Author: (Page 1 of 5)

The company you have to hate

t couldn’t have happened to a nicer company. Halliburton is scrambling the corporate lawyers and PR flaks to handle the fallout even as I write this.

The commission investigating who and what was to blame for the worst oil spill disaster in US history released its first report this week. The culprit: Halliburton’s faulty cement job.

According to Halliburton’s own records, the cement that was eventually poured down the Macondo oil well in the Gulf of Mexico had failed three separate tests to determine if it met industry standards. Remember: that’s “industry standards,” not government standards because, well, there were no government standards in force at that time. In that kind of “anything goes” environment, “industry standards” aren’t worth much, either. Yet Halliburton’s product failed even that low bar.

On March 8th, Halliburton communicated the dismal results of one of these tests to BP, which did nothing in response. After tinkering with the test, Halliburton finally got a passing grade for its cement, but never told BP about it.

So when BP engineers gave the go-ahead to pour the Halliburton mixture into the well, it was with the full knowledge that they were using a faulty product.

And, as Halliburton spokesman Thomas Roth has said, that same cement has been used in over 1,000 other wells around the world.

Makes you gasp, doesn’t it?

The commission has conducted its own tests on Halliburton cement. Out of nine separate tests, the cement failed nine times. Halliburton PR people complained that the commission didn’t use the right cement mixture, but the samples tested by the commission were supplied to it by Halliburton in the wake of the accident. Now Halliburton’s got two problems: they’re not only responsible for using a faulty product on the Macondo oil well, but they’re also completely incompetent.

Or else they’re lying.

And it’s now clear that the only test Halliburton’s cement has ever passed is the quick profits test.

2010 SIFF – Week One

I’m a cinephile who’s always had a love/hate relationship with the Seattle International Film Festival. In the early 1990’s when I first started going to the festival, it was devoted almost entirely to foreign films, which made it a paradise for those of us who hunger for films not made in Hollywood.

But even back then, there were problems with the way the festival was run. It was almost entirely run by volunteers, and it showed. Morning screenings often started late because the volunteers had slept in. You had to wait—sometimes for hours—in a long line to buy your tickets from a single box office. And each venue differed in how efficiently it was run. You might show up at 6:30 for a 7 pm film and find yourself standing in the rain until 7:30 while the volunteers went through a shift-change.

Sometimes even the films suffered. I recall one memorable screening of a Russian World War II film that switched halfway through to a scene of Polish teenagers climbing through a bedroom window in modern-day Gdansk. (The projectionist apologized by saying that the reels must have gotten mixed up at the office because Russian words looked exactly like Polish ones to him.)

Over the years, the little foreign film festival with sparse audience attendance has evolved into a behemoth that screens documentaries, foreign blockbusters, independently made US films, and the rejects from major Hollywood studios. It’s easier to obtain tickets and the screenings start on time, but you still have to wait an hour in line at each screening in order to get a good seat. And if you find a foreign gem, it’s only after much sifting.

Yet I still attend the festival, every year, with the hope of finding one or two (or maybe a few more) really good films that I wouldn’t be able to see otherwise. This year, I’m focusing on documentaries and foreign films with a political subtext.

Here’s a list of the documentaries I’ve seen so far:

Queen of the Sun – an artful film about the honey bee and everything it does for the human race. This film examines the state of the American honey bee and various threats to its existence, including commercial agriculture, monoculture crops, pesticides, the use of antibiotics in commercial bee hives, and Colony Collapse Disorder. But the film is uplifting, with its focus on independent, organic beekeepers, whose ranks include aging hippies, retired scientists, and a third generation beekeeper engaged in urban guerrilla beekeeping on the rooftop of her New York apartment building.

The Oath – filmmaker Laura Poitras, who directed My Country, My Country which was nominated for an Academy Award in 2006, interviews Abu Jindal, the brother-in-law of Guantanamo detainee Salim Hamdan. Almost immediately, it becomes clear that Abu Jindal, who works as a cab driver in Yemen, knows more about the inner workings of Al Qaeda than 90% of the detainees being held in indefinite detention at Guantanamo. The film reveals the complexities of the US war on terror by going inside the mind of a man who was once, and may still be (despite his protestations to the contrary), a true believer in jihad. I found this film fascinating because I couldn’t definitely pin down who Abu Jindal is and what he truly believes. Whether that’s a reflection of the man himself or the limitations of the medium—a film made by a Western woman—is still a question I’m asking myself days after I saw this film.

Gerrymandering – a worthwhile topic for a film, but first-time director Jeff Reichert has invested more time in making this documentary visually entertaining than in defining his message. Tellingly, the film lacks a coherent historical timeline of gerrymandering in US politics. It sort of resembles…well…a gerrymandered Congressional district: all over the map without a valid reason for how it was cobbled together.

Turtle, the Incredible Journey – billed as a family-friendly film, there’s a lot more in Turtle for adults to enjoy than in most films made for children. It narrates the lifecycle of the loggerhead turtle, which goes on one of the longest migratory routes of any animal on the planet. The filmmakers captured a lot of stunning undersea photography. If you get a chance to see this one on the big screen, go for it.

So during my first week at the festival, I’ve had three good hits and one miss. Not bad so far.

Sheila Bair’s Big Gamble

The FDIC recently shut down another three banks, bringing total bank failures in the US so far this year to 98. Last year there were 25, and in 2007, there were only three.

The Federal Deposit Insurance Corp. is not just the government entity that insures your cash deposits in the bank; the FDIC also has the unenviable task of unwinding banks that have run up massive debts and have no cash on hand to pay them off or cover their customers’ needs. When too many customers (depositors) learn of the rickety state of their bank and line up to demand their money, it’s called a run on the bank. Runs can drain a bank down to nothing, and the FDIC has to make the call when it’s time to close the doors and sell off the remaining deposits and assets to another, healthier bank, thus avoiding a situation where the FDIC has to make good on all the remaining cash demands of the depositors and creditors of the bank long after all the cash has been drained away by a bank run.

Unfortunately for the FDIC, the pool of healthy banks willing (and able) to buy up the assets of ailing banks has dwindled, leaving the FDIC with a lot of assets on its hands that may in the long term be worth money, but right now can’t be sold for even pennies on the dollar. The FDIC’s own cash pool, which comes from annual fees paid by banks (about 12 to 16 cents for every $100 of deposits) has dwindled.

In 2008, the FDIC spent $20 billion of its cash reserves on 25 bank failures; this year, that figure is more than $30 billion. Around the 1st of October, the FDIC’s cash reserves went into the red–meaning that they need to raise cash fast to cover more expected bank failures. The FDIC estimated earlier this year that they would spend approximately $70 billion total by the end of next year, but raised that estimate recently to $100 billion. The need for cash is hanging over FDIC Chair Sheila Bair like the sword of Damocles.

Big investment banks, like Goldman Sachs and JP Morgan, have been keeping an eye on the situation and trying to figure out how to make money from it all. Last month they proposed loaning money to the FDIC so that Sheila Bair, who’s been a major critic of how Fed Chief Ben Bernanke and Treasury Secretary Timothy Geithner have run the financial industry bailout (without strengthening regulation in the process), can avoid going to her enemies for a loan.

The FDIC has two ways to raise more money. It can borrow money from the US Treasury (with Timothy Geithner’s approval) or it can levy a special assessment on banks. But the FDIC had already issued a special assessment last May, and Bair’s critics wailed that another special assessment, or an increase in the annual assessment, would only drive more ailing banks into the ground. Bair didn’t much like the prospect of borrowing money from Goldman or JP Morgan at usurious rates or, heaven forbid, at adjustable rates (a type of loan that should be illegal, after all the damage it’s done to the economy and to peoples’ personal balance sheets). So Bair came up with a compromise.

The FDIC will ask banks to pre-pay their annual assessments through 2012. In other words, Bair is taking an interest-free loan from banks. In order to avoid harming the banks that are still struggling, she gave them the okay to not report the prepayments on their financial statements, so their cash reserves will look better than they really are.

How is this different from the accounting tricks that banks have been using to hide their debts and overvalue their risky investments to make their cash reserves look good? According to Bair, the difference is in degree. The few pennies that make up the FDIC assessment will be small change compared to the other expenses on banks’ financial statements. But having banks prepay those few pennies will add up to $45 billion that will replenish the FDIC fund.

The other, more important question is this: Will this $45 billion be enough? By the FDIC’s own estimate, they’ll need at least $50 billion to get through the end of 2010. Asking banks to pay their assessments through 2012 right now leaves a gap of two years when the FDIC can expect zero income from its main source but will still have to close down troubled banks. A taxpayer bailout will be inevitable.

The fact that Sheila Bair–the only top regulator in this country who’s been outspoken about the causes of the crash–can’t turn to either the Obama administration or to Congress to replenish the FDIC’s fund is a symptom of just how sick our system is. She’s betting that things will get better between now and next year, that new financial regulation will be in place, that the economy will turn a corner, and that Congress and the American people won’t view a request from her to replenish the FDIC’s fund with taxpayer money as a taxpayer bailout that marks her as the same kind of leach as Kenneth Lewis of Bank of America or Franklin Raines of Fannie Mae.

