To: Mr. Robert Platte

c/o Federal Bureau of Investigation

Dear Sir,

You will be, no doubt, little surprised to learn that the entire story leading to the upcoming release of the “Eggn manuscript”, at eggtothenth.com has been a concoction to enhance the mystery surrounding this work of fiction. Yes, the urban legend surrounding the purported location of a mysterious capsule near White Sands, if this event ever really did take place, has been co-opted strictly for the purpose of embroidering a bit of verisimilitude around a story inspired, so we have been told, by the work of Jules Verne.

Just as the incidents surrounding the Roswell story have been adapted by so many authors and publishers, it was the publisher's assumption that there was no harm in the author taking the “Capsule” story and using it for his own purposes. We apologize if this has caused alarm bells to be raised within certain circles, if that really be the case (something we doubt).

Be informed that as far as we were and remain concerned, the events previously described in the item entitled "Anti-Prologue" were made up entirely out of whole cloth. The author was not attempting to dupe us in this matter, and we were not attempting to dupe our readers.

Further, we concur with the Eggn author that the kind of thinking that went into the Roswell story is outdated and somewhat illogical, much more a reflection of the paranoia generated during the Cold War by certain factions within the political spectrum.

Why, for instance, would the US Government continue to this day to hide the fact that beings from outer space had been discovered in a location near the area of the first nuclear test explosion?

From a scientific perspective, the crash landing, much less the successful cover up, of highly advanced beings is extremely dubious. Even at close to the speed of light, these particular beings and their flying saucer would certainly have had to have already been positioned in the vicinity of our solar system, before even the first wireless signals were sent into space. After all, Alpha Centauri, our nearest neighboring sun, is 4.6 light years distant.

The Roswell beings would have had to be very near neighbors in our own solar system and in possession of an extremely advanced form of propulsion to get here in a reasonable amount of time. Assuming, then, that such an advanced civilization had evolved in this close proximity, we might make a reasonably sound statistical deduction that intelligent life is an inordinately common universal phenomenon and that there are hundreds of thousands of such civilizations just in our own corner of the galaxy. Further, their communications would require electromagnetic wavelengths. In recent years, tens of millions of dollars have been spent in vain by the government through NASA and universities in the quest to capture any signal of intelligent communication in the galaxy.

Are we to suppose that NASA at the height of its prestige would not have been able to penetrate the veil of secrecy around something as significant as the very well known Roswell story and that no Administration hence has had the power to crack that secrecy? After all, the possibilities of backward engineering alone would make the discovery invaluable to science, not to mention government scientists working to solve the propulsion and speed problems that plague today's deep space program.

We feel confident that the publication of Eggn can be of absolutely no interest to any organization that you (Platte) purport to represent. The author assures us that this is a work of fiction and that the time capsule depicted in the "Anti-Prologue" is a metaphor for the period between its authorship and the present dates of first publication.

We therefore defy you to demonstrate any evidence that gives you a legitimate platform to make any of your various charges. Further, you have 5 days from today to make those charges known to us.

Pascal Pasquino

Chief Editor, Fiction

The Dymaxion Web

We agreed to meet him in the bar of the Mayflower Hotel at 3 the following Monday, a time, we noted, when the spacious, somewhat dimly lit bar is usually quite empty.

There was quite a bit of snow on the ground after the weekend's blizzard that had shut down all of the area, including the three airports. The underground portion of the Metro was working, though quite sporadically. Still, we managed to start out early and only walked in from the hotel lobby entrance about 15 minutes late. Our Mr. Platte was sitting in an isolated corner booth; we told him he would recognize us as a mature couple and that I would be wearing a brown Borsalino. A man stood up and somewhat discretely signaled us over to his booth. It was clear from that single movement that this was a figure accustomed to going unnoticed. Skin pasty, hair partially gray, he wore a gray worsted suit, vaguely yellowed white shirt, nondescript tie and an unreadable demeanor. Strangely, as we approached him, we picked up the scent of a particularly old fashioned after-shave lotion. I could see my companion's nostrils flare slightly as she caught the first whiffs.

When Platte didn't offer his card, it was also clear that this was going to be an unusual business meeting. Particularly after we offered him ours and there was no reciprocity. Our host had already got a tall, colorless drink that fizzled slowly on the dark table in front of him. He took a seat first, then offered his hand. We sat down with our backs to the room and began with some very small weather talk. Then Platte managed to get the attention of the waiter and we ordered a couple of tap pints.

“Look,” I said, “ I don't know who you are or what you want so it's time you put your cards on the table, we've got a lot of things to do today and little interest in delaying our plans.”

“Well,” said Platte, “I'm not sure you'll welcome this but I am here representing people who believe you have no right whatsoever to the material you're planning to publish. The capsule was, as your research indicated, found by a young man who should have turned it over to his employer, the government. Had he, this hoax would never have seen the light of day. You my friend have been duped. There is nothing to the capsule except that it is US Government property found in a sensitive locale.”

“Government property?”

“That's what this all about. And if you persist in going forward with this scheme you will no doubt face serious consequences.”

“Did you say you represented individuals or are you government agent of some kind?”

“All you will hear from me for now is that you have no right to publish this so-called translation that you are calling EggN. You've already indicated that the capsule was probably stolen or taken inappropriately out of a locker at ASU and that it was found by a US Park Service employee. Even if you have gone ahead and got the permission of that former employee –and let us all be clear that the name Thomas Doolittle is as much of a fiction as your recount of its discovery-- you would have no right to the contents.”

“Well, what would you say if we contended that the manuscript, itself is a work of fiction, and the introduction we published was part of that fiction?”

“I am not here to play games with you, sir.”

Throughout, Platte spoke his lines without showing the slightest emotion, as if he himself had preprogrammed our responses.

We paused the conversation long enough to allow the drinks to be delivered and as soon as we were again out of earshot of anyone in the bar (though clearly not that of the video tape being made of the meeting) we picked it up.

“Are you going to say who you are, who you represent and provide the property identity? Otherwise, my inclination is to end this conversation right here.”

Platte's response was slow and menacing: “You will be hearing more from us shortly, in the meantime you would be more than prudent in holding up on your plans to make public this ridiculous work.”

And so, readers, we apologize for failing to follow up with our promise to publish chapter by chapter the translation now in our hands.

We have decided that we have no choice for the moment other then to take the menaces of this man called Platte seriously. In the meantime we have taken precautions to protect the manuscript's multiple whereabouts from theft or intrusion. We will be talking to legal representation and other Article 1 advocacy groups. There is, of course, no way we can protect ourselves from denial of service attacks without a certain amount of aid from certain groups.

Truth in publishing: This is not the script for some modern day film noir, even if we have perhaps been seeing too many in recent weeks.

The Discovery of the Titanium Capsule

On a gray afternoon in late 1984 a battered, cream colored panel truck could be seen navigating a steep, curving incline on NM Route 82 about half way between White Sands and Cloudcroft. About a mile and half behind them followed a late model black Cadillac sedan with Nevada license plates. At one of the highest points along the way, the driver of the van pulled right onto the overlook, and then back as close to the edge as he could get. Another large man from the passenger side seat jumped out, headed to the back of the truck and quickly pulled out a large pair of cable clippers. Within seconds he snapped the double reach of cable on the right side where it joined the corrugated steel barrier post. The splayed cables lay sprawled on the sandy highway edge. Below, the almost sheer precipice dropped down about five hundred yards. Besides a few scattered clumps of brush, and some outcroppings, there would be little to slow the descent of the van as it bounced, flipped and finally took fire in the deserted valley below.

As the gasoline fueled fire raged through the overturned vehicle, a plume of thick black smoke wafted across the deserted valley. It was only two days later that the military command back at White Sands got a satellite report and downloaded a photo of the event along with its coordinates from a system that was being developed and tested for a newly started program.

Already short on security units, Colonel Charlie Landrift, (according to a press article) quickly made the decision to turn the case over to local authorities. The call went out to the State Police in Alamogordo who radioed instructions over to Cloudcroft.

The Discovery

As a kid, Park Ranger Tommy Doolittle would sneak out of bed after lights out on the farm. He had built himself a 6-band radio from a kit he'd seen advertised in Popular Mechanics. There wasn't a lot to listen to up in those mountains back then so getting onto the Base's internal communications always had more recognizable voices than the other short wave bands he could get on different nights. One thing about these mountains, he'd discovered, was some sort of electromagnetic confluence: Depending on meteorological conditions, Tommy could listen to ships at sea on certain nights and he also often captured the downbursts from NASA and other more secret satellites.

Tommy's job over at the National Forest at first made little use for these skills. He drove a pick-up and spent most of his time clearing fire ignition debris. But a couple of years back, a group of geologists from the State University had come over and set up a semi-permanent camp about ten miles up the road from High Rolls. Tommy had met some of the guys quite by chance one day and got to talking with them. One thing led to another and they invited him over to the camp for a couple of beers and that led to a conversation about their communication system. That's when Tommy heard about how they could actually use the telephone lines to dial into their PDP11 system as if they were sitting in the computer lab.

They were standing in front of a cathode tube terminal, Sandy R___ was a little red-faced and on to his fourth can that he held in one hand while he typed instructions on a keyboard with his right: "This here is on a server at Flagstaff but you see this directory," he moved deftly through a tree structure of letters and slashes, "that's all the way over in Palo Alto at Stamford."

With a couple of commands, Sandy had logged into a database of rock formations located at a site run by the NGS. Tommy couldn't believe what he was seeing. The concept of tapping into databases stored in various places around the country brought up all his old questions about what he was doing in the Forest Service. He'd joined up because it was there and comfortable and because he thought he knew that since his mom had passed from cancer, he was needed for a while. His dad, after those pain-filled months, had never gotten over it.

So the next day at work, when he picked up the call between District 8 headquarters and the patrol car about the unreported fire, he decided to head out himself to see what had happened. After all, his crew was breaking up for the day and heading the other way into town to Johnie's Neon Boots, a place he'd never felt right in, at least, since his mom's death.

There were still about two hours of daylight left when he pulled up to the overlook. He could see where the cable lay and that it had been snipped, not broken, clean. Tire marks cut into the edge and when he looked down he could make out what looked like the burnt-out shell. Tommy also knew there was no way to climb down to the ravine bottom from up there. Somebody was going to have to get a hold of an ATV, maybe the one over at the Oppy spread to get down there. He went back to the cab of his blue and white F150 and pulled out of a khaki canvas holder a pair of government issued ranger binoculars for a better look. The sun was getting lower and starting to flare reddish by that time. And it was pretty clear to him that Trouper Ansel Kodak wasn't going to be able to get over to the site until the next day.

As he peered through the glasses, trying to follow the recognizable contours down to the spot where the wreck lay, like a beetle on its back, Tommy's eye caught something that glinted back the sunset rays. He noted in his recount that he had never seen a more vibrant color in all his life. But just as abruptly, the glint was gone. Tommy glanced at his watch to note the moment, marked in his mind the bear's jaw outline of the rock formation where he had seen the light burst and then continued down to finally spy in on the broken panels.

But it was something about that laser-like beam that kept flashing like a neon sign in his mind's eye as he shared dinner with his dad. Even the news about what was clearly a deliberate dumping of the truck didn't really grab the interest of the older man, who Tommy could tell was, as become his manner, only asking questions to punctuate their fork-fulls. As soon as they'd wiped clean the bowl of stew with the ritual slice of Wonderbread, Tommy knew his dad would excuse himself and head into their small den to nestle back in his plaid recliner, placed in front of a very snowy Channel 7, the only station that sometimes made it that far.

"The weatherman over in Las Cruces, you know the one that cottons to Madras sports coats all year round, says it's gonna be a little warmer tomorrow. Seems that the el Niño is gonna keep things drier than usual, maybe right through this year's rainy season. How's that gonna effect you guys?"

Tommy had already started to clear the dishes. He knew his dad wouldn't wait around, not even for an answer to his own question. I wish I knew where his mind really is he thought.

Dead Sea Scrolls II

Tommy had to wait until Saturday but by that time he had figured out what he wanted to do. He'd heard all about the wreck find and how there had been what seemed to be two dead bodies stowed in the back. He'd monitored first Kodak's report and then those of the team that had driven down from the State Police Crime Lab. But he was going to set out on another mission. He had been back out on the overlook both Thursday and Friday and at just about the same time he'd seen that indescribable burst of what he had already dubbed 'nourishing light'.

Even though he'd figured the shortest way to get over there by cutting through Oppy's back acres, and he'd started out just after sunrise to give himself plenty of time, he realized that what looked like a bear's head from up above was not an image that could help him as he tried to plot a way up the slope from below. The problem was that if he waited until an hour before sunset, he'd have to make his way back in the dark.

Three weekends later, and still coming up empty despite all the various schemes he'd dreamed up, he knew he would have no choice but to camp over the following weekend. Maybe then he'd get a look at the reflection from below or if not he'd had the whole of Sunday to cover the area he guessed the source was located in.

But it wasn't until his fifth weekend that he located the small rocket shaped container he had been searching so diligently for. Tommy trembled all the way back on the path the crime squad had blazed the week they'd spent in November. It was now January and even Tommy's dad had begun to wonder what had so taken him over. His crewmates had even stopped ribbing him about his strange distant look. Tommy had not taken his mind off of that capsule from the first time it had contacted him.

Tommy didn't know what binary code was at that time. But the closer he looked at the strange markings engraved in the shiny surface the more he guessed that the marks were neither random nor the product of natural forces. On February 15^th, he drove over to the University campus where he met up with R___, G___ and B___ at the cafeteria across from the Geoscience Department. He had on one of those lightweight backpacks they sell in the Orvis catalogue.

"I have something to show you", he said, "and I think we oughta keep it secret, I don't know why but I just reckon you might go along with me on this." They went back across the parking lot and into the basement where the assistant professors shared offices. R____ flashed his card and they let themselves into the area clustered around the small conference rooms. R____ had a key to S22, the one with vertical blinds which they pulled. Then Tommy carefully laid his precious object on the white birch table. He had also come equipped with magnifying glasses and a laser pointer that he'd also sent away for.

Wherefore?

The events of this day were to greatly alter the lives of all who were there. Tommy would agree, despite all his gut told him, to leave the capsule in a steel locker across from the room they were gathered in. There was immediate recognition among the three scientists that the metal alloy they were inspecting was beyond unusual, like nothing they'd ever seen before. B___ quickly got a hold of the project's Geiger counter and they relaxed when it determined that the object's radioactivity level was no more excessive than a lot of natural formations in the area.

None of them were metallurgists and they all concurred that the only way to know more was to locate someone who could be trusted, for an analysis. They guessed it was a remnant from one of the secret programs around there and understood that if it was, the Government certainly hadn't made public its loss, not to the scientists working in the area nor to the local Forest Service. Around Alamogordo that wouldn't surprise anyone.

The geologists inspected the tiny pockmarks on the outside and agreed that none of them was capable of making any kind of interpretation of what looked like some kind of code. G___ mentioned a guy name J_____ over in the computer science department that they all knew. He'd been instrumental in getting them set up to access ARPANET, and, most importantly, was someone they thought could be trusted.

Then, while three of them sat there, G___ went back to his office and located a combination locker lock he'd gotten for a lapsed New Year's resolution, that was still in its paper bag. The capsule would be deposited and locked in the metal locker third down from the entrance to S22. Only they would know what was in it and the sequence for the lock.

The Disappearance

What happened in the ensuing 48 hours has never been revealed even though friendships and trust were tested to their ultimate limits. Their were accusations, police involvement and even more than one armed threat. All to no avail. What is known is that the locker was broken into by some one or entity and that the capsule vanished along with all traces. No photographs had been taken during the period, only drawings, notes and oral interviews. The matter was reported in the local press at the time but does not appear on line or in microfiche records.

This is as much as we at DymaxionWeb have been able to piece together from our own due diligence. We are well aware of the rumors that spread after the capsule's disappearance and cannot verify nor disprove any of the major hypotheses that have appeared in various Internet forums on the subject of various strange findings (and disappearances) in the surround desert and highlands that have been frequently reported upon.

Confidentiality Agreement

It is important for all readers to note that all of us who have handled the Eggⁿ manuscript are working under the terms of a publishing agreement that is protected by a confidentiality agreement made between the present holders of the text and its providers. We can make clear to our readers that we hold the sole rights to the publication of the materials we will publish under the title Eggⁿ and that we are further obliged to make no changes to the text as furnished to us by the holders.

We can affirm, however, that we have never seen the alleged capsule nor have any knowledge of its whereabouts (although we have been made quite convinced of its existence) and have played no role in the translation that has provided the text to be published under the title Eggⁿ. We are required by our agreements to not reveal publicly or privately any information that might lead to the identity or whereabouts of the text's owners.

