Author: Maria Tomchick (Page 2 of 4)

The State of the Obama Presidency

The annual State of the Union address is the president’s laundry list for Congress: what he wants to see them do in the next year. Except, of course, in a campaign year, when the State of the Union address is the president’s kick-off speech for his campaign. Given that this is an election year, and given that Congress was paralyzed by partisan squabbling last year, Obama’s State of the Union speech was unusually larded with admonitions for Congress to pass bills for the president to sign. This has been the modus operandi of the Obama administration: Congress is in charge, they’re responsible for this mess, it’s out of my hands.

Take, for instance, the lead issue in the State of the Union speech: jobs. After admonishing US corporations to bring jobs back to the US, Obama offers up a host of tax credit sweeteners, as if the federal government is wallowing in money right now. Commentators pointed out immediately that taxes are not the main reason for offshoring. Cheap labor, lack of labor laws and safety regulations, and closer proximity to commodities and parts are the main reasons corporations send jobs overseas. Obama didn’t say, “We’re ready to repeal labor laws; Congress, send me a bill and I will sign it!” Although that’s what it would take to move these jobs back here.

In fact, the Obama administration doesn’t need to do this on a federal level, because similar actions are occurring at the state level. Last week, Indiana became the 23rd state in the union to pass a “right-to-work” law that undermines labor unions, and a number of other states are considering doing the same. The Obama administration has chosen to remain silent on the “right-to-work” movement, which amounts to a strategic decision to passively support corporations’ efforts to create a Third-World underclass here in the US.

Likewise, his job training initiatives will help employers at the expense of students. A proposal to create a public-private partnership between corporations and community colleges begs the question: while students are learning how to measure, calculate, cut, solder, clean, and assemble, will they be learning civics, reading comprehension, history, or critical thinking? These latter skills are essential for an informed populace in a democratic society, as many Middle Eastern nations are learning today. Will we lose an important edge in our capacity for freedom and democracy in order to gain a competitive edge in the international job markets?

Many listeners celebrated Obama’s call to free K-12 students from standardized testing, expand work-study opportunities for college students, allocate more pay for teachers, extend the tuition tax credit, and lower college tuition rates. He didn’t say, however, where the money would come from for all of these expensive proposals.

No, instead he changed the subject to immigration reform, sending a deeply contradictory message: yes, we should pass laws allowing immigrant students to become naturalized citizens. But then he beat his chest about how he’s closed the borders by putting more “boots on the ground” than any previous president. These two statements don’t constitute an effective immigration reform policy, and certainly don’t fulfill the promise he made in his campaign three years ago to reform our broken immigration system. Under his presidency, that system has become more militarized—an overzealous arm of the anti-terrorism campaign—and has torn many families and communities apart.

Much has been written since the State of Union speech about Obama’s new taskforce to crack down on banks and mortgage lenders who engaged in shady lending practices in the past decade. It’s three years too late and millions of dollars short. The SEC and the Department of Justice have already covered this ground, suing big banks and their former CEO’s and extracting insufficient settlement payments—most of which were paid by shareholders of those companies, not the executives responsible for the misdeeds. The banks will argue strenuously and with great success that this is double jeopardy: they can’t be sued twice for the same crimes. Proponents’ arguments that the taskforce will uncover new crimes are not persuasive, given that that the taskforce will be staffed with many of the same lawyers from the SEC and the DOJ who pursued the earlier cases.

The clearest example of the Obama administration’s approach to governance can be seen in its energy and environmental policies. In his speech Obama said, “Tonight I’m directing my administration to open more than 75% of our potential offshore oil and gas resources.” So much for cracking down on oil company polluters in the wake of the Deepwater Horizon spill in the Gulf. He went on to say that hydraulic fracturing (“fracking”) is okay, as long as companies tell us which chemicals they’re pouring into the ground. No mention was made of how those chemicals often migrate into groundwater and drinking water supplies, harming human, plant, and animal life. No mention was made of recent studies of earthquake activity near the deep-well disposal sites for contaminated fluids used in fracking.

Boasting that we have 100 years of natural gas reserves in the US, Obama ignored recent estimates by his own Energy Information Administration that show those reserves to be much lower—more than 40% lower, in fact, than earlier estimates. In addition, the US is set to become a net exporter of liquefied natural gas by 2016, belying Obama’s assumption that that our natural gas supply is for domestic use only.

The president then tossed a bone to environmentalists by calling for the opening of public lands to clean energy projects. Unfortunately, this shows the Democratic Party’s vast ignorance of the debate raging in environmental circles about such projects. Many enviros condemn the effort to place, for example, solar panels in a pristine and fragile semi-desert environment, when there are many private lands that could be used for clean energy development. The difference: energy companies would have to pay private landowners, when they could get access to public lands much more cheaply. Again, financial incentives to corporations trump environmental policy.

Most important are the elements missing from an Obama administration energy and environmental policy, primarily energy conservation plans and any effort to require power plants to clean up their carbon emissions. Corporations and the Republican Party have called these “job-killing” initiatives, and the Democratic Party has swallowed it hook, line, and sinker.

Aside from the tax credits for businesses to bring jobs home, the expensive educational initiatives, and the call to fund clean energy projects, the centerpiece of Obama’s State of the Union address, the words that everyone was waiting to hear were: “Here’s how we’re going to pay for all this.”

Again, Obama disappointed us. He made two, brief statements about funding for his proposals. First, he claimed that the federal government will get a peace dividend from ending the war in Iraq, which Congress should spend to pay down the deficit and fund infrastructure projects.

The peace dividend is a mirage. The US is still pouring billions of dollars into the War on Terror. Sure, not as much of it is going to Iraq, although we still have the largest US embassy in the world in Baghdad, and we’re still funding Iraqi infrastructure and security forces training there. But we’re pouring increasing amounts of money into secret and undeclared wars all across the Middle East and Africa, from Pakistan to Yemen, to Somalia. And let’s not forget Afghanistan, where the US military estimates we’ll be involved for at least the next decade or longer.

Secondly, Obama embraced Warren Buffet’s proposal to raise taxes on people who make more than a million dollars per year. This does not constitute a comprehensive, detailed tax plan. He didn’t say a single word about letting the Bush tax cuts expire, he didn’t mention raising taxes on carried interest (wages earned by hedge fund managers that are taxed at only 15%), or raising capital gains tax rates. He didn’t mention revising the alternative minimum tax to capture more wealthy taxpayers instead of middle-class taxpayers. He didn’t mention a special tax on investment transactions, nor did he make a case for the estate tax or closing loopholes that allow the wealthy to transfer their assets tax-free to their children and grandchildren. He didn’t discuss how many businesses in the US paid little or no tax on their profits last year. In short, he presented no plan to deal with the federal government’s fiscal woes. And that’s a massive failure of governance.

Congress bears some responsibility for not passing a comprehensive budget, but that doesn’t let the president off the hook for proposing a solution to the most important problem in the national political arena. Obama failed to do that, and in doing so, proved himself as much removed from reality and divorced from the concerns of average Americans as George W. Bush ever was.

Obama’s State of the Union speech can be viewed as a campaign speech, but it should also be viewed as a gauge for the state of his presidency. In spite of rhetoric meant to appeal to middle class Americans, his administration has done everything it can to help the wealthy maintain their privileges, and to help corporations erode democracy, workers’ rights, and the environment in pursuit of more profits for their shareholders. None of the Republican candidates for president would be better, but they also wouldn’t be much worse, and that makes me shudder for the future of democracy in America.

Mitt Romney’s Wealth and What It Means

The mainstream media has been full of news reporting on Republican Presidential candidate Mitt Romney’s finances. First, let’s thank the Occupy Wall Street movement, because without them, this would never have become a campaign issue. And even as Mitt Romney tries desperately to keep his finances a secret, bits of information keep leaking to the press.

First, there’s Romney’s own, casual admission that he paid “about 15%” in income taxes last year, but of course he won’t know for sure until his accountant finishes his tax return (sometime in April, after most of the early primaries are over). He could release his 2010 tax return, however, as other candidates have, but he won’t, which says lot about the amount of government secrecy we can expect from a Romney administration.

