Archive for April, 2009

Is The United States Too Big To Fail?

April 29th, 2009 Comments off
In 1970 Soviet dissident Andrei Amalrik wrote a highly controversial book entitled, “Will the Soviet Union Survive until 1984?” The book was vociferously criticized by Kremlinologists, who maintained that the mighty USSR, superpower rival to the United States, was simply “too big to fail.” Back in 1970, it was considered the height of lunacy to envision the demise of the Soviet colossus.
Well, Amalrik was off by seven years, but otherwise he was remarkably prescient. How was it possible for him to be correct and the legions of Soviet experts so wrong? The primary reason is that Andrei Amalrik understood what the so-called experts did not; there is no such thing as “too big to fail.” That applies to countries and empires as well as companies. The United States of America included.
The Global Economic Crisis has savaged the economy of the U.S. along with much of the rest of the world. In response to the most severe economic contraction America has experienced since the Great Depression, the Obama administration is going into debt to fund massive economic stimulus programs. Yet, as extravagant as those stimulus programs may appear on the surface, they are marginal in comparison with the trillions of taxpayer dollars both the Bush and Obama administrations have made available to subsidize Wall Street and the major actors in the financial industry, to in effect save them from the consequences of their own follies. The mantra of both the current and previous administrations is that these Wall Street entities are “too big to fail,” meaning if they are not provided with whatever taxpayer-funded credit they demand, a systemic financial collapse would ensue.
The price being demanded-and obtained-by the oligarchs of Wall Street, combined with the economic demand destruction unleashed by their reckless greed is expanding the national debt of the United States at a frightening pace. An example of this disastrous fiscal trend is the recent announcement by the U.S. Treasury Department that for the second quarter of 2009 the United States government will need to borrow $361 billion to pay its bills, compared with $13 billion for the same period in 2008. For all of 2008, the U.S. budget deficit was approximately $455 billion; in the third quarter alone of 2009 it is projected to be $515 billion, and that is probably an overly optimistic estimate.

In addition to the $750 billion TARP program to bailout banks and Wall Street that was approved last October by Congress, untold trillions of dollars have been provided or promised to the financial industry by Treasury and the Federal Reserve, off the books of the official budget. A most recent estimate puts this figure up to $13 trillion, nearly equal the entire GDP of the United States. The official national debt of the U.S. now tops $11 trillion, and may surpass the GDP within two years. In addition, state, county and local governments across the country are sinking into an ocean of red ink. In effect, the entire credit worthiness of the United States has become the “lender of last resort” for the “too big to fail” entities. The financial elites of America are no doubt uncorking their champagne bottles, as their privileged excesses are held whole through the ultimate backstop; the indebtedness of not only the current generation of Americans, but also their children and perhaps even their grandchildren. It appears that the oligarchs are so devoid of historical understanding, they fail to recognize that this subsidization of their Wall Street empire of credit default swaps and gargantuan compensation packages can only be sustained if the United States can forever go into debt. And in order to believe that the U.S. is ultimately “too big to fail,” they have to be equally ignorant of basic mathematics, the ultimate irony for the supposed magicians of high finance.

But what if a point is reached when the rest of the world is no longer willing to lend its scarce capital to the United States, and subsidize its Wall Street bailouts and extravagant military industrial complex? No doubt, the oligarchs would then use their political muscle to enact higher taxation on middle income Americans. This may come in the form of higher consumption taxes; however, a growing possibility is the hidden tax of inflation. A dirty secret that is increasingly being discussed by economists in quiet corners is that there is no way the United States can possibly pay for the servicing of its massive, expanding national debt without resorting to inflation.

What the financial and political elites have not analyzed are the consequences for America’s social cohesion and viability should the nation’s exploding debt burst beyond the point of containment. For unlike AIG, Citigroup and Goldman Sachs, the United States does not have the option of calling upon others to rescue it from its own excesses, with the justification being that it is “too big to fail.”

It strikes me that most Americans, not only the financial elites but across the nation’s social fabric, have a distorted image of how their country fits in with the rest of the world amid the Global Economic Crisis. In a chilling parallel to our times, Amalrik writes about the paralysis of isolation as a factor that would eventually bring about the collapse of the Soviet Union. In 1970 he wrote, “This isolation has created for all—from the bureaucratic elite to the lowest social levels—an almost surrealistic picture of the world and of their place in it. Yet the longer this state of affairs helps to perpetuate the status quo, the more rapid and decisive will be its collapse when confrontation with reality becomes inevitable.”

