Monday, April 06, 2009

Never in the field of human history has so much been taken from so many by so few

By Simon Davies and Donald Hunt

The last week in March started with the coordinated call from Russia and China for a new non-national reserve currency, an idea that was greeted as one would expect with some derision until US Treasury Secretary Timothy Geithner said he supported such an idea. We can only speculate that he forgot his role in this Act 2 of the international stage tragedy "Global Financial Crisis" and used his lines from Act 4 which has of course yet to come. In this Act the role of the US is to resist such calls.

The week ended with the G20 summit and more importantly with the G20 final communique which promises a dark future; for wrapped in the cloth of "free trade", a trillion dollars for the IMF and "trade finance" and the regulation of banker's pay is the formation of a global overseer, the Financial Stability Board and the announcement that "the era of banking secrecy (which means privacy) is over."

There is a great deal in the G20 final communique and what with the general goings on this coming week with the NATO summit following the G20 and US President Obama's visit to Ankara that we will be providing an analysis of the G20 summit and its context during the course of next week.

This week we take a closer look at who really benefited from the AIG bailout and the true size of the US governments financial commitments to the "Global Financial Crisis". With apologies to Winston Churchill and the fighter pilots of the Battle of Britain:-

Never in the field of human history has so much been taken from so many by so few


Since Tuesday, March 31st was the end of the first quarter of 2009, let's look at the quarterly numbers. The dollar gained ground in the first quarter, gaining 5% on the euro and 7.6% on the yen. The major world stock indices fell during the first quarter, with the Dow losing almost 16%, the FTSE 14%, the DAX 18%, the NIKKEI 8.5%, and the Hang Seng down 9.75%. The Brazilian BOVESPA was up 1.7%. Gold was up 5.5% in dollars and 11% in euros. Oil rose 7% in dollars and 12.6% in euros. [This week's and the quarter's data tables are at the end of this article].

For the week and two days since Friday, March 20th, world stock indices were up, mostly in the 2% to 6% range, as was the dollar (up 2.5% against the euro and 3% against the yen). Gold fell 3% and oil fell almost 5% in dollars.

Here are some charts following currency and commodity prices since January 2005. Note that oil prices and the dollar/euro exchange rates are very close to what they were in the beginning of '05. Gold, however, has more than doubled despite the immense downward pressure exerted by the world gold cartel as it seeks to maintain a cap on the price of gold and silver.

Dollar/Gold -- Note the ceiling at $1000

Dollar/Oil - back to Jan 05 levels



Gold:Oil ratio - quite a change in a year!

Reserve Currency

Some confusion was generated, deliberately or not, last week when U.S. Treasury Secretary Geithner told the Chinese that he was "quite open" to a new reserve currency besides the dollar.

The dollar plunged instantly against the euro, yen, and sterling as the comments flashed across trading screens. David Bloom, currency chief at HSBC, said the apparent policy shift amounts to an earthquake in geo-finance.

"The mere fact that the US Treasury Secretary is even entertaining thoughts that the dollar may cease being the anchor of the global monetary system has caused consternation," he said.

Mr Geithner later qualified his remarks, insisting that the dollar would remain the "world's dominant reserve currency ... for a long period of time" but the seeds of doubt have been sown.

The markets appear baffled by the confused statements emanating from Washington. President Barack Obama told a new conference hours earlier that there was no threat to the reserve status of the dollar.

What are we to make of this? As the Financial Times wrote, changing reserve currencies is quite an undertaking which ultimately hangs on "sovereign credibility and power":-

Global reserve currency

Athenian owls, Roman denarii, British sovereigns, US dollars. There have been many pseudo reserve currencies down the ages. Now the governor of the People's Bank of China has called for a new global currency "disconnected from individual nations". Russia, too, wants to move away from a world dominated by the dollar. Kazakh president Nursultan Nazarbayev suggests such a currency could be called the acmetal - an amalgam of "acme" and "capital".

But is there a case for one? In theory, yes. (Although no one was banging the table for change when emerging growth rates were still being powered by deliberately undervalued domestic currencies.) The reserve currency status of the dollar helped to create nasty global imbalances - one of the main culprits of the current downturn. As China, for example, recycled export earnings back into dollar-denominated assets, the US could happily run profligate trade deficits with impunity. That helped push up the price of US assets, particularly house prices.

Now surplus countries are stuck. They cannot diversify fast enough and a rapid sell down of US assets would destroy their portfolios. Not only that, global central banks holding about two thirds of their reserves in dollars are hostage to the Obama administration. Unsurprisingly, huge budget deficits and the Federal Reserve's leap into quantitative easing have foreigners fretting over the longer term health of the dollar.

Theory is one thing, however. In reality, currencies live and breathe more than just short-term economic air. The two other life forces for a reserve currency are sovereign credibility and power. China, Russia and India simply do not have long enough economic track records to justify backing a reserve currency. Find a single investor in this crisis that has panicked out of dollars into roubles. Of course, if China one day emerges as the dominant economic and military power, the status quo will change. Until then, investors cannot be rushed.
What the Financial Times seems to be avoiding is the obvious fact that the idea of a new international reserve currency means that it will be supra-national and the "power' and "credibility" will be delivered by a supra-national body or bodies. Such a body or group of bodies would have the effect of being a World Government.

One thing is clear, if destroying the dollar moves the Plan to concentrate control of the world into fewer hands, among which will be a handful of megabanks, it will happen; conversely, if the Plan calls for a strong dollar, that will happen. For the moment it appears that the confusion caused by Geithner's and China's statements was intended; or, as we said in our introduction, perhaps Geithner forgot which Act of the play we are in.


Once more we see gold being manipulated, this time ahead of the G20 summit being sold down aggressively to the $900 mark. At the summit we heard the same old tired story of IMF gold being sold into the physical market; a story that just keeps getting trotted out whenever the physical market looks likely to burst through the downward pressure exerted through the futures market.

Seeking Alpha has come across an interesting change in the futures market:-

NYSE Runs Out of Gold Bars: What Happens Next?

The NYSE-Liffe futures exchange has, it seems, run out of 1 kg bars of gold. Futures markets, like NYSE-Liffe and COMEX, try hard to maintain the fiction that they will deliver physical gold, [o]n completion of executed contracts. Indeed, to prevent fraud, U.S. law requires clearing members to keep a stockpile, of one kind or another, consisting of a minimum of 90% of metal. Up until October, 2008, it didn't matter. Only about 1% of long buyers of paper gold futures contracts typically took delivery. Now, the situation is very different. Demand has surged and, it appears, one major futures exchange, NYSE-Liffe, and by extension, the COMEX gold warehouses it shares with its larger cousin, are unable to meet the requirements of their contracts, vis-a-vis, delivery of 1 kg. bars.

As of December 31, 2008, the NYSE-Liffe mini-gold (YG) contract specifications were changed to read, in pertinent part, as follows:
33.2 fine troy ounces (+10%), no less than .995 fineness. Seller's discretion delivery of one vault receipt representing one bar or one Warehouse Depository Receipt (WDR) representing either 1/3 interest in one full size gold NYSE Liffe vault receipt or full interest in a NYSE Liffe Mini Gold vault receipt. Delivered to exchange approved vaults by exchange approved carriers.
But, before that, on August 26, 2008, it read as follows:

33.2 troy ounces (±5%) of refined gold, assaying not less than .995 fineness, contained in no more than one bar.

In summary, there is now so much demand for delivery of the mini-contracts that the exchange can no longer deliver 1 kg bars. When the wording was changed, a flurry of complaints resulted. Technically, in my opinion, if you bought a mini futures contract from an NYSE-Liffe clearing member, prior to December 31st, you could bind them to their legal contract with you, and force them to either deliver the 1 kg bar, or pay for you to obtain it on the open spot market. Based upon the original wording, NYSE-Liffe and its clearing members are legally obligated to deliver that 1 kg bar per contract, whether they want to or not, and regardless of the internal rules of the exchange. Whether anyone will force compliance, however, is an open question.
On top of this or perhaps because of it, COMEX has announced that it is launching a new E-Mini future contracts on gold and silver on April 19th covering, yes you guessed it, 1kg of gold and 1000oz of silver for which they is absolutely no mechanism for physical delivery. With no mechanism for delivery and only cash settlement the floodgates of market manipulation through naked short selling will be opened. Theodore Butler summed these new contracts up perfectly:-

Let me be as clear as I can - because these new contracts do not contain actual metal delivery clauses, they are, in my opinion, fraudulent contracts. The CME should be ashamed of itself for introducing them, and the CFTC disgraces itself (again) for not preventing their introduction.

With ever greater quantitative easing and the resulting inflationary pressures we can only wonder how long the blatant rigging of the bullion market can continue.

Monetary Policy, Inflation, Stimulus

If you are trying to keep score, according to Bloomberg, the U.S. has spent or committed almost $13 trillion on bailouts, rescues, and stimuli. Note the attitude displayed of the bankers and economist in the article below and ask yourself, with respect to each of them, if this is the attitude of a person who really understands what is going on, who hasn't a clue or is in on the scam:-

Financial Rescue Nears GDP as Pledges Top $12.8 Trillion

The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation's gross domestic product was $14.2 trillion in 2008.

President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation's 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

"The president and Treasury Secretary Geithner have said they will do what it takes," Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. "If it is enough, that will be great. If it is not enough, they will have to do more."

Commitments include a $500 billion line of credit to the FDIC from the government's coffers that will enable the agency to guarantee as much as $2 trillion worth of debt for participants in the Term Asset-Backed Lending Facility and the Public-Private Investment Program. FDIC Chairman Sheila Bair warned that the insurance fund to protect customer deposits at U.S. banks could dry up because of bank failures.