Further there have been extreme measures taken to make opaque the manner in which all contacts and communications have been made between us and the holders.

We can reveal, however, that we have been told that the process of machine decipherment was extremely "tortuous" and are convinced that until recently it would have been impossible for most CPU arrays to have succeeded in the task. Further, we have been told that there has been no human intervention to change wording or phrasing resulting from the machine translation.

Publishing Schedule

We are planning to publish the full text in excerpts as they are made available to us over a relatively short period of time. The website set aside for the publication of Eggⁿ www.dymaxionweb.com/eggn. We are inviting readers to follow this link to the text. An Archive section will be provided that allows new visitors to read all excerpts in the chronological order in which they are published.

First excepts will be published on EggN from early February 2010 forward until completion. We look forward to your comments.

"This sucker could go down", quoth the President,

Quoth the Secretary of the Treasury, "Nevermore". 

The Vice Presidential candidate peers through her trademark glasses and exclaims: "Putin rears his head and comes into the airspace" while grown Congressmen change their votes because of the tone of a speech by the Democratic leader. Hold you Nose! Everybody kinda sorta agrees that maybe throwing a trillion unfunded dollar sponge to soak up the (toxic) waste will somehow unplug the overflowing toilet. We've got "cow patties with marshmallow centers", car wrecks galore and the greatest inflation of unfortunate metaphors in the country's history.  This truly is a national nadir commensurate with the waning days of the eight-year Bush reign. 

Heartland Wisdom

$85 billion, that's your money. I mean, it's all of our money. I don't know where they get it. It's really interesting. They just print it or something.

Mayor Richard Daley Jr.

Too Big to Fail, or Uncreative Capitalism

The Fed and the Treasury move blindfolded across the countryside followed by a gaggle of lobbyists shouting out the path from behind the trees. In their wisdom they have quickly created three large supernational banks, surely too large to fail.  So much for the creative destruction of capitalism that the fundys love to invoke. "Take a sharp left to that $25 billion carmaker bail-out then....."

This is truly a test of the power of the US Treasury's virtual printing presses. The immediate crisis will be averted if only enough money can be beamed at it fast enough.

The taxpayer response should be simple enough: Equity, interest, fees, whatever, we want our money back with interest. Give us a new agency: The Department of the Portfolio, with requirements to report back to us every three months. All profits go the Social Security Trust Fund

Bail-outs Are US

We're used to seeing the media lunging at the meme du jour like a flock of pigeons on a telephone pole. Their target line being the trail of talking points sprinkled like a string of directional clues through the semi-dark labyrinth they forage in. Each nibble, of course, leaves them more clueless as to the real way out.  But there's solace, there will always be new bread crumbs.  Lunch is assured.

Candidate in a Telephone Booth

We've been having a like spectacle among the political leaders with one party's candidate suspending all campaigning as he emerges from telephone booth and leaps into a situation he knows virtually nothing about. His hope, it seems, is that by some odd chance he will manage to get the politics right, thereby winning the favor and respect of the citizenry readying to cast their votes. It's hard for us to tell if this is a strategy or a tactic but in any case it is meant to appear decisive.... at least, up to the point he has to make a decision. Unfortunately for this gray-haired chap, whose left eye may just be sagging under the strain, he found himself, with no legs, unblinkingly leaping into the mother of all political and economic quagmires.

Sorry but folks out there have little clue how this whole mess came about but they sure don't trust what their leaders are telling them, particularly those leaders who were spoon-feeding them up to just a week ago a taste of  "the fundamentals are sound".

Beam Me Up A Virtual Depression, Hank

We know, of course, that the fundamentals are NOT sound and moreover that they have not been sound for a very long time, so long, in fact, that the most dynamic underpinning of the private sector house of cards has all but collapsed. We've reached a point in the evolution from molecules to bits, where only outliers dare dispute that what's good for Wall Street is good for America. We are a country that has gone into the Transporter Booth only to be fleeced as our money is beamed around the world in bits and bytes. The transporter is located in the south end of Manhattan Island and must be saved.  If not, of course, the whole sucker just might go down. Thus, in typical eloquence, are we rallied on by our leader.

Real Time Central Planning

By beaming those dollars to all round edges of the globe, Wall Street genius has managed, in Greenspan's words to "spread the risk" so thoroughly that there is no one left willing to take any of it, ergo the urgent plea to the Congress to crank up the printing presses. It is the ephemeral soundness, the vibrating beams of money we know is in the ether, that still makes this a virtual depression rather than the kind that sends folks into public bread lines. The next phase, the one that is being passed in Congress today is to further spread the risk out to every single taxpayer in perpetuity as an ever larger chunk of the ever more virtual budget goes not to arms or wellbeing but to debt service, the province of which is controlled by, well, Wall Street, of course. In a virtual depression; we are much more likely to see the citizenry on their way to the grocers with real time credit limits being reevaluated on their plastic between the time they enter the store and leave.  We'll be kept abreast on our iPhones.

The Wal*Marts of Treasury Bonds

Another way to look at it is to view the US economy as it manufactures fewer hard goods replacing that lost productive activity with the production of Treasury Bonds.  Quite simply, we can assume that as the world economy falters there will be a rush to US Treasury bonds. And the good news is that business is jumping, so this week, even as the US economy dangled on the breach, the smiling yellow face went up and US T Bills flew off the shelves. The oil bubbling Russian stock market, for one, simply collapsed, Asians saw German and French road-kill, sold off Euros and the Yen, setting off a rush for dollars! Rates dropped to 1/20th of 1% on short term T-Bills.

For those customers with too many dollars around the world, and derivatives they couldn't move limit-free on E-bay, there is a happy outcome to all this.  The Treasury Secretary, tired of merely spawning M&A deals in a down market, has moved to Washington where money need only be printed. He now rolls out the greatest deal of all time, an $800 billion whopper. Doors open bright and early next Monday morning, the line forms in front of the White House, forget the lead boxes, just bring the toxic waste.

We call this a virtual depression because its fundamentals are hidden in plain site: there is now a seemingly endless all too real war being fought on borrowed money, one that has coincidentally cost up to now approximately $800 billion. Another major factor, is the supply of imported petroleum costing hundreds of billions. This money is sent East to gadget maker and oil producers alike who must re-circulate it, into something other than the now proven toxic collateralized debt objects  and the Agencies issued by Fannie Mae and Freddie Mac.

We have turned the country's principal market into one vast junk money market with headquarters in Washington: Employees around the country, throw off your assembly line gear and don the uniform of the big banks.  In virtual America you'll be flipping  T-bills for minimum wages until someone here can figure out how to gin up the next bubble.

A vast moat of debt is being built around the capital for the next Administration to grapple with.  In it, Paulson is creating an ever deeper pool of US T-Bills and one can imagine, as the mechanics of the bail-out get put in place, new classes of Agency bonds backed, once again, by the full faith of the US government. Conceivably, with a little help from Congress, Paulson will have kicked the ball down the field until that ever looming day, the virtual dollar, itself, faces collapse. What has been beamed away will reappear.

Bernanke et al. know that the dollar manufacturing monopoly provides an enormous cushion,  years, at least. Monopolies don't break easily. Unfortunately, the endless War will not go away, that's the clear logic of Iraq and Afghanistan where costly troop deployments, will have to be augmented by even more costly (aid) giveaway programs. After all, spreading dollars like manure worked in Anbar Province. Obama's hands are tied before he even gets there. This is Bush's parting gift, he thinks, while all he has really done is pull the cloak off the virtual dollar machine, the great transponder.

The (Private) Debt Party is Over?

Meanwhile, back in that part of the USA outside the Beltway, where molecules still make sense, the party is temporarily suspended. The bad news folks is that, like in 1932, the bottles empty, we've bubbled out. We have, after all, been tripping the light fantastic from bubble to bubble since the 70's and given the costs piling up for real world War and the onset of shockwaves from Peak Oil,, the end of this one has had a fate, perforce, no better than Steve Fossett's.

It will take years to dig out from under a borrowing blizzard that has been going on for decades.  This is not just bad residential and commercial mortgages but leveraged buy-outs, credit card debt, auto loan debt multiplied thousandfold by layer upon layer of big bets in the shadow banking system. While the Administration was keeping the cost of the War off the books and running up steeper and steeper official budget deficits in synch, the public was doing its bit on the helium of borrowed money and spiked smoke in the stock and housing casinos. Such is leverage in every day spiked Bubble World.

Human Nature, or Leveraging Leverage

Had the borrowing frenzy been restricted to the above confines, we'd be in the process of winding down from a serious binge but there'd be only the usual casualties, the hogs, the foolhardy, and the suckers.  Over time we'd work our way out of it. But this is a different story that has been brought on by the accelerating logarithms of what's come to be called the shadow banking system. Ultimately. what goosed the lending frenzy was a financial industry where the hogs had gobbled up the pigs. These porcine magos took all manner of loans, good, bad and otherwise, and bundled them and sold them as CDO's or MBS's or Swaps or whatever device they could use to pile leverage on top of leverage. To be quaint, they labeled them "toxic waste" and like their smokes from another generation they consumed them with even more gusto.

Importantly, in a souped up low interest environment, they found they could move these "securities" that paid very little better than T-Bills at enormous margins. In a creative flurry, equal they imagined to the one that brought us the Internet, they took to bundling the bundles themselves into various classes of so-called derivatives, quantifying so-called tranches of loans into various levels of risk for anyone who wanted to make believe he understood them.  And as this market grew, they created a class of insurance policies they called credit default swaps, designed to back up the derivatives. We wrote a few months ago that the CDS market totaled  the astounding sum of $57 trillion, though lately we've heard it calculated at 62 trillion (no one really knows) or, 4 years of the total US economy! We concluded that it was little more than a Vegas kind of side bet industry since there was no open market for the swaps nor were there any requirements for set aside reserves.  It was, every hog for himself.  We also predicted it would end up in the taxpayer's lap!

Meanwhile the regulators in Washington were no where to be found.  Greenspan's Fed did not raise its rates to slow things down nor did it urge Congress to institute new rules that might curb the activities of the security issuers by requiring transparency, marketability or reserves to back up their promises.

In order to keep this market going, long after every not so eligible borrower had exceeded their ability to ever pay back their loans, the banks began eating more and more of their own toxic waste, trading more and more of the stuff among themselves to the point, today, that they no longer trust the books of any of their counterparties or peers.  Today's bailout sponge is meant to take all of this massive mess off their hands 

The reason we have seized up is that there are no markets to trade these derivatives and swaps and no way to know what they are worth given that no one knows what the underlying loans look like or how they are actually backed up. For this, and a host of other suspicions, the banks have stopped lending to each other making it hard to satisfy their legitimate customers. 

Washington Truce and Consequences

Back in the 1980's the Reagan Administration introduced what has turned out to be one of the two basic seeds of destruction for the modern Republican Party. For Reagan, who promised to "get government off the backs of the American people", the Administration would embrace a theory called supply side economics (the other seed, of course, is the creation of a Christian fundamentalist base that can get ecstatic with having the likes of a Sarah Palin as President) as a substitute for the prevalent Keynesian approach that both parties had adopted, as Richard Nixon famously said. Hitherto, conservative orthodoxy had been closely associated with a cloth coat, business-like fiscal conservatism intent on balancing the budget.

Put, perhaps too simply: for Keynes, the government had a roll in stimulating the economy in a crisis through the creation of infrastructure: money put into highways, bridges, parks, etc. directly generating jobs and economic activity while contributing to the common wealth. For supply-siders, the individual taxpayer becomes the net beneficiary since the government, in essence, finances its projects through debt rather than taxes, something that Reagan's Republican primary opponent, George HW Bush, dubbed "voodoo economics". Supply-siders argued then and still try to make the case that by leaving the taxpayer off the hook to spend and invest as he/she wishes, economic activity is stimulated and over time limited level tax revenues actually increase. This was a wondrous no-pain solution for the wealthy that better fit the mood of Americans moving from the Rustbelt to the South and West. For high bracket Americans, it was "the shining light on the hill". Unfortunately, for future generations it was debt service.

It was a novel idea that also had its roots nourished by an emerging rightward libertarian tilt of the party whose proponents also advocated truly risible nihilistic thoughts of "starving" government of its lifeblood, through choking the tax stream. Reagan would abolish government social programs --for instance, it was at one time committed to abolishing the Department of Education-- while greatly increasing the Defense Department budget. In the end, Reagan left office with the largest non-wartime deficit in history; nonetheless, his presidency was seen, particularly among his co-conservatives, as a success, and the basis of a winning coalition. Since then Republicans have never looked back on this smorgasbord  of voodoo economics and politics that would have horrified many of their Eisenhower era colleagues.

For a bookend, the hapless Bush II who never ran a profitable business, of course, does the same thing, only with no-blink attitude.  He greatly expands the Defense budget through his new endless War and Homeland Security, he puts little or no restraints on government growth or on the mega-pork-barrel spending of a Republican Congress and he cuts taxes on high earners well below the levels Reagan wrangled out of the Democrats. There is no longer any doubt he will leave office having run up more debt than all the previous presidents combined, with the exception of Franklin Roosevelt, who merely had to dig the country out of the Great Depression and finance the Second World War. Ironically, he will, as a result of the Wall Street Bail-out Bill,  also be associated with the largest government takeover of private assets in the country's history.

The End of the Bretton Woods Era?

What Reagan had inadvertently tapped into --and what makes the theory of starving the government so risible-- was the built-in advantage the US had over its trading partners, the almighty reserve currency, the now virtual dollar. Since Richard Nixon had delinked the dollar from silver, the dollar had become strictly a piece of  paper backed up only by the credit and faith of the US government. It was in old parlance a "fiat currency" that also happened to be, by international agreement, acceptable as a reserve currency for central banks around the world, with the same status as gold. The US printing press would become the engine churning out decades of debt absorbed by a willing South Asia Middle East. 

Back in 1999, as the Wikipedia puts it: "shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act."

What Gramm and the banking lobby behind him accomplished with this Act combined with a preceding Gramm-Leach-Bliley Act removing the bounds between thrifts, investment houses and insurance companies that governed the financial industry since the 1930's, provides the stage for the present meltdown on Wall Street. The Act quite specifically opened the door to a whole new classes of completely unregulated investment vehicles we're calling the shadow banking system. Gramm, of course, is the same unfettered market fundamentalist who had been John McCain's campaign head and chief economic guru until he had the misfortune to speak his mind on TV a few weeks ago.  As we all remember, he got in trouble for saying that the American economic problems were psychological and that Americans who saw it differently were whiners. Another enormous irony: should McCain be elected, Gramm may by his Secretary of Treasury and therefore in charge of spending the money that Congress has just allocated.

Revolutionizing the Debt Republic

It's pretty easy to guess why all these financial wizards could play make believe with trillions of dollars: quarterly profits on Wall Street boost investment house stock prices, enriching option holders and annual profits feed into enormous bonuses for those fortunate enough to be in the game.  So, for several years this decade, as the housing market pushed upward investment house stocks soared and paydays on Wall Street were the envy of the world. It would not be uncommon for a middle level executive to take home an 8 figure bonus.  These were heady times and the Bush tax cuts meant that less would go back to the government coffers and the more to penthouses, second and third homes and breakfasts at Tiffany's and the pockets of armies of lobbyists and political donations to the pliant. Are we whining yet, Evita?

Billions of "excess" dollars flowed into the shadow banking system as exemplified by the plethora of hedge funds that sprang up like mushrooms around the big Investment Banks. For hedge funds there were no limits on leverage, they could borrow as much as the Merrill's etc. would lend them and the Gramm Act had removed reserve restrictions on these guys as well. Mighty Bear Stearns fell partially on the weight of its lending to its own in-house hedge funds. Where restrictions did apply, the created entities called special investment vehicles, or SIVs to skirt the laxly enforced rules on public companies. After all, the SEC was now being run by industry lobbyists weaned on Enron accounting.

Off With Their Heads!

For those yearning for the public stripping of wealth, the symbolic guillotine, the place to start might be with the hedge fund managers who not only pulled billions off the top of their funds as they gamed the derivatives game but also found a highly questionable loophole that allowed them to declare their managerial fees as capital gains, rather than wages, thereby paying a lower tax rate than the guy who emptied their wastepaper basket, as Warren Buffet famously pointed out. A simple IRS ruling under the next administration might be made to apply to this billion dollar loophole  So far, we've heard no one call for this one.

Of Bubbles and Bail-outs:  The Saga Continues

$85 billion here and $400 billion there and $800 billion there and before long you are talking about real money: and so, alas, this story only gets worse. Yes, Lehman Brothers was allowed to crash on its own but even there in the background the Fed was making moves to goose up its lending capital and is now accepting not only bad paper but the collapsing stocks of the other investment houses as collateral for its back window short term loan facility that not too long ago was restricted to the thrifts it oversees and which must maintain verifiable reserves. Paulson's transparently phony line in the sand on socializing loss at Lehman didn't stay visible even for the 24 hours it took to blow off AIG.