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Does Torture Work? Ask The Nazis Who Interrogated Noor Khan

April 26th, 2009 Comments off
Former Vice President Dick Cheney is on a mission. He has taken to the airwaves, seeking to repair the tarnished legacy that belongs to him and George W. Bush. With the U.S. economy in free fall collapse due in large measure to the catastrophic fiscal policies of the late Bush-Cheney administration, the former Vice President has chosen a rationale that is far removed from the realm of economics. In the perverse logic that only Mr. Cheney seems capable of, he is claiming that his legacy should be revered because he and the 43rd U.S. president were willing to use torture in the so-called war against terrorism, what he and his supporters euphemistically refer to as “enhanced interrogation techniques.” The essence of Dick Cheney’s argument is that the ends justify the means, the rationalization favored by tyrannies since time immemorial.
Torture works, says Dick Cheney. Unquestionably, torture is very effective in obtaining false confessions. The Spanish Inquisition and the Stalinist show trials of the 1930s are among a rogue’s gallery of evidence that these “enhanced interrogation techniques” will force most people to admit to virtually anything. Stalin’s secret police chief, Beria, once boasted, “give me a man for 24 hours and I’ll have him confessing he is the King of England.”
But as a useful tool for obtaining accurate, vital information, is torture truly efficacious? Dick Cheney, the man who obtained 5 draft deferments during the Vietnam War, is not, in my view, the most authentic judge on this matter. Let us look to the Third Reich, which made use of torture against those it deemed as “security threats” without the least restraint. In particular, we should recall the case of Noor Inayat Khan.

A young Muslim woman, Noor Khan was a descendant of Tipu Sultan, the last Mogul Emperor of Southern India. After her family relocated to France, she studied at the Sorbonne, and became a musician and author of children’s books. A petite and fragile woman, she was brought up in the Sufi tradition of pacifism, and by all accounts was as gentle and kindly a soul as could be. When the Nazis invaded and occupied France in 1940, Ms. Khan and her family escaped to England.

Though a pacifist, Noor was deeply affected by the occupation of her adopted homeland, and the anti-Semitic bestiality of the Nazis. She became convinced that it was her duty to fight the Nazis, even at the cost of her own life. She volunteered for service with the Special Operations Executive of British intelligence, where she was trained as a radio operator. In 1943 she was flown into France, where for four months she was the principal radio liaison between the French Resistance and the SOE, until she was betrayed to the Nazis. In November 1943 she was transported to the notorious Pforzheim prison in Germany, where she endured ten months of sheer hell.

Physically and psychologically, Noor Khan was subjected to the ultimate form of Cheney’s “enhanced interrogation techniques.” The Gestapo was determined to break her, and compel her to reveal every piece of vital information she possessed. To begin with, Noor Khan was placed in solitary confinement on a starvation diet, chained hand and foot, and frequently denied even a scrap of clothing. She was subjected to barbaric beatings and water torture, and that was only the beginning. Survivors of Pforzheim recall often hearing her cries of agony, as Noor was subjected to all the refinements created by man’s capacity for inventive inhumanity. The Nazis would subject their most recalcitrant security prisoners to having their bodies suspended until their joints were dislocated, piercing and burning their flesh, ripping out fingernails and crushing the digits of their hands. Female prisoners, in particular, were subjected to electric shocks being applied to the most sensitive regions of their bodies. What Noor endured during those ten months at Pforzheim can scarcely be imagined. It must have been beyond human endurance. Yet this cultured, delicate woman endured the unendurable. She never broke. Noor Khan would not even reveal to the Nazis her true identity. Finally, her captors admitted defeat and sent Noor to her final destination on earth, Dachau concentration camp.

On September 13, 1944, in front of other prisoners who witnessed her final hours, Noor Khan was stripped naked and then savagely beaten by SS guards at Dachau. A pistol was pointed at her head. Before the trigger was pulled, Noor’s last word ever to be uttered was overheard: “Liberty.”

The life of Noor Inayat Khan does not prove that torture does not work. What her martyrdom does demonstrate is that torture is only effective when all understanding of the concept of liberty is lost to a nation.