About that 15%: it’s less than half of what his wealthy father paid in taxes during his time as an American millionaire, which was 37%. Ah, those good old days. And I’m not even talking about a time that was in the distant past. Ten years ago, Mitt Romney would have paid about 25% in taxes, and 15 years ago, in the mid-1990’s, he would have paid 29%. That was during the booming years of Bill Clinton’s first term, when the economy gained around 11.5 million jobs (which puts the entire Bush Jr. presidency to shame) and the federal government ran a surplus, not a deficit.

So whenever you hear right-wing pundits complain that raising taxes on the rich will hurt the economy, you should know better. The rich have paid much higher tax rates during some of the best years of the U.S. economy.

Let’s remember that the federal deficit wasn’t a side effect of the George W. Bush years; it was the whole point. Bush was heavily supported by Wall Street, the oil industry, and defense contractors because he was willing to spend taxpayer money (and borrow even more) on two wasteful wars in the Middle East, which turned out to be very profitable for them. And of course Bush pushed through two major tax cuts for the wealthy that were very dear to the hearts of his wealthy constituents.

Now comes Romney, who is the very embodiment of everything that is Wall Street. His fortune, estimated to be around $250 million, puts him in the upper ranks of the 1%. His tax rate of 15% means that he earns no wages or salary; he makes all of his money through his investments. His work history, as former CEO of Bain Capital, means he has yet to learn what an honest day’s work in the real economy—the one that manufactures real goods and provides services to average Americans—really means.

Bain Capital is a private equity firm. Private equity firms engage in leveraged buyouts. They collect a big pool of cash from wealthy investors and use that pool of cash to buy a distressed company. They “turn that company around” by cutting what they determine to be excess: they sell off some of the assets and lay off a lot of people. Once they’ve turned the company into a money making enterprise, they use that company as collateral for big loans, which are then used to buy more distressed companies, and so on. And the amount of profit that private equity firms demand from the companies they buy is very high, because they have a whole bunch of wealthy investors who want a big, exciting rate of return.

Romney is no longer CEO of Bain Capital, but a large portion of his fortune is invested in Bain Capital’s various investment funds. And at least $25 million of his fortune is invested in offshore funds that Bain set up in the Cayman Islands.

Romney and his financial advisors have all denied that he invested in those funds to avoid paying U.S. taxes. They all say something like: “he chose those funds because of the assets they invested in, not for tax reasons.” That’s disingenuous, to say the least. Every investor looks at the total rate of return of the investment he’s considering. The “total rate of return” is what the fund pays the investor less any costs to the investor, including fees paid to the fund managers and income taxes. There would be no other reason for Bain to set up a fund in the Cayman Islands except to help the investors avoid paying U.S. income taxes. Bain has a total of 138 offshore investment funds in the Cayman Islands.

Now, many politicians—both Republicans and Democrats—have railed against companies and individuals who use offshore banks and other foreign institutions to avoid paying U.S. taxes. The U.S. Treasury has been cracking down on taxpayers who don’t declare their foreign earnings, because the Treasury has a vested interest in knowing the extent of the problem, and for good reason. Offshore investments suck an estimated $100 billion dollars in tax revenue out of the U.S. Treasury.

But the problem could be worse than that. Funds that are organized in a foreign country but purchase and trade mostly U.S. assets allow foreigners to invest in the U.S. without having to pay U.S. taxes on that income, as they would otherwise be required to do if they bought and sold those assets directly. And U.S. assets, particularly real estate, are looking like a very good deal to foreign investors these days. The U.S. Treasury needs that tax revenue now more than ever, but can’t collect it from funds organized as offshore tax havens. Don’t expect Mitt Romney to change that law.

Nor can we expect Mitt Romney to advocate for a repeal of the Bush-era tax cuts for the wealthy, as Barack Obama has done. Those tax cuts have rewarded Romney, and his Wall Street cohorts, beyond their wildest dreams.

The Most Under-Reported Economic Stories of 2011

In the past year the press was full of stories speculating over whether the economic recovery was well under way or beginning to falter. But most stories were economic happy talk, glowing reports of record corporate earnings without any mention of how the companies were using their windfalls of cash. The disconnect between what ordinary Americans see inside their own checkbooks and what they read or watch in the news reports is getting bigger every day. So here is our list of the most important and neglected economic stories of the year.

1. The European Debt Crisis was manufactured by big, institutional investors to punish the European Union for not fully bailing out Greece the way the US government bailed out big banks in 2008 and 2009.

Let’s admit the truth here. Sure, Greece was in serious trouble. But Spain? Italy? And now France and Germany? No way. The equation is simple, but the financial press never laid it out for anyone. Instead of bailing out Greece, the EU worked out a deal that forced private investors to take a loss on their Greek bonds, which made big institutional investors (banks and hedge funds) angry; so they dumped any and all European debt in their portfolios. A few weeks later, no European government could get a favorable rate on their short-term debt. And no government in the world can currently get a long-term loan because investors are worried that, once interest rates rise, their money will be locked into long-term bonds whose value will have fallen and whose interest rates will be super low. The European Debt Crisis didn’t ease up until December when the European Central Bank finally announced that it would do what the US Federal Reserve did in 2009: extend no-interest loans to any and all banks that want them. Mission accomplished.

2. Hidden problems in the bond market.

Here’s another simple equation for you: add together panicked investors looking for a safe investment plus a huge number of retiring baby boomers. This leads to a record amount of money poured into the bond markets, because bonds are a safe investment, right? Well, not exactly. With few medium and small businesses able to borrow money, and government debt in disfavor, we should be asking ourselves where all that bond market money is going.

Here’s a way to find out: by looking at the largest bond market index mutual funds, which buy investments to match the composition of the entire US bond market. Here’s what one such fund holds: 70% in US government agency debt, 20.7% in corporate bonds, and the last 9% is made up of municipal bonds, other sovereign debt, cash, and a few risky derivatives (to boost the fund’s rate of return).

Sounds pretty safe, right? But here’s the kicker: of that 70% of US government agency debt, only a little more than half is invested in the safest US Treasuries (US federal government debt, i.e., the much maligned “deficit”). The rest, a full 34.4% of the entire fund, is made up of bonds issued by Fannie Mae and Freddie Mac; in other words, it’s tied up in the still-sinking housing market. Many of these bonds may be worthless, because Fannie and Freddie have been doing the same things that other big US mortgage lenders have been doing: delaying the inevitable write-off for as long as possible.

In addition, of the 20.7% of the fund invested in corporate bonds, more than a third of that (36%) is invested in bonds issued by banks, brokerages, insurance companies, and real estate investments trusts, and other financial industry companies. So the total amount in the fund that’s invested in the housing market and the finance industry is 42%, which shows us exactly how big the housing market bubble still is, and how risky investing in bonds can be.

3. Nearly half of all Americans are poor or low-income.

Last year, as in past years, the US Census Bureau calculated the number of people whose incomes are below the poverty level, defined as $22,314 for a family of four. That number totaled about 49.1 million Americans. But, for the first time, the bureau also calculated the number of people whose incomes were just above the poverty level, but below the “low-income” level, defined as $44,405 for a family of four (about 200% of the poverty level). That total came to 97.3 million additional Americans, which means nearly half of all people in the United States are poor or low-income.

In addition, 1 in 4 Americans needed emergency food assistance in the past year, 57% of all children in this country are in poor or low-income families, and 62% of low income families spent more than one-third of their income on housing. Child care costs take up another 20%, which doesn’t leave much for food, transportation, clothing, school supplies, etc.

With half of our population barely able to afford basic necessities, consumer spending (which accounts for more than 70% of economic activity) will never be able to rescue the US from its economic downturn.

4. The average tax rate paid by large US corporations is really 18.5%.

Whenever anyone mentions raising taxes, a wail goes up in corporate boardrooms all across America: “We pay too much tax!” The aspirational tax rate for US corporations is 35%. Wouldn’t it be nice if the US Treasury actually collected that much? According to a study done by Citizens for Tax Justice, only one-quarter of large US corporations pay more than 30% of their income in tax. Another one-quarter pay less than 10%. Approximately 30 companies in the study paid no tax, despite earning large profits. The most notorious offenders included Boeing, which received enormous tax breaks from the US government because it’s a major defense contractor, and companies like Microsoft who, because they’ve built call centers in other countries, can list most of their profits as foreign earnings not subject to US taxes.

