The Expanding Prison/Industrial Complex

Two main items of interest in today's news as it relates to the growing Prison/Industrial Complex. First:

Cheney charged over jail 'abuses'

A judge has yet to approve the indictment against Mr Cheney

A Texas grand jury has charged US Vice-President Dick Cheney for "organised criminal activity" related to alleged abuse of private prison inmates.

The indictment says Mr Cheney - who has invested $85m (£56m) in a company that holds shares in for-profit prisons - conspired to block an investigation.

The indictment has not been seen by a judge, who could dismiss it.

Hopefully it's only the first in a long line of indictments against Bush & Co., although everyone's expecting pardons- if not blanket pardons, at least for the worst offenders. And this is yet another indication of the corruption at the highest levels of our government. Of course he holds shares in private prisons, a business that's only set to become more profitable, says today's Wall Street Journal.

Prison companies are preparing for a wave of new business as the economic downturn makes it increasingly difficult for federal and state government officials to build and operate their own jails.

The Federal Bureau of Prisons and several state governments have sent thousands of inmates in recent months to prisons and detention centers run by Corrections Corp. of America, Geo Group Inc. and other private operators, as a crackdown on illegal immigration, a lengthening of mandatory sentences for certain crimes and other factors have overcrowded many government facilities.

Prison-policy experts expect inmate populations in 10 states to have increased by 25% or more between 2006 and 2011, according to a report by the nonprofit Pew Charitable Trusts.

Private prisons housed 7.4% of the country's 1.59 million incarcerated adults in federal and state prisons as of the middle of 2007, up from 1.57 million in 2006, according to the Bureau of Justice Statistics, a crime-data-gathering arm of the U.S. Department of Justice.

Corrections Corp., the largest private-prison operator in the U.S., with 64 facilities, has built two prisons this year and expanded nine facilities, and it plans to finish two more in 2009. The Nashville, Tenn., company put 1,680 new prison beds into service in its third quarter, helping boost net income 14% to $37.9 million. "There is going to be a larger opportunity for us in the future," said Damon Hininger, Corrections Corp.'s president and chief operations officer, in a recent interview.

Some other surprising statistics from the land of the free:

• The U.S. has less than 5% of the world's population, yet has more than 25% of the world's prisoners. [Wikipedia]
• As a percentage of total population, the U.S. also has the largest imprisoned population, with 739 people per 100,000 serving time, awaiting trial or otherwise detained. [King's College]
• The American prison population has quadrupled since 1980, partially as a result of mandated sentences that came about during the "war on drugs." [Wikipedia] Despite this, somehow drugs are still widely available.

Dissident voice reports that

Why is this happening? Inmates have become the raw material for a prison-industrial complex, shoring up perpetual profits for McJails. Corporate prisons are paid on a per-prisoner/per-day basis, and thus they lobby hard for longer mandatory sentences. Inmates also provide cheap labor, and they are about to become, once again, guinea pigs for pharmaceutical trials. All of this signals the conversion of people into valuable “bio-mass.”

Incarceration makes sense, politically. Prisons provide jobs to rural and small town Americans who would otherwise be unemployed. These workers and their families represent votes, especially in the South, where electoral majorities are White and electoral minorities are Black. The drug war is, in large part, a race war by other means.

Study after study documents the following: African Americans are disproportionately stopped and searched; African Americans are disproportionately arrested; African Americans are disproportionately charged; and African Americans are disproportionately convicted. And all felons are disenfranchised, never to vote again.

See why Bush & Co. loves private prisons? Put all those undesirables in jail, let em rot. If they get out, they're still not going to be voters, so who cares? In the meantime, you're providing jobs, AND you get a healthy dividend check.

For more information: American Gulag Project

Times are tough all over

It seems like a daily occurrence now. I open the paper to see another story of people who have fallen on hard times. Maybe it's people struggling to make their mortgage payment. Maybe it's a single mother trying to decide whether to pay the electric bill or put food on the table. Perhaps a young family that cannot afford all the medical care that they need. Or maybe, like today, it's a story of the most drastic cutbacks of all- the very richest are being forced to cut back on gifts and allowances that they give to their mistresses.

Fully 82% of men in the study said they planned to lower the allowances to their mistresses, while more than three quarters planned to provide fewer gifts, less expensive gifts and fewer perks, like jet rides, resort vacations and top restaurant meals.

Yes, it truly is a dark day in America when 80% of multi-millionaires are forced to cutback in this way. 80%!! We need a bailout for extra-marital lovers!! They're vital to the luxury goods portion of economy. Just think about how many people are employed by the resort vacation industry, top restaurants, jewelry sales, not to mention all the aviation jobs provided by all those private jet-rides. Congress better act- and soon! I suggest a modest bailout- perhaps $25 billion? Just enough to get them through the current crisis, without encouraging any moral hazards or windfall profits. Let it never be said in these great United States of America that we failed, during our darkest hours, to take care of those that matter the most!

Financial Armageddon rocks!

Financial Armageddon is right on:

Today, Henry Paulson served up his latest round of reassurances that things were looking up. According to the Associated Press, in a report entitled "Paulson, Bernanke Defend $700 Billion Bailout," the Treasury Secretary said that

the U.S. has "turned a corner" in averting a financial collapse.

With that in mind, Iit seemed like a great time to go back and see whether Mr. Paulson's remarks should be taken at face value. Below is a sampling of his past prognostications (in chronological order):

"Bush, Paulson: Economic Upturn Will Take Time," MSNBC, Oct. 15, 2008:

“I believe [the financial rescue plan] is a major step in restoring confidence in our capital system, and that is key — it’s the most important thing we can do for our economy,” Paulson said.

"Paulson 'Very Optimistic' on Freddie, Fannie Rescue," Bloomberg, July 20, 2008:

The banking system is "sound" and regulators are being "vigilant," though some banks are starting to struggle, he said.

"US Treasury Secretary: Economic Fundamentals are Sound" , VOA News, 20 July 2008:

"We are going through a challenging time with our economy,...but our economy has very strong long-term fundamentals."

"Paulson Says Economy Strong Despite Oil Strains," Reuters, June 24, 2008:

Treasury Secretary Henry Paulson said on Tuesday that the global economy was being strained by costly energy but said U.S. economic fundamentals were sound.

In an interview on Mexican television, Paulson said he thought that most of the slump in U.S. housing prices would be over by year-end and that growth should be stronger by then.

"Paulson Again Downplays Credit Crisis, Expects Continued Economic Growth," Thomson Financial, August 20, 2007:

"US economic fundamentals are healthy: unemployment is low, wages are rising and core inflation is contained," Paulson told the House Financial Services Committee today. "Although the recent reappraisal of risk, coupled with weakness in the housing sector, may well result in a penalty, the fundamentals point to continued US economic growth."