I hope she’s right–but I don’t think she is. All indications are that banks are in for another round of collapses, this time sparked by commercial real estate loans.

Many banks are using an accounting trick called “interest reserves” to hide the bad commercial loans on their books. When a risky construction loan is made, a bank may choose to calculate the interest on the loan and put that money in a special account called an “interest reserve.” The bank essentially pays the interest on the loan to itself, absolving the debtor from having to make any payments for a certain period of time. These loans are often made to real estate developers who won’t get any income from their new property until they’re done building a new building and leasing it out or selling it. The interest reserve account, however, makes the loan look like a performing loan on the bank’s balance sheet when it’s not; it’s just a risky IOU that will only be paid back if the developer finishes building his project, leases or sells it, and stays in business long enough to pay all his debts.

The collapse of the real estate market has brought bankruptcy to many real estate developers, and banks are ending up owning semi-developed properties that they can’t sell or manage. The use of interest reserve accounts is widespread in the banking industry, but bank regulators are complaining that many banks are resisting the need to write off these bad loans and do away with their interest reserve accounts. Banks are hoping that the real estate market will pick up and they can sell those properties. But with most companies downsizing and commercial vacancies high, the future doesn’t look so good for US banks.

Fiddling While the World Burns

The UN Summit on Climate Change came and went last week, with very little change in nations’ attitudes toward capping carbon emissions. In spite of the Obama administration rhetoric that the meeting was a successful step forward, no deal was reached-no consensus on targets, no caps on emissions, and no specific goals to reduce global warming gases.

Certainly, the leaders of individual nations stood up, one-by-one, and gave self-congratulatory speeches about the small steps they were taking to regulate carbon emissions in their respective countries. Chinese president Hu Jintao expressed a willingness to set specific goals, but gave no indication what those goals would be. Each country had the same attitude: “we’re willing to do something, we just don’t want to be the first to commit to a specific goal.” Even Japan, which has committed to specific targets, will only enact their plan if the rest of the global community follows suit. In other words: “you go first.”

It’s hard to argue that the country to go first should be anyone other than the US. We’ve been responsible for most of the carbon emissions spewed into the atmosphere up till now. If China now produces more than we do, it’s only been in the past year or two that they’ve surpassed us. We are still the global leader, at least in perception, and if we want to kid ourselves that our actions inspire other nations to follow our lead, then we need to act with the responsibility that leadership requires.

President Obama, however, has pushed the climate crisis further down on his agenda, below the wars in Iraq and Afghanistan (which should be ending by now, but aren’t), the healthcare reform debate (which has been slowly simmering for years and could have waited awhile longer), and the economic crisis (which he’s used as a convenient excuse to put off instituting carbon caps). Sure, switching from a carbon based energy system to cleaner energy is going to have an economic impact, but it has to begin as soon as possible or the economic impact in the future will be even more dire than the current recession.

Take, for example, the UN Environment Program’s latest report, released shortly after last week’s climate summit. It predicts that, if all the countries in the world institute the strictest carbon limits that they’ve committed to so far, the planet will warm by 6.3 degrees Fahrenheit by the end of this century. That’s approximately double the previous estimate done by the Intergovernmental Panel on Climate Change in 2007. In addition, the new report predicts that sea levels will rise by as much as 6 feet by 2100, instead of the 1-1/2 feet predicted by the IPCC. Such a change would be catastrophic in terms of population dislocation, salination of low-lying farmlands, and would seriously disrupt the world’s climate system, bring food scarcity, and, yes, negatively impact the global economy.

So there’s no excuse to stall, even for another year. The Copenhagen Summit in December is fast approaching, and world leaders are no closer to agreeing on an agenda, much less a new treaty to replace the expiring Kyoto Protocol. The Obama administration should be looking at the Democratic majorities in the House and Senate and telling themselves: “we will never have a better chance than this to pass binding legislation to regulate carbon emissions. Let’s do it now.”

Instead, in the absence of any action in Congress, state governments are taking action in court to force limits on carbon emissions. Much of the carbon emitted in industrialized countries is caused not so much by vehicle exhaust, but by the burning of coal to generate electricity. Coal is still the cheapest and easiest way for many nations, from China to the US, to power our computers and turn on our lights.

So eight states, along with New York City and three public land trusts, sued in court for the right to prosecute five power companies for creating a “public nuisance” by not reducing their carbon emissions. Last week, a two-judge panel of the US Court of Appeals for the Second Circuit in New York ruled in favor of the states’ right to sue the power companies. Notably, the two judges were not “liberal judicial activists”; one was appointed by George H.W. Bush in 1990 and the other was nominated by George W. Bush in 2003. If conservative justices can rule in favor of carbon limits, then Congress no longer has any excuse to punt on this issue.

But it’s up to the Obama administration to roll up their sleeves and get started on an international treaty while simultaneously pushing for legislation in Congress. It’s not enough for us to take a wait-and-see approach, or to argue that individual nation’s goals are good enough to bring carbon emissions down, because those individual limits are clearly not strong enough.

If the US can propose that G-20 nations submit to an international economic plan for “more balanced growth” to be monitored by the IMF and a peer review process, then we can at least propose an international framework for balanced carbon reductions. Such a framework would not rely on a cap-and-trade scheme that allows the biggest polluters to continue their destructive ways, but would institute a global carbon tax that makes businesses pay the real costs of using dirty forms of energy. The proceeds from the carbon tax would be used to develop and implement cleaner forms of energy production.

The solution is within reach. Someone-in this case, President Obama-needs to step forward and announce a plan. Obama missed his cue when he engaged in hand-shaking and back-slapping at the UN summit instead of laying a serious proposal on the table and asking the rest of the world to make firm commitments to steep reductions. There’s not much time left before the Copenhagen summit, he needs to get busy.

After All Is Said and Nothing Gets Done

Last week President Obama gave his annual speech to Congress, using it as a platform to restart the healthcare reform effort in the Senate.

He spent much of the speech trying to counter statements made by Republicans and trying to explain the provisions included in the bills that have passed three committees in the House of Representatives and one committee in the Senate. But in the end his speech was massively disappointing, because it was built around a retreat from the principles that sparked the drive for healthcare reform in the first place.

At the beginning of his speech, Obama made it clear that healthcare reform is precisely that: reform-i.e., minor tweaks to the system we already have. Single-payer is completely off the table because we must, for unexplained reasons, protect the insurance industry and, by extension, insurance industry profits. He is not out to change the system, that is clear, even though he has made the point repeatedly that our system is broken, and that no other developed nation in the world has chosen the dysfunctional model we have.

Having said that, he gets to the heart of the matter at the mid-point of his speech: he wants a plan with a “not-for-profit public option,” a term that can mean many different things. Instead of defining precisely what he means, Obama leaves the concept deliberately vague, indicating that he is willing to accept whatever Congress comes up with as a compromise solution-whether that means a government-administered plan, a plan run by a co-op or nonprofit entity, or a reform plan with a “trigger” option wherein the government would set up a public plan only if the health insurance exchange doesn’t lower costs below a certain pre-set level.

This waffling will not help the Democrats pass a plan; instead, it will give the Republicans and other right-wing anti-government paranoics a chance to draw whatever conclusions they want, thereby further alienating the American people from the whole concept of healthcare reform and a “public option.” We need specifics in order to counter the lies from folks like Sarah Palin and Rush Limbaugh. Barak Obama had the opportunity to lay out a specific plan and advocate for it, and he failed to do that.

The day after his speech, in a move that was timed for maximum political impact, the federal Census Bureau released its annual report showing that 46.3 million Americans (about 15.4% of the population) are uninsured. There were two noteworthy things about this report.

First, that statistics were tallied only through December 2008. Millions of people have lost their jobs in 2009. With those numbers included, the ranks of the uninsured are probably closer to 50 million, or about one-sixth of the population.

Secondly, the number of folks covered by employer-provided insurance plans decreased from 177.4 million down to 176.3 million (about 58% of the population-a very slight majority). Not all of the folks who lost their employer coverage became uninsured, however: many of them joined government-run programs like Medicare and state-run children’s insurance programs. In fact, government-run programs are covering an ever-increasing number of people: the estimate as of December 2008 is 77.5 million, or more than one-quarter of the US population.

Obama failed to say that fewer and fewer Americans are being covered by employer plans, while more and more are joining government plans-a phenomenon created by our current private insurance system. <I>We already have public plans competing with private insurance, and the public plans are winning, even though they’re hobbled by limitations on who can join.</I> This is why free-market extremists are so vocal in their protests against a public option; because, ironically, the private market can’t compete against even the limited public plans we have now, and this exposes as a fallacy the notion that utilizing the private market is always the best and most efficient way to do everything.

No one, whether it’s Obama, Democratic leaders in Congress, or members of the media, has stated the obvious: we are already moving in the direction of a single-payer plan without enacting any “reforms.” It’s time to make the ultimate reform: expand Medicare to cover everyone. Make our current public plan all-inclusive and let the languishing private insurance market expire from its own inefficiencies.