Enron Accounting Goes to Washington

For 6 years Bush has been able to keep the annual $130 billion cost off the books as he fights his "temporary" war.  No surprise, then, when Paulson let it slip that he wasn't going to put the $29 billion he laid aside for Bear Stearns on the books, either. Our point, as this virtual depression started to unwind last year has been that when this story of unbridled lending fueled by insane greed got to the end, the taxpayer would pay and pay big.  We have no doubt that eventually the government will find it necessary to directly intervene in the national housing market to stabilize prices there too as well, after all it is at the very root. 

A real bail-out of the housing market will indeed cost real money, much more than the $1 trillion already pumped in, and on the books, or off, depending on how transparent or eventually profitable the results are --are we getting laughable?--  taxpayers will be paying for it for years to come. There are also reasons, given the takeover of Fannie Mae and Freddie Mac, to believe we may have actually already doubled the national debt by the time this crisis finally blows over.

The Deficit is not the Deficit is not the Deficit 

What we are seeing this month of September is the meltdown of the entire Wall Street elite of independent investment banks either through merger with big old style banks or through collapse as in the case of Lehman Bros, that waited too late to make a deal.

Not every one of the regulated thrifts is going to make it through this meltdown (117 were already on the regulator's watch list even before the collapse of Lehman, Wamu, Wachovia and AIG). It was also very likely, as the unwind plays through, that the FDIC, the agency that insures depositors' money, would run out of cash.  It didn't take too many IndyMacs to get to that stage.  The Senate, in its version added on this facility for the Treasury as well, in exchange for the "temporary" raising of insurance limits to $250,000 per depositor. FDIC is funded by the banks in normal times. The $250K limit will no doubt be made permanent despite the objections of the banking lobby.

It's the Mortgages, Stupid!

Well, maybe not just the mortgages and the national housing market. But continuing lower prices for houses is at the core of much that's gone on so far. But the profits brought on by the issuing of a pyramid of paper based on these loans also extended to all manner of commercial and consumer loans. Mortgages and house prices are particularly insidious because they amount to the plus and minus side of Americans' largest class of assets. If your house is worth less than you owe on it then you are probably underwater all the way around.  After all, on the minus side, most Americans have carried credit card debt, and auto loans, not savings accounts. Where mortgages look particularly bad in the coming year is not so much in the sub-primes that were so flimsy that many collapsed at the first downdraft and are being cleared off the books.  But many ordinary Americans with better that bottom of the barrel credit and looking to move up, or simply to refinance their credit card debt-- took out something called Alt-A mortgages that didn't require strict income documentation and that were characterized by very easy terms during the first couple of years. These Alt-A's or "liar loans" were more than the majority of  loans issued in 2006 and many will require refinancing in the coming months. That's bad news in a declining market because borrowers will  face significantly higher monthly payments on houses they cannot sell for anything near what they owe. How many just walk away depends very much on just how low prices on these houses go. House prices during the Great Depression fell over 30%,  Depending on how you  measure it, we may have reached about half or two thirds of that grim statistic but no one can guarantee that 30% is a magic number. The ratio of debt to savings that Americans customarily carry today was nowhere to be seen back in those more innocent days; home ownership was more limited and job mobility hardly existed.

These increased loan payments are coming due just as the job market begins to crumble. In the past decade wages had remained below growth levels but there were jobs.  Now, those jobs are starting to disappear.  This is bad news for already shaky families who may no longer have a choice about staying in homes that are underwater.  They may have to move to where the jobs seem to be, despite school and community ties.

After all, in the days of easy credit, homeowners were  bombarded with offers to refinance, in other words, use their houses as ATM ;machines every time they maxed out their credit cards or wanted that bigger SUV flashing across their TV screens  Ah for the life of off the road, clean family fun, or sex drugs and rock n' roll or great adventure.  In that world, you could, with no money down, drive all the way to the top of the most pristine mountain peak and gaze out at a pollution free world with nary another SUV in sight or drive up the swankiest night club in town in your V-8 Ram tough.

Such is the magic of the American dream, as easy as flipping your keys to the parking valet!

Or Maybe, It's the Taxpayer, Stupid!

It's hard to mark just when we morphed into our present system of jobless, bail-out capitalism, was it the Saving and Loan bubble when everybody and his brother opened a bank with a lending window marked: No Developing Country Will Be Turned Away? Since then the series of bubble and busts have followed one another like Atlantic hurricanes in September.

Like those single-eyed monsters, the intensities and trajectories can be different but damage is left in the wake for the clean-up. FEMA gets called in and taxpayers foot the bill. Hurricanes, of course, are acts of nature, while economic bubbles are acts of human nature. Still, in the end, it's the taxpayer, stupid! --we'll resist the temptation to reverse the word order, or shedding a tear for that matter.

Many people marvel at the breadth, scope, flexibility and velocity of the world economic system as it shifts trillions of dollars from Hong Kong to London to Tokyo to New York in a 24 hour cycle. And it truly is a marvel but like any very large and constantly changing system it is open to ever more sophisticated forms of manipulation.

For some it's a necessary mechanism of doing business, a streamlined way to finance and pay for their every day business transactions.  But for many more, it is an opportunity, a way to game a few basis points more out of their capital investments. And it is this very greed that is at the bottom of every bubble.  It's easy to say that if losers don't get to pay for their greedy mistakes, another bubble will be on the way even before this one is wound down. But bubbles are much easier to stimulate than hard work, productivity and inventiveness, the stuff of real growth.

Alas, Say it Ain't So!

In the end, the ultimate target is always the ordinary gamer who gets sucked into the pyramid scheme just as it begins to hit its height and who is destined to get burned as the scheme begins to collapse. But often, perhaps to prove their existence, the Gods of Fear and Greed see to it that the very perpetrators of the scam get caught up in their own webs and end up taking the biggest falls of all.  And so, welcome to Bail-out World, where they get to use the leverage of their power and wealth to drag in those who stayed completely clear of the whole process and never dreamed that it would be their money that would be used to get the big guys off the hook.

The mantra of course is "too big to fail".  It explains why those who profess the religion of maximum gain for those who invent, work hard and risk, find it necessary to "suppress"  their own core belief in moral hazard for the "good" of society. During the brief time-out, everyman will now be allowed, for the greater good, to step in and once more mop up the blood on the floor.

Last month, as the Treasury Department stepped in to bail-out Fannie Mae and Freddie Mac, we may have just witnessed the largest one-day Federal takeover in US history but certainly only the prelude to this tragicomedy. 

The Tragedy of Fannie and Freddie

Like all Atlas-like epic fiascos there is a long and complex story with many more sinners than saints for main characters across the generations. In the end there is a complete failure of the system as a cynical move was made by Greenspan's Fed to shift the bubble away from the stock market after the tech bubble blew up.

In 2002, the extensive lowering of interest rates in the wake of the tech bust and 9/11 actually priced money at a negative interest rate. Banks and investment houses were encouraged by the Fed to get into the game, mortgage rates fell to historic lows and homeowners were encouraged to refinance, take cash, trade up,  take on second homes and to take a plunge into real estate speculation. The flourish in activity had the effect of driving up housing prices the same way the stock market soared during previous bubbles. As housing prices rose much faster than people's salaries, encouragement in moving up hinged on the proposition that house prices would continue to move up for the foreseeable future. Greenspan assured Congress in public testimony that there was nothing to fear from rising home assets, no irrational exuberance, this time around in this Fed induced and abetted bubble.

Wall Street, on an unfettered lending and borrowing binge of its own, roared into the game by greatly widening the market for sub-prime and Alt-A mortgages through the issuance of all manner of derivatives based those mortgages.  But as we noted, it was just too profitable a game to voluntarily put the brakes on.  If ever there was a need for adult supervision, it was here. It is, of course, just another gambling at Ricks, moment when politicians exclaim they were caught unawares.

 Meanwhile in Washington, the GSE's, that is, those hybrid privately owned Government Sponsored Agencies, commonly known as Fannie Mae and Freddie Mac, who were the backers of most ordinary mortgages issued in the country, were basically frozen out of this new market for bundling sub-prime mortgages into securities, by their own regulators. Undaunted, they found a climate in Washington ready to open the ways for them to get around their own regulations by getting leave to buy up the Wall Street derivatives to hold as their required reserves. And they borrowed heavily, leveraging 60 to 1, to get at the "profits" in this burgeoning market. Needless to say, as hybrids that made them public or private when it suited, they had grown accustomed to paying their own executives massive bonuses as well, based on the same short-term criteria as Wall Street. As a Washington creation with roots back to the New Deal, they had become masters in the game of lobbying and thus in getting their way no matter the Administration.

The Bell Tolls for Fannie and Freddie

Of course, sooner or later, someone would have a reality moment and sell off some of the growing mountain of toxic waste.  That finally occurred with a couple of hedge funds run by one of Wall Streets most savvy and ruthless bond trading houses, Bear Stearns. When people began to pull money out of the funds back in summer 2007, the managers were forced to offer up their securities to the market and when Bear, itself, wouldn't fully step in, there were no other takers. Then, Bear Stearns, themselves were forced quite publicly to only sorta back up their own funds,  letting the more highly leveraged one slosh noisily into oblivion.. The emperor's clothes had now to be hung out to dry. With the sweep of a wand, less than 7 months  later, venerable, savvy, Bear, itself was toast and banks all around the world were nervously digging into their balance sheets to determine just how much waste product they were holding. True they had hedged up by buying things called credit default swaps to insure against losses but they now were forced to take a hard look at who it was that had issued these totally unregulated insurance policies and just how much in reserves there were to back them up. Bear's hasty demise, greased by Paulson's Treasury, told the sad story.

Credit ratings, based on the possible toxic reserves, were suddenly being reevaluated.  Reserves were based on the face value of securities with no market and the regulations required they be marked to market, or priced at what they might actually bring in a sale. Many swap and derivative agreement also had clauses in them that required issuers to firm up reserves as their credit ratings were downgraded.  This set off a spiral, as the entire financial world began to grock that there was no real market for the derivatives of the swaps. Mark to market, or give a real value to a security, had no meaning and too much meaning at the same time.  SEC regulations required this accounting.  The commercial banks would be forced to begin making real write-downs of billions in losses to meet their requirements. The operative word was "write downs' but these were losses that had to be put on the balance sheets. It was a signal to the other banks that their best customers might just be insolvent.

A Hosing in Housing

Meanwhile back at the subdivisions of California, Nevada, Florida, etc., as those houses in real America went into foreclosure, it drove the price of surrounding houses down as well. People who had been convinced that they could borrow beyond their means for houses they couldn't afford now found themselves owing more than their houses were worth.  Many of them had no choice but to pack up, leave the keys under the mat and take off. Home builders found themselves with developments full of unsellable houses worrying about the cost of plugging roof leaks and cutting down weedy front lawns. Their stocks tumbled as did the stocks of the big banks as it became clear they were holding mountains of debt based on an inflated value of the same sinking home market. For a while, there was denial then a belated effort by some of the big regulated banks to unwind their worst losses. Along the way IndyMac bank suffered the first public run since the 1930's as it shut its doors. The spectacle was taking an ugly turn.

Government Bail-Out Phase 1, a mere $29 billion

The problem was becoming national and then international.  Each quarter major banks around the world would announce the write-off of billions of dollars, $10 billion for USB, one quarter, $8 billion for Merrill Lynch, another. Foreign buyers were invited in to take big pieces of these International financial trophies. And then one winter weekend Bear Stearns fell off the cliff. The losses were mounting into the hundreds of billions and the Asian and Arab nouveau riche bowed out.

Here then was Treasury Secretary Hank Paulson, a Wall Street poobah, himself, announcing a deal in which the old, hard knuckled investment house that had assured every one that it was fully capitalized, would be sold off over a single weekend before markets in Asia opened on their Monday morning.  It was highly unseemly, not only wasn't there adequate capital, the entire $multibillion firm was actually less than worthless, an estimated $29 billion less than worthless! Paulson took $29 billion out of the Treasury, and gave it to JP Morgan to make the problem disappear.  And for a while, the markets quieted down.  The crisis was averted! But now there was the potentially politically damaging spectacle of a Republican Administration using public's money to shore up Wall Street, the paradigm of excess, while millions of Americans were facing foreclosure on their rapidly devaluing homes and collection agency calls on their lump sided plastic debt.

Are We Whining Yet?

For years the Wall Street wing  of the Republican establishment has wanted nothing more than to stick a stake in the heart of the two largest (when combined) financial institutions in the United States, Fannie Mae and Freddie Mac. And then  when the housing bill passed Congress before the summer recess, Treasury Secretary Paulson, a Wall Streeter himself, was given the green light to do the deed as part of a what then appeared probable bail-out of the two hybrid giants. Still, he hesitated, there was too much at risk to the broader economy.

And yet, it had become clear to knowledgeable folks who looked over their holdings that a collapse at Freddie and Fannie was inevitable.  There was a tactical question as to whether they could hold out until after the election, which seemed to be  why Paulson and the Administration kept holding back from doing the deed. A financial crisis as large as a Fannie and Freddie collapse, would certainly turn the public's attention back to the economy and probably spark the big run on the banks.
 

It's Not Just Housing, Stupid!

But in a tightrope act, the Treasury under Paulson was active in other pre-election areas as well. Towards the middle of July, the dollar suddenly jerked upward and the price of oil moved in the opposite direction. Until then, for months, the dollar had been trading in a range between 1.55 and 1.60 Euros.  As we write this, it has gone down well below 1.40.  Meanwhile, oil, which peaked near $140/barrel has fallen back to less than $95. It was as if, somewhere way behind the damask, the Administration had decided they had to bring the price of oil down before the election and had set in motion the gears that force the dollar up. By doing this, they would with the benefit of a little lag time, sacrifice gains made in exports, for what would be an immediate stop to the oil price bubble that had powered the speculation market in the early summer.

At first the strengthening of the dollar and the even bigger drop in oil prices appeared to provide a boost for the US stock market already reeling from the sub-prime mortgage crisis, but which had reached a bottom in the middle of July just as the price of oil peaked. Then the sucker started to go down!

AIG and then what?

For mortgage lenders and a number of banks and investment houses of all sizes, the subprime debacle has been an ongoing disaster. Two of the largest lenders in the market, had already gone belly up, and many observers believe that the nation's largest bank, Washington Mutual would soon follow suit. Morgan Stanley, one of the last of the 4 independents seemed likely to go the way of Merrill Lynch, in some shotgun deal and that might even have dragged down the last, Goldman Sachs, Paulson's own alma mater.

Credit, Credit, Everywhere and Not a Drop to Drink

This --the latest chapter-- in what has come to be our first virtual Depression-- was breathtaking in the number of ironies that got rolled up into what is still unfolding as the greatest rescue package of all time..

In retrospect, it might appear to more sanguine viewers that the consolidated goal of the Bush Administration, its Fed and the bankers became to strip Americans of their one asset, their house, and turn it into spending money. With a little luck, they might also have succeeded in diverting social security into Wall Street's maws.

There was a rather lengthy list of major players in the scheme all with their own, sometimes coinciding, sometimes antagonistic agendas:  There was the Administration that was intent upon replicating and outdoing the Reagan years by running up the national debt; there was Alan Greenspan's Federal Reserve that was equally intent upon experimenting with substantial deregulation of the financial markets and stimulating growth through low interest rates, there was Wall Street, with its bonus system of big insider payoffs, ready to pick up the Greenspan's challenge of "innovating" and new types of unregulated investment entities we'll lump under the rubric of hedge funds; there were the commercial banks that were being rolled up into giant national financial entities as banking laws were repealed; there were the building and building supply industries, obvious beneficiaries of a residence construction boom; there were foreign governments running enormous trade surpluses with the US looking for creative ways to park their dollars,  there were millions of Hispanics ready to risk all to cross illegally into the country for low wage building jobs, there were the mortgage brokers who sold the loans; there were, of course, the homeowners who could tap their equity and, sometimes, move up and eventually lots of new homeowners who were offered deals on homes that might never have dreamed to get into, the flippers, or the speculators who jumped in to fire the upward pressures on the market as house prices spiraled higher, and now, of course, the guy who thought he was staying clear of the shenanigans, who's just getting the mop up bill.

Pigs Get Fat While Hogs Get Slaughtered (Tom Delay quoting Texas wisdom)

The trouble with virtual depressions is that they always leak over into the real world. Recent government moves have proved once again that while the gains may be private, the risk must be socialized; on that both political parties are in agreement as are all the governments in the G8. All that bad paper sloshing around the world financial system will eventually be absorbed by the governments and the great international banks themselves, when it suits them, as the price they pay to soak up pesky competitors. The next couple of years will be full of sound and fury as the politicians realize they will have no choice but to pull out all the stops to stabilize the housing market as a first step. This will not be a pretty tug of war nor a shining day for moral hazard. But in financial crises as in war, the truth is always the first casualty.