Paulson has said previously that the August credit crunch will act as a penalty on growth, but that the US is not headed toward recession.

Paulson added that unlike previous market downturns, turbulence in the markets over the last few weeks was not caused by problems in the 'real economy,' and instead reflected "excesses in the credit markets."

He also downplayed problems in the subprime mortgage market, saying that US home ownership has increased over the last decade and that home ownership in general is not threatened.

"Even in the current environment, the vast majority of new homeowners will not have difficulty keeping their homes," he said.

"Paulson Sees Subprime Woes Contained," Reuters, August 1, 2007:

Treasury Secretary Henry Paulson said on Wednesday the repricing of credit risk was hitting financial markets, but U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decades....

"The market has focused on this. There's a wake-up call, and there's an adjustment to this repricing of risk, but I see the underlying economy as being very healthy," he told reporters before leaving Beijing.

Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was "largely contained," despite losses in a number of financial institutions and a long period for subprime issues to move through the economy.

We report. You...cry.

Paulson *IS* the smartest guy in the room!

My wife & I were discussing the bailout yesterday, and all the various and sundry ways it has been mismanaged.

"Paulson's an idiot," I opined.

"No, he's a genius," my wife retorted.

Stunned, I sat at a loss for words. What essential fact could I be missing that would turn him from a moron to a genius? Maybe he really does have a plan to turn this all around, some brilliant 11th hour, hail-mary, go-for-broke, movie-ending twist that will put all the pieces in place. Everything will finally make sense and we could all have a good laugh about "the time when we thought the Treasury Secretary was out to screw us." But what twist be could that be?? I'll admit, I couldn't see it.

"He got everything he wanted... he got Congress to give him $700 billion with no strings attached. That's pretty damn smart."

And so's my wife. Now why can't Congress dig deep, find some balls, and start doing what's right for the people?

Why not help the homeowners?

Nouriel Roubini's back at it again- he's forecasting a long way down for residential home prices, for a cumulative drop of 40% from the peak.

Now this fall in home prices is important for 3 reasons. As long as it occurs, residential construction is going to keep on falling in absolute terms as a share of GDP. Secondly there is the huge wealth effect coming from a fall of $6 trillion of housing wealth. But most important factor I think is that right now ongoing is that with such a fall in home prices, by the end of next year about 40 percent of all households with a mortgage are going to be underwater, negative equity with the value of their homes below the value of their mortgages. So about 21 million out of the 51 million houses that have a mortgage. And there’s a huge incentive to walk away from your home, because the US mortgages are not recourse loans.

Now, not everybody is going to walk away. Let’s be even conservative. Let’s assume that only 1 out of 5 people that are underwater are going to walk away. If you do the math — I’m not going to go into the detail of it — you get additional losses for the financial system of the order of $400 billion dollars. This is on top of all the other write-downs that have already had been made through subprime-kind of a writedown. So that’s another huge loss for the financial system. This is just assuming that only 1 out of 5 people underwater are going to walk away. If it’s more like 40 percent, then the losses is another $800 billion. So you’re in a situation in which you can wipe out a good chunk of the capital of the financial system. So that’s what we are observing.

Of course, Paulson doesn't want to solve that problem, he wants to keep giving the money to the banks.

Paulson resisted pressure from lawmakers to commit to implementing a foreclosure-prevention program proposed by Federal Deposit Insurance Corp. Chairman Sheila Bair.

``There is a balance to getting money for those who need it as opposed to those who don't need it,'' Paulson told the panel. ``There's also a balance to not providing a windfall to the banks.''

Home prices fell in four out of every five U.S. cities in the third quarter, a record spurred by nationwide foreclosure sales, the National Association of Realtors said today. The financial turmoil sparked by the collapse of the U.S. subprime mortgage market has caused $996 billion of losses for banks, lenders and insurers.

So, if we're looking at further (semi-conservative) losses of $800 billion, plus the $996 billion already lost then we're pretty close to $1.8 trillion. Our entire GDP is only $13.8 trillion. If you really want to talk crazy then lets figure in the amounts already allocated, which CNBC is calculating as $4.3 trillion. By the way, that's more than the U.S. spent on WWII, on an inflation adjusted basis. So how much longer can we go on solving the problems caused by excessive debt and lax oversight by issuing new debt and handing out money without any oversight? As Naomi Klein says, it's a "multi-trillion-dollar crime scene".

Klein sees three areas of borderline illegality. The first is that rather than being used to get banks lending again, the bailout money "is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers."

The second is that, without Congressional authorization, "the Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government."

The third problem, which dwarfs the $700 billion bailout itself, is that "there’s another $2 trillion that’s been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don’t really know who they’re handing the money out to, because, apparently, it’s a secret."

"If the Fed has accepted distressed assets as collateral in exchange for these loans," stated Klein, "there’s a very good chance the taxpayers aren’t going to be getting this money back. ... So that’s why we’re calling this the 'trillion-dollar crime scene' or the 'multi-trillion-dollar crime scene.'"

What credit crunch?

The bailout was supposed to alleviate a dramatic credit crunch, one that could possibly destroy the entire world economy- at least if you believed Paulson, Bush, et al. But stop and think for a moment... do you know anyone that wanted to get a loan and could not, due to the "crisis"? Anyone? I haven't heard a single story of someone that simply could not get financing. There are plenty of stories of economic hard times, but no specific lending problems that I've seen. So why does the data show that banks are lending more than ever???? Oh right, because the whole thing was a massive fraud to begin with. I keep forgetting.

The latest government numbers, through mid-October, show bank commercial and industrial loans up, bank commercial real estate loans rising and interbank loans climbing. Indeed, from September 2007 to mid-October of this year, the numbers in all three categories have climbed consistently.

It's a puzzle that's getting little attention, even as hundreds of billions of taxpayer dollars are devoted to fixing a problem that seems belied by government figures.

"Their own data seems to contradict their position," said V.V. Chari. "It would be valuable for them to explain what they're talking about."

h/t to Open Left

Paulson's Op-Ed

Secretary Paulson in today's New York Times:

Recently I’ve been asked two questions. First, Congress gave you the authority you requested, and the economy has only become worse. What went wrong? Second, if housing and mortgages are at the root of our economic difficulties, why aren’t you addressing those problems?

The answer to the first question is that the purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties. The crisis in our financial system had already spilled over into the overall economy. But recovery will happen much, much faster than it would have had we not used TARP to stabilize our system. If Congress had not given us the authority for TARP and the capital purchase program and our financial system had continued to shut down, our economic situation would be far worse today.

The answer to the second question is that more access to lower-cost mortgage lending is the No. 1 thing we can do to slow the decline in the housing market and reduce the number of foreclosures. Together with our bank capital program, the moves we have made to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, will promote mortgage lending. We are also working with the Department of Housing and Urban Development, the F.D.I.C. and others to reduce preventable foreclosures.

