Category: Uncategorized (Page 2 of 25)

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.

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.

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