The taxpayer, alas, will not get his Department of the Portfolio.

Bail out, Congress, Bush, Paulson, Wall Street, Economy, The Dollar, Presidential politics

Decoration of Exceptional Civilian Service

Credit the enduring demand for shows like The Twilight Zone, The X Files and the writings of Philip K. Dick to feelings of deep suspicion that many Americans share regarding the government's power to pull the strings of reality from beyond the shadowy pale. There is a toolbox for these black ops weapons of mass deception: cultural steganography, repeated leaked disinformation, innuendo, half truths and the cloak of a credible enough alternative or cover story.

In that light, consider another equal and enduring layer of the zeitgeist that succeeds in pinning the attribution of game changing events to the lone, "deeply disturbed" individual. Just as the X-Files Agent Fox Muldur could be expected to trip over "nonexistent" government installations, there is also a proven narrative for this lone actor, who having hidden in plain site, gets thrown headfirst into the churn of the news cycle and then, if the stakes are high enough, somehow eviscerated before he gets into a court of law.

Until not too long ago, Bruce Ivins, a scientist at the DOD's Fort Detrick lab, was mainly known, from what his colleagues and neighbors have to say, as a well respected and liked colleague, a family man, churchgoer, part time musician and amateur juggler. Officially, he was an award winning American who in 2003 received the highest military award given to a civilian for his work in developing a vaccine against anthrax. His memorial service at Fort Detrick, where he worked, was attended by more than a hundred colleagues and friends even as his persona was being retrofitted in the tossings of the media cauldron.

The LA Times:

At a Pentagon ceremony on March 14, 2003, Ivins and two colleagues from USAMRIID were bestowed the Decoration of Exceptional Civilian Service, the highest honor given to nonmilitary employees of the Defense Department. "Awards are nice",Ivins said in accepting the honor. "But the real satisfaction is knowing the vaccine is back on line".

Ivins, like his fellow scientists in highly secure government labs had been subjected to numerous regular background checks over the years including a post anthrax-letter attack evaluation in 2002. In a radio interview on NPR this week, Ivins' former boss at the time said he, as direct supervisor, had never been informed of what, through a steady stream of FBI leaks, has become a laundry list of Ivins' alleged aberrances.

Indeed, so much dirt was piled up against Ivins through a series of leaks and, finally, the formal presentation that it became nearly impossible to believe he would have held security clearance in a lab that was already ground zero for the largest bioterrorism in the country's history. At the time, a colleague there, Steven Hatfill was being publicly hounded as a "person of interest".

The fierceness of the FBI's character attack on Ivins seemed to have achieved its results despite the weak forensic case; on Diane Rehm's Friday roundup show, three well known and experienced MS journalists, Karen Tumulty, Ruth Marcus and Brian York, while expressing degrees of skepticism on the FBI's evidence presentation, had all clearly bought into the weirdo profile angle. None seemed to factor in that in the final year and a half --when Ivins does check in and out of various clinics and refuges-- he was being purposely put under the kind of FBI duress that few among us could withstand.

The Loner Story Trumps Evidence

It would be a very dark day for the FBI if in trying to hastily close the 7-year old bioterrorism case, it turned out, as now seems ever more likely as they move to unveil their full case, that after wrongfully persecuting Hatfill for years, they have managed to hound yet another possibly innocent man.... this time to his death.

For those watching closely, this has been yet another case where the blogosphere has played a decisive role in tackling the story head on almost from day one. You can just go over to Glen Greenwald's blog at Salon.Com for the kind of thorough, researched journalistic effort that the case deserves. Importantly, Greenwald has gone beyond casting a cold eye on the limited crime story line that is being reported in the media cycle: Greenwald has raised front and center a defining dimension left out of most stories by reminding his readers that the anthrax-letter terror campaign had far greater political impact than merely extending the horror of 9/11 to the mail slots of each and every American around the country.

Cui Bono?

The killing and terror campaign aimed at leading politicians, journalists and seeming random public --eventually it was postal workers who took the homicidal brunt-- was a major factor in heightening the public's insecurity and fear of terrorism. It was a meme that was handily leveraged by those who were bent on attacking Saddam Hussein and getting the Patriot Act passed. Curiously, it was not only a broad driver of public fear but there were overt attempts to link Saddam Hussein to the anthrax at around the same time that the Administration was beginning to publicly build its case for war; i.e, that Saddam Hussein had contacts with Al-Q'aeda and, more importantly, that he controlled a large arsenal of weapons of mass destruction; biological, chemical and nuclear that he might just be willing to hand over to them.

Greenwald reports that in one major network instance it was Brian Ross of ABC Nightly News who ran with a story based on "four government sources" that the anthrax used in the attack contained the substance, bentonite, and that this was purported to be a signature of the Iraqi biological weapons program. This story turned out to be a complete fabrication as it was later ascertained that silicon had been used rather than bentonite as a part of the process of weaponizing the powder containing the toxic bacterium.

Even though Ross and ABC News were fed a false story that clearly has the earmarks of someone trying to use the bioterrorism attack to stir up anti-Iraq sentiment, the network has never released who it was that planted the story. (For Ross's explanation go to here.)

The Lone Weirdo Story Gets Rolled Out

It was first reported (AP) that Ivins had committed suicide just days before a meeting with prosecutors for a "plea bargain". The plea bargain part, of course, makes this a loaded leak that, according to Ivins' lawyer, was, indeed, a distortion. Other stories reported that the government was gearing up for a dealth penalty case. Over time a litany of weird and suspicious behavior was attributed to Ivins, some of which we'll get to below.

But a mainstay of the new narrative --what we might characterize as the scientific or rational cover vs. the looney-did-it story-- was that new more sophisticated DNA evidence, discovered since the Hatfill fiasco-- had been used by the investigators to link Ivins to the precise anthrax used in the attack, or as the Justice Department would finally come, the day of their public accusation, to define as "the murder weapon" "solely controlled" by Ivins' lab since 1997. Unfortunately for the FBI case, it quickly emerged that Ivins' sample may have been circulated to other labs and, certainly, to other individuals. Further, the FBI is yet to say how they can even be sure they traced all distributions since anthrax inter-lab transfer records weren't formally kept back in 2001. Interestingly,in 2002, the FBI had also offered some very sophisticated scientific carbon dating evidence that the batch used in the attacks had not been developed before 1999.

In recent days since the FBI released their case, there have emerged a number of pieces authored by scientists in publications ranging from the NY Times to more specialized scientific journals raising a number of questions. For a rundown on some of those, please check here.

As for the psychopathic loner narrative, on day two of the media cycle word of a "psychologist" in fear for her life was headlined. This person, said to have charged in a court affidavit filed in Ivins' home town, Frederick, MD, that through her interaction with him as a counselor she feared Ivins whom she named as a "sociopath" ... "murderous killer" Further anonymous leaks to the media soon emerged relating that Ivins had a private P.O. box where, it was said, he received pornography featuring "bound women".

As the cycle churned, it was also revealed that he had once had a fixation for a young woman who was a soccer player and that he attended games she played and that he had once said that he would kill her if her team lost. Further, it was confirmed that Ivins had sought help for alcohol addiction and --going back to his college days-- that he had an obsession with a certain sorority, Kappa, Kappa Gamma, that could, it was stated, directly link him to the site of the mailbox in Princeton, New Jersey where anthrax letters were posted.

But by the time the FBI and the Justice Department moved into the formal revelation of their case on August 6th, reporters looking for something concrete, were raising all kinds of questions. For one thing, Paul Kemp the lawyer hired by the Ivins' family was speaking out. Even in the wake of Ivins' suicide he was beginning to counter the FBI leaks. Most importantly, he was able to point out that there was, as far as he knew, not a shred of physical evidence to link Ivins directly to the anthrax letter campaign; the FBI case was strictly circumstantial, according to Kemp.

The FBI has never been able to claim they hold any evidence placing Ivins in Princeton or even on the road at that time. As for timeliness, reporters also found that the links between Ivins and the national sorority went back to a woman he knew in his college days in Ohio and that there was nothing to connect him to any "odd" behavior regarding the organization since 1981, and absolutely nothing ever regarding its chapter's small, upstairs, office in Princeton, located some 60 yards from the mailbox.

Another leaked story that a first seemed somewhat significant appeared in the Washington Post on August 5 entitled Anthrax Dryer a Key To Probe: Suspect Borrowed Device From Lab. This story attempts to indicate that a key piece of evidence might lie in the fact that Ivins had "borrowed" a drying device called a lyophilizer that is used to produce powdered substances from the type of liquid brew in the flask in Ivins' lab. Lyins, it was reported, should not have needed such a device for his work. The next day Greenwald rejoined:

...... that appears to be completely false. Here is the abstract of a 1995 research report, for which Ivins was the lead scientist, reporting on discoveries made as part of their research into anthrax vaccines (h/t substantial). This is the method they described using:

The efficacy of several human anthrax vaccine candidates comprised of different adjuvants together with Bacillus anthracis protective antigen (PA) was evaluated in guinea pigs challenged by an aerosol of virulent B. anthracis spores. The most efficacious vaccines tested were formulated with PA plus monophosphoryl lipid A (MPL) in a squalenel lecithin/Tween 80 emulsion (SLT) and PA plus the saponin QS-21. The PA+MPL in SLT vaccine, which was lyophilized and then reconstituted before use, demonstrated strong protective immunogenicity, even after storage for 2 years at 4°C. The MPL component was required for maximum efficacy of the vaccine. Eliminating lyophilization of the vaccine did not diminish its protective efficacy. No significant alteration in efficacy was observed when PA was dialyzed against different buffers before preparation of vaccine. PA+MPL in SLT proved superior in efficacy to the licensed United States human anthrax vaccine in the guinea pig model.

The Post had failed to report that Ivins had obtained the lyophilizer through a proper requisition and that he had made no attempt to hide it from his coworkers in the lab, who, one would suspect, would have soon come to a heightened level of suspicion as the terror attack spread.

As for the so-called psychologist turned witness being reliable: Here's the August 6 account by the Washington Post:

The counselor he saw for group therapy and biweekly individual sessions, who would eventually tell a judge that he was a "sociopathic, homicidal killer," had a troubled past. Jean C. Duley, who worked until recent days for Comprehensive Counseling Associates in Frederick, is licensed as an entry-level drug counselor and was, according to one of her mentors, allowed to work with clients only under supervision of a more-seasoned professional.

Shortly before she sought a "peace order" against Ivins, Duley had completed 90 days of home detention after a drunken-driving arrest in December, and she has acknowledged drug use in her past.

In a 1999 interview with The Washington Post, Duley described her background as a motorcycle gang member and a drug user. "Heroin. Cocaine. PCP," said Duley, who then used the name Jean Wittman. "You name it, I did it."

It takes a specialized lab to weaponize anthrax powder. An opinion piece was placed in the Wall Street Journal by a biological war specialist who had been part of the UN team that investigated the Iraq program in the lead up to the war. The author, Richard Spertzel argues: Bruce Ivins Wasn't the Anthrax Culprit, pointing out the technology required to produce the attack powder was of a much greater difficulty than might be carried out by a single individual working in even the most sophisticated program. Ivins' lab, with its vaccine objective, was not set up for that.

Spertzel's piece seems to punch a gigantic hole in the FBI's case. The FBI claims that Ivins would have cooked up the powder while working late in his own lab alone and that his activities pulling off this very difficult feat had gone unnoticed somehow by his fellow lab workers. He might have had a drying machine but Sperzel's piece indicates that getting the toxic liquid into a solid was hardly the difficult part of the weaponization process. Other sophisticated instruments would have been needed to "mill" and treat --hence the silicon/bentonite-- the powder to get it into a volatile form that could get into a victim's lungs. Once in this very deadly state of volatility, there is an immense handling problem for the perpetrator(s) to overcome as the envelopes are packed, sealed, transported and deposited into the mail system.

On August 6th, targets and victims' families, including members of Congress were more fully briefed on the case as the prosecutors came before the microphones to announce that they are convinced that Ivins could be proved guilty and that he, a lone, estranged, psychologically disturbed perpetrator acted alone. Formal documents were presented to the public including papers submitted to the courts by the FBI as they sought warrants in the case. What many people following the case were watching for, was some concrete evidence linking the powder, handwriting, envelopes, movements, etc. to Ivins.

Would the FBI be able to show any trace of the anthrax mailings that also had Ivins' DNA on them or that he had made the trips to Princeton, or even minute traces of the powder in his home, automobile, etc or anything else, physical for that matter?

What emerged with great emphasis, instead, was a claim that Ivins in 2001, in the period between 9/11 and the anthrax attacks had sent an email to a colleague that talked of Bin Laden and seemed to use language somewhat reminiscent of that used on the notes that accompanied the poisonous powder. Ivins, it was said, had expressed fear that Bin Laden might have access to anthrax or sarin nerve gas and that he was an an enemy of the Jews and America.

As the investigation played out, the FBI is said to have put intense pressure on Ivins and his immediate family, according to a NYT August 5 article: Pressure Grows for F.B.I.’s Anthrax Evidence

They had even intensively questioned his adopted children, Andrew and Amanda, now both 24, with the authorities telling his son that he might be able to collect the $2.5 million reward for solving the case and buy a sports car, and showing his daughter gruesome photographs of victims of the anthrax letters and telling her, “Your father did this,� according to the account Dr. Ivins gave a close friend.

We're reminded that this is not just any criminal case where the prosecutors zero in on a weak link and try to bring a brute force case backed by character assassination (alcohol, porn, breakdowns, etc.) even while lacking any physical proofs tying the defendant to the crime. In this case we are talking about one of the most important chapters in our recent history that paved the way for an unprecedented assertion of Executive Branch power and the lead up to a war whose costs will be felt individually and collectively for decades. A weak case that might just get over the very low bar of just getting you to trial is hardly enough.

This case needs to be looked at by Congress and perhaps even by an as close as can be hoped for independent Commission. Even as it is hard to put too much stock in the end product of any of those processes, it's important to find out under oath who back in 2001 leaked to ABC and to others like John McCain, who went on Dave Letterman's show at the time and mentioned that Iraq just "may" have been the source of the anthrax powder. Others have reported that they were tipped off just before the anthrax attacks began that they should go to their doctors and request prescriptions for Cipro. Richard Cohen of the Washington Post is one person who reported such a tip from someone he knew in the government. Experts like Spertzel have to be called and records, including the complete FBI files showing the results of security checks, polygraph tests, Ivins' colleagues' testimony and other trails they pursued that didn't pan out, have to be subpoenaed.

As Agent Muldur would say: "the truth is out there!"

The Apotheosis of Deal Making

For Ben Bernanke and the Fed these have been bare knuckle flying days. Never has the dominant central bank moved so radically into a new orbit as has the US Fed this year. Conversely, for the Media this launch into monetary outer space has been greeted with the kind of yawn that might have been reserved for a weather balloon.

Never mind the Bear Stearns rescue that was done so hastily that it appears no one bothered to insist that JP Morgan Chase return future windfalls estimated to be in the billions against guarantees the Fed made to get the deal done in a weekend. The Bear deal did close to end out a very perilous week and what looked like a potential domino game of other falling investment houses --Lehman Brothers was most named as the next-- was stemmed, at least for the time being. This respite, coupled with recent moves up in the markets and the dollar, has gained Bernanke street creds and has kept the flak to a minimum, and directed mainly by capitalist purists, long used to not being listened to. Politically, it also has served as leverage for those who would rescue the millions of underwater adjustable mortgage holders.

While it's true that the Fed's rescue of an important "investment house" crossed a bright historical line, it was also widely recognized that the banking world itself has changed so radically in the last decades as deal making has replaced the sweat and toil of agriculture and manufacturing, that the commercial banks and the investment houses overlap in the kind of credit issued and the kind of paper they accept either as "insurance" or "assets" to back their financing of deals. And it wasn't just Bear and Lehman Bros. etc. who were taking enormous losses, it was also the world's largest "commercial" banks; i.e, Citi, Deutsche, UBS, HSBC, etc. who were announcing multibillion write-downs as far as the eye could see.

The lesson to be drawn is that the Fed and the key European central banks (ECB, BOS, BOE,) have made it abundantly clear that no rash of bad deal making, no matter how egregious the imbalances created are, will be allowed to fail. The Bear deal made headlines, that couldn't be helped but a much more radical plan to create a superfund for bad debt that could go to $800 billion by year's end passed unnoted!

