Monday, May 28, 2007

Signs of the Economic Apocalypse, 5-28-07

From Signs of the Times

Gold closed at 661.40 dollars an ounce Friday, down less than 0.1% from $662.00 at the close of the previous Friday. The dollar closed at 0.7439 euros Friday, up 0.5% from 0.7403 at the previous week’s close. That put the euro at 1.3442 dollars compared to 1.3508 the Friday before. Gold in euros would be 492.04, up 0.5% from 490.08 for the week. Oil closed at 65.20 dollars a barrel Friday, up 0.4% from $64.94 at the close of the week before. Oil in euros would be 48.50 euros a barrel, up 0.9% from 48.08 for the week. The gold/oil ratio closed at 10.14, down 0.5% from 10.19 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,507.28, down 0.4% from 13,556.53 for the week. The NASDAQ closed at 2,557.19 Friday, virtually unchanged from 2,558.45 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.86%, up six basis points from 4.80 for the week.

We are seeing a clear trend of rising U.S. interest rates with the ten-year Treasury note rising 22 basis points over the last four weeks. This has helped boost the dollar against the euro, but is one blade of the scissors cutting the U.S. consumer, the other blade being the rise in energy and food prices. The official inflation numbers don’t look too bad but they exempt food and energy prices (the two most necessary items) and include housing prices, which have dropped. If you don’t own a house yet, that’s good news, but about 70% of U.S. citizens do own a house and it is their most valuable asset, so dropping housing prices are bad news for most folks.
U.S. Existing Home Sales Drop to Lowest in Four Years

Shobhana Chandra

May 25 (Bloomberg) -- Sales of previously owned homes in the U.S. unexpectedly fell in April to the lowest level in almost four years, dimming prospects for a quick recovery in the housing industry.

Purchases fell 2.6 percent to an annual rate of 5.99 million last month from 6.15 million in March, the National Association of Realtors said today in Washington. A measure of the supply of homes for sale rose to the highest since August 1992.

The decline comes a day after a government report showed sales of new homes surged as buyers took advantage of a slide in prices. Today's figures suggest that owners of existing homes may have to cut prices further during the prime spring selling season. The drop also reflects the impact of banks making it tougher to get subprime loans, a response to rising defaults.

“The housing market correction won't be resolved quickly,” said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. “Downward pressure on prices will persist and sales will be sluggish for some time.”

Resales were expected to be at a 6.12 million annual rate, unchanged from the originally reported March figure, according to the median of 70 forecasts in a Bloomberg News survey. Estimates ranged from 5.9 million to 6.4 million. Logan forecast a 6 million pace.

Inventory Grows

The number of previously owned unsold homes on the market at the end of April represented 8.4 months' worth at the current sales pace. The supply of homes for sale increased 10.4 percent to 4.2 million last month.

Purchases fell in all four regions. They declined 8.8 percent in the Northeast and 0.7 percent in the Midwest. They slid 1.2 percent in the South and 1.7 percent in the West.

The median price of an existing home fell 0.8 percent last month from a year earlier to $220,900.

Resales of single-family homes declined 2.4 percent in April to an annual rate of 5.22 million, the report said. Sales of condos and co-ops dropped 3.8 percent to a 770,000 annual rate.

“There is just no way that the housing slump is over,” said Roger Kubarych, chief U.S. economist at UniCredit HVB in New York.

Sales of new homes jumped 16 percent in April, the Commerce Department reported yesterday, as buyers took advantage of the biggest decline in median prices since 1970. New homes make up about 15 percent of the market.

Timely Barometer

Economists consider sales of new homes a more timely barometer because they are recorded when a contract is signed. Figures on home resales are compiled from contract closings and may reflect agreements reached a month or two earlier.

The housing slump helped reduce the pace of economic growth last quarter to an annual 1.3 percent, the slowest in more than four years. Federal Reserve policy makers say housing remains a risk to their forecast that growth will pick up later this year.

The Realtors group forecasts resales will fall 2.9 percent this year, after an 8.5 percent drop in 2006, and the median price of an existing home will drop 1 percent.

A recovery in housing is being held back by a wave of subprime mortgage defaults, which is throwing homes back onto the market and prompting banks to tighten lending standards for borrowers with poor or limited credit histories.


Curbs on subprime lending “are expected to be a source of some restraint on home purchases and residential investment in coming quarters,” Fed Chairman Ben S. Bernanke said May 17. Even so, Bernanke said he doesn't foresee “significant spillovers” from the subprime market to the rest of the economy.

At least 50 subprime lenders have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data, leading to a smaller supply of money for lending.

Builders are still struggling. Toll Brothers Inc., the largest U.S. luxury home builder, yesterday reported a 79 percent plunge in profit in the quarter ended April 30.

The Horsham, Pennsylvania-based company didn't provide an earnings forecast for the rest of the year because of “uncertainty” about the pace of sales and the direction of the market.

“We continue to operate conservatively in the current difficult market,” Chief Executive Officer Robert Toll said in a statement. Still, he said he was “a little more confident” than he was on a May 9 call.


Lower prices and higher incomes may make homes more affordable, drawing buyers back into the market. Affordability has improved since the second quarter of last year, when it slipped to the lowest since at least 1992.

Robert Niblock, chief executive of home-improvement retailer Lowe's Cos., said on a May 21 conference call that the housing market is “at or near the bottom.” Lowe's, based in Mooresville, North Carolina, lowered its annual earnings forecast after fewer home sales hurt demand for cabinets and appliances last quarter.

Housing accounts for about 23 percent of the U.S. economy, when taking into account purchases of furniture, appliances and items for new homes, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.

The wave of large public corporations taken private by private equity firms gathered steam last week with EMI and Alltel joining Chrysler as private companies. For the short term the buyouts and mergers (81 billion dollars worth of deals in May alone, a record amount) have propped up stock markets in the U.S. Record high stock prices help to keep economic confidence up and mask the structural defects of the economy.

For the long term, the private equity boom marks a new stage in depriving people of economic power. Changes to labor laws over the past 30 years have given workers much less control over their lives and now the private-equity boom is taking power away from public shareholders. And now, Wall Street is taking the private equity trend a step further, creating a private trading system for “stocks” of such privately held companies:
Goldman Takes 'Private' Equity To a New Level
Firm's Trading System Lets Unregistered Stock Reach Exclusive Market

Randall Smith

Goldman Sachs Group Inc. ranks as the most profitable securities firm on Wall Street -- reflecting its mastery of trading on the world's public markets.

Now Goldman is turning that franchise on its head, creating its own private system to trade the stocks of companies that don't want the scrutiny and regulatory burdens of going public.

The new system, GS TRuE -- short for Goldman Sachs Tradable Unregistered Equity -- was announced two weeks ago and made its debut on Monday with an $880 million sale of a 15% stake in Oaktree Capital Management LLC, an alternative-investment manager.

It is the first of several new, private exchanges like these being considered by Wall Street firms and others. Nasdaq is also planning its own new market for smaller, unregistered securities.

These markets will generally be closed to individual investors. For instance, Goldman's market is open only to large institutional investors with assets of more than $100 million. That is because the stocks traded on GS TRuE aren't registered with the Securities and Exchange Commission and issuers aren't subject to SEC regulations designed to protect individual investors.

It represents the latest step in the creeping exclusion of individual investors from a growing proportion of financial-market activity. For instance, giant private-equity firms are busy buying public companies and delisting them from stock exchanges. The growing importance of hedge funds -- which are generally limited to wealthy investors, institutions and endowments -- also excludes individuals.

The new system is "a manifestation of the growth of private-equity relative to public equity," said Jay Ritter, a finance professor at the University of Florida in Gainesville, pointing to the record-setting pace of private-equity buyouts of public companies recently.

Traditional mutual funds -- one of the main investment tools at the disposal of individual investors -- are also limited in the amount of unregistered securities they can buy or sell. Hedge funds, by contrast, have more freedom to buy unregistered stocks and bonds.

Indeed, bankers and capital-markets executives at rival firms say that, at GS TRuE's debut, hedge funds were prominent among buyers for the issue by Los Angeles-based Oaktree.

Some investor advocates criticized the trend of selling more securities faster with less disclosure. "It becomes much more of a buyer-beware marketplace with little regulatory oversight or protection," said Steven B. Caruso, a New York lawyer who represents investors in disputes with Wall Street.

Business Backlash

Goldman's move partly reflects a business-community backlash against increased regulation of public-company accounting practices
-- a favorite theme, as it happens, of Treasury Secretary Henry M. Paulson Jr., who is also a former Goldman chief executive.

Wall Street executives said the market offers an alternative to companies that don't want to wait for regulators to approve their financial disclosures needed for an initial public offering, which can take 90 days or more.

They also said it offers a haven for firms that don't want to be subject to what Oaktree described as "the full panoply of regulations applicable to publicly traded companies in the United States." In a memorandum describing the stock sale, Oaktree added that staying private would avoid "pressure to describe the company as one capable of steady growth, whereas our underlying business is actually quite variable."

Although the Oaktree offering was sold to only about 50 buyers, it traded at roughly the same multiple of expected 2008 earnings as Fortress Investment Group LLC, a comparable alternative-investment manager that recently sold stock in a conventional initial public offering, according to Wall Street traders.

In other words, the Oaktree stock traded without a price discount that would reflect the lack of a public market with multiple dealers. In that respect, the new market passed an important first test. If stocks traded at too much of a discount, that might dissuade other companies from listing there.

What History Says

Bankers at rival firms -- many of which are developing similar systems -- predict that there will be consolidation among the different platforms.

"History in other markets would indicate that this will converge into a single platform," said Daniel Simkowitz, a managing director in capital markets at Morgan Stanley, which advised Oaktree on the issue.

Indeed, Nasdaq Stock Market Inc. is in the home stretch of getting approval for a similar unregistered trading facility for smaller companies called Portal. Another securities firm, Friedman, Billings, Ramsey Group Inc., has sold unregistered stock for numerous companies in real estate, energy and lodging.

Goldman executives said one reason they launched their own system solo, without asking other rival securities firms to participate, was to insure control over the number of investors in any particular security. That is crucial, they said, because any company that goes over 499 investors must register as a public company.

That 499-investor limit, said one executive of a top private-equity firm, is one reason why such buyout firms aren't likely to rush pell-mell into this type of new issue for their portfolio companies. The buyout firms want to attract far more investors to make sure they get the best prices for their stock, he explained.