'Within an Eyelash'

The combined commitment has increased by 73 percent since November, when Bloomberg first estimated the funding, loans and guarantees at $7.4 trillion.

"The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets," said Dana Johnson, chief economist for Comerica Bank in Dallas.

"Everything the Fed, the FDIC and the Treasury do doesn't always work out right but back in October we came within an eyelash of having a truly horrible collapse of our financial system, said Johnson, a former Fed senior economist. "They used their creativity to help the worst-case scenario from unfolding and I'm awfully glad they did it."

Federal Reserve officials project the economy will keep shrinking until at least mid-year, which would mark the longest U.S. recession since the Great Depression.

The Real Economy

The recession in the UK was worse in the 4th quarter of 2008 than thought due to sharper decreases in consumer spending and construction.

In the United States, home prices fell 20% from January 2008 to January 2009 in the 20-city index published by Case Shiller. The city of Flint, Michigan, made famous by Michael Moore's classic documentary, Roger and Me, is actually considering shutting down parts of the city:-

Look in any direction from Bianca Bates' north Flint home, and you'll see graffiti-covered siding, boarded-up windows and overgrown lots

About half of the homes on her block are burned out or vacant magnets for drug dealers and squatters. It isn't where she thought she'd end up, but it's all she can afford to rent.

"It's a dangerous place to live," said Bates, 21, who lives on East Russell Avenue. "Everywhere you look, these houses are empty around here."

Property abandonment is getting so bad in Flint that some in government are talking about an extreme measure that was once unthinkable -- shutting down portions of the city, officially abandoning them and cutting off police and fire service.

Temporary Mayor Michael Brown made the off-the-cuff suggestion Friday in response to a question at a Rotary Club of Flint luncheon about the thousands of empty houses in Flint.

Brown said that as more people abandon homes, eating away at the city's tax base and creating more blight, the city might need to examine "shutting down quadrants of the city where we (wouldn't) provide services."

He did not define what that could mean -- bulldozing abandoned areas, simply leaving the vacant homes to rot or some other idea entirely.

On Monday, a city spokesman downplayed Brown's comments.
US banking rescue

Just in case there was any doubt who is running the United States it was wiped away as President Obama had a "very pleasant" meeting with the big bankers then, a week later, fired the head of General Motors and condemned GM and Chrysler to bankruptcy. The auto companies actually make something useful and provide salaries, pensions and healthcare to lots of working and retired people while the banks have been shown to be nothing more than immense private casinos.

There is no doubt that the economic system needs to be restructured, banks and auto companies included, but to continue bailing banks out with essentially no conditionality other than a few figs leaves to placate the public while condemning the millions of people associated with the auto industry is reprehensible. Maybe the auto companies should have donated more money to the campaigns of the President and members of Congress.

Although after the meeting with the bankers, there was a show of some dissatisfaction, that was only for public display. Joe Kishore:-
Every aspect of the administration's economic policy caters to the interests of the financial elite, of which the president is merely a mouthpiece. The private meeting at the White House had the air of a conspiracy against the public, a gathering to discuss carving up state resources in order to hand them over to the banks and major investors.
The discussions about the auto industry revolved around how best to deny healthcare and pensions obligations to retired workers. When, after a massive giveaway to the banks, Obama had to appear tough against the corporate elite, he took on the politically easy target of the auto companies. Of course the auto companies are no angels having connived to suppress fuel-efficient and alternative fuel vehicles for decades and building their products on the basis of them being consumables rather than long term assets. But they are one of the few remaining pillars of manufacturing in the US with millions of livelihoods depending upon them. It takes years to retool auto plants so decisions taken now will be hard to reverse; which may be exactly the point of course.

Joe Kishore again:-

As the administration works with Wall Street to make the banks - and the personal portfolios of the bankers - whole, Obama is preparing a massive attack on the working class. During his press conference, the president repeatedly stressed his determination to tackle "high health care costs" and implement "Entitlement reform" - i.e., cuts in Social Security, Medicare and Medicaid.

As the question of restrictions on executive bonuses is dropped, Obama repeated on Thursday his insistence that any aid to the auto industry be conditioned on further job and wage cuts from autoworkers. In an online town hall meeting, the president said that the auto industry will have to "make some pretty drastic changes. And some of those are still going to be painful."

The policy of the administration is to ensure that this "pain" is born entirely by the working class, while the looting of public assets by the financial elite continues.
The Geithner plan to devote $1.2 trillion to take "toxic" assets off bank balance sheets is breathtaking in its criminal simplicity: use taxpayer money to pay banks for their worthless assets, leaving the banks to run their profitable businesses and keep the money they stole for over a decade. The scheme is headlined at $1.2 trillion which according to Douglas Elliot at the Brookings Institute is the sum total of toxic mortgage assets held by US banks. Not only that, but they get to run one more scam.

The Free Market, Financial Style: How the Scam Works

Newspaper reports seem surprised at how high banks are bidding for the junk mortgages that Treasury Secretary Geithner is now bidding for, having mobilized the FDIC and Fed to transfer yet more public funds to the banks. Bank stocks are soaring - thereby bidding up the Dow Jones Industrial Average, as if the "financial industry" really were part of the industrial economy.

Why are the very worst offenders - Bank of America (now owner of the Countrywide crooks) and Citibank the largest buyers? As the worst abusers and packagers of CDOs, shouldn't they be in the best position to see how worthless their junk mortgages are?

That turns out to be the key! Obviously, the government has failed to protect itself - deliberately, intentionally failed to do so - in order to let the banks pull off the following scam.

Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million as defaults loom on Alt-A "liars' loan" mortgages and sub-prime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting operators taking out mortgages at far more than properties were worth and pocketing the excess.

The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each other's junk CDOs.) The government - that is, the hapless FDIC - puts up 85 per cent of $5 million to buy this - namely, $4,250,000. The bank only needs to put up 15 per cent - namely, $750,000.

Here's the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth.

The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85 per cent. So the strategy is to overpay, overpay, and overpay. Paying 15 per cent is a small price to pay for getting the government to put in 85 per cent to take the most toxic waste off your books.

The free market at work, financial style.

What Michael Hudson, author the article above, has skimmed over is that the scam is even bigger than he describes so succinctly. According to Elliot at the Brookings Institute; the private investors (the banks, hedge funds and private equity funds) will have their losses capped at 10 to 20 percent of what they put up; the Fed will come in 50/50 on the meagre amount the investor puts up and on occasion will lend the entire investment amount. The scheme is astounding in depth and breadth; it is a trillion dollar heist.

AIG and Goldman Sachs

Talking of scams and heists, as we discussed last week, the grandstanding in the US Congress over AIG bonuses was clearly designed for the media spin machine while deftly keeping the real secrets of the AIG bailout out of the public mind. As Megan Slack at Alternet points out, the Merrill Lynch "performance related" bonuses were 22 times the contractual "retention" bonuses at AIG. The Merrill bonuses were also 36.2% of the TARP monies granted to Merrill and Bank of America, it's new parent. We may have missed it of course but we didn't notice the roof of Congress being blown off in uproar and hastily cobbled tax Bills being rushed through at the Merrill pay outs. It is therefore appropriate to take a close look at where some of the AIG bailout money went.

Last week we explored how AIG Financial Products (AIGFP) acted as final insurer for an array of Credit Default Swaps and other unregulated derivatives in a manner that meant that when the value of the insured securities dropped AIGFP was required to provide cash collateral. AIGFP was also heavily involved in the Stock Lending business which included similar arrangements for AIGFP to provide cash collateral in the event of the value of stocks falling. On March 15th AIG disclosed who its counterparties were and how much money they had received under these collateral and other arrangements between September 16th 2008 and December 31st 2008.

Setting aside the sums paid to US States, we find that $22.4 billion was paid out directly as collateral against Credit Default Swaps; $27.1 billion indirectly, via a company set up to manage parts of the AIGFP portfolio called Maiden Lane III, as collateral against Credit Default Swaps; and $43 billion to Securities Lending Counterparties, all to banks.

The individual beneficiaries of note were; Goldman Sachs - $12.9 billion, Bank of America/Merrill Lynch - $ 12.4 billion, Societe Generale $11.9 billion, Deutsche Bank - $11.8 billion, Barclays - $8.5 billion, UBS - $ 5 billion and BNP Paribas - $4.9 billion.

Of course complete silence over where all this money went was impossible. Initial calls for investigation came from those who champion global markets when it suits the US and then suddenly find themselves violently opposed to global markets when it doesn't suit. The initial wave of protectionist rhetoric focused on the fact that foreigners were reaping the benefits of the AIG bailout but this has now had to be broadened to include Goldman Sachs.

AIG Payments to Banks Should Be Probed, Lawmakers Say

Lawmakers called for a federal probe into whether banks including Goldman Sachs Group Inc. received more funds than necessary from the bailout of American International Group Inc.

"We would like to know if the AIG counterparty payments, as made, were in the best interests of the taxpayers," said 27 members of Congress led by Elijah Cummings, a Democrat from Maryland, in a letter dated yesterday to Neil Barofsky, inspector general for the Troubled Asset Relief Program. Banks got about $50 billion in payments tied to credit-default swaps.

The demand reflects widening frustration among lawmakers with the rising cost of AIG's bailout, now valued at $182.5 billion. The U.S. has propped up New York-based AIG four times since September after a cash shortage left the insurer unable to back up protection sold to banks on their fixed-income holdings. The lawmakers asked why banks weren't asked to take some losses to help stabilize AIG and the financial system.

