Saturday, December 31, 2011

An Uncertain Future

Ilargi at Automatic Earth seems to have a new boost of energy toward the end of this year and has produced a contemplative essay that acknowledges all our fears as we move forward into an uncertain new year. The question is where do we go from here?

It's the sort of question you would expect a child to ask in one of those Grimm Brothers fairy tales, a child that walks so far into the woods that it gets lost, and takes another wrong turn and then another, and the forest feels denser and darker all the time, and it doesn't even run around in circles to return to its trail of breadcrumbs, or it doesn't know, because they've all been eaten by the animals. And then night falls slowly.

That's how I increasingly picture our financial situation. We march forward full of faith and feigned innocence into uncharted territory, telling ourselves we will and must find a way out of this mess, boosted by the high priests of our economic belief systems, the media, economists and politicians.

The children in the fairy tales always escape from the dark in the end, but we're not those children. Getting lost in the woods because you ignore the warnings is in general not an act of bravery, but one of stupidity.

Characters in fairy tales serve to teach their young readers and listeners a lesson about the morals of their societies; these characters don’t perish, they get saved because they timely see the errors of their ways. A morality tale.

But whereas the children in these fairy tales go gently into a good night, we go blindly into a bad one.

Perhaps it's fittingly ironic that this time around the rally came before instead of after the announcement by ECB president Mario Draghi of €489 billion in cheap loans for European banks. It fits right in with all the other things we get totally the wrong way around. About 60% of those loans, by the way, are just regurgitated old stuff.

Looking at what they have come up with in episode 1001 of the bailout drama, and just a brief look will do, there's one conclusion and one only: what they say is not what they think.

The ECB claims that it "hopes" the banks will use the money to purchase peripheral debt, but the ECB knows they won't (and what sort of €489 billion deal depends on "hope" only?). It knows, because the ECB itself, along with other parties, has refused to guarantee that debt.

It may be presented as a good deal, but borrowing at 1% to get a 5% return is not all that attractive when you have a 50% chance of an 80% haircut. Or something along those lines.

The ECB also said they hope banks will use the money to loan out to consumers. Just as big a pile of doo-doo. Banks are shedding assets like they're fleas, because they need reserves. That is a solvency issue. Being able to borrow ever cheaper while handing out ever more doubtful collateral addresses a liquidity issue.

There are a few things that this sort of lending will indeed achieve. It will gobble up bad assets from private banks and transfer them to the risk of the public coffer. Nothing new there. The child just gets deeper into the forest, and the light starts fading. A step by step process perceived as progressing so slowly, it raises no alarm. It's still morally repugnant, but who in charge of this thing has any morals left at all in the first place?

Another effect of those €489 billion is that the divide between the ECB and Germany, in particular its central Bundesbank, will widen, and substantially so. Which endangers the entire Eurozone project.

Whatever plan Europe comes up with, be it the European Financial Stability Facility or the European Stability Mechanism, or this latest one from the ECB, there are only two countries left to carry the vast majority of the risk and the burden. One of those countries, France, will soon be downgraded. So will its banks. This will lead to a downgrade of the EFSF and, if there's still time, the ESM.

There will at that point be one country left to carry the entire rest on its shoulders. Germany's allies and relatively strong partners, Holland, Finland, are way too small to do any heavy lifting. Moreover, Holland is on the verge of a housing collapse.

The EFSF needs to be funded; it can only spend what it has received. Europe has been unable to agree on expanding the Facility. Which is why the ECB now comes with its loan plan. Which did lead to a market rally, but that rally fizzled as soon as the plan was announced, even though it was at least €100 billion larger than expected.

So France soon will no longer be a net contributor to the EFSF. Which is one of the main reasons the expansion didn't materialize. Hence, it's all Germany's responsibility, and Germany is smart enough to understand it's not strong enough to bear that responsibility.

And then out of left field comes Mario Draghi handing out half a trillion euros in loans to 523 different European banks that on average are just about to draw their last breath, selling off profitable assets because they're all buyers are interested in, and keeping the lousy ones, which they now can pledge to the ECB, with a huge chunk of the risk involved landing squarely on the shoulders of the German citizenry.

The chance that Berlin will now look even a lot more serious at cutting its losses while it can has become much bigger with Mr. Draghi's first substantial act as ECB president. It's deceptively simple, really. Germany can't guarantee Greek and Italian and Spanish debt with the risk waiting in the wings of France slumping badly. Not without risking its own wealth, its own coherence as a society, in the process.

Staying in the metaphor of the child lost in the darkening forest (and yes, the Grimm brotheres were German), it's like the child, after taking yet another wrong turn, has stumbled upon a big bad wolf.

And though it's already getting almost too dark to see, the last thing the child does notice is that the wolf looks nothing like its sweet old grandmother.

Friday, December 30, 2011

A One Party State

When Robert Reich suggests the Grand Old Party is imploding and that's a bad thing I am tempted to disagree, but he wants to make the case that a vibrant Republican Party is a good thing, and there I do disagree:

Two weeks before the Iowa caucuses, the Republican crackup threatens the future of the Grand Old Party more profoundly than at any time since the GOP’s eclipse in 1932. That’s bad for America.

The crackup isn’t just Romney the smooth versus Gingrich the bomb-thrower.

Not just House Republicans who just scotched the deal to continue payroll tax relief and extended unemployment insurance benefits beyond the end of the year, versus Senate Republicans who voted overwhelmingly for it.

Not just Speaker John Boehner, who keeps making agreements he can’t keep, versus Majority Leader Eric Cantor, who keeps making trouble he can’t control.

And not just venerable Republican senators like Indiana’s Richard Lugar, a giant of foreign policy for more than three decades, versus primary challenger state treasurer Richard Mourdock, who apparently misplaced and then rediscovered $320 million in state tax revenues.

Some describe the underlying conflict as Tea Partiers versus the Republican establishment. But this just begs the question of who the Tea Partiers really are and where they came from.

The underlying conflict lies deep into the nature and structure of the Republican Party. And its roots are very old.

As Michael Lind has noted, today’s Tea Party is less an ideological movement than the latest incarnation of an angry white minority – predominantly Southern, and mainly rural – that has repeatedly attacked American democracy in order to get its way.

It’s no mere coincidence that the states responsible for putting the most Tea Party representatives in the House are all former members of the Confederacy. Of the Tea Party caucus, twelve hail from Texas, seven from Florida, five from Louisiana, and five from Georgia, and three each from South Carolina, Tennessee, and border-state Missouri.

Others are from border states with significant Southern populations and Southern ties. The four Californians in the caucus are from the inland part of the state or Orange County, whose political culture has was shaped by Oklahomans and Southerners who migrated there during the Great Depression.

This isn’t to say all Tea Partiers are white, Southern or rural Republicans – only that these characteristics define the epicenter of Tea Party Land.

And the views separating these Republicans from Republicans elsewhere mirror the split between self-described Tea Partiers and other Republicans.

In a poll of Republicans conducted for CNN last September, nearly six in ten who identified themselves with the Tea Party say global warming isn’t a proven fact; most other Republicans say it is.

Six in ten Tea Partiers say evolution is wrong; other Republicans are split on the issue. Tea Party Republicans are twice as likely as other Republicans to say abortion should be illegal in all circumstances, and half as likely to support gay marriage.

Tea Partiers are more vehement advocates of states’ rights than other Republicans. Six in ten Tea Partiers want to abolish the Department of Education; only one in five other Republicans do. And Tea Party Republicans worry more about the federal deficit than jobs, while other Republicans say reducing unemployment is more important than reducing the deficit.

In other words, the radical right wing of today’s GOP isn’t that much different from the social conservatives who began asserting themselves in the Party during the 1990s, and, before them, the “Willie Horton” conservatives of the 1980s, and, before them, Richard Nixon’s “silent majority.”

Through most of these years, though, the GOP managed to contain these white, mainly rural and mostly Southern, radicals. After all, many of them were still Democrats. The conservative mantle of the GOP remained in the West and Midwest – with the libertarian legacies of Ohio Senator Robert A. Taft and Barry Goldwater, neither of whom was a barn-burner – while the epicenter of the Party remained in New York and the East.

But after the Civil Rights Act of 1964, as the South began its long shift toward the Republican Party and New York and the East became ever more solidly Democratic, it was only a matter of time. The GOP’s dominant coalition of big business, Wall Street, and Midwest and Western libertarians was losing its grip.

The watershed event was Newt Gingrich’s takeover of the House, in 1995. Suddenly, it seemed, the GOP had a personality transplant. The gentlemanly conservatism of House Minority Leader Bob Michel was replaced by the bomb-throwing antics of Gingrich, Dick Armey, and Tom DeLay.

Almost overnight Washington was transformed from a place where legislators tried to find common ground to a war zone. Compromise was replaced by brinkmanship, bargaining by obstructionism, normal legislative maneuvering by threats to close down government – which occurred at the end of 1995.

Before then, when I’d testified on the Hill as Secretary of Labor, I had come in for tough questioning from Republican senators and representatives – which was their job. After January 1995, I was verbally assaulted. “Mr. Secretary, are you a socialist?” I recall one of them asking.