'New Tool' in the Kit

Rob Pace, a senior capital-markets executive who played a lead role in developing the Goldman system, called such issues "a new tool in the tool kit" for investors, filling out a spot between harder-to-trade traditional private placements and public offerings.

Mr. Pace noted that Goldman still believes "the U.S. public capital markets are the deepest and most liquid," and will continue to represent "a more prevalent way to raise equity capital."

Goldman also said companies that issue stock on its system must promise to issue quarterly, annual and event-related financial reports comparable to those of public companies. However, they don't have the same obligation for widespread dissemination of detailed business information that can be of use to competitors.

Gregg Weinstein, a Goldman trading executive who also worked on the system, said Goldman doesn't "have any expectation that we're going to be able to stand alone in this product forever." But, he said, working with other dealers on the first issue would have risked delays.

China was in the news last week for a variety of reasons. The second U.S. – China Strategic Economic Dialogue took place last week between U.S. Treasury Secretary Paulson and Chinese Vice Premier Wu Yi. The Chinese pushed back at U.S. pressure to let Chinese currency increase in value, so Alan Greenspan sparked a sharp drop in the Chinese stock market by mentioning how overvalued it is and the Washinton Post expanded the poison food additive from China scandal moved from pet food to human food. China then announced $36 billion in U.S. business deals.

First the Strategic Economic Dialogue:

Dancing with the Drago
Paulson in China

Mike Whitney

May 24, 2007

Treasury Secretary Henry Paulson wrapped up 2 days of high level talks with the Chinese delegation on Wednesday without any progress on the two issues of central importance to the American people"the massive $230 billion trade deficit and the ongoing manipulation of the Chinese currency, the yuan. As expected, China agreed to allow "more passenger flights between the two countries" and they also approved a plan "to remove a ban on the entry of new foreign brokerages and to allow financial services firms to expand their operations in China". (Marketwatch)

But that was basically it. China will not to allow its currency to float freely on the open market. They want to maintain the advantage they have on their American competitors by continuing to "fix" the yuan in a way that best serves their national interests. That's the way nations are supposed to work. The Chinese aren't taken in by the hogwash about "free trade" or "deregulation". They're playing to "win""and that's what counts.

It's different in America, where the currency has been deregulated to serve the interests of a small group of bankers and investors. Every one else loses. Factories are boarded-up and workers are thrown out of their jobs because they cannot compete with foreign manufacturers who "underbid" them on every item. This doesn't matter to Paulson and his buddies in the financial service industry. Their business thrives on ever-increasing flows of cheap capital to American markets. Whatever happens to the American worker is not his concern.

Oh sure, Paulson may wave his finger reproachfully at his Chinese counterparts for rigging their currency, but he's certainly not going to do anything that would disrupt the flow of $230 billion into US bonds and securities. America's massive $800 billion current account deficit is what keeps interest rates low and the stock market humming-along at full throttle. Why would he mess with that?

After all, what's more important: American workers or the wealth and prosperity of Wall Street moguls and banking giants?

According to Marketwatch, Paulson succeeded in persuading his Chinese counterparts to allow foreign brokerages and financial services firms "to expand their operations in China." Big surprise, eh? As former chief of Goldman Sachs, it's clear that this was high on Paulson's list of priorities. After all, Chinese workers set aside an estimated 50% of their earnings and have saved a whopping $2 trillion in the last decade. The financial service industry must be salivating at the thought of opening shop in Beijing and tapping into that mushrooming market.

There's a misconception in the US (particularly among "protectionist" Democrats) that trade with China is a "one way street" that only benefits the Chinese. That is not the case. In fact, the real beneficiaries of the present arrangement are the US business elites who set out to destroy the American work-force by moving factories to a country with no labor or environmental laws. The Bush administration has assisted the exodus of US corporations by creating tax incentives for "off-shoring" and by promoting a free trade ideology which is ruinous to America's future.

But that's not China's fault. China can't be blamed for our job losses or "unsustainable "trade deficit---that's the result of the neoliberal policies which have enriched a few wealthy American industrialists and bankers at the expense of everyone else. As China expert Henry C K Liu says in his article "A Dialogue of the Mute"

"China has actually been a powerless respondent to the dysfunctional terms of trade set by US economic policies, aggressively exploited by US transnational corporations and financial institutions for unfair profit." (More than 60% of China's trade surpluses are traded by foreign companies, many of which are US firms)

Liu adds: "China cannot expand domestic consumption because Chinese wages and benefits are too low. Yet Chinese cannot raise wages faster because real wealth has been leaving the country through export trade while the yuan money supply is expanding through the central bank buying dollar inflows with yuan. The result is a liquidity bubble, with too much currency chasing a dwindling supply of real wealth that has been exported."

The Strategic Economic Dialogue (SED) between the Chinese and US delegations was a complete failure. The yuan will continue to be manipulated and America will continue to bleed jobs and wealth. We'll probably never know what really went on behind closed doors, but one thing is certain; the US is not giving the orders anymore. With $1.3 trillion in dollar-backed securities and US Treasuries, the Dragon is in the driver's seat. Now that Japan has slowed down its purchases of US debt; China represents the last bit of scaffolding holding up the feeble greenback. That means that the Fed will have to consult with their "loan-officers" in Beijing before raising or lowering interest rates.

Sounds crazy, but its true.

And, while everyone is predicting that Fed-master Bernanke will probably lower interest rates to save the struggling real estate market; it may be that our Chinese friends will demand a rate-hike to preserve their investment. That'll just speed up the sub-prime meltdown and send tremors through world stock markets.

Our favorite economic guru, Elaine Supkis, provides a bit of historical background to our current economic predicament. In Yesterday's post she says:

"Anyone with half a brain can see that on 9/11, we reset our economy on its present irresponsible course. Bush and the American people declared a war on terror and began spending like fiends and cut taxes and Bush famously said we should all go shopping so we went on the world's biggest, stupidest shopping binge.

To hide the inflation this new policy brought and thanks to the Federal Reserve simultaneously dropping interest rates to an amazing and irresponsible 1%, hiding inflation became the #1 job and to do this, we had to shift as much labor as possible to China!
China's surplus in trade with us was fairly insignificant before 9/11 but it shot through the roof. After 9/11, China passed Japan and has been the #1 source of cheap labor for the US which must use China in this fashion or find some other nation to do this for us.

What I am saying is, we cannot simply force China to raise their prices to us, we will simply rush to India or some other cheap labor nation to do the work for us!

The US RULERS know China's intentions. Bush's family works for the Communist Chinese, they have had business deals with them for years and years. The Chinese have cultivated corrupting the Bush clan since they first met Mr. Bush Sr. when he jumped from the CIA to ambassador to China. These people then ran off to China to make money off of the differential between Chinese labor's wages and American consumer buying abilities. The Chinese exploited this treason as they should, after all, we are in competition with them for ruling the world and if our rulers are so banged stupid that they think they will dominate the Chinese and not vice-versa then...we get what we are getting today.

Namely, our necks in a Chinese noose. But do not forget, the American ruling class put our necks there, not the Chinese. They simply cooperated! (See the whole post here.)

The economic war against the American people started on the same day as the war on terror"9-11. Interest rates plummeted, the money supply was put on steroids, and the US began auctioning off its national wealth at a rate of $800,000 billion a year. The current account deficit and the loss of 3.2 million manufacturing jobs has been used to conceal inflation which is only now beginning to rear its head in the form of recycled dollars in an over-leveraged stock market. (Why else would the Dow hit new highs every day when GDP is an anemic 1.3%?)

We can see now, (from the coordination of policy) that it wasn't just Big Oil and the neocons who led us to war with Iraq. The Federal Reserve played an equally important part in that deception. It lulled the people to sleep with low interest rates (which kept the economy humming-along) while the nation's wealth was shifted from the middle class to the mega-rich. The Fed's policies have created enormous equity bubbles and a massive "unsustainable" trade deficit. When the bubbles burst, the America people will be forced to "privatize" whatever public assets are left.

Wasn't that the goal from the very beginning?

Now, we're stuck and there's no way out. If China allows its currency to rise; then the US economy will plunge into recession or worse. And, if we stay on the same course, the country's wealth will be sold piecemeal to foreign investors while the dollar continues to weaken and unemployment soars.

Our options are limited and we appear to be headed for a hard landing. But--Elaine Supkis is right--you can't blame the Chinese for that. It may be their noose, but it was Bush and Co. who put our necks there.

Poison food is one result of the collusion between greedy, plutocratic Chinese and greedy plutocratic U.S. elites. The following investigative report was published by the Washington Post:

Tainted Chinese Imports Common

In Four Months, FDA Refused 298 Shipments

Rick Weiss
May 20, 2007

Dried apples preserved with a cancer-causing chemical.

Frozen catfish laden with banned antibiotics.

Scallops and sardines coated with putrefying bacteria.

Mushrooms laced with illegal pesticides.

These were among the 107 food imports from China that the Food and Drug Administration detained at U.S. ports just last month, agency documents reveal, along with more than 1,000 shipments of tainted Chinese dietary supplements, toxic Chinese cosmetics and counterfeit Chinese medicines.

For years, U.S. inspection records show, China has flooded the United States with foods unfit for human consumption. And for years, FDA inspectors have simply returned to Chinese importers the small portion of those products they caught -- many of which turned up at U.S. borders again, making a second or third attempt at entry.

Now the confluence of two events -- the highly publicized contamination of U.S. chicken, pork and fish with tainted Chinese pet food ingredients and this week's resumption of high-level economic and trade talks with China -- has activists and members of Congress demanding that the United States tell China it is fed up.

Dead pets and melamine-tainted food notwithstanding, change will prove difficult, policy experts say, in large part because U.S. companies have become so dependent on the Chinese economy that tighter rules on imports stand to harm the U.S. economy, too.

"So many U.S. companies are directly or indirectly involved in China now, the commercial interest of the United States these days has become to allow imports to come in as quickly and smoothly as possible," said Robert B. Cassidy, a former assistant U.S. trade representative for China and now director of international trade and services for Kelley Drye Collier Shannon, a Washington law firm.

As a result, the United States finds itself "kowtowing to China," Cassidy said, even as that country keeps sending American consumers adulterated and mislabeled foods.

It's not just about cheap imports, added Carol Tucker Foreman, a former assistant secretary of agriculture now at the Consumer Federation of America.

"Our farmers and food processors have drooled for years to be able to sell their food to that massive market," Foreman said. "The Chinese counterfeit. They have a serious piracy problem. But we put up with it because we want to sell to them."