UK Economy Sinking Amid Worst British Financial Crisis Since Great Depression

April 24th, 2009 Comments off
When Gordon Brown was Britain’s Chancellor of the Exchequer under Labour Prime Minister Tony Blair, he relished boasting in the House of Commons on the efficacy of his stewardship of the UK’s economy. However, now that the Global Economic Crisis has impacted the United Kingdom with particular severity, Prime Minister Gordon Brown is being seen as ineffectual as both a politician and economic manager. The British economy is plunging into the depths of its most severe contraction since the 1930s, with all the macroeconomic indicators pointing south.
The response to this financial meltdown has been happy talk, at times bordering on the ridiculous. At one point, Brown even claimed that his spendthrift ways had “saved” the global economy. As recently as last November, Chancellor of the Exchequer Alistair Darling claimed that in 2009 the UK economy would contract be a mere 1%, a fantasy calculation that even the Labour government now concedes. Yet in the supposedly more realistic budget just tabled by the Chancellor of the Exchequer, imagination still takes precedence over reality. The UK government now projects a decline in the nation’s economy of 3.5% in 2009, with a return to growth in 2010. However, the International Monetary Fund released its own estimate on the global economy shortly after the British budget was tabled, projecting a decline in the UK economy of 4.1 % in 2009 and likely a continued contraction in 2010. Interestingly, this number reflects growing pessimism by the IMF concerning the UK economy, as it had projected a decline of 2.9% back in January.
The imploding British economy has set off deflation in key asset classes, particularly real estate. Unemployment is skyrocketing, having reached an official figure of 6.7 %, or 2.1 million jobless. However, the opposition Conservative Party has claimed that the actual number of British unemployed stands at more than three million. Whatever the true number of unemployed is now, it will certainly rise substantially during the next two years.

Complicating the economic problems in the UK is its disastrous banking crisis, which rivals that of the United States. Much of Britain’s banking sector is insolvent, prompting a costly bailout by Gordon Brown’s government. With plunging tax revenues due to the nation’s economic contraction, the UK has been forced to borrow vast amounts of money to cover the cost of subsidizing the nation’s zombie banks. The combination of bank bailouts and stimulus spending has created staggering budgetary deficits, prompting the governor of the Bank of England, Mervyn King, to warn that further government indebtedness threatens the long-term stability of the UK’s finances.

The IMF actually challenged the official UK government estimate on the cost of taxpayer funded bank bailouts, presented in Darling’s budget at 60 billion pounds. When the IMF issued its own cost estimate of 200 billion pounds, Gordon Brown and his team went ballistic, forcing the International Monetary Fund to lower is projection to an earlier figure of “only” 130 billion pounds, still more than double the official UK estimate. However, strong-arming the IMF cannot alter the fact that the national debt of the UK is climbing at an astronomical rate. Alistair Darling is projecting that the UK will need to borrow more than $500 billion during the next two years, a sum that exceeds the cumulative borrowing of all previous British governments since the creation of the Bank of England more than three centuries ago, according to the leader of the official opposition, David Cameron.

The UK economy has been transformed, in effect, into a candle burning at both ends. Insolvent banks are consuming taxpayer funds at a rate that is intergenerational while the domestic economy tanks and unemployment soars .In the meantime, the national debt is exploding. Deflation is raging now, while the specter of hyperinflation hovers around the corner, as eroding financial fundamentals cripple the value of Britain’s currency. Amid the acute economic and financial crisis afflicting the UK, the nation’s political establishment offers only rosy projections. Tony Blair may have been called George W. Bush’s lap dog, but Gordon Brown is proving to be his economic disciple.




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U.S. Banks Doomed To Fail

April 22nd, 2009 Comments off
Within days after the legalized accounting fantasy masquerading as first quarter earnings for several of America’s largest banks and financial institutions were released, the markets began to catch on. After several days of a sucker’s rally on Wall Street, the Dow Jones went into retreat as more savvy investors caught on to the charade. That is when Timothy Geithner, U.S. Treasury Secretary, ran to the rescue, ready-made script in hand.
In advance of the so-called “stress test” that is supposed to establish the fiscal health of U.S. banks, Geithner released a sneak preview. “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” boasted Obama’s Treasury Secretary. With Pavlovian instincts, the market bought Timothy Geithner’s fiscal fantasy, at least for a day.

A few weeks before these antics a more sober assessment of America’s banking health was delivered at the National Press Club in Washington by Dr. Martin D. Weiss, the head of Weiss Research, a global investment research firm. Previously, Weiss had accurately forecast the demise of Bear Stearns and the implosion of the U.S. investment-banking sector. However, at the National Press Club he offered a more chilling prediction: 1,568 U.S. banks and thrifts risk failure. Included in that number are several of the largest American banks, including J.P. Morgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Sun Trust Bank and HSBC Bank USA. The numbers and depth of the banking problem highlighted by Dr. Weiss are far larger and much more ominous than has been portrayed by the Federal Reserve, Treasury Department and FDIC. He backed up his dire analysis with documentation and precise mathematical modeling. For example, he refers to the government’s justification for a hideously expensive taxpayer bailout of AIG, based on the firm’s exposure to the fragile investment vehicles known as Credit Default Swaps, or CDS. The policymakers maintain that AIG’s $2 trillion in CDS exposure represented an unacceptable systemic risk, meaning AIG was “too big to fail.” However, Weiss points out that Citigroup alone holds a portfolio of $2.9 trillion in Credit Default Swaps, while J.P. Morgan Chase possesses a staggering $9.2 trillion of these toxic instruments, about five times the exposure that led AIG to demand that the government rescue it, or see the global financial system implode.