But the first concrete sign that white, Southern radicals might take over the Republican Party came in the vote to impeach Bill Clinton, when two-thirds of senators from the South voted for impeachment. (A majority of the Senate, you may recall, voted to acquit.)

America has had a long history of white Southern radicals who will stop at nothing to get their way – seceding from the Union in 1861, refusing to obey Civil Rights legislation in the 1960s, shutting the government in 1995, and risking the full faith and credit of the United States in 2010.

Newt Gingrich’s recent assertion that public officials aren’t bound to follow the decisions of federal courts derives from the same tradition.

This stop-at-nothing radicalism is dangerous for the GOP because most Americans recoil from it. Gingrich himself became an object of ridicule in the late 1990s, and many Republicans today worry that if he heads the ticket the Party will suffer large losses.

It’s also dangerous for America. We need two political parties solidly grounded in the realities of governing. Our democracy can’t work any other way.

Thursday, December 29, 2011

Martial Law Plans

From the infowars website this inflammatory document suggesting plans are in place to essentially ignore the constitution in the event of economic collapse. I suppose, looking at it cold bloodedly if law and order breaks down constitutional law will inevitably be a casualty. Indeed had I read this essay a year ago I might have dismissed it as nonsense but recent events have me worried about issues that seem esoteric but are in fact fundamental to a free society. Granted not many Americans seem interested in protecting constitutional law anymore but I should be disappointed not to see a robust discussion around the country about the future of our political system in an election year. Is martial law a possibility? Who knows, but things don't look good economically and from that unhappiness any kind of security measures can be envisioned. Including this horror I suppose:

On Wednesday, December 21, published a brand new Federal Emergency Management Agency (FEMA) document dated November 18, 2011, that “that show military involvement in a FEMA-led takeover within the United States under partially-classified Continuity of Government (COG) plans,” and designate “the American people as ‘enemies’ under a live military tracking system known as Blue Force Situational Awareness (BFSA).”

The FEMA document, appearing under the headline “National Continuity Programs (NCP) Program and Mission Support Services (PAMSS),” ask contractors to assist FEMA in national emergencies. But don’t let the bureaucratic language fool you. This is really a Martial Law document. FEMA is not interested in emergency preparedness, but in establishing a military dictatorship in the United States.

Ordinary Americans are classified as the enemy in this FEMA document, and similar Martial Law documents, such as this one from Halliburton/KBR that published on Tuesday, December 6, 2011. The militaristic language that appears in these Martial Law documents, and in the draconian NDAA bill that the treacherous Congress passed last week, suggests that the hijacked U.S. government desires that there be insurgents and domestic terrorists in the United States.

The traitors in Washington need enemies, both foreign and domestic, in order for the politically and morally bankrupt National Security State to remain relevant and powerful in American society. This is a militarist and secret system that is led by the most evil personalities in the 21st century who create fake enemies (Al-Qaeda) and stage false flag terrorist attacks (9/11) just to remain in power. The word restraint does not exist in their vocabulary.

The day will come when the traitors in Washington, led by President Obama, will issue orders to the military and police to fire on Americans and enforce Martial Law. At that point, even the most blind and ignorant people will probably come to the obvious conclusion that it is not Al-Qaeda who desires the destruction of America, but the hijacked and treasonous U.S. government.

Much like in Iraq and other occupied countries, the hijacked U.S. government is reaching out to private contractors like KBR to help the U.S. military and Homeland Security implement Martial Law.
A d v e r t i s e m e n t
Government thugs and private contractors will be used to control the population in critical areas of the country after the coming economic collapse, as well as to contain and eliminate domestic threats, meaning any American citizen who does not want a hijacked military and blood-soaked mercenaries occupying America.

The idea that America will come under military occupation sounds foreign, but it shouldn’t, because the dark road that was taken by the murderous thieves in Washington after 9/11 would eventually lead to such a crisis.

What is written down in FEMA papers and similar Martial Law documents must be put into a larger political and historical context. America’s political system did not suddenly transform into a tyrannical beast overnight.

The rise of the shadow state, and its evil twin brother, the police state, has been decades in the making. The culture of the police has been so dramatically altered during this time that for many brainwashed police officers the implementation of Martial Law is a natural and necessary response to emergencies and crises.

After three decades of a traumatic war on drugs, military rhetoric comes naturally to hardened police officers, who don’t see themselves as protectors of the law and the public but as warriors of the state fighting terrorists, criminals, protesters, and drug dealers.

All of these threats, by the way, are invented and exaggerated. If the war on drugs and the war on terror are ended, the warriors of the state will be forced to redefine their identity and occupation because without endless wars to be fought and without enemies to be killed then there is no use for a warrior class.

And society doesn’t really need a warrior class. Our common interests and our democratic values are not threatened by “terrorists,” but by an international oligarchy. Police officers and military men need to grasp this reality. And they also need to realize that by blindly accepting a state of war, and viewing the American population as the enemy, they – the warriors of the state – become the real enemies of the public and the rule of law. But the biggest enemies are the philosophical masters who stand above the brainwashed warriors and define their goals as noble and heroic, but direct their will towards evil ends.

If the facts were known, Martial Law in America, and North America, would be defeated before it is even implemented. A military dictatorship won’t last for long if enough people speak up and fight back. We have the numbers, the truth, and the bravery to reclaim freedom for future generations to live happily and prosper in this new century. The traitors and terrorists in Washington are not on the right side of history. They are cowards to be defeated, not giants to be feared.

And the truth is they are scared and ashamed, that’s why they do everything in secret. The shameful FEMA document was posted on a government website called, but was immediately taken down after radio host Alex Jones alerted his listeners to the existence of the document and discussed its broader significance. This shows that the hijacked U.S. government is controlled by very frightened and pathetic people who know they are crossing a red line by quietly setting up a military dictatorship in America.

Aaron Dykes explained why the government’s censorship of the document is unwarranted in his article, “Government censors document revealing plans to wage war on Americans”:
“The government-linked document we posted was marked ‘Source Selection Sensitive’ but not considered classified. Further, it was listed publicly on a government website that was soliciting bids for government contracts. However, despite its public classification, it contains information that clearly is NOT intended to gain wide publicity.”
This document does not tell us anything new. We’ve known for years that there is a conspiracy to destroy America and other Western nations through an engineered economic collapse and a false global war of terror that has been used to legitimize the destruction of basic human rights in the West.

Some facts can no longer be denied and dismissed. It is not a theory that is America is being destroyed by the traitors and terrorists in Washington. It is reality. It is self-evident.

Fortunately, the hijacked U.S. government has no public credibility. Its systematic policy of deceit and fraud, its destruction of the Constitution, and its illegal implementation of Martial Law will backfire severely.

American law professor and lawyer Jonathan Turley said on C-SPAN on December 19, 2011 that most Americans do not fear any foreign threats like Al-Qaeda, but their own unresponsive and out-of-control government:
“We’ve had three polls in the last year and they all show the same thing. The American people say that they are more afraid of the government than they are outside forces like terrorists. So there’s this disconnect. The majority of Americans are actually very concerned about the loss of rights, but Congress, both Democrats and Republicans, can’t move harder against privacy. And this is part of the cynical calculation. I think that President Obama made this calculation early on and decided that no one would be to the right of him on terrorism and national security, and he has taken the Democratic party with him on that.

So you have this remarkable disconnect, where the majority of citizens are going, ‘We’re really concerned about this. We are fearful of our own government,’ and yet it’s just not translating on the hill.”
In the near future, Washington may not even exist. The wild wolves of the new world order in the shadow CIA, and their partners in crime in the shadow Mossad, could burn down Washington D.C. in a false flag attack and relocate in Denver, Colorado.

They have already turned the heart of New York City into a pit of ashes, so what’s stopping them from doing the same to the heart of the capital in the heart of the present global order, Washington D.C?

These psychopathic maniacs are capable of carrying out the greatest acts of evil and destruction in human history. Loss of life on an epic scale means nothing to them. They desire mass death and mass destruction.

In their eyes, they believe they must destroy the basic foundations of America, from the Constitution and the Bill of Rights to the grand architecture of Washington D.C., before they can move on and establish their fascist global dictatorship upon the ruins of the old age.

If such a dark and scary scenario unfolds, if Washington is destroyed by the lawless power elite, then Colorado will become America’s green zone, out of which America’s shadow terrorist state will wage war against a politically awakened and rebellious population.

Wednesday, December 28, 2011

Housing Gloom

From the advisorone website this discussion of housing numbers by Gil Weinreich reporting home sales figures have been inflated to make the housing market look better than it is. While this well reported story is interesting, what it highlights is the unappealing truth that statistics issued by corporate American and political America are composed mostly of lies. Unfortunately we have seen the seasonal high retial sales numbers "adjusted down" while lower unemployment numbers seem to reflect not an improving economy but statistics altered to suit the needs of the people in charge. Things are not getting better and the new home purchase program due to start in January won't help. There aren't any banks secure enough to make loans, there are too many homes empty and in foreclosure and there aren't any jobs. So now what?