5. Income disparity is at record levels in the US.

The Congressional Budget Office issued a report on income disparity in the US: the richest 1% of Americans saw their income increase by 275% over the past three years, during the worst economic downturn since the 1930’s. The upper 20% of Americans took home 53% of all after-tax income (more than the other 80% of Americans combined). Most shocking was the fact that the poorest 20% of Americans took home only 5% of all after-tax income.

6. Economically, we don’t live in a post-racist America.

More figures from the Census Bureau show us the racial composition of poverty in the US. The poverty rate is the highest for African Americans at 27%. For Hispanics it’s 26%. And for white Americans it’s 9.9%. Clearly, we don’t live in a post-racist America.

The statistics on race and poverty also held one startling fact: the median annual income for a male, full-time worker (of any race) in 2010 was $47,715. In 1973, the median income for the same worker was $49,065. This erosion of earnings has benefited corporate America immensely, while creating a lost generation for American workers.

7. Mortgage fraud is still going strong.

In August, the FBI released their annual report on mortgage fraud, showing that it’s still a widespread problem in the US. An estimated $10 billion in fraudulent loans were issued in 2010. The most common problems include falsifying documents so people could qualify for loans they couldn’t afford, inflating appraisals of houses so people had to take out larger mortgage loans, and pushing people to buy investment or rental properties that they couldn’t afford—all the same practices that led to the subprime mortgage collapse.

In addition, the Associated Press reported that mortgage-style robo-signing has become a common practice on the sale documents for properties. In 2010, banks were caught rubber-stamping mortgage loan documents and, after paying a nominal fine, they agreed to clean up their act. But now the AP has discovered that the actual sale documents for houses are being processed in the same way, potentially calling into question the ownership of millions of properties that have changed hands in the past decade.

8. Take-home pay in 2010.

Who took home the biggest slice of the pie in 2010? Was it corporations, small business, workers, or investors? Of national income in 2010, 14% was claimed by corporations, the highest rate in history. Small businesses, which are often lauded as the driving engine of employment in our economy, took home only 8.3%, the lowest rate ever. Workers took home 49.9%, the first time ever that employees took home less than 50% of total national income. And the remaining slice of the pie, a full 28.4%, went to investors, most of whom don’t work for a living, and who pay only a 15% tax rate on their income.

9. Failure of the Chrysler bailout.

A couple of years ago, when the US government stepped in to bail out Chrysler, we were told that taxpayers had to pony up to save a US automaker, which would also save US jobs. In addition, this was supposed to be an investment for US taxpayers, who could earn a healthy profit on the deal.

Well, those were lies. The US Treasury sold the last of its Chrysler stock in July, and the total loss shouldered by US taxpayers was $1.3 billion. And Chrysler is no longer a US automaker; Fiat (an Italian company) stepped in to buy up most of its stock, announcing that it would lay off a large chunk of Chrysler’s workforce in the coming merger.

We must point out that, without the bailout, Chrysler would have been bought out by Fiat or another foreign automaker anyway, because of its valuable factories and equipment strategically located in one of the most important car-buying markets in the world. The main difference is that, without the bailout, Chrysler shareholders and bondholders would have taken that $1.3 billion loss, instead of US taxpayers. That’s what a bailout is: nationalization of corporate losses so shareholders and bondholders (often big banks and hedge funds) can be rescued from their stupid investment decisions. (This is what economists mean when they talk about “moral hazard”: the more we rescue investors, the stupider and riskier their investment decisions become.)

10. Where did the cash go?

With this year’s economic happy talk centering on record corporate earnings, we might well ask where all that cash is going. It’s not creating jobs, that’s for sure. In June, the New York Times printed an article entitled “Employers Spend On Equipment Rather Than Hiring.” Apparently, equipment and software costs are so cheap (most of it is manufactured abroad, where labor costs are lower) that corporations have been on a shopping spree. Buying newer equipment and software often means more efficient automation, which leads to more layoffs. In addition, while equipment and software costs have increased only 2.4% in the past couple of years, labor costs have increased 6.7%, mostly because of skyrocketing medical insurance premiums. As a consequence, hiring is up only 2% in the past two years, while equipment and software purchases are up 26%.

So that’s where all the money has been going: to buy goods made by other US companies, but not made in the US, where labor costs are still too high, in spite of the erosion of wages for US workers over the past 40 years.

The trend is obvious, if you gather the right information: more of the available resources and money is being seized by big corporations and investors, while less money is available for the rest of us–those of us who do the real work. It’s too bad that the mainstream US media can’t seem to get the message, much less spread the message.

Why Does Greece Matter?

If you read or watch the news much, you’ve seen news reports about problems with Greece’s economy and its debt. Greece can’t pay back its lenders, and somehow that’s a disaster for the world’s economy. But Greece is a small country, right? How can its problems possibly bring down the whole of Europe and threaten the US economy, too?

Welcome to a world of massively increased bank profits based on hugely magnified risk.

Greece’s debts are not terribly big; for example, French and German banks (its biggest lenders) hold about $90 billion in Greek debt. That’s less than the US spent on the war in Afghanistan last year. For a small country that’s a lot of money, but for the global financial system, it’s peanuts.

So why can’t European banks restructure the debt and give Greece more time to pay off its loans? Answer: healthy banks could do this, but European banks are not healthy. They lack the capital to cover the lost income from Greece’s regular debt payments. European banks are structured the same way US banks are: loans have been used as capital to support making further loans. In accounting terms, banks have treated their loans as tangible assets instead of the intangible assets that they truly are.

That’s common practice in the worldwide banking industry, and most of the negotiation over new reform rules for banks is about what banks should consider “capital” and how much capital banks should have on their books vs. how much money they can lend out. Regulators want banks to stop considering loans as capital, and they think banks should hold more cash as capital. The strictest regulators want banks to hold 14 percent of all their assets in cash (capital) to offset losses on loans. The banks are holding out for 7 percent or less, and are arguing about what should be considered “capital.”

Why are the banks fighting against a regulation that would help to stabilize the banking industry and avoid a situation where the collapse of a small country’s economy could threaten the health of their entire industry? Answer: profits.

The more loans a bank can make, the more income it generates. Requiring banks to sit on piles of cash and stop using loans as capital would severely cut down on the amount of loans banks can make, thereby reducing the banks’ income. Huge bank profits mean huge bonuses for bankers and big profits for shareholders. Financial industry stocks have driven much of the growth on Wall Street in the past 15 years.

Okay, so French and German banks would be in trouble. Big deal, right? Why should the US and other countries care about a few foreign banks? If they fold, then that means more business for our banks, right? Wrong. The global financial industry is interconnected. One bank failure can lead to massive problems for all other banks. Think back a few years ago to the collapse of Lehman Brothers, and you’ll get an idea of what I’m talking about. The collapse of one bank sent a shockwave through the worldwide banking sector. It led to the near demise of AIG and forced the merger of several large US banks in order to avoid another Lehman Brothers. The US Treasury and the Federal Reserve poured hundreds of billions of dollars into the banking system both in the US and abroad; in fact, the Federal Reserve loaned more money through its discount window to foreign banks than it did to US banks.

But haven’t things changed since then? Well, no. If anything, things are more precarious now. The big banks are even bigger, having swallowed up several of their large competitors and many mid-size banks, too (and taken on bigger debt loads in the process). The Dodd/Frank bill that was supposed to bring real reform to Wall Street contained only a vague restructuring of the regulatory agencies, while leaving the details of new reforms to those agencies to work out. Wall Street and the Republicans in Congress have fought against every change that the regulatory agencies have tried to make, and been extremely successful at stopping any meaningful reforms.

As a consequence, US exposure to Greece’s debt problems may be higher than anyone knows. The US market for derivatives is probably the largest in the world, although no one knows for sure because derivatives are still the unregulated Wild West of the financial world–traded privately, with no reporting to the SEC. In the year since Greece’s troubles first came to light, European banks have probably purchased huge numbers of credit default swaps to insure their investments in Greek debt. In other words, if Greece defaults, US banks may have to make payments on those credit default swaps to European banks. This is what brought AIG to the brink and, while Greece is not as big a problem as the AIG mess was, nobody really knows how big a mess it is, and that’s enough to scare everybody.