The essential point Dr. Weiss made at his press conference is that the degree of exposure U.S. banks have to a variety of toxic assets is beyond what the U.S. government and, by extension, the American taxpayer is financially capable of rescuing. Continued bailouts of insolvent banking institutions will not repair a broken financial order, but may very well cripple the overall economy.

Earlier, NYU economics professor Nouriel Roubini had already gone on record as declaring that much of the U.S. banking sector was functionally insolvent, and that bailing out zombie financial institutions would only replicate the Japanese “lost decade” of the 1990s, when Tokyo’s preference for keeping alive insolvent banks instead of closing them down led to a prolonged L-shaped recession. Roubini and other critics of both Bush and Obama administration policies on bank bailouts have looked to the Swedish model for resolving a profound banking crisis, which involved temporary short-term nationalization, closing down insolvent banks, while those banks that can be salvaged are cleaned up of their toxic assets, recapitalized and then sold back to the private sector. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail,” Nouriel Roubini has argued.

According to the International Monetary Fund, the global financial and economic crisis has already created more than $4 trillion in credit losses due to toxic assets. If nothing else, the IMF estimate on the scale of the economic and financial disaster thus far should compel the Washington political establishment to face the painful yet necessary truths regarding America’s precarious situation. However, it appears that fantasy is preferred over reality within the corridors of power.

The procrastination of policymakers in Washington in facing dark reality, and preference to avoid any public takeover of troubled banking institutions while simultaneously subsidizing these financial dead men walking with almost unlimited taxpayer funds, at the same time maintaining the fiction, as Timothy Geithner has just done, that all is basically fine with the “vast majority” of U.S. banks, is to insure the inevitability of a systemic banking collapse in the United States. The conglomeration of reckless, greed-induced banking practices by the oligarchs of finance and inept, reality-denying policymakers is sending much of the American banking sector on a Wagnerian death ride into a financial apocalypse. Many of the U.S. banks are in fact doomed to fail, and no contrived stress test or Geithner speech can alter that outcome. And that isn’t even the worst part. For when mass banking failures occur in the United States and overseas, a global economic depression will be an irreversible outcome.

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Paul Krugman Angers Austria’s Bankers, Politicians By Stating The Obvious

April 18th, 2009 Comments off
Nobel laureate Paul Krugman stirred the ire and indignation of Austria’s political and financial establishment by merely stating the obvious. While speaking at the Foreign Press Club, Krugman responded to a query regarding Austria’s exposure to flimsy debt in over-leveraged Eastern Europe. The Princeton University economics professor and New York Times columnist had the audacity to provide a factual response. As Paul Krugman restated in his blog, ” I responded by saying what everyone knows: Austrian lending to Eastern Europe is off the charts compared with anyone else’s, and that means some serious risk given that emerging Europe is experiencing the mother of all currency crises.” Hell knows no fury than an economist stating the obvious.
Austria’s irate Vice-Chancellor and Economy Minister, Josef Proell, denounced Krugman’s comments as “totally wrong.” To make sure everyone understood his point, he added, “absolutely absurd.” Adding to the amen chorus of aggrieved Austrian politicos was the International Monetary Fund. The head of the IMF, Dominique Strauss-Kahn, informed the Austrian media, “I do believe that the Austrian situation is fairly good, so I have no particular concern about the Austrian economy these days.”
No concern? The Austrian banking situation vis a vis East European loans is “fairly good?” What planet is Dominique Strauss-Kahn living on? It’s perhaps time for a little financial history, which the Austrian and European political establishment seems to have forgotten. Does anyone still remember the collapse of the Credit-Anstalt?
Created in 1855, with links to the Austro-Hungarian nobility and Rothschild banking family, Credit-Anstalt was the world’s first investment bank. It was the catalyst of many of the most important infrastructure projects in the last decades of existence of the Habsburg Empire. In the years after World War I, this Austrian bank engaged in major speculation throughout Europe, giving all the appearances of being a highly profitable financial institution. Even after the stock market crash on Wall Street in 1929, Credit-Anstalt sought to conduct business as usual, though the economic contraction that followed the 1929 crash transformed a growing proportion of its balance sheet into non-performing assets. When the bubble burst on May 11, 1931, it sent shock waves throughout the world’s financial system.
Contrary to public perception, the Wall Street Crash of 1929 was not the major catastrophe of the Great Depression; it was merely the precipitating event. In fact it was the bankruptcy of Credit-Anstalt in 1931 that made the Depression truly global, and crippled banks throughout Europe and North America. The resulting run on banks throughout the world, with numerous banking failures, was the catalyst that accelerated the rise in global unemployment. When Franklin Roosevelt assumed the U.S. presidency in 1933, his first major task was to attend to the deplorable state of U.S. banking. That reality was at least in part attributable to a chain reaction of financial failures that stemmed from the insolvency of Credit-Anstalt.