The health of the housing market has come under fresh doubts after the National Association of Realtors released substantially revised figures showing 3 million fewer homes than previously thought were sold between 2007 and 2010.

The good news is that NAR’s revised data show that inventory of unsold homes has dropped to a level not seen since 2005; a smaller backlog of homes is generally viewed as a precondition for a healthy clearing market.

Indeed, much of the early analysis in the media seems to suggest the housing market is turning a corner, that the bad news belongs to the past while recent positive home sales and housing starts data, together with low mortgage rates, foretell recovery.

Richard Green, director of the USC Lusk Center for Real Estate, in an interview with AdvisorOne, offered a more sober view of current real estate trends, saying he was “neutral to very cautiously optimistic” about the housing market.

The NAR’s double counting, he said, affects both the numerator and the denominator, meaning that fewer homeowners than previously thought were willing or able to sell their homes in the past few years. “You’re looking at a 14% downward revision in sales. That means we’re probably 14% further away from being through this,” Green, (left), says.

One positive for the real estate market’s revival prospects, at least in theory, are today’s low mortgage rates. A survey of rates conducted by Freddie Mac, and released Thursday, shows mortgage rates reached their all-time low this week. But, Green says, “the effectiveness of low rates is being blunted by how difficult it is to qualify for them.”

In related news, the HousingIntelligencePro newsletter reports that, despite record low rates, 38% of home purchases this year were paid in cash. That is exactly twice the level of cash home purchases in the healthier housing market of 2006. Green was unsurprised by this statistic, not only because of the difficulty of obtaining financing for a mortgage, but because of the search for dividends in today’s low-yield market environment.

“If you have cash, you can buy houses at a pretty substantial discount,” Green says. “There are a lot of people who are investing and renting these places out. If you buy a house in Bakersfield, [Calif., for example], you can get a 7% or 8% dividend. By not having debt service, you’re in a very safe place.” Green says cash buyers can typically get a 5% to 10% discount off the purchase price since sellers don’t risk the sale falling through because a loan is denied.

Looking ahead, Green says one possible reason for cautious optimism in the housing market is the government’s new Home Affordable Refinance Program. While previous HARP programs have failed, new rules changes that go into effect Jan. 1 should make it a lot easier to refinance Fannie Mae and Freddie Mac loans, he says.

Tuesday, December 27, 2011

Mercenary Arrests

Alexander Cockburn of the unflinching Counterpunch newsletter looks at the recently approved measure that allows the US military, in defiance of the Posse Comitatus Act, to arrest US citizens and detain them indefinitely on the vague grounds of involvement with terrorism. Cockburn suggests military "contractors" formerly known more bluntly as mercenaries or hired hands, may soon get that privilege. Ask around, no one you know will be aware of these new intrusive powers granted to the Armed Forces. Then wonder how far we allow this militarization of our democracy to go.

Too bad Kim Jong-il kicked the bucket recently. If the divine hand that laid low the North Korean leader had held off for a couple of weeks, Kim would have been sustained by the news that President Obama is signing into law a bill that puts the United States not immeasurably far from the Democratic People’s Republic of Korea in contempt of constitutional protections for its citizens, or constitutional restraints upon criminal behavior sanctioned by the state.

At least the DPRK doesn’t trumpet its status as the last best sanctuary of liberty. American politicians, starting with the president, do little else.

A couple of months ago came a mile marker in America’s steady slide downhill towards the status of a Banana Republic, with Obama’s assertion that he has the right as president to order secretly the assassination, without trial, of a US citizen he deems to be working with terrorists. This followed his betrayal in 2009 of his pledge to end the indefinite imprisonment without charges or trial of prisoners in Guantanamo.

Now, after months of declaring that he would veto such legislation, Obama has now crumbled and will soon sign a monstrosity called the Levin/McCain detention bill, named for its two senatorial sponsors, Carl Levin and John McCain. It’s snugged into the 2012 National Defense Authorization Act.

The detention bill mandates – don’t glide too easily past that word - that all accused terrorists be indefinitely imprisoned by the military rather than in the civilian court system; this includes US citizens within the borders of the United States. Obama supporters have made strenuous efforts to suggest that US citizens are excluded from the bill’s provisions. Not so. “It is not unfair to make an American citizen account for the fact that they decided to help Al Qaeda to kill us all and hold them as long as it takes to find intelligence about what may be coming next,” says Senator Lindsay Graham, a big backer of the bill. “And when they say, ‘I want my lawyer,’ you tell them, ‘Shut up. You don’t get a lawyer.’” The bill’s co-sponsor, Democratic senator, cosponsor of the bill, Carl Levin says it was the White House itself that demanded that the infamous Section 1031 apply to American citizens.

Anyone familiar with this sort of “emergency” legislation knows that those drafting the statutes like to cast as wide a net as possible. In this instance the detention bill authorizes use of military force against anyone who “substantially supports” al-Qaeda, the Taliban or “associated forces”. Of course “associated forces” can mean anything. The bill’s language mentions “associated forces that are engaged in hostilities against the United States or its coalition partners, including any person who has committed a belligerent act or who has directly supported such hostilities in aid of such enemy forces.”
This is exactly the sort of language that can be bent at will by any prosecutor. Protest too vigorously the assassination of US citizen Anwar al Awlaki by American forces in Yemen in October and one day it’s not fanciful to expect the thud of the military jackboot on your front step, or on that of any anti-war organizer, or any journalist whom some zealous military intelligence officer deems to be giving objective support to the forces of Evil and Darkness.

Since 1878 here in the US, the Posse Comitatus Act has limited the powers of local governments and law enforcement agencies from using federal military personnel to enforce the laws of the land. The detention bill renders the Posse Comitatus Act a dead letter.

Governments, particularly those engaged in a Great War on Terror, like to make long lists of troublesome people to be sent to internment camps or dungeons in case of national emergency. Back in Reagan’s time, in the 1980s, Lt Col Oliver North, working out of the White House, was caught preparing just such a list. Reagan speedily distanced himself from North. Obama, the former lecturer on the US constitution, is brazenly signing this authorization for military internment camps.

There’s been quite a commotion over the detention bill. Civil liberties groups such as the ACLU have raised a stink. The New York Times has denounced it editorially as “a complete political cave-in”. Mindful that the votes of liberals can be useful, even vital in presidential elections, pro-Obama supporters of the bill claim that it doesn’t codify “indefinite detention.” But indeed it does. The bill explicitly authorizes “detention under the law of war until the end of hostilities.”

Will the bill hurt Obama? Probably not too much, if at all. Liberals are never very energetic in protecting constitutional rights. That’s more the province of libertarians and other wackos like Ron Paul actually prepared to draw lines in the sand in matters of principle.

Simultaneous to the looming shadow of indefinite internment by the military for naysayers, we have what appears to be immunity from prosecution for private military contractors retained by the US government, another extremely sinister development. Last Wednesday we ran here an important article on the matter from Laura Raymond of the Center for Constitutional Rights.

The US military has been outsourcing war at a staggering rate. Even as the US military quits Iraq, thousands of private military contractors remain. Suppose they are accused of torture and other abuses including murder?

The Centre for Constitutional Rights is currently representing Iraqi civilians tortured in Abu Ghraib and other detention centers in Iraq, seeking to hold accountable two private contractors for their violations of international, federal and state law. In Raymond’s words, “By the military’s own internal investigations, private military contractors from the US-based corporations L-3 Services and CACI International were involved in the war crimes and acts of torture that took place, which included rape, being forced to watch family members and others be raped, severe beatings, being hung in stress positions, being pulled across the floor by genitals, mock executions, and other incidents, many of which were documented by photographs. The cases – Al Shimari v. CACI and Al-Quraishi v. Nakhla and L-3 – aim to secure a day in court for the plaintiffs, none of whom were ever charged with any crimes.”

But the corporations involved are now arguing in court that they should be exempt from any investigation into the allegations against them because, among other reasons, the US government’s interests in executing wars would be at stake if corporate contractors can be sued. And Raymond reports that “they are also invoking a new, sweeping defense. The new rule is termed ‘battlefield preemption’ and aims to eliminate any civil lawsuits against contractors that take place on any ‘battlefield’.”

You’ve guessed it. As with “associated forces”, an elastic concept discussed above, in the Great War on Terror the entire world is a “battlefield”. So unless the CCR’s suit prevails, a ruling of a Fourth Circuit federal court panel will stand and private military contractors could be immune from any type of civil liability, even for war crimes, as long as it takes place on a “battlefield”.

Suppose now we take the new powers of the military in domestic law enforcement, as defined in the detention act, and anticipate the inevitable, that the military delegates these powers to private military contractors. CACI International or a company owned by, say Goldman Sachs, could enjoy delegated powers to arrest any US citizen here within the borders of the USA, “who has committed a belligerent act or who has directly supported such hostilities in aid of such enemy forces,” torture them to death and then claim “battlefield preemption”.

Don’t laugh.