Credit default swaps are another risky way that banks boost their profits. But US banks aren’t the only ones with exposure to Greece. US money market funds buy a lot of short-term debt of other financial industry players, and foreign bank debt is particularly popular. Spooked by the 2008 collapse on Wall Street, many investors are keeping their savings in money market funds, which in turn have to hunt for enough short-term debt to buy to ensure a small income for investors. It’s not clear that these funds could sell off their European bank debt even if they wanted to. With record cash inflows and investors demanding safe and steady returns, and with an economic downturn that’s stifled public works projects around the world, where else could money market funds go to buy “safe” debt?

So the pressure on the Greek government is enormous. Twenty or thirty years ago it would have been routine for lenders to refinance or restructure a nation’s debt, as so many developing countries did during the 1980’s and 1990’s. But now the only solution is to force the Greek populace to absorb tax increases, job cuts, wage cuts, cuts in social services, and a sell-off of public assets. These austerity measures were used in the 1980’s and 1990’s, too, but never during a worldwide recession and under conditions that make it impossible for Greece to increase exports to help stimulate it moribund economy.

The global banking industry, because if its own greed, now has to squeeze blood from a stone. From here on, the choices are simple, but stark: Greece will either become the poorest nation in Europe, destabilized by riots and a crippling collapse of its economy, or the banks will have to restructure Greece’s debt. If the banks give in, then maybe the financial ripples will be small. But don’t bet on it, because Greece is not alone: Ireland, Iceland, Portugal, Spain, and even Italy are also in trouble because of their debts.

So things are not looking good for Greece. Unfortunately, the political and social turmoil there may get a whole lot worse. Political leaders may find out that allowing banks to operate without any oversight can lead to severe political repercussions, ones they never expected.

Improvements at Metro? We’ll See!

No more empty Metro buses running to the ‘burbs! Metro may end the 40/40/20 rule.

The King County Council’s transportation committee voted last week to change the way Metro allocates bus service. In the past, Metro used a 40/40/20 ratio to allocate new bus service: 40% would go to south county routes, 40% would go to east county routes, and the remaining 20% would go to routes inside the city of Seattle (even though the vast majority of bus riders live inside the city). The 40/40/20 rule was a compromise with the conservative members of the county council who didn’t want to fund new bus service unless their constituents in the suburbs and rural areas of the county got the majority of new routes.

But in the last two years, as Metro has struggled to provide funding for basic bus service in the face of an economic downturn, the 40/40/20 rule has proven to be a huge liability and a system-breaker. Last year Metro had to balance its budget by cutting 75,000 hours of service. The cuts were spread evenly across the system, based not on ridership or demand, but on the service hours on each route. The in-city routes, which had received only 20% of new service hours in the past decade, were forced to take 60% of all the cuts last year, leaving a lot of Seattleites and north-county riders standing at their stops while full buses passed them by.

Last year, an advisory group recommended that Metro transit do away with the 40/40/20 rule. The county council is finally on the way to making that a reality. The full council will vote on new allocation criteria within the next few weeks. Under the proposed new rules, service levels will be based on the number of households on each route, the number of jobs in a given area, the number of low-income households on each route (as lower income folks tend to use the bus more than wealthy folks do), and the location of natural “growth hubs” (for example, major employers, like Microsoft or the University of Washington, or major retail areas, like the Northgate Mall, Bellevue Square, or Southcenter.)

Under the new rules, Metro expects that only 1% of its bus service will shift to in-city routes, which doesn’t match the expectations of most in-city riders I’ve talked to. Nor is it a cure for Metro’s worst problems: its growing budget shortfalls and its worsening on-time record.

Crowded buses are one thing. Buses that run chronically late (when they bother to show up at all) is another. Metro’s on-time record for its in-city routes has become abysmal. There is no excuse for making passengers stand for more than half an hour in the downtown bus tunnel at 7 pm waiting for a bus to the University District; yet this is becoming a common occurrence—and these are the most frequently travelled routes in the entire system. It’s also common to stand in the bus tunnel for long periods of time (20 to 40 minutes) with no buses arriving at all, but plenty of empty light-rail trains at seven minute intervals.

Even worse are the drivers who are routinely early and who suffer no consequences for it. I recently flagged down a #67 bus that was speeding by a stop a full ten minutes early. The driver shrugged his shoulders and said: “those times are just estimates.” Well, no. They’re not, at least not for the rider. We expect the bus to be on-time when we’re standing outside in the rain in 40-degree weather. Ten minutes late is okay, but ten minutes early? Never!

The main cause of Metro’s on-time problem is simple: Metro recently shortened drivers’ layover times at the end of each route. Now drivers have every incentive to zoom through their routes early; otherwise, they barely get a bathroom break before they have to begin their next route. This is a prescription for a chronic on-time problem. Extending driver’s break times, of course, would cost money which Metro doesn’t have.

The King County Council is currently looking at a proposal for a $20 car tab fee to fund Metro transit. But for the proposal to pass the council, it would need a supermajority of 6 out of 9 council members to vote for it. Four of the most conservative council members have already said they’ll vote it down. Alternatively, the council could vote with a simple majority (5 to 4) to put the tab fee on the ballot for voters to decide in November. They should do this as soon as possible, so transit advocates have time to gear up a campaign in support of the ballot measure.

Without that funding, Metro will have to cut 200,000 service hours next year in order to plug the hole in its budget. The bus system is already in trouble; a cut of 200,000 hours could cause one of the nation’s largest and most reliable transit systems to collapse.

2010 Media Follies!

Welcome to this 15th annual selection of a few of the year’s most over-hyped and underreported local stories. 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.

2010′s Most Over-Hyped Stories: Local

Dino Rossi. In a year when most Republicans pretty much had to be caught multiple times copulating with sheep in order to lose their elections, Rossi trailed in the polls against incumbent Sen. Patty Murray from the day he announced his challenge. Despite the big Republican wave, and despite receiving huge sums of money (from the US Chamber of Commerce, Wall Street, and the various other national corporate interests Rossi promised to faithfully serve), Rossi did no better in 2010 than he did against Gov. Christine Gregoire in 2008. Yet despite this–and despite Murray’s long history of beating better-funded Republican challengers–for endless months local media painted this race as a tossup. It never was.

Mike McGinn is evil incarnate. Local media–particularly the reactionaries running the Seattle Times–can’t quite seem to wrap their collective minds around the idea that someone who’s not part of Seattle’s Old Boys & Gals Network might have legitimate ideas and concerns. Well, to be fair, they’re not really trying to wrap their minds around that–they’re too busy trying to slag McGinn and promote Tim Burgess to replace him in 2013.

In April, local TV and newspapers gave enormous attention to local Tea Party rallies on Tax Day that drew a few hundred people at most. Two weeks later, a pro-immigrant rally in Seattle that drew at least ten times as many people was roundly ignored.

Plus, as usual, car crashes, fires, violent (and potentially violent) crimes, big (and not-so-big) weather “events,” heartwarming stories of photogenic, plucky survivors (preferably kids) overcoming adversity or being reunited with pets, and every other staple of Chuckle-Buddy News.

2010′s Most Over-Hyped Stories: National & International

The End of the Iraq War: Except for, you know, all the US troops still shooting and getting shot at. And the suicide bombers. And the civil war. And the newest wave of Iraqi refugees: exiles who tried to return, only to find the economy collapsed, government services nonexistent, tribalism rampant, and the violence often as bad as ever.

Iran Nukes: The International Atomic Energy Agency (the UN’s nuclear enforcement arm) has no evidence an Iranian nuclear weapons program even exists. If it does exist, it’s still years away from anything operational. Iran, a signatory to the Nuclear Non-Proliferation Treaty (NPT), is not in violation of the treaty. (The US is, on numerous fronts.) And Iran has not attacked any other country in hundreds of years (The US, um, has.) Yeah, the Iranian government sucks. That’s no excuse for exaggeration and lies.

“Don’t touch my junk!” Better yet, don’t tap my phones, read my e-mail, or imprison me without trial or due process.

Anything concerning Glenn Beck. The fact that Beck’s pronouncements, which generally range from error-ridden to lunatic, are taken seriously by a large and credulous audience, is as damning an indictment of American ignorance as we’ve seen in generations.