Now we are in 2009, with the subprime mortgage securities debacle having been the underlying cause of the state of insolvency afflicting America’s largest banks. The U.S. government, including Congress, Treasury and the Fed, have injected or issued backstop guarantees to the tune of $13 trillion, in a frantic effort aimed at keeping these zombie financial institutions artificially alive. Yet, in this truly global economic and financial crisis, events in other parts of the world may render mute and futile all the trillions of dollars the U.S. is borrowing to save the American and global financial system. As in 1931, it may well be the Austrian banking sector that is the final nail in the coffin of the current globalized financial order.

With the fall of communism, former East Bloc European states were encouraged to borrow heavily by their Western brethren, with Austrian banks leading the way. Governments in Eastern Europe borrowed massively to finance the modernization of their industries, with the goal of providing lower-cost industrial goods and commodities to consumers throughout Western Europe. In addition, consumers in Eastern Europe were encouraged to borrow money in Euro currency at low interest rates for homes and consumer durables. When the Global Economic Crisis hit Europe, demand destruction afflicted the highly leveraged new industrial plants in Eastern Europe. In addition, the consumers who unwisely borrowed money from Western banks in Euros were devastated by the collapse of their home currencies. A new housing crisis has arisen in lands as diverse as Hungary, Bulgaria and Romania.

The non-performing assets on the balance sheets of European banks are enormous, and have affected many countries throughout the Eurozone. However, in terms of percentage of toxic assets to GDP, no European state is in as precarious a state as Austria. More than $250 billion in bad assets are poisoning the balance sheets of Austrian banks, a sum equal to more than 62% of the nation’s GDP. By way of comparison, if the admittedly shaky U.S. banks held toxic assets in the same ratio to GDP, this would equal $8.7 trillion dollars in bad assets. If America’s banking disaster was on the same scale as Austria’s, it would require a dozen TARP programs to cover the holes on the balance sheets.

Is another Credit-Anstalt catastrophe in the works? The macroeconomic data emerging from Europe looks increasingly gloomy. In addition, the European Union is proving to be both disunited and uncoordinated in facing up to mounting evidence of a financial avalanche that may bury the Union and everything else with it, including the common currency. Policymakers throughout Europe are arguing over Eastern European stabilization funds, protectionism versus “free trade,” and other issues, both real and distractions, while the financial underpinning of the entire European economic system is ablaze.

Just as Iceland was the first nation to become nationally insolvent due to bank failures stemming from the Global Economic Crisis, Austria may be fated to endure a similar disastrous outcome. Should Austria’s banks fail as spectacularly as did the Credit-Anstalt back in 1931, the impact on the world’s financial and economic order will be at least as catastrophic and likely much worse. It is indeed timely for Paul Krugman to state the obvious regarding the looming Austrian banking crisis, irrespective of the indignation pouring out of Vienna.

Will 2009 prove to be 1931 redux? The indicators favor the pessimists far more than the optimists. Nobel Prize winning economist Paul Krugman has issued a sober warning, which hopefully will not be drowned out by the hyperbole of reality-denying European politicians.


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Singapore Economy In Free Fall Disaster

April 17th, 2009 Comments off
The city state of Singapore, Venice of the 21st century in terms of its mercantile prowess, has as its national anthem the refrain, “Onward, Singapore.” With the data that has recently emerged on the Q1 performance of Singapore’s economy, however, it may be time to change the national anthem to, “Backwards, Singapore.” The numbers are that bad.
This tiny Island republic, sitting at the tip of the Malay Peninsula, covers only 274 square miles, with a population of under five million. Yet through innovation, industriousness and the entrepreneurial environment facilitated by a pro-business if somewhat authoritarian government, Singapore has become a powerhouse within the global economy. Indeed, no less an authority than the World Bank has graded Singapore as the most business friendly economy in the world. However, amidst the tectonic shifts occurring as a result of the Global Economic Crisis, Singapore has discovered that it is an exceptionally vulnerable and fragile geopolitical space.

Global trade is the engine that drives the Singapore economy. The tiny nation has a vast manufacturing sector, which includes electronics, petrochemicals and engineering. With its small population, Singapore must export the products it manufactures. That export trade has led Singapore to being the fourth largest port in the world. The Global Economic Crisis, however, has sent international trade into a tailspin. All major exporters are hurting badly; Singapore is bleeding.

In the first quarter of 2009, Singapore’s GDP contracted at a catastrophic rate of 11.5%, much worse than expected. In March, non-petroleum exports declined by 17%, the eleventh consecutive monthly decline. Unemployment is rising while business confidence is plummeting. The once busy port of Singapore is now almost quiescent, a reflection not only of Singapore’s decline but also a window on how severely global trade has been impacted by the worldwide recession.