U.S. agricultural exports to China have grown to more than $5 billion a year-- a fraction of last year's $232 billion U.S. trade deficit with China but a number that has enormous growth potential, given the Chinese economy's 10 percent growth rate and its billion-plus consumers.

Trading with the largely unregulated Chinese marketplace has its risks, of course, as evidenced by the many lawsuits that U.S. pet food companies now face from angry consumers who say their pets were poisoned by tainted Chinese ingredients. Until recently, however, many companies and even the federal government reckoned that, on average, those risks were worth taking. And for some products they have had little choice, as China has driven competitors out of business with its rock-bottom prices.

But after the pet food scandal, some are recalculating.

"This isn't the first time we've had an incident from a Chinese supplier," said Pat Verduin, a senior vice president at the Grocery Manufacturers Association, a trade group in Washington. "Food safety is integral to brands and to companies. This is not an issue the industry is taking lightly."

New Focus on the Problem

China's less-than-stellar behavior as a food exporter is revealed in stomach-turning detail in FDA "refusal reports" filed by U.S. inspectors: Juices and fruits rejected as "filthy." Prunes tinted with chemical dyes not approved for human consumption. Frozen breaded shrimp preserved with nitrofuran, an antibacterial that can cause cancer. Swordfish rejected as "poisonous."

In the first four months of 2007, FDA inspectors -- who are able to check out less than 1 percent of regulated imports -- refused 298 food shipments from China. By contrast, 56 shipments from Canada were rejected, even though Canada exports about $10 billion in FDA-regulated food and agricultural products to the United States -- compared to about $2 billion from China.

Although China is subject to more inspections because of its poor record, those figures mean that the rejection rate for foods imported from China, on a dollar-for-dollar basis, is more than 25 times that for Canada.

Miao Changxia, of the Chinese Embassy in Washington, said China "attaches great importance" to the pet food debacle. "Investigations were immediately carried out . . . and a host of emergency measures have been taken to ensure the hygiene and safety of exported plant-origin protein products," she said in an e-mail…

An Official Response

The Cabinet-level "strategic economic dialogue" with China, which began in September and is scheduled to resume on Wednesday, was described early on as a chance for the United States and China to break a long-standing stalemate on trade issues. When it comes to the safety of imported foods, though, they may highlight the limited leverage that the United States has.

It is not just that food from China is cheap, said William Hubbard, a former associate director of the FDA. For a growing number of important food products, China has become virtually the only source in the world.

China controls 80 percent of the world's production of ascorbic acid, for example, a valuable preservative that is ubiquitous in processed and other foods. Only one producer remains in the United States, Hubbard said.

"That's true of a lot of ingredients," he said, including the wheat gluten that was initially thought to be the cause of the pet deaths. Virtually none of it is made in the United States, because the Chinese sell it for less than it would cost U.S. manufacturers to make it.

So pervasive is the U.S. hunger for cheap imports, experts said, that the executive branch itself has repeatedly rebuffed proposals by agency scientists to impose even modest new safety rules for foreign foods.

"Sometimes guidances can get through, but not regulations," said Caroline Smith DeWaal, food safety director at the Center for Science in the Public Interest, an advocacy group. Guidances, which the FDA defines as "current thinking on a particular subject," are not binding.

Under the Bush administration in particular, DeWaal said, if a proposed regulation does get past agency or department heads, it hits the wall at the White House Office of Management and Budget.

Andrea Wuebker, an OMB spokeswoman, said that the office reviewed 600 proposed rules last year and that it is up to agencies to finalize rules after they are reviewed. She did not tally how many reviews sent agencies' rule-writers back to the drawing board. She noted that some food safety rules have been finalized, including some related to mad cow disease and bioterrorism. Critics point out that the bioterrorism-related regulations were required by an act of Congress.

John C. Bailar III, a University of Chicago professor emeritus who chaired a 2003 National Academies committee that recommended major changes in the U.S. food safety system -- which have gone largely unheeded -- said he has become increasingly concerned that corporations and the federal government seem willing to put the interests of business "above the public welfare."

"This nation has -- and has had for decades -- a pressing need for a wholly dedicated food safety agency, one that is independent and not concerned with other matters . . . to bring together and extend the bits of food safety activities now scattered over more than a dozen agencies," he said in an e-mail.

Legislation to create such an agency was recently introduced, though many suspect that is too big a challenge politically.

But in the aftermath of the recent food scandals, a growing number of companies and trade groups, including Grocery Manufacturers of America, are speaking in favor of at least a little more protection, starting with a doubling of the FDA's food safety budget...

Paul Krugman points out the absurdity of the Bush administration’s refusal to enforce regulations while the industries themselves are literally asking for it:
…Without question, America's food safety system has degenerated over the past six years. We don't know how many times concerns raised by F.D.A. employees were ignored or soft-pedaled by their superiors. What we do know is that since 2001 the F.D.A. has introduced no significant new food safety regulations except those mandated by Congress.

This isn't simply a matter of caving in to industry pressure. The Bush administration won't issue food safety regulations even when the private sector wants them. The president of the United Fresh Produce Association says that the industry's problems "can't be solved without strong mandatory federal regulations": without such regulations, scrupulous growers and processors risk being undercut by competitors more willing to cut corners on food safety. Yet the administration refuses to do more than issue nonbinding guidelines.

Why would the administration refuse to regulate an industry that actually wants to be regulated? Officials may fear that they would create a precedent for public-interest regulation of other industries. But they are also influenced by an ideology that says business should never be regulated, no matter what.

The economic case for having the government enforce rules on food safety seems overwhelming. Consumers have no way of knowing whether the food they eat is contaminated, and in this case what you don't know can hurt or even kill you. But there are some people who refuse to accept that case, because it's ideologically inconvenient.

That's why I blame the food safety crisis on Milton Friedman, who called for the abolition of both the food and the drug sides of the F.D.A. What would protect the public from dangerous or ineffective drugs? "It's in the self-interest of pharmaceutical companies not to have these bad things," he insisted in a 1999 interview. He would presumably have applied the same logic to food safety (as he did to airline safety): regardless of circumstances, you can always trust the private sector to police itself.

O.K., I'm not saying that Mr. Friedman directly caused tainted spinach and poisonous peanut butter. But he did help to make our food less safe, by legitimizing what the historian Rick Perlstein calls "E. coli conservatives": ideologues who won't accept even the most compelling case for government regulation.

Earlier this month the administration named, you guessed it, a "food safety czar." But the food safety crisis isn't caused by the arrangement of the boxes on the organization chart. It's caused by the dominance within our government of a literally sickening ideology.

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Monday, May 21, 2007

Signs of the Economic Apocalypse, 5-21-07

From Signs of the Times:

Gold closed at 662.00 dollars an ounce Friday, down 1.6% from $672.30 at the close of the previous Friday (and down 4.2% over the last two weeks). The dollar closed at 0.7403 euros Friday, up 0.2% from 0.7391 at the previous week’s close. That put the euro at 1.3508 dollars compared to 1.3530 the Friday before. Gold in euros would be 490.08 euros an ounce, down 1.4% from 496.90 euros for the week. Oil closed at 64.94 dollars a barrel Friday, up 3.9% from $62.51 at the close of the week before. Oil in euros would be 48.08 euros a barrel up 4.1% from 46.20 for the week. The gold/oil ratio closed at 10.19 Friday, down 5.6% from 10.76 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,556.53 Friday, up 1.7% from 13,326.63 for the week. The NASDAQ closed at 2,558.45 Friday, down 0.1% from 2,561.91 at the end of the week before. In U.S. interest rates the yield on the ten-year U.S. Treasury note closed at 4.80%, up 13 basis points from 4.67 for the week.

Consumer sentiment was up in early May in the U.S.. Why? I would just chalk it up to the fact that, in the northern temperate zone, ANY kind of sentiment is up in May. How could it not be the case with warmer weather, lilacs in bloom, leaves opening on trees and birds chirping? It almost can make a person forget all the stormclouds on the horizon.

Not least among those stormclouds is the move towards private equity firms taking public corporations private. This month’s purchase of the Chrysler Corporation by Cerberus Capital Management is still reverberating. I find it interesting that Cerberus was named after the demon dog who guards the gates to Hades, the underworld realm of the dead, allowing the spirits of the dead to enter but none to exit. Nice.

Who is Cerberus and what do they want to do with Chrysler?

The Cerberus takeover of Chrysler—what it means for auto workers

Shannon Jones
17 May 2007

Chrysler CEO Tom LaSorda called for cuts in retiree health benefits one day after the announced sale of the North American unit of DaimlerChrysler to the private equity firm Cerberus Capital Management. The statement by LaSorda, who will continue to head Chrysler under Cerberus ownership, confirms that the sell-off of Chrysler is the preparation for a wholesale assault on North American auto workers.

The sale of the Michigan-based automaker to Cerberus has been widely presented by politicians, the media and the leadership of the United Auto Workers as a blessing for Chrysler workers. The change of ownership, it is said, will help shore up and stabilize the automaker’s operations and ultimately benefit the workforce.

The reality is that Cerberus, a firm notorious for stripping companies of their assets in order to resell them at a profit, is preparing to brutally slash the jobs, wages and benefits of Chrysler workers. Since its founding in 1992, Cerberus has amassed enormous wealth from the contraction, not the expansion, of corporate entities ranging from retail chains to auto parts and supply companies. It has left a trail of battered companies either drastically downsized or dismantled.

Last year, for example, Cerberus bought 600 Albertson’s supermarkets. Within months it had laid off 1,000 workers. In 2004, Cerberus purchased the Mervyn department store chain. The next year it closed 62 Mervyn stores, eliminating 4,800 jobs. It recently closed a bus plant in Canada and several textile mills in the US. It has also been involved in the downsizing of the car rental firms Alamo and National.

The sale of Chrysler to Cerberus “will shake the ground under people’s feet in a huge way,” Kevin Boyle, a professor at Ohio State University and a noted historian, told the New York Times in a May 14 article entitled “Cerberus Emerges from the Underworld.”

The Wall Street Journal on May 15 quoted Peter Pestillo, the former CEO of auto parts maker Visteon and for a time the Ford executive in charge of UAW talks, as saying, “This deal by Cerberus sets things up for very significant changes in Detroit. It will shake up GM and Ford as well.” Cerberus, Pestillo continued, doesn’t “soldier on with bad contracts. They shine things up and sell.”

Unlike mutual funds, private equity funds operate largely outside of government regulation, since their stock is not publicly traded. They pool huge amounts of private capital seeking the largest return in the shortest time. The modus operandi of firms like Cerberus is not to create profit through the development of new products and technologies, but to plunder the assets of existing companies.

