harmed by both of the extreme versions of these theories.

Do you like really free markets? How about we bring back slavery, then? And I suppose people don’t really need to be licensed to practice medicine? Where do we draw the line? How dangerous is too dangerous for an outsourced petrochemical plant? Profit-seeking managers will likely generate worse outcomes than than a robust legislative system, when it comes to this type of debate.

Efficient markets don’t get a free pass, either. The article’s use of the mortgage industry as an example is a good one: “It was completely redesigned since the 1980s along good HBS guidelines—to maximize efficiency, lower costs, and increase liquidity. Collateral damage: no relationships, skewed incentives, incompetent regulation, and greed run amok.”

What really happened was that “easy” short-term profit-seeking activities (how hard is it to swindle from the poor uneducated masses, really?) undermined the long-term viability of corporate institutions (and therefore the entire financial system). If markets are efficient, they will allocate capital to viable long-term enterprises with net positive returns. That didn’t happen. Not by a long shot.

So, we need to re-educate the Reagan generation:
Fair markets, with strong rules that don’t let corporations hurt societies, are good
Some markets are efficient, others aren’t, and irrationality exists

There. Now go fix the world.

(A cynic would argue that right now the short-term profit seekers are getting in the way of making more bad stuff illegal. Call it regulatory capture. Or state-capture. But as Alton Brown would say, that’s another show.)

Elizabeth Warren: An Ode to the Middle Class

2009-10-10T00:41:00.000-07:00

Elizabeth Warren is a professor @ Harvard Law School and, in the words of Cornell "Not Related To Kayne" West, a "decent sister." Belwo is an excerpt from an interview she did with the Washington Post. Full text of interview here.

WARREN:we're in trouble on so many fronts.

I will start with credit. We clean up the credit mess. This is like sewing up a hole in the bottom of someone's pocket. This is literally tens of billions of dollars that are just falling out of the pockets of middleclass families and making their way over to a handful of very large financial institutions. We can change some laws, and we can fix that one.

I have to say on health care, I do studies on families filing for bankruptcy in the aftermath of serious medical problems. Whatever else is going on in the debate is the reminder that even with people with health insurance are paying enormous sums for medical care, whether it's about copays, things that are denied and higher prices that they're paying for their health insurance. So whatever we can do to bring those costs under control for middle class families will help enormously.

Sending the kids to college, the costs are just out of control. And we are putting debt loads on children unlike those we have ever imagined.

The housing crisis. The way in which most American families build wealth is not through the stock market. It's by buying a home and paying it off. That is, for most Americans, their retirement account. They'll get that house paid off, live on Social Security. That'll be the in heritance for the children if they don't have to spend it down for medical care.

The chaos in the housing market is destroying wealth for middle-class families. To the extent we're popping a bubble, I get it. That's what it's going to have to be. But I worry now about overshooting in the other direction. You know, that just like a bubble pushes up too high, the collapse pushes down too low.

We're watching more and more families go underwater on their mortgages and not by 5 percent, going underwater by 25 and 30 percent. And this is going to intersect with unemployment. As unemployment keeps going up, more and more people are going to lose their houses. That means it depresses the value of the houses next door because it's all downward pressure on prices.

And, of course, the last one I would mention is the income front. As the pie grew throughout the 20th century, the portion that went to workers, went to the median earning family in the United States, it stayed the same percentage wise, but that meant a bigger and bigger pie was a bigger and bigger slice of pizza.

That began to shift in the '70s, and, ultimately, what happened is that the pie kept getting bigger. It's measured through productivity. It's measured through GDP. But the proportion that middleclass families got in income began to shrink.

As we talk about things, like what we produce in the United States, do we really have any manufacturing base, if not hard manufacturing, do we have other intellectual products where we think we have a comparative advantage, those kinds of issues about how workers get back in the role of participating in the growth in our economy, that's whether or not we're going to have a strong and vital middle class.

And, you know, at the end of the day, it's about these economic factors, but we have to remember we have fundamentally changed as a country.

In the 1950s and the 1960s, coming out of World War II, we said as a government, as a people, what can we do to support the middle class. You know that's what FHA was to help people get into homes, right? VA, GI loans on education, we looked at policies, like whether or not they strengthen and support the middle class.

Somewhere, that began to change in the late 1970s, early 1980s, and the middle class instead became like a resource to be pulled from, and you know, they became the turkey at the Thanksgiving dinner. Who could who could carve off a piece? Who can get this little piece? Who could make a profit from this piece and that piece or squeeze down on the wages? And the middle class has gotten shakier and shakier, hollowed out.

The consequences of that are far more than economic. The middle class is what makes us who we are. It's affects the poor. A strong and vital middle class is a middle class that can offer a helping hand to the poor. A strong and vital middle class is a middle class that has room, is creating new jobs to ¿ basically to suck the poor up out of poverty and into middleclass positions. The middle class is what gives us political stability. It's what gives us an America that's all bought into the whole process that what we do is not just about a handful of folks at the top who profit from it. We all profit from it, and that's why we work, and that's why we vote, and that's why we accept that the outcome of elections. And that's why we're safe to walk our streets, because we have a middle class for which this ultimately works, this country.

And every time we hollow that out, every time we take away a little piece of that, we run the risk that some of what we understood at America, some of what we know as America begins to die. That's what scares me.

Tax credits, subsidies and pernicious threats: Business still does not understand that to get along, it must go along

2009-10-06T11:59:00.000-07:00

As noted in the article below, the State of Michigan simply can't win in its dealings with big business. The story is equally applicable in all forty-nine other states, where the incentives required to lure a few hundred jobs from another state often costs the "winner" more than would have been lost in refusing to extend unwarranted subsidies to unappreciative business vermin-- the same cabal that will relentlessly continue to socialize the risk of economic failure while privatizing the benefit of profit. If this trend continues (and there's no evidence of it is waning), then the economy of the States, and the nation as a whole, will continue to deteriorate as the Electrolux's of the world exploit cheap foreign labor while demanding access to the American market and the protection of its laws.

In Michigan, A Yellow Light For Green Jobs:
Some Question Focus of Ailing State's Governor

By Dana Hedgpeth
Washington Post Staff Writer
Tuesday, October 6, 2009

LANSING, Mich. -- If the future of American manufacturing lies in green industries, the Michigan governor's pursuit of jobs offers a cautionary tale.

Four years ago, Jennifer M. Granholm set out to remake her state, which took an exceptional walloping with the decline of the auto industry, as a pioneer in creating environmentally friendly jobs. Today, however, jobs are still disappearing much faster than she can create them, raising questions about how long it will take Michigan and other hard-hit states to find new industries to employ their workers.