As in America and other major economies that have been decimated by the Global Economic Crisis, Singapore has its share of overly optimistic economists, analysts and media pundits who are trying to spin the bad news into glimmers of hope. Some have even suggested that the severity of the country’s Q1 economic statistics are “proof” that the recession has hit bottom and will soon begin to ease. However, such appalling macroeconomic data cannot wear a happy face under any circumstance; it is irrefutable proof that the synchronized global recession now shattering the worldwide economy is unprecedented in its depth and reach. I think the elder statesman of Singapore, former Prime Minister Lee Kuan Yew, was more aligned with reality when he recently suggested that it will take at least six years before Singapore recovers from the effects of the Global Economic Crisis.

Amid all the horrific economic news, Singapore can boast of an advantage denied the deficit-driven economies of Europe and the United States. During the good times, the Island nation prudently set aside substantial foreign exchange reserves. Even with a recent $20 billion stimulus package, Singapore still maintains a reserve fund of $170 billion. This will provide flexibility for policymakers to address the immediate ramifications of the severe economic contraction now occurring in their country. Nevertheless, there can be no doubt that once prosperous Singapore is facing many years of economic and financial hardship that will severely test the country’s capacity for entrepreneurial innovation and hard work.

If a nation that has been as prudent and fiscally responsible as Singapore is enduring a free fall meltdown in vital areas of its economy, what about the United States, which is also undergoing a significant economic contraction, but with a massive debt load instead of sizeable reserves?



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Goldman Sachs, America’s Unofficial Welfare Queen?

April 14th, 2009 Comments off
Wall Street received the news from Goldman Sachs as though a gift from the gods above. The former investment bank, now deemed a “bank holding company” so as to qualify for Federal bailout money under the TARP program, exceeded the expectations of analysts in reporting first quarter profits of $1.66 billion. This follows the first ever loss for Goldman Sachs in the final quarter of 2008, when the red ink amounted to $2.3 billion. The iconic Wall Street firm also let it be known that it would raise billions of dollars through a stock sale so as to repay the U.S. Treasury the $10 billion in TARP funds that Goldman Sachs had received.
However, when one looks deeper at the details surrounding Goldman Sachs and its interactions with the Federal government as the financial world built by Wall Street began to implode, it appears that an essential component in the survival of this illustrious firm is missing from the most recent quarterly report; specifically, the lifeline to Goldman Sachs that runs through AIG. For it is clear that without that lifeline, there would be no Goldman Sachs.
Back in September, former Goldman Sachs CEO Hank Paulson, now serving as Treasury Secretary in the Bush administration, made two fateful decisions. He decided to let a principal competitor of Goldman Sachs, Lehman Brothers, go bankrupt, resulting in a systemic meltdown that brought the global financial system to the edge of the abyss. Simultaneously, Paulson also decided to save AIG, which he deemed as being “too big to fail.” He and Fed chairman Ben Bernanke immediately provided an $85 billion taxpayer funded loan to AIG; in the months since, that public stake in AIG has increased by another $100 billion. Participating in a crucial meeting involving the Federal Reserve Bank of New York and the U.S. Treasury Department on the fate of AIG was only one CEO of a major Wall Street firm; Lloyd C. Blankfein of Goldman Sachs.
As it turned out, the Treasury and Fed have merely been using AIG as a pass through to funnel tens of billions of dollars in taxpayer money into the coffers of major Wall Street banks and financial institutions. The largest recipient of these payments to AIG counterparties has been Goldman Sachs, which reportedly had received $12.9 billion in Q4 of 2008. Strange coincidence indeed that a former Goldman Sachs CEO serving as U.S. Treasury Secretary “invites” his successor CEO at Goldman Sachs to participate in a meeting that decides to put the U.S. taxpayer on the line for payment to AIG counterparties, in which that same company has been the most significant beneficiary.
Allegations have already surfaced regarding the payments to AIG’s counterparties, and the inspector general for the TARP program, Neil Barofsky, is currently conducting an audit of the payments. The question being raised is why the American taxpayer should be accountable for 100% of the obligations AIG had on insuring the derivative contracts held by firms such as Goldman Sachs. As with the recent controversy over AIG bonuses, the major financial firms maintain that they had a contractual relationship with AIG. Of course, if AIG had been permitted to go bankrupt, as was the case with Lehman Brothers, those Credit Default Swaps would have become worthless. That appears to be the sole rationale for maintaining the zombie existence of AIG on life support; to pay out derivative contracts to firms such as Goldman Sachs.