An article in the May 14 edition of the German magazine Der Spiegel, entitled “Hellhound Snaps up Chrysler,” had this to say: “Venture capital firms like Cerberus invest in or purchase other companies that are about to go bankrupt. After buying them, they either take control as the largest creditor, rationalize the business and re-sell it—or they carve it up into pieces. Originally, Cerberus primarily bought the debt of bankruptcy candidates from their creditors. Since then, the portfolio has expanded to all kinds of problem-ridden assets. Firms like Cerberus have earned the nickname of ‘vulture funds.’”

One asset Cerberus undoubtedly has its eye on is Chrysler’s profitable auto finance unit Chrysler Financial. Cerberus already owns a majority stake in General Motors Acceptance Corporation Financial Services (GMAC), which it bought from General Motors last year. It is likely that Cerberus will attempt to carve Chrysler Financial, with net assets of $5.5 billion, out of Chrysler and merge it with GMAC, creating a massive and potentially highly profitable entity.

Cerberus’s owners have reaped enormous profits since the company’s start-up in 1992. Company founder, Stephen Feinberg, formerly worked at corporate buyout firm Drexel Lambert, notorious in the 1980s for popularizing so-called “junk bonds.” Fortune magazine in 1999 listed Feinberg as one of the richest Americans under the age of 40. At that time his net worth was $274 million.

According to an October 3, 2005 report in BusinessWeek, some of the top personnel at Cerberus earn up to $40 million a year. An article in CNNMoney from November of 2006 noted that private equity firms returned 22.5 percent on investments, as compared to an average of 6.6 percent for companies included in the Standard & Poor’s 500 list.

Such extraordinary returns are not possible from more traditional business operations, and certainly not from the production and sale of automobiles. The functioning of firms such as Cerberus often involves complex and risky transactions that have absolutely nothing to do with the creation of real value.

A piece in the March 16, 2006 edition of USA Today states that the secret of private equity firms “is the use of debt—usually as much as seventy cents of every dollar they invest. Because they pile debt onto the companies they buy, private equity firms free up their own cash, allowing them to make additional investments and maximize their potential returns.”

In some cases, private equity fund managers have been accused of taking out loans against the assets of companies they have purchased so as to award themselves fat payouts, regardless of what happens to the takeover target.

Underlying the rise of private equity is the ready availability of investment cash. Following the 2000 stock market collapse, private equity became a preference for investors seeking big returns.

Increasingly, private equity funds have obtained investment capital from public pension funds, which accounted for about one quarter of all new money raised by private equity firms last year. According to a report in the May 15 New York Times, among the investors in Cerberus are the Los Angeles Fire and Police Pension System and the Pennsylvania Public School Employees Retirement System.

Thus, workers’ pension funds are being used to help underwrite the takeover and destruction of companies and the consequent elimination of the jobs and benefits of other workers.

Further, given the highly speculative nature of private equity ventures, the increasing turn by pension funds to private equity investment is exposing workers’ retirement benefits to substantial risk. There is already talk in some circles of a “private equity debt bubble” (Boston Globe, May 1, 2007).

Who runs Cerberus?

A look at the leading personnel of Cerberus underscores the socially reactionary character of this enterprise. Feinberg has assembled a management team comprised of individuals from politics and business whose names are associated with job-cutting and other anti-social polices carried out by the US and international ruling class over the past several decades.

* The chairman of Cerberus is John W. Snow, formerly Bush’s treasury secretary. Snow led the drive for massive tax cuts for the rich.
Prior to his tenure in the Bush cabinet, Snow headed CSX Corporation, the railroad conglomerate.

* Former Republican Vice President Dan Quayle is another notable at Cerberus. Since joining Cerberus in 2000, he has focused on international operations, using his political connections to assist in acquisitions in Japan and Germany.

* Former US Secretary of Defense Donald Rumsfeld was an investor, according to a report filed in 2001.

* David Thursfield, a senior member of Cerberus’s automotive and industrial team, gained a reputation at Ford as a savage cost-cutter. His push to force parts suppliers to reduce prices produced so much tension within Ford management that he was forced to leave the company in May 2004, the same month he joined Cerberus.

* A new figure at Cerberus is Wolfgang Bernhard, a former executive at Chrysler and Mercedes Benz. According to a report in the May 14 New York Times, “At both companies he wielded a cost-cutting ax, ruffling the feathers of the labor unions and higher-ups.”

* Another important team member, assisting Cerberus operations in Europe, is former German Defense Minister Rudolf Scharping, who is said to be an advisor. Scharping was dismissed from his government post in 2002 following several scandals.

For the UAW bureaucracy to praise the sale of Chrysler to Cerberus, claiming it is in the “best interests” of workers, says much about the reactionary interests the UAW serves.

China is now getting into the Private Equity game:

China says to take $3 billion stake in Blackstone

May 20, 2007

NEW YORK (Reuters) - China on Sunday said it plans to make a $3 billion investment in the Blackstone Group, one of the world's largest and most aggressive private equity groups that is based in the United States.

China, in a joint release with Blackstone, said the country's soon-to-be-established state foreign exchange investment company would make the investment in the form of non-voting common units of Blackstone.

China said it will have less than a 10 percent equity stake in Blackstone immediately after Blackstone completes its planned initial public offering, and aims to hold its investment for at least four years.

"We are very pleased to be able to make the State Investment Company's very first investment in such a well-respected firm as Blackstone," Lou Jiwei, head of the working group of the State Investment Company, said.

All these mergers and acquisitions have helped push the U.S. stock market to more record highs but there is little doubt that they will dump millions of workers with lots of debt onto the job market. Rumors of massive job cuts at IBM ( in the 150,000 range) seem realistic. Unions at IBM called a 15 minute work stoppage to protest the rumored cuts:

IBM union calls work stoppage to protest U.S. layoffs

Nancy Gohring

May 15, 2007

An IBM labor union is calling for a 15-minute work stoppage to protest job cuts at the company.

The stoppage is scheduled for Tuesday at 3 p.m. Eastern Time across the U.S. Workers at IBM in Italy are also planning a similar action in support of the U.S. employees.

The union, Alliance@IBM, is asking employees to stop work for 15 minutes, including leaving phones and instant messages unanswered.

"Tell IBM to stop abandoning good U.S. jobs," on its Web site.

A recent posting on the Robert X. Cringely blog at suggesting that IBM might lay off about 150,000 U.S. employees may have contributed to concern about impending job cuts at the company. The posting set off a flurry of comments across the Web.

On a newsgroup on the Alliance@IBM Web site, several IBM employees posted a note they received from management calling Cringely's blog posting inaccurate and based on gross exaggerations. The letter confirms that the company has recently implemented a "focused resource reduction in the U.S." but says that IBM currently only has about 130,000 employees in the U.S.

Alliance@IBM said in early May that IBM recently laid off more than 1,300 U.S. workers from its global services division.

Over the past few years, IBM has quickly grown its operations in India and China and some employees may fear that growth will come at the expense of the U.S. operations.

As of Jan. 1, IBM had 53,000 employees in India.

It’s not hard to see the whole thing unravelling soon. George Ure sees the following:

This all adds up to one of those "perfect storm" kinds of things for this fall. Picture continuing droughts, escalation of prices for food while housing crashes hitting at the same time that IBM is belt-tightening, and all the recent merger activity results in huge layoffs, which is typically how M&A deals are penciled out to make sense -- cutting employees to become more efficient. Remember, if productivity is high enough, no one has a job.

Stef Zucconi found an interesting list on the CIA website:
You’ve got to laugh…

This just tickled meFrom the CIA World Fact Book - National current account balances for 2006 ranked by size...The Top 10 -

Then 143 other countries…

Then the bottom 10 [the numbers in parentheses are negative, in other words, deficits] –

What I find fascinating about the bottom five is that each of those countries have suffered a neocon takeover, France being the latest. Is it more than a coincidence? Cause? Effect? Correlation? A clue may lie in the one country in the bottom five that was taken over by but later escaped escaped the grip of the neocons, Spain. The editors of Signs of the Times made the following comment on an article describing Spain’s financial difficulties.

The article asks the question: "Where has the money gone?" The central bank of any country is not owned or controlled by the government, the central bank of any country is in fact the government's creditor, it calls the shots from a financial point of view, and to be viable, any government is 100% dependent on finances. If it so chose, a central bank could engineer a financial crisis of a nature that, with the help of the media, could force a government out of power. The question then is, who owns the central bank, in this case, the Banco de España?

International bankers?

What is interesting is that Spain's potential financial crisis looms large just after Sarkozy takes power in France. Spain's current government is definitively socialist, Zapatero even allowed himself to be photographed last year with a Palestinian scarf around his neck. Spain is Europe's last significant anti-globalist government. When it goes, the ZioCon lock down will be complete. If Spain's socialist government is toppled, will it be as a result of a "financial crisis"? And who will be to blame? No one of course, we all know that these things "just happen"...

Maybe the psychopathic parasite weakens the host first by draining a country of its financial reserves before consuming it.

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Monday, May 14, 2007

Signs of the Economic Apocalypse, 5-14-07

From Signs of the Times:

Gold closed at 672.30 dollars an ounce Friday, down 2.6% from $689.70 at the close of the previous Friday. The dollar closed at 0.7391 euros Friday, up 0.4% from 0.7358 at the previous week’s close. That put the euro at 1.3530 dollars compared to 1.3591 the Friday before. Gold in euros would be 496.90 euros an ounce, down 2.1% from 507.47 for the week. Oil closed at 62.51 dollars a barrel Friday, up 0.9% from $61.93 at the close of the week before. Oil in euros would be 46.20 euros a barrel, up 1.4% from 45.57 for the week. The gold/oil ratio closed at 10.76 Friday, down 3.5% from 11.14 at the close of the previous Friday. In U.S. Stocks, the Dow Jones Industrial Average closed at 13,326.63 Friday, up 0.5% from 13,264.62 for the week. The NASDAQ closed at 2,561.91 Friday, down 0.4% from 2,572.15 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.67%, up three basis points from 4.64 for the week.

The big news in the U.S. economy last week was the surprising drop in retail sales. The result was a surprise because analysts had predicted a small rise. It shouldn’t have been that surprising, though. Consumption in the United States has been driven by the housing bubble. Now the bubble is bursting, consumption must decrease. Rising energy prices (and soon, food prices) will make it worse.
Retail sales take surprise drop in April

May 11, 2007

WASHINGTON (Reuters) - Sales by U.S. retailers fell 0.2 percent to a seasonally adjusted $372.03 billion in April as soaring gasoline prices and a slumping housing industry sapped consumers' appetite for spending, a Commerce Department report on Friday showed.