TAF, the Fed's Superfund for Toxic Waste

Last December 17, the Fed announced that it was about to offer US Banks (This was later expanded to include the Bank of Switzerland and the European Central Bank) a deal that they couldn't (and wouldn't) refuse. In exchange for the highly discredited --we prefer the word, toxic--mortgage backed securities on their books, the Fed would offer the banks at face value highly secure US Treasury notes. This deal was called TAF, or Term Auction Facility. In exchange, the Fed charges only 2% --slightly below market, that is, for paper that would probably mark to market at an average discount of 20%-- in interest.

In essence, to get around reserve rules and allow the banks to keep lending, the Fed is taking them off the hook for the bad paper they issued and bought and for the collateral they received from hedge funds that were gambling in the real estate bubble that was fueled by these mortgage backed securities. Remember, the mojo that fueled the rush to lend anybody standing (Chicago voting rolls had better actuaries) with the dough to get into their dream house, came directly from the red hot mortgage backed security and credit swap markets that looked great on the balance sheet of the hedge funds, generated huge annual bonuses for the poo-bahs, and eventually spread as far as the coffers of small towns on the banks of the Norwegian fjords.

So, once again, now that the party is over, the bonuses banked, the private jets furbished and the summer and winter palaces built, the Fed has rushed in to sweep up Wall Street's left over garbage. However, quite significantly, since this was a very big party, even the limits of the US Federal Reserve may be stretched by the time this plays out.

The Fed had been buying up Treasuries for over a hundred years and before this latest rescue operation now in full stride, it had managed to accumulate a war chest of over $800 billion. It's more than a little notable, that by early May, they had already drawn down that pool by more than $150 billion.

In May, Bernanke and crew decided to double down on their bet when they realized that this was not just a mortgage crisis but instead a major debt crisis that includes consumer and student loans as well as automobile credit. To meet the threat that Americans might start walking away from their gas guzzlers and piles of credit card debt, they agreed to expand the definition of eligible paper beyond residential and commercial mortgage backing to anything with a rating above AAA/Aaa asset backed securities. Remember, one of the sub plots of the whole greedy asset-backed security mess, was the way the bond rating agencies decided to jump into the party by trading good ratings for expanded business. In this pool, AAA/Aaa could mean practically anything, even used cars!

Bernanke's big bet is that the failure in the real estate markets will have begun to normalize by the end of the year. And for this to happen he has managed to buy time by putting his $800 billion stake on the table where everyone can see it. For the moment, this has had a calming effect on the stock market and even has slowed the decline of the dollar.

By the end of the year, this hiatus may look more like a pause between storms and if housing prices continue to fall, job losses accelerate and consumers pull way back , it's quite possible Bernanke will have blown the entire pool of Treasurys built up over a century in just a single year. Little wonder, then, that he has given his own encouragement to Congress to move in its rescue of the little guys struggling to hold onto their houses. Too many empty houses on the market could tip the balance.

But there are headwinds that could counter the stimulus that comes from artificially low interest rates, government supported mortgages and a giant green light for bankers to continue to lend. For one thing, a majority of the houses that need rescuing are located in exurban locations. Commuters from these locations where just about everyone has a long commute, often driving the de rigeur SUV or pick-up are getting doubly clobbered as they fill up their tanks and do the weekly supermarket run. Also, a number of the most vulnerable no-money-down mortgage holders were working in the then booming construction industry. In order for prices to even bottom out, new building will remain at a standstill for a long time to come. The combination of a slowdown and the kind of inflation that hurts consumers most, also spells trouble for the commercial building market as company's shrink their staffs. The Fed and Congress's best efforts may not be enough to convince people to keep paying for homes, much less cars, they can't and never could afford.

In CreditWorld, Leverage is King

Most Americans not only do not have savings but most have accumulated large amounts of plastic debt as they attempted to live better even while struggling to keep up wages and pay for health care, fuel and food prices that have only accelerated even as jobs get harder to find.

By lowering interest rates to artificial levels for the second time in five years --to make its TAF subsidy less conspicuous?-- the Fed is also telling savers that they are losers in this new economy. There is little wonder that people who sat on the sidelines while their neighbors were tapping their houses like ATM's now see themselves as the losers. In CreditWorld, it's obvious that Aesop's Tales get flipped upside down.

We have been in bubble mode back since the Keating Five. Since then we have had a succession of bubbles all fanned by Fed policies. We can offer some ideas on what the Fed will sacrifice next to keep the party going one more time.

The Dollar Has No Clothes

Where the buck stops and starts, erosion of the world's preeminent store and measure of value, the US dollar, can serve as a metaphor for the way we grok an expanding, inter-related sphere of critical but slow boiling crises like: energy, health care, population, food, water, climate change, human rights, personal freedom, trade imbalance, wealth division; etc.

FUD and Band-Aids

The dollar is, after all, merely the material meter with which we value all our goods and labors. And yet the precipitous shrinking of this measure, of anywhere between 50 and 150% over the last decade against basic materials has all but escaped mention in the agenda-driven, zeitgeist whirlpool we call the Media. Obviously, once again, it serves no one's agenda to call attention to this inconvenient happening just as it appears to serve no one's interest to understand the consequences of peak oil in an energy driven world economy.

We can offer some "politicized" explanations for the inconvenience, like the cost of a long war to folks who want to expand it to Iran, the war's impact on the price of oil, the insistence on borrowing from foreigners holding excess dollars-- to offset government deficit spending and soak up the overhang from the trade imbalance, the fostering of easy credit needed to jack up the consumer component of the economy to over 70% even as wages stagnate and manufacturing and services are outsourced, the fudging of the CPI to grossly hide inflation and the loosening of controls on how the financial sector can create money.

Here in Dymaxia, we have no magic ways to tap into pools of truth. We are as unarmed as you, dear reader, to insist on what gets talked about on the loud megaphones that, when blared, reach everyone. So, when we try to discern agendas; we mainly revert to the "who stands to gain" approach.

In TV-land we notice there are rarely analysts who insist that borrowing a trillion dollars to fight a war has a negative affect on the value of our currency. There are rarely analysts who make plain that the war in the Persian Gulf is about the control of the flow of petroleum even as it is so completely obvious it sometimes shows up as a slip of tongue by some soon to be sorry politician. There are rarely analysts who make clear that it has been Iran, that has been the greatest beneficiary of our sorry adventure in Mesopotamia. It even took forever for anyone to note that Bush's brain was running on empty even though nobody had ever heard him successfully string three words together.

Time Outs are Ugly

The blogosphere, with all its cacophony, is the repository of an enormous pool of gray matter and hands-on knowledge. One only need think about Wikipedia, warts and all, to grasp its potential to gather information in a cooperative endeavor. But for all its vitality it is a David in the face of a massive Goliath. The whole sorry run-up to the war and the fool me twice rant on the success of the Surge has shown just how a repetitive Media acting in unison can drown out wiser voices.

China, as well as many other more or less totalitarian regimes, has gone further in managing to suppress activity on the Net. Likewise, here in this country, the major internet service providers (led by AT&T and Verizon) have been waging a legislative battle to gain control of the Internet's pipes they manage and parse them into fast lanes (for paid media stuff) and slow lanes (for everybody else). Advocates for Net Neutrality understand that the speed in which a web page, or say, a YouTube clip, is delivered to a browser can ultimately have a major impact on users' preferences for competing info sources. Lest we forget, here's a brief list of YouTube moments that have, for better or worse, had significant weight on this election: Jeremiah Wright's "God Damn America" rant, Hillary's Bosnia misinformation episode, Allan's Macaca Moment (yes, he was an insider conservative pick), McCain's confusion over Sunnis and Shiites, etc.

Ultimately, a sure sign our experiment in democracy is failing is when citizens continue to vote against their best interests. There is, it seems, one tried and true way to make this happen, through cacophony and confusion that elevates wedge issues far above their significance and neutralizes inconvenient facts and truths. Imagine pointing out to people that the price of gasoline or their basic foodstuffs hasn't really gone up so much as the dollars we use to pay for them have gone down. Imagine how that would affect the mass psychology! Instead the story line goes: India and China are now getting richer and they are buying up all our excess petrol, rice and corn. Shouldn't we be wondering how this cosmetic explanation gained such mainstream currency?

Peak Oil?, When's the Last Time You Heard About Peak Oil?

The great issue of our moment, is the nonrenewable fuel crisis. It shapes the most fundamental aspects of our government policies in enormous ways that then need to be obscured by those who would allow us down this --for them very profitable-- path towards the most momentous crash this civilization has ever known. If you look at the War as an extension of our status-quo oil policy, and the cost of maintaining that war at its present inconclusive level and the cost of borrowing to sustain that and factor that in as a direct subsidy to petroleum, the price we really pay per barrel goes ballistic. Now, add in the cost of keeping the Persian Gulf open for shipping, the naval and air power, control and command structures for the region and all the unintended consequences that grow out of our preoccupation with keeping the spigots open, then factor in the burgeoning cost of global warming, not to mention road building and maintenance and you are talking about the greatest subsidy in our history for an ultimately declining industry that will, by the definition of its finiteness, only fail us if we insist on remaining addicted to its supply.

What is worse, as long as we insist upon basing our energy mix around imported oil, we are sending more dollars out of the country into the coffers of the very same countries we feel most threatened by! This, we submit, is collective insanity of the first order and it it doesn't convince you, dear reader, that something very fundamental in the way we process information in this country is entirely broken, then, we suppose, you are reading this for laughs.

Corn to Ethanol, a Metaphor for our Time

It might take chutzpah and confusion to get here but once in Washington, the real money is in the FUD and band-aid businesses: take the current economic crisis-- the product of serial bubbles and across the board excess borrowing from the government down to the lowliest citizen. As a remedy for these excesses, the President announces, without worrying how it might be paid for, that he is sending everybody in the country a check that he promises is sure to kick-start a new recovery to the "slowdown", Congress funds a way for communities to buy up foreclosed properties, the Fed has its back window open soaking up the financial waste products on the books of the major banks and brokerages and it's printing presses running over-time to serve up cheap (when you factor in inflation, interest rates are now negative) money for the next bubble, farmers are paid to turn corn into ethanol even if the process absorbs as much energy as it produces and food shortages pop up around the world, and the Presidential candidates promise programs or further tax cuts, with no way to pay for them. "Got a Problem?, we'll lower a tax!

You might think that this money for nothing, kicks for free approach to solving what is essentially a borrowing crisis, might have raised the curiosity of those who tell the national narrative. How, they might ask, have we found ourselves in the position of facing lower salaries for workers, rapidly rising food prices, gasoline prices that might have showed up in some SUV driver's nightmares a few years ago, and a dollar that is so anemic that travelers abroad have taken to complaining they can't afford un Grand Mac not to mention a coffee and croissant. Watched or not, pots will come to a boil, and now it seems we have come to one of those moments where the steady stream of bubbles in the weak dollar kettle can't be ignored. Of course, as they ignored the rise of CO2 in the atmosphere and its effects, or the decline in ordinary peoples' earning power over the years, the pundit class continues to prate, as if they were playing pin the donkey's tail on their own asses.

Connecting the Dots

First off, there's the unavoidable price at the pump that's brought one of the least enjoyable aspects of traveling in Europe to our own pump islands. You no longer have to imagine paying over 120 bucks to fill up your tank; it's enough it seems to make some people want to give up a job that requires a 150 mile daily commute in their Tundra, if they could only find another. No wonder then, that people are tucking the keys under the Hummer's driver side mat and walking away from that 5000 sq. ft. dream house now 20 or 30% under water, with heating and cooling bills to match.

For that matter, has anyone noticed that while the price of gas was going up, the value of the US dollar was somewhat symmetrically falling when measured against food staples, raw materials, precious metals or even other trading partner currencies like the Euro or Yen?

Of course, we are not on a gold standard, that is, there is no official link between the metal and the dollar but quite curiously we can see that even though the price of oil is actually quoted in dollars, the sellers of that black liquid are getting no more today, if measured in gold, then they did five years ago.

Once upon a time, there were, in more primitive days, political positions that would argue in favor of a weaker or stronger currency. Populists, remember William Jennings Bryant and his famous Cross of Gold speech, would argue for the government to soften its golf restraint to print more money to stimulate growth, Conservatives, with notions of protecting their net worth, argued against the notion. Later it was said that a cheap currency protected both industry and worker by cheapening exports and making imports more costly. Significantly, it was Richard Nixon who broke off the last link between a precious metal --in this case, silver-- and the dollar, thereby making the American printing press, the world printing press. Today, a weak dollar benefits the balance sheets of multinationals who can shift resources in and out of markets and magnify the "growth" of foreign profits by converting them, on paper, at least, into cheaper dollars. For instance, last month, it was Ford's turn to show a profit abroad that magically out-totaled its losses in the US.

For those of us who measure our spending ability in dollars, it is hard today to make the argument that a less valuable dollar has some beneficiary impact. The old saw that currency devaluation acts as a stimulus for export trade has a very hollow ring to a society that has outsourced most of its manufacturing capability to other parts of the world. A low dollar may be helping China and India to establish markets in the "strong" Euro and Yen zones but it has done little or nothing to offset the ever growing trade deficits being run up in this country.

Curiously, outside of Ron Paul's run, none of the present candidates talks about the impact of the dollar's value on all us and so while broadly "the economy" is perhaps the major issue, the role our currency plays appears to get short shrift. Paul, though somewhat coherent, probably has done little to broaden the discussion. By putting a lot of focus on the gold standard, which only rewards gold producing countries, and combining that with an unreal role for government, Paul turns off most progressives and fiscal conservatives who might otherwise be repelled by a weak dollar policy that punishes all of us with savings and earnings in dollars while rewarding multinational corporations that can hedge their holdings abroad and further gimmick earnings.

There are many reasons why the weak dollar has been shut out of the national political discourse by both parties; it's just plain inconvenient since: it makes our assets less valuable in a global economy, it makes it advantageous for players outside the dollar zone to purchase US assets, it tilts corporate power to companies that can do a large part of their business outside the dollar zone and most importantly, it boosts the prices of staples and raw materials where there is global demand. Like the recent rise in oil prices vis à vis the dollar, the same thing is happening with the price of rice, corn and wheat, the basic food staples the world depends upon. And like petroleum, the food story has a raft of causes. Being somewhat simple in nature and style, we here in Dymaxia, will make the argument that the price of food, like the price of copper, or platinum or uranium has followed closely the ascent of the price of oil (and, of course, the symmetric decline of the dollar).

It's the Dollar, Stupid

We are left to wonder why the two Democratic candidates have not seized on the weak dollar as an argument against McCain and his supply side bromides that will lead to further deficits as far as the eye can see. One supposes they are afraid of being ridiculed the way Paul was made to suffer. Ultimately, this may be a mistake because there is a visceral component to the issue. We in this country are being beggared in order to protect global hegemony for our great global corporate entities. In fact, this is actually and certainly, a potent enough issue, if past currency crises are examples, to be successfully used as an argument for pay as you go government!

Many of the most successful investors over the last six years have bet against the dollar. They looked at the supply-side (debt-fueled) script that Bush was intent on playing out, they looked at the historically unprecedented shift of manufacturing capability out of the US to Southeast Asia that insured an ever increasing trade deficit, they looked at the ensuing shift in demand for basic commodities including food and energy, they looked at the laissez-faire postures coming out of Greenspan's Fed, and finally, once underway, they concluded that the cost of the Iraq War, particularly as it was funded off the books, would further weigh on the dollar, the world's reserve currency.

We are far from our Zimbabwe moment --the rest of the world is paying a price for the weak dollar and will ultimately intervene to support it-- where it takes a wheelbarrow of currency to buy a loaf of bread but we are beginning to see some weird distortions: the price of basic foodstuffs has climbed throughout the world. This is partially due to weather changes, they say --the rice crop in Australia-- and partially due to increasing demand, particularly in Southeast Asia, and partially to the use of corn for ethanol production but also to the decline of the value of the dollar. The US is a major grain producer, a weak dollar would indicate that grain becomes cheaper when purchased outside the dollar zone. This is not the case, of course. Instead, like oil that is also denominated in dollars, food grain prices have climbed as currencies in the raw materials exporting parts of the world have not followed the US dollar down, countries like Canada, Australia and New Zealand.

Because so much of our food is packaged, manufactured product, the raw material component price has not had such a startling impact as say, the price of corn has had on Mexican families who rely on the grain as a key part of their diet. There have been demonstrations in a number of countries beyond Mexico including most recently violence in the streets of Haiti. It is possible then to foresee troubled times around the globe because of a devaluation in the US.