If Goldman Sachs were not the recipient of AIG pass through money in the last quarter of 2008, it is clear that this firm would be facing the serious prospect of liquidation. It is therefore somewhat odd that after a catastrophic last quarter, the firm can gleefully announce a return to profitability in Q1 of 2009. To set the record straight, Goldman Sachs should come clean on any funds it received from U.S. taxpayers, passed through AIG, in the first quarter of 2009, and provide a precise accounting on how those payments affected their Q1 bottom line. Absent this transparency, Congress should demand full disclosure on any continuing payments to Goldman Sachs through the corporate corpse called AIG. In the final analysis, if it transpires that AIG payments are what is keeping Goldman Sachs alive, then the Obama administration should explain why General Motors and Chrysler should not be wards of the state, while Goldman Sachs is anointed as the nation’s unofficial welfare queen.


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Ireland’s Economy In Free Fall Collapse

April 12th, 2009 Comments off
Once known as the “Celtic Tiger” for its sustained record of double-digit economic growth, Ireland is now in the midst of a financial tsunami. Unemployment is soaring, economic activity is contracting, banks are over-loaded on toxic assets and government spending is out of control. In many ways, Ireland seems to be a microcosm of the United States, only with a Gaelic accent. However, sheer size and the status of the U.S. dollar as the world’s reserve currency has delayed the full replication of what Ireland is currently experiencing. For that reason, what is occurring to the Irish economy in the present may be a window of what might soon lie ahead for the United States.
The strength of Ireland’s economy during its glory years was largely based on the seeming success of the globalization economic model. International businesses, especially in the high technology sphere, set up shop on the Emerald Isle, taking advantage of a well educated, cost-competitive workforce in close proximity to the European mainland, and an economy fully integrated into the Eurozone. This globalized corporate presence ended the historic migration of Irish workers overseas, as the local economy’s demands even drew immigrants from Eastern Europe into Ireland. The increase in domestic opportunities contributed to a massive explosion in property prices. Irish banks bet heavily on securitized assets, as the financial sector assumed a leading role in the Irish economy. This is a scenario we have seen elsewhere, and led to Ireland being especially vulnerable to the consequences of the Global Economic Crisis.
Since the onset of the synchronized global recession, the Irish economy has undergone a rapid contraction, erasing almost overnight the economic gains of the past several years. Unemployment in the Irish republic stands at near 11%, and is likely to get much worse. According to Ireland’s Central Statistics Office, the nation’s GDP shrank by 7.5% in Q4 of 2008. Added to these grim numbers hangs the dismal situation characterizing Irish banking and financial institutions; approximately $110 billion of toxic assets are eroding their balance sheets.
The Irish Taoiseach, Brian Cowen, has reacted with desperation. Recently, his government unveiled a second emergency budget. Ireland’s finance minister, Brian Lenihan, submitted a spending plan that contained a smorgasbord of selective tax increases and spending cuts. These steps were taken in recognition of the dual emergency facing the Irish economy. The once “Celtic Tiger” is not only incurring massive unemployment and social distress; the collapse in revenues has driven the nation’s budget deficit through the roof. The steps proposed by Lenihan sought to reduce the government’s budget deficit from nearly 14% to about 10.75% of GDP. These steps were not nearly enough to comfort the worried rating agencies. Standard and Poor’s has removed Ireland’s coveted AAA rating, while Moody’s downgraded all 12 Irish banks.

With expenditures of 55 billion euros and revenues falling below 35 billion euros, Ireland is facing the daunting paradox confronting a growing host of nations, including the United States. The politicians maintain they cannot implement draconian spending cuts in the face of severe human hardships being created by the Global Economic Crisis. Yet, mathematical realities may constrict the ability of political leaders to infinitely borrow money in order to maintain high structural deficits. With the rating agencies having made their move, the ability of Ireland to finance its deficits through the largess of the global credit market will become increasingly more problematic. It appears that the IMF may be the ultimate lender of last resort for Ireland, and that kind of assistance will impose costs of its own.

The economic catastrophe facing Ireland will cause sorrows that cannot be suppressed by a pint of Guiness. Nothing less than national insolvency threatens this once robust economy. And lest the United States pretend that the economic collapse now underway in Ireland is irrelevant to its own situation, the elements that have brought down the “Celtic Tiger” are almost identical to those now eating away at the very foundation of the U.S. economy.



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IMF Nightmare Forecast: Economic Crisis Creates $4 Trillion In Toxic Assets

April 9th, 2009 Comments off

The International Monetary Fund is set to release an updated report on the scale of toxic assets that are sitting on the balance sheets of financial institutions and banks worldwide. To characterize the IMF revised numbers as jaw dropping would be a severe understatement; the International Monetary Fund will indicate that toxic assets now amount to a staggering $4 trillion. If there are any doubts as to the severity of the Global Economic Crisis, this most current estimate of the rot eating away at the global financial architecture should set them aside.