"Was any attempt made to renegotiate and close out these contracts with 'haircuts?'" the letter asked. "If not, why not?"

The query from the lawmakers concerns payments made to unwind some of AIG's credit-default swaps, contracts similar to insurance that pay investors if bonds don't pay as promised. AIG sold swaps to more than 20 U.S. and foreign banks.

Imposing 'Haircuts'

After AIG was rescued by the U.S. from collapse last year, banks that bought credit-default swaps got $22.4 billion in collateral and $27.1 billion in payments to retire the contracts, the insurer said earlier this month. Goldman Sachs, Deutsche Bank AG and Societe Generale SA were among the largest recipients. The letter asked whether holders received 100 cents on the dollar for their securities, a sum they wouldn't be entitled to get unless their bonds actually defaulted...

So in summary we have a group of international banks who have made billions from the trading of securities, often through the deliberate and careful manipulation of prudential and legal regulation, finding that the value of their portfolios was severely reduced due to a mixture of factors including the simple fact that many of the securities were in fact useless junk. Other securities may not be useless junk but nobody can really tell as they depend upon ordinary people paying their mortgages and companies paying their loan commitments over time.

Under the law, the banks would have to sit out the crisis and see what could be recovered over time. Their insurer is bankrupt and cannot be relied upon as it is insolvent and must therefore be wound up. Whether they recover 5 cents on the dollar or more or less will be a matter of time and a great deal of hassle. If this was the insurance on our homes, our assets or our life savings this is what would happen.

But the law does not apply to the financial elite; other rules apply to them.

Before moving on let's cast our minds back to September 2008 when Lehman had collapsed, AIG was rescued and the New York Times ran this story:-
Behind Insurer's Crisis, Blind Eye to a Web of Risk

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals' woes, was A.I.G.'s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman's side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.'s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm's own interests.
As FTAlphaville put it:-

... which caused something of a furore.

Goldman strenuously and very publicly denied the gist of the allegation. So aggressive was their rebuttal, in fact, that the wires even wrote up separate stories on it. Here's Reuters:
Goldman Sachs Group Inc rejected as "seriously misleading" a published report on Sunday that said the Wall Street bank had as much as $20 billion of exposure to the troubled insurance giant American International Group Inc.

Lucas van Praag, a Goldman spokesman, on Sunday said the Times article was wrong to suggest that Goldman had reason to be concerned about AIG's problems.

"Although we have said many times on the record that our exposure to AIG was, and is, not material, the reporter chose to pursue a story line which suggests, by innuendo, that is not the case," he said in an e-mailed statement.

"For the avoidance of doubt, our exposure to AIG is offset by collateral and hedges and is not material to Goldman Sachs in any way," he continued. "The conclusions about our interests that readers of the New York Times article are invited to reach are seriously misleading."

Now, being humble souls we at may not have a proper understanding of the value of money but doesn't $12.9 billion seem like a material amount of money to you?

At the end of 2008 Goldman Sachs had $42.7 billion of Tangible Common Equity (TCE - the type of core capital that the Obama administration is focused on), should AIG not have paid out that $12.9 billion the hit for Goldman would have been taken against this. Such a significant hit to a bank's capital in the current environment might have been catastrophic. What Goldman has collected between the end of 2008 and now under the ever increasing AIG bailout is anybody's guess.

Not only is $12.9 billion a material amount of money and banking capital but the last time one of us did a stock exchange exam it was a criminal offensive to make false or misleading statements in relation to a public company, especially if the person making those statements was an officer of the company. So it seems to us that members of the US Congress instead of grandstanding for punitive taxes against AIGFP executives should be demanding criminal probes of Goldman Sachs and its current and former employees. This is of course not going to happen because Goldman Sachs former employees run the US government. What an excellent example of the corporate controlled state, otherwise known as Fascism.

To believe that the financial crisis is a result of mistakes or stupidity would be naïve. Larry Summers, Timothy Geithner and their colleagues are not stupid. Nor, more importantly, are the faceless people giving them their orders. The mess the whole world is in is a direct and completely foreseeable result of the legal and regulatory framework put in place with the commencement of the repeal of the Glass-Steagall Act in 1999. Dave Lindorff dug up quotes from the 1999 article about the repeal in the New York Times:
A Financial History Lesson: These Are the People We Expect to Fix Things?

George Santayana once famously said, "Those who cannot learn from history are doomed to repeat it." But what about those who don't just ignore history, but who hire and take counsel from those who committed historic follies in the past?

Back in November 1999, Congress passed legislation pushed by then Sen. Phil Gramm (R-TX), rescinding the Depression-era Glass-Steagall Act. The measure, backed by the Clinton administration, and overwhelmingly passed by the Senate (90-8) and the House (362-57), opened the way for banks to merge with investment banks and insurance companies, and led directly to the current financial cataclysm.

A report on that Congressional action written by reporter Stephen Labaton and published in the New York Times on Nov. 5, 1999 under the headline "Congress Passes Wide-Ranging Bill Easing Bank Laws," includes some remarkable quotes from key players in that sellout to the financial sector.

Here's Larry Summers, a chief architect of the current financial industry multi-trillion-dollar bailout giveaway being orchestrated by the Obama administration, where he serves as director of President Obama's National Economic Council:-

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century. This historic legislation will better enable American companies to compete in the new economy.''

And here's what Sen. Charles Schumer (D-NY), awash in Financial industry campaign donations but currently in high dudgeon over the Wall Street's bonus payments to executives, speaking about the '99 measure eliminating Glass-Steagall:-

''If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world. There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive."

The article quotes the Clinton administration and Summers' Treasury Department as predicting that revoking Glass-Steagall and permitting banks to expand into investment banking and insurance would save consumers "$18 billion a year" through economies of scale - a figure that seems rather quaint as taxpayers now pony up trillions of dollars to rescue those same institutions. (The article notes that critics of deregulation argued that even those paltry savings, probably overstated, would flow to financial sector investors, not to consumers.)

The old Times clip (brought to my attention by alert veteran radical writer and activist Bert Schultz of Philadelphia), does highlight a couple of prophetic heroes, too.

Sen. Byron Dorgan (D-ND), one of seven Senate Democrats who voted against revoking Glass-Steagall, said:-

"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010. I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''

And then there's the late Sen. Paul Wellstone (D-MN), who died in a plane crash during his campaign for re-election in 2002. Congress, he said, seemed:-

"...determined to unlearn the lessons from our past mistakes. Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis. Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''

For the record, also voting against Glass-Steagall repeal in the Senate were lone Republican Richard Shelby of Alabama, and six other Democrats: Barbara Boxer (CA), Richard Bryan (NV), Russ Feingold (WI), Tom Harkin (IO), and Barbara Mikulski (MD). 51 Democrats, 5 Republicans and 1 independent voted against the measure in the House.

Treasury Secretary Tim Geithner, a key player in the current bailout scheme, isn't mentioned in the Times article about Glass-Steagall, but at the time was a protégé of Summers, working as undersecretary of the treasury for international affairs.

While they are thankfully well out of the loop in the current scramble in Washington to both end the reverse the economic collapse and try and help financial companies and financiers profit from it, it's worth reading too in this 10-year-old clip what Phil Gram and then Sen. Bob Kerry (D-NB and now embattled president of the New School in New York City) had to say about ending Glass-Steagall.

Sen. Gramm:-

'The world changes, and we have to change with it. We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''

And then Sen. [Bob] Kerry, with a line that should probably be etched someday on his tombstone as his most memorable line:-
"The concerns that we will have a meltdown like 1929 are dramatically overblown."
The New York Times article did say that
The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.
As always, we would all have been served better if the "handful of dissenters" had been listened to. However, we believe that the policymakers quoted in favor of the Act did realize what the consequences would be; they knew that it would open the flood gates of financial speculation known in banking as "proprietary trading"; their subsequent actions in allowing excessive bank leverage, keeping credit derivatives deliberately unregulated and emasculating the SEC and other regulators confirms this. They were lying to the public and they were conducting a scam in favour of the financial elite and themselves.

Under a Guise

With its President, Nicholas Sarkozy threatening to boycott the G20 summit, a threat so ridiculous in its hollowness that it was clearly stage-managed for the media spin machine, France is presented as being at the forefront of the push for tougher regulation and in the battle against 'tax havens'.

As we have commented before, there is nothing in the nature of this manufactured crisis that can be laid at the door of 'tax havens' yet Sarkozy makes it one of his "red line" principles upon which he is prepared to sacrifice the entire G20 summit. For Sarkozy this is a "red line" issue; for us this is a very large red flag for it seems that there are global moves afoot to establish totalitarianism. France and Germany are championing the destruction of financial privacy under the guise of fighting tax evasion; the EU as a whole is championing the replacement of parents with the state in the minds and lives of children; the UK is championing the destruction of privacy in general in its mania for video, email, postal and telephone surveillance under the guise of fighting terrorism; Australia is championing wholesale national censorship of the internet (the last free and open medium of exchange) under the guise of fighting terrorism and pedophilia; the US is championing the violence of the police state and total population control with its heavy use of Tasers, establishment of internment camps, "in-your-face policing" and "papers please" control that would make the Gestapo proud (in fact, if one traces the real origins of the CIA it IS making the Gestapo proud for that is the origin of much of the CIA); while Israel perfects the art of apartheid and genocide while portraying itself as the ultimate victim.