The report offered persuasive signs that the combined stress from costlier fuel and falling housing prices were turning consumers cautious - spending on building materials took the biggest tumble in more than four years and new-car sales fell by the largest amount since mid-2006.

…The sales figures came in much weaker than Wall Street economists had forecast and will reinforce worry that consumers will have difficulty sustaining their spending punch that fuels two-thirds of national economic activity.

Total retail sales had been forecast to rise 0.4 percent, instead of decline, and sales excluding automobiles also had been predicted to gain 0.4 percent rather than being flat.

The 0.2 percent April sales drop contrasted with a 1 percent March gain. It was the first outright drop in monthly sales since last September when they fell 0.6 percent although total sales were flat in both January and last October.

The declines were widespread in April. Building material sales plunged 2.3 percent - the biggest decline since February 2003 when they were down 5.1 percent -- after rising 1 percent in March.

New-car sales were down 1 percent in April after rising 0.4 percent in March. It was the biggest drop in monthly car sales since last June when they were down 2.4 percent.

In fact, the world’s largest retailer, Wal-Mart had it’s worst decline in 28 years as same-store sales dropped 3.5% in April.
Wal-Mart Sales Decline Is Worst in 28 Years

By Kris Hudson
May 10, 2007

DALLAS -- Wal-Mart Stores Inc. posted its worst monthly same-store sales results in at least 28 years, tallying a 3.5% decline in April due to this year's early Easter as well as generally challenging economic conditions for consumers.

Wal-Mart's 3.5% drop in the four-week period ending May 4 at U.S. stores fell below its earlier forecast of "flat" sales to a 2% decline. In a recorded phone message Thursday, Wal-Mart blamed bad weather last month in most U.S. regions and the early Easter on April 8, which pushed many Easter sales into March.

Same-store sales measure sales gains or losses at stores open for at least a year. They are a key indicator of the returns a retailer reaps on the capital it spends, and thus an influence on its profitability. Most publicly traded U.S. retailers are reporting their April results Thursday.

Wal-Mart's chief financial officer had warned a month ago that the retailer's earlier guidance for earnings per share of 68 cents to 71 cents for its latest quarter would be "a challenge" to achieve given what the company foresaw as a difficult April. The retailer didn't provide an update. It did, however, predict a sales gain for this month of 1% to 2%. Wal-Mart will report its results for its first quarter ended April 30 on Tuesday.

For the first quarter, Wal-Mart, Bentonville, Ark., reported a preliminary sales tally of $85.4 billion. Its 3.5% decline in same-store sales was comprised of a 4.6% decline at its flagship U.S. Division -- which includes its more than 3,200 supercenters, discount stores and Neighborhood Markets -- and a 2% gain by its Sam's Club division.

Technically, Wal-Mart's 3.5% April decline ranks as Wal-Mart's worst monthly showing in the 28 years it has reported such figures, handily outpacing the previous worst 0.6% decline in April 1996. In a broader context, the result was pulled down by scheduling quirks in addition to Wal-Mart's increasing difficulty in topping its own year-ago numbers…

According to Mike Whitney, a drop in retail sales will be the signal for foreign investors to pull the plug on the dollar and the U.S. stock markets:

The Harder They Come ...A Stock Market Post-Mortem

Mike Whitney
May 3, 2007

"There's class warfare, all right, but it's my class that's winning."
--Investment tycoon, Warren Buffett

The real estate market is crashing faster than anyone had anticipated. Housing prices have fallen in 17 of 20 of the nation's largest cities and the trend lines indicate that the worst is yet to come. March sales of new homes plummeted by a record 23.5% (year over year) removing all hope for a quick rebound. Problems in the subprime and Alt-A loans are mushrooming in previously "hot markets" resulting in an unprecedented number of foreclosures. The defaults have slowed demand for new homes and increased the glut of houses already on the market. This is putting additional downward pressure on prices and profits. More and more builders are struggling just to keep their heads above water. This isn't your typical 1980s-type "correction"; it's a full-blown real estate cyclone smashing everything in its path.

Tremors from the real estate earthquake won't be limited to housing--they will rumble through all areas of the economy including the stock market, financial sector and currency trading. There is simply no way to minimize the effects of a bursting $4.5 trillion equity bubble.

The next shoe to drop will be the stock market which is still flying-high from increases in the money supply. The Federal Reserve has printed up enough fiat-cash to keep overpriced equities jumping for joy for a few months longer. But it won't last. Wall Street's credit bubble is even bigger than the housing bubble---a monstrous, lumbering dirigible that's headed for a crash-landing. The Dow is like a drunk atop a 13,000 ft cliff; inebriated on the Fed's cheap "low-interest" liquor. One wrong step and he'll plunge headlong into the ether.

The stock market cheerleaders are ooooing and ahhing the Dow's climb to 13,000, but it's all a sham. Wall Street is just enjoying the last wisps of Greenspan's low interest helium swirling into the largest credit bubble in history. But there are big changes on the way. In fact, the storm clouds have already formed over the housing market. The subprime albatross has lashed itself to everything in the economy ---dragging down consumer confidence, GDP and (eventually) the stock market, too. The real damage is just beginning to materialize.

…The big question now is how long will it take before foreign creditors wise up and see the maxed-out American consumer is running out of steam. As soon as consumer spending slows in the US; foreign investment will dry up and stocks will tumble. China and Japan have already slowed or stopped their purchases of US Treasuries and China has stated that they plan to diversify their $1 trillion in US dollars in the future. This has lowered demand for the dollar and decreased its value in relation to other currencies. (The dollar hit a new low just last week at $1.36 vs. the euro)

A slowdown in consumer spending is the death-knell for the dollar. That's when there'll be a stampede for the exits like we've never seen before--with each of the world's central banks tossing their worthless greenbacks into the jet-stream like New Years' confetti. According to Monday's Washington Post that moment may have already arrived. As the Post's Martin Crutsinger says, "Consumer spending rose at the slowest rate in five months in March while construction activity managed only a tiny gain, weighed down by further weakness in housing".

The connection between housing and consumer spending is critical. Housing has been the main engine for growth in the US in the last 5 years accounting for 2 out of every 5 new jobs and hundreds of billions in additional spending through home-equity extractions. A downturn in consumer spending means that foreign investors will have to look for more promising markets abroad, which will trigger a steep reduction in the amount of cheap credit coming into the country via the $800 billion trade deficit. This will slow growth in the US while further weakening the dollar.

Can you say stagflation?

The present currency and economic crises were brought on by Bush's unfunded tax cuts, unsustainable trade deficits, and the Fed's hyperinflationary monetary policy. These policies were executed simultaneously for maximum effect. They were entirely premeditated. Many people now believe that the Bush administration and the Federal Reserve are intentionally creating an "Argentina-type meltdown" so they can privatize state owned assets and usher in the North American Union--the future "one state" alliance of Canada, Mexico and US--along with the new regional currency, the Amero.

Stay tuned.

Nevertheless, monetary policy is not the only reason the stock market is headed for a fall. There's also the jumble of scams and swindles which have been legalized under the rubric of "deregulation". New rules allow Wall Street to take personal liabilities and corporate debt and repackage them as precious gemstones for public auction. It's the biggest racket ever.

Consider the average hedge fund for example. The fund may have originated with $10 billion of its own cash and swelled to $50 billion through (easily acquired) credit. The fund manager then creates an investment portfolio that features CDOs (collateralized debt obligations) and Mortgage Backed Securities (MBS) to the tune of $160 billion. The majority of these "assets" are nothing more than shaky subprime loans from struggling homeowners who have no chance of meeting their payments. In other words, another man's debt is magically transformed into a Wall Street staple. (Imagine if you, dear reader, could sell your $35,000 credit card debt to your drunken brother-in-law as if it was a bar of gold or a vintage Ferrari. That, believe it or not, is the scam on which bond traders thrive)
So, the fund is leveraged, the assets are leveraged and (guess what) the investors are leveraged too---either buying on margin or borrowing oodles of cheap, low interest credit from Japan to maximize their profit potential.

Get the picture; debt x debt x debt = maximum profit and skyrocketing stock prices. That's why the face value of the market's equities far exceeds the world's aggregate GDP. It's all one, big debt-Zeppelin and it's rapidly tumbling towards planet earth.


Deregulation works like a charm for the gangsters who run the system. After all, why would they want rules? They're not thinking about capital investment, productivity or infrastructure. They're not building an economy that serves the basic needs of society. They're looking for the next big mega-merger where two monolithic, maxed-out corporations join in conjugal bliss and create a mountain of new credit. That's where the real money is.

Wall Street generates boatloads of cyber-cash with every merger. This pushes stock prices up, up and away. Deregulation has turned Wall Street into the biggest credit-generating Cash-Cow of all time--spawning zillions through seemingly limitless debt-expansion. These virtual dollars were never authorized by the Federal Reserve or the US Treasury--they emerge from the black whole of over-leveraged uber-transactions and the magical world of derivatives trading. They are a vital part of Wall Street's house of mirrors where every dollar is increased by a factor of 50 to 1 as soon as it enters the system. Assets are inflated, debt is converted to wealth, and fiscal reality is vaporized into the toxic gas of human greed.

Doug Noland at Prudent explains it like this: "We've entered a euphoric phase of financial arbitrage capitalism with extreme Ponzi overtones, a pyramid scheme of revolving credit rackets and percentage spread plays completely abstracted from any reality of fruitful activity. The reason we don't even call "money" by its former name anymore is precisely because we realize at some semi-conscious level that "liquidity" is not really money. Liquidity is a flow of hallucinated surplus wealth. As long as it flows in one direction, into financial markets, valve-keepers along the pipeline, like Goldman Sachs, Citibank, or the hedge funds, can siphon off billions of buckets of liquidity. The trouble will come when the flow stops -- or reverses! That will be the point where we will rediscover that liquidity really is different from money, and if we are really unlucky we'll discover that our money (the US dollar) is actually different from real wealth".

Noland is right. The market is "a pyramid scheme of revolving credit rackets and percentage spread plays" and no one really knows what to expect the flow of liquidity slows down or "reverses".

Will the stock market crash?