It was only back in January that the IMF had estimated that toxic assets tied to the United States stood at $2.2 billion, while NYU professor of economics Nouriel Roubini provided a more sobering analysis that placed a figure of $3.6 trillion regarding toxic garbage sitting on global balance sheets, half that figure being directly tied to U.S. financial institutions. The revised IMF numbers, in my view, tell us two things: 1. The erosion in asset values across the world is accelerating and 2. No


one knows for certain how catastrophic this financial cancer is; the only certainty is its virulence.As expected, the United States is the major component in the IMF scenario of horrors, being the source of three-quarters of the $4 trillion nightmare forecast. However, nearly a trillion dollars of bad assets are, according to the IMF report, tied to Europe and Asia. That latter figure is actually a portent of much worse news, as all the macro-economic indicators from Europe and Asia are deteriorating. The Eurozone is in deep recession, Eastern Europe is defaulting on massive debts and the banking sector in the U.K. is for all intents and purposes insolvent. The world’s second largest economy, Japan, is in free fall collapse, with catastrophic contraction of its critical export trade. China’s export market is shrinking, in the process shattering Asian economies on her periphery. The OECD (Organization for Economic Cooperation and Development) is projecting that the economies of its thirty member countries will collectively contract by 4.3%, while global trade is reduced by a savage rate of 13%. These numbers suggest that the fundamentals that have facilitated the erosion in global asset values will be even more destructive in the months ahead.

Placed in context, the IMF revised estimate on the meltdown in the global financial architecture is merely a pointer in a very dangerous direction, and not a final estimate on toxic assets. It is likely that the ultimate number goes beyond $4 trillion. How much worse can it get? A secret document leaked from the European Commission suggested that European banks alone hold up to $24 trillion in “troubled” assets. If one quarter of those assets are indeed toxic, it is not beyond the realm of possibility that the actual scope of financial toxicity on global balance sheets may be in the range of $8-9 trillion. However, even worse than any apocalyptic forecast is the realization that no one knows with certainty how massive the financial contagion really is. In the final analysis, it is the uncertainty being wrought by the Global Economic Crisis that is most destructive to the world’s financial system, even more than the appalling statistics, as frightening as they are in the abstract.


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U.S. Defense Budget May Bankrupt America

April 7th, 2009 Comments off
Robert Gates serves as the Secretary of Defense for President Obama, just as he did for President Bush. He has just unveiled the proposed U.S. defense expenditures for fiscal year 2009. Though in real terms the increase being proposed is modest compared to the annual expansions of the Bush years, the overall number is daunting. Gates is proposing that the United States spend $654 billion on its military in FY 09. This stratospheric expenditure is equivalent to the combined totals for the next 25 largest military budgets on the planet. Even more disconcerting, the planned military budget for the upcoming year represents a 72% increase from 2000, the year George W. Bush was elected president.
As is well recognized, this massive explosion in Pentagon spending was not due to any military conflict or arms race involving a major power. The primary justification is the threat posed by Al-Qaeda. There are also rationalizations regarding the need for missile defense to protect America from a possible Iranian threat, and especially peculiar, a long-term threat from China, a nation that has become the primary source of credit for the U.S. government. It is indeed awkward to justify China’s ambitions as a basis for the explosive growth of the U.S. defense budget, given that the Chinese treasury has become the banker of last resort for the Pentagon.
In reality, the only sustained threat to national security that would warrant an increase in the defense budget is that emanating from Al-Qaeda in the wake of 9/11. However, Al-Qaeda, notwithstanding its deadly intentions, is a non-state actor with a few thousand adherents scattered in different countries. Rather than a proportionate response to the quality and quantity of the actual threat posed by Al-Qaeda, what we have witnessed has been an explosive growth in military spending. Since this money did not grow the actual size of the U.S. armed forces in the period from 2000-2008, and the strength of some components actually shrank, as with the number of air force combat aircraft, it appears to have been infused into the military industrial complex in the perpetuation of costly research and development programs that have limited value towards enhancing national security.

At a time when the United States in sinking deeper in debt amid a devastating economic crisis, does a bloated military budget that requires Chinese loans to finance represent a true enhancement of U.S. national security? There should be much more serious and critical discussion involving the scope, size and vast increase in the outlays for military spending. Ultimately, it is America’s economic viability that is the bedrock of her national security. Appropriating funding for the Pentagon that exceeds the nation’s capacity or willingness to pay is not, in the long-term, a sound direction for safeguarding America’s security. To maintain the status quo is to proclaim that the United States can borrow money indefinitely from China, using those funds to pay for gold-plated military programs to protect us from that same creditor. It is also a path leading to national bankruptcy.


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