Each of these planks of the totalitarian future is being "perfected" and normalized in one country or region and then slowly introduced elsewhere. So while people, including yourself perhaps, may sit back and nod sagely that it is important to crush tax havens and prevent those dreadful tax evaders from evading their legal obligations remember that they are supporting a key part of the totalitarian future.

Sarkozy got what he wanted on tax havens in text that should be chilling for us all:- take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;
In case it needs repeating, we urge you to truly understand what is meant by "non-cooperation" and the threat of sanctions. Remember that Iraq and Afghanistan are both sovereign nations that did not cooperate. Iraq was subject to sanctions that killed an estimated 500,000 children under 5 over ten years. Iran is a sovereign nation that is deemed by its enemies to not be cooperating and is now under a throttling regime of sanctions that go mostly unreported in the mainstream media.

There is a new world order being implemented both right in front of us and in the shadows; those that resist are termed "non-cooperative" and will have the full weight of propaganda turned against them such that should they continue to resist then sanctions will be imposed. For nations that rely on international finance for their survival, sanctions will no doubt bring them to heel; for other nations more brutal measures may be required, as in Iraq and Afghanistan. Every move will be justified using the mainstream media propaganda machine; the aggressors will be portrayed, as always, as seeking to right the wrongs of the world; all the while the dark suppressive blanket of totalitarianism is drawn further over us all.

The power of the nations of the G20 is essentially absolute so once again we see history marching forward forgetting the lessons of its past and in particular the old adage that "Power Corrupts and Absolute Power Corrupts Absolutely".

Market Data

The markets from March 23rd to March 31st

Previous close March 31st close Change% change
Gold (USD) 952.90925.0027.902.93%
Gold (EUR)701.80698.063.740.53%
Oil (USD) 52.1049.662.444.68%
Oil (EUR)38.3737.480.892.33%
USD / EUR0.7365 / 1.35780.7547 / 1.32510.0182 / 0.03272.47% / 2.41%
USD / GBP0.6918 / 1.44550.6982 / 1.43230.0064 / 0.0132 0.93% / 0.91%
USD / JPY95.857/ 0.010498.82/ 0.01012.963 / 0.00033.09% / 2.88%
HANG SENG 12,83413,5767435.79%
US Fed Funds 0.19%0.31%0.12n/a
$ 3month 0.20%0.20%0.00n/a
$ 10 year 2.64%2.66%0.02n/a

The markets from January 2nd to March 31st

January 2nd close March 31st close Change% change
Gold (USD) 876.80925.0048.205.50%
Gold (EUR)629.698.0668.2710.84%
Oil (USD) 46.3549.663.317.14%
Oil (EUR)33.2937.484.1912.58%
USD / EUR0.7183 / 1.39220.7547 / 1.32510.0364 / 0.06715.07% / 4.82%
USD / GBP0.6874/ 1.45480.6982 / 1.43230.0108 / 0.0225 1.57% / 1.55%
USD / JPY91.830/ 0.010998.82/ 0.01016.99 / 0.00087.61% / 7.34%
HANG SENG 15,04313,5761,4679.75%
US Fed Funds 0.06%0.31%0.25n/a
$ 3month 0.08%0.20%0.12n/a
$ 10 year 2.37%2.66%0.29n/a

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Sunday, March 29, 2009

Inflating Their Way Out of Trouble After All

By Simon Davies and Donald Hunt

A busy two weeks in the global economy as the taps were opened by governments busy creating new money. Sadly they decided to use it to buy government bonds and worthless "toxic assets" rather than employ and train citizens and build much needed national infrastructure.

Inevitably, with new money flowing into the system inflation will grow further eroding the value of savings and wages, while mobile money will seek a home in commodities thereby adding a double boost to the cost of living for us all. Governments seem to be clinging to the hope that excess supply will dampen the inflationary pressure; a forlorn hope. China and Russia called for a new global reserve currency clearly losing patience with the US pretense at global economic leadership.

The US Congress became "a rat's nest of grandstanding" on the issue of AIG bonuses while remaining silent on the secrecy of the Federal Reserve as to who's been receiving the trillions in bailout money and on Goldman Sachs receipt of over $12 billion in AIG bailout money.


World stock indexes all rose over the past two weeks, led by financial institutions, on news that the bailouts are having their intended effect of pushing the losses onto the taxpayers and leaving profitable business to the financial institutions.

Over the past two weeks the U.S. dollar fell. The drop in the dollar is not surprising given the $1.5 trillion in extra money to be brought into existence and then thrown into the black hole that is the US financial system. Oil jumped 14% over the past two weeks while gold rose 6% against the dollar but now seems range bound between $930 and $950/oz.

Crude Oil Rises as Dollar's Decline Increases Commodity Demand

Crude oil rose to the highest in almost four months in New York as the dollar extended its losses against the euro, increasing the investment appeal of commodities.

Oil advanced for a third day as the dollar's decline improved the appeal of hard assets as an inflation hedge and made commodities cheaper for non-U.S. buyers. Crude for May delivery jumped 11 percent last week as the U.S. Federal Reserve announced new initiatives to lower interest rates and speculators turned bullish on oil for the first time in three weeks.

"Sentiment has definitely improved on the back of the Fed announcement," said Toby Hassall, a research analyst at Commodity Warrants Australia Pty in Sydney. "We're going to need further weakness in the dollar to really establish a base at $50."
The Euro was the main beneficiary of US dollar weakness again, having strengthened 7.7 against the dollar during March.
With the US, UK, Japan and Switzerland now fully committed to "quantitative easing", the creation of new money by the government, there are few safe havens other than the Euro, as John Normand at J.P. Morgan put it:-

"The dollar is a sell near term versus those currencies where quantitative easing is off the table. The top on euro-dollar will come when the ECB looks likely to join the quantitative easing crowd. For now, it's content to stay on the sidelines."

The markets the last two weeks (from March 8th to March 22nd)
Previous close This week's close Change% change
Gold (USD) 939.50952.9013.401.43%
Gold (EUR)742.57701.8040.775.49%
Oil (USD) 45.6752.106.4314.08%
Oil (EUR)36.1038.372.276.30%
USD / EUR0.7904 / 1.26520.7365 / 1.35780.0539 / 0.09266.82% / 7.32%
USD / GBP0.7096 / 1.40920..6918 / 1.44550.0178 / 0.0363 2.51% / 2.58%
USD / JPY98.270/ 0.010295.857/ 0.01042.413 / 0.00022.46% / 1.96%
HANG SENG 11,92212,8349127.65%
US Fed Funds 0.25%0.19%0.06n/a
$ 3month 0.20%0.20%0.00n/a
$ 10 year 2.87%2.64%0.23n/a

Fiscal Stimulus

Fiscal Stimulus should perhaps better be termed "loads of money" as despite their being hundred of thousands of economists in the world, the best that governments can come up with as they grapple with a crisis that they seem resolute to exacerbate, is to create new money and throw it at financial investors, a process know as "quantitative easing". This would be a good thing if the money were being used to create but instead, as is wholly predictable, it is being pumped into the financial system rather than the real economy. In the UK, ₤75 billion is being created to buy UK government bonds (known as gilts). An incredible sum considering it is 20% of all gilts outstanding.

In the US an equivalent sum would be $900 billion according the UK Financial Times. No such luck for holders of US Treasuries who would be delighted to sell as the amount earmarked by the US Treasury is "just" $300 billion. However, there was great news for US banks that will get to unload over $1.2 trillion of "toxic" mortgage backed securities onto the US government.

So if you had you eye on a new highway, school, hospital, community centre, transport system, affordable housing or pretty much anything else that would pay millions of ordinary people to build things that will last at least another generation or perhaps some newly trained teachers, doctors or nurses you will have to wait for there is a far more pressing need to save the banking system.

The other economic tools available to government are of course interest rates, which they are all busily cutting as fast as possible in a race to zero, and stimulus packages which, if properly directed could make huge differences. The question of course is whether they are being properly directed. If you have received any meaningful indication in your bank account, through your employer or in the price you pay for goods and services that these massive stimulus packages are reaching ordinary citizens please let us know. Before recipients of tax refunds bombard us with the details, those don't count. They don't count because (i) they are not meaningful in terms of total household finance, (ii) you had to pay tax to get a refund, (iii) it was your money already, they just gave a bit back, (iv) the tax system is totally rigged in favour of the rich so getting screwed a bit less is not a good deal and (v) compare tax refunds per capita with bailout dollars per bank shareholder and you'll know why they don't count.

So here's this weeks litany of stimulus:-

South Korea announced a stimulus package worth $3.9 billion to be followed this month by one totaling $33 billion.

Colombia lowered interest rates as did Mexico. Australia signaled its intent to lower interest rates further as did Eastern European countries, abandoning any effort to prop up the value of their currencies. Eastern European currencies did find some relief with the announcement of an increase in the amount of aid forthcoming from the EU. India also signaled lower rates.

It is an interesting freak of economics that when a government decides to create new money there is an immediate inflationary boost which predictably results in the value of the currency falling on world markets, yet when there are massive booms fueled by bank created "credit money" such as that engineered up until 2007, despite the fact that there is often a greater inflationary effect, we are told everything is just fine and the "markets" behave accordingly. In reality, the real rate of credit created inflation and particularly asset price inflation rips the guts out of the average person's economic security while tethering them to a debt burden that will remain with them for the entire lives.

There are infinitely better ways to use newly created money than "buying" worthless paper from insolvent banks. For example governments could follow the example from the 19th century of Guernsey by paying people with newly created money to build nationally important infrastructure or they could train people for jobs which we know there is ready demand for such a teachers, doctors, nurses and a myriad of other professions and trades where skills shortages are extreme.