Since taking office in 2003, Granholm has created 163,300 positions, her office says. She expects that a recent infusion of more than $1 billion from the Obama administration aimed at nurturing car battery and electric-vehicle projects will generate 40,000 more positions by 2020.

In the past decade, however, as the auto industry has grown smaller, Michigan has lost 870,000 jobs -- about 632,000 of them during Granholm's tenure. The number is expected to reach 1 million by late next year, the end of her term.

In her effort to attract employers, the governor has taken up the latest arms in the economic arsenal -- tax credits, loans, Super Bowl tickets and a willingness to travel as far as Japan for a weekend to try to persuade an auto parts company to bring more jobs to Michigan. She has won solar and wind energy, electric car batteries, and movie production jobs. About 10,800 of the new positions came from overseas companies, according to her office, the fruits of visits to seven countries.

"We have great bones as a state," she says. "We know how to build stuff. We will build on that strength and diversify this economy. We will lead the nation in creating jobs in renewable energy. We're not going to be viewed as Luddites."

In a state hit so hard by the recession, though, securing every new job has required enormous effort: mobilizing the state bureaucracy, negotiating tax deals with a politically divided legislature, dispelling impressions that Michigan is a pro-union state and inhospitable to business.

Supporters and detractors alike call the 5-foot-7-inch blonde "Jenny the cheerleader" because of her relentless optimism. She prefers zealot. Those qualities were severely tested three years ago when appliance maker Electrolux closed its century-old refrigerator plant in Greenville, 160 miles northwest of Detroit, and moved to Mexico, taking 3,000 jobs from the town of 8,000.

As Granholm told the story in her office, overlooking the state Capitol, tears welled up in her eyes. She had spent months calling, e-mailing and meeting with city and state officials trying to sway the company to take a package worth about $70 million in tax breaks to stay in Michigan. Electrolux left anyway.

Granholm visited with workers at an orchard near the plant within days of the last refrigerators coming off the assembly line, and the employees ate a "last supper" of boxed lunches while a band played. Her staff had scheduled 45 minutes. She stayed three hours, listening to workers' stories.

"I went to say, 'I'm sorry,' " Granholm said. "We couldn't save it. I can't even say it now. I stayed until the last guy left."

A 48-year-old man with tattoos and a ponytail, who had worked at the plant since high school, described how his grandfather and father had worked there, too.

"He told me, 'I don't know anything else. Who is going to hire me?' " the governor recalled.

Granholm remembered coming home and telling her husband, "I just don't know what to do for people."

A $37 million tax package helped persuade Michigan-based United Solar Ovonic -- she wooed the chairman with a trip to the 2006 Super Bowl in Detroit -- to build a solar panel production plant on the Electrolux property instead of pursuing a South Carolina offer. To retrain workers, she secured money from the legislature and later developed "No Worker Left Behind." With new skills and a new plant, the people of Greenville would have new opportunities.

Except, she discovered from a workforce training agency, only about 20 percent of the 400 jobs at the new plant, which opened in 2007, went to former Electrolux workers. Many simply didn't have the skills; some were fearful about their ability to learn.

"You had people who were testing in at sixth-grade math," she said, "when they'd gotten awards as line workers."

Granholm had a community college and a state workforce training agency set up a separate program so they wouldn't feel humiliated beside more skilled students.

"It was taking one step forward and then one step back, and then two steps forward," she said. "We still didn't get the numbers we wanted to get."

Residents remember the time and effort invested in seeking to preserve the Electrolux jobs.

"She put everything she had into trying to save that little town," said Dick Long, a former national political director for the United Auto Workers union. "I've never seen somebody work so hard and get so frustrated in trying to save them. She just didn't give up. But in the end, we lost them."

Although Granholm's critics admire her determination and concede that creating jobs and transforming the economy are long-term goals, they say that she has not done enough to streamline state government and regulations and that she is too enamored of alternative-energy jobs, which they say represent a relatively small number of positions.

Genesee County Treasurer Daniel T. Kildee, like Granholm a Democrat, said she is "too concerned about finding consensus with the legislature and interest groups."

He worries that the focus on green-energy jobs detracts from fixing problems such as those facing schools and municipal governments. "The green economy is not going to replace jobs of an industrial era," he said. "It is an important part of the new economy. But it is not the next GM."

Granholm says she is trying to diversify the economy, going after defense-related firms, robotics and life sciences along with green jobs.

State Senate Majority Leader Michael Bishop (R) says Granholm has been remiss in not reshaping Michigan's business tax.

The state, he said, needs to change its image and "create an environment where taxes are low, labor costs are low, and not send so many negative vibes."

Granholm's office said that she has offered business tax proposals but that she has met opposition from the legislature and some business leaders.

Michigan felt the recession first and hardest. The state ranks fifth in foreclosures and last in attracting new residents. Nearly 20 percent of its citizens are on Medicaid. As the auto industry has shrunk, so has tax revenue. The state government technically shut down for nearly two hours early Thursday over a budget crisis, and the legislature and governor are still tussling over how to resolve a projected $2.8 billion deficit. Underlying all of the grim statistics is the loss of jobs. Michigan has had the nation's highest unemployment rate -- now 15.2 percent -- for most of the past three years.

"This is not a time for wimps," Granholm says to her two dozen cabinet members one recent morning. "The message is to continue to play offense -- go get jobs."

Granholm's résumé is well known in her state: Michigan's first female attorney general and governor; mentioned as U.S. Supreme Court candidate; graduated summa cum laude from the University of California at Berkeley, Harvard Law School, beauty queen, mother of three. The 50-year-old is a native of Canada who settled in Detroit in the mid-1980s after marrying a Michigan man; she was a federal prosecutor there for four years.

Her quick focus pleases businessmen such as David Hardee, top executive of California-based Clairvoyant Energy, who encountered Granholm at a meeting after spending three months negotiating with her economic development officials over a green-energy development.

"We were on the third slide and she politely interrupted and said, 'I get it. What do you need? I'm here,' " Hardee said.

With a tax incentive package worth more than $100 million, Michigan beat out Arkansas, Missouri and Oklahoma, as well as Spain, in getting Hardee's company and two other alternative-energy firms -- one from Texas and one from Switzerland -- to take a factory that once made the Lincoln Continental and Ford Thunderbird about 40 miles northwest of Detroit in Wixom and turn it into a solar panel and battery storage pack manufacturer employing 4,000 workers.

In the spring of 2008, Granholm returned to Greenville to tour the United Solar plant that replaced the Electrolux factory.