Double-wrong again, Secretary. The answer to the first question is that you had already lost control by that point, and you knew it. Of course, it's easy to say now that you got you bailout that things would have been much worse without it, but we'll never know, will we?

Your answer to the second question, if you were telling the truth, would sound more like this: "We couldn't care less about homeowners. We are trying to get as much cash into the hands of those that caused this mess as possible. If it weren't for that meddling Sheila Bair, we could ignore the homeowners all together."

I nominate the following statement to be the one most likely to come back to bite Paulson's ass:

As policymakers face the difficult challenges ahead, they will begin with two considerable advantages: a significantly more stable banking system, one where the failure of a major bank is no longer a pressing concern; and the resources, authority and potential programs available to deal with the future capital and liquidity needs of credit providers.

"The failure of a bank is no longer a pressing concern"??? So what will he say once Citigroup goes belly up? Oh, that won't be a "failure", because the government will either dump a bunch of money into them, or help them become acquired.

GOP Senator: Paulson may have given money to friends

File under "No shit?" If you're interested, you can read the full text of Inhofe's letter to his senatorial colleagues here.

Inhofe: He criticizes Henry Paulson for changing the $700 billion bailout plan.

By JIM MYERS World Washington Bureau
11/16/2008
Last Modified: 11/16/2008 2:31 AM

WASHINGTON — U.S. Sen. Jim Inhofe said Saturday that Congress was not told the truth about the bailout of the nation's financial system and should take back what is left of the $700 billion "blank check'' it gave the Bush administration.

"It is just outrageous that the American people don't know that Congress doesn't know how much money he (Treasury Secretary Henry Paulson) has given away to anyone,'' the Oklahoma Republican told the Tulsa World.

"It could be to his friends. It could be to anybody else. We don't know. There is no way of knowing.''

Inhofe's comments, unusually pointed even for a senator known for being blunt, come on the heels of Paulson's shift in how he thinks the bailout funds should be spent.

Last week the Treasury secretary announced he was abandoning his plan to free up the nation's credit system by buying up toxic assets from troubled financial institutions. Instead, Paulson wants to take a more direct action on the consumer credit front.

"He was able to get this authority from Congress predicated on what he was going to do, and then he didn't do it,'' Inhofe said.

"So,

that's enough reason right there.''

Inhofe recalled earlier comments opposing Paulson's plan because the administration's point man did not have answers for a number of questions. He also recalled questioning the rush to get the bailout passed.

"I have learned a long time ago. When they come up and say this has to be done and has to be done immediately, there is no other way of doing it, you have to sit back and take a deep breath and nine times out of 10 they are not telling the truth,'' he said.

"And this is one of those nine times.''

Inhofe has laid out his legislative plans for this week on the bailout package in a letter to his Senate colleagues.

He wants to freeze what is left of the initial $350 billion — reportedly $60 billion, but Inhofe concedes he does not know for sure.

Then he wants a provision requiring an affirmative vote by Congress before Paulson can get his hands on the second $350 billion of bailout money.

Current law lays out a scenario where President Bush submits a plan on the second half of the funding.

Lawmakers have 15 days to disapprove it, but Inhofe questions that wording.

"Congress abdicated its constitutional responsibility by signing a truly blank check over to the Treasury Secretary,'' he wrote.

"However, the lame duck session of Congress offers us a tremendous opportunity to change course. We should take it.''

In the interview, the senator said his plans can provide "redemption'' for those senators who supported Paulson.

Inhofe's plan appears to be a long shot at this point. Senators originally approved the bailout plan by a 74-25 vote.

He does not know how much support he has among his Republican colleagues, and he concedes Democratic leaders could block it.

Bush also could veto it if it were to make it out of Congress.

Neither Senate Majority Leader Harry Reid's office nor the Treasury Department commented.

Reid, D-Nev., wants to use the upcoming lame duck session to push economic issues such as extending unemployment benefits and aid to the nation's ailing auto industry.

Inhofe opposes both.

"You don't stimulate the economy by giving away more money,'' he said.

In response to concerns expressed by some that allowing even one of the big automakers to fail would be too much of an economic hit for the nation, Inhofe said reality must be accepted.

"If we keep on nursing a broken system, then we can't expect to have a different result come later on,'' he said.

"I just think we have to draw the line someplace, and the time is here.''

Still don't believe Congress is owned by corporations?

Once in a while, someone in the corporate media slips up and says what they're not supposed to. Like today, for example, when Yahoo News reported that "Toyota, BMW senators oppose auto rescue." Apparently these senators are wholly-owned subsidiaries of these international companies. They'll have a fight on their hands, I'm sure, once the GM and Ford senators hear about this!! (See Carl Levin's quotes here and here) You can see the slip-up below, on the right hand side near the massive Toyota logo.

h/t the Raw Story

Who won the election? Capitalism

Brilliant satire can be found here.

International Anarchist Communist Statement On The Global Economic Crisis And G20 Meeting

International Anarchist Communist Statement On The Global Economic Crisis And G20 Meeting

by Anarkismo Editorial Group Report

International anarchist communist statement on the global economic crisis and G20 meeting, endorsed by Alternative Libertaire (France), Federazione dei Comunisti Anarchici (Italy), Melbourne Anarchist Communist Group (Australia) and Zabalaza Anarchist Communist Front (South Africa).

Anarchist Communist Statement On The Global Economic Crisis And G20 Meeting
1.The current crisis is typical of the crises that regularly appear in the capitalist economy. "Overproduction", speculation and subsequent collapse are inherent to the system. (As Alexander Berkman and others have pointed out, what capitalist economists call overproduction is actually underconsumption: capitalism prevents large numbers of people from fulfilling their needs, and so undermines its own markets.)

2.Any solution to the crisis prepared by capitalists and governments will remain a solution within capitalism. It will not be a solution for the popular classes. Indeed, as in every crisis, the workers and the poor are paying – while financial capital is being bailed out with huge sums. This is likely to continue. No change within capitalism can resolve the problems of the popular classes; still less can such a solution be expected from individual politicians, such as Barack Obama. The most such politicians can do is play a part in offering the capitalists a way out, and perhaps in throwing the working class some crumbs.

3.The bank bailouts show not only whose interests the state serves, but the hollowness of capitalist commitment to free markets. Throughout history, capitalists have stood for markets when it suits them, and state regulation and subsidies when they need it. Capitalism could never have existed without state support.

4.In the US, the UK and elsewhere, the bailouts have taken the form of nationalisation of troubled financial institutions – with the full support of capital. This shows that capitalists have no fundamental problem with state ownership, and that nationalisation has nothing to do with socialism. It can also be a method of screwing the working class. We ourselves, not the state, need to take control of the economy.