Sweden and Canada are expected to join the quantitative easing programme soon. This will leave the world in a new and bizarre situation as the major economies outside Asia Pacific will be busily printing money in a series of what are looking increasingly like competitive devaluations of their respective currencies. Essentially a devaluation of all western currencies will occur as Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London said:-

"Quantitative easing across the board will diminish the fiat currencies as a store of value. Investors may then seek refuge in harder currencies such as commodities."
We would remove the "may" and say that speculative money and any mobile money seeking to protect itself from this across the board devaluation will seek refuge in commodities. The commodity of choice would normally be gold followed by silver yet gold, as we mentioned above, remains range bound between about $930/oz and $950/oz. The gold market is one of the most controversial in the world. There is an immense body of evidence, produced by serious and professional participants and observers, which shows that it is highly manipulated. The data that proves the manipulation is of course ignored and the messengers attacked and ridiculed. This last week is a good example of the manipulation and how it works.

While oil jumped 14% against the dollar gold nudged up just 6%. As a haven of value gold is unique so it would seem a little odd that at the time the world's de facto reserve currency is devaluing itself by over $1.5 trillion gold is out performed by oil for which there is currently a very finite demand, peak oil propaganda notwithstanding. The clue to why gold performed the way it did is that two days after the announcement of quantitative easing in the US an additional 1.2 million ounces of gold was sold short on Comex. The effect of short selling is that it gives the impression that supply is exceeding demand such that it creates a downward pressure on the gold price.

Therefore somebody was in the gold futures market driving the gold price down. If the details and history of how gold is manipulated are of interest take a look at the Gold Anti-Trust Action Committee (GATA). There used to be a Wikipedia article on GATA but it was deleted in February 2009. Considering that GATA is ten years old, has some highly respected Board members including Catherine Austin-Fitts and has funded two landmark anti-trust law suits it seems odd that it be removed with the reason given as, "This non-notable organization has no third-party sources for it's notability."

There was an interesting although depressing comment from Neil Mackinnon, a former economist for the U.K. Treasury and now chief economist and partner at ECU Group, a London based hedge fund with about $1 billion in assets:-

"All major central banks will have to follow the Fed and adopt quantitative easing. If the European policy makers are hoping they will get a free ride on the U.S. stimulus, hoping they will look more prudent, they are deluding themselves."

Which means that every major economic nation will be forced to create bundles of new money which will cause currency devaluation, known as inflation, across all western nations thereby wiping out the value of savings and wages; the knock-on effect into emerging markets will be devastating. To exacerbate matters mobile money will seek to find a home in readily tradable commodities, especially in the event that the gold market continues to be manipulated, thereby driving the price of basic essentials even higher. Those of us caught in the middle are already being whipsawed and it's going to get a lot worse the more quantitative easing goes on.

While we sit looking at the stark reality of such a future it is clear that we are not the only ones who'd like to see a different currency system for both Russia and China have called for a new international reserve currency modeled on the IMF's Special Drawing Rights. It seems that Russia and China now see the pitfalls of allowing the world's dominant economic nation and dominant military power to have free rein for so long. Both countries are at the mercy of the US. The devaluation of the US dollar is making Chinese manufactured goods more expensive for US consumers while China's strategic monetary reserves are shrinking in value as the dollar and other currencies devalue. As Zhou Xiaochuan, governor of China's central bank, said the desirable goal of the international monetary system is to:-

"create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."
In an indication of the bizarre nature of investor "sentiment" Hungarian and Polish Hungary banks shares rose following the fall in the Swiss Franc (due to quantitative easing) as many of the loans made to Hungarian and Polish nationals are denominated in Swiss Francs and Euro so the local currency write downs these banks will have to make is momentarily reduced. Never mind that these banks, like their brethren in Western Europe are essentially bankrupt. It is this short term nature of the financial markets that exemplifies the disconnect between those seeking self interested profit and those seeking the long term benefit of all people on this planet. How can the latter win over the former when the mindset of self interest is the central core of the entire political, economic and social system?


Other G20 nations have joined the United States in signaling a willingness to use tax money to relieve financial institutions of so-called "toxic assets." In other words, paying the gambling addicts gambling debts off so they can keep on gambling.

Troubles in auto manufacturing are not limited to the United States. In Japan both Mazda and Nissan are in trouble with Toyota eating through it's cash reserves at an estimated rate of $10 billion a quarter. Nissan has tapped the US government's trillion dollar aid programme, issuing $1.5 billion in bonds backed by auto loan receivables.

Mazda, Shut Out of Bond Market, May Need Aid as Cash Dwindles

Mazda Motor Corp., burdened with the second-worst credit rating among Japan's carmakers and a 62 percent surge in short-term borrowing this fiscal year, plans to apply for government aid as it consumes cash.

"We can't sell bonds right now," said Nobuyoshi Tochio, general manager of Mazda's financial services division. "The market isn't functioning. Conditions are really bad."

Mazda, Japan's second-largest car exporter, used 174 billion yen ($1.8 billion) in cash last quarter as sales of Mazda6 sedans have plunged in the U.S. and Europe. The Hiroshima-based company may turn to the government for low- interest loans as its junk rating prevents it from following Toyota Motor Corp. in tapping capital markets.

"Mazda needs loans from the government badly, as it's vulnerable," ....."The company is important to the local economy, so it should be able to get them."
[ ]

Surging unemployment and tight credit has driven overall car demand to an almost 30-year low in the U.S. In the first two months of 2009, the company's sales plunged 29 percent in the U.S., 16 percent in Europe and 38 percent in Japan.
Exacerbating the drop in sales is the yen's 17 percent gain against the euro and 7.5 percent rise against the dollar in the past six months.......Every 1 yen drop against the dollar and euro cuts Mazda's annual operating profit by 2.6 billion yen and 1.4 billion yen, respectively.

In response, the carmaker slashed production by at least 221,000 vehicles in the second half of the fiscal year, slowing down the rate it was burning cash.
A little aside here: Mazda say the bond market isn't functioning which is not entirely true. The bond market has been remarkably busy, the problem is that while there is a lot of money looking for a safe haven there is also an almost inexhaustible supply of government guaranteed and other highly rated issues which is crowding out higher risk issuers such as Mazda. Such is the self-fulfilling nature of financial crises.

The saga of the overextended and insolvent German mortgage lender, Hypo Real Estate continued with a war of words regarding its nationalization between its major US based investor, J.C. Flowers & Co., and German regulators.

J.C. Flowers, the head of the firm, which holds 24% of Hypo Real Estate wants to keep his shares while the German government and therefore the German people bailout the bank to the tune of billions and possibly as much as €1 trillion. His argument is essentially that as that is what is being done in the US so the same must be done in Germany - an argument that is reflective of the mindset of the adherents to pure free market capitalism; a singularly self interested and rapacious mindset.

"Of course Hypo Real could not survive without the assistance of the German state and Germany; the government and the people have done the bank a good service," Flowers told the Bundestag, or lower house of parliament, finance committee hearing. "Steps taken were very necessary and appropriate though not unique, being taken by other states around the world."
[ ]

"Hypo's shares have positive value and with restructuring of the bank we believe the shares with state support have the prospect for long-term recovery," said Flowers.
[ ]

"It doesn't surprise me" that Flowers is insisting on keeping his stake in Hypo Real Estate, Merkel told reporters in Berlin. What's decisive is the German parliament's vote on the planned expropriation law, she said.

She reiterated that Hypo cannot be allowed to fail because of the bank's "systemic" importance. "That's why we need that 'last resort,'" she said.
The US announced plans to buy $1.2 trillion of "toxic" bank assets, namely mortgaged backed securities. The details were released late as Timothy Geithner, US Treasury Secretary, was busy trying to save his backside being bitten off by a bunch of hypocritical members of Congress that have recently contracted a severe form of rabies which causes them to foam wildly at the mouth when the topic of banking bonuses is in the air, more on which a little later.

It's a sweet deal for the banks but you'd never know it from the reactions with many complaining of having to sell too cheaply.

Meanwhile, yet another time bomb of toxic assets is about to hit the banks, shipping loans. Just like real estate mortgages which become worthless pieces of paper when the home owner cannot pay the monthly payments and the home is worth a fraction of what was originally paid for it, so too the ship mortgage market. Even with nearly 500 container ships laid up (taken out of circulation) there just isn't the global demand to keep shipping rates up. As a result the value of vessels, just like that of real estate is dropping like a stone; the NYK Procyon, a 4,750 teu (Twenty foot Equivalent Unit or one of the short containers) container ship sold for about $10 million last week whereas it would have been nearer $50 million a year ago.


Confidence is viewed as a key economic indicator for the simple reason that it is in effect a measure of how much we all believe the big lie that is the global economic system. The economic system relies on all of us believing in it. We have to believe that the bank note in our pocket is actually worth something when in reality it is just a piece of paper for which a bank promises to give you another piece of paper of the same value. As you can see that is a circular proof of value and therefore valueless, unless of course you keep believing otherwise. This is why the G20 continually pledge to "restore confidence"; and of course along with confidence "growth" but more on "growth" another time.

We are told that the Federal Reserve will not tell us where the bulk of the money it is lavishing on the US banking system is going because otherwise "it would cast a stigma on recipients". Which is to say that people would stop having confidence in those banks and other institutions that can only survive on government money.

So when confidence drops it is a measure that those in power watch closely.

South African Manufacturing Confidence Tumbles

South African manufacturing confidence tumbled in the first quarter as the global economic crisis slashed export demand, the Bureau for Economic Research said.