It depends on the aftereffects of the subprime meltdown. The defaults on existing mortgages are only part of the problem. The real issue is how the "credit dependent" stock market will respond to the tightening of lending standards. As liquidity dries up in the real estate market; all areas of the economy will suffer. (We've already seen a downturn in consumer spending) Wall Street is addicted to cheap credit and it has invented myriad abstruse debt-instruments to get its fix. But what happens when investment simply withers away?

According to Jerome Corsi that question was partially answered in a letter from the Carlyle Group's managing director William Conway Jr. Conway confirms that the rise in the stock market is related to "the availability of enormous amounts of cheap debt". He adds that:

"This cheap debt has been available for almost all maturities, most industries, infrastructure, real estate and at all levels of the capital structure." (But) "This liquidity environment cannot go on forever. The longer it lasts, the worse it will be when it ends.Of course when ends, the buying opportunity will be once in a lifetime."

Ah, yes, another wonderful "buying opportunity"?

You can almost feel the breeze from the great birds flapping overhead as they focus their gaze on the carrion below. Once the stock market collapses and the greenback flattens out on the desert floor; they'll be plenty of smiley faces preparing for the feast.

Conway is right, though, the stock market IS floating on a cloud of cheap credit created by a humongous trade deficit, artificially low interest rates, and a 10% yearly expansion of the money supply. Like he says, "It cannot go on forever." And, we don't expect that it will.

And all this gloom and doom doesn’t even take into account the consequences for the dollar of the U.S. defeat in Iraq and Afghanistan. Add to that the prospect of an insane attack on Iran and a global economic and political meltdown is not unlikely. Last week saw some disturbing portents. The neoconservatives seem to realize that they have to make their move now: France is now in their corner (and already has an aircraft carrier in the Persian Gulf), Blair is still PM for a little while, and Bush is on life support. Cheney made threatening comments to Iran from an aircraft carrier in the Persian Gulf then went to Saudi Arabia, where he usually goes before attacking some southwest Asian country:

Cheney warns Iran to keep sea lanes open

Tom Raum
The Associated Press

May 11, 2007

ABOARD USS JOHN C. STENNIS — From an aircraft carrier in the Persian Gulf, Vice President Dick Cheney warned Iran on Friday the U.S. and its allies will keep it from restricting sea traffic as well as from developing nuclear weapons.

"We'll keep the sea lanes open," Cheney said from the hangar deck of the USS John C. Stennis as it steamed about 150 miles from the Iranian coast.

Cheney is touring the Middle East asking Arab allies to do more to help Iraq and to curb Iran's growing power in the region. With Iraq in turmoil, both Iran and Saudi Arabia are maneuvering to see who can help fill the leadership vacuum.

The vice president made clear the United States' intentions on the rivalry. "We'll stand with others to prevent Iran from gaining nuclear weapons and dominating this region," he said.

On Saturday, Cheney will make a fence-mending visit to Saudi Arabia.

The oil-rich kingdom, long a key American ally in the Middle East, recently has been shunning the U.S.-supported government of Iraqi Prime Minister Nouri al-Maliki, suggesting he is too close to Iran.

Roughly a quarter of the world's oil supplies pass through the narrow Straits of Hormuz connecting the Persian Gulf with the open waters of the Arabian Sea. Iran controls the eastern side of the straits.

With two U.S. carrier groups now in the region, the vice president declared, "We're sending clear messages to friends and adversaries alike. We'll keep the sea lanes open."

At the same time, we hear that the U.S. will continue talks about Iraq with Iran. So was Cheney just bluffing to get oil prices higher? If so, he must have had a nice welcome in Saudi Arabia, who will get continued higher oil prices without the destabilization that would come from a real attack on Iran. Or are the Iran negotiations carried out by parts of the government not under Cheney’s control? In any case, the political crisis in the United States is coming to a head. Calls for Cheney and Bush’s impeachment get louder by the day. Last week the top aide to former Secretary of State Colin Powell all but came out for impeachment. So, for the neocons, the time may be now or never. The planets are briefly aligned for them with the U.S., the U.K., France, and Germany in their hands.

While the ruling groups seems united about precipitating and benefitting from an economic collapse (a “buying opportunity” in the words of the Carlyle Group plutocrat quoted above in Mike Whitney’s article), deep divisions over the best strategy to maintain dominance are bubbling to surface, as seen in the debate in ruling circles on Bush, Iraq and Iran. It’s hard at this point to predict which side, realist or neocon, will prevail, but the economic collapse is sadly easy to predict.

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Monday, May 07, 2007

Signs of the Economic Apocalypse, 5-7-07

From Signs of the Times:

Gold closed at 689.70 dollars an ounce Friday, up 0.7% from $684.70 at the close of the previous Friday. The dollar closed at 0.7358 euros Friday, up 0.5% from 0.7325 at the previous week’s close. That put the euro at 1.3591 compared to 1.3652 the Friday before. Gold in euros would be 507.47 euros an ounce, up 1.2% from 501.54 euros for the week. Oil closed at 61.93 dollars a barrel Friday, down 7.3% from $66.46 at the close of the week before. Oil in euros would be 45.57 euros a barrel, down 6.8% from 48.68 for the week. The gold/oil ratio closed at 11.14 Friday, up 8.2% from 10.30 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,264.62 Friday, up 1.1% from 13,120.94 for the week. The NASDAQ closed at 2,572.15 Friday, up 0.6% from 2,557.21 at the end of the week before. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.64%, down five basis points from 4.69 for the week.

A depressing week, with bad economic news on several fronts, ended with a discouraging victory for predatory capitalism and neoconservative foreign policy: the election of the fascist Sarkozy as president of France. France, which until now seemed immune from the twin diseases of neoliberalism and neoconservatism, is about to experience what those of us in the United States, United Kingdom, Australia and other countries have experienced for decades.

The plan is to force the ratification of the EU constitution over the wishes of the voters. Capitalism will be unchained and let loose on France. The people of France will be told that There Is No Alternative:

An Unsustainable System
Anti-Capitalism in Five Minutes

By Robert Jensen
April 30, 2007

We know that capitalism is not just the most sensible way to organize an economy but is now the only possible way to organize an economy. We know that dissenters to this conventional wisdom can, and should, be ignored. There's no longer even any need to persecute such heretics; they are obviously irrelevant.

How do we know all this? Because we are told so, relentlessly -- typically by those who have the most to gain from such a claim, most notably those in the business world and their functionaries and apologists in the schools, universities, mass media, and mainstream politics. Capitalism is not a choice, but rather simply is, like a state of nature. Maybe not like a state of nature, but the state of nature. To contest capitalism these days is like arguing against the air that we breathe. Arguing against capitalism, we're told, is simply crazy.

We are told, over and over, that capitalism is not just the system we have, but the only system we can ever have. Yet for many, something nags at us about such a claim. Could this really be the only option? We're told we shouldn't even think about such things. But we can't help thinking -- is this really the "end of history," in the sense that big thinkers have used that phrase to signal the final victory of global capitalism? If this is the end of history in that sense, we wonder, can the actual end of the planet far behind?

We wonder, we fret, and these thoughts nag at us -- for good reason. Capitalism -- or, more accurately, the predatory corporate capitalism that defines and dominates our lives -- will be our death if we don't escape it. Crucial to progressive politics is finding the language to articulate that reality, not in outdated dogma that alienates but in plain language that resonates with people. We should be searching for ways to explain to co-workers in water-cooler conversations -- radical politics in five minutes or less -- why we must abandon predatory corporate capitalism. If we don't, we may well be facing the end times, and such an end will bring rupture not rapture.

Here's my shot at the language for this argument.

Capitalism is admittedly an incredibly productive system that has created a flood of goods unlike anything the world has ever seen. It also is a system that is fundamentally (1) inhuman, (2) anti-democratic, and (3) unsustainable. Capitalism has given those of us in the First World lots of stuff (most of it of marginal or questionable value) in exchange for our souls, our hope for progressive politics, and the possibility of a decent future for children.

In short, either we change or we die -- spiritually, politically, literally.

1. Capitalism is inhuman

There is a theory behind contemporary capitalism. We're told that because we are greedy, self-interested animals, an economic system must reward greedy, self-interested behavior if we are to thrive economically.

Are we greedy and self-interested? Of course. At least I am, sometimes. But we also just as obviously are capable of compassion and selflessness. We certainly can act competitively and aggressively, but we also have the capacity for solidarity and cooperation. In short, human nature is wide-ranging. Our actions are certainly rooted in our nature, but all we really know about that nature is that it is widely variable. In situations where compassion and solidarity are the norm, we tend to act that way. In situations where competitiveness and aggression are rewarded, most people tend toward such behavior.

Why is it that we must choose an economic system that undermines the most decent aspects of our nature and strengthens the most inhuman? Because, we're told, that's just the way people are. What evidence is there of that? Look around, we're told, at how people behave. Everywhere we look, we see greed and the pursuit of self-interest. So, the proof that these greedy, self-interested aspects of our nature are dominant is that, when forced into a system that rewards greed and self-interested behavior, people often act that way. Doesn't that seem just a bit circular?

2. Capitalism is anti-democratic

This one is easy. Capitalism is a wealth-concentrating system. If you concentrate wealth in a society, you concentrate power. Is there any historical example to the contrary?

For all the trappings of formal democracy in the contemporary United States, everyone understands that the wealthy dictates the basic outlines of the public policies that are acceptable to the vast majority of elected officials. People can and do resist, and an occasional politician joins the fight, but such resistance takes extraordinary effort. Those who resist win victories, some of them inspiring, but to date concentrated wealth continues to dominate. Is this any way to run a democracy?

If we understand democracy as a system that gives ordinary people a meaningful way to participate in the formation of public policy, rather than just a role in ratifying decisions made by the powerful, then it's clear that capitalism and democracy are mutually exclusive.

Let's make this concrete. In our system, we believe that regular elections with the one-person/one-vote rule, along with protections for freedom of speech and association, guarantee political equality. When I go to the polls, I have one vote. When Bill Gates goes the polls, he has one vote. Bill and I both can speak freely and associate with others for political purposes. Therefore, as equal citizens in our fine democracy, Bill and I have equal opportunities for political power. Right?

3. Capitalism is unsustainable

This one is even easier. Capitalism is a system based on the idea of unlimited growth. The last time I checked, this is a finite planet. There are only two ways out of this one. Perhaps we will be hopping to a new planet soon. Or perhaps, because we need to figure out ways to cope with these physical limits, we will invent ever-more complex technologies to transcend those limits.