As we've also often noted, paradoxically, the oil rich Arab states, the Chinese and the Japanese have a vested interest in supporting the dollar regime, even as it appears to be falling apart. This is because they are major holders of the dollar in the coffers of their banking systems. They could precipitate a world financial crisis that would make the present leveraged banking crisis feel like a warm breeze in the eye of a hurricane. To be sure, they are all working overtime trying to figure out the least destabilizing ways to lower their dollar positions. We can look for the Chinese, say, to be out seeking stakes in entities that own and control raw material assets and distribution.

Another factor driving the value down is our artificially low interest rates. Money from abroad that might normally flow into the US for safe harbor bond purchases, will instead go to places where interest rates are higher. Today, the rates set by the governing central banks in Europe, Australia, New Zealand and Europe are about where the US was before the Fed rushed in with its record setting cuts. Low interest rates make it cheap for companies to borrow and thus stimulate business activity. What's dismissed is that low rates hurt savers and retirees who have managed to be thrifty and are now living off those savings, even as much as a cheap dollar does. Together, there is a double whammy of inflation and wealth erosion.

Miraculous Recovery

There are some out there who are already heralding that we are on the brink of recovery in the US, even as we are just entering into this Recession. After all, the stock market has performed well this month and the unemployment figures don't seem so bad. Our guess is that unemployment and job loss will be revised upward in the future as they are measured by means that tend to obscure the facts at the outset and end of cycles.

What that would mean is that the financial system has managed to absorb $100's of billions in bad paper, that construction workers who have lost their jobs have some how ended up on their feet, that ordinary Americans, no longer able to borrow against their houses, are bellying up to the bar and paying more for gas and food and still yet are able to keep the 70% of our economy that depends on their consumption on track for growth, that continuing job losses in manufacturing are being replaced elsewhere, that interest sensitive savers are able to absorb the hit of low returns, that high diesel costs are not driving up retail costs and that continuing job shrinkage --we need 150,000+ new jobs per month just to keep pace with population growth-- are all being overcome by some miraculous happenings off the radar somewhere.

Lately, of course, moral hazard has become in the popular press something associated with the ongoing financial crisis. Roughly defined, it invokes the requirement that investors, fully rewarded for their wins, must also pay the whole price for their haircuts. And so, it's not bad behavior, per se, that must be reckoned to the full but behavior that results in material loss, wanton or not. In this latest crash there has been no shortage of the usual caddish behaviors: salespeople were spiffed to get customers into financially disadvantageous loan agreements, borrowers faked their personal financial data, rating agencies put their AAA imprimaturs on toxic paper, bankers created an insatiable demand for loans they could package and pass on, "counterparties" cleaned up writing default swaps they could market, regulators looked the other way, brokerages shorted the securities they themselves issued to their own customers, hedge funds borrowed heavily to get their bets into the game, bankers made extreme loans to hedge funds, bankers created off the-book entities to issue suspect paper, etc.

And, of course, when this rash of bad behavior went from endemic to epidemic, the usual calls for government intervention went out, first by the general public when foreclosure signs began to sprout in their neighborhoods like mushrooms in a rainy Fall and then in the weightier pages of the WSJ and FT when it became clear that the great investment houses, themselves, had been left swallowing their own toxic waste and melting into the ground like a serial Three Mile Manhattan, London and Basil. As fast as the Fed and the ECB pumped "liquidity" into the markets, the faster the banking system seemed to fuse to a halt. Something more radical than winners and losers was occurring, hence the concerted move to a bail time-out for the whales left flapping on the beaches.

For the cynics here in Dymaxia, it came as no surprise that the bailouts would extend well beyond the former limits of the commercial banks all the way to the free-market precincts of the hedge fund industry. After all, by definition hedge funds are highly leveraged entities that do their borrowing from their willing commercial and investment banker brethren. We also remembered Ben Bernanke's famous "helicopter" speech in which he vowed to keep the government printing presses going day and night to supply whatever money might be needed to keep the system off (or on, we couldn't recall) its knees.

To ourselves, laying down the editorial pages of the Wall Street Journal, we mused, moral hazard is about as quaint a notion today as the characters in Austin's Sense and Sensibility might have appeared to Choderlos de Laclos, the author of Les Liaisons Dangereuses, had he lived long enough to contemplate them. In the end, it was the chronicler of another gilded age that seemed more appropriate, and so we deferred to the much maligned Marquis de Sade for our contemporary standards for hazardous morals.

As we noted in our last posting,
Pushing on a String of Discontent: Bernanke's Tale: Bernanke's Tale, the Wall Street executives who led their companies so deeply into this quagmire, would surely not admit, even under oath, that the good performance their companies produced as the pyramid scheme unfolded, and for which they were so richly rewarded by cash and stock option bonuses, had little or nothing to do with the hard landings their companies were experiencing today. "Who could have predicted," their chorus lamented, "that the unprecedented growth in home equity and home ownership, would have resulted in a bursting bubble?" And like all farces that recount the foibles of the Gods, economists, the regulators and the mainstream press, echoed in polyphonic tone from across the stage, "who would have predicted"?

And so, in keeping with the moment's theme of decadent farce and moral hazard, we asked rhetorically, will those entities that are now rushing in to save the remnants of Bear Stearns (it was too late for these guys who, it appears, were so swimming in toxic waste that a special $29 billion fund had to be set aside by the Fed to soak it up) and most recently Lehman Brothers (they've already availed of $4 billion in back-up spare change) be asked to take back some of the bonuses that were paid out to top executives during the recent up years?

The answer, of course, is that it will take another round of heat, at least, before anyone begins looking for a couple of high level guys for some communal bloodletting. After all, James Cayne, the Chairman and CEO at Bear Stearns, we hear from those same journalists who continue to insist on calling that company's forced by-out, a non-bailout, has paid dearly for the loss of equity he suffered. His shares, they remind us, went for $10 a piece when just a couple of years ago they were trading at $171. We are, by this light, supposed to suffer for the good chap who like a Long Island Nero, played bridge while his firm and his bonus shares sank into the clutches of the goodly fiends at JPMorgan Chase.

Quaint, we say, because today's gilded age has funneled so much wealth into the hands of this super class that counts its yearly earnings not in the hundreds of millions but in the thousands of millions of dollars even while the tax rates paid by this über group are less than those paid by the lowest wage earners. Last year, a tepid attempt by Congress to reckon hedge fund manager earnings as taxable earnings was quickly shunted to that special place on Capitol Hill where all high minded efforts go to be stored, like Walt Disney's body, for a better day.

Speaking of which, the distortions created by economic policies that hide the cost of war, rely on declared and hidden deficit spending, encourage plastic-based consumerism, personal credit extension, negative real-term interest rates to discourage saving, and money printing dollar devaluation are now emerging like the dead from the earth on Judgment Day: basic commodities, like food and energy costs ripple upward even as economic activity slows, the banks, unsure of the value of their own securities, refrain from lending and wages continue to fall for the vast middle even by normal definitions-- measured against wages in the Euro and Yen zone, the loss in buying power for the average American over the decade has accelerated in a way that is astounding.

The housing bubble, the ultimate, live today, pay tomorrow spree, where anybody could borrow as much as he wanted, was the antidote to the sinking of American economic hegemony. And yet there is also a Main Street equivalent to the moral hazard story that has appeared, like a throwback to some cloth coat Republican era, both in George Bush's and John McCain's rhetoric as they have been forced to grasp the systemic and political implications of a housing bubble meltdown: never mind the dastardly builders, loan brokers and debt packagers, what about all those obnoxious speculators you used to run into at every wedding, first communion and bar mitzvah party? All of them had just successfully flipped a whole bunch of condos somewhere or other, turned their log cabin into a country manor house and had all become safely installed in their suburban equivalent of Monticello. Are these the guys who need to be bailed out of all their flimsy loan deals?

As for those Members of Congress who are supposed to be working to get aid to all the poor folks who just happened to get sucked into the housing frenzy at the wrong moment or through devious paper sleight of hand (remember those spiffs that pulled brokers toward selling loans with trap doors built in) , we wish them the best or luck. They will need every ounce of backbone they can stiffen, or, not only will the lion's share go to the same scoundrels who partied on the way up (NYTimes on the Senate version,
Big Tax Breaks for Businesses in Housing Bill) but also to the shareholders of the two big once quasi governmental agencies that were designed during the New Deal to save housing during that desperate period, Fanny Mae and Freddy Mac. The proposal on the table would build in government backing to expand Fanny and Freddy's capacity to lend to soak up bad mortgages designed to spin out of control with a new crop of fixed-rate models to homeowners even if their present houses are already underwater.

Beyond the personal debacles, a falling housing market that might lose up to 40% of present value is predicted to cause the kind of Main Street financial chaos that would spread beyond containment. Of course, the new plan would require the Federal Government to provide guarantees for all these new underwater loans in case homeowners just plain decide to walk away from their homes in search of greener pastures. It needs to be noted that here, once again, the backstop is going to be the already battered dollar, and the recipient agencies, though hybrids of a sort (Fannie, for instance, uses its quasi status to avoid paying local property taxes for its headquarters in DC), these are private stock issuing entities just emerging from bookkeeping scandals that fortified private industry level salaries and bonuses for their executives.

You already know that the US finances a very expensive war by printing dollars off the books (which no doubt explains why billions of them have just disappeared into the Mesopotamian underground) runs a built in deficit that grows from year to year and buys ever more from abroad. The Federal Reserve is providing hundreds of billions to backstop a financial system that has taken shock one, the blowback from the sub-prime crisis but may soon face the prospect of seeing the loans and counterparty paper issued to "insure" the equally speculative business of highly leveraged buyouts come a cropper as well. This Recession is like the new year, hardly a baby still. Prolonged recessions can be trouble for a number of corporations under normal circumstances but for leveraged buyouts paying out enormous debt loads, a few bad quarters can be as toxic as the sub-primes were for leveraged financial giants like Bear and Lehman Bros.

We recall that up to a short while a ago, LBO's, or leveraged buy-outs, were all the rage on Wall Street. Last week, one of them, Linen and Things, with 17,000 employees around the country, announced they were shutting their doors. With gas prices expected to hit $4 a gallon this summer ( it's already there in some places, while the Diesel fuel that truckers rely on has already passed that line across the country), building activity down, and the price for food hitting the roof, it's hard to believe that Linen and Things will be the only stretched out retailer to bite the dust. As the Chinese currency, the RMB is inevitably pushed up to counter the worldwide inflation in raw materials, the price of retail goods in the US will have to move with it, despite what the round smiley face signs at the end of the aisle tell us.

Those who argue that this Recession still has a long way down to go, certainly have more than their share of arguments and data to back it up. Watch out!

In other words, while we were staging this most excellent pyramid game, no one complained about a hundred million here or there, not even our stockholders; so now why shouldn't we be paid a little extra for managing the hard times we are going through? In effect, "you really want to know where the bodies are buried, then get real!"

But for just a moment, never mind the titans at the top of the world, that mentality works on regional levels as well.  Here in Washington, a local marvel at the crest of another bubble when the capitol region was fast becoming a tech Mecca, Friedman, Billings, Ramsey, or FBR as it's known, have been on a nearly consistent losing streak that has seen practically every investment they've undertaken this millennium, lose money. Just recently their board announced that they (the founders) were awarding their top executives (themselves) a massive bonus-- one supposes to keep themselves in place so they can do even more damage.

Here's what Steven Pearlstein, a columnist at the Washington Post had to say on that account in his Friday column:

"But for pure chutzpah, nothing tops the recent announcement that, following a year in which the company posted an operating loss of $740 million, Billings and three other top executives were awarded bonuses and stock grants worth $30 million, at the time equal to nearly 9 percent of FBR's market value."

The Ultimate Bear Trap

But, of course, last Friday was different. it marked a clear point of demarcation, as the government moved from mere propping and backstopping to the next big step in this menacing financial unraveling. Friday saw hundreds of billions pledged for the first phase of a pure and simple bail-out for one of Wall Streets bare knuckle gangs. The Fed was now taking mortgage backed securities no one else wanted as loan collateral, albeit for 28 day loans, not for a commercial bank, as comes under its mandate, but instead to ward off the collapse of a brokerage and trading business that specialized in mortgage-back finance.

As you no doubt remember there was an incident back last summer when a couple of hedge funds managed by Bear Stearns -- Wall Street's fifth largest investment and clearing businesses-- that had borrowed large sums of money to invest in (actually, soak up paper sitting on Bear's books) mortgage-backed securities, ran into a reef.  See our piece, The Big Crack

It was the first major extrinsic sign that the great easy money home lending bubble was about to burst.  Of course, anybody looking should have foreseen this outcome as the pyramid scheme finally ran out of suckers, in this case some of Bear Stearns own high worth customers.

Every so often there comes a point when a downdraft causes Wall Street and Main Street to collide: right then down on Main Street people's wages were standing still even while they were gobbling up high priced homes for themselves that had doubled or trebled in price over the course of a few short years.  The easy lending had also fostered a pack of players looking to "buy" (no money down, no questions asked) and flip neighboring properties as they came on line. And if you wanted to know how, all you had to do is look at the ads in your local paper or even check your mail every day. There was no shortage of banks and brokers who were bending over backwards to lend you money against the accrued value in your own house as they urged you to buy a newer, bigger one.

But never mind the collateral, the money kept getting easier: first, you didn't need any money down, so you could borrow up to 100% or the purchase price, then you didn't need to pay back any of the principal, then not even at the going opening mortgage rate for the first couple of years and finally, you only had to pay off the teaser interest part of the loan.  Finally, the word got out that you didn't really need to prove you had a job or reliable income to get a loan, you could just make up an income figure and move the family into your Mac-mansion as fast as you might get a pizza delivered there.

The Huge Sucking Sound from Wall Street

There was, it seemed, an uncannily huge demand to underwrite these mortgages no matter what shape or form they came in, and it came all the way from the heights of Wall Street. For, with the ink still wet on the loans, they'd be immediately taken off the hands of the issuing banks and, with a special kind of magic known only to these financial wizards, crammed into some three-letter financial gadget (ABS, SIV, CBO, CLS)  that would pack them together with a mix of other peoples' loans, and send them off as fodder for this new, largely unregulated and soon-to-become massive, shadow banking system.

The Fed's easy money policies, laissez faire attitude and the tsunami of new dollars being created by trade-deficit recycling, had, it seems, been turned into a great demand for paper that paid even just a percent or two more than the safe stuff and so a profitable bundling business turned into profitable underwriting businesses and bundles were sliced, diced and rebundled in secondary and tertiary derivative markets and sold to anyone who wanted to lay down cash or step up to the window and borrow to leverage their bets. Investors around the world were rushing into the hedge funds that were pulling off these tricks, ready to pay the fund managers up to a third of the paper profits in fees for the privilege.

At the end, there was even a perverse echo of the previous bubble, the hedge fund doing an IPO; cherry on the cake: to leveraged buy-out companies like Blackstone and the Carlyle Group. Carlyle Capital, a spin-off of highly successful defense industry investor Carlyle Group (more below) took the scheme of borrowing heavily to buy mortgage-backed paper as a business model and brought it to the stock market. They issued an IPO on the Carlyle name, registration in the Isle of Guernsey, selling shares to the public through the Amsterdam Exchange! Other such highly leveraged companies went into the market selling bonds or creating further derivatives. Last summer, just before the first crack occurred, Bear Stearns, themselves, tried to palm off another load of their own toxic paper, to a subsidiary they were trying to hastily bring public.  They didn't get it launched until it was too late, thereby saving a whole bunch of suckers their money until, one assumes, the next Ponzi moment.  

Smart Guys, Smart Money

But now, this Ides of March we are just beginning to see the leading edge of the worst effects of this splurge in mindless highly leveraged bet making. What may be mind-boggling is that the so-called smartest guys, the ones who had to know what kind of toxic crap they were creating, buying, insuring, lending against and selling, so flooded the market that they got caught up eating their own dog food trying to make it still look palatable. Time-wise, it's hard not to parallel this with the exploits of Elliot (Ness) Spitzer who had boosted his career by slapping down Wall Street's greediest no-gooders.  The same week that finished with gritty, uncooperative (they had balked at joining the other big investment firms in the LTCM bail-out in the 90's) Bear Stearns finding itself in the ignominious position of being on its knees before a rival bank, JPMorgan Chase, Spitzer would have to quit as New York's Governor because money and electronic tracking traps, he himself had souped up to use on others, would, in a federal investigation, ensnare the enforcer himself, pants down.

In contrast to the "irrational exuberance" that characterized the last crash--  this time the tectonic plate has moved much further than the precincts of stock touters and patsies. This time, the folly occurred far outside the grasp of the regulators-- and it is spreading to impact ordinary home and car owners, folks on fixed incomes, municipalities, bridge and tunnel authorities and the states, themselves, who all reside way beyond the precincts of the giant global banks and investment houses.