The manufacturing business confidence index fell to 16 from 31 in the previous three months, the bureau, based at the University of Stellenbosch near Cape Town, said in an e-mailed statement today.

"The impact of the global economic crisis, which exacerbated the domestic economic slowdown already in motion, seems to be bringing the sector to its knees," the bureau said. "Retrenchments of factory workers continued to increase as production plummeted."

Official data shows that manufacturing, which accounts for 16 percent of the economy, plunged a record 11.1 percent in January from a year ago, threatening to push the economy into recession. A collapse in car sales in the U.S. and Europe have forced manufacturers such as ArcelorMittal South Africa Ltd., Africa's biggest steelmaker, and Volkswagen AG, the country's second-largest automaker, to scale back production and fire workers.

South Africa's economy, the biggest on the continent, contracted for the first time in a decade in the fourth quarter, with output dropping an annualized 1.8 percent.
Same situation in Japan:-

Japan Manufacturer Sentiment Tumbles Most on Record

Confidence among Japanese manufacturers slid the most in at least five years as a deepening global recession spurred record declines in exports and factory output, a government survey showed.

Sentiment among manufacturers was minus 66 points this quarter compared with minus 44.5 three months earlier, a joint survey by the Cabinet Office and Finance Ministry showed today. The drop was the biggest since the report began in 2004. A negative number means pessimists outnumber optimists.

Businesses said they will cut spending next fiscal year as the global collapse in demand erodes earnings. Prime Minister Taro Aso is preparing a stimulus package that may be twice as big as the 10 trillion yen ($104 billion) already pledged to revive an economy facing its worst recession since 1945.

"We're far from an environment where companies can be optimistic," said Yoshiki Shinke, a senior economist at Dai- Ichi Life Research Institute in Tokyo. "Companies may cut business investment more next fiscal year and we're going to see job and wage cuts intensify."
There isn't any confidence in Shipping these days either. This is just some of the news from Lloyds List:-

- Norwegian ship owner Siem Offshore has cancelled NKr1.2bn ($190m) of newbuilding anchor handling tug supply vessels at Norwegian shipyard Kleven Maritime albeit leaving it with 8 vessels still on order.

- Another Norwegian ship owner Petroleum Geo-Services has cancelled one of four seismic survey ships it ordered from Spanish yard Factorias Vulcano. PGS subsidiary Arrow Seismic Invest notified the yard and demanded a €39m ($53m) refund after a charter party was cancelled.

- Swedish shipowner Srab has cut its losses and walked away from a three vessel newbuilding order in Turkey.

- Navibulgar, the privatised Bulgarian operator sold last year to German interests, is to scrap around one-third of its elderly fleet, axing over 700 seafaring jobs in the process

- Israeli carrier Zim Integrated Shipping Services has laid up ten 4,000 teu container ships in the Philppines.

- An estimated 400-500 container vessels are now laid up worldwide, of which many belong to leading operators. Market leader Maersk, to cite just one example, is expected to mothball about 25 units totaling 150,000 teu, equivalent to 8% of its fleet.
In the United States, it would be incorrect to speak of lost confidence. Confidence is long gone, we should rather speak of increased fear and anxiety.

Financial fears grow - More consumers are just a paycheck or two away from ruin

Americans are in a collective state of financial depression as many admit they could only cover their bills for two months at most if they found themselves suddenly jobless, a nightmare more and more worry may come true.

The results of a bevy of surveys found a growing number of consumers are only a couple paychecks away from a household collapse even as many scramble to shore up savings. Rainy-day funds appear to be a distant memory as households burn cash to cover food and energy bills as well as mortgage and car payments.

A large number of households say that even one missed paycheck would spell financial ruin. And even in households that remain well off, the surveys show a festering fear that financial problems are lurking.....

A MetLife study released last week found that 50% of Americans said they have only a one-month cushion -- roughly two paychecks -- or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

And it's not just low-income earners who would find themselves financially challenged. Twenty-nine percent of those making $100,000 or more a year said they would have trouble paying the bills after more than a month of unemployment.

A Discover U.S. Spending Monitor monthly study found that consumers were becoming more despondent as each month passed...
This is a condition that is known as slavery and relates very closely to the condition known as "living in illusion". Now the illusion is being increasingly exposed for what it is we wonder what the reaction of the masses will be; will they resort to violence as the powers that be clearly wish them to or will they seek an alternative path, one that will mean thinking of themselves as part of a community of man rather than as deserving individuals for whom "looking after No. 1" is all they know?

The Mighty Fallen

Babcock and Brown the infamous Australian private equity firm fell into receivership the week before last:-

Babcock & Brown is dying as it lived: beyond its means. Few institutions embodied the "buy now, pay later" ethos quite like the Australian fund manager. For years it bought ports, property and power stations on credit, spun them off into heavily leveraged satellite funds, then booked big advisory and development fees, hoping that the assets would keep rising.

Babcock & Brown collapsed into bankruptcy on Friday, ending the public life of the Australian group that for years cut a swathe on the world stage with its particular brand of infrastructure investing.

The death knell came as New Zealand owners of subordinated debt voted down a restructuring plan that would have seen noteholders receive just A$18,000 for a debt instrument with a face value of A$180m.

However, senior creditors owed close to A$3.9bn are expected to pick over B&B's carcass for years as they attempt to sell off the group's remaining infrastructure, real estate and aircraft leasing operations.
GE, which is suffering from the uncertainty and assumed poisonous nature of its massive financial arm GE Capital, has at last lost its "Blue Chip" status, being downgraded one notch (credit rating levels are called 'notches') by Standard & Poors (S&P) rating agency from AAA to AA+, a move that seems to have brought much relief as it was mooted that a four notch downgrade might be on the cards. This caused the UK Financial Times to comment:-

The downgrade is further confirmation of financial markets' dysfunctional relationship with ratings agencies. After years of accepting repackaged junk as top-shelf goods just because S&P or Moody's said so, the crisis has pushed investors to the opposite extreme of treating any financial firm as guilty until proved innocent. That is how GE's debt has been quite irrationally treated, so Thursday's sigh of relief may be a sign the agencies are regaining their credibility.
The dysfunctional relationship between financial markets and credit rating agencies is simply a reflection of the nefarious and peccant relationship between financial institutions and ratings agencies. Despite their much vaunted claims of independence, rating agencies became extremely compliant when dealing with the largest investment and commercial banks on whose business they depended for a substantial portion of their income.

Similarly, Berkshire Hathaway, the investment vehicle of famed finance guru Warren Buffett was downgraded by the Fitch rating agency from it exalted AAA to AA+. Much of Fitch's concern stems from the fact that Warren Buffet is so central to Berkshire's success and at 78 isn't a spring chicken.

Job Losses - Economic Depression - Austerity

Morgan Stanley projected a 4% contraction in the economy of Latin America this year while the European Central Bank is predicting a contraction of 3.3% for the Eurozone.

The situation in Ireland, once the showpiece of the new global economy, is dire.

Ireland: Government to impose draconian austerity measures with opposition support

Ireland's prime minister (Taoiseach), Brian Cowen, has warned of more savage cuts than expected in the emergency budget scheduled for April 7.

Speaking to the Dail, or parliament, Cowen of Fianna Fail said that there had been a "serious deterioration in the public finances," with the Department of Finance estimating a deficit €4.5 billion. This is a rise in the deficit from a predicted 2 percent to as much as 6 or 6.5 percent.

A bleaker picture still was painted by Central Bank Governor John Hurley, who said that Ireland is experiencing "an unprecedented contraction" in output, which is set to continue for the next two years. The 6 percent decline in Ireland's GDP would lead to unemployment topping 11 percent.

The decline had begun in the property and construction sectors, but had now "broadened out into a marked weakening of domestic demand, which is being significantly amplified by the contraction in export demand as a result of the movement into recession of all our main trading partners," Hurley said.

"No one should be in any doubt about the seriousness of the global situation, which is not easing, and the seriousness of our own difficulties," he added. At the end of the two years, Hurley said that the economy would have declined by 10 percent.

The government's emergency budget will impose devastating cuts in public spending, while raising large additional amounts through taxes on working people. These cuts will be in addition to the €2 billion pay cut already levied on public service workers via the "pension levy," and the €2 billion cuts in spending already announced for the 2009 budget.

Cowan said the cuts were necessary because Ireland had to deal with the crisis "in a way which would be seen to be credible by international markets."

Announcing the proposal, Finance Minister Brian Lenihan made clear that the new taxes will be levied on the lowest-paying workers. Currently, 40 percent of the workforce earns wages below the tax threshold. But in future, according to Lenihan, "Everybody will have to pay something..."
Sales at department stores and discount stores fell in South Korea in February as unemployment rose:-

Consumers are reducing spending as the deepening global recession prompts Asian companies to lower production, close factories and cut jobs. The number of employed people in South Korea dropped by 103,000 last month, the most in five years, as retailers and manufacturers fired workers.
In Eastern Europe, the War on People is taking the form of the old IMF austerity assault. Hungary's premier resigned last week due to the economic crisis and the elite called for his replacement to be an economist trained in "crisis management" (we all know what that means). Hungary's premier, Ferenc Gyurcsany, said he had to quit so that a government could be formed that would have "wider support" for cutting spending. The "wealthy" countries, not subject to IMF dictate, play by slightly different rules. They are urged to increase spending to rescue banks and "key industries" which will in due course bankrupt them so that then austerity for the people becomes necessary.

The End of Neo-liberalism?