No, instead we will continue to have a patchwork of programs that cover the elderly, the disabled, and the children of extremely poor people. And we will continue to complain that those programs are costly because we’ve excluded healthy, working-age adults (who must participate in any plan to make it self-supporting, regardless of who’s running it).

Obama deserves one pat on the back for saying that the wars in Iraq and Afghanistan have been far more expensive than his healthcare reform proposal. But he should have gone a step further and said that it’s high time Congress got its priorities straight. Republicans and conservative Democrats must stop blaming a “public option” healthcare plan for breaking the federal budget; only an idiot would believe such nonsense. The federal budget deficit was created by the Bush administration spending the budget surplus on two wars and tax cuts for the rich, and the bailouts given to big banks to avoid a financial system collapse. The Democrats must address the reality of that, bring the wars to an end, and repeal the Bush tax cuts.

But we will have to wait until Hell freezes over to hear such strong words from President Obama, whose nickname should be “The Great Compromiser.” Sometimes you have to get things done with a bare majority. Healthcare reform is one of those things.

As for the rest of what’s needed, well, the millionaires who represent us in Congress will never add them to the agenda unless we, The People, make our voices heard. We need a powerful, revitalized progressive movement that demands that Congress and the Obama administration do the following: 1) end both wars right now, today, 2) repeal the Bush tax cuts, 3) pass a single-payer healthcare plan or a public option plan for those of us who want to move in that direction, 4) make banks repay the bailout money they received from the federal government, with interest, and 5) pass meaningful financial reform legislation and enforce it.

Americans know that trying to pass healthcare reform without balancing the budget is crazy. The only way to balance the budget is to reverse the policies that created the deficit in the first place. Barak Obama used his speech to Congress to address only one of the many things that must happen in the next year, thereby missing an important opportunity to get the nation back on track and to answer the fears that sparked fierce protests at town hall meetings this summer.

We’re in for a rough winter.

Now We Bomb Hospitals?

Assassination is banned by a US federal executive order issued by President Gerald Ford in the 1970s. That didn’t stop the Bush administration from adding assassination to its toolkit in the War on Terror, along with torture, detention without trial, and extraordinary rendition. Unfortunately, the Obama administration has not only taken up the torch, but has vastly expanded a CIA program that uses unmanned aerial drones to summarily execute suspected Taliban and Al Qaeda leaders and anyone who happens to be in the vicinity.

These are not “surgical strikes.” Aerial drones fly at very high altitudes to avoid detection. Some carry cameras to locate suspicious clusters of people, while others carry high-powered bombs to target groups of people in the hope that someone of importance is killed. A subdivision of Boeing manufactures aerial surveillance drones.

A couple of weeks ago, US officials boasted that Baitullah Mehsud, a suspected Taliban leader, had been assassinated by a missile fired from a CIA-controlled aerial done. At first, US officials told The New York Times (and the paper faithfully reported) that Mehsud, a diabetic suffering from kidney failure, was killed while receiving medical treatment on the roof of his father-in-law’s villa. No sooner had the strike been reported than conflicting information emerged.

An Associated Press article appearing in the Seattle Times on Aug. 8 said that Mehsud was killed along with his wife and several bodyguards while hooked up to an intravenous drip and undergoing treatment for “stomach problems.” The Wall Street Journal quoted Pakistani officials saying that Mehsud was “undergoing treatment for a kidney ailment.” Almost certainly he was receiving kidney dialysis at the time–not something that can occur on the roof of his father-in-law’s villa. Also, the article stated that Mehsud was killed when a missile targeted the second-story balcony of a building where he was receiving treatment. No mention was made of any rooftop.

In fact, it appears that Mehsud was killed when the CIA bombed a medical clinic–probably the only facility that offers kidney dialysis in the Waziristan frontier. We can believe with some confidence that his wife and bodyguards were not the only ones killed in the bombing, but medical personnel and other patients were included in the death toll. In addition, anyone who lives in South Waziristan who needs kidney dialysis will now die without access to the complex, sterile equipment and medical personnel required to keep them alive.

Let’s remember what’s been forgotten by US officials and the US press: the bombing of medical facilities is a war crime, a direct violation of international law and the rules of warfare. It doesn’t matter if the enemy is receiving medical treatment in the facility at the time. It doesn’t matter if the clinic is treating Hitler or Osama bin Laden, or Baitullah Mehsud, or enemy foot soldiers. Hospitals and clinics are off limits.

Nevertheless, US officials were jubilant. They happily theorized that the death of Mehsud would cause a fatal fracture among the Waziristan tribes who’ve been helping Mehsud target the Pakistani government. Scholars of Pakistan and observers on the ground in Waziristan had a different view. In the Seattle Times report, Karim Mehsud, a lawyer in Peshawar who had met Baitullah Mehsud, was quoted as saying, “Another Baitullah will emerge. This is an ideological war, this is not a local problem.” Almost everyone agrees that Baitullah Mehsud was responsible for focusing his tribe’s attention away from Afghanistan and towards the Pakistani government; now that he’s gone, his 10,000-man guerilla army is free to reunite with the Taliban and once again attack US troops in Afghanistan.

More than 360 people have been killed in over 40 drone attacks in Pakistan this year. Pakistan has publicly condemned each and every one of these attacks as a violation of Pakistani sovereignty. But both Pakistan’s foreign minister and the chief of its Interior Ministry have hailed the assassination of Mehsud as a major success. The Pakistani military has been preparing (with dread) for an offensive against tribal elements in the rugged, mountainous region of Waziristan, spurred on by heavy urging from the US government. The Pakistani government is now hopeful they can avoid the effort and expense altogether, much to the Pentagon’s dismay.

This week, US officials leaked news that the top US military commander in Afghanistan, Gen. Stanley McChrystal, is considering pulling US troops back from their forward positions near the Afghanistan/Pakistan border. Since the Pakistani government won’t deploy its own troops in Waziristan, “there’s no point swinging a hammer if there’s no anvil there,” according to US officials. The recent buildup of US troops in Afghanistan has apparently had no effect, except to disperse the Taliban over a wider area and provide more targets for their attacks.

Eight years of warfare, and this is what it comes down to: our government is engaging in assassination prohibited by US law and committing international war crimes, with the excuse that it will “save American lives” and “help end the war in Afghanistan.” Nothing could be further from the truth. To accomplish those goals our military would have to pull out of Afghanistan completely, and our president would have to end the policy of assassination with the use of aerial drones and high altitude bombing. Obama has shown no willingness to order either of those things.

When you assassinate an enemy’s leader, someone will inevitably take his place. In the case of Baitullah Mehsud, who’s been ill for some time now, the preparation for his successor was probably already complete. A new leader of the Mehsud tribe will arise swiftly and without most of the infighting so ardently expected by CIA officials.

Of course, the man who replaces Baitullah Mehsud will be more radical and more bloodthirsty. And now he’ll be looking for revenge.

Sources: “Taliban leader in Pakistan reportedly dead,” Joby Warrick, Joshua Partlow, and Haq Nawaz Khan, Associated Press, reprinted in the Seattle Times, 8/8/09; “U.S. Drone Kills Chief of Taliban in Pakistan,” Matthew Rosenberg, Zahid Hussain, and Siobhan Gorman, The Wall Street Journal, 8/8/09; “U.S. studies pulling troops from remote Afghan posts,” Jonathan S. Landay and Nancy A. Youssef, Seattle Times, 8/13/09.

Happy Talk in Terrible Times

In recent weeks, the stock market has made a run that has most Americans asking, “Are we out of The Recession yet?” Investors seem to think so, and the Fed has contributed to the optimism. It recently released a report that claims the outlook has “improved modestly” and the economy is contracting at a “somewhat slower pace.” Economists and investments managers have been quick to jump on board the happy talk express and announce that the recovery is just around the corner.

If there’s one thing the Obama administration believes, it’s this: the key to slowing the economic downswing is to manage the public’s perception of the problem.

Take the bank stress tests, for example. In February, after Tim Geithner made his disastrous announcement of a vague plan to rescue the banking system, the markets went into free-fall. The White House realized that merely announcing their earnest intentions to fix the problem was not enough. They had to manufacture an event that would reassure investors.

Business news in this country is all about periodic events and how the stock markets react to those events. When the Labor Department issues its monthly report on unemployment, it’s an event that triggers a rash of buying and selling on the stock market. Investors place their bets, in other words, on whether the news is going to be good or bad. The White House has come to understand that these events are important to Wall Street, and so it has devised the bank stress tests as a means to urge investors to place their bets in favor of the banking system.

Many economists have proposed that the best way to stabilize the US financial system would involve nationalizing the banks, taking their stock off the NYSE, and removing them from the burden of the daily, hourly, even minute-by-minute tyranny of their shareholders’ bets. The current under-capitalization of banks is obviously exacerbated by the precipitous drop in their stock prices: the lower their stock prices fall, the less capital banks have and the harder it is for banks to borrow money at advantageous interest rates to cover their operations.