On this issue of the “privatization” T.P.Wilkinson has a brilliant essay in our latest newsletter on “corporate nihilism and the roots of war”. Wilkinson starts with a critique of the familiar argument that a return to the draft would bring America’s wars home to the citizenry and the prospect of their children being sent off to possible mutilation by IEDs or death would spark resistance. Wilkinson suggests that this underestimates the saturation of our society by militarism. He goes on:

“But does the new warfare even need the large battalions of expendable troops? Just as financial “engineering” has replaced industrial production as a means of wealth extraction, remote-control weapons deployment and mercenary subcontracting have largely replaced the mass armies that characterized U.S. and U.K. warfare in Korea and Vietnam. In this sense, warfare has become even more “corporate.” The fiction that wars of invasion and conquest are the result of state action is obsolete. The entire “national security” process has been fully depoliticized; in other words, the state is more clearly than ever a mere conduit for policies and practices whose origin and essential characteristics are those of boardroom strategic planning and marketing. The difference between global business and global warfare has, in fact, dissolved.

“This presents a serious cognitive problem for anyone trying to find the root of this poisonous plant in order to tear it from the ground that nurtures it. The military sustained by the draft was mimetic of the steel mill in Gary, Indiana, or the cotton plantation in the south? Today’s military operates like the headquarters of Microsoft or USX – the actual physical violence has been outsourced.”

In this latest newsletter, hot from the presses, we continue our series on Obama’s record, with David Macaray’s fine dissection of the Democratic president’s treatment of the people whose organizing and also money put him in office: we mean the labor movement. And how did Obama reward the labor movement? Read Macaray to get the full, sordid story.

What is the Obama administration really up to in the Pacific, deploying US Marines in Australia amid much fanfare, pumping the alarm buttons about China’s military might? Read Conn Hallinan’s report.

He’s slithering down in the polls right now, but Newt Gingrich created a stir with his innovative proposals to put youngsters to work, instilling in impressionable youth the beauties of the work ethic, cleaning toilets. Co-editor Cockburn puts Gingrich in a time machine and takes him back to the coalmines and chimneys of nineteenth-century England, when his dream world of unregulated labor was in full flower.

Monday, December 26, 2011

US Arrest Without Trial

From zero hedge this chilling reminder this season of goodwill, that government powers in the US are being readied for war on our own population. We have seen extra constituional lawmaking in the past in times of crisis, during the Civil War and after pearl harbor for instance, but this piece of illegal lawmaking is designed to take care of a threat that doesnt even exist. And the population at large raises no protest, which is perhaps the most chilling part of all. Happy Boxing Day everyone!

Top experts say that the newly-passed National Defense Authorization Act authorizes indefinite detention of Americans living within the United States.

Top legal experts point out that the government claims the right to assassinate American citizens on U.S. soil without any charge or trial or other Constitutional protection.

I noted last month that Congress was considering repealing prohibitions against torture. (I wrote to attorneys at the ACLU, but haven't received word yet on whether or such a provision has been enacted).

However, Mother Jones notes today that Congress has explicitly authorized rendition, allowing American Citizens on U.S. soil to be sent to other countries which do torture:

A defense spending bill that passed both houses of Congress overwhelmingly and is set to be signed by President Barack Obama as early as this week could make it easier for the government to transfer American terrorist suspects to foreign regimes and security forces.

The National Defense Authorization Act (PDF) contains a section that says the president has the power to transfer suspected members and supporters of Al Qaeda, the Taliban, or "associated" groups "to the custody or control of the person's country of origin, any other foreign country, or any other foreign entity."

That means if the president determines you're a member or supporter of Al Qaeda or "associated forces," he could order you to be handed over to the Saudis, the Egyptians, the Yemenis ("any other foreign country"), any of their respective security forces, or even the United Nations ("any other foreign entity"). You can read the relevant section of the law here:


Daphne Eviatar, a lawyer with Human Rights First adds that there are "a whole lot of scenarios" where the government might want to transfer a suspected terrorist—even a US citizen—to foreign custody. For example, the administration might not want to go through the political mess of determining whether to send a suspect to Gitmo, try him in a military commission, or use the civilian system. The administration might also want to avoid the mandatory habeas corpus review that would come if the US held the suspect itself. In such a case, transferring the suspect to a foreign security force might present an appealing option.

The Founding Fathers would not recognize this nation as America.

We have more on this tomorrow with an essay considering the possible addition of mercenaries to the ranks of those now entitled to arrest and detain US citizens anywhere in the world.

Sunday, December 25, 2011

A Christmas Carol

A Christmas Message From America's Rich by Matt Taibbi. To say Merry Christmas seems rather trite in the face of this stuff but I will say it anyway!

It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.

True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful.

But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments.

Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:

“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”

Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm:

“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles.

Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line:

Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said.

“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”

Finally, there is this from Blackstone CEO Steven Schwartzman:

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.

“You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”

There are obviously a great many things that one could say about this remarkable collection of quotes. One could even, if one wanted, simply savor them alone, without commentary, like lumps of fresh caviar, or raw oysters.

But out of Abelson’s collection of doleful woe-is-us complaints from the offended rich, the one that deserves the most attention is Schwarzman’s line about lower-income folks lacking “skin in the game.” This incredible statement gets right to the heart of why these people suck.

Why? It's not because Schwarzman is factually wrong about lower-income people having no “skin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on.

It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter.

The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments).

So that IPO birthday boy is now standing up and insisting, with a straight face, that America’s problem is that compared to taxpaying billionaires like himself, poor people are not invested enough in our society’s future. Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place.

But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You've got it all riding on how well America works.

You can’t afford private security: you need to depend on the police. You can’t afford private health care: Medicare is all you have. You get arrested, you’re not hiring Davis, Polk to get you out of jail: you rely on a public defender to negotiate a court system you'd better pray deals with everyone from the same deck. And you can’t hire landscapers to manicure your lawn and trim your trees: you need the garbage man to come on time and you need the city to patch the potholes in your street.

And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air.

The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.

An ordinary person who has a problem that needs fixing puts a letter in the mail to his congressman and sends it to stand in a line in some DC mailroom with thousands of others, waiting for a response.

But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.

Want to lower the capital reserve requirements for investment banks? Then-Goldman CEO Hank Paulson takes a meeting with SEC chief Bill Donaldson, and gets it done. Want to kill an attempt to erase the carried interest tax break? Guys like Schwarzman, and Apollo’s Leon Black, and Carlyle’s David Rubenstein, they just show up in Washington at Max Baucus’s doorstep, and they get it killed.

Some of these people take that VIP-room idea a step further. J.P. Morgan Chase CEO Jamie Dimon – the man the New York Times once called “Obama’s favorite banker” – had an excellent method of guaranteeing that the Federal Reserve system’s doors would always be open to him. What he did was, he served as the Chairman of the Board of the New York Fed.

And in 2008, in that moonlighting capacity, he orchestrated a deal in which the Fed provided $29 billion in assistance to help his own bank, Chase, buy up the teetering investment firm Bear Stearns. You read that right: Jamie Dimon helped give himself a bailout. Who needs to worry about good government, when you are the government?

Saturday, December 24, 2011

Mortgage Abuse Prosecutions

From Yves Smith at naked capitalism we hear that there is a chance that mortgage cheats, at the banking end of the fiasco, may get their just desserts. It always strikes me as odd that people who took out loans at the urging of every sainted advertiser in the country, including the President, cop the blame when the falsity of those loans is made apparent. I think its about time the bankers faced their responsibilities. if the paperwork was good they would have no trouble foreclosing on delinquents. Instead we blame the delinquents without wondering why the banks can't foreclose. It seems a few people in power are now asking the awkward questions.

The development reported by the Financial Times’ Shahien Nasiripour, that the inspector general for the FHFA, the supervisor of Fannie and Freddie, and the Federal Home Loan bank, has decided to share information with New York State attorney general Eric Schneiderman, is far more significant than it appears on the surface.

It’s a well deserved slap in the face of the Department of Justice.

I’m not certain of the precise scope of powers of the FHFA inspector general. But typically, federal inspector generals have limited scope of action. They can only subpoena documents and cannot subpoena witnesses. And, of course, they are not prosecutors and cannot launch cases. The theory of IGs is that if they uncover something unsavory, they’ll hand it off to the Department of Justice. But as a former IG has pointed out, the DoJ does not take case leads from the IGs unless they are fully fleshed out, and that is well nigh impossible to do in the absence of speaking to witnesses.

The Department of Justice has AWOL on the mortgage and banking beat, no doubt to avoid ruffling powerful possible Obama donors. Inspectors general are in theory independent, and on top of that, the FHFA is an independent agency and is not running the Administration playbook (I’ve been told by people involved in bank regulation that Geithner has tried pressuring FHFA acting chief DeMarco to no avail).

So what does the FHFA inspector general do, certain that Eric Holder will ignore any misdeeds he finds? Turn to another prosecutor who can bring cases that can bring cases that are national in scope. From the Financial Times:

The collaboration between New York’s top prosecutor and the federal auditor overseeing half of the US home loan market raises the spectre of criminal probes and increased scrutiny of Wall Street’s once-lucrative role in packaging mortgages into securities.