Anything concerning Sarah Palin. Except for that.

Lindsay Lohan is in rehab again this week. Which reminds me; I’ve been meaning to ask. Who is Lindsay Lohan? And why does anyone care?

2010′s Most Underreported Stories: Local

The Seattle City Council and the Mayor passed up a well-qualified African American candidate for Chief of Police and opted for business-as-usual, in spite of a host of complaints about police brutality against minority suspects. And what happened? A subsequent rash of ugly nationally publicized incidents involving non-white victims of SPD abuse–most notoriously, the murder of Native American woodcarver John T. Williams–and predictably milquetoast responses from SPD and city leadership, who apparently don’t see the deep distrust such incidents foster as any serious kind of problem. Nothing a press release and obligatory promise of internal investigations (while the officers involved get, at worst, a nice paid vacation for their troubles) can’t cure, right?

The downtown traffic tunnel/viaduct replacement is already over budget. By making a quiet gift of half the reserve money to the contractor before a bid was even submitted, the state officially put the project over budget, but the local media decided to ignore this. Local media has also chosen to ignore the copious signs from the state legislature that Mayor McGinn’s concerns about Seattle taxpayers beings stuck with the cost overruns are well-grounded. Instead, we’re supposed to think McGinn is being paranoid, because Gov. Christine Gregoire has promised that she won’t let that happen–even though Gregoire will be long out of office before the bill for the overruns comes due.

The FBI investigation of the Port of Seattle’s contracting practices regarding the third runway at SeaTac died a quiet death with nearly no press coverage. With no one looking, it was easy for the feds to shelve the case, in spite of evidence of severe mismanagement and fraud. And we’re still waiting for the state to audit the rest of the Port’s corrupt, sleazy dealings.

The Regional Transit Taskforce recommendation to change the way bus service is allocated in King County got no airplay here. Every bus rider knows that the city needs more service and the outlying county less, but Metro is still relying on a formula that sends half-empty buses out to Issaquah and Auburn while in-city routes are standing-room-only.

A judge’s ruling that the Washington state law banning felons from voting violates the 1965 Voting Rights Act should have set off a concerted effort to extend voting rights to the incarcerated population of this state. We (and they) are still waiting.

It’s no surprise that the state has a huge budget deficit; nearly every state does. But all media coverage of the state’s budget struggles focuses on the “tough cuts” politicians have to make in wake of the voters’ defeat of tax increases in November. No one has even hinted at the possibility of closing any tax loopholes, particularly the $12 billion in B&O tax breaks given to businesses in this state every year.

The worst of these: Even as a special April legislative session wrestled with the gaping budget deficit, Olympia quietly passed a huge new tax break for Microsoft, redefining the state royalty tax in a way that not only saves Microsoft $100 million a year going forward, but retroactively absolved the company of up to $1.2 billion in back taxes, penalties, and interest from a scam involving claiming its software was licensed in the state of Nevada (which has no such tax), even though it was made and sold here. And in December, Gov. Gregoire effectively buried the issue by naming a former Microsoft executive to head the state Department of Revenue.

The corporate corruption of the state initiative process: All but one of the statewide initiatives that made the ballot in 2010 were put there by corporate interests–and corporate interests were instrumental in killing the lone exception (I-1098, the high earners’ income tax). While the corporate-funded initiatives met with mixed success, the real lesson was that a form of lawmaking that was supposed to be the avenue for ordinary citizens when we are shut out by special interests and corrupted lawmakers has itself been hijacked by those same interests. It’s much, much more difficult now for grassroots activists to qualify a measure for the ballot than it is for a big transnational corporation or trade association.

2010′s Most Underreported Stories: National & International

Meanwhile, at the national level, the impact of the January US Supreme Court Citizens United decision was enormous, swinging dozens of federal and and countless state and local elections in favor of whichever side (usually Republican) stood most to benefit from the newly legal corporate largesse. Corporate money swamped the 2010 election, yet pundits insisted on treating the election results as a message from voters–not as brainwashed voters repeating the paid messages they were bombarded with ad nauseam for months.

We’re used to thinking of global warming and global climate change as a slow-moving apocalypse, one that our children or their children will experience. But a myriad of data this year has shown that the drastic effects of climate change are coming sooner than we realized and are already well under way. From massive snow storms in Europe and the East Coast of North America to a drastic drop in phytoplankton in the world’s oceans, we’re seeing the results of our uncontrolled experiment with the Earth’s climate right now. And the utter failure of the government of the country that is the world’s worst per capita greenhouse gas emitter (namely, the Obama administration) to either pursue its own initiatives or help international agreements move forward is, simply put, a crime against humanity.

So many different aspects of the BP oil spill in the Gulf of Mexico went unexamined or unreported that it’s difficult to choose just one. At the top of the list is the fact that these type of spills happen frequently elsewhere in the world (Nigeria, for example) with no attention from the Western press–although Western newspapers are quick to condemn Nigerian activists for attacking oil platforms. A close second is the scientific fact that oil doesn’t just disappear when you spray dispersants on it: it sinks to the bottom of the ocean floor, where many marine creatures live. Just because we can’t see the devastation doesn’t mean it didn’t happen. And, sadly, no one is even attempting to study the long-term impact of the largest deepwater oil spill in US history.

The FBI is using your tax dollars to groom and train domestic terrorists, and then help them realize their half-formed dreams. In a year in which every single one of the nation’s “intelligence” agencies missed catching Faisal Shahzud (the Times Square bomber) until after he tried to set off his defective bomb, it was dispiriting to watch the FBI run major sting operations against troubled teenagers and homeless twenty-somethings. In those sting operations, the FBI brought to life troubled individuals’ fantasies that never, ever would have otherwise posed a threat to anyone.

The Return of the Know-Nothing Party. The main significance of the 2010 rise of the Tea Party and the continuing popularity of figures like Beck and Palin is that facts–scientific or otherwise–not only no longer matter to a large swath of American political culture, but are openly ridiculed as “elitist.” In such an environment, it’s hard to imagine effective responses to any of the myriad urgent crises facing the US or the world. One envisions dinosaurs looking at the large meteor hurtling to Earth, but not being concerned, because Tyrannosaurus Rush told them it was just another harmless chunk of green cheese. If not a damned plot by those irritating new “mammals.”

The nation’s new defense policy, announced with fanfare as a major change from the Bush administration’s Doctrine of Overwhelming Force, is in fact a continuation of American Empire business-as-usual. Obama & Co. have recycled all of the Bush era policies and given them a new, touchy-feely veneer. We call it the Doctrine of Overwhelming Denial.

The national budget deficit has nothing to do with Social Security or Medicare costs. The hard truth is that Bush era tax breaks for the rich plus two extremely expensive wars in Afghanistan and Iraq have bankrupted the country. Good luck trying to find those facts in any major newspaper.

Did we say two wars? The US is now involved in a third major war, in Pakistan–a war that’s as much against the Pakistani military (which supports the Haqqani network of the Taliban) as it is against the Pakistani tribes that support the Taliban. And, of course, to keep the war going indefinitely, we’re arming and funding both sides.

Three wars? What about the fourth? Yes, the US got involved in a fourth major conflict this year: the civil war in Yemen, which has the potential to be as insoluble as the war in Afghanistan. And we’re still regularly bombing various Islamist factions in Somalia, too–or, at least, the hapless civilians who happen to be in whichever neighborhoods we’ve mistakenly targeted.

After nearly a full year without a functioning government, Iraq is on track to become a one-party state. The winners of this year’s election are still waiting to take office–any office of any kind. Meanwhile, the loser of the election has just crowned himself king for a second term. So much for the Bush-era mandate to “bring democracy to the Middle East.” And so much for Obama assurances that Iraq is no longer at war.

Shamefully unreported in the US, even though it took place in New York, is the United Nations report condemning the use of unmanned aerial drones as a war crime. The US continues to be the main deployer of unmanned drones (in Afghanistan, Pakistan, and Yemen, and probably many other places we don’t know about), causing massive numbers of civilian casualties wherever they drop their bombs. Not so long ago, the US government accused Saddam Hussein of a war crime by building an unmanned drone that looked like a rusty bicycle with wings; now we use sleek, Boeing-made aerial drones on a daily basis to murderous effect.