5.Owing to the globalisation of capital under neo-liberalism, the ruling class recognises that the solution must be global. The G20 is meeting from 15 November to discuss the crisis. This is significant. The rulers of the US, Europe and Japan are coming to realise that they cannot handle the crisis on their own; that they need, not only one another, but other powers, notably China (which is emerging as a top industrial producer, and is on its way to becoming the world's third-biggest economy). India, Brazil and other "emerging" economies will have seats at the table. This may mark a recognition – under discussion for some years – that the G8 alone are no longer the world's economic decision makers. It is likely to signal a shift in the running of the global economic system.

6.We place no hopes in the inclusion of new capitalist powers. China's rulers may claim to be socialist; others, such as Lula of Brazil and Motlanthe of South Africa, may present themselves at times as champions of the poor. But in fact, all are defenders of capitalism, exploiters and oppressors of the people of their own countries, and, increasingly, imperialist or sub-imperialist exploiters of the people of other countries.

7.If the crisis is to lead to anything other than complete defeat for the global popular classes, poverty, exploitation and war, the popular classes must mobilise. We must demand bailouts, not for the capitalists, but for us. We anarchist communists will fight for those who got homes on subprime mortgages to be bailed out and keep their homes. We will continue to engage in and support struggles for jobs with better wages and shorter hours, housing, services, health services, welfare and education, protection of the environment. We fight for an end to imperialist wars and to repression of our class and its struggles.

8.We present these demands in response to the G20 meeting, and will continue to present them in the future. Through such demands, and through direct action to bring them about, we will work towards building a global movement of the popular classes that can put an end to capitalism, the state and the crises they create.

Signed:

Alternative Libertaire (France)
Federazione dei Comunisti Anarchici (Italy)
Melbourne Anarchist Communist Group (Australia)
Zabalaza Anarchist Communist Front (South Africa)

AIG to pay out $503 Million to top execs

Are you getting it yet? This whole bailout is a fucking rip-off. How much more blatant can they be? If AIG had middle fingers, they'd both be firmly upraised in a big fuck-you to the American public, as well as to Congress.

Treasury officials said earlier this week that they had imposed some of the most stringent limits ever on AIG executives' bonuses and compensation in exchange for the broader bailout.

Oh really? So how does this half-a-billion in bonuses figure into that?

Congressmen generally don't call people chumps, but in this case it's pretty applicable. I'm not sure Kashkari is the sole person that should be directed towards, but whatever.

Stock market or Ponzi scheme?

November 13, 2008

A Credit Crisis or a Collapsing Ponzi Scheme?

The Two Trillion Dollar Black Hole

By PAM MARTENS

Purge your mind for a moment about everything you've heard and read in the last decade about investing on Wall Street and think about the following business model:

You take your hard earned retirement savings to a Wall Street firm and they tell you that as long as you "stay invested for the long haul" you can expect double digit annual returns. You never really know what your money is invested in because it’s pooled with other investors and comes with incomprehensible but legal looking prospectuses. The heads of these Wall Street firms have been taking massive payouts for themselves, ranging from $160 million to $1 billion per CEO over a number of years. As long as new money keeps flooding in from newfangled accounts called 401(k)s, Roth IRAs, 529 plans for education savings, and hedge funds (each carrying ever greater restrictions for withdrawing your money and ever greater opacity) everything appears fine on the surface. And then, suddenly, you learn that many of these Wall Street firms don't have any assets that anybody wants to buy. Because these firms are both managing your money as well as having their own shares constitute a large percentage of your pooled investments, your funds begin to plummet as confidence drains from the scheme.

Now consider how Wikipedia describes a Ponzi scheme:

“A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (‘profits’) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi...One reason that the scheme initially works so well is that early investors – those who actually got paid the large returns – quite commonly reinvest (keep) their money in the scheme (it does, after all, pay out much better than any alternative investment). Thus those running the scheme do not actually have to pay out very much (net) – they simply have to send statements to investors that show how much the investors have earned by keeping the money in what looks like a great place to get a high return. They also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time...The catch is that at some point one of three things will happen:

(1) the promoters will vanish, taking all the investment money (less payouts) with them;

(2) the scheme will collapse of its own weight, as investment slows and the promoters start having problems paying out the promised returns (and when they start having problems, the word spreads and more people start asking for their money, similar to a bank run);

(3) the scheme is exposed, because when legal authorities begin examining accounting records of the so-called enterprise they find that many of the 'assets' that should exist do not."

Looking at outcomes 1, 2, and 3 above, here’s where we are today. The promoters have clearly not vanished as in outcome 1. In fact, they are behaving as if they know they have nothing to fear. As over $2 trillion of taxpayer money is rapidly infused through Federal Reserve loans and over $125 Billion in U.S. Treasury equity purchases to keep these firms from collapsing, the promoters are standing at the elbow of the President-Elect in press conferences (Citigroup promoter, Robert Rubin); they are served up as business gurus on the business channel CNBC (former AIG CEO and promoter, Maurice “Hank” Greenberg); they are put in charge of nationalized zombie firms like Fannie Mae (Herbert Allison, former President of Merrill Lynch); they are paying $26 million and $42 million, respectively, for new digs at 15 Central Park West in Manhattan, where their chauffeurs have their own waiting room (Lloyd Blankfein, CEO of Goldman Sachs; Sanford “Sandy” Weill, former CEO of Citigroup, who put his penthouse in the name of his wife’s trust, perhaps smelling a few pesky questions ahead over the $1 billion he sucked out of Citigroup before the Fed had to implant a feeding tube).

We are definitely seeing all the signs of outcome 2: the scheme is collapsing under its own weight; there are panic runs around the globe wherever Wall Street has left its footprint.

But outcome 3 is the most fascinating area of departure from the classic Ponzi scheme. Legal authorities have, indeed, examined the books of these firms, except for one area we’ll discuss later. They found worthless assets along with debts hidden off the balance sheet instead of real depositor funds. Instead of arresting the perpetrators and shutting down the schemes, Federal authorities have developed their own new schemes and pumped over $2 trillion of taxpayer money into propping up the firms while leaving the schemers in place. Equally astonishing, Congress has not held any meaningful investigations. This has left many Wall Street veterans wondering if the problem isn’t that the firms are “too big to fail” but rather “too Ponzi-like to prosecute.” Imagine the worldwide reaction to learning that all the claptrap coming from U.S. think-tanks and ivy-league academics over the last decade about efficient market theory and deregulation and trickle down was merely a ruse for a Ponzi scheme now being propped up by a U.S. Treasury Department bailout and loans from our central bank, the Federal Reserve.