Eric Schneiderman, New York attorney-general, has the power to file criminal charges as part of his investigation into banks’ role in packaging mortgages into securities for sale to investors, who have suffered hundreds of billions of dollars worth of losses.

Steve Linick, the inspector-general overseeing the Federal Housing Finance Agency, US mortgage financiers Fannie Mae and Freddie Mac, and the Federal Home Loan Banks, is probing allegations of fraud involving mortgage-backed securities purchased by Fannie and Freddie. He is also investigating wrongdoing by lenders that allegedly sold fraudulent home loans to Fannie and Freddie, according to testimony Mr Linick gave in Congress last week…

The partnership is bolstered by Mr Schneiderman’s ability to use the Martin Act, a 1921 state law that allows him to bring misdemeanour and felony criminal charges against alleged wrongdoers doing business in New York. The prosecutor can operate across state lines, essentially acting on behalf of investors across the US.

This is a win-win on several fronts. Not only can the FHFA inspector general have the New York attorney general use its subpoena and prosecutorial powers to advance its cases that the AG also thinks are promising, but the New York AG can presumably also take advantage of the IG’s expertise and staffing. State attorneys general are thinly staffed relative to the demands on them, so pooling resources could help the AG bring more cases (not just in combination with the IG, but by freeing up staff).

I am wondering if the tide is turning on the legal front. Catherine Masto is moving along quickly with her pursuit of mortgage abuses. As we indicated when she brought her criminal case against two mid level LPS employees, she appears to be going systematically, from the bottom of the crime racket. First she has gone after the foot soldiers. Now she has filed a wide ranging civil suit against LPS, which handles over half the foreclosures in the US via its network of foreclosure mills. Based on reports I have heard about LPS conduct from multiple, credible sources, I am quite confident that Masto has solid evidence backing the charges in her suit. LPS is likely to claim it believed it did nothing wrong (!) because it was acting as directed by its clients. Or Masto may separately be able to prove the servicers were well aware of LPS’s actions by getting her hands on internal documents or LPS’s software (impermissible practices institutionalized in the software cannot be a secret to the servicers). So expect Masto’s suits to lead to the heart of the servicing industry. She has found the thread that can unravel the entire garment and is pulling hard.

Another intriguing sign is the SEC case against former Fannie and Freddie executives over their alleged misreporting of subprime exposures in investor reports. This looks to be a cagey crowdpleaser. Obama gets to say he is going after executive bad conduct…and it happens to be at the company Republicans love to hate. Expect more Obama populist window dressing as we get closer to the election.

The mortgage industrial complex is starting to look a smidge vulnerable. That time is long overdue. I hope readers will cheer these tough minded state attorneys general on in the courageous work.

Friday, December 23, 2011

Measuring Net Energy

BY Gail Tverberg of the site Financial Sense we get this fascinating essay. It's written by someone crunching the numbers, that is to say not a politician trying to make a point nor by a wonk passionately devoted to a point of view. The conclusion is chilling in light of the fact that we are never ever told by our leaders that the future will be a shrunken version of the present. The numbers offered here make sense and when I look to the future I ask myself the same question: how do we pay to create an alternative future? The answer suggested here is that we cannot, and that being the case the future has to be less than the present in terms of energy consumption. energy consumption measures the modern standard of living. Welcome then, the Darker Age.

The world has many ideas for solving our energy shortfall, but they all seem to involve investment:

Drill for more oil and gas;
Develop alternative energy sources;
Build more efficient gas-powered cars or electric cars;
Fix homes and offices so they are more energy efficient.
I thought I would check through government data to see if we really have a chance of being able to invest enough money to solve our problems.

What I found was more than a little disturbing. United States’ “Net Savings,” as a percentage of Gross National Income has dropped greatly and is now below zero. This is a situation one website described as implying an “

Back in the 1950s and 1960s, when the Interstate Expressway System was built and the electric grid that we are still using today was built, Net Savings averaged close to 10% of Gross National Income. It has dropped since then, and is now negative.

In the United States, investment is made in many kinds of long-lasting goods, including everything from buildings, to roads, to oil and gas drilling, to pipelines, to wind turbines, to equipment for factories. Gross Domestic Investment (blue) is the total of such investment made in a given year, shown as a percentage of Gross National Income.

Some of this Gross Domestic Investment comes from an increase in debt; some of it comes from savings. Gross Savings (red) is the portion that comes from savings (foregone consumption), rather than an increase in debt.

Each year, some long-term assets wear out or are destroyed. Net Savings (green) is what is left, after subtracting the portion that relates to these assets which are lost (“Consumption of Fixed Assets”). So basically Net Savings is the amount of investment during a given year in long-lasting goods that was not financed by an increase in debt, and is not simply a replacement for something that has worn out. If Net Savings is negative (as it is today), we are not even replacing things that wear out, except through the use of more borrowed money.

High Net Savings occurs when companies in general are quite profitable–in other words, when invested capital can be expected to yield a high rate of return. In such an environment, most companies will be earning enough profit that they can invest in additional plant and equipment, if desired. In such an environment, real wages are likely to rise. Governments will have little difficulty obtaining enough taxes for schools and roads, and other governmental investment.

The term “bankable project” is sometimes used to describe a project with an expected high rate of return, since this is something that a bank might be willing to lend money on, if asked. An economy with high Net Savings will have many bankable projects.

Why would Net Savings Decline?

I can think of four reasons for the decline:

Declining EROI. Much of the infrastructure of the United States was built in the day when oil was cheap because the Energy Return on Energy Invested (EROI) was very high. Over time, EROI has dropped, and as a result, the price of oil has risen. When the price of oil was inexpensive, new infrastructure could be added cheaply. Oil and gas companies made good returns, even with low oil prices. Now oil costs have risen but wages have not risen correspondingly, creating a mis-match. With the relatively lower wages now, it is harder for workers to afford oil-based products and goods manufacturers make.
Human Labor Has Been Mostly Replaced. At one point, it was possible to create substantial efficiency gains simply by replacing human labor by fossil fuel labor. For example, a ditch digger could be replaced by a machine that dug ditches, and the cost of digging ditches would go down quickly, creating a profit for the entrepreneur buying the machines and the company making the ditch digging machines. The biggest opportunities for efficiency gains have already been made. In the early days, domestic industries were protected with tariffs. As tariffs were lifted and world trade increased, there was increased competition from areas with lower wages. Capital was attracted to parts of the world where returns on capital appeared to be better, leading to a loss of investment in the US.
Limits to Growth. As we reach Limits to Growth (of the type described in the 1972 book by that name), completing claims for limited resources can be expected to raise costs for basic materials relative to wages. As a result, bankable investment projects can be expected to become less numerous. Herman Daly talks about a lack of bankable projects, not only in the US, but around the world, in this recent post. In his view, the low returns on projects today may be related to ecological limits to growth.
Will There be Enough Funds for the Investments that will be Required to Solve our Energy Shortfall?

It is difficult to see that there will be enough funds available for such investment.

At this point, we need increasing debt just to stay even in terms of replacing infrastructure. We cannot expect ever rising debt to continue, however. Instead, we should expect reduced debt, as I described in my post The Link Between Peak Oil and Peak Debt – Part 1. Private debt is already declining and is under further pressure, because of European banking problems and Basel III rules reducing the amounts European banks are able to lend. The US Government keeps increasing its debt level, but this continued growth in debt is unsustainable, and is the reason behind threatened governmental shut-downs.

With reduced debt levels in the future, Gross Domestic Investment will drop below Gross Savings in Figure 2, above, leaving even a smaller amount of funds available for investment than we have today. We may very well, in the aggregate, reach the point where we are not able to maintain current infrastructure with the funds that are available for investment. This means that will need to make choices on which things we maintain–schools or roads or oil distribution pipelines or electric grid or our housing stock. If we suddenly want to spend a lot more on new oil and gas drilling, or on an upgraded electrical grid and more wind turbines, this would seem to reduce funds available for investment in other things, which are also quite necessary.

If we think of investment as requiring the use of resources such as oil, steel, copper, and fresh water, it would stand to reason that there is an upper limit on how much we can invest each year. If we are in fact reaching “Limits to Growth,” or even “Peak Oil,” the total amount of these resources available in world markets will be declining. Even if the amount of resources extracted each year does not decline, but stays close to flat, the share of these resources that the US is able to obtain and use for infrastructure building is likely to decline, because of more-rapid growth of emerging market nations.

The only way around this difficulty that I can see is adding high EROI, quick payback, energy projects such as oil wells from the 1930s. Unfortunately, there aren’t any of these left (and of course, they have environmental issues as well).

We have deluded ourselves into thinking that projects that require government subsidies and that theoretically will produce an adequate return over a long period (20 to 60 years) are an acceptable way of replacing high EROI, fast payback projects. This might be true, if we still lived in a world in which fossil fuels would provide enough of a subsidy to the system that we could live without favorable cash flow returns from other investments.