After all, when you normally hear about margin calls, it's the banks and brokerages requiring their clients to put in more capital to back up their bets. This time around, it's the banks themselves that are hearing the margin calls.  They are being asked to "mark to market" all of this Byzantine three-letter asset-backed paper they have on their books as collateral. The only problems is, that having lost confidence in their own holdings, this time there is no market to mark to. Trading has slid to a near halt.

So guess who has opened up a window to accept the toxic waste? Why it's our very government sending in the cavalry, with bushels of ordinary people's tax dollars. That same no-good government, if you read the editorial page of the Wall Street Journal on most ordinary days, that is supposed to be standing aside and letting the private sector do it's magic.  Never mind the deficits already on the government's books, never mind the money being thrown into the endless War, the Federal Reserve now stands at the ready to suck up the waste product of greed with yet more borrowed money. And so, in this nasty tale, so sinks the dollar ever further.

Since the  fiasco of 1929, when borrowed money underlying the stock bubble brought the developed world economy to its knees,, there have been rules in place that limit a bettor's ability to borrow money to buy securities.  In recent years, the onset of leveraged and highly leveraged hedge funds has driven something of a major loophole into these rules.

There were, obviously, no such rules, only practices, in place when it came to the mortgage business at a time that the Federal Reserve was pushing interest rates down, down, down to soften the landing of the Tech Bust.

Greenspan's Legacy, the New Shadow banking System

One of the great ironies of this present and particularly alarming crash --they seem to come back to back at greater frequency--  is how avoidable it might have been had not we come to a particularly dangerous fork in the ideological setting that led up to what now is clearly going to be more than a mere "two quarters and out, garden variety recession" that the majority of economists can somehow still project. Here in Dymaxia, we often excoriate the mainstream press for their birds on a telephone wire, reflexive reporting.  Economists, seem to have invented the phenomenon. No single societal group seems to be more consistently wrong at every turn, even in their rear view mirrors. 

At their historic crest, the mood in the dominant party back in 2000 was to eliminate regulation wherever possible and to generally roll back any public protection that might have been created since the mid-Depression Roosevelt years. Unfortunately for that movement, we were in the aftermath  of the Enron debacle and it was all too crystal clear that, despite all the regulation in place, it was still possible to game the stock market big time. That wasn't the moment that Congress could be seen thinking of getting rid of the market police at the Securities and Exchange Commission, rather they begrudgingly toughened reporting standards with Sarbanes Oxley.

But the guy sitting inside the Fed, the man who'd gained palpable clout for how he'd managed the Tech Bust (by bringing interest rates down to near zero), was Alan Greenspan, an acolyte who had once literally sat at the feet of novel writer, Ayn Rand, an icon of a newly invigorated Conservative movement that was striving to restore, in Randian terms, the power of the individual over that of the collective.

Anything less than a purposely anesthetized Federal Reserve Governor, would have smelled a rat, when, in a moment of low inflation, housing prices started to take off wildly. For a boom to turn into a bubble you need a blind regulatory eye, the promise of ever rising prices to suck more and more people in and plenty of freshly printed, readily available money to lend them. The promise goes something like this: "Buy now, even if you have to borrow everything you can plus some, because this time next year you'll be able to sell, get everything back plus a profit and move on to the next killing."

Bubbles are something we will always have, as long as there's a natural dose of greed around.  But as night follows day, there will be busts, too. Fear, will sooner or later rear its head. The smart money is supposed to get in early and out of the way when the bubble begins to crash.

Ironically, central banks, like the Fed, came into being to ensure that the inevitable crashes didn't pull perfectly innocent participants going about their day to day business in the banking system into some extraneous financial world wreckage. They are there to regulate, to make rules to thwart bubbles and backstop only to protect the innocent bystanders. For such, the Fed is mainly limited to using its hold on interest rates to slow or quicken the economy, to keep things on a smooth course.

Unlike its predecessor, the Tech pyramid, the impetus for the Housing Bubble, however, can be almost entirely laid at the doorstep of the Fed, itself. The Fed quite significantly has the power to require banks to manage their lending practices.  Greenspan, it's clear, decided not to get in between the banks and their more risky business partners, including the completely unregulated hedge fund industry, even as it knew that the once hard walls separating banks and the brokerage business had been freshly pulled down.  The theory, no doubt being that savvy adults, bankers included, ought to know what they are doing and take the up as well as the down consequences for their actions.  Consequence, after all, is the cornerstone of laissez faire capitalism.

In Greenspan's zeal to unleash the unregulated hedge fund industry even as commercial banks were spreading into the investment world, he managed amnesia regarding one of the main tenants of the Austrian School that he professes adherence to, and that has to do with the printing of paper money with nothing "real" behind it.  The modern Fed is in the business of printing money with nothing behind it, no inconvenient bars of gold no silver, no nothing.  And now, in this Spring of discontent, it seems, it is also in the business of mitigating the consequences of bets gone horribly wrong.

Credit, Credit, Everywhere but not a Drop to Drink

This latest pyramid, we all know, started in the mortgage industry as homeowners were given the opportunity to trade in older more traditional mortgages for loans that had lower introductory interest rates. The kicker was that these older loans demanded a 20% down payment and over time further equity built up as the monthly payments included principal as well as interest. It's a cliché but also a truism that house's have traditionally served as a ordinary folks' largest and most important piggy bank, not, as in our present paradigm, it's ATM machine. The Fed could have cut the bubble off at its knees by taking a hard stance on the lending rules and the valuation of the derivatives that were being issued to fuel the worst excesses, the excesses that have actually brought the financial system to its knees. When questioned, Greenspan, from his pinnacle, repeatedly said he saw no intrinsic peril in the practices.

Yesterday, the government agency that measures such things, made public that for the first time since the end of World War II -- in the shadows of the Great Depression, that is-- Americans own less of their houses than do the banks and other lenders.  It came in 51% to 49%.  So much for the piggy bank and so much for the household! The conversion to a nation of debtors in just a short period was complete.

For those unhappy folks whose house now is worth less than they owe on it, there is another kind of choice: Do I hang around and struggle to pay off a mortgage, set to bump upward in many cases, or just walk away?  For a lot of folks with nothing in and facing ever scarier job prospects, this is a no brainer.  And so more houses go onto the market and prices in surrounding neighborhoods start to drop as well.  This second wave is ushering in a new chapter where companies that have borrowed on the basis of ABS-type bundles of these prime mortgages are also being called in to put up more solid collateral. Clearly, the problem has begun to spread in a number of directions. And worse for all the innocent bystanders, the Fed, in it's policy of hastily lowering interest rates, the public be damned, merely spits against the wind, yet, all the while, sewing the seeds of the next big distortion, sure to take root from interest rates that in real terms --that is, after you take inflation into account-- are already negative.

Of course, while the banks were inundating home owners with loan offers, they were also chasing every living American to open up a new line of plastic credit debt.  If you were maxed out, no worry, just consolidate --6 month teaser rate-- and come play with us, they beckoned. American families now owe an average of $28,000 in credit card debt, often with interest rate tags of over 20%, not to mention penalties if they miss a payment.

Then there's the added glow that a bubble or pyramid scheme brings to the players early in.  But this last bubble driven expansion had a weird hue to it from the start, all its own. Americans, even as their jobs were being shipped abroad, were borrowing and spending at a rate never before seen in our history, and mainly for stuff no longer made by them.  It's no exaggeration that we now  don't even question that 70% of our economy is based, not on what we make but on what we consume, nor do we second guess the massive trade imbalance that has ensued. The American consumer, it is said, is the engine that fuels the entire world economy. 

And for the world, that ought to be very bad news.  While every day consumers were borrowing, and the shadow banks were leveraging in the billions, they were being matched in spades by their own Government as it refused to tax for its own spending needs and even set the trend by running a major war --$12 billion a month-- off the books. This government borrowing together with the trade deficit has in just one Administration pushed down by half the buying power of the dollar, especially in Europe and Japan but most significantly in the Middle East, where the oil is. Consumers are now pouring money down the Exxon and Shell funnel to Arabia even before they can even get to Wal*Mart and Target for their little contribution to the Chinese dream. Never mind, the Spender in Chief encourages them to go out and spend. Got problems, he says, just save my tax cuts, and I'll send you a check in the mail.

A feeble dollar makes us all poorer but it is yet another gimmick governments use to stimulate business.  In the old model, a cheap dollar would have led to higher exports thus stimulating the domestic economy. But in a service economy where manufacturing has largely been sent abroad, there's nothing extra to sell. Goods, and particularly raw materials, from abroad get more expensive in dollar terms and before you know it you have a systemic inflationary force.  It should be noted, that the Fed is betting that a slowing economy will take care of that inflation by pushing down demand.  In other words, even as the Fed is pushing the pedal to the metal, it's betting that its mainly going to spin the wheels. That mud, it seems, is being thrown into the eyes of all those who predict this will be a two-quarters and out event.

Japan, a mega-industrial power you don't hear much about these days, has been in a state of low or no growth for over twenty years despite the fact that the Bank of Japan --their version of the Fed-- has kept interest rates a near real-term zero over most of that time. The government refuses to force the banks to clean the mountains of bad debt they accumulated in their own stock bubble way back in the 80's. Still, Japan runs an annual trade surplus with the US of over $80 billion, holds over a $trillion in reserves, and their people save at a healthy rate.  Their population continues to age and they appear culturally unable to absorb foreigners to replace their work force.  Could America's brand of borrow and bail out, create our own version of a limping giant?

Saving has totally disappeared as a concept in the US.  With houses now tapped out, university costs soaring and the education gap between high earners and the stagnant middle class ever widening, the coming generation, routinely emerges from college and graduate school with tabs in the hundreds of thousands of dollars. Working folks have to dread a medical event that can throw them into even deeper debt.

What the housing bubble did was temporarily mask the hard truth of falling manufacturing jobs and the wages and benefits that came with these often unionized jobs. Easy lending combining low (initial) payments and very loose requirements had a major impact.  Many people --depending where you live, of course-- saw the values of their homes rising by 10 or 20 percent per year as all the churning encouraged people to "trade up". The activity also brought in speculators who saw how easy it was to buy houses on margin and flip them as prices soared.

For the Administration, this was no-questions-asked territory.  It was being hailed as the result of lowering taxes on the wealthiest players in the game even as they were wracking up the biggest pay-offs of their careers. By the no-tax theory, increased activity brings increased tax revenue and the whole thing pays for itself.  So never mind, the growing domestic deficit and never mind the equally ballooning foreign trade deficit.  In the end, it would all shake itself out. And if it didn't, well that would be the problem of the next Administration, and the debt that of the next generations.

Now that this is starting to spin out of control, everyone with their own skin in the game is running the other way. No one trusts what's on the other guys books so no one is loaning despite the Fed's best efforts. Present Fed Governor Bernanke is printing money as fast as he gets interest down.  But that's like trying to stop the flow of water by putting your hands into a stream.

To attack the problem of mortgage backed securities as collateral, the Fed has announced that it will lend to banks and accept, in exchange the toxic collateral that no one else will take.  For this it has made available the sum of $400 billion dollars, which, is half the amount the Fed holds for all market intervention it makes. But that was earlier in the week, before it was forced to intervene in saving Wall Street's 5th biggest firm, Bear Stearns. This Bear Stearns rescue marks the first federal bail-out of a major bank since, yes, since, the Great Depression! To close the deal that saw JPMorgan Chase take Bear Stearns for less than the building it owns and occupies is worth, never mind the $80 billion it claimed in assets just last November, the Fed agreed to scoop up $30 billion in further toxic waste. Clearly, the skin they, the Fed, have in the game is other people's money, in this case the taxpayer's.

But that's not all that happened in this week.  In a clear echo of the Bear Stearns crack, a leveraged hedge fund started by the investment bank giant, Carlyle Group, was being called to put up more security against the $22 billion it too had borrowed to get into the mortgage security margin play game.  And so a few million here and another 100 million there and before you know it, additional billions of dollars are coming off of balance sheets of the world's great financial institutions in write-downs. In the end, the Carlyle Group decided to let technically separated Carlyle Capital sink into bankruptcy rather than pay out a billion to save it's own good name.  That decision shook all it's Wall Street lenders, including Bear Stearns where it may have been the straw that broke the camel's back.

Perfect Storm, Yet?

It's been estimated there are still more than $100 billion in write-downs to come in the area around mortgage paper alone.  Last time out, we wrote about something as obscure as the CDO's and CLO's,  called credit-default swaps, or CDS's.  This is a gargantuan insider "insurance" market that is fairly unregulated.  It is estimated to total the staggering sum of $45 trillion.  If this market should start to unravel, it is impossible to predict where the outcome might lead. And sure enough, in the noise around the collapse of Bear Stearns, there is already talk of failing CDS's. No doubt this is where the Fed has placed itself as counterparty to shield JPMorgan from god knows what else.

As we've noted, the aftershocks coming from the sub-primes has spread into what are traditionally boringly safe markets like the ones for municipal bonds. The sub-prime fiasco has also called into question the reliability of a lynch pin of the system, the credit rating agencies, which, for greed of their own, were willing to bestow their highest AAA imprimatur onto mortgage-backed securities, including some with a tranche or percentage of sub-primes in the mix. 

What's poisoning the municipal bond market, that cities, states and their agencies use to finance their projects, is the state of the so-called monoline insurers who cover the risk of municipal bonds by selling insurance on the basis of their own AAA credit ratings.  These insurers have nearly gone belly up because they too jumped into the CDO and CLO security game, providing added cover to the toxic waste products. Now the municipalities issuing bonds to cover things like stadiums, bridges, sewer systems, etc. are having a hard time convincing investors that the insurance they hold to ensure their AAA rating will actually cover them. Investors who could rely on the ratings and the insurance, are now forced to try to figure out which water company is more solvent than say, the nearby sewer authority.  As a result, mundane bond auctions have been failing for weeks on end.

There is more of the pernicious circular dynamic here since these very municipalities depend on property taxes and user fees to pay off their bonds.  As their property bases shrink as people walk away from underwater mortgages, the very income the municipalities need to pay off their debt is called into question; hence investor apprehension.

On this very shaky weekend, the thought occurred to us: what if some other unexpected jolt --our proverbial black swan-- were to hit this truly unprecedented situation, a 9/11 type event or a pandemic episode like the Avian Flu, or a run on the dollar as foreign banks moved to Euros or Yen? 

Moral Hazard

We are now at the point we predicted it would all come to: where the Fed is putting up public money to bail out the greediest layer of society, the guys whose bonuses are in the millions, who set up their shell companies in the Caribbean to get out of paying taxes on profits, who treat their salaries at the Bush capital-gains rate.  The guys who, as Warren Buffett put it, pay less in taxes than their secretaries do.

For every $billion the Fed puts up to suck up the excess waste, will players have to pay a special tax on the bonuses they took home while the party was roaring? We wager not!

And will the Fed in  it's zeal to bring interest rates down find some way to compensate regular folks for the little bit of interest they are losing on their savings?  After all, seniors present and future are encouraged to save so they will have something to live on in retirement.  Low interest rates, like pushing on a string, may stimulate some movement but it's just as likely to be as distorting as it is in Japan where housewives are said to borrow Yen at the low rates to invest in high interest places like Australia and New Zealand.  The hedge funds call this activity the carry trade and it is ready to make a comeback at a fund near you, soon.  

Last month we warned that the second shoe is about to drop as subprimes move off the front pages to make room for something more obscure but potentially even more toxic, called credit default swaps or CDS's. And once again, as with the problem of the subprime mortgage disaster extending far beyond the problem of millions of people unable to make their home payments and the falling home prices of their neighbors but rather to the mountain of three-letter (CDO, CLO, SIV, etc..) financial rigmarole that the banking system and the shadow financial system generated on top of the mortgages, the failure of billions of dollars in CDS's and their derivatives, will rain down on all of us.

Remember, banks in China, Singapore, even a few small towns in Norway and some of the biggest world-straddling financial institutions are all still trying to figure out how much they lost buying the toxic waste their bond development arms so profitably generated in the pyramid scheme that led up to the latter stages of the subprime crash. Financial institution balance sheet losses, alone, are conservatively estimated to be in the range of $250 billion when all the off-book transactions are brought into the open as write downs..

Counterparty, What's a Counterparty?

Unfortunately, as they say on prime time, there's more to come, folks: the credit default swaps --insurance policies with little money behind them-- are whole new episodes still to be played out.  And when it's all done the major economies of the world will have thrown further billions in taxpayer money at the various debacles.  Only the scoundrels who conceived of the pyramid and spread the bets around, will be left with their fortunes intact; for, if we've learned anything at all, we know that the bailouts will be seen as necessary to keep the system from crashing entirely and the guys who walked away and the guys who were supposed to be regulating them will be off laughing, no doubt conspiring on the next bubble.