"They had product orders all the way out until June 2009 back then," said Greenville Mayor Ken Snow. "But the global economy shifted. That left them with more product than orders that need to be filled."

Since March, United Solar has been feeling the downturn, and so have the workers in those hard-won positions. Some have been furloughed for six days each month.

There are no easy victories in the fight for jobs.

"You can't give up," Granholm says. "You gotta keep moving."

How much would you pay for 1,400 acres of farmland near Shanksville, Pennsylvania?

2009-08-31T20:46:00.000-07:00

If you answered $9.5 million ($6,810/acre), then you must be Interior Secretary Ken Salazar. According to the following article from the NY Times, the Feds, already projected to run a $1.6 trillon deficit this fiscal year, are printing up $9.5 million to purchase the 1,395 acres as the site for the Flight 93 memorial.

If you wondering what the market rate is for acreage in Sommerset County, Pennsylvania, I point you to this sample-- a nice 405 acre parcel near Confluence, PA, for the grand bargain of $1.5 million, or $3,700/acre. Granted, the sample land is not as close to the cosmopolitan city of Shanksville, and likely never was reported to have had a 757 nosedive into it, but still, it's basically listed at half-off the government rate. Don't worry too much though as Larry Hoover, the yokel quoted below, noted that despite the inconvenience of haggling for nearly eight years to only get double the market rate, he has settled with his conscience that he's getting a "fair deal" on his 5 acres. Moreover, if you were worried that the Fed's broke the Treasury with their generosity, you should also know that the FIRST phase of the memorial is slated to cost a mere $58 million. No word yet on if the money appropriated for this fiasco was a line item inserted by John Murtha (with a concomitant kickback from the appraiser, of course), whether Haliburton received a no-bid contract to construct the memorial, or if Blackwater/Xe will provide security for the project...

Path Cleared for Memorial to Flight 93
By SEAN D. HAMILL

Work will begin this fall on a memorial to those killed aboard United Airlines Flight 93 on Sept. 11, 2001, now that agreements have been reached to buy the last key pieces of land in Pennsylvania, Secretary of the Interior Ken Salazar said Monday.

The federal government will pay about $9.5 million to the owners of nine parcels near Shanksville, in rural southwestern Pennsylvania, totaling 1,395 acres, including the site where the plane crashed and one right-of-way, Mr. Salazar said.

“Thanks to the collaborative efforts of the landowners, the Families of Flight 93 and the employees of the National Park Service, we have reached this important milestone,” he said.

Flight 93 was traveling from Newark to San Francisco when it was diverted by hijackers, who crashed the plane as passengers tried to wrest control of the cockpit. All 33 passengers and seven crew members died.

The announcement ends years of bargaining with landowners.

Negotiations intensified at the end of last year when, with some parcels still in limbo, the Families of Flight 93, a nonprofit group that has been helping with the purchases, asked the Bush administration to get something done before it left office.

This summer, with time running short to get the first $58 million phase of the memorial completed in time for the 10th anniversary of the crash, the Interior Department set a deadline for the remaining landowners and threatened to take the land through condemnation.

That prompted Senator Arlen Specter to intercede and bring in Mr. Salazar to talk to the landowners himself, which got negotiations moving.

“It really took all the elements to align these stars,” said Patrick White, a lawyer and member of the Families of Flight 93, who helped with negotiations.

Larry Hoover, whose family owned two parcels, totaling five acres, would not say how much his family would receive for the land that held his summer home and a year-round home for his son.

“It was an honorable figure for both sides,” he said. “Did we get everything we wanted? Probably not. But it was fair.”

Originally published at http://www.nytimes.com/2009/09/01/us/01penn.html?ref=us

Because I Can

2009-08-27T00:36:00.000-07:00

http://www.motherjones.com/politics/2009/08/foreclosure-rescue-mirage#comment-194653

Too Bad
Submitted by Anonymous (not verified) on August 26, 2009 - 5:34am.

It's difficult to feel sorry for the individual homeowners who don't get the government to magically erase their problems. My husband and I bought a $50,000 fixer-upper in Vermont in 2003, and put our own money into it to basically renovate everything. We knew that the payment was low enough that we could continue to afford it even if only one of us was working, which was what happened when I decided to stay home with our kids. And because the payment was low, we managed to continue to save money to float us by when my husband was recently laid-off for three months.

People signed onto loans that they should have known that they could not afford. It doesn't take a PhD in math to figure out what would happen if the rate changed or a person lost a few months of income. This isn't saying that the government is also to blame for its lax rules. But people should take some kind of personal responsibility.

But as I sit here in my modest home reading about people losing their "dream homes," I really don't feel sorry at all for them. Maybe I don't have my "dream home" yet, but I still have my home. They thought they deserved a great McMansion right off the bat and now they are paying the price. They should have known better. Now taxpayers like me who did know better are supposed to bail them out. No Thanks.
recommend this (1) reply

Heartless and Smug
Submitted by I'm Just Sayin' (not verified) on August 26, 2009 - 6:47am.

O.K., "Too Bad" we get it. You don't care about millions of families dispossessed from their homes; desperately struggling folks and their children literally forced out onto the streets to fend for themselves. Neighborhoods filled with abandoned homes that these same families could have continued to occupy as renters, if someone in D.C. or even say, Vermont, cared a little more about regular folks than about bankers. That doesn't bother you. We get it.

But for the rest of us folks (even those of us who regularly make our mortgage payments) we DO give a damn, even about folks who make mistakes, or more often than not were misled by unscrupulous mortgage brokers. And maybe you should too since you're so concerned about your tax money being wasted. Chew on this-- if these default rates aren't significantly reduced in the near future, you can kiss the possibility of a meaningful economic recovery goodbye, in which case, get ready to have a lot more of your precious tax dollars wasted on attempting to keep insolvent zombie banks in business. If they can't make a market for those CDOs then they will not become solvent anytime soon and we will continue to bail them out over and over again. Maybe you need to rethink the situation as you sit there in the warmth of your modest Vermont home. Cause if we don't stop these defaults soon it will be "too bad" for all of us! I'm just sayin'.
recommend this (2) reply

Jesus Christ in a birchbark canoe
Submitted by RW Twain (not verified) on August 27, 2009 - 12:20am.
tagged as: solution

"Maybe you need to rethink the situation as you sit there in the warmth of your modest Vermont home."

Perhaps you should stop and think about the situation altogether.

You assert that it is a justifiable power of government to save individuals, or to tax the whole for the benefit of the few, either wealthy or impoverished. You place full blame on mortgage brokers for sins they could not commit alone, while pushing for intervention on stop-gapping CDS defaults as the panacea for saving the economy. Given that tripe, you launched a salvo against the Vermont poster for smugness?