Anti-globalization protests continue, in spite of the lack of media coverage. And the absence of the major media has allowed police departments and government military units to beat peaceful protestors with impunity at every meeting of the G-20. Meanwhile, the slow collapse of the global financial system is proving that anti-globalization protestors have been right all along.

Finally, an annual installment: Dick Cheney is Not in Jail: Still. And it’s not like he–and most of his closest friends and colleagues, Republicans and Democrats alike, at the highest levels of corporate and political America–haven’t tried. –Geov Parrish & Maria Tomchick

Top 10 Economic Stories of 2010

1) In 2008 and 2009, the Federal Reserve functioned as the central bank for the entire world. Documents pried from the Federal Reserve in November show that dozens of foreign banks and an astonishing number of foreign governments lined up to get handouts from the Fed, who kept its client list a deeply protected secret. The recipients included most of Europe’s major banks: Barclay’s Bank, Bank of Scotland, RBS, Societe Generale, Dresdner Bank, Bayerische Landesbank, and Dexia. Also on the list are the central banks of Australia, Denmark, Mexico, Norway, Switzerland, Sweden, South Korea, Britain, and Japan.

If it had been publicly known at the time what the true, global extent of the crisis really was, the world’s economy would have completely collapsed. This is the biggest story of the year, perhaps of the entire past decade, but it’s received zero attention from the US press.

2) The Fed’s current policy of “quantitative easing” (QE I and QE II) are an under-the-table bailout of US corporations. By buying up medium- and long-term treasury bonds, the Fed is keeping interest rates near zero so US corporations can refinance a record amount of junk bonds that were set to come due in 2012, 2013, and 2014 (a total of $700 billion). Some corporations have been able to refinance their debt by issuing 50- or 100-year bonds. That’s insane. Most companies don’t stay in business for 10 years, much less 100 years.

3) The IMF rises from the dead…just in time to impose austerity measures on Greece, Ireland, and a host of other European Union countries. Of course, the one country that’s most responsible for the global economic crisis—the United States—doesn’t fall under the IMF’s purview. Instead, we get to do the opposite: extend the Bush tax cuts, extend the war in Afghanistan to at least 2014, and run up a record government deficit.

4) The financial industry is too big. Way too big. In the mid 1990’s it accounted for about 17% of the gross domestic product of the US. Now it accounts for over 60%. How did that change happen? Well, blame it on the worst Bush era tax cut ever devised: the 15% capital gains and dividend tax rate. When you give a tax cut for dividends and capital gains, you’re subsidizing the investment industry, which is now mostly composed of speculation: money in search of profits taxed at only 15%. So we get huge amounts of money invested in non-productive areas of the economy: derivatives, currency trading, speculation in commodities markets, hedge funds, and stupid venture capital investments that will never make a profit or provide a necessary service (i.e., Pets.com on steroids). Too big to fail? Yes, but it’s also too big to even comprehend.

5) More banks failed in 2010 than in 2009. The FDIC told us that 2009 would be the worst year of the crisis, but this year small and mid-sized banks continued to fail in record numbers. In 2008 the FDIC closed 25 banks; in 2009 the total was 140. As of November, the total for 2010 was above 150 and counting. Clearly, we still haven’t seen the worst of the crisis.

6) Meanwhile, the biggest banks are still misbehaving. From refusing to modify mortgage loans to using robo-signers and filing defective paperwork with bankruptcy courts, to sending a huge posse of lobbyists to Washington DC to gut the financial reform bill, the biggest banks have been operating as if the financial crisis never happened. And they’ve been racking up record profits and paying out enormous bonuses to their top management. Guess who’s really running this country?

7) Low-interest loans + bad banks = new perfect storm on the horizon. I won’t say more, or it will depress you.

8) Flash crashes are the wave of the future in the stock markets. (Yes, you read that right. “Stock markets,” plural. There are more than a dozen in the US alone.) If you don’t know what a “flash crash” is, then you should sell your stock right now and stick your money in your mattress, because you don’t know enough about investing to keep from losing your shirt. If computers have made it possible for everyone, including your grandma, to play the stock market, they’ve also made it possible for a few big sharks to crash the markets within milliseconds. And nothing’s being done to stop them.

9) Microcredit banks, which were heralded as the saviors of the poor in developing nations, are headed for a major collapse. It turns out that the nonprofits that extended small loans to poor people in developing nations from India to Sub-Saharan Africa have been operating just like the big US banks that caused the 2008 economic collapse. They saw a way to make a profit off the poor, and they went for it. Guess who’s going to pay for it all in the end?

10) It’s the end of 2010 and nobody’s been prosecuted for the mortgage meltdown, banking crisis, or the economic collapse. No one’s even been charged with a crime. Obama’s Financial Crisis Inquiry Commission has turned out to be toothless, powerless, and invisible.

If George Orwell could have seen the real dimensions of our Brave New World, he wouldn’t have been worried about governmental control. In fact, maybe we ought to give Barack Obama a break: there’s only so much you can get away with before your boss gets really pissed off.

The question is: who’s the real boss? Is it Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs? Or is it you and me?

Maybe it’s time to stand up and show ‘em who’s boss.

Ireland: Slammed by the Global Economy

Ireland has been persuaded by the European Union to accept a $114 billion bailout to save the Irish government from defaulting on its government debt. Of course the gift comes with strings attached: an austerity program that includes steep tax increases and major cutbacks in social service programs.

Ireland didn’t have to accept the bailout; it could have gone a different route. It could have defaulted on a portion of its debt, thereby forcing investors to take the loss, instead of imposing hardships on its poor, disabled, and elderly citizens. But just the whiff of a default, just the barest hint that Ireland was considering default as a possible alternative, sent the interest rate on Ireland’s bonds shooting up over 8%, making a bailout necessary immediately.

Therein lies a lesson on the pitfalls of an international financial system. The Bush Sr./Clinton/Bush Jr. administrations all trumpeted the beauty of the World Trade Organization, the “liberalization” of the world economy, the dissolution of trade barriers and the deregulation of the financial industry worldwide. A “global economy” was supposed to make us all richer. In fact, it’s made a few financial industry executives and securities traders astoundingly wealthy, while the rest of us are struggling to get by on less than ever, many of us buried in piles of debt.

Thirty years ago, Ireland’s bonds would have been held by its national banks and its own public, and default might have been a workable possibility. Investors would be forced to take the brunt of the loss (which is the way the system is supposed to work) and they wouldn’t be able to easily move their money to another country at the push of a button. Today, Ireland’s bonds are sold to investors all over the world, from Japan to the U.S. to Brazil, sold to pension funds, to hedge funds, to major international banks—all of whom are quick to dump a security when it looks a little risky. The speed at which these rats desert a sinking ship can precipitate financial disaster within hours or even minutes.

And so, we get emergency bailouts. It’s quick and it’s easy to dump the problem on the taxpayers; but once you go down the road of bailouts, it’s nearly impossible to turn back. The bailout of Ireland comes hot on the heels of Greece’s bailout. Now Portugal is teetering on the brink, next in line for an IMF-style bailout/austerity package. Unfortunately, that won’t be the end: Spain is also suffering under an investor retreat, and Spain’s economy is twice the size of Greece’s, Ireland’s, and Portugal’s put together.

The European Economic Union could eventually collapse under a financial version of the domino effect. Yet investors and big banks are protected at all costs. Without regulations, restrictions, boundaries, and borders, they can always take their money and go elsewhere.

Maybe what we need is a new set of laws to regulate the flow of money in the global economy. Forget about migrant workers: migrant money is what’s hurting us the most.

Shoot-out at the Wall Street Corral

Mini flash crashes are proving that the US stock markets are an ungovernable mess.

On May 6, 2010, the US stock markets went into a wild plummet. Over the course of a few seconds, the stock price of several Fortune 500 companies dropped to only pennies a share while the stock of relatively unknown companies shot up to nearly a thousand dollars per share. After several minutes of chaos, human intervention finally stopped all trading on the markets. When trading resumed, prices went back to normal.