Both those positions are equally delusional. Delusions may bring temporary comfort, but they don't solve problems. They tend, in fact, to cause more problems. Those problems seem to be piling up.

Capitalism is not, of course, the only unsustainable system that humans have devised, but it is the most obviously unsustainable system, and it's the one in which we are stuck. It's the one that we are told is inevitable and natural, like the air.

A tale of two acronyms: TGIF and TINA

Former British Prime Minister Margaret Thatcher's famous response to a question about challenges to capitalism was TINA -- There Is No Alternative. If there is no alternative, anyone who questions capitalism is crazy.

Here's another, more common, acronym about life under a predatory corporate capitalism: TGIF -- Thank God It's Friday. It's a phrase that communicates a sad reality for many working in this economy -- the jobs we do are not rewarding, not enjoyable, and fundamentally not worth doing. We do them to survive. Then on Friday we go out and get drunk to forget about that reality, hoping we can find something during the weekend that makes it possible on Monday to, in the words of one songwriter, "get up and do it again."

Remember, an economic system doesn't just produce goods. It produces people as well. Our experience of work shapes us. Our experience of consuming those goods shapes us. Increasingly, we are a nation of unhappy people consuming miles of aisles of cheap consumer goods, hoping to dull the pain of unfulfilling work. Is this who we want to be?

We're told TINA in a TGIF world. Doesn't that seem a bit strange? Is there really no alternative to such a world? Of course there is. Anything that is the product of human choices can be chosen differently. We don't need to spell out a new system in all its specifics to realize there always are alternatives. We can encourage the existing institutions that provide a site of resistance (such as labor unions) while we experiment with new forms (such as local cooperatives). But the first step is calling out the system for what it is, without guarantees of what's to come.

Home and abroad

In the First World, we struggle with this alienation and fear. We often don't like the values of the world around us; we often don't like the people we've become; we often are afraid of what's to come of us. But in the First World, most of us eat regularly. That's not the case everywhere. Let's focus not only on the conditions we face within a predatory corporate capitalist system, living in the most affluent country in the history of the world, but also put this in a global context.

Half the world's population lives on less than $2 a day. That's more than 3 billion people. Just over half of the population of sub-Saharan Africa lives on less than $1 a day. That's more than 300 million people.

How about one more statistic: About 500 children in Africa die from poverty-related diseases, and the majority of those deaths could be averted with simple medicines or insecticide-treated nets. That's 500 children -- not every year, or every month or every week. That's not 500 children every day. Poverty-related diseases claim the lives of 500 children an hour in Africa.

When we try to hold onto our humanity, statistics like that can make us crazy. But don't get any crazy ideas about changing this system. Remember TINA: There is no alternative to predatory corporate capitalism.

TGILS: Thank God It's Last Sunday

We have been gathering on Last Sunday precisely to be crazy together. We've come together to give voice to things that we know and feel, even when the dominant culture tells us that to believe and feel such things is crazy. Maybe everyone here is a little crazy. So, let's make sure we're being realistic. It's important to be realistic.

One of the common responses I hear when I critique capitalism is, "Well, that may all be true, but we have to be realistic and do what's possible." By that logic, to be realistic is to accept a system that is inhuman, anti-democratic, and unsustainable. To be realistic we are told we must capitulate to a system that steals our souls, enslaves us to concentrated power, and will someday destroy the planet.

But rejecting and resisting a predatory corporate capitalism is not crazy. It is an eminently sane position. Holding onto our humanity is not crazy. Defending democracy is not crazy. And struggling for a sustainable future is not crazy.

What is truly crazy is falling for the con that an inhuman, anti-democratic, and unsustainable system -- one that leaves half the world's people in abject poverty -- is all that there is, all that there ever can be, all that there ever will be.

If that were true, then soon there will be nothing left, for anyone.

I do not believe it is realistic to accept such a fate. If that's being realistic, I'll take crazy any day of the week, every Sunday of the month.

There will no doubt be a push in France to privatize things that were until now public trusts. At first they will try to privatize things that might seem reasonable to privatize. But beware, the process will never end. In the United States, jails have been privatized (and inmates charged rent) and now even the roads are being privatized:

Roads To Riches

Why investors are clamoring to take over America's highways, bridges, and airports—and why the public should be nervous

Emily Thornton

May 7, 2007

Steve Hogan was in a bind. The executive director of Colorado's Northwest Parkway Public Highway Authority had run up $416 million in debt to build the 10-mile toll road between north Denver and the Boulder Turnpike, and he was starting to worry about the high payments. So he tried to refinance, asking bankers in late 2005 to pitch investors on new, lower-interest-rate bonds. But none of the hundreds of investors canvassed was interested.

Then, one day last spring, Hogan got a letter from Morgan Stanley that promised to solve all of his problems. The bank suggested Hogan could lease the road to a private investor and raise enough money to pay off the whole chunk of debt. Now Hogan, after being inundated with proposals, is in hot-and-heavy negotiations with a team of bidders from Portugal and Brazil. "We literally got responses from around the world," he says.

In the past year, banks and private investment firms have fallen in love with public infrastructure. They're smitten by the rich cash flows that roads, bridges, airports, parking garages, and shipping ports generate—and the monopolistic advantages that keep those cash flows as steady as a beating heart. Firms are so enamored, in fact, that they're beginning to consider infrastructure a brand new asset class in itself.

With state and local leaders scrambling for cash to solve short-term fiscal problems, the conditions are ripe for an unprecedented burst of buying and selling. All told, some $100 billion worth of public property could change hands in the next two years, up from less than $7 billion over the past two years; a lease for the Pennsylvania Turnpike could go for more than $30 billion all by itself. "There's a lot of value trapped in these assets," says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co.

There are some advantages to private control of roads, utilities, lotteries, parking garages, water systems, airports, and other properties. To pay for upkeep, private firms can raise rates at the tollbooth without fear of being penalized in the voting booth. Privateers are also freer to experiment with ideas like peak pricing, a market-based approach to relieving traffic jams. And governments are making use of the cash they're pulling in—balancing budgets, retiring debt, investing in social programs, and on and on.

But are investors getting an even better deal? It's a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. What's more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal.

There's also reason to worry about the quality of service on deals that can span 100 years. The newly private toll roads are being managed well now, but owners could sell them to other parties that might not operate them as capably in the future. Already, the experience outside of toll roads has been mixed: The Atlanta city water system, for example, was so poorly managed by private owners that the government reclaimed it.

Such concerns weigh on the minds of public officials like Hogan. He intends to negotiate aggressively with corporate suitors and has decreed that the buyer must share future toll-hike revenues with the local governments that built the highway. But with the market for infrastructure still in its infancy, every deal is different. The ideal blend of up-front payment, toll hikes, and revenue sharing hasn't been found.


The nascent market in roads and bridges in the U.S. follows the shift toward privatization in Europe and Australia that began with British Prime Minister Margaret Thatcher in the 1980s. It took longer to develop in the U.S. because of the $383 billion municipal bond market, which has been an efficient source of capital for governments over the years.

But with the explosion of money flowing into private investments recently, fund managers have been exploring the fringes of the investing world in search of fresh opportunities. Now a slew of Wall Street firms—Goldman, Morgan Stanley, the Carlyle Group, Citigroup, and many others—is piling into infrastructure, following the lead of pioneers like Australia's Macquarie Group. Rob Collins, head of infrastructure mergers and acquisitions at Morgan Stanley, estimates that 30 funds are being raised around the world that could wield as much as $500 billion in buying power for U.S. assets.

Many investors think of infrastructure investing as a natural extension of the private equity model, which is based on rich cash flows and lots of debt. But there are important differences. Private equity deals typically play out over 5 to 10 years; infrastructure deals run for decades. And the risk levels are vastly different. Infrastructure is ultra-low-risk because competition is limited by a host of forces that make it difficult to build, say, a rival toll road. With captive customers, the cash flows are virtually guaranteed. The only major variables are the initial prices paid, the amount of debt used for financing, and the pace and magnitude of toll hikes—easy things for Wall Street to model. "With each passing week, there are more parties expressing unsolicited interest in some kind of a financial transaction that will involve one of our assets directly or indirectly," says Anthony R. Coscia, chairman of the Port Authority of New York & New Jersey.

Firms are even beginning to market infrastructure to investors as a separate asset class, safe like high-grade bonds but with stock market-like returns—and no correlation with either. The Standard & Poor's 500-stock index has returned about 10% a year, counting dividends, since 1926. Bonds have returned about 5%. Firms say infrastructure will beat both, and without having to sweat out market dips along the way. That's a huge selling point at a time when stock, bond, and commodity markets around the world are becoming increasingly interconnected.

Investors can't get in fast enough. They recently deluged Goldman Sachs with $6.5 billion for its new infrastructure fund, more than twice the $3 billion it was seeking. "We're using [infrastructure] as a fixed-income proxy," says William R. Atwood, executive director of the Illinois State Board of Investment, who plans to invest $600 million to $650 million, or 5% of its portfolio, in infrastructure funds over the next three years. "We're hoping to get 11% to 12% returns and lower risk." Pension funds in particular like the long-term investment horizons, which match their funding needs well. Infrastructure "delivers similar yield expectations to high-yield bonds and real estate, with less risk," says Cynthia F. Steer, chief research strategist at pension consulting firm Rogerscasey.

On the other side of the bargaining table from the investment firms sit struggling governments suddenly amenable to the idea of selling control of assets to solve short-term problems. The burden of maintaining roads, bridges, and other facilities, many built during the 1950s, is becoming difficult to bear. Federal, state, and local governments need to spend an estimated $155.5 billion improving highways and bridges in 2007, according to transportation officials, up 50% over the past 10 years. And that's hardly the only obstacle they face. In 2006 alone, states increased their Medicaid spending by an estimated 7.7%, to $132 billion. And state and local governments could be on the hook for up to $1.5 trillion in retiree liabilities, estimates Credit Suisse. At the same time, politicians find it difficult to raise taxes. Chicago's former chief financial officer, Dana R. Levenson, sums up the situation: "There is money to be had, and cities need money." U.S. Representative Chaka Fattah, a Pennsylvania Democrat who is running for mayor of Philadelphia, proposes to privatize the Philadelphia International Airport and use the proceeds to fund poverty programs—a much easier sell than a tax increase.