The VT poster was simply enunciating a view that success and overall happiness in life are dependent upon personal responsibility in a person's actions. That poster did not overpay for the house, and apparently made the commitment to labor sweat equity in to the "modest Vermont home" to provide for her own comfort. Repairs weren't likely financed on credit cards or a cash out HELOC, but spent from dollars that the poster would rather not have taxed for the benefit of those who failed to exercise the type of financial responsibility required in adulthood.

You seemingly argue for tax dollars to be used for the ongoing support of the disendomiciled and flipperquesters, but not for corporate welfare. I agree on the latter point, but am repulsed by the former. I'll pay taxes for the convenience of the roads, rails and post, willingly endure expenditure of my earned, but lost wealth for police, fire, schools and the like (perhaps even universal health care), but I will never condone the taking of my wealth for use in unjustified wars, bureaucratic inefficiency, fraudulent public spending or welfare for individuals who failed to comprehend the long-term consequences of their instant, exhibited avarice. Calculating that as a total, I unwillingly endure 75% of all current federal spending and perhaps 15% of state spending.

A recovery won't be obtained from rewarding those you have failed. Support for those who are justifiably downtrodden underlies the eventual recovery of the US economy, but it should not be drawn entirely on the backs of citizen taxpayers. We can't have a recovery of the economy until the majority of us, masters and slaves, Congresspeople and lobbyists, aging, hippie liberal douches and pissed off, redneck conservatives, rediscover the enlightenment that is personal responsibility and morally upright behavior.

Until that time, it's simply pissing in the wind.

For reaction, see http://www.motherjones.com/politics/2009/08/foreclosure-rescue-mirage#comment-194653

American Mission Creep Increasing in Kurd-Arab Dispute

2009-08-17T11:03:00.000-07:00

US commander in Iraq wants troops in disputed land
By KIM GAMEL, Associated Press Writer
Mon Aug 17, 10:19 am ET

BAGHDAD – The top U.S. commander in Iraq said Monday that he wants to deploy American soldiers to disputed territories in northern Iraq following a recent spike in bombings there.

The move would be a departure from the security pact that called for Americans to pull back from populated areas on June 30.

The U.S. soldiers would partner with Iraqi government and Kurdish troops to secure the largely unguarded villages along the faultline of land disputed between Arabs and Kurds, Gen. Ray Odierno said.

He stressed that no final decision has been made but said Iraqi and Kurdish leaders were receptive to the idea.

"I think they just all feel more comfortable if we're there," he told reporters Monday at a briefing at Camp Victory, the U.S. military headquarters on Baghdad's western outskirts.

The U.S. deployment would be a temporary "confidence-building" measure, he said, adding he had discussed the idea with Iraqi Prime Minister Nouri al-Maliki earlier Monday in a meeting.

Odierno said it would not affect the overall withdrawal timeline that calls for U.S. combat forces to leave the country by the end of August 2010, with a full withdrawal by the end of 2011.

Iraq's government, meanwhile, approved a draft law paving the way for a referendum on the security pact that lays out the U.S. withdrawal timeline to be held simultaneously with national parliamentary elections on Jan. 16, spokesman Ali al-Dabbagh said in a statement. The measure still needs to be approved by Iraq's parliament, which is in recess until next month.

Iraqi lawmakers agreed to the security pact last November, after months of bitter negotiations. But it included the caveat that the deal should go before voters in a referendum to be held by July 30. The government said earlier this year that it wanted the referendum to be held on the same day as the national elections to save time and money.

Opponents had argued the Americans should leave immediately after the Dec. 31 expiration of a U.N. mandate for foreign forces.

The inclusion of the referendum met a demand by the main Sunni bloc in parliament and raised the possibility that the deal could be rejected if anti-U.S. anger and demands for an immediate withdrawal grow.

Odierno's announcement reflects heightened U.S. concern over an increase in violence since American troops pulled back from urban areas, particularly in northern Iraq. Some 160 people have been killed in bombings near the northern city of Mosul and in Baghdad since Aug. 7, when the recent spike began.

"I'm still very confident in the overall security here," Odierno said. "Unfortunately they're killing a lot of innocent civilians."

Several top defense officials have identified the split between Iraq's majority Arabs and the Kurdish minority as probably a greater long-term threat to Iraq's stability than the more familiar Sunni-Shiite conflict. Defense Secretary Robert Gates went to the Kurdish self-rule area in the North to make the case that both sides have limited time to resolve their differences before U.S. troops leave in 2011.

At the heart of the dispute is the oil-rich city of Kirkuk and a batch of villages in Ninevah province that the Kurds want to incorporate into their semiautonomous area despite opposition from Arabs and minority Turkomen ethnic group.

Odierno said al-Qaida in Iraq was exploiting the ethnic divisions to stage high-profile bombings in small towns that don't have a police force and other so-called soft targets in order to avoid heavy security concentrated in more central areas and maximize the number of casualties.

"Al-Qaida is trying to take advantage of the seam," he said.

He said the deployment of the U.S.-Iraqi-Kurdish protection forces would start in Ninevah province, which includes the volatile city of Mosul, then extend to Kirkuk.

Odierno discussed the idea with senior Iraqi and Kurdish officials on Sunday and planned another meeting in early September.

"Having met with all these leaders, I think there is room to work this out," he said.

Truth in Reporting?

2009-07-25T02:49:00.001-07:00

\
Let's hope somone on staff in DC reads this re-printed article from Xinhua. Summary to your boss: "The new Iraq, created in our name, is coming apart at a seam. If half of the following article is true, a larger war rapily over the horizon comes."

Chinese Newws
News Analysis: Arabs-Kurds escalating tension endangers security in Iraq

www.chinaview.cn 2009-07-25 16:35:32 Print

by Xinhua writers Fu Yiming and Gao Shan

ARBIL, Iraq, July 25 (Xinhua) -- Iraq's semi-autonomous Kurdish region started its general elections on Saturday amid a simmering land and oil controversy that may endanger security in Iraq.

While Kurdish people are longing for their independence, recent escalating tension between Kurdish Regional Government (KRG) and the Baghdad central government overshadowed its outlook.

Last month, the KRG parliament in Arbil approved a new draft constitution for their autonomous region, legalizing its claims to the oil-rich Kirkuk as well as other disputed areas in Nineveh and Diyala Provinces.

Despite a delayed referendum -- generally regarded would pass by a majority -- the move, though condemned by Arabs as annexing disputed territories and a final secession.