Hence, the notion that, by nationalizing the banks, we take away the constantly shifting sand beneath the banks’ balance sheets. Shareholders, of course, would lose their entire investments in bank stocks, but the value of most of those stocks has already dropped by 95 percent in the past year, so shareholders really don’t stand to lose much more at this point.

Barack Obama, however, has announced that he will never nationalize any US banks. Having closed the door on the most sensible approach to stabilizing the system, he’s committed himself to the only other approach available: find some way to push up the price of banks’ stocks.

Hence, the White House concocted the stress tests, which are pure advertising, with almost no substance to support them. For example, the stress tests assume that unemployment will hit 10.3 percent by the end of 2010, but the Labor Department just announced that unemployment has already hit 8.9 percent in April. Most economists now agree that unemployment will hit 10 percent or higher by the end of 2009, and layoffs are expected to continue throughout 2010.

Another example: some banks are already reporting larger commercial real estate loan losses than were assumed under the worst case scenario in the stress tests. Clearly the tests were designed to be a very low bar. Since the Treasury Department consulted with Wall Street banking executives on the design of the tests, we shouldn’t be too surprised.

In addition to being worthless, the tests are highly misleading. They emphasize losses on loans that banks have made to customers and then kept on the banks’ books. The tests have paid no attention to losses on derivatives and mortgage-backed securities–the “toxic assets” which are at the root of the current economic crisis. For the Treasury to ignore the impact of these investments on bank balance sheets now, while running these tests, is a sign that the Obama administration is content to perpetuate the grossly lax regulation of the past decade. What’s required is exactly the reverse: the system can’t and won’t stabilize until stronger regulations governing these opaque investment vehicles are in place.

Meanwhile the real economy is still in an ever deepening slump. The economy shrank by 6.1 percent in the first quarter of this year (January through March), while economists had predicted a fall of 4.7 percent. Homebuilding and construction shrank by 38 percent, the largest fall since 1980. Business spending fell by the highest amount since the 1950s. Exports fell 30 percent, their worst showing since 1969. Even the government sector trimmed spending, in spite of the Economic Stimulus Bill passed by Congress (a sign that state and local governments are really suffering).

We’re still seeing declines in credit, falling home prices, increased bankruptcy filings and foreclosures, and unemployment increases in all metropolitan areas tracked by the Labor Department. The fact that April’s declines are slightly less than March’s or January’s is not significant of anything, except that the downturn is continuing.

One group of investors that hasn’t been fooled by the stress tests is foreign governments, particularly China and Japan. For years now, the US has relied on Asian investors to finance the deficit by buying US Treasury bonds. Recently, China’s diplomats made noises about the rising US deficit and lack of transparency in our financial system, and how this is eroding China’s investment in our country. This was China’s way of saying that they won’t continue to pour cash into our system unless we clean up our act. Unfortunately, the Obama administration ignored these warnings.

So last week’s auction of 30-year US Treasury bonds was much weaker than expected. With not enough buyers wanting bonds, the US government watched as bond prices fell and interest rates rose, in spite of the fact that the Federal Reserve is buying up long-term US Treasury bonds to keep interest rates low. Asian investors are no longer willing to step in and rescue us. Inflation and higher interest rates may be just around the corner, and nothing would kill a nascent recovery quicker, or plunge us into a deeper downward spiral faster, than inflation on top of a recession.

By closing off the most direct route to stabilizing the system–nationalizing big banks and imposing a stronger regulatory apparatus–the Obama administration is risking a train wreck. Happy talk might obscure the problems for a while, but it can’t change the underlying reality.

2008 Media Follies!

by Maria Tomchick & Geov Parrish

Welcome to our 13th annual selection of the year’s most over-hyped and underreported stories, separated into local and global categories. With the news business, especially newspapers, undergoing a not-very-slow collapse, and hard news coverage usually the first victim of tightening budgets, there was more underreported news than ever this year. Fear not, however. America’s addiction to trivial distractions can withstand any assault from economic hardship–or from reality.

2008’s Most Over-Hyped Stories


The Great Black Hope. Reality check, please? Obama is a corporate centrist–not a progressive. Always has been, never sold himself as anything but. His actions thus far as President-Elect are exactly what he promised. But after eight long, desperate years, far too many progressives believed what they wanted to be true, not what actually was true. Wasn’t that the approach that got George W. in trouble?

Sarah Palin. Sure, it was beyond stupefying that John McCain would pick such a massively unqualified running mate to be a heartbeat (or lack thereof) away from the most powerful job in the world–and a searing indictment of the ignorance of many Americans that she then developed a cult-like following (not unlike Obama’s). But how many times can one make that point? There’s only so much ridicule to go around, and a world full of deserving targets.

Obama v. Clinton. It’s a given that commercial media have a financial interest in making the outcome of a political race (or any other event) seem unclear when it’s not. They want you to keep watching, listening, reading, and buying. But for three torturous months after Hillary Clinton’s nomination became mathematically all but impossible in early March, Americans were flagellated with ubiquitous coverage that lurched from week to week and primary to primary as though a Clinton miracle was imminent and the outcome was in doubt. It never was, a shocking instance of journalists putting institutional self-interest (or personal bias) ahead of reality-based reporting.

Beijing Olympics. What has happened in China in the past 30 years is one of the modern world’s most amazing stories. But it has a nasty, ugly underside of mass displacement, extreme poverty, and brutal human rights abuses. Hey, how ’bout that Michael Phelps!!

Celebrity Gossip. Britney has custody of her kid again. The fact that I even know this fills me with an indescribable self-loathing.


The tunnel that refused to be buried. Seattle residents voted down a tunnel to replace the Alaskan Way Viaduct, but the city and state transportation planners are still considering a tunnel alternative. It’s like Frankenstein’s monster. We’re going to keep hearing about it for the next hundred years.

A streetcar system for Seattle. Just repeat the mantra over and over until everyone’s on board. Never ask the important questions: “Why?” “Who will actually ride this thing?” and “Where the hell are we going to get $600 million to build this thing?”

The arena that wouldn’t die. The Sonics are long gone (and their inevitable departure was another over-hyped story), but Key Arena keeps resurfacing as a potential home for another NBA team and a vacuum cleaner for stray public tax money.

Gun bans in public parks. One shooting by a mentally ill guy at Folklife sparked a long and tedious drumbeat about the danger of guns in public parks and major public events. Duh. We have yet to hear Commandante Nickels’ plan for enforcing the ban. Or how he’ll pay to defend the city from the inevitable, successful lawsuits.

Mayor’s music Mecca. After doing his best to shut down the city’s music clubs, Commandante Nickels announced a “Seattle City of Music” initiative that had the music community scoffing. And did he allocate any money for it? Are you kidding?

Boeing machinists’ strike hurt the Dreamliner schedule. This was not only over-hyped, it was downright wrong. Notably, no such claims were made when SPEEA, the engineers’ union, threatened to go on strike. Boeing didn’t want to bash the engineers too much because that would give them the license to trash-talk the company and let out the big secret: design flaws and problems with foreign subcontractors are primarily to blame for the repeated Dreamliner delays. Instead, Boeing gave its engineers a 20 percent pay raise over the life of their new contract. Can you say “hush money?”

A Futile Sports Year for the Ages: The Sonics had their worst year ever, then left town. The Mariners and Seahawks were both supposed to win their divisions, and instead were among the worst teams in their leagues. And the WSU Cougars were being suggested as the worst team in college football history–until they were handed a victory at season’s end by the winless UW Huskies. You would have thought the world had just ended. It was hilarious.

Car crashes, fires, violent crimes, big (and not-so-big) weather “events,” heartwarming stories of photogenic, plucky survivors (preferably kids) overcoming adversity, and every other staple of Chuckle-Buddy News.

2008’s Most Underreported Stories


The methane time-bomb is exploding right now. Climate researchers warned in September that preliminary data show methane sinks in the Arctic seabed are beginning to release their gases into the air. If true (and there’s every indication it is), this could bring on a massive increase in global warming in a very short time. Methane is 20 times more potent a greenhouse gas than carbon dioxide. Meanwhile, world leaders dithered, and George Bush wanted us to all go out and buy SUVs.

Economics Lesson #1. Capitalism doesn’t work without regulations to keep it in check.

Economics Lesson #2. Globalization has a downside, like we activists have been saying since the early 1990s. Huh.

Final Economics Lesson. Henry Paulson and Ben Bernanke are trying to roll back the clock to 2005, when the stock market was flying high, bank profits were soaring, and housing prices were through the roof. But guess what? Only idiots think it’s smart to live in the past. (Or people who made piles of money back “when times were better.”)

The criminal Bush Gang’s final looting spree. In 2001, there was much Republican wailing that the Clintons were taking the White House silverware. Eight years later, as you read this, the Bush cabal is looting the US treasury, gutting regulations for their buddies, and stealing everything not welded in place on the way out the door, and our media could not care less.

All the Bush Gang’s other criminal acts–the missing e-mails, the fired US attorneys, the corrupt administrators, ad nauseam–that mostly went unreported and ignored, and whose perpetrators will now almost all move on, unpunished, to opulent lives as lobbyists or consultants.