Fortunately for American taxpayers, Bloomberg News has some inquiring minds, even if our Congress and prosecutors don’t. On May 20, 2008, Bloomberg News reporter, Mark Pittman, filed a Freedom of Information Act request (FOIA) with the Federal Reserve asking for detailed information relevant to whom the central bank was giving these massive loans and precisely what securities these firms were posting as collateral. Bloomberg also wanted details on “contracts with outside entities that show the employees or entities being used to price the Relevant Securities and to conduct the process of lending.” Heretofore, our opaque central bank had been mum on all points.

By law, the Federal Reserve had until June 18, 2008 to answer the FOIA request. Here’s what happened instead, according to the Bloomberg lawsuit: On June 19, 2008, the Fed invoked its right to extend the response time to July 3, 2008. On July 8, 2008, the Fed called Bloomberg News to say it was processing the request. The Fed rang up Bloomberg again on August 15, 2008, wherein Alison Thro, Senior Counsel and another employee, Pam Wilson, informed the business wire service that their request was going to be denied by the end of September 2008. No further response of any kind was received, including the denial. On November 7, 2008, Bloomberg News slapped a federal lawsuit on the Board of Governors of the Federal Reserve, asserting the following:

“The government documents that Bloomberg seeks are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression. The effect of that crisis on the American public has been and will continue to be devastating. Hundreds of corporations are announcing layoffs in response to the crisis, and the economy was the top issue for many Americans in the recent elections. In response to the crisis, the Fed has vastly expanded its lending programs to private financial institutions. To obtain access to this public money and to safeguard the taxpayers’ interests, borrowers are required to post collateral. Despite the manifest public interest in such matters, however, none of the programs themselves make reference to any public disclosure of the posted collateral or of the Fed’s methods in valuing it. Thus, while the taxpayers are the ultimate counterparty for the collateral, they have not been given any information regarding the kind of collateral received, how it was valued, or by whom.”

As evidence that Bloomberg News is not engaging in hyperbole when it uses the word “cataclysmic” in a Federal court filing, consider the following price movements of some of these giant financial institutions. (All current prices are intraday on November 12, 2008):

American International Group (AIG): Currently $2.16; in May 2007, $72.00

Bear Stearns: Absorbed into JPMorganChase to avoid bankruptcy filing; share price in April 2007, $159

Fannie Mae: Currently 65 cents; in June 2007 $69.00

Freddie Mac: Currently 79 cents; in May 2007 $67.00

Lehman Brothers: Currently 6 cents; in February 2007, $85.00

What all of the companies in this article have in common is that they were writing secret contracts called Credit Default Swaps (CDS) on each other and/or between each other. These are not the credit default swaps recently disclosed by the Depository Trust and Clearing Corporation (DTCC). These are the contracts that still live in darkness and are at the root of why the Wall Street banks won’t lend to each other and why their share prices are melting faster than a snow cone in July.

A Credit Default Swap can be used by a bank to hedge against default on loans it has made by buying a type of insurance from another party. The buyer pays a premium upfront and annually and the seller pays the face amount of the insurance in the event of default. In the last few years, however, the contracts have been increasingly used to speculate on defaults when the buyer of the CDS has no exposure to the firm or underlying debt instruments. The CDS contracts outstanding now total somewhere between $34 Trillion and $54 Trillion, depending on whose data you want to use, and it remains an unregulated market of darkness. It is also quite likely that none of the firms that agreed to pay the hundreds of billions in insurance, such as AIG, have the money to do so. It is also quite likely that were these hedges shown to be uncollectible hedges, massive amounts of new capital would be needed by the big Wall Street firms and some would be deemed insolvent.

Until Congress holds serious investigations and hearings, the U.S. taxpayer may be funding little more than Ponzi schemes while companies that provide real products and services, legitimate jobs and contributions to the economy are left to fail.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

On torture

Reading this article about a new documentary entitled Torturing Democracy reminded me of one of the primary reasons I decided to broaden this blog from it's restricted focus on atheist issues. A few months ago, I began to question some of my long-held beliefs or assumptions about the world. I soon realized that the world was not the way that I had always believed it to be.

I, like most Americans, believed in the fundamental goodness and morality of governmental policy. Not always in its outcomes, but certainly in its intent. When problems (abuses?) cropped up, I didn't make the connection that the could be deliberate or pre-meditated. I thought they were probably isolated incidents, or a few "bad apples". After reconsidering my positions, I realized that I was wrong.

The American government tortures people. Please stop and consider that for a moment- your government tortures people, and in your name. They degrade, they dehumanize, they inflict pain, they isolate, and they drive people insane. Not only in Abu-Ghraib (warning:graphic images), not only outsourced torture to other countries-- but also on American soil, and against American citizens. In violation of international law, the United States government has tortured-- and probably still is-- torturing people as I write this. Some of those in charge of these programs have sought advice (or absolution) from a priest for their despicable actions:

Vandeveld described a crisis of conscience over the prisoners' treatment and the ethical handling of cases that led him to quit last month as prosecutor.

"I am beginning to have grave misgivings about what I am doing, and what we are doing as a country," he wrote in the Aug. 5 e-mail, which the priest shared with The Associated Press on Monday night. "I no longer want to participate in the system, but I lack the courage to quit. I am married, with four children, and not only will they suffer, I'll lose a lot of friends."

And yet it's not front-page news, it's not a scoop, it's barely even acknowledged. Despite the fact that John McCain was a P.O.W., the issue was barely even visible during the most recent presidential campaign. The ACLU is worried that Obama will forget about his early campaign promises, and so has taken out a full-page ad in the New York Times to put pressure on him to fulfill those promises. People around the world danced and celebrated Obama's election, hoping that he's going to reverse these horrible actions. I hope they're right.

How did we get here? I thought we stood for truth, justice, the American way? I thought we were a "shining beacon on a hill". The media is complicit in keeping torture on the back pages, as are all of us. Every day that goes by and we don't try to stop it, means one more day that someone is getting tortured.

...People are imprisoned without charges or access to attorneys, and it's routine. People are surveilled, their reading habits studied, their telephone usage logged, and it's commonplace. People, including children, end up on a secret list of those who are not allowed to fly, nobody will tell you why, there is no appeal, and it's ordinary. We swallow lies like candy, nod sagely at babblespeak, and it's unexceptional.

Torture is inflicted with White House approval, the president lies about it and it's just another Tuesday.

Once upon a time, Americans were fond of looking upon backward nations, upon places where law was whatever the king said it was, and noting with pride that we do things differently in our country. But that was a day long ago and a country long gone.

If we miss the one or mourn the other, you'd never know it to look at us. We live through what feels evermore like a Joe McCarthy fever dream. We feel without feeling, hear without hearing, see without seeing and do not protest what we have become.

Because this is normal now.

Can you live with that?