"Kirkuk is Kurdish, like Arbil, Sulaimaniyah or Dohuk, and is part of Kurdistan," KRG President Massud Barzani said, "all of the historical and geographical documents prove this."

Back in Baghdad, Prime Minister Nuri al-Maliki is already not on speaking terms with Massud Barzani. Iraqi political leaders have denounced the constitution as a step toward splintering Iraq.

"This lays the foundation for a separate state. It is not a constitution for a region," said Osama al-Nujaifi, a Sunni Arab member of the national Parliament, "it is a declaration of hostile intent and confrontation. Of course it will lead to escalation."

Multiple clashes between the Iraqi army and the Kurdish Peshmerga militia in disputed region of Nineveh and Diyala Provinces, highlighted since the summer of last year, almost resulted in military confrontations.

On August 10 last year, the central government deployed army forces to northern Diyala and ordered the Kurdish Peshmerga militia to withdraw within 24 hours. They even forced KRG staff out of their government buildings a week later, and triggered a final crossfire between the two sides in late September.

After the general elections of Iraq in January, some Kurd-dominant regions in Nineveh and Diyala Provinces rejected new officials close to Maliki government to take office, and the Peshmerga militia even blocked those officials out of towns.

The incident resulted into a massive troop deployment from the central government to disputed areas. If officials from both sides joined by U.S. counterparts had not sat together for negotiation, bloodshed might have well happened.

KRG President Barzani has said in public that military clashes may happen in some regions. Unsatisfied with the hard stance of Maliki's central government, some Kurdish officials even called Maliki "another Saddam."

As both sides get more impatient, little room seems to be left for compromise, and chances for violence are mounting.

U.S. diplomats and military officials have repeatedly warned the potential for a confrontation between Iraqi central government and the KRG, which is emerging as "a threat as worrisome to Iraq's fate as the remnants of the insurgency."

The complication between Iraqi central government and the KRG involves many ethnic, territorial and international factors that may jeopardize the hard-gained security improvement in Iraq -- a sign that worries all -- if the confrontation upgrades further.

An expanded Kurdistan secession may trigger the string effects in neighboring countries like Turkey and Iran, which are all against Kurdish independence on their territories. Even Iraqi President Jalal Talabani, as a Kurd, said earlier this year that an independent Kurdish state is just a dream and won't happen.

With the back of the United States, the United Nations has proposed a compromise solution in which Kirkuk would be given a special status with links to both the central government and the KRG. But so far the proposal has failed to win much favor from either side.

During a visit to Washington on Thursday, Maliki acknowledged that these tensions were among "the most dangerous challenges that have been a concern for all the Iraqi government." But he said such controversies in politics could only be solved through constitutional means, instead of force.

Residential Loan Losses Mounting

2009-07-06T22:14:00.000-07:00

July 5, 2009
Fair Game
So Many Foreclosures, So Little Logic
By GRETCHEN MORGENSON
www.nytimes.com

LAST week, the stock market tumbled on news that housing foreclosures and delinquencies rose again in the first quarter. The Office of the Comptroller of the Currency said that among the 34 million loans it tracks, foreclosures in progress rose 22 percent, to 844,389. That figure was 73 percent higher than in the same period last year.

But the comptroller’s office also said that amid the gloom, there was promising data about loan modifications: they rose 55 percent in the quarter. That growth came on a very low base, of course, but the move encouraged John C. Dugan, head of the comptroller’s office.

“As the administration’s ‘Making Home Affordable’ program gains traction and helps offset the impact of this very difficult economic cycle,” he said in a statement, “we should continue to see progress in future reports.”

A glimpse of second-quarter mortgage data, however, indicates that the progress Mr. Dugan and his colleagues in Washington are hoping for may take longer to emerge — raising questions about whether policymakers and banks are moving quickly or intelligently enough on the foreclosure problem.

Foreclosures remain one of the great financial ills for the economy. The Bush administration largely overlooked foreclosures affecting average homeowners, focusing instead on propping up elite, troubled financial institutions with taxpayer funds. The Obama administration has said it wants to wrestle the foreclosure issue to the ground by encouraging mortgage loan modifications, but its efforts have gotten little traction.

Loan modifications occur when a lender agrees to change terms of a troubled borrower’s mortgage; the most common approach is to reduce the loan’s interest rate. Cutting the amount of principal owed — an option that could be of more help to a borrower — is rare because it means homeowners pay less money back to the bank over time.

Lenders and their representatives, however, don’t like to modify loans through interest rate cuts or principal reductions because, of course, it reduces the income they receive from borrowers. No surprise, then, that loan modifications have been a trickle amid the recent foreclosure flood.

Enter the government, with the program it announced in March to encourage modifications. It offers incentives to loan servicers to change mortgage terms, providing $1,000 for each loan they modify. The program focuses on making payments more affordable through lower interest rates, but delinquent amounts and late fees are typically tacked onto the mortgage balance. “Making Home Affordable” does not compel lenders to reduce mortgage balances.

Servicers signed on to the program in April. The program’s early months were not covered by the O.C.C.’s first-quarter report. But other figures on modifications conducted in April, May and June are available. And they show a decline in modifications, not an increase as the government hoped.

Alan M. White, an assistant professor at the Valparaiso University law school in Indiana, analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo. The loans were written in 2005 through 2007; data on their performance is provided to the trusts’ investors. Mortgages handled by five of the nation’s largest loan servicing companies — Bank of America, Chase Home Finance and Litton Loan Servicing among them — are contained in the Wells Fargo data.

Mr. White found that mortgage modifications peaked in February and have declined in all but one month since. While servicers modified 23,749 loans in these trusts in February, they changed only 19,041 in May and 18,179 in June. This is exactly when servicers were supposed to be responding to the government’s loan modification urgings.

Foreclosures, meanwhile, keep rising. In June, 281,560 were in process, slightly above the 277,847 in May. Last January, there were about 242,000 foreclosures in the pipeline among the Wells Fargo trusts.

“I was hoping we would see some impact in June of the government’s program,” Mr. White said. “Is ‘Home Affordable’ working? My short answer is no.”

To be sure, the government’s data differs from that which Mr. White analyzed, and its loan modification figures for the second quarter may look better as a result. The O.C.C. includes prime loans as well as subprime, for example, while the Wells Fargo data contains no prime loans.

Nevertheless, Mr. White has collected the figures since November 2008, and he said that in the months since, the performance of the 3.5 million mortgages that he analyzes tracked the O.C.C. data pretty closely.

THE Wells Fargo data is illuminating. It shows that in June, 58 percent of modifications cut the payments that the borrower has to pay, a slightly smaller percentage than in April or May. The average reduction in June was $173 a month.

But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.

Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. Perhaps no other single figure shows how wildly the mortgage mania pumped up home prices. It also bodes poorly for the quality of the mortgage-related assets lurking in banks’ books.

Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.

Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.

And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”

If banks have written down the value of these loans to the 40 cents on the dollar that they are fetching on foreclosures — the only true value for these homes right now — then why don’t they bite the bullet and reduce the loan amount outstanding for the troubled borrowers? That type of modification would be far more likely to succeed than larding a borrower who is hopelessly underwater with yet more arrears.

“You can reduce payments with a lot of gimmicks similar to those built into subprime loans — temporary rate reductions that defer a lot of principal, balloon payments,” Mr. White said. “To me that leads to a situation where American homeowners are paying 50 to 60 percent of their incomes for mortgages which reset in 2011 and 2012. That is not solving the problem.”

Certainly not for borrowers, that is. And because many of these losses will ultimately be passed on to taxpayers, it’s not solving our problem, either.

REPRINTED FOR COMMENT @ http://portlandhousing.blogspot.com/2009/07/gresham-mayor-averts-foreclosure.html

Yes, We Can... Spend Recklessly

2009-07-06T09:17:00.000-07:00

Fattening the Beast
Obama's Twist on a GOP Budget Strategy

By Fred Hiatt
Monday, July 6, 2009

Since the Reagan era, some conservatives have hoped to shrink government by "starving the beast." Refuse to raise taxes, they figured, and eventually spending would have to fall.

It's beginning to look as though the new team may have a similar strategy, in reverse: Increase spending, and eventually taxes will have to be raised.

No official has articulated that to me as a strategy. But look at the evidence.

George Bush bequeathed to President Obama a nation heading slowly but surely toward fiscal disaster. Because of an aging population and rising health-care costs, spending -- primarily on Medicare, Medicaid and Social Security -- will steadily rise in coming years, as the nonpartisan and authoritative Congressional Budget Office explained in a report last month. Revenue is not projected to rise nearly as quickly. The result, if the government does not alter course: crushing debt that could lead to hyperinflation, prolonged depression, or both. Poor people would suffer most, and there would be many more of them.

"The systematic widening of budget shortfalls projected under CBO's long-term scenarios has never been observed in U.S. history," the CBO pointed out in its usual dry style. And: "All in all, the U.S. economy could contract sharply for a long period."

Obama's response has been to acknowledge the seriousness of the problem -- and make it worse. I'm not talking about his record-breaking stimulus plan, which was essential (if not ideally shaped) given the recession he also inherited. Rather, it is Obama's long-term budget that would more than double the projected deficit over the next 10 years, to $9 trillion, by extending most of the Bush tax cuts and limiting the alternative minimum tax while creating new programs and entitlements (to college tuition scholarships, for example) and refusing to cut back on existing ones.

And that's not to mention his top priority, universal access to health care. Obama has said that reform must be paid for, and he hopes it will lead to a slowing in the growth of health-care costs. That would hugely improve the long-term budget outlook.

But the prospects of cost control are tenuous, experimental, distant and politically fraught; by comparison, creating an expensive new entitlement is easy. Obama has proposed to pay for part of universal access by collecting more income tax from the wealthy, which would make the existing deficit that much harder to close. The cost of the entitlement could rise more quickly than the revenue paying for it. There is a good chance, in other words, that whatever emerges from Congress this summer will worsen the budget prognosis.

The bottom line is this: You cannot run a progressive government of the kind Obama favors by collecting only 18 percent of the gross domestic product in taxes, which has been the norm over the past 40 years. Nor can you increase the tax take to 24.5 percent of GDP -- which is what Obama proposes to be spending in 2019 -- simply by making the rich pay more.

But rather than level with the American people about this, or lay out a plan to raise the needed taxes, the Obama administration and the Democratic Congress are putting the spending pieces of progressive government in place and apparently counting on the tax piece to fall into place later.

Just to be clear: I support universal access to health care, and I don't think there's any natural law that says the U.S. economy couldn't function with higher taxes -- say, 22 percent of GDP. But you can't get there without wrenching changes -- abolishing the mortgage and charitable deductions, for example, or instituting a nationwide consumption tax. And unless you raise taxes so high that you risk choking economic growth, you also will have to trim Medicare and Social Security benefits.

It would be foolishly counterproductive to begin closing the gap in the midst of recession. But you could be setting long-term changes in motion -- adjusting rules for people who will retire five or 10 years from now, for example.

Obama and his economic team understand all this, and maybe they have a plan to get from here to there. Maybe they'll do the popular stuff first, and then next year, or next term -- as global investors become alarmed at the U.S. fiscal outlook and begin driving our interest rates higher -- persuade Congress to take its medicine and get the fiscal house in order.

But let's not forget how that starving-the-beast thing worked out. Conservatives were happy to cut taxes, but cutting spending didn't appeal all that much, and deficits soared. By postponing all the "hard choices" he warns of, Obama may be scripting a sequel.

But You Can't Fire Me!!

2009-06-30T22:40:00.000-07:00

MADRID (Reuters) - Spanish police have arrested a man whom they suspect hired a contract killer to murder his boss in a desperate bid to avoid being laid off, newspaper El Pais reported on Tuesday.

The head of audiovisual services at the Barcelona International Convention Center contracted a Colombian man who shot and killed the director of the convention center on Feb 9, according to police.

The director had planned to lay off the arrested man as part of a restructuring project, police said.

In fear of losing his job, the head of services, through his sister, contracted a team of six Colombians who planned and carried out the killing, El Pais reported.

Police have also detained the sister and six Colombians.

The shooting marks one of the most extreme actions by Spaniards who fear losing jobs, homes and businesses during a recession in which unemployment is rising faster than in any other developed country.

Other cases include an indebted Spanish builder who kidnapped his bank manager at gunpoint and the head of a construction firm who threatened to set himself on fire unless debts he was owed were paid.

(Reporting by Andrew Hay; Editing by Matthew Jones)

Cheating the Tax Man: The Shadowy World of the Repatriation of Foreign Profits

2009-06-05T22:59:00.000-07:00

Tax Break for Profits Went Awry
By FLOYD NORRIS

It was called the “Homeland Investment Act,” and was sold to Congress as a way to spur investment in America, building plants, increasing research and development and creating jobs. It gave international companies a large one-time tax break on overseas profits, but only if the money was used for specified investments in the United States.

The law specifically said the money could not be used to raise dividends or to repurchase shares.

Now the most detailed analysis of what actually happened — using confidential government data as well as corporate reports — has estimated what happened to the $299 billion companies brought back from foreign subsidiaries. About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends.