There’s still a war in Iraq. At what point does a war, or the million-plus Iraqi civilians now believed dead because of it, cease to become important simply because the media covering it get bored? Not only that, but…

Iraq is on the verge of civil war. Now. A new National Intelligence Estimate leaked to the press in October said all 16 US intelligence agencies agreed that Iraq is on the verge of exploding into interethnic and sectarian fighting over unresolved political issues, including the status of Kirkuk and the allocation of oil resources. And the US policy of creating Sunni paramilitary groups to fight the insurgency has only exacerbated the problem.

We’re in an all-out war in Pakistan, too. Our media have been very careful–and dishonest–in reporting endless bombings and attacks in northwest Pakistan, in which the US is both target and perpetrator, without bothering to draw the obvious conclusion. Meanwhile…

Somalia is a failed state, and the US is keeping it that way. We’re hearing tons about Somali pirates, but almost nothing about the desperate chaos in Somalia that drove them to such extreme measures–and less than nothing about the fact that the Islamist groups that were bringing stability to Somalia in 2006 were driven out of power by the US and its Ethiopian surrogates, which continue to work overtime to keep the Islamists from regaining control of the country. And then there’s…

The worst war in the world. No, it’s not Iraq. Not Afghanistan or Pakistan. Nor even Darfur. It’s the decade-old conflict in the Congo that’s killed more than five million people. Alas, there are no Westerners getting shot–they’re just sponsoring the war from their corporate offices in London, Antwerp, and New York–so we hear nothing about it.

Anti-depressant drugs no better than a placebo. A study published in the journal Public Library of Science Medicine analyzed 47 clinical trials of the most popular anti-depressant drugs on the market, including Prozac, Effexor, Serzone, and Paxil, and concluded that they’re no better than taking a sugar pill. In fact, a half-hour of exercise every day had a more positive effect on mood than taking antidepressants. They do, however, provoke serious side-effects, including millions in profits for Glaxo Smith Kline, Wyeth, and other drug companies.

Average emergency room waiting times have doubled in a decade. There are now fewer emergency rooms than in 1996, but 32 percent more patients trying to use them. Only 40 percent of those patients are covered by private insurance. The rest are covered by the state and federal government or are completely uninsured (which amounts to the same thing). (Time to get rid of that 40 percent.) In a poll in May, 82 percent of Americans said that the health care system either needed complete rebuilding or fundamental change.

Pure food activists win against Monsanto. Major retailers (Safeway, Kroger & others) banned milk containing recombinant bovine growth hormone (r-BGH) from their store brands, and Kraft Foods and Dean Foods both announced they would offer cheese marked as BGH-free. BGH was banned in the European Union, Japan, and Australia. In August, Monsanto finally gave in to the inevitable and announced they would sell off their last r-BGH production plant, marking a major victory for pure food activists.

FDA not concerned about pure food. After a salmonella outbreak that sickened more than 1500 people in 40 states and led to losses of over $200 million to the tomato industry (chili peppers were eventually blamed for the outbreak), AP reporters got hold of documents from the Food & Drug Administration showing that the FDA only inspects about one percent of all foreign food shipments entering the US. The documents also showed that about 76 million Americans get sick from food-borne illnesses every year, and 5,000 die. The FDA’s solution? Irradiate everything, but not enough to kill the germs, because that would make your food taste bad. Yum. Would you like some salmonella with that Cesium salad?

Military tribunal system exposed as a farce. With the first verdict in the military tribunals set up to prosecute Guantano detainees, Salim Hamdan, accused of being Osama bin Laden’s driver, was found not guilty of nearly all the charges against him. Found guilty of a single charge of driving bin Laden’s car, he was sentenced to 5-1/2 years in prison, with credit for most of the seven years he’d already spent in US custody. He’ll be free by Christmas. Since that ruling, various courts have ordered the release of at least 22 other Guantanamo detainees.

Fear and Favor, Part II. The New York Times sued the Defense Department to get access to records relating to the Pentagon’s domestic propaganda operation. It found that major pundits on TV news shows at FOX, CNN, NBC, ABC and other networks were given talking points by the Pentagon and rewarded for parroting the Pentagon line. The rewards? Access to Pentagon contracts for the military contractors these pundits represented in their spare time, when they weren’t brainwashing the American public.

Underreported Story Emeritus [Retired]: Say, where is Osama bin Laden, anyway?


State Republicans Ignore Campaign Finance Laws. First came the lawsuit by retired state Supreme Court justices exposing Dino Rossi’s illegal coordination of huge “independent” fundraising with the Building Industry Association of Washington. Later, we found out the state’s realtors were in on it, too. And Rossi, Rep. Dave Reichert, and state Attorney General Rob McKenna all got massive TV buys on credit, an illegal corporate loan. That mostly unreported (and thus far unpunished) sleaziness, in a tight race, probably won another term for Reichert–along with…

HarvardGate. Harvard describes its studies as “concentrations,” not majors or minors. Why should anyone care? Because a manufactured controversy two weeks before the election, launched by Reichert’s staff and fanned by the Seattle Times and conservative talk radio, accused challenger Darcy Burner of lying about her Harvard degree because she described herself as having a “degree in economics” rather than a “degree with a concentration in economics.” In a Democratic year, Burner was five points up in the polls when the “story” broke. She lost by 20,000 votes.

The Top-Secret Police Accountability Report. The Seattle city council’s report on police accountability was finished on May 23, 2008, but the public and press have yet to see a copy of it. If we only had the money for a lawsuit…

City raids neighborhood transportation funds. When Prop. 1 failed last year, the city lost most of its funding source for the Mercer Corridor Beautification Project. So Mayor Nickels and council member Jan Drago have diverted about $30 million from neighborhood transportation funds to spiff up Paul Allen’s backyard.

The city is watching you. The city council voted in June to release $850,000 for surveillance cameras in three city parks: Hing Hay, Occidental Park, and Victor Steinbrueck Park. This came after Mayor Nickels unilaterally stole $144,000 from the city budget and spent it on cameras for Cal Anderson Park on Capitol Hill.

City flunks the public service pop quiz. State auditor Brian Sonntag released an audit of 30 public agencies and their responsiveness to public information requests. At the bottom of the list: the City of Seattle, which was completely nonresponsive 80 percent of the time. Time to call the undertaker!

Port scandals: first there is a mountain… Speaking of audits, Sonntag’s December 2007 report of potential fraud by the Port of Seattle surrounding the construction of the third runway sparked an internal audit at the port by its accounting firm, Moss Adams. Their highly publicized conclusion: “no deficiencies.” Then they admitted quietly that they didn’t review the construction of the third runway. In August, a State Supreme Court ruled that the recall petition against commissioner Pat Davis could go forward; Davis is accused of malfeasance by colluding with former port CEO Mic Dinsmore to award him a $339,000 golden parachute payment. Then, in December, an independent audit commissioned by the port and conducted by former US attorney Mike McKay found that the port did indeed engage in fraud in construction of the third runway. Expect indictments in, oh, 20 years or so.

City sweeps the homeless under the rug. Mayor Nickels wants the homeless to just go away, hence the city’s stepped-up clearing of homeless encampments. While millions are being wasted on the Mercer Corridor Beautification Project, nothing is being spent on providing more shelter space and services to the homeless. And, in a massive give-away to developers, the city council voted in July to subsidize market-rate housing, but not spend a dime for low-income housing.

Plastic grocery bag tax is defeated by national organization of grocery store owners and chemical companies. Heil hydrocarbons.

Half-time update: Employees 2, Starbucks 0. A California Superior Court awarded Starbucks baristas $100 million in back pay for tips they were forced to share with their supervisors. Meanwhile, in Texas Starbucks settled a federal lawsuit and agreed to pay an undisclosed amount of money to 350 assistant managers who were forced to work unpaid overtime. Do we see a pattern here?

Boeing forced to redesign the Dreamliner. Already 6 months behind on the new Dreamliner 787, Boeing quietly told one of its major customers that it would have to redesign the entire wing box of the 787, which would delay the project for another 6 to 9 months. In trying to lighten the weight of the airplane, the support beams for the wing box–where the wings and fuel tanks are attached to the plane–were made too thin and they buckled under testing. Incidentally, that part of the plane was manufactured by a subcontractor in Japan.

Premera rate increases. From 2004 to 2007 Premera transferred $49 million in surplus revenue from its Washington State operations to its unprofitable Arizona subsidiary to prop up its failing Arizona division. During the same years Washington ratepayers saw double-digit increases in their insurance premiums, proving that insurance companies are evil bloodsuckers. This led to the state legislature passing a bill that reinstated the state insurance commissioner’s power to oversee insurance rate increases in our state. Hurray for regulation!

Big victories for local farmers and farmers’ markets. The state legislature passed a bill in March to allow public schools and state institutions to buy fresh produce from Washington farmers, even if it costs more than the imported stuff. The bill also allowed food banks to accept local produce and farmers markets to accept food stamps. In May, the city council approved the Food Action Initiative (mostly a policy statement, but every little bit helps), and the city announced a cut in fees charged for farmers markets.