The combination of eager sellers and hungry buyers is shaking loose public assets across the country. The 99-year lease of the Chicago Skyway that went for $1.8 billion in 2005 was the first major transaction. Last year came the Indiana deal. Now states and cities are exploring the sale of leases for the turnpikes in New Jersey and Pennsylvania, a toll road in Texas, Chicago Midway Airport, and several state lotteries. Suddenly politicians around the country are wondering how much cash they might be sitting on. Based on the going rate of about 40 times toll revenues, the iconic Golden Gate Bridge could probably fetch $3.4 billion were California interested in selling. The Brooklyn Bridge? If permission were granted by New York City to charge the same tolls as the George Washington Bridge, a private owner might shell out as much as $3.5 billion for it.

…The certainty of future toll hikes doesn't jibe with the uncertainty of service quality. Assets sold now could change hands many times over the next 50 years, with each new buyer feeling increasing pressure to make the deal work financially. It's hardly a stretch to imagine service suffering in such a scenario; already, the record in the U.S. has been spotty. In 2003 the city of Atlanta ended a lease of its water system after receiving complaints about everything from billing disputes to water-main breaks. The city wrestled with the owner, United Water Inc., over basics like the percentage of water meters it should monitor. Both parties acknowledge that the contract lacked specifics. In the end, "we didn't believe we were getting performance," says Robert Hunter, commissioner for Atlanta's Dept. of Watershed Management. "I don't believe the city will ever look at privatizing essential services again." United Water says the contract wasn't financially feasible because Atlanta's water system was in worse shape than the city had represented.


States are wrestling with other public policy issues, too. Bankers say New York could reap a combined $70 billion for long-term leases on a bunch of assets, including the state's lottery, the Tappan Zee Bridge, and the New York State Thruway. New York state officials have looked into the option of leasing the lottery, which itself might command $35 billion—a sum that could substantially upgrade, say, New York's higher education system. The downside? The state would probably have to remove constraints on the lottery's marketing designed to discourage people from gambling more than they can afford. If the state insists on keeping the constraints in place, it could reduce the value of selling it.

Chicago's experience shows the possibilities and the pitfalls of privatization. Former CFO Levenson has been one of the movement's biggest champions. He was an architect of the Skyway deal, which kicked off the market. Then he sold control of parking garages to Morgan Stanley for $563 million. Next, he started shopping around a lease for Midway Airport that could fetch as much as $3 billion. And soon the city hopes to auction off rights to operate some recycling plants. Levenson dismisses critics who argue that he has dumped prized assets. "This is not like where a person goes in and buys a loaf of bread from a store and walks out with that loaf of bread," he says. "Some entity, we expect, will make an offer to lease the Midway Airport for 75 to 99 years, and the following day I'm pretty sure it will still be there."

Wearing a crisp suit and stylish eyeglasses, Levenson looks like the Wall Streeter he once was, working for Bank One Corp. and Bank of America Corp. before taking the Chicago city job in 2004. In April he returned to banking: As a managing director at the Royal Bank of Scotland Group, he now beats the bushes for infrastructure deals. Levenson doesn't understand how local governments can afford not to put public works up for sale. Thanks to the 99-year lease for the Skyway, Chicago has paid off its debt and handed over $100 million to social programs like Meals on Wheels. Plus, says Levenson, it's earning as much in annual interest on the $500 million it has banked from the transaction as it used to earn from running the Skyway ($25 million).

In some ways, Levenson argues, the city still has control over the highway. The agreement with the new owners spells out guidelines in mind-numbing detail, dictating everything from how quickly potholes must be filled (24 hours) to how rapidly squirrel carcasses must be removed (8 hours). If Macquarie and Cintra violate those conditions, the city can take back the road.

So far, the buyers have strictly adhered to the rules. At 7 a.m. on a Wednesday in March, five workers begin another day at the Chicago Skyway's Snow Command. On their to-do list are potholes to be checked and cracks to be sealed. Juan Rodriguez used to patrol the freeway for Chicago city. Today, he cruises the road for private owners. He discovers some potholes have grown unacceptably large because of salt that was spread the previous night. There's some tire debris that must be removed, and a disabled vehicle holding up traffic.


In the past, Rodriguez says, he had to write out a ticket for each problem, which would be added to a long list of chores. Addressing problems often took days, Rodriguez recalls. But by 10:25 a.m., all of this morning's issues on the Skyway's 7.8-mile stretch of pavement are resolved. "The new owners are taking the Skyway to a whole new level," he says.

They've certainly spent money on improvements. The message "a clean workplace is a happy workplace" is scrawled on a whiteboard in a freshly painted and ventilated garage where workers meet. There's electronic tolling, which didn't exist before. A bunch of new lanes are under construction. The investments seem to be paying off: Since taking over two years ago, the Skyway's operators estimate traffic has risen 5%.

It's all encouraging, except that Chicago "probably could have gotten more without privatizing," according to Dennis J. Enright, a principal and founder of NW Financial. His firm's analysis shows that Chicago could have done a lot better by handling the whole deal itself. It could have raised tolls and sold tax-exempt municipal bonds backed by the scheduled hikes. That would have given the city the up-front cash it needed while preserving some of the income from the toll hikes. Instead, that money will go to Macquarie and Cintra.

Meanwhile, the higher tolls will take a big bite out of lower-income people's wallets. "You have to ask yourself if you want roads that used to be considered a public service to be rationed by income class," says Princeton University economics professor Uwe E. Reinhardt. Chicago says it hasn't received any formal complaints from citizens, though two different drivers recently went to extremes to avoid tolls, says Skyway maintenance manager Michael S. Lowrey. When the new owners introduced free towing for broken-down vehicles, the drivers called the Skyway for help, claiming to be stranded. After workers hauled the vehicles past the tollbooths, they hopped in their cars and sped away.

For workers, the privatization wave has wrought many changes. Skyway toll takers used to be full-time city employees with rich benefits. Now most are part-time independent contractors without benefits. Brian Rainville, executive director of the Chicago Teamsters Joint Council 25, helps manage the union's pension fund. When he listened to a recent pitch from a pension consultant about infrastructure funds, it sparked a realization: The returns he might generate for his pensioners could be canceled out by the union's shrinking number of contributors. "It's pretty obvious that it's not sound fiscal policy for the [pension] fund to undercut the people it's serving," Rainville says.

Pushback against private investors is now playing out in different ways elsewhere. In Pennsylvania, the state turnpike commission is going head-to-head with private bidders for the right to operate the state's 537-mile toll road. Pennsylvania desperately needs cash to repair its nearly 6,000 structurally deficient bridges. Some pundits expected Pennsylvania Governor Edward G. Rendell to propose hikes in gas taxes and other fees to fund the projects. But in December, Rendell unexpectedly announced plans to privatize the turnpike. Timothy J. Carson, vice-chairman of the commission, scrambled to submit an expression of interest for the turnpike to continue to run itself. His proposal is being judged against many others, including those from big Wall Street firms.

Carson isn't dissuaded by arguments that investors are better qualified to run turnpikes profitably. "There's no magic here," he says. "These [deals] are largely driven by one factor: the permitted toll increases." Carson says the state doesn't need to hand over the turnpike to private owners. Historically, he says, the state wanted the turnpike to collect only enough money to break even. But it could just as easily adopt its own toll-hike schedule. The state could also charge tolls on more roads. In other words, the public could remain in control simply by changing the turnpike's mission. That would ensure that the benefits of the toll hikes were spread throughout the populace, says Carson.

Pennsylvania's isn't the only turnpike authority exploring the possibility of bidding for roads. The North Texas Tollway Authority calculated in March that it would have valued a partially constructed 25-mile stretch of highway near Dallas 26% more than a private investor had bid. Now it's considering making a formal bid. And on Apr. 11, the Texas House of Representatives passed an amendment by a vote of 134 to 5 to impose a two-year moratorium on privatizing state toll roads. "We need to put the brakes on these private toll contracts before we sign away half a century of future revenues," said representative Lois W. Kolkhorst, who proposed the bill. A similar bill was passed in the state senate on Apr. 19.

With so much money at stake and so many options available to states, it's impossible to know how the great infrastructure craze may play out. But this much is certain, says Pennsylvania's Carson: "People are willing to pay more than they are currently being charged. The only question is to what extent you're willing to take advantage of that."

Blackwater shows how the military and police can be privatized. Wal-Mart is paving the way for the privatization of intelligence and policing, something that has a long history in the United States (see Pinkerton, for example):

Wanted: Global threat analysts

Wal-Mart seeks former intelligence officers for security

Marcus Kabel

Associated Press

April 24, 2007

BENTONVILLE, ARK. — Wal-Mart Stores has been recruiting former military and government intelligence officers for a branch of its global security office aimed at identifying threats to the world's largest retailer, including from "suspect individuals and groups."

Wal-Mart's interest in intelligence operatives comes at a time when the retailer is defending itself against allegations by a fired security employee that it ran surveillance operations against targets including critics, dissident shareholders, employees and suppliers. Wal-Mart denied any wrongdoing.

Wal-Mart posted ads in March on its Web site and sites for security professionals, including the bulletin of the Association of Former Intelligence Officers, for "global threat analysts" with backgrounds in government or military intelligence work.

The jobs were listed with the Analytical Research Center, part of Wal-Mart's Global Security division, which is headed by former senior CIA and FBI senior officer Kenneth Senser. The analytical unit was created over the past year and a half, according to published comments by its head, Army Special Operations veteran David Harrison.

The job description includes collecting information from "professional contacts" and public data to anticipate and assess threats stemming from "world events, regional/national security climates, and suspect individuals and groups."

"Familiarity with a broad spectrum of information resources and data-mining techniques" is listed among the skills sought, along with a foreign language, preferably Chinese or Spanish.

A Wal-Mart spokesman declined to comment on the Analytical Research Center for this story or to make any security executives available for interviews.

Many corporations hire law enforcement officers for their security departments. But Steven Aftergood, who runs the government secrecy project for the Washington-based Federation of American Scientists, said Wal-Mart's efforts appear to go beyond what most companies are doing, raising questions about corporate intelligence work outside of the oversight process in place for government spying.

France may be the last place where all these things will happen, but the danger is clear. Most likely, the French people will fight hard to preserve their social benefits and labor rights. Can they prevail over those who are putting Sarkozys in power all over the world? It’s hard to believe that the combination of neoliberal economic policy and neoconservative foreign policy will be popular in France. But once Sarkozy’s people get even more control of the media and penetrate further the state security system, all efforts will be made to bring France along with the neocon “clash of civilizations” (i.e., Christians, Jews and Hindus against the Muslims). A shocking false flag event cannot be ruled out. Sarkozy has been lucky when it comes to conveniently timed unrest in recent years. Let’s hope his luck runs out.

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