There is no evidence that companies that took advantage of the tax break — which enabled them to bring home, or repatriate, overseas profits while paying a tax rate far below the normal rate — used the money as Congress expected.

“Repatriations did not lead to an increase in domestic investment, employment or R.& D., even for the firms that lobbied for the tax holiday stating these intentions,” concluded the study by three economists, including a former official of the Bush administration who took part in the discussions leading to enactment of the plan in 2004.

The study, titled “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” was released this week by the National Bureau of Economic Research. It was written by Dhammika Dharmapala, a law professor at the University of Illinois; C. Fritz Foley, an associate professor of finance at Harvard Business School; and Kristin J. Forbes, a professor of economics at the Massachusetts Institute of Technology who was a member of the president’s council of economic advisers from 2003 to 2005.

“The restrictions on how the money will be spent seem to have been completely ineffective,” Ms. Forbes said in an interview this week.

“Dell was a great example,” she added, referring to Dell Computer. “They lobbied very hard for the tax holiday. They said part of the money would be brought back to build a new plant in Winston-Salem, N.C. They did bring back $4 billion, and spent $100 million on the plant, which they admitted would have been built anyway. About two months after that, they used $2 billion for a share buyback.”

The research is the first on the act that was able to use confidential information gathered from companies by the Bureau of Economic Analysis, a part of the Commerce Department. The researchers learned from that exactly how much in overseas profits each company repatriated, and also learned how much it had invested and repatriated in earlier years. They had to promise not to disclose company-specific data and Ms. Forbes emphasized that the numbers she cited on Dell came from the company’s public filings with the Securities and Exchange Commission.

From the B.E.A. data, the researchers were able to calculate that $300 billion in overseas profit was repatriated by American companies in 2005, when they had to pay a tax rate of just 5.25 percent, rather than the normal corporate tax rate of 35 percent. The amount was five times the normal amount of repatriations.

United States tax law allows American companies to defer paying taxes on foreign profits so long as the profits are invested outside the United States. That is a big reason most major companies pay taxes that amount to far less than the 35 percent corporate tax rate would indicate.

Last month President Obama complained that “our tax code actually provides a competitive advantage to companies that invest and create jobs overseas compared to those that invest and create those same jobs in the U.S.,” and called for changes in the law. He stopped short of calling for repeal of the deferral provision, but business still reacted angrily.

“This plan will reduce the ability of U.S. companies to compete in foreign markets, which will not only reduce jobs, but will also cripple economic growth here in the United States. It couldn’t come at a worse time,” said John J. Castellani, president of the Business Roundtable, a trade group of large companies. This week Steven A. Ballmer, the chief executive of Microsoft, said his company would move jobs overseas if the Obama proposals were enacted.

In lobbying for the new act in 2003, a group of companies and trade associations formed the Homeland Investment Coalition and forecast that passage would help the American economy by “increasing domestic investment in plant, equipment, R.& D. and job creation.” The title of the new study reflects its findings that none of that happened.

One fact found by the study indicates that some of the repatriated money was not even really returned to the United States, contrary to the intent of the law. Companies knew of the tax holiday in 2004, and many of them chose to “invest” money that year in foreign subsidiaries that had profits subject to American taxes if they were brought back to the United States. They then brought the profits back in 2005, getting the tax break while not reducing the continuing foreign investment.

Ms. Forbes said about $100 billion left the United States and came right back, in a process the paper calls “round-tripping.”

Other studies, using only publicly available information from S.E.C. filings, have previously estimated that the amount of money going to shareholders was much lower. In a paper to be published in The Journal of Accounting Research, two accounting professors, Jennifer Blouin of the University of Pennsylvania and Linda Krull of the University of Oregon, estimated that about 20 percent of the money went to share repurchases. They did that by comparing the spending of companies that repatriated money to similar companies that did not.

Ms. Forbes and her colleagues were careful to say their findings did not indicate that any companies violated the law barring use of the money for share repurchases and dividends. “Rather,” they said, the results “reflect the fact that cash is fungible and that a tax policy which reduces the cost of accessing a particular type of capital will have difficulty affecting how that capital is used.”

Indeed, the study praises the companies for not spending the money in other ways, such as raising executive pay or investing in noneconomic projects. And it concludes that the American economy may have been helped by the act.

“Although the H.I.A. does not appear to have spurred the domestic investment and employment of firms that used the tax holiday to repatriate earnings from abroad, it may still have benefited the U.S. economy in other ways. The tax holiday encouraged U.S. multinationals to repatriate roughly $300 billion of foreign earnings and pay most of these earnings to shareholders. Presumably these shareholders either reinvested these funds or used them for consumption. Either of these activities could have an effect on U.S. growth, investment and employment.”

In the current credit squeeze, however, some companies may wish they had not spent so much money on share repurchases. In total, Dell spent $7.2 billion buying back 204 million shares in 2005, spending around $35 a share. But it stopped making sizable purchases of stock a year ago.

Today, Dell’s shares trade for about $12, and $7.2 billion would be enough to buy back almost a third of the nearly two billion shares outstanding. Dell officials declined to comment.

Detailing the Banking Pig's Lipstick

2009-06-05T22:41:00.000-07:00

By Yalman Onaran

June 5 (Bloomberg) -- Big banks in the U.S. say they’re on the mend. The five largest were profitable in the first quarter, rebounding from record losses for the industry in the fourth quarter. Share prices have jumped, with the KBW Bank Index doubling since March 6.

Treasury Secretary Timothy Geithner, after “stress testing” 19 banks on their ability to withstand a worsening economy, declared in early May that Americans can be confident in the banks’ stability and resilience. Wells Fargo & Co. and Morgan Stanley were among banks raising $43 billion in new capital since then through share sales.

“With our capital and assets, stressed as they have been, we can go back to focusing all our attention on managing our business and restoring value,” Citigroup Inc. Chief Executive Officer Vikram Pandit said after Geithner’s examinations were completed.

The revival may be short-lived. Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.

The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

‘Bogus’ Profit

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The accounting rule changes that matter most for the banks came on April 2, when the Financial Accounting Standards Board gave companies greater latitude in how they establish the fair value of assets. Lawmakers, including Representative Paul Kanjorski, a member of the House Financial Services Committee, had complained that existing mark-to-market standards worsened the financial crisis.

Debt Valuation

Along with that change, FASB also let companies recognize losses on the value of some debt securities on their balance sheets without counting the writedowns against earnings. If banks plan to hold the debt until maturity, they can avoid hurting the bottom line.

At Citigroup, the recipient of $346 billion in fresh capital and asset guarantees from the government, about 25 percent of the quarterly net income came thanks to the debt securities rule change, the bank said.