What happened? Market analysts dubbed it a “flash crash,” and the SEC spent several months studying the trades that led up to the meltdown to try and figure out what caused it. As a result, most of the major stock markets in the US (there are over a dozen now) instituted automatic circuit breakers to stop all trading in any single stock that experiences a steep and unexplained drop in price. The heads of the New York Stock Exchange and the NASDAQ reassured investors that the new circuit breakers would work and prevent another flash crash from ever happening.

Last week, the New York Times reported that, since May 6, there have been at least a dozen more mini flash crashes that have triggered the market circuit breakers. The mini crashes have involved the stock of relatively unknown companies like Progress Energy (an old-style, stable, profitable utility company) in addition to well-known mega-corporations like Citigroup, Washington Post Co., and Nucor.

A dozen mini crashes since early May means that these events are happening at the pace of at least two per month, which puts the lie to any claim that a major flash crash over the entire system couldn’t happen again. Eventually it will, if nothing is done to address the causes of market chaos.

Critics point the finger at three main causes: 1) electronic trading, 2) high frequency traders, and 3) poorly written computer algorithms. Electronic trading means that anyone, anywhere in the world can have access to the market and, with the use of a computer can set up an automatic trade. Trades occur at the speed of light, taking only microseconds to be executed. High frequency traders take advantage of the parameters of electronic trading by making a profit off the pennies or fractions of a cent that they can make on millions of lightning fast trades in any given day. Most high frequency traders enter the market every morning with their cash and completely exit the market at the end of the day owning no stock, but having amassed a tidy cash profit by gaming the system. Most of them use computer algorithms to help them buy and sell multiple stocks quickly. Poorly written computer algorithms like the one that triggered the flash crash on May 6 can lead to a crash in a single stock price, which can be magnified by the actions of other high frequency trades.

On May 6, a trader entered a sale of a huge quantity of a single security tied to the S&P 500, but didn’t specify a minimum sale price. This made the price of the security plummet to near zero as market computers continued to try and sell the stock long after all legitimate buyers had made their purchases. Other investors, seeing a security tied to the value of the S&P 500 lose all its value, promptly panicked and sold all their holdings, which sent other stocks into a tailspin. To magnify the problem, high frequency traders, which make up the majority of trading on the markets on any given day, froze all of their trading. By withdrawing from the markets, they removed massive amounts of market liquidity; and with few buyers and no cash in the markets, the entire system crashed.

Clearly, as the subsequent mini flash crashes show, the problems still exist. The SEC has made no rules to restrict electronic trading or high frequency traders by, for example, requiring them to hold each security for a minimum amount of time. No rules exist to govern computer algorithms, either, although the SEC could and should require all traders to enter certain basic information for each trade, including minimum sales and maximum purchase prices. As the New York Times pointed out by quoting the head of the Laboratory for Financial Engineering at MIT: “The US equity markets have become the Wild, Wild West.” And the town sheriff is hiding in the saloon.

Millions of investors have pulled back or pulled out of the market since the events of May 6, and billions of dollars have been withdrawn from US mutual funds, in spite of the current stock market upturn. This begs the question: is the current stock market upturn sustainable or is it built on wild speculation?

Meanwhile, the Federal Reserve’s policy to stimulate the economy is doomed to fail. It’s based on the assumption that if the Fed lowers long-term interest rates to boost stock prices, Americans will feel wealthy enough to spend money and the increased consumer spending will stimulate the economy. But, since the economic downturn started in 2008, fewer Americans hold stock and, if they do, flash crashes have done little to reassure them that their investments are safe, stable, or reliable.

The G-20 Currency Skirmish

President Obama spent all week in Asia, posing with heads of state prior to the G-20 economic summit in Seoul, South Korea. It was all in vain.

Both Obama and Treasury Secretary Timothy Geithner were rebuffed at the summit. They came to the table arguing that the group needed to agree on ways to address trade imbalances between nations. In other words, they wanted China to raise the value of its currency.

A trade imbalance occurs when one nation’s population buys more goods from abroad than it can sell on the world market. This creates a national trade deficit, which is very similar to a person charging goods on a credit card and not paying it off every month. If the trade imbalance accumulates for too long and becomes too high, it can negatively affect the nation’s economy. No population can consume more than it produces without eventually suffering a collapse, and the US trade deficit has hovered at record highs for some time now.

China, on the other hand, has a record trade surplus. While China has a large population, most of its citizens don’t make enough money to afford expensive imports. In addition, the Chinese government holds the value of the Chinese currency tied to a peg—in other words, the government determines the value of the renminbi by averaging the value of a basket of other nations’ currencies and arbitrarily deciding how many renminbi can buy a share of that basket.

Since World War II, the US government has worked assiduously to force smaller nations to unpeg their currencies (i.e., allow them to “float”) so that the value of most currencies in the world now rise and fall according to the markets (and market speculation, but that’s another issue.) As a consequence, those nations whose currencies are strong (have a higher value) can buy more imported goods, while those countries whose currencies are weak (have a lower value) can’t afford many imports, but can sell a lot of their manufactured goods on the world market because their goods are cheap to buy. This gives developing nations like China an incentive to artificially keep the value of their currencies low—their populations don’t have much buying power, but their industries make a lot of money selling cheap goods to the rest of the world…especially to the US.

Obama and Geithner were articulating a long-term US goal that’s been on the national agenda since the Clinton era: China has a lot of cash to spend, and the US can no longer be the consumer of last resort for the entire world.

At the G-20 meeting, however, the Americans were literally laughed off the stage. The Federal Reserve’s recent announcement that it would print money in an effort to stimulate the economy has the whole rest of the world aghast. By increasing the supply of US dollars, the Fed is weakening the value of the dollar and making US exports cheaper. The rest of the world views this as outright currency manipulation very similar to what China has been doing for decades.

Recently, however, China has been slowly allowing the value of its currency to rise in an effort to control runaway growth and a worrisome asset bubble. It may not be happening fast enough for the US government, but the renminbi is already increasing in value. China doesn’t want its economy to crash, as it would if they were to suddenly let the renminbi float; instead, they’re bringing the plane in for a soft landing.

That’s a lesson we could learn from them: how government regulation can smooth over both the peaks and valleys in a national economy. In our free-for-all economy, we’ve eliminated regulations so the peaks can grow extremely high, but the ensuing plummet can be precipitous and long-lasting.

The Real Reasons the Republicans Won

After reading a lot of post-election articles, I’m stunned that most analysts have completely missed the main reasons why people voted the way they did. Most Americans are not obsessed with politics; they don’t dig deeply into the candidates’ backgrounds, and often don’t take the time to read and understand the candidates’ positions on the issues (if indeed the candidates even have any—and many don’t).

There were three important dynamics involved the current election:

1) Anti-incumbent fervor.

This election was not a massive victory for the Tea Party candidates, or even for the Republican Party, as exit polls showed. Many voters supported Republican candidates, but when asked if they supported the platforms of the Republican Party, they disagreed with most of its tenets. For example, a majority of Americans are against making changes to Social Security or cuts to Medicare—but both those issues will be major components of any Republican plan to balance the budget. Likewise, most Americans think the Bush era tax cuts shouldn’t be extended for people making more than $250,000, although the Republicans want to extend them for everyone, the rich included.

By and large, the single sentiment that most people expressed was a yearning either for less intrusive government or a desire to “throw the bums out”—possibly reflecting a desire to make politicians understand our high unemployment rate through firsthand experience.

2) Elderly voters.

Midterm elections are usually dominated by older voters (folks who are over 50 and are nearing or in retirement). What exactly is the current situation for older Americans in this lingering recession?

Well, for one thing, the value of their homes has plummeted by as much as 50% in some parts of the county, and it’s not recovering anytime soon. It can be disheartening, to say the least, to work hard most of your life, pay off your home, and then find out it’s worth a lot less than you put into it, especially if you were counting on selling it to help pay for your retirement.

Secondly, most elderly Americans live on a fixed income: Social Security plus whatever savings they’ve accumulated, which is usually invested in very safe, fixed income investments (i.e., cash accounts or bonds). But right now, the policy of The U.S. Treasury and The Federal Reserve is to keep interest rates at or near zero, which means elderly Americans are making no money on their savings during a time when they have to spend a portion of it to pay for living expenses. As a consequence, they’re seeing their retirement funds dwindle at an accelerating rate, and many are having to go back to work or delay their retirement to make ends meet at a time when there’s already a shortage of jobs. And the U.S. government is doing nothing to create jobs.