The problem is that now, even fossil fuel investments require a lot of up front funding (think oil sands extraction in Canada, and fracking of oil and gas wells in the US), and don’t necessarily have all that good a long-term return, regardless. This is especially the case if the government needs to take an increasingly large share of this return, in order to fund its infrastructure requirements.

And increased debt is less and less of a solution.

Somehow, we need to be looking at the overall picture. How can we get enough profitable cash flow to get the cash we need to buy the resources needed to maintain essential parts of infrastructure? If we are looking at energy-related investments, what do they really provide in terms of cash flow? They may supposedly have a high EROI, if viewed over a long enough period, but this in itself is not all that helpful, if cash flow is not positive in a fairly short time-period–probably seven years or less.

My expectation is that the majority of energy investments will be terrible in terms of cash flow, and thus make our “Net Savings” (and Gross Domestic Investment) even lower over time. Installation of wind turbines and solar panels is likely to fail in terms of providing quick cash returns.

In fact, anything that requires a subsidy is likely to have serious cash flow issues. But even new nuclear power plants and new coal-fired power plants will have such issues. Adding scrubbers to coal-fired power plants without them is a great idea from an environmental point of view, but further adds to the need for additional infrastructure investment, without ever generating additional cash.

Perhaps we need to be figuring out which infrastructure investments we can eliminate, that won’t bring down the whole system. Which roads do we turn from asphalt to gravel? Can we eliminate purchase of military jets? Do we stop building and upgrading schools and universities? Do we stop building new homes and office parks?

I will admit I do not fully understand this whole issue. If we could suddenly convince the world that US has more opportunities for profitable investments than anywhere else in the world, theoretically our problem could be solved. But I don’t see this happening. Some have claimed that the recent improvements in oil and gas drilling make the US a more attractive place for investment, but I am doubtful that this is a true solution. Many of the assessments seem to be based on very optimistic estimates of future oil and gas production from “fracked” wells. And the amount of the effect is likely small.

I am afraid that the lack of cash flow funding for investment in infrastructure is what will eventually bring the system down. This is not an issue that researchers have looked at much, to my knowledge. This connection has the potential to pull the whole system down quite quickly–I would guess in 20 years or less.

Perhaps we need to be thinking more about what infrastructure investments can truly last beyond the system itself. The names “Renewables” were given to our current high-tech wind turbines and solar PV to give us the impression that they can last beyond the system themselves, but I am doubtful that this is really the case, since they depend on the availability of the electric grid and other support systems. Perhaps we need to be focusing more on lower tech applications that can be repaired with local materials and will truly provide lasting benefit.

Thursday, December 22, 2011

Europe in 2012 Looking Bleak

The Automatic Earth has been showing a few signs of life lately and appears to be making an effort to be timely relevant and interesting. They have a contributor who writes in Sanskrit and I can't understand a word of his economic analysis but when it's Ilargi dissecting the news it's often a good read. This one is good and long too.

Ilargi: 2012 may not bring the end of the world, but it will bring the end of the Eurozone and the European Union as we've known them. There are now too many things that can potentially go wrong, and some of them will.

The fact that the European Union counts 27 different constitutions, and the Eurozone 17, makes it either excruciatingly hard or downright impossible to swiftly adopt or change treaties or laws. Treaties such as the last one, agreed on December 9, can therefore far too easily be dragged down into various legal quagmires, and almost certainly will be.

Moreover, in all those European nations there are people willing to fight for their rights. And they will all fight their own fights. Which will not only tear at the seams of the Union, it will destabilize governments, overthrow governments, and not all of these can or will be replaced with technocrats. At the same time, any country that doesn't move in lock step with Brussels can derail the process of changes for all others.

Even if the richer countries try very hard to get rid of the process of unanimous decision making. The entire EU institution has never been an overly democratic one, but the big boys will undoubtedly try to do themselves one better in this regard. Hardly anybody even complains about the unelected governments of Greece and Italy anymore. So they go for the next step in their doomed effort at dismantling representative democracy in Europe. Stephen Castle for the New York Times:

Only 9 Nations Will Be Needed To Ratify Europe’s Fiscal Treaty

A new treaty to impose tighter discipline among the 17 nations in the European Union that use the euro will come into force once nine countries approve it, according to a draft released Friday. That potentially reduces the threat that disapproval by one nation could scuttle the pact.

The treaty is intended to help improve confidence in the euro by tightening the coordination of the 17 euro zone economies, requiring nations to balance their budgets and cut debt.

The outline of the plan was agreed to by most European leaders a week ago, with the exception of Britain. European officials hope to reach agreement on the eight-page draft of the treaty within weeks, with Britain being offered observer status in discussions.

The treaty will enter into force "on the first day of the month following the deposit of the ninth instrument of ratification by a contracting party whose currency is the euro," the draft states.

That means that if one country held a referendum on the treaty and did not approve it, the decision would not block others from putting it in place once nine other nations ratified it. The terms of the treaty will, however, apply to each country only when the country ratifies it.

If a euro nation fails to ratify the treaty, it would be in an "uncomfortable position" politically, said one European official who spoke on condition of anonymity.

Ilargi: I'd say all Europeans need to think hard about this. The big boys are changing laws on the fly. It goes something like this: Only 9 nations are required to agree to the fact that only 9 nations are required to agree to ... anything at all. And anyone who doesn't follow suit, well, they "would be in an "uncomfortable position" politically".

In this fashion, the politics, especially with regards to the economy, of 17 different nations can be dictated by just a handful (some countries will blindly follow Germany and/or France).

Luckily for the rest of them, this clever scheme won't go anywhere. Louise Armitstead and Philip Aldrick write for the Telegraph :

Brussels accord on the verge of collapse

Germany's cherished European fiscal compact was unravelling as Hungary and the Czech Republic said it would be damaging, and protesters in Warsaw demanded Poland stands firm against Angela Merkel.

Amid fresh warnings that Europe is triggering a 1930s global depression, the German Chancellor faced open rebellion against the key plank of her Brussels accord.

The leaders of Hungary and the Czech Republic told a joint conference in Budapest they were ready to reject the planned treaty changes and implied plans for a centralised tax system. Czech Prime Minister Petr Necas said he was "convinced that tax harmonisation would not mean anything good for us".

Ilargi: Add to that the resistance in Finland, Britain, Sweden, Ireland, and you have a recipe for, if not outright "disaster", certainly long delays. And those delays will easily be long enough to change the focus from the problems of sovereigns to those of banks, as I indicated it would a while back.

Germany will need to bailout Commerzbank. Soon. Not all that big an issue, perhaps. But it has more troubled banks. Add them all up, and you're talking major decisions to be made, as well as a bit of introspection: how to solve things at home instead of at the neighbors.

The largest of those neighbors, France, will face what we might label Commerzbank squared. In the past little while, the main French banks have made some pretty grave announcements, which were mostly snowed under in all the other bad news.

BNP Paribas will leave the global mortgage market, Crédit Agricole will quit the commodities market and SocGen will shut down its U.S. gas and power trading desk. On top of that, even Crédit Mutuel, a credit union writ large, was downgraded.

For BNP to quit the mortgage market can mean only one thing. It's desperate for cash. Ditto for Crédit Agricole's move away from commodities. These are the very lifelines for banks of their size in good to moderately good times. They throw out their feet on the ground revenue streams, because they need all the cash they can gather.

Société Générale's decision is indicative not only of that same principle, it also casts a major blinding light on another problem: financing for the energy industry. Andrew Peaple in the Wall Street Journal :

Oil Explorers Drill Deep for Project Funding

For oil and gas explorers, turning reserves into production isn't a cheap business. Thanks to the European banking crisis, it's about to get even more expensive.

French banks such as BNP Paribas, Crédit Agricole and Société Générale have long dominated the market for loans to oil companies secured against reserves. But these banks are now raising prices and cutting credit. For exploration and production companies, finding funds could soon get as hard as finding oil.

Reserve-based lending is predominantly a dollar-based business and already quite conservative. Loans, which can run into the billions of dollars, typically are made over three to seven years, shorter than for normal project-finance loans. Banks usually lend assuming long-term oil prices at $65 a barrel, well below current $100 prices.

But European banks have been starved of dollar funding since the summer, forcing them to retreat. The cost of reserve-based loans is now at about four to 4.5 percentage points over the London interbank offered rate, or Libor, compared with 2.5 to three points at the start of 2011, says the head of energy lending at one major French bank.

For companies that previously enjoyed low borrowing costs, that will come as a shock; the chief financial officer of one major exploration and production company says that next year he will need to refinance $2 billion of 2007 loans priced at less than one percentage point over Libor.

Banks from Japan and Australia have been stepping into the gap, some people in the industry say. But longer term their activity also could be hampered by Basel III rules, which force banks to set aside more capital for reserve-based lending.

Ilargi: None of this need be a surprise to longtime TAE readers: this is the credit crunch we've been talking about for years. And about which we've always said that it doesn't matter what central banks do; they can't prevent the crunch from happening. The credit must vanish, because its flipside is too much debt to service.