Another $2.7 billion before taxes came from an accounting rule that lets a company record income when the value of its own debt falls. That reflects the possibility a company could buy back bonds at a discount, generating a profit. In reality, when a bank can’t fund such a transaction, the gain is an accounting quirk, Weiss says.

Citigroup also increased its loan loss reserves more slowly in the first quarter, adding $10 billion compared with $12 billion in the fourth quarter, even as more loans were going bad. Provisions for loan losses cut profits, so adding more to this reserve could have wiped out the quarterly earnings.

Wells Fargo

Without those accounting benefits, Citigroup would probably have posted a net loss of $2.5 billion in the quarter, Weiss estimates. In the five previous quarters, Citigroup lost more than $37 billion.

Wells Fargo also took advantage of the change in the mark- to-market rules. The new standards let Wells Fargo boost its capital $2.8 billion by reassessing the value of some $40 billion of bonds, the bank said in May. And the bank augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity.

Wells Fargo spokeswoman Julia Tunis Bernard declined to comment, as did Citigroup’s Jon Diat.

The higher valuations Wells Fargo put on its securities probably won’t last, as defaults increase on home mortgages, credit cards and other consumer and corporate lending, Northeastern’s Sherman says.

Fed’s Optimism

“These changes will help the banks hide their losses or push them off to the future,” says Sherman, a former Securities and Exchange Commission researcher.

The Federal Reserve, which designed the stress tests, used a 21 percent to 28 percent loss rate for subprime mortgages as a worst-case assumption. Already, almost 40 percent of such loans are 30 days or more overdue, according to Tavakoli, who is the author of three primers on structured debt. Defaults might reach 55 percent, she predicts.

At the same time, the assumptions on how much banks can earn to offset their losses are inflated, partly because of the same accounting gimmicks employed in first-quarter profit reports, Weiss says.

“There’s a chance that it might work,” Columbia’s Stiglitz says of the government’s attempt to boost confidence. “If it does, then they’ll look like the brilliant general. But all these efforts also bank on the economy recovering and housing prices not falling too much further. Those are not safe assumptions.”

Indeed, while the government and accounting rule makers try to help the banks look their best, they may make the U.S. economy worse. As long as lenders are stuck with bad loans, they can’t provide new money to consumers or corporations to fuel a potential recovery. The banks may look pretty, but they’ll be zombies until they clean up their books.

Fluctuating Currenices and the Problem of China's Massive Dollar Reserves

2009-05-26T14:23:00.000-07:00

Beijing's Would-Be Houdinis

By Sebastian Mallaby
Tuesday, May 26, 2009

With extraordinary speed, China has morphed from a diffident player in international finance into an impatient table-banger. Six months ago, one could muse about whether the Chinese were interested in a larger role within the International Monetary Fund or in helping to rebuild the crisis-battered global system. Now, the Chinese are pumping almost $40 billion into a new East Asian version of the IMF, browbeating trading partners into using the yuan, and floating fantastical ideas about a new international reserve currency. Visiting Beijing last week, Brazilian President Luiz Inácio Lula da Silva picked up on his hosts' changed mood. Calling for a "new economic order," he suggested that it was time to stop denominating trade in dollars.

It's great that China is speaking up. The country accounts for a large share of the world's savings and much of its growth; if a stable economic order is to emerge from this crisis, it will need Chinese buy-in. But there's a not-so-great side to China's transformation, too: Its contribution to the global debate is mostly muddled.

Why have the Chinese found their voice? Put simply, they have bought so much of the international system that they can no longer be indifferent to it. By running colossal trade surpluses, they have accumulated vast holdings of bonds and shares denominated in dollars, the currency at the core of global finance. If the greenback declines, China's government stands to lose a fortune.

The political backlash from such a loss could be brutal. Already, Chinese bloggers have ripped into the officials who invested $3 billion in the U.S. private equity group Blackstone, only to see the stock plummet. "They are worse than wartime traitors," one online chatter fumed, according to the Financial Times. A large fall in the dollar would make the Blackstone loss look like a picnic.

So Chinese authorities are searching for a way to reduce their exposure to the greenback. The surest method would be to stop buying so many U.S. Treasury bonds, but that would mean allowing the Chinese currency to rise against the dollar, which would hurt Chinese exporters when they are already suffering. So the government is scrabbling around for something -- anything -- that can spring it from the dollar trap without driving up its currency.

China's ideas come in two categories. The wackiest popped up unexpectedly on the Web site of the Chinese central bank -- itself a stunning sign of the nation's ambitions to shape the new order. It proposed that the IMF greatly expand its issuance of "special drawing rights," the multilateral quasi-currency it dreamed up in the late 1960s. The notion is that the IMF would trade these SDRs for some of China's dollars, and -- presto! -- China's dollar exposure would go down. But the hitch is that either the IMF or one of its member governments would be left holding the bag. The idea is a non-starter.

China's other approach is to promote the global use of its own currency. Its central bank has offered yuan to Indonesia and Argentina in return for rupiah and pesos. It hopes more trade will be denominated in yuan. Its contribution to the new IMF-like East Asian reserve fund may one day mean that a crisis-prone country in the region borrows partly in yuan.

All this is intended to buy China's currency some respectability. But as an escape from China's dollar trap, it is laughable. The idea is that once the yuan goes international, foreigners may be willing to borrow in it. That way, China can keep running a trade surplus and exporting capital, but instead of accumulating bonds denominated in dollars it would be able to accumulate bonds denominated in yuan. Again -- presto! -- China's exposure to the greenback would be reduced. But the hitch is the same as with the IMF idea: The currency risk would be transferred, in this case to China's borrowers. Given that the yuan is artificially held down by Chinese policy and will almost certainly rise over the medium term, a foreigner would have to be desperate (or intimidated) to help China out of its impasse by borrowing in its currency.

So neither the IMF idea nor the scattershot attempts to internationalize the yuan will rescue the Chinese from their dilemma. China has accumulated at least $1.5 trillion in dollar assets, according to my Council on Foreign Relations colleague Brad Setser, so a (highly plausible) 30 percent move in the yuan-dollar rate would cost the country around $450 billion -- about a tenth of its economy. And, to make the dilemma even more painful, China's determination to control the appreciation of its currency forces it to buy billions more in dollar assets every month. Like an addict at a slot machine, China is adding to its hopeless bet, ensuring that its eventual losses will be even heavier.

It is easy to appreciate China's sudden appetite for bold new ideas about international finance. But Beijing's leaders look less like the architects of a new Bretton Woods than like aspiring Houdinis.