And, finally, even though inflation is near zero, healthcare costs are still increasing by double digits every year, while the new healthcare reform legislation won’t kick in for a while yet. Elderly and disabled Americans take the brunt of our broken healthcare system, and that’s played a major role in how they voted in this election.

3) Rural vs. urban.

One useful graphic I saw on TV this week was a map of the United States with the areas of the nation that elected Republicans candidates in red and the areas that elected Democrats in blue. The entire center of the country was red, with a thin blue edging on the east and west coasts and a few isolated blue dots corresponding to major Midwest cities. Nothing so clearly shows the rural vs. urban divide in the U.S. electorate.

Why do rural folks vote overwhelmingly for the party that promises a smaller government? It’s because of an enduring perception that government takes more away from them than it gives back—a perception aggravated by the biannual act of paying property taxes. A higher percentage of rural people tend to own land, and own more of it, than city dwellers (more than 50% of urban dwellers in the U.S. are renters). When rural folks open their property tax bills, it sets off strong anti-government feelings.

Yet studies have shown that rural communities benefit more from state and national government services than their local tax base could afford. In short, taxes paid by city dwellers helps to subsidize services provided to the surrounding rural areas: roads, schools, fire departments, police, hospitals and health clinics—you name it. Few of these things would exist in rural areas without state and national government funding.

In addition, many rural people take for granted the federal “entitlement programs” that the Republicans would like to dismantle: Social Security, Medicare, Medicaid, Unemployment, Disability, and Welfare. In fact, the term “entitlement program” is meant to make us think that people who receive money from these programs don’t really deserve what they’re getting. But they do, and the fact that these programs are or will be available to all of us if we need them is a form of insurance that underpins a humane, modern, and civilized society.

These programs should be called “the safety net,” because that’s what they are. Yet those of us who are not receiving any direct cash benefit from the safety net often have the suspicion that someone else is, and is taking unfair advantage of it. Why can’t those people just work hard like we do, who are also struggling to get by? This is where rural isolation comes into play. Urban dwellers routinely encounter the poor, disabled, and disadvantaged and can’t deny the need for programs to care for them.

In rural areas, the attitude is often: “give me my guns, my family, and my land, and the rest of you can go to hell!” But a nation—and its economy—can’t survive with that attitude.

Hopefully, the next two years of gridlock in Washington DC will be eye-opening for the American public. I’m hopeful that people will begin to talk more about the issues and less about personalities, and make more effort to become educated about the issues that face us as a nation. As a first step, we should acknowledge the problems I’ve listed above, and try to figure out a way to address them.

W’s Election Avoidance Syndrome

In his state of the union address, George W. Bush pledged to “finish the historic work of democracy in Afghanistan and Iraq.” That’s a promise which differs markedly from the reality on the ground.

This past week, hundreds of thousands of Iraqis marched in the streets of Baghdad, Basra, Karbala, Najaf, and other cities to demand democracy in Iraq. Their main target: a proposal by the Bush administration to select a new interim legislature to take over from the US military in July. “Selections” instead of “elections” are what US viceroy Paul Bremer is touting, a process whereby local caucuses–most of them selected by officials put in place by the US military on the recommendations of Iraqi exile groups–will select the delegates for the new interim legislature.

Iraqis object to this process for many reasons, and not only because it’s less democratic than a popular election. They’ve had nine months to experience life under US occupation and a corrupt and incompetent US-appointed Governing Council. During that time, they’ve experienced food shortages, blackouts, lack of fuel to heat their homes and cook their food, long lines at the gas pump, high unemployment, even higher inflation, an unending string of car bombings punctuated by nighttime searches of their homes by US troops, and the indignity of having to deal with a government staffed by returning exiles who have little or no knowledge of life in Iraq. One can forgive them for wanting change.

The demonstrations were an effort to put pressure on the US and the UN, whose representatives, Paul Bremer and UN Secretary General Kofi Annan, met in New York this week to discuss involving the United Nations, not in organizing elections (its specialty), but in persuading the Iraqi people that a selection process is in their best interest. Kofi Annan is, understandably, somewhat less than enthusiastic for this prospect.

For one thing, in spite of Bush administration statements to the contrary, elections are a real and viable possibility in Iraq. All of the Bush administration objections to elections can be easily addressed and dismissed. There are three stated reasons for depriving Iraqis of the right to vote for their own leaders: 1) the security situation won’t allow free and fair elections, 2) there is no census or voter registration roll, and 3) a hasty election will produce “bad” results.

After weeks of assuring the US press and public that the security situation in Iraq is improving after the capture of Saddam Hussein, it’s a little suspicious to argue now that the security situation is so bad that elections can’t be held. The US government has historically made few or no objections to elections held under the cloud of violence. One example would be the East Timorese independence referendum, which saw outrageous acts of violence perpetrated by the Indonesian military and its proxies in East Timor–and the election results (independence for East Timor) were not invalidated but upheld by the United Nations and the United States. A similar example would be the current violence in Afghanistan, where the Taliban has regained control of portions of southeastern provinces and driven out UN voter registration workers and fighting between rival warlords has brought a halt to voter registration in other areas of the countryside. But the US has not called a halt to the election process in Afghanistan or provided additional troops for security, in spite of warnings by the UN’s representative Lakhdar Brahimi that a free and fair election is in jeopardy.

One could go on to argue that announcing democratic elections in Iraq within the coming year might actually improve the security situation by giving Iraqis something to hope for, for a change. It would have the additional benefit of undermining the Iraqi guerrilla movement, especially those elements fighting for Iraqi self-determination. Hold an election and many of these folks will put down their guns.

As for voter rolls and census information, two detailed and accurate databases exist of Iraqis who received food rations under the UN’s Oil For Food Program. These databases were updated on a monthly basis, providing more current information than even the census data used in the United States to draw up legislative districts. There are, of course, two groups of people not represented on these databases: political enemies of Saddam Hussein who were dropped off the roles as a form of punishment, and Iraqi exiles. Those two groups, however, are relatively small and can be registered through a voter registration program–one that has a much better chance of succeeding than the one that’s limping along in Afghanistan.

The final objection of the Bush administration–that “hasty” elections will bring a “bad” result–are based on fears that Shiite Muslim fundamentalists will take power in Iraq and ally themselves with the Shiite fundamentalist rulers of neighboring Iran. Shiites make up about 60% of the Iraqi population, and their main community organizations center around the Hawza, a religious foundation that provides everything from security for local Shiite communities to funding for education and social welfare projects throughout southern Iraq. The Hawza is a primarily religious group run by Shiite clerics, and the very thought that the Hawza may become politicized and take control of Iraqi government gives Paul Bremer and George W. Bush night sweats.

Yet the leader of the Hawza, Grand Ayatollah ali-Sistani, has remained ardently anti-political throughout his whole life, preferring to take a stance that opposes the rule of clerics in Iran. He has refused to meet with Paul Bremer or any other US citizen, speaking instead with members of the Iraqi Governing Council and limiting his “political” pronouncements to a general call for democracy and elections in Iraq. He has, numerous times, refused to condone violence or any Shiite uprising against the US military occupation–and there have been many younger and more radical Shiite clerics who have urged him to do so.

Ali-Sistani has, in short, proven himself to be a moderate element in Iraq, the very kind of group that the Bush administration supposedly wants to encourage. Yet Paul Bremer continues to promote the selection process and scorn elections, while the Bush administration remains adamant that the new interim legislature must be in place by June 30th. Ali-Sistani has commented that this arbitrary deadline seems to have been set by George Bush’s reelection campaign committee in order to provide a political victory for Bush going into the November elections, and he’s correct.

So it comes down to this: what the Bush administration fears is that an election will bring to power a legislature that truly represents the people of Iraq and is responsive to their needs and desires. Such a body would foreclose attempts by the US, the World Bank, the IMF, and developed nations–including Japan, Russia, Germany, and France–to privatize Iraq’s state industries and extract its resources for the benefit of foreign corporations. The “bad” result is a democratic one, and the Bush administration will resist democracy in any way it can.

Of course, elections remain the best way for the US to scramble out of the quagmire in Iraq, but George W. Bush Inc. is intent on digging us in deeper.

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