There has been a lot of talk lately about the end of the neoliberal era, the end of Anglo-Saxon free market ideology. Many have said that the ideology of free markets has failed. Of course it did fail at the stated goals of making everyone free and prosperous, but were those the real goals? Or was the real goal of the free-market ideology the funneling and concentration of wealth and power in the hands of a few? If so, it was a resounding success:

Is This Really the End of Neoliberalism? - The Crisis and the Consolidation of Class Power

Does this crisis signal the end of neo-liberalism? My answer is that it depends what you mean by neo-liberalism. My interpretation is that it's a class project, masked by a lot of neo-liberal rhetoric about individual freedom, liberty, personal responsibility, privatisation and the free market. These were means, however, towards the restoration and consolidation of class power, and that neo-liberal project has been fairly successful.

One of the basic principles that was set up in the 1970s was that state power should protect financial institutions at all costs. This is the principle that was worked out in New York City crisis in the mid-1970s, and was first defined internationally when Mexico threatened to go bankrupt in 1982. This would have destroyed the New York investment banks, so the US Treasury and the IMF combined to bail Mexico out. But in so doing they mandated austerity for the Mexican population. In other words they protected the banks and destroyed the people, and this has been the standard practice in the IMF ever since. The current bailout is the same old story, one more time, except bigger.

What happened in the US was that 8 men gave us a 3 page document which pointed a gun at everybody and said 'give us $700 billion or else'. This to me was like a financial coup, against the government and the population of the US. Which means you're not going to come out of this crisis with a crisis of the capitalist class; you're going to come out of this with a far greater consolidation of the capitalist class than there has been in the past. We're going to end up with four or five major banking institutions in the United States and nothing else...

Moves on the Grand Chessboard

China, the country with money and industrial capacity, is slowly advancing as an imperial power at the expense of the U.S. and Western Europe:

China to Add $2 Billion to African Investment Fund, FT Reports

China will add $2 billion to an African investment fund to take advantage of opportunities in agriculture, power generation and mining left behind by western investors caught in the global credit freeze, the Financial Times reported, citing Chi Jianxin, chief executive of the fund.

The China-African Development Fund has invested $400 million since starting in 2006 and will probably have spent most of its initial capital of $1 billion this year, as much as two years ahead of schedule, the report said.
Meanwhile, as we discussed above, China has been increasingly vocal about its desire to consider alternatives to the U.S. dollar as the world's reserve currency. Last week, Premier Wen Jiabao went so far as to say China "was concerned about the security of our assets," an unusually blunt statement for the diplomatic Chinese.

"We're concerned about the security of our assets" - China premier warns of potential dollar collapse

In a public statement raising questions about the solvency of the US government, Chinese Premier Wen Jiabao said Friday that China, the largest holder of US treasury debt, was "concerned about the security of our assets."

Wen's remarks came at a news conference following the annual session of China's parliament, where he commented on the economic policies of the new US administration. "President Obama and his new government have adopted a series of measures to deal with the financial crisis," Wen said. "We have expectations as to the effects of these measures. We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried."

He called on the United States to "maintain its good credit, to honor its promises and to guarantee the safety of China's assets."

Chinese officials fear that the huge borrowing in world credit markets required to finance the US government's budget deficits - a projected $5 trillion over the next four years according to an estimate released by the Obama administration last month - will lead to a decline in the value of the dollar.

Since Beijing now holds about $1 trillion in dollar-denominated assets, including nearly $700 billion in US Treasury debt, a decline in the value of the US currency would hit China hard.

Wen added that while concerned about the safety of its dollar holdings, Beijing would "at the same time also take international financial stability into consideration, because the two are inter-related." This underscores the conservative role of the Chinese regime, which places the defense of world capitalism at the center of its policy.

US officials reacted with repeated reassurances about the value of the dollar and the safety of the dollar-denominated assets held by Chinese and other overseas investors.

White House economic adviser Lawrence Summers defended the record of US Treasury borrowing, saying Friday that dollar holders would suffer much more if full-scale deflation sets in and US gross domestic product collapses.

A Treasury spokeswoman declared, "The US Treasury market remains the deepest and most liquid market in the world." White House Press Secretary Robert Gibbs added, "There's no safer investment in the world than in the United States."

President Obama followed up Saturday, during a joint media appearance with visiting Brazilian President Luiz Inacio Lula da Silva at the White House, declaring that, "Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States."

Obama depicted the influx of dollars into the United States as an endorsement of the future prospects of American capitalism. "There is a reason why even in the midst of this economic crisis you have seen actual increases in investment flows here in the US," he said. "I think it is a recognition that the stability not only of our economic system but also our political system is extraordinary."

The driving force of this influx of capital is fear rather than confidence, however. Investors are pulling out of weaker regions like eastern Europe and southeast Asia, as well as Africa and Latin America. They are also shifting from the purchase of stocks and bonds issued by American banks and corporations, now regarded with great distrust, in favor of government-issued debt instruments.

The US fiscal deficit has mushroomed. During the first five months of fiscal 2009 (October 2008 through February 2009), the federal budget deficit tripled compared to the same period the previous fiscal year, growing from $265 billion to $764.5 billion, the largest ever. The five-month deficit is already nearly 70 percent larger than the full-year deficit of $459 billion for fiscal 2008.

Writing in the Financial Times on March 12, Paul Kennedy, Yale University professor and author of The Rise and Fall of the Great Powers, argued that the Obama stimulus program would have a destabilizing effect on world financial markets: "no one is asking who will purchase the $1,750bn of US Treasuries to be offered to the market this year - will it be the east Asian quartet, China, Japan, Taiwan and South Korea (all with their own catastrophic collapses in production), the uneasy Arab states (yes, but to perhaps one-tenth of what is needed), or the near bankrupt European and South American states? Good luck! If that colossal amount of paper is bought this year, who will have ready funds to purchase the Treasury flotations of 2010, then 2011, as the US plunges into levels of indebtedness that could make Philip II of Spain's record seem austere by comparison?"

According to an estimate by Merrill Lynch, US Treasury notes have produced Chinese investors a 2.7 percent loss this year in terms of the Chinese currency, the yuan. Beijing is in a bind, however, since any effort to unload a significant part of its massive dollar holdings could flood the market and trigger a financial panic, with devastating effects on the value of all dollar-denominated securities, including its own investments.

Objective processes are undermining the longstanding symbiotic relationship between Beijing and Washington, however. The US slump has produced a massive drop in purchases of Chinese goods. Chinese exports plunged 25.7 percent in February, slashing the country's trade surplus from $39.1 billion to $4.8 billion. Continuation of this trend means China will earn correspondingly fewer dollars to invest in US government bonds.

The mounting conflicts between the two major powers find expression not only on the financial plane, but in diplomatic and security issues. Wen's statement of concern over the dollar was issued only days after the highly publicized clash between US and Chinese naval vessels off the coast of Hainan Island. Chinese vessels sought to force the USNS Impeccable out of an area, about 75 miles offshore, where it was conducting surveillance of traffic in and out of China's biggest submarine base.

President Obama dispatched a guided-missile destroyer to the South China Sea on Thursday, armed with torpedoes and missiles, to escort the Impeccable as it continues its surveillance mission. Obama later met with Chinese Foreign Minister Yang Jiechi at the White House.

The next day came Wen's declaration about the dollar, and then a day later a Chinese consortium signed a $3.2 billion natural gas deal with Iran. Beijing effectively thumbed its nose at the US policy - escalated by Bush and continued by Obama - of seeking to undermine the Iranian regime economically. The three-year deal involves extensive Chinese engineering assistance to the development of the South Pars gas field under the Persian Gulf seabed, in return for gas deliveries to Chinese customers.
China offered support to Russia's call for an alternative to the dollar as the world's reserve currency. Meanwhile, offshore banking entities dumped U.S. Treasury debt last month.

The EU is reluctantly considering increasing its aid to struggling Eastern European countries. This is their "backyard" in imperial parlance, Western Europe's source of cheap skilled labor, so one would think that offering "aid" (which always comes with strings attached) might be natural. The reluctance comes from Germany which is clearly still resisting the global wave of "spend now, pay later" bailout capitalism. Whether this stems from a general fiscal conservatism for which Germany is rightly renowned, a simple protectionist stance or a deeper understanding of the trap that world leaders have fallen into, we can only speculate. In the US of course there are those that believe that any nation that doesn't follow the US and UK lead to the letter and mortgage the future of its children on saving the economic system as we know it is "seeking a free ride" or "waiting to pick up the pieces when it's all over". These voices are clearly those of Puppets working for an agenda set by hidden masters:-

Merkel Keeps Cashbox Closed as She Spurns Obama Plea

Forget Nicolas Sarkozy. Ignore Gordon Brown. Angela Merkel, taking advantage of Germany's economic heft, is now the European Union's dominant figure. And leaders from Warsaw to Washington had best not forget it.

Just as the German chancellor vetoed a bailout for eastern Europe on March 1, she is now leading European opposition to U.S. President Barack Obama's call for a global pump-priming package. She'll determine the fate of a 5 billion-euro ($6.4 billion) infrastructure proposal at an EU summit in Brussels later this week.

"It's Merkel who holds the key to the cashbox, and she doesn't want to give it up," says Jean-Dominique Giuliani, chairman of the Robert Schuman Foundation, a research center in Paris.

Merkel's rejection of more stimulus touched off the first trans-Atlantic clash of the Obama administration and led critics to say she risks deepening the global recession. Even as finance ministers from the Group of 20 nations were meeting in southern England March 14, seeking to paper over differences with a pledge to deliver a "sustained effort" to boost growth, Merkel was 42 miles (67 kilometers) away in London, defending her opposition to further spending.