Federal Election Commission won't audit Obama

As I argued here, the campaign finance system in this country is utterly broken, and Obama may have found the perfect way to skirt laws and raise a mind-blowing (and election-winning) amount of money. All you have to do is opt out of the public financing system, then raise as much as you can in small donations. If you're successful at it, apparently you don't even have to go through an audit. This is the first presidential campaign in which the candidates have raised more than $1 billion, led by Obama's $639 million- yet apparently the very fact that he opted out of the public finance system makes an audit less likely.

FEC Won't Audit Obama

The hundreds of millions of dollars that Barack Obama raised for his presidential campaign would seem to make him a perfect target for a full audit to account for the legality of every dollar he raised and spent. Yet, in part because Obama raised so much, the Federal Election Commission isn't likely to investigate, according to Politico. When the FEC determines whether an audit is necessary, it takes into account the amount the candidate collected--the more raised, the less significance each error carries, the commission reasons. Even an FEC complaint from the Republican National Committee raising concerns about fictitious donors and foreign addresses that snuck under the Obama campaign's radar probably won't trigger an audit.

If Obama had accepted public financing limiting him to $84 million for the general election, he'd be obligated to undergo such an audit. Instead, John McCain now faces a long and expensive accounting review that will analyze how he spent taxpayers' money after opting into the public financing system. McCain will use $9.4 million from his legal and accounting compliance fund to help pay for the investigation into how he spent his money.

The end of American capitalism?

President Bush isn't right very often, but he hit the nail on the head yesterday when he declared that "This is a decisive moment for the global economy." He may not even know how correct he is. I must confess, I feel very vindicated-I never thought I'd see sentiments like this one from the mainstream press, as today's Washington post argued that "there is also no denying that American-style capitalism has been undermined by its own success. In its present incarnation, it rewards manipulation over innovation and speculation over genuine value creation, resulting in massive misallocations of capital and the accumulation of unheard-of wealth in the hands of money managers and top corporate executives who are more lucky than they are skilled."

That's what seemed so comical to me about the recent presidential election. Amid all the talk of socialism and tax rates seemed to miss the fundamental point that none of that matters right now. The machinery of capitalism is falling down around ears, and the only thing we heard from the candidates were pithy talk about change and hope and blah blah blah. Gone unacknowledged is the simple fact that our bills are coming due, there will be no more money to fund grand social programs. You can promise the world on the campaign trail, but it's a whole different story when the world of high finance is imploding, albeit a slowly. Yesterday's rally will be a case in point, I'm sure the pundits have already begun saying that we've hit bottom, just as they have for all of the previous short-lived rallies.

You think I'm being too pessimistic? Who would you rather hear from? Yesterday, I posted Nouriel Roubini's grim assessment. Remember, he's one of the few that saw this coming. Who else do you want to hear from? Henry Paulson came from Goldman Sachs, you want a Goldman Sachs guy to say it? Former Goldman Sachs Chairman and former Deputy Secretary of State John Whitehead says "I think it will be worse than the Depression"

"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."

There are at least ten "trillion dollar problems," facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.

"The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs -- all very costly and all done by the government," he said.

Large deficits can weaken the country's credit and increase its borrowing costs, which already constitute a significant part of funding to cover expenses. Whitehead said it could take "several years" for the current problems to be resolved.

Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.

"I just want to get people thinking about this, and to realize this is a road to disaster," said Whitehead. "I've always been a positive person and optimistic, but I don't see a solution here."

How about a billionaire? So much was made of it when Warren Buffett spoke out a few weeks ago in favor of buying stocks. Here's George Soros:

"I fully anticipated the worst financial crisis since the 1930s,'' said Mr Soros, whose fund is flat this year.

"But frankly, what has happened in the last eight weeks exceeded my expectations.''

Don't feel badly George, you're not alone. We've heard that all the way down... and I expect to keep hearing it as things continue to worsen. The New York Times last month published an account of how Secretary Paulson has been behind the curve on this crisis all year.

“I could have seen the subprime problem coming earlier,” he acknowledged in the interview, quickly adding in his own defense, “but I’m not saying I would have done anything differently.”

Shocking in its own way, but sadly he's not alone. Here's Alan Greenspan (see here also):

In 2005, I raised concerns that the protracted period of the underpricing of risk if history was any guide would have dire consequences. The crisis, however, has turned out to be much broader than anything I could have imagined.

So can we acknowledge that the current crisis is worse than anything that the smartest guys in the room ever saw coming? If so, then what are the implications for dealing with this? Hard choices are coming our way fast; Congress is unwilling to bite the bullet, and Obama appears unable or unwilling to rock the boat. All I know is that we need to radically re-evaluate our strategy in attacking this crisis or things are going to be totally out of hand in short order. Nothing they've tried so far is having the slightest impact. The Fed can only drop interest rates another 1%, then they're pretty much out of options. If the textbook solutions aren't working, it's time to throw the textbook out the window and start getting serious about saving this ship.

I have a fear of heaven....

And this is why.

The New York Times - Breaking News, World News & Multimedia

Wouldn't it be nice?

The (fake) New York Times - Breaking News, World News & Multimedia

Maximum Wage Law Passes Congress

Salary Caps Will Help Stabilize Economy

By J.K. Malone
Published: July 4th, 2009

WASHINGTON — After long and often bitter debate, Congress has passed legislation, fiercely fought for by labor and progressive groups, that will limit top salaries to fifteen times the minimum wage. Tying the bill to a plan of overall reform of the U.S. economy, the bill echoes a similar effort enacted by President Franklin Roosevelt in 1942, which was followed by the longest period of growth for the middle class in U.S. history.

“When C.E.O. salaries remain stable thanks to high taxation of high salaries, there’s little incentive to take big risks with shareholders’ money, and the economy remains in a steady growth mode,” said Senator Barney Frank, one of the bill’s co-sponsors. “But when C.E.O. salaries can fly through the roof, there’s a very strong incentive for C.E.O.s to rake in massive dividends, often at the cost of the company’s, and the country’s, stability.”

The first time the U.S. implemented a maximum wage was in 1942, when President Roosevelt said that “no American citizen ought to have an income, after he has paid his taxes, of more than $25,000 a year,” the equivalent of $315,000 today.

Some version of a maximum wage law was in effect until 1980. Before 1964, income over $400,000 in today’s dollars faced a 91 percent federal tax rate, and the top-bracket tax rate never dipped below 70%. Under Reagan, the top tax rate slid down to 28 percent — a shift that is now understood to have been one of the prime contributors to the mortgage meltdown and other market failures.

The current minimum wage is $5.85 ($12,168 annually) making the new maximum wage $182,520/year. Any amount over that will be taxed at a rate of 100 percent.

The Center on Executive Compensation is an industry-backed group based in Washington whose goal is to tell corporate America’s side of the executive pay story. Richard Floersch, the center’s chairman and the chief human resources officer at McDonald’s, defended high salaries. Most companies, he said, are “dedicated to a very strong executive compensation program with very strong principles around pay for performance.”