Big new tax break for businesses. Sucking up to Boeing isn’t enough. The state legislature passed $6.1 million in new tax breaks for business by extending tax breaks formerly reserved just for Boeing to the entire aerospace industry, including Boeing’s subcontractors. Hint for the incoming legislature: balance the budget by closing these business tax loopholes!

There’s more, of course. There always is. Send us your nominations ( and we’ll run a follow-up addendum next month! Meantime, read carefully in 2009, and rely on multiple sources. You’ll come away knowing a lot more about how our city and world work–and what you can do to bring genuine change in 2009.

Another Bailout: The Change We Want to See?

Everyone is trying to figure out how much money the Federal Reserve and the US Treasury have committed to bailing out the financial industry and the US economy, something that appears to be a state secret on a par with the number of civilians killed in the Iraq War. “We don’t keep track” was absurd when the Pentagon said it; it’s criminal for the Fed and Treasury to say it now. Independent estimates range between $3 trillion and $7 trillion.

An argument can be made that the tremendous cost of the Iraq War has inured us to the huge numbers involved in the government’s economic rescue. I would argue that the reverse is true: the trillions of dollars being poured down the black hole of the banking collapse will eventually make the Iraq War seem cheap by comparison.

So it’s worth asking: what are we getting for our trillions in taxpayer money? The Treasury has spent almost all of the first half of the $700 billion bailout package, and none of it has gone to purchase “troubled assets” from banks. Instead, the Treasury poured that money directly into the coffers of a dozen or so big banks with no strings attached; the Treasury told them to loan it out to people, but the banks have hoarded the cash to offset losses from bad loans or used it to buy their weaker rivals. Whether we, the people, supported the $700 billion bailout bill or not, the money at least ought to be spent according to the outlines of the bill passed by Congress.

Now comes more bailouts. An extra $20 billion poured into Citigroup, when its market value fell so low that the company was worth only $20.5 billion on the Friday before the Treasury announced this new cash infusion. Did the Treasury force Citigroup to declare bankruptcy, like they did with Lehman Brothers? Oh, never fear: Citigroup’s international status, with branches in 100 countries around the world, made it “too big to fail.” Okay, so did the Treasury consider seizing Citigroup, booting out its CEO and upper management, and selling off its assets–in effect fully nationalizing it, as they did with Fannie Mae and Freddie Mac? Of course not. This is the Bush administration we’re talking about.

Yet, a bank seizure would have made the most sense. Even as Citigroup’s stock price fell so low the company was valued at only $20.5 billion, the company itself claimed to have a $2 trillion balance sheet. Some of that could be asset-inflation, but the difference is mostly due to the perils of being a publicly traded company and the vagaries of allowing shareholders to vote every second of every business day on the value of your company. Clearly, banks should never become publicly traded entities that sell their stock on a major stock exchange. Period. It’s a recent innovation, born of the massive political lobbying by the banking industry since the 1980s that has thrown down the regulatory barriers for the entire financial industry. The experiment has failed massively, and it has to be brought to an end.

The quickest and easiest way to put the genie back into the bottle is for the federal government to seize control of troubled banks and nationalize them. They may be reprivatized later, but only after re-establishing the regulatory regime that existed prior to the 1980s. Yet this is the absolute reverse of what the Treasury and Federal Reserve are doing. Their strategy of pouring cash into banks with no strings attached while guaranteeing bank debts is being called sarcastically the “finger in the dyke” method by their critics. Yes, it’s an attempt to roll back the clock to 2005, when banks were flying high, making enormous profits, and extending loans to anybody with a pulse. It’s also a strategy that will only dig us deeper into the hole.

Likewise the Federal Reserve’s announcement that it will loan $200 billion to institutional investors, including hedge funds, so they can buy up securities backed by commercial loans (credit card debt, auto loans, etc.) is an attempt to roll back the clock. They’re trying to remove some of the glut of debt from the financial system so that consumers can, yes, rack up more debt under the guise of boosting consumer spending, an activity that accounts for about two-thirds of all US economic activity. Instead of acknowledging that consumer debt levels are too high and that Americans will have to work more, save more, and pay down their debts, the Federal Reserve is trying to hook us all on more debt. And they’re not even doing it in an effective way.

If you want Americans to spend more, you should give them more money to spend, which is why an economic stimulus package might help. Maybe. It won’t be enough, but it’s a step in the right direction.

The truth is that, instead of trying to roll back the clock, we all have to admit that the US economy needs to shrink. Much of the money and wealth that Americans accumulated in the past decade existed only on paper, and we all borrowed against that wealth thinking we could sell stocks or sell our homes or refinance to pay off our debts. Now that the nonexistent money has vanished, we all have to adjust. The question is, who will have to adjust more: the poor or the managers of Citigroup and other big financial companies who hyped home ownership, drove up housing prices to unsustainable levels, and sold subprime and adjustable rate mortgages to people who didn’t need them and couldn’t afford them?

We need only look at the impact of the economic crisis on American households to understand why the Fed and Treasury’s moves are having no effect on the overall economy. Americans’ disposable income fell by 9.2 percent in the third quarter of this year, the largest drop since 1947 when the government started keeping records. Currently, 36.5 million Americans live below the poverty line, laughably defined as $21,200 per year for a family of four, and that number may increase by more than 10 million before this crisis is over.

The crisis is affecting Americans’ ability to even feed themselves. The number of people using food stamps has increased 9.6 percent (by about 2.6 million people) from August 2007 when the crisis first hit and August 2008, just before the recent sharp downturn. Food banks and soup kitchens are struggling to keep up. In 2007, more than 36 million Americans (12.2 percent of the entire population) struggled to feed themselves, with 691,000 children going hungry at some point during the year.

In October, the United Nations reported that major cities in the US have levels of economic inequality equal to cities in Africa, and the OECD reported that the US as a whole had the highest inequality and poverty rates of all but two nations (Mexico and Turkey) in a 30-nation survey that included most major developed and developing nations.

A real bailout package would focus on the root of the problem. It would relieve high debt levels for American families by reforming the recent “bankruptcy reform bill” that made it harder for Americans to get their debt forgiven and by unwinding and outlawing mortgage-backed securities which make it impossible for most homeowners to renegotiate their troubled mortgages. It would address the gross income inequalities brought about by 30 years of horrible political policies: from the Reagan administration undercutting unions and cutting corporate taxes, to the Clinton era budget-balancing that dismantled the social safety net for the America’s poor, to the Bush administration tax cuts for the rich and pursuit of a fiscally ruinous War on Terrorism. It would end the regulatory vacuum that has led to loan fraud and criminal corruption in all levels of the financial industry.

Barack Obama has pitched himself as the change we need to see, but most of his economic advisors are former Clinton administration aides. The likelihood that he will bring about a real shift in economic policy seems slim at the moment, but one thing we know for sure is: if we don’t speak up and demand what we want, we won’t get it. Call your senator. Email President-elect Obama. Let them know what real change should be.

Q&A: The Credit Crisis–Part 2 of 2

Q: They keep telling us that taxpayers own AIG now, but isn’t the Fed a private bank? Who really owns AIG and what’s it worth?

A: Yes, the Federal Reserve Bank of New York is a private bank. Here’s how the deal worked: the Fed agreed to loan $85 billion to AIG at a very high interest rate. That’s what the Fed gets out of the deal: enormous interest payments. But the Fed told AIG that it couldn’t have the loan unless it made the US Treasury (the taxpayers) the majority shareholder in the company. So now, the Fed (as AIG’s biggest creditor) and the US Treasury (as the majority shareholder) control the direction of the company.

The first thing Bernanke and Paulson did was fire the old CEO and hire a new one. The next thing they’re going to do is sell off AIG’s valuable assets and use the money to pay off creditors (including that huge $85 billion loan to the Fed). If there’s not enough money to pay all the creditors, the US Treasury (taxpayers) will be on the hook to cover the bill. And all the junk assets that couldn’t be sold will belong to the US Treasury (taxpayers), including AIG’s credit default swaps. Don’t be fooled by statements that claim the US Treasury (taxpayers) could make some money off this deal. There’s no market in credit default swaps, so there’s no place to sell this junk, and there never will be. It’s worthless.

So, if they’d been allowed to fail and declare bankruptcy, AIG would have had to sell off all its assets and pay as many of its creditors as it could. Everyone else, including its bondholders, shareholders, and customers who owned credit default swaps, would get nothing. Under the bailout plan, the US Treasury will ensure that at least the bondholders and customers of AIG get something–all at taxpayers’ expense.

Q: What about the bigger bailout that Congress is considering? Isn’t that just going to help the rich jerks who got us into this mess? Why doesn’t Congress do something to help people like you and me who are losing their homes to foreclosure?