Mike 'Mish' Shedlock puts it like this:

The story of Credit Agricole is symbolic of the banking sector everywhere. Banks are shedding assets, not because they want to, but rather because they have to. The reason they have to is they are over-leveraged or need to raise capital for numerous reasons including new Basel requirements.

The unfortunate irony is banks may be shedding profitable organizations simply because there is still a bid for the assets.

Credit Crunch Math
In a credit crunch, banks, hedge funds, mutual funds, and other organizations sell what that can, not what they want to. In essence, distressed sellers weaken themselves by shedding profit centers to retain assets for which there is no bid.

Ilargi: So France tries to dictate, along with Germany, the conditions under which all of Europe must operate going forward. Now, you can try and pull that off if you’re big and healthy. But you can't if you're just big and bloated. Not at all unlike what happens to the US on the world scene.

Already, people like Sarkozy are appealing to their people to "buy French". No matter that any such idea contradicts the entire European project. But the more its banks are under threat, the more France will follow this line; it has little choice. The same goes for many, if not all, other EU countries.

France even made a foolhardy attempt to claim that Britain should be downgraded ahead of itself. Pot, kettle: I'd say don't worry, you’ll all get your turn soon enough.

Thing is, the more this progresses, the less other EU nations are inclined to listen to France. Europe is still a gathering of highly divergent cultures trying to move together, something that works far better in times of plenty than it does in times of less than that.

If it were solely up to France, we would see a much larger EFSF, and an ECB that purchases a far bigger share of sovereign bonds; France deems it in its own interest to spread the risk around the whole Eurozone. Germany wants no part of this, because it realizes that all that spreading will eventually end up at the doorsteps of Berlin.

The German Bundesbank doesn't like the idea of "stealth-funding" the IMF either, for similar reasons. Der Spiegel:

German Bundesbank Wary of IMF Help for Europe

The shock waves from last week's European Union summit in Brussels were difficult to ignore, with Great Britain emerging as isolated and the rest of the bloc promising to take steps toward fiscal union.

A closer look at the fine print, however, revealed that the 27 heads of state and government really only emerged from the summit with one concrete pledge aimed at dampening the most immediate effects of the debt crisis currently battering Europe. They vowed to loan up to €200 billion ($260 billion) to the International Monetary Fund so that the IMF could step up its aid to European countries in need.

Now, though, with Germany's central bank showing increasing doubts about the fund and others demonstrating an unwillingness to participate, even that measure may now be in doubt. Bundesbank head Jens Weidmann has insisted that before Germany sends its €45 billion share to the IMF, it needs assurances that other fund members outside of Europe are also willing to help out.

Russia indicated its willingness to play along on Thursday. There are indications, however, that the United States will not help out. According to Bloomberg, Federal Reserve Chairman Ben Bernanke told Senate Republicans on Wednesday that the Fed would not devote more money to the IMF.

US President Barack Obama has also said that the IMF has sufficient resources. Canada too has shown no interest in the IMF plan. And Japan has insisted that Europe do more on its own.

Increasingly Unrealistic
But there are problems in Europe too. British Prime Minister David Cameron on Wednesday made it clear that his country would only contribute €10 billion, far lower than the €30 billion EU leaders had expected, according to the Financial Times.

The Czech Republic, for its part, has said it will chip in its share of €3.5 billion if all EU countries participate. Furthermore, it wants to take its time to thoroughly examine the plan -- making next Monday's envisioned deadline for collecting European funds look increasingly unrealistic.

The agreement on the €200 billion IMF fund is essentially an admission that the current euro bailout fund, the European Financial Security Facility (EFSF), is likely not large enough to handle Italy's -- or even Spain's -- refinancing needs should they run into trouble.

Plans are afoot to leverage the EFSF, but the fund's spending power is likely to max out at €750 billion. The current consensus, voiced most recently by European Central Bank governing council member Klaas Knot, holds however that at least €1 trillion is necessary to stabilize the euro.

IMF Managing Director Christine Lagarde on Thursday underlined the severity of the crisis in comments during a conference at the US State Department. She said that the global economy is faced with threats similar to those which triggered the Great Depression in the 1930s. "It's not a crisis that will be resolved by one group of countries taking action," she said. "It's going to hopefully be resolved by all countries, all regions, all categories of countries actually taking action."

Still, it is Germany's central bank which is causing the most consternation. Weidmann has said that, despite the Bundesbank's independence, he would like parliamentary backing for the measure. Furthermore, he is against earmarking the proposed €200 billion IMF fund solely for European use, saying it should be used to strengthen the IMF as a whole.

'Back on Course'
According to a report in the Financial Times Deutschland newspaper on Friday, Weidmann has also highlighted the dangers the IMF fund poses to Germany's €211 billion share of the EFSF.

Because of the IMF's "preferred creditor status," debts to the IMF are paid back first, meaning that should a country where both the IMF and the EFSF are involved becomes insolvent, the EFSF -- and thus Germany -- stands to lose at least a portion, if not all, of its contribution. According to the paper, Weidmann warned German Finance Minister Wolfgang Schäuble of the dangers on the day of the summit last week.

Ilargi: Too many things that can potentially go wrong, and some of them will. Too many different cultures and languages. Too many different and divergent interests. That's Europe's history, and it will be its future.

Looking at the war of words surrounding Britain's decision not to comply with the December 9 treaty changes, and the subsequent war of words between France and David Cameron, one gets to wonder how much longer it will take before Sarkozy and Merkel start referring to each other as frogs and krauts, respectively.

Still, the first real cracks in the EU will likely start to show up in the periphery. Like Hungary, an EU member, though with its own currency. Boris Groendahl and Edith Balazs report some interesting developments for Bloomberg:

Austrian Banks Facing Payback as Hungary’s $22 Billion Debt Slaves Revolt

When Hungary’s former central bank governor was buying a house two months before Lehman Brothers Holdings Inc. collapsed and the country sought an emergency bailout, he received an offer he couldn’t refuse.

Peter Akos Bod, now an economics professor at Corvinus University in Budapest, was given a choice of mortgages by his bank. The 60 year-old could select a loan in Hungary’s currency, the forint, at 13 percent interest, or one in Swiss francs at less than 6 percent. After crunching the numbers on a spreadsheet, he picked the cheaper franc loan. "It was rational," he said of his 2008 decision in an interview in the Hungarian capital. "I put it into a model."

Three years later, Bod and about one million compatriots who took mortgages in francs are faced with a debt pile that has swelled to 4.9 trillion forint ($22 billion). The currency’s 40 percent slump against the franc has raised repayment costs, pushing mortgage arrears to a two-decade high and prompting Prime Minister Viktor Orban’s government to brand the loans "debt slavery."

To help homeowners, Orban imposed currency losses on banks including Erste Group Bank AG and Raiffeisen Bank International AG (RBI) that may total 900 million euros ($1.2 billion), according to Cristina Marzea, an analyst at Barclays Capital. Faced with the risk Orban would impose further measures, lenders have offered to accept $2.2 billion of additional losses if the government promised to take no further action. If it doesn’t, banks are threatening they may withdraw from the country.

'Too Risky'
"Against the backdrop of a potential western European financial crisis, this raises the risk that western lenders will just pull out of Hungary because it’s just too risky, which would be disastrous," Neil Shearing, senior emerging markets analyst at Capital Economics Ltd. in London, said in an interview. "Hungarian banks are incredibly dependent on their western European parents for short-term credit lines. At the very least it means credit is going to remain very tight."

Six of Hungary’s seven biggest banks have foreign parents, including Italy’s Intesa Sanpaolo SpA and UniCredit SpA (UCG) and Germany’s BayernLB. Only OTP Bank Nyrt., the country’s largest lender, is still domestically owned.

'Free of Debt'
Almost 18 months after Orban was elected in April 2010, he passed a law allowing Hungarians to repay mortgages denominated in foreign currencies at discount of about 25 percent to today’s exchange rate. As long as a client applies before Dec. 31 and repays the entire loan before Feb. 28, the banks have to make up the difference.

"I paid it back last week," Bod said. "I’m free of debt slavery," said the former industry minister. The plan "is easy to explain from a political viewpoint. It’s cheap for the government, expensive for the banks, good for voters."

Ilargi: Hungary, in effect, makes the banks pay; good for voters. It's interesting to see how little attention this has gotten in the press. Predictably, the EU and IMF are now a-huffin' and a-puffin' in Budapest, as Gordon Fairclough describes in the Wall Street Journal:

EU and IMF Break Off Talks With Hungary

European Union and International Monetary Fund officials broke off preliminary talks with Hungary over new financial backing because of fears the government is trying to limit central bank independence and lock in fiscal policies before any loan agreement can be negotiated, people familiar with the situation said.

Heavily indebted Hungary—under threat from rising borrowing costs and a sharply depreciating currency as global markets shudder—said last month it would seek cooperation with the IMF and EU for a "safety net" that would reassure investors about the country's stability and credit-worthiness.