In the two days since Mr. Floersch made these comments to a reporter, the Center on Executive Compensation has dissolved. A statement on their website now reads: “We have decided that in light of recent changes in economic policy, and the failure of hedge fund managers and banks to prevent massive losses despite their astronomical pay, our Center has lost its relevance.” The statement also acknowledges the problems caused by Fannie Mae and Freddie Mac executives falsifying profits of $9 billion so their firms would appear attractive to investors and then, instead of being fired, receiving retirement packages upwards of $10 million.

House Speaker Nancy Pelosi celebrated the bill’s passage with an impassioned speech. “The struggle on behalf of human dignity continues. We need investment in productive enterprises and public services. The era is over of C.E.O.s who receive millions in bonuses as their employees go without health care and the company fails.”

In her speech, Ms. Pelosi extensively quoted Treasury Undersecretary E. Merrick Dodds, who stated, shortly after passage of the first maximum wage under Roosevelt: “The modern period has been one in which a new impulse towards regulation has gathered strength as a result of our experience of the evils to which unlimited freedom of contract gives rise in a postindustrial society characterized by extreme inequalities of wealth and bargaining power and by sudden oscillations between booms and depressions.”

Dr. Doom speaks again

Nouriel Roubini, has been known as Dr. Doom. Probably because of predictions like this one-

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

Now do you want to hear what he sees for the road ahead? Read on...

The Worst Is Not Behind Us
Nouriel Roubini

It is useful, at this juncture, to stand back and survey the economic landscape--both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy, as well as for financial markets:

--The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.

--The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.

--Obama will inherit an economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollars in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise, given price deflation, while the value of financial assets is still plunging.

--The world economy will experience a severe recession: Output will sharply contract in the Eurozone, the U.K. and the rest of Europe, as well as in Canada, Japan and Australia/New Zealand. There is also a risk of a hard landing in emerging market economies. Expect global growth--at market prices--to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus, China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.

--The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation, as the slack in goods, labor and commodity markets will lead advanced economies' inflation rates to become below 1% by 2009.

--Expect a few advanced economies (certainly the U.S. and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon, zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising, thus further pushing down aggregate demand, and where money market fund returns cannot even cover their management costs.

Deflation also implies a debt deflation where the real value of nominal debts is rising, thus increasing the real burden of such debts. Monetary policy easing will become more aggressive in other advanced economies even if the European Central Bank cuts too little too late. But monetary policy easing will be scarcely effective, as it will be pushing on a string, given the glut of global aggregate supply relative to demand--and given a very severe credit crunch.

--For 2009, the consensus estimates for earnings are delusional: Current consensus estimates are that S&P 500 earnings per share (EPS) will be $90 in 2009, up 15% from 2008. Such estimates are outright silly. If EPS falls--as is most likely--to a level of $60, then with a price-to-earnings (P/E) ratio of 12, the S&P 500 index could fall to 720 (i.e. about 20% below current levels). If the P/E falls to 10--as is possible in a severe recession--the S&P could be down to 600, or 35% below current levels.

And in a very severe recession, one cannot exclude that EPS could fall as low as $50 in 2009, dragging the S&P 500 index to as low as 500. So, even based on fundamentals and valuations, there are significant downside risks to U.S. equities (20% to 40%). Similar arguments can be made for global equities: A severe global recession implies further downside risks to global equities in the order of 20% to 30%.Thus, the recent rally in U.S. and global equities was only a bear-market sucker's rally that is already fizzling out--buried under a mountain of worse-than-expected macro, earnings and financial news.

--Credit losses will be well above $1 trillion and closer to $2 trillion, as such losses will spread from subprime to near-prime and prime mortgages and home equity loans (and the related securitized products); to commercial real estate, to credit cards, auto loans and student loans; to leveraged loans and LBOs, to muni bonds, corporate bonds, industrial and commercial loans and credit default swaps. These credit losses will lead to a severe credit crunch, absent a rapid and aggressive recapitalization of financial institutions.

--Almost all of the $700 billion in the TARP program will be used to recapitalize U.S. financial institutions (banks, broker dealers, insurance companies, finance companies) as rising credit losses (close to $2 trillion) will imply that the initial $250 billion allocated to recap these institutions will not be enough. Sooner rather than later, a TARP-2 will become necessary, as the recapitalization needs of U.S. financial institutions will likely be well above $1 trillion.

--Current spreads on speculative-grade bonds may widen further as a tsunami of defaults will hit the corporate sector; investment-grade bond spreads have widened excessively relative to financial fundamentals, but further spread-widening is possible, driven by market dynamics, deleveraging and the fact that many AAA-rated firms (say, GE) are not really AAA, and should be downgraded by the rating agencies.

--Expect a U.S. fiscal deficit of almost $1 trillion in 2009 and 2010. The outlook for the U.S. current account deficit is mixed: The recession, a rise in private savings and a fall in investment, and a further fall in commodity prices will tend to shrink it, but a stronger dollar, global demand weakness and a larger U.S. fiscal deficit will tend to worsen it. On net, we will observe still-large U.S. twin fiscal and current account deficits--and less willingness and ability in the rest of the world to finance it unless the interest rate on such debt rises.

--In this economic and financial environment, it is wise to stay away from most risky assets for the next 12 months: There are downside risks to U.S. and global equities; credit spreads--especially for the speculative grade--may widen further; commodity prices will fall another 20% from current levels; gold will also fall as deflation sets in; the U.S. dollar may weaken further in the next six to 12 months as the factors behind the recent rally weather off, while medium-term bearish fundamentals for the dollar set in again; government bond yields in the U.S. and advanced economies may fall further as recession and deflation emerge but, over time, the surge in fiscal deficits in the U.S. and globally will reduce the supply of global savings and lead to higher long-term interest rates unless the fall in global real investment outpaces the fall in global savings.

Expect further downside risks to emerging-markets assets (in particular, equities and local and foreign currency debt), especially in economies with significant macro, policy and financial vulnerabilities. Cash and cash-like instruments (short-term dated government bonds and inflation-indexed bonds that do well both in inflation and deflation times) will dominate most risky assets. So, serious risks and vulnerabilities remain, and the downside risks to financial markets (worse than expected macro news, earnings news and developments in systemically important parts of the global financial system) will, over the next few months, overshadow the positive news (G-7 policies to avoid a systemic meltdown, and other policies that--in due time--may reduce interbank spreads and credit spreads).

Beware, therefore, of those who tell you that we have reached a bottom for risky financial assets. The same optimists told you that we reached a bottom and the worst was behind us after the rescue of the creditors of Bear Stearns in March; after the announcement of the possible bailout of Fannie and Freddie in July; after the actual bailout of Fannie and Freddie in September; after the bailout of AIG in mid-September; after the TARP legislation was presented; and after the latest G-7 and E.U. action.