A: You’re right, there are two ways to handle the problem. You can inject money into the top of the pyramid and bail out the big banks and investors, which is what’s happening now. Or you can spread money around at the base of the pyramid by helping out folks going through foreclosures. But the time to do that is past. Back in late 2007, housing advocates called loudly for a government plan to help people refinance their mortgages; this would have forced banks to take write-downs for part of the value of the bad loans they made. Sure, there would have been turmoil at the top, but it wouldn’t have been as bad as it is now. For one thing, everyone would have had a better idea of how big the problem is, instead of continually trying to guess, and then finding out you’re still underestimating the problem.

Even back in March, when Bear Stearns collapsed, there was an opportunity for the Bush administration to wake up and formulate an overall plan for addressing the problem. There was still time for President Bush and Treasury Secretary Henry Paulson to put together legislation that might have helped homeowners and given Wall Street some guidance on how to get through this crisis. But at every step of the way, the Bush administration was hamstrung by its own extreme free-market ideology, which prohibits government from interfering with the “self-correcting” market. The current panic is the result of that inaction.

Q: I’m not surprised that George Bush didn’t have a plan; that’s his modus operandi, whether we’re talking about stuff here at home or the war in Iraq. But what about the presidential candidates? Do they have any plans to deal with this crisis?

A: John McCain has done a number of flip-flops when it comes to the economy. He has a record of supporting deregulation, and his senior advisor on the economy is Phil Gramm, the man who drafted key legislation to deregulate the finance industry. But just last week McCain started talking about imposing more regulation on banks and finance companies. He’s also done a complete U-turn on bailouts. He was against bailing out any private companies, but last week he changed his mind and supported the bailout of AIG. Then he changed his mind yet again and scolded the Fed for setting up a bailout plan for the industry and said it should stick to managing inflation and ensuring a strong dollar. That made people question whether McCain is on the same planet as the rest of us. It doesn’t help that the only concrete proposal he’s made so far is to set up a commission to study the financial crisis.

Obama, on the other hand, has been clear and specific about what he would do. Back in March, when Bear Stearns collapsed, Obama listed three things that should be done immediately: 1) the Fed should be allowed to regulate any company that borrows money from it, 2) regulators should set standards for how much cash on hand each bank must have, ensuring that banks have adequate cash-flow (liquidity) and not just adequate capitalization (which measures assets that aren’t necessarily easy to sell), and 3) the federal government should create an oversight body that can identify risky types of investments before they become a threat to the stability of the system (in other words, regulate derivatives and ban the riskiest ones before they are widely marketed and sold). These three very specific proposals show that Obama at least understands the nature of the problem. Obama wouldn’t necessarily do a better job managing the economy than McCain would, or even do things differently from McCain. But at least Obama isn’t stumbling in the dark trying to figure out the problem. He knows what it is, and that’s the first crucial step in finding a solution.

Q&A: The Credit Crisis–Part 1 of 2

Q: How did all this start?

A: Throughout the 1980s and 1990s, beginning with the Reagan era, Congress has engaged in an orgy of deregulation, doing away with the Depression-era safeguards that forced transparency and limits on US banking and financial companies. Regulations were repealed one by one; for example, in 1999 Congress passed a bill that repealed the Glass-Steagall Act and allowed commercial banks and investment banks to buy each other and combine operations under one roof. This era of massive deregulation also sparked the invention of creative and unusual investments, including derivatives, which were previously prohibited under earlier securities law.

So, before 1999, the financial industry consisted of commercial banks (with brick-and-mortar branches where you could deposit your paycheck and open a savings or checking account), investment banks and brokerage firms, mortgage companies, credit card issuers, insurance companies, etc., and they were all separate companies. After 1999, the gloves came off, and any of these companies could buy any other company, which caused a huge expansion in both the size and the profitability of US financial firms.

Moreover, any company could now issue loans. General Motors, for example, could now open a finance unit that issued auto loans, and they did. Customers wanting to buy a car didn’t have to go to their banks to get auto loans; they could finance the purchase through the company where they bought their car. This, of course, proved to be very convenient for US businesses, and very profitable.

Unfortunately, because of lax oversight and because of the explosion in the number of companies that were now issuing credit, it became impossible to track how much money was being loaned to whom under what terms, and whether businesses had the cash on hand to cover any shortfalls if a lot of customers defaulted on their loans. Nowhere was this more of a problem than in the housing market.

Q: I’ve heard about the problems with mortgage-backed securities, but I don’t understand how that could cause such a huge mess. What happened?

A: To understand the current crisis, you need to understand only one thing: what mortgage-backed securities really are. Starting in 2003, banks with mortgage units made a lot of risky mortgage loans. The banks then bundled these loans together and called them an “asset” (a mortgage-backed security). They sold some of these “assets” to investors and used the rest as collateral to borrow more money from other banks. Then they used that borrowed money to make more risky loans, which they called “assets” and used as collateral to borrow more money to make more loans, etc., etc. And banks did this in volumes that were so huge that it dwarfed the amount of cash and real assets that these banks owned.

So now our financial industry is struggling under layers and layers of bad debt. Risky subprime loans started going bad in 2006, but the first big wave hit the financial industry in Aug. 2007, when banks finally had to own up to the problem and declare huge write-downs in the value of their mortgage-backed “assets.” This made their stock prices fall, which affected the value of their companies and made it harder for banks to borrow the cash they needed to cover their bad debts. It’s been a downward spiral ever since.

Q: Why is the collapse happening now? Why didn’t it all happen in Aug. 2007?

A: Because in Aug. 2007, nobody knew how bad the problem was or how long it would take all the bad loans to come due. In fact, today we still don’t know the depth of the problem. Investors, the public, regulators, the Fed, even the CEOs at the banks involved in this whole Ponzi scheme still can’t come up with a figure for exactly how many bad loans are out there. It’s been a year–a psychologically important timeframe on Wall Street–and banks are still taking write-downs and scrambling to borrow more cash to cover their bad debts.

The fact that nobody knows the size of this problem is key to understanding the current panic. Without information, everyone is free to image a doomsday scenario. And they may be right, we just don’t know.

As an example of how clueless everyone is, we need only look to the Fed chief, Ben Bernanke, and Treasury Secretary Henry Paulson. Bernanke and Paulson will be presenting an industry-wide bailout plan to Congress in the coming days that’s estimated to have a price tag of $500 billion. But where does that figure come from? Keep in mind that Bernanke and Paulson have avoided putting a dollar amount on the bailout plan themselves–members of Congress are the ones who came up with the $500 billion figure. Nobody has explained the basis for it, but my guess is that they took the IMF’s estimate of the crisis ($1 trillion) and subtracted the amount that the Fed and the Treasury have already poured into the financial markets (about $500 billion) and came up with the difference. So $500 billion is just a guess, a number pulled out of a hat. The total could be much higher. Or it could be lower, but I wouldn’t count on that.

Q: Explain more about the government bailout. Why did the Fed bail out AIG and not Lehman Brothers?

A: Lehman was hovering on the verge of bankruptcy a couple of weeks ago, but they had the opportunity to work out a sale to a group of investors. The investors, however, didn’t offer Lehman enough money, and the CEO of Lehman turned down the deal. He was hoping to get a better deal from the Fed, similar to the bailout of Bear Stearns. But the Fed turned him down flat. When that happened, Lehman’s stock price plunged drastically, and the investors who’d offered to buy the company said, “No way, this isn’t a good bargain for us anymore,” and took the deal off the table. Lehman was forced to declare bankruptcy.

Merrill Lynch, on the other hand, could see the writing on the wall. Instead of holding out for help from the Fed, Merrill agreed to be bought out by Bank of America for about 50 cents on the dollar.

Within hours of the Lehman collapse, the insurance industry behemoth AIG was driven to the wall. Because AIG owes hundreds of billions of dollars (no one is sure yet exactly how much they owe, but it’s a lot) to foreign banks and foreign governments, the Fed simply couldn’t let them fail. To do so would be a global economic disaster. It would also have serious political repercussions and shake global confidence in the US financial system. So a bailout was necessary to prevent a run on US banks, a huge sell-off of US corporate stocks, and–this is the real nightmare scenario–a massive sell-off of US government treasuries, which are owned by most foreign banks and governments around the world. If the US government loses the ability to borrow money cheaply through sales of treasury bills and bonds, then it becomes impossible to come up with the cash to pay the interest on the federal deficit and pay for the war in Iraq, much less find the money to bail out anyone.

Q: So how did AIG get into this mess? Isn’t AIG an insurance company, not a mortgage lender?

A: That’s right. AIG didn’t issue mortgages or mortgage-backed securities; instead, they sold massive quantities of a derivative called a “credit default swap.” Essentially, that’s a form of insurance that hedges against mortgage-backed securities.

Here’s how it works. If an investor owns a lot of mortgage-backed securities, they might want to protect themselves against a fall in the value of their investment. So they might buy insurance that would protect them against the loss in value of their mortgage-backed securities. That’s what credit default swaps are. By buying credit default swaps, the investor would be “hedging” their investment.