"Germany really has contributed its share," said Merkel, 54, as she stood alongside Brown, the U.K. prime minister.

Third Rebuff

The remarks were her third rebuff in three days to Obama's March 11 call for "concerted action around the globe to jump- start the economy," comments echoed by Lawrence Summers, his top economic adviser, and Treasury Secretary Timothy Geithner.

It is a reversion to type for Germany, which built its postwar society on the principle of monetary stability after the economic havoc of two world wars. Germany authored the limits on budget deficits for countries using the euro currency -- only to flout them during the reign of Merkel's Social Democratic predecessor, Gerhard Schroeder.

With the world economy set to shrink for the first time since World War II, Merkel has forged a European position not to go beyond tax cuts and emergency spending that the EU says amounts to 3.3 percent of gross domestic product.

Nobel laureate economist Paul Krugman says Merkel is underestimating the scope of the crisis. Germany is a "giant stumbling block" to global efforts to fight the recession, he told Der Stern magazine last week.

Obama on March 14 said there isn't a fundamental "conflict or contradiction between the positions of the G-20 countries" on how to deal with the crisis, only "a difference in details." Merkel spokesman Thomas Steg today also denied any "conflict," calling it an "artificial debate..."

While the EU forecasts that the German economy will shrink 2.3 percent in 2009 -- the second-worst in the 16-nation euro region, after Ireland -- economists say its relative strength will likely re-emerge whenever the recession ebbs. Europe's largest economy has used the 10-year-old euro to rebuild its competitiveness, and the EU's eastward expansion in 2004 moved Germany from the edge of the European market to the center.

Manufacturing Anger

Last week the United States was in an uproar over a $165 million dollars of bonuses and incentive pay paid to executives of the AIG insurance group subsidiary AIG Financial Products while the parent group has received $180 billion in bailout money. The US Congress took advantage of a golden opportunity to grandstand; the House of Representatives passed a bill to tax the bonuses by 90%; a move fraught with serious constitutional issues relating to retrospective law and a precedent that many of us will come to rue.

Interestingly, the Obama administration has attempted to tamp down public anger about this and to allow the bonus payments while also expressing "outrage". It is a tricky situation for the Obama administration as bonuses lie at the heart of the "wheeler-dealer" culture that fueled the credit boom and also contributed handsomely to the funds of many members of Congress and to the President himself.

The focus on bonuses is also a wonderful distraction. The entire US media, and therefore the bulk of the US populace, are focused on $165 million already paid and the prospect of further bonuses to "retain key AIG staff" that may total $600 million all in while the real issue is where the now $180 billion of government money pumped into AIG has gone. As usual Bill Van Auken had some pithy words on the subject:-

The AIG bonuses furor: the class issues

The bankrupt insurance giant American International Group (AIG), which has received the most massive public bailout of any US financial institution, is paying out hundreds of millions of dollars in bonuses to the very executives who oversaw the transactions that bankrupted the firm and threatened to drag down much of the US and world economy with it.

This revelation has sparked genuine popular anger, while providing a graphic exposure of the real class character of the economic policies being pursued by the Obama administration in the face of the deepest economic crisis since the Great Depression of the 1930s.

According to the Wall Street Journal, AIG International is paying out $450 million in bonuses to executives at its London-based subsidiary AIG Financial Products, which was primarily responsible for the company's staggering $99.3 billion loss in 2008.

The bonuses are on top of $121.5 million in "incentive pay" for 2008 going to 6,400 of AIG's employees and another $600 million in "retention pay" going to another 4,000 of them, for a grand total of over $1 billion.

The New York Times reported that seven AIG executives would receive bonuses worth $3 million or more each, while the Washington Post related that $165 million was being divvied up between 400 employees - an average of $412,500 each, or roughly ten times the annual gross pay of an average worker.

Given the de facto bankruptcy of AIG, these bonuses are being paid directly out of taxpayers' funds, a total of $180 billion of which have already been showered on the company. This amount is roughly equal to all of the discretionary spending contained in the Obama administration's anemic economic stimulus package.

In addition to the deep-felt popular outrage of millions who are faced with the daily threat of losing their jobs and their homes while seeing their income slashed as a result of the crisis, the bonus plan also triggered toothless expressions of disapproval from the Obama administration.

Treasury Secretary Timothy Geithner is reported to have called the government-installed chairman of AIG, Edward Liddy, telling him that the bonuses were "unacceptable" and demanding that they at least be pared down. Given that in its first $85 billion bailout of the company last September the government took over an 80 percent share of the firm, one might have thought that Geithner's request would have carried some weight.

Think again.

Liddy, a former board member of Goldman Sachs - the investment house believed to have received a large portion of the bailout money after it was "laundered" through AIG's insurance contracts - fired back an extraordinary letter telling the government to get lost.

"Quite frankly, AIG's hands are tied," he wrote, claiming that the bonuses were "binding obligations" - part of the executives' employment contracts - and interfering with them could provoke lawsuits. Moreover, he argued that they were fully warranted, despite the massive losses for which those receiving them were responsible. Without doling out a billion in additional compensation, he claimed, AIG would be at risk of losing "the best and the brightest to lead and staff the AIG businesses." Employees would leave if "their compensation is subject to continued and arbitrary adjustment by the US Treasury," he said.

"The best and the brightest?" The executives in AIG's financial division ran an unregulated credit-default swap operation that was just as much a scam as Bernie Madoff's fund, and far more destructive.

The obvious question is: where precisely are these "best and brightest" going to go if they fail to get their hundreds of millions in bonuses? The market for this type of financial parasitism has collapsed, dragging down with it the livelihoods of millions upon millions of working people. Rather than getting bonuses, those in charge of the financial manipulations carried out by AIG and its partners should be on the receiving end of criminal investigations.

In the end, the Obama administration came around to Liddy's position that the bonuses must be paid. This was made clear Sunday by Lawrence Summers, the chairman of the White House National Economic Council, in a televised interview on ABC's "This Week."

"There are a lot of terrible things that have happened in the last 18 months," declared Summers, "but what's happened at AIG is the most outrageous."

Despite his supposed outrage, Summers insisted that the government, its 80 percent ownership of AIG notwithstanding, could do nothing about the bonuses. "We are a country of law," he proclaimed. "These are contracts. The government cannot just abrogate contracts."

The government cannot abrogate contracts? Try telling that to American autoworkers who have seen not only bonus payments, but pay, holidays, pensions, health benefits and working conditions - all part of their contracts - slashed as a condition imposed by the White House for government financing to stave off bankruptcy.

There were no pious statements from Washington about a "nation of law" and the sanctity of the contract as the government backed a vicious assault aimed at driving autoworkers back to the conditions of the 1930s. Rather, these workers were vilified amid the universal demand - seconded by the United Auto Workers union - that they agree to rip up their contracts and be quick about it.

This is the real content of the Obama administration's economic policy. What is sacred is not law or contracts, but rather the principle that the wealth, power and privileges of the top one percent of American society cannot be touched, no matter how deep the economic crisis.

The real concern of Summers and others in the administration is that the AIG bonuses are so provocative that they will interfere with the attempts to carry through policies aimed at placing the full burden of the crisis onto the backs of working people in the name of "shared sacrifice."

This was expressed most clearly by Obama's economic advisor, Austan Goolsbee, who warned that AIG's action would "ignite the ire of millions of people." He added, "You worry about backlash."

It is precisely this development, which the administration and the ruling elite so fear, that points the only way to resolving the deepening economic catastrophe in the interests in the majority of the population. The "ire" and "backlash" of millions upon millions of working people must be mobilized to settle accounts with the financial oligarchy that is responsible for the present crisis and to break its economic and political stranglehold over society.
This shouldn't be surprising. The major financial institutions in the United States donated more than $100 million dollars to the presidential campaigns last year. And when Citigroup, J.P. Morgan and Bank of America say, "Jump" whoever gets elected asks, "How high?"

According to Paul Craig Roberts, the bailouts, while clearly scams, have at least taught the US public that "the elites run the government in their own private interests":-

Eliot Spitzer, the former New York Governor who was set-up in a sex scandal to prevent him investigating Wall Street's financial gangsterism, pointed out on March 17 that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG's financial deals. These payments, Spitzer writes, are "a way to hide an enormous second round of cash to the same group that had received TARP money already."

Goldman Sachs, for example, had already received a taxpayer cash infusion of $25 billion and was sitting on more than $100 billion in cash when the Wall Street firm received another $13 billion via the AIG bailout.

Moreover, in my opinion, most of the billions of dollars in AIG counter-party payments were unnecessary. They represent gravy paid to firms that had made risk-free bets, the non-payment of which constituted no threat to financial solvency.

Spitzer identifies a conflict of interest that could possibly be criminal self-dealing. According to reports, the AIG bailout decision involved Bush Treasury Secretary Henry Paulson, formerly of Goldman Sachs, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury. No doubt the incestuous relationships are the reason the original bailout deal had no oversight or transparency.

The Bush/Obama bailouts require serious investigation. Were these bailouts necessary, or were they a scam, like "weapons of mass destruction," used to advance a private agenda behind a wall of fear? Recently I heard Harvard Law professor Elizabeth Warren, a member of a congressional bailout oversight panel, say on NPR that the US has far too many banks. Out of the financial crisis, she said, should come consolidation with the financial sector consisting of a few mega-banks. Was the whole point of the bailout to supply taxpayer money for a program of financial concentration?

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