In each case, the optimists argued that the latest crisis and rescue policy response was the cathartic event that signaled the bottom of the crisis and the recovery of markets. They were wrong literally at least six times in a row as the crisis--as I have consistently predicted over the last year--became worse and worse. So enough of the excessive optimism that has been proved wrong at least six times in the last eight months alone.

A reality check is needed to assess risks--and to take appropriate action. And reality tells us that we barely avoided, only a week ago, a total systemic financial meltdown; that the policy actions are now finally more aggressive and systematic, and more appropriate; that it will take a long while for interbank and credit markets to mend; that further important policy actions are needed to avoid the meltdown and an even more severe recession; that central banks, instead of being the lenders of last resort, will be, for now, the lenders of first and only resort; that even if we avoid a meltdown, we will experience a severe U.S., advanced economy and, most likely, global recession, the worst in decades; that we are in the middle of a severe global financial and banking crisis, the worst since the Great Depression; and that the flow of macro, earnings and financial news will significantly surprise (as during the last few weeks) on the downside with significant further risks to financial markets.

I'll stop now.

Yesterday, I argued that bankruptcy is a better option for carmakers than a bailout, especially since they're already proven failures. This article disagrees, my comments are interspersed.

Why GM can't survive bankruptcy

Some companies use the courts to reorganize and come out stronger. That would be difficult for GM, experts say.

NEW YORK (CNNMoney.com) -- It worked for the airlines, but it might not work for General Motors. Saving the company through bankruptcy is probably not a viable option for the troubled automaker.

The reasons go deeper than the belief that consumers would shun a vehicle being sold by a bankrupt automaker. Some leading experts said that GM would find it exceedingly difficult to raise the billions in financing it would need to stay in business during a bankruptcy reorganization.

The bottom line: Unlike the experience of United, Delta and Northwest airlines, a GM (GM, Fortune 500) bankruptcy could spell a quick end to the company's operations.

Good, they've been losing money for years.

The question of whether GM can survive is crucial to the growing debate in Washington over whether the government should put up $25 billion or more to bail out automakers.

GM on Friday, while saying it was working to avoid a catastrophic bankruptcy, disclosed that it has almost run out of cash and said it needs federal assistance before the end of the year. President Bush, who will be in office until Jan. 20, remains wary of a bailout.

Bailout advocates, including President-elect Barack Obama and the Democratic leaders of the House and Senate, argue that the collapse of a major automaker would be too great a shock for an already struggling U.S. economy to absorb. It is estimated that a GM bankruptcy alone would cascade widely throughout the economy and cost as many as 2.5 million jobs.

So how do you want to play it? At the rate they've been losing money, even if you give a whole $25 billion to GM alone they'll burn through that inside of 6 months. Then what? We'll be in the second quarter of '09, deeply into the worst global recession or depression the world has ever seen. Are we supposed to come up with another $25 billion to keep going another 6 months?

Some critics of a bailout have suggested that the automakers would be better off filing for bankruptcy to to get out of obligations and contracts they can't afford and become competitive again without putting taxpayer dollars at risk.

Cash troubles

There is precedent for bankruptcy turnarounds. But those companies, filing under Chapter 11 of the bankruptcy code, were able to secure what is known as debtor-in-possession, or DIP, financing.

Lenders make such loans in part because bankruptcy law allow them to go to the front of the line of the company's creditors if the company is not able to stay in business. In turn, the bankrupt company uses the cash to make changes and return to profitability.

Without DIP financing, liquidation -- usually under bankruptcy Chapter 7 -- may be the only option left.

Experts in the field and even GM itself say that DIP financing might not be available for GM.

"The state of the capital markets does make the prospects for DIP financing a much bigger question mark than would have been the case in other times," said Bob Schulz, Standard & Poor's senior auto credit analyst. "To reorganize does require financing."

Others question if GM would be shut out of DIP financing entirely. But even they say it would come at a steep price.

"I would say it is likely that they would find some financing," said bankruptcy attorney Ronald Silverman, a member of the American Bankruptcy Institute who recently spoke on the outlook for the auto sector. "It may not be inexpensive financing. But there are investors with cash interested in investment opportunities, and DIP loans are among the most attractive investment opportunities."

OK, so either they get DIP financing or they don't. Seems like the market ought to make that determination, not Congress. I mean, if "DIP loans are among the most attractive investment opportunities" then they should have no trouble attracting financing. Oh wait, they could only do that if people believe they've got good long-term prospects. Does anyone still believe that?

Still, the fear that car buyers won't want to buy cars from a bankrupt automaker may preclude GM from financing. For example, a recent survey of car buyers found that as many as 80% wouldn't even consider buying from a bankrupt automaker.

"You don't qualify for DIP if you don't have certainty about your revenue base," said Tony Cervone, a GM vice president.

Some question whether sales in fact would drop following a bankruptcy. University of Maryland economics professor Peter Morici believes automakers could assure buyers by offering warranties backed by third parties, the way bankrupt electronics retailer Circuit City is now doing.

But Mike Jackson, CEO of Autonation (AN, Fortune 500), the nation's largest chain of dealerships, said bankrupt automakers would have a hard time selling cars.

"I deal with consumers every day. They have their investor's hat on when they spend $30,000. They're making a calculation about resale value," Jackson said. "They have so many choices -- why take a gamble on a manufacturer who is in bankruptcy."

And so how would government bailout make any difference to the consumer's perception... US automakers are bankrupt in all but name already. Even if we give them billions, they're still bankrupt. Do you want to buy a car from GM, even if they receive a $25 billion injection?

Change in the market

Most experts, even some of those who believe that GM would ultimately be able to find the financing it needs, agree that there is far less DIP financing available today because of the credit crisis.

"A year ago we had 30 DIP lenders; you could count on about 20 of them showing up in any big case. It was a buyer's market from a debtor's perspective," said Jack Williams, a bankruptcy law professor at Georgia State University and an ABI resident scholar. "Now we have three or four, maybe five, and they're all very careful."

Still, there are some who believe that GM should use bankruptcy to reorganize. And to them, a lack of financing to reorganize is just another argument against a federal bailout.

"If they can't get financing, then they should just sell the assets and go out of business," said Morici. "That means that bankruptcy reorganization is impractical; it means they can't be viable under any circumstance."

Finally, someone gets it right. GM, Ford- they're not viable under any circumstances. Here's the big elephant in the room: consumers aren't looking to buy cars right now. They're not looking to buy much of anything. So how do you return these automakers to profitability with no customers? If they haven't been able to sell enough cars to make a profit since 2004, how can they sell enough amid the largest global recession ever? Can anyone answer me that?