AIG sold some of these derivatives to US banks and investors, but they sold most of them to foreign banks and foreign governments, because foreign markets operate under different rules. Many foreign governments have regulations requiring their banks to limit risk or hedge their riskier investments. When the market in mortgage-backed securities tanked, AIG’s customers came knocking, looking for payouts on their credit default swaps. AIG was able to cover the payouts for a while–for more than a year, in fact. But shareholders looked at AIG’s business and got nervous about AIG’s ability to keep paying. AIG’s stock took a pounding, the value of the company fell, and suddenly they couldn’t borrow enough cash to cover all their debt payments. They simply ran out of cash.

Q: Just a second … define “derivatives” for me. Just what the heck are they?

A: Defining “derivatives” is almost impossible, since the term encompasses so many different types of investments (which is why you can search high and low for a definition and not find a satisfactory one). Maybe the best definition would be: “a catch-all term to describe non-traditional types of investments. Derivatives can be any immaterial thing that people are willing to pay money for.” An example of a derivative might be a piece of paper representing the likelihood of an event that may or may not occur in the future. As long as people are willing to buy and sell that piece of paper (make a market in it), then that derivative has a value. When people lose interest in buying that piece of paper, the market for that derivative collapses and the investment is deemed worthless.

It’s important to note that mortgage-backed securities are not derivatives–they’re bonds made up of individual mortgages bundled together and sold as a package. Unfortunately, when investment banks put together these mortgage-backed bonds, they grouped good mortgages with lots of really bad subprime mortgages and “liar loans” (mortgages issued to people who didn’t have to show any proof of their income or assets). Investment banks, along with the major ratings agencies (Moody’s, S&P, and Fitch), colluded to market and sell these bonds as extremely safe investments, when in fact they were extremely risky investments. So when a lot of subprime mortgages began to fall into arrears in 2006, it took a while for that to impact the value of mortgage-backed securities, but the collapse of the mortgage-backed securities market was inevitable. It proves that, while derivatives are extremely risky investments, high-risk securities can be created anywhere in a system with little or no regulation.

Why Things Cost More

Line up; pay more. That’s the refrain everywhere this summer, whether you’re getting a fill-up at the gas station or buying a loaf of bread at the supermarket. Gas has doubled in price in the past year and certain foods–especially fresh produce, meat, milk, and eggs–have doubled in price in just three years.

Are these high prices necessary? Are we now beginning to pay for decades of low prices held in check by the Fed’s policy of keeping interest rates low (and therefore keeping inflation in check)? Were we underpaying for food and energy before?

Yes and no. Americans historically have paid lower prices for gasoline than many other countries, European countries in particular. Much of the difference was due to subsidized supply. Our taxpayer dollars paid for tax breaks and subsidies to oil companies–not to mention the hundreds of millions of dollars spent on foreign wars and “police actions” to ensure that US companies had unimpeded access to petroleum sources. But those tax breaks, subsidies, and expensive foreign wars are still in effect today, in spite of Congressional Democrats’ recent efforts to eliminate a handful of those tax breaks for oil companies, and the forgotten promises by Democrats to end the war in Iraq.

Economists often cite the increased demand for energy in China, India, and other developing countries as the main cause for high oil prices. They are categorically wrong. Yes, there is an increase in demand for energy in the developing world, but the overall supply of oil has not decreased; in fact, the supply has increased. Because of the increase in price, people in the US and Europe have cut back dramatically on their oil use, thereby causing an oversupply of oil on the global market. Yet oil prices continue to set records. This flies in the face of supply-and-demand economic theory which tells us that, as the supply of oil dwindles, the price should increase, and whenever demand lessens or there’s an oversupply of oil, the price should drop.

So what is causing the spike in oil prices? We can find the answer by looking at the commodities markets. Oil futures and oil contracts are routinely traded on the commodities markets: sold by companies that extract and refine oil and purchased by companies that make gasoline, diesel fuel, and heating oil available for purchase on the retail market. Once upon a time the commodities markets were governed by regulations that restricted who could buy and sell futures and contracts. To buy a contract, an investor had to prove that he or she represented a company that could take delivery of the actual oil or petroleum products.

In other words, you or your grandmother couldn’t just buy an oil contract for 1,000 barrels of oil, specifying a delivery date thirty days in the future, then turn around and sell that contract a week later for a profit. That kind of trading is referred to as “speculation.” An economic rule of thumb is that the more speculation there is in a market, the more prices increase, at least for a while. At least until the bubble bursts.

In the year 2000, energy companies pushed a bill through Congress with provisions that largely deregulated the commodities markets. One provision, which economists called “The Enron Loophole,” exempted electronic traders from any requirements to prove that they could or would eventually take possession of the actual oil represented by the contracts and futures they were purchasing. Not only did this benefit Enron, which manipulated the market in order to make hundreds of millions of dollars, it also opened up the market to outside investors with no direct interest in oil extraction, refining, and delivery. In other words, after 2000, you and your grandma could buy all the contracts you wanted.

At first the number of outside investors was small. In the year 2000, outside speculation accounted for about 29 percent of the oil-futures market. But once the credit crisis hit in mid-2007 and the stock market started to tank, the commodities markets saw a massive in flow of cash from investors searching for easy ways to make a quick profit. In poured money from hedge funds and pension plans, from wealthy investors and unrelated corporations–all in search of ways to offset their losses on mortgage backed securities and the stock market. Speculation now accounts for about 71 percent of all trading in oil futures, according to the Commodity Futures Trading Corporation, the government agency that has nominal, but not effective, oversight of commodities markets.

With the increase in speculation has come dramatic price increases that are not tied in any way to supply and demand. Oil prices, which used to be fairly stable, now swing as wildly as the stock market. News of a pipeline attack in Iraq? Oil prices skyrocket within hours, as investors frantically buy up contracts in anticipation of an interruption in supply, however small and transitory it may be.

Once we understand that oil prices are no longer connected to supply and demand, two things become instantly clear. First, the Saudis’ reluctance to increase oil production is revealed as a practical response to an already oversupplied market. Cranking out more oil would have no effect on the price of oil, but would put a huge strain the Saudis’ overburdened infrastructure.

Secondly, recent reports of only slight increases in overall inflation become much less puzzling. Yes, oil and food prices have skyrocketed, but when these two items are subtracted from the equation, all other goods have increased only a tiny bit, and many have actually decreased in price. The items that have increased are ones influenced by the price of transportation, and only a fraction of the true transportation cost is being passed on to the consumer. Companies are afraid to raise the price of nonessential goods too high, because Americans stressed by high gas and food prices aren’t doing much shopping for nonessentials. And because companies can’t pass on the full increase in transportation costs, they seek other ways to economize, including laying off employees. While the price of oil may not be tied to supply and demand, the price of everything else still is.

Except, of course, for food. Many variables influence the price of food. Unlike oil, the world is suffering under a real shortage of basic foodstuffs. Only part of this shortage is due to the much-discussed and often-lamented increase in demand from developing nations (as if the poor should be blamed for wanting better quality nutrition for themselves and their children). Pundits often point to two other reasons for food price increases: high oil prices (a lot of energy is required to grow, process, refrigerate, and transport food), and biofuel production.

But higher oil prices should only account for a modest increase in the price of food, and the production of sugarcane and corn for ethanol is a very tiny slice of the agricultural market which should have no impact at all on food prices. Four other factors usually ignored by economists and the press are more important in determining the price of a loaf of bread.

First, fertilizer costs have skyrocketed. Composed mostly of phosphates and nitrogen which exist in abundance, fertilizer should be cheap. But corporations are using an increased demand for fertilizer as an excuse to jack up their prices.

Secondly, policies promoted by the World Bank and the IMF have pushed family farmers off the land and turned millions of acres in developing countries over to plantation farms to grow nonessential commodities for export: tea, coffee, tobacco, rubber, etc. This has contributed to the increased demand for food on the world market, as developing countries have lost the ability to grow enough basic foodstuffs to feed their own populations.

Economists often cite bad weather as a reason for the drop in food supplies, but they seldom mention that drought in Australia, Africa, and Southern Europe and flooding in the US Midwest are the consequences of global climate change caused by greenhouse gas emissions. Global warming is now beginning to interrupt the food chain for humans as well as wildlife.

And, finally, food contracts and futures are bought and sold on deregulated commodities markets the same way oil is. In a better world, investors who have no ability or intention of ever accepting delivery of 1,000 bushels of corn would never be allowed to bid on or buy a corn contract, but they can. Hedge funds, pension plans, and wealthy investors are doing it in record numbers. Speculation in commodities markets, which totaled $13 billion in 2003, has jumped to around $260 billion today.

If the US Congress were to close the Enron loophole and pass comprehensive legislation to re-regulate the commodities markets, analysts at have estimated that the price of oil could fall by half, and so would the price of gas. Within 30 days after the legislation passes, Americans could be paying a little over two dollars per gallon at the pump. And there’s no telling how food prices would be effected, but they wouldn’t continue to climb so dramatically.

Democrats in Congress have discussed commodities market regulation, but have felt no urgency to act on this vital problem. If we all telephone or e-mail our representatives, that might change.

Page 1 of 5

Powered by WordPress & Theme by Anders Norén