EU monetary-affairs spokesman Amadeu Altafaj-Tardio said Friday the EU, along with the IMF, "decided to interrupt the preparatory mission" in Hungary because of concern about "the intention of the Hungarian authorities to push forward with the adoption of laws that can potentially undermine the independence of the central bank." [..]

Ilargi: But Hungary for now remains defiant:

In their public statements, Hungarian Prime Minister Viktor Orban and his aides have stressed they want a precautionary agreement with the IMF and EU. Because they don't intend to draw on any credit line, they have said, they expect the strings attached to the money to be limited.

On Friday morning, Mr. Orban said in a radio interview that once formal talks begin, "the government doesn't wish to discuss its economic policies with the IMF." He said the talks were, in effect, "Hungary negotiating with its own bank," since it is a member of the IMF.

Ilargi: And has a somewhat different view of its domestic financial situation:

In an interview Friday, Zoltan Csefalvay, a state secretary in the Economy Ministry, expressed openness to other types of deal. "We'll see what the IMF offers," Mr. Csefalvay said. He stressed that Hungary is in much better shape than it was in 2008, when it became the first European country to be bailed out by the EU and IMF when global credit markets froze after the collapse of U.S. investment bank Lehman Brothers.

Mr. Csefalvay said Hungary's economy expanded in 2011, its budget deficit is below 3% of gross domestic product as required by the EU, and its current account—a measure of international trade and payment flows—is in surplus.

Ilargi: The press may not have much attention for Hungary's unilateral decisions that benefit its citizens at the cost of foreign banks, but you can be sure other eastern European nations do. Nations which, while they welcome any favorable aspects of EU membership, don't want to leave any doubts about their independence.

Issues such as tax harmonization, and fiscal union in general, don't necessarily rhyme with that independence. And if Sarkozy is loudly promoting "Buy French", why would these other countries not do the same? In the process loosening the ties between nations, not strengthening them.

And the people who live in these nations, while appreciative of a government that seems to stand up for them against big banks and larger nations, will still be opportunistic. We’re seeing the first signs of what might be called a run-up to a bank run in Greece and Latvia. Citizens in other countries will follow suit. Jesse Westbrook and Saijel Kishan for Bloomberg:

Peripheral Europe May Face a Run on Banks in Coming Months, Kyle Bass Says

Michael Platt, founder of the $30 billion hedge fund BlueCrest Capital Management LLP, said most of the banks in Europe are insolvent and the situation will worsen in 2012 as the region’s debt crisis accelerates.

Kyle Bass, the Dallas-based hedge-fund manager who said in 2009 there would be sovereign defaults within three years, said Greek, Portuguese and Spanish depositors will withdraw money from banks in the coming months. [..]

'Destabilizing Latvia'
Latvians pulled about $54 million from local Swedbank AB automatic teller machines on Dec. 11 and 12 on speculation customers wouldn’t be able to access their funds. "The rumors were knowingly distributed with the goal of destabilizing the situation in Latvia," Prime Minister Valdis Dombrovskis said, according to the Leta newswire.

Ilargi: And Helena Smith for the Guardian:

Greeks fearing collapse of eurozone bailout pulled record sums from bank

An unprecedented exodus of capital from Greece – peaking in a record number of withdrawals from banks in recent months – has exacerbated the liquidity crisis now wracking the recession-hit country.

The latest figures released by the Bank of Greece reveal that in September and October alone investors pulled €12.3bn (£10.3bn) from domestic banks, spurred by fears of political uncertainty and economic collapse.

Overall, outflows have reached a record 25% since September 2009 – when household and corporate deposits stood at a peak of €237.5bn, the data showed.

Theodore Pelagidis, an economics professor at the University of Piraeus, said: "This is part of the death spiral of the recession as a result of austerity measures. People realise that contagion has come to banks and they are very afraid of losing their deposits. On average around €4bn-€5bn in capital flees the banking system every month."

Ilargi: 2012 will be a year in which we'll see sovereign defaults, bank defaults, bank runs, banks preying on each other and each other's depositors, the end of the EU and Eurozone as we know them, and more, increasingly desperate and violent, street protests than we have to date been capable of imagining. All simply a culmination of developments long in the pipeline.

And the biggest and most severe credit crunch in human history will have devastating consequences that will be felt for years to come. At Marketwatch, Matthew Lynn allows a peek into his upcoming book:

This slump won’t end until 2031

In retrospect, it wasn’t hard to see that the markets were becoming dangerously unstable. Germany had just adopted a new monetary system, and Europe was being flooded with cheap German money. Greece had signed up to a monetary union with Italy and France but was struggling to hold it together.

Financial markets had been deregulated. New technologies were transforming production and communications, allowing money to move across borders at lightening speed. And a massive new industrial power was flooding the world with cheap manufactured goods, blowing apart old industries. When it all fell apart in an almighty crash, it was only to be expected.

A prophesy for London, New York or Berlin in 2012? Not exactly. It is a description of Vienna in 1873. In that year, in one of the great crashes of all time, the Austrian markets triggered collapses across Europe, swiftly followed by an equally spectacular collapse in New York.

It was the start of what economic historians call the Long Depression, a prolonged period of volatility, unemployment and slumps that lasted an epic 23 years, only coming to an end in 1896.

I have been researching that episode for my new e-book "The Long Depression: The Slump of 2008 to 2031." The parallels with our own time are fascinating. German unification, and the adoption of the gold standard, had led to a boom in that country, and cheap German money had flooded Europe.

Greece had just joined the Latin Currency Union, an ill-fated attempt to merge currencies across Europe. Banking had been deregulated, which was partly why so much German money was invested on the Vienna bourse. The telegraph created instant communications, allowing the European crash to spread to New York.

The U.S. was industrializing, transforming the global economy as much as China has transformed the present era’s economy in the past decade.

All those factors came together to create an almighty bubble, followed by an even worse crash. The slump that followed — although it is hard to measure these things precisely — lasted more than two decades. If the slump following the crash of 2008 is anything like that one, then this one is going to last until 2031.

Ilargi: The IMF has a message eerily similar to Matthew Lynn's, if you listen well, as Larry Elliott, Heather Stewart and Nicholas Watt write for the Guardian. Just that where Lynn refers to the 1870's, Christine Lagarde sticks with the 1930's.

IMF warns that world risks sliding into a 1930s-style slump

The world risks sliding into a 1930s-style slump unless countries settle their differences and work together to tackle Europe's deepening debt crisis, the head of the International Monetary Fund has warned.

On a day that saw an escalation in the tit-for-tat trade battle between China and the United States and a deepening of the diplomatic rift between Britain and France, Christine Lagarde issued her strongest warning yet about the health of the global economy and said if the international community failed to co-operate the risk was of "retraction, rising protectionism, isolation".

She added: "This is exactly the description of what happened in the 1930s, and what followed is not something we are looking forward to."

The IMF managing director's call came amid growing concern that 2012 will see Europe slide into a double-dip recession, with knock-on effects for the rest of the global economy. "The world economic outlook at the moment is not particularly rosy. It is quite gloomy," she said. [..]

Speaking at the State Department in Washington, Lagarde said: "There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies, that will be immune to the crisis that we see not only unfolding but escalating.

"It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking some action."

Ilargi: Yeah, unity. Sure. Later in the same article, reality bites back:

As Lagarde called for unity, there were strong attacks on Britain from both the French finance minister, Francois Baroin, and the governor of the French central bank, Christian Noyer, in what appeared to be a concerted attempt by Paris to escalate a war of words with London in the wake of Britain's decision to veto a new EU treaty.

Noyer, speaking amid financial market speculation that the Standard & Poor's ratings agency was about to strip France of its coveted AAA rating, said Britain's credit rating should be downgraded first.

He said a downgrade for France (which would drive up the interest Paris pays to borrow, and make loans in the wider economy more expensive) "doesn't strike me as justified based on economic fundamentals.

"If it is, they should start by downgrading the UK, which has a bigger deficit, as much debt, more inflation, weaker growth, and where bank lending is collapsing."

In strikingly similar language, Baroin poked fun at David Cameron in a speech to the French parliament. "Great Britain is in a very difficult economic situation: a deficit close to the level of Greece, debt equivalent to our own, much higher inflation prospects, and growth forecasts well under the eurozone average. It is an audacious choice the UK government has made." [..]

John Bryson, the US commerce secretary, signalled that Washington would retaliate against Beijing's decision to put tariffs on high-performance US cars imported into China. "The United States has reached a point where we cannot quietly accept China ignoring many of the trade rules. China still substantially subsidises its own companies, discriminates against foreign companies, and has poor intellectual property protections," he said.

Ilargi: Of course, all of the above takes place against the backdrop of a global financial and banking system that seeks to preserve and grow its riches and political and military dominance. In order to preserve its privileges, the financial system will increasingly attempt to take away people's sovereign and democratic rights along with their wealth. And that in turn guarantees much more violent protests going forward, since increasing inequality will become increasingly and glaringly obvious.

Not a pretty picture. A union divided upon itself.

The center cannot hold. The center cannot even hold itself.