It might be sobering to note that there are estimated to be $45 trillion in CDS's in circulation as we write this, that, in case you're not counting, amounts to approximately 3 years worth of the entire US economy! CDS's are designed to act as insurance against the default of specific junk bonds, bundles of bonds or, their derivatives, and in a further twist, of the same companies that issued the insurance swaps in the first place. They have existed in a market outside of, but impacting the bond insurance traditionally issued by the monoline companies to guarantee corporate and municipal bonds and the complex rating system that determines the interest rates that companies and municipalities end up paying as they rotate their borrowing sometimes on a weekly or monthly basis.

But as CDS's took off even the sleepy monoline insurance business got a hit of cocaine in the last few years and got into the more lucrative business of using their AAA credit ratings to issue insurance on the CDO's that Wall Street was using to finance the subprime mortgage bubble. As a result nearly all of the major bond insurers (Ambac and MBIA, are the leaders) are now facing bankruptcy, unable to take on the financing needed to cover their obligations without so diluting their capital that takeover vultures will rush in right behind the capital injections.  This is still to be played out as bailouts get structured (here's a Marketwatch article).

In the meantime, with the money spigot left wide open by the Fed, the vast majority of squirrelly bonds issued by Wall Street was "junk" rated and thus out of the realm of the regular insurers --who,  by the way, are also required to keep a certain amount of reserves on their books to back up the insurance or lose their vaunted credit ratings--  and so a whole new range of players stepped in to fill the void with these CDS's.  The issuers, whether hedge funds or off-the-book brokerage house and bank financed companies, created mountains of new paper insuring, as we noted, not only the derivative products but the derivatives that were derived from bundling derivatives (you wonder who would have bought into this game?). These new insurers, or counterparties, as they're called on Wall Street, were totally unregulated, existed outside the realm of the already overly loose playing ratings agencies, and thus had no real obligation, other than their own guarantees, to keep any reserves on hand.  And, of course, as quickly as the hedge funds were able to amass piles of cash, they could disappear as investors smelling the coming debacle, pulled their money out.

Like the subprime mortgages that were issued by people who were paid to write them but who carried no risk should they go bad, the CDS writers and the brokerage houses that moved their paper guarantees had little to worry about and plenty to gain in the short term. The clearest description of what a CDS is came in some of our reading last week.  The author --who will have to go without credit as we forgot to pencil in a note-- called them something akin to side-bets that viewers of a sporting event make between themselves along the side-lines.  CDS's, it turns out, were bought and sold by participants who were not holding the underlying securities that were insured.  In that way they opened the door to speculators who might be trying to short the derivative, junk bond or CDO, etc. markets.

In free market theory all this activity would be beneficial to the overall market as it spreads the risk or at worst, would be detrimental strictly to the players on the wrong side of a bet. 

According to this line of thinking, you've got supposedly shrewd and savvy people managing other supposedly smart, shrewd and savvy people's money making their own bets on how things will play out.  This "hedging" or "speculative" activity, depending on the bettors perspective, is theoretically supposed to allow more granulated approaches to larger market forces thus smoothing out discrepancies that might otherwise disproportionately tilt them. Unfortunately, as we are once again about to see so tragically, it doesn't work that way when the guys who start the pyramid game get to walk away Scot free leaving people who never ever heard of a hedge fund, much less, a CDS to pay the piper!  That's where we are today as markets around the world tumble and the Central Bankers and politicians scurry to print more paper, this time in the form of legal tender, thus diluting everybody.

It's Pay Up Time

The big problem with the CDS's is that losses involving this paper may total another $250 billion or perhaps much more, according to the calculations of people like Ted Seides (see our last piece, The Next Big, Big Crack)  Junk bonds by their very definition, are bonds issued by entities with weak balance sheets.  They pay higher interest because there is a higher probably some of them fail.  Historically, these defaults run in a range, depending on the relative financial health of the issuer,  from about 2.8% to 4.7 % in normal times. With the pool of junk bonds expanding over the last few years in a borrowers market when investors were willing to buy just about anything sporting even a small risk payoff (in fact the premium between Treasury's and junk had never been narrower), there's lots of room for future failure. It's also obvious that in a recession the percentage of failing companies increases significantly and therefore the number of failing bonds increases.  It may, with a deeper than normal recession looming, then be much more that an average failure rate for low rated junk of  4.7% over the next couple of years, if so the losses would be nearly $1/2 trillion just in CDS's. And once again, no one knows who the counterparties are and where they could possibly come up with that kind of money (we can guess with great certainty, they can't) and, more importantly, who is holding all these CDS's that are likely to sink to pennies on the dollar. Imagine the big banks going through another round of hat-in-hand begging for cash injections around the globe.  Any takers for side bets on whether the governments will step in?

Now comes the US recession and an ongoing crisis in the world financial system still trying to swallow the subprime debacle's losses and we can now foresee the failure of numerous junk bond issuers.  As those bonds fail, investors will turn to the CDS issuers to cover the defaults. And, of course, the issuers of those guarantees will be nowhere to be found, their gains tucked handily out of reach in offshore havens that require no reporting and no taxes.  No wonder the Fed and the Treasury Secretary have gone into panic mode!

 Meanwhile, the so-called US or world recession will deepen as the authorities begin to dig deeper and deeper into their rescue strategies. Nobody, except maybe the GOP candidates, will be lauding the free market system as it becomes time to start wiping the blood off the floor.  Stock holders and investors will be the first to be hit but certainly won't be the worst victims of the folly that let $45 trillion in insurance be issued without any reserve requirements.  Interest rates will be forced down affecting older Americans whose incomes are tied to them, families with large credit card debt will default, governments will struggle with lower tax revenues and begin cutting programs designed to protect their taxpayers, good jobs will be lost at an even faster pace then during the "good times' of the last 4 years. As Wall Street insider and serial bull, Mort Zuckerman, so out of character, put it on the weekly John McLaughlin Show, we're looking down the barrel of the worst recession since 1929.

The already wounded large banks will struggle once again to cover the next round of losses brought around by the CDS debacle and new and larger pieces of America will go on fire sale to those private and "sovereign" entities sitting with their coffers stuffed with dollars that have been passing so quickly through Wall*Mart, Exxon, etc. conveyor belts on their way East. The CDS debacle will be this chapter's Black Swan.

That's why nobody thinks the $150 billion stimulus plan proposed by the President with Congress on the bandwagon is going to do more than a peashooter aimed at a tsunami. Just as sharply lower interest rates in the US will only accelerate the race out of the dollar thus fueling a new round  of strange distortions down the road.

Bush, it looks like, will finally get to truly exceed his father. The 2nd Bush Recession, potentially the worst since 1929, on top of the series of debacles around the world of this regime, and a bleeding dollar will put the nail in the coffin of the Reagan Revolution. The party of domestic deficit spending, unfettered trade policies in the face of enormous dollar trade deficits, moving social security money to Wall Street, off the books war spending, and the dogmatic unfettering of the activities of the world's pyramid scheme guys, will likely come to an end.  Already you can see it coming apart as the so-called social conservatives get fleeced at the gas pump on their way to jobs or homes that might not be there next month, the defense hawks contemplate unending $trillion, force-draining occupations of Iraq and Afghanistan and the fiscal conservatives see their savings eaten away by a diluted dollar.

Imagine a country with high unemployment, millions of personal bankruptcies and foreclosures, bailed out banks and brokerages and a social safety net in tatters; now think about the lip licking, fire-sale vultures waiting in the wings to swoop in, who have gotten away with the loot thanks in part to egregious tax loopholes that not even a Democratic congress had the guts to close.  If that doesn't make you mad, nothing will.

We got back to the States two weeks ago, in time to hear the weekend bloviators indicate almost unanimously that Hillary Clinton had wrapped up the Democratic presidential nomination.  Only on the following Monday when an ABC Washington Post poll came out of Iowa were they stunned into realizing that all of their hot air and spin had to be revised.  Somehow, Iowans --the folks who actually will be making up their minds in 5 weeks-- had, like their credit cards, maxed out on Hillary's message of a return to the good old days. 

What Don't They Miss?

Pundits, of course, travel on other peoples' credit cards and sometimes even get to dine and rub shoulders with the Great Gatsby crowd that have had a great run these last few years. For them, the sound and smell of little people's mortgages going up in smoke is as far away as one of Jupiter's liquid moons. Nothing it seems can divert their eyes from the talking points coming across the transom, not even the unseemly multibillion dollar panhandling in Arabia of giant financial institutions --Bear Stearns, Merrill Lynch, Citibank, Bank of America, HSBC, to name a few- as stoppers to the hundreds of billions of dollars in write-downs they are taking for holding derivatives (many of their own making-- that were somehow supposed to have allowed them to sprinkle fairy dust on the toxic waste they'd bundled into tidy CDO's, CLO's, MBS's, etc.)  (For a lot more detail on this alphabet soup mess, please have a look at our July 27 piece The Big Crack )

That trillions of dollars have flowed out of the US and into the coffers of sheikdoms small and large, friend and foe, as well as to our East Asian allies and rivals is something best left to the money men to figure out, it seems.  Even when great banks teeter on the brink, and CEO's are forced packing, we hear nary a peep out of the political and media class.

Does anyone among the poobahs and sages wonder how it is that nearly all these so-called sophisticated money men, and their peanut counters in the back room bought so heavily into their own waste product?  Or in the more convoluted case of Goldman Sachs, shorted the lousy paper they were selling to their best customers (even while the present Secretary of the Treasury was still leading the firm)?

Hardy, though Paul Krugman, the Princeton economist and New York Times columnist, who does do his own thinking, had a simple way of nailing it; greed in the corner office in a political environment that has put the foxes in full control of the henhouse. Krugman has made the Enron-revisited point that none of the CEO's who've lost their jobs as the multibillion dollar losses of the subprime crisis have hit the fan, has had to give back his golden parachute going forward or the obscene, bonus-based, pay packages they collected during the years they were ginning up the phony mortgage market and creating the mountains of bad paper --they secretly called "toxic waste"-- their institutions and stockholders are now forced to swallow and that is shaking world financial markets.

The Farce Begins

The Friday November, 30th Wall Street Journal reports that the Bush Administration --the same guys who advocated that Social Security should be replaced by private investment accounts in the markets-- is in the process of negotiating with the banks with an end result that is sure to mean --even if its hidden in the deal-- that the taxpayers will soon be subsidizing the banks as well.

Here's a good pundit question to be asked: Will the Democratic Congress ratify a deal designed to help the banks and the holders of some of the many balloon mortgages that are scheduled to blow up as rate increases kick-in, without asking that at least some of those bank and hedge fund executives who have pulled in billions of dollars in bonuses for the last few years to give back any of their bonuses and commissions, in return for a rescue of their scams?

We, here in Dymaxia, are willing to bet that the question will hardly arise before it gets buried like a lead pipe in a toxic waste dump.  After all, this sitting Congress already has a record on hedge fund bonus money; i.e., they continue to allow it to be called "capital gains" by the hedge fund moguls, so it can be taxed at 15%, half the rate the folks who sweep their offices pay on their earnings!

But bank sub-prime paper mega-write-downs (see the E*Trade deal where $3 billion in CDOs was turned overnight into $800,000, for instance)   also strike at lots of folks who have pensions invested in the banking industry not to mention bank stocks in their mutual fund portfolios. In the case of Citigroup (CIT), alone, shareholders have, since the beginning of the year, lost approximately two thirds of the value of their holdings, or more than $80 billion dollars. In E*Trade's (ETFC) case, shareholders have lost more than three-quarters of their holdings.

CIT is, or was, of course the world's largest financial institution. In desperation, to stay above water it negotiated a deal in which it promised to pay its rescuer, the Abu Dhabi government, 11% interest on the $7.5 billion cash injection it received this week. In today's world where very big money accrues even to individuals if they're in the right place, $7.5 billion probably doesn't sound like a lot to a pundit's ear.  It was, it turns out, enough to buy nearly 5 percent of our biggest bank.  Importantly, for the gulf state oil sheikdoms, it represents probably only a few-day flow of petrodollars; here, it seems, the pundits and the petro-billionaires can agree!

Trillions of dollars, of course, is real money even in Washington where they print the stuff.  No one knows where it all goes except when big purchases become visible like the Chinese attempt to buy a large oil company with significant reserves or when the management of our major ports goes on the block. What the Citigroup deal points out is that these outside government and quasi-government players in the Gulf States (including Saudi Arabia, of course), China, and Russia are likely to continue to gain clout as the major tectonic shifts of the current crisis continue to shake the banking system.

Now, imagine for a minute that subprime mortgage based money creation was not an anomaly and that there are parallel but even larger fault lines still to come into play!  Impossible, you say?

Here's the way it works when the Fed and the regulators are betting on the private sector to regulate itself: banks and their proxies earn immediate money by lending time bombs that don't go off for several years; bigger banks and hedge funds earn money on these foolish loans by packaging them and turning them into respectable derivatives they sell without, in many cases having to pay a middle man or market fee directly to their customers; rating companies profit by this new business stream and give out their imprimatur of a high credit ratings to this paper now three steps removed from the original loan; other banks and insurers serve as counterparty guarantors, buying and selling the obligations as investment grade to their customers or hold as reserves, thereby "spreading the risk" eventually around the globe.

Are Junk Bonds the Next Junk Bombs?

When it became clear last summer that the entire world banking system had been gaming itself as the US home mortgage bubble reached gargantuan proportions, politicians and their sock puppets looked the other way, spouting the usual nonsense about the core economy being sound.  Neither party could see perils without an equal mix of good news in dealing with the crisis.

Now that the problem has spread beyond the growing rash of foreclosures (these only affect ordinary people and are thus ..........) and to the foundations of the major banks thereby threatening pension funds and even bank deposit holders, the problem still gets less notice by the commentators than the daily swings of the Dow Jones Index.  It's almost as if on the day the twin trade towers fell, the stock market stayed open and went on to gain a couple of hundred points so the headlines read: "Despite Early Fall, Markets up on Gains in Scrap Metal, National Security and Office Building Prospects".  The Dow Jones Index now seems to be the only gauge the media use to measure events on the ground.

Official Blindness

Pundits are an important component of the information flow, since they shape public opinion; so how they get spun matters much. Politicians, we know, who get out in front of public opinion face ridicule and sudden death, which is probably why there are mere nuances of differences in the platforms of all the Democratic candidates, minus say, Kucinich and for all the Republican's, Ron Paul. The pundits, as we noted, tend to read each other, hoping, one supposes, that one among them knows something. The rest of the time they rely upon being fed thought aids by the lobbyists and other operatives, the guys who earn the big bucks in Washington.

Unlimited Dollars All Around

Public money used to have meaning in Washington until Ronald Reagan intuited that debt, in our new economy, had become as American, say, as a wallet full of credit cards. Take the 5th year of the Iraq Occupation. The United States continues to spend off budget nearly 10 billion dollars a month on Iraq, or, in annual terms, nearly one percent of our entire annual gross national product.  To make this palatable, the Administration has raised no taxes but preferred to merely further run up our national debt, something it has been doing across the board without much pushback, anyway.

As we've often pointed out here in BlowBack, since Bretton Woods, the US has had a built-in cushion that allowed it to spread its debt practically cost free around the world. The privilege, a massive type of seigneurage, was made the base of a system in which dollars printed here and spent to buy foreign goods and services often don't show up for payment but instead get held by other countries as a Reserve Currency  It's a great benefit that any country would be envious of; nonetheless, there can be too much of a good thing; the system has been allowed to perpetuate right into this massively financial global era, allowing trillions of dollars to build up outside the country in the last few years as China and petrodollar debts mounted geometrically.

Now that there are these trillions of dollars out there, it doesn't take a perfect storm scenario to imagine what kind of an avalanche a real crack here --say, a major bank or brokerage going under, might set off! China and oil producing nations, should more bad paper start to unwind, might be tempted to cut their losses and try to recycle those dollars into "real" investments, like shares, say, in hat in hand banks or teetering corporations or in the holders of natural resources..

It now looks like one indirect result of the Iraq adventure will be the future dismantling of Bretton Woods.  Since Bush took office the dollar has lost more than half of its value if gold, oil or other raw materials, including food grains) are used as a counter value. 

Our pundit class, of course, never mentions the actual financial cost of the occupation, even as many of them advocate stretching it out as far as the eye can see, once again imagining that the US can go on printing dollars indefinitely just like in the good old days.

But this level of obliviousness, unreality and folly is, of course, hardly limited to the falling dollar, the collapsing mortgage market, the strains showing in the banking system from Citibank to E-Trade or even the looming recession.

CDS, the Next Dominos, Junk Bonds and Counterparts

To get to the Perfect Storm scenario, another shoe might have to drop and it looks like junk bonds may very well be the next subprimes:

This week, we read a compelling piece on where the next big crack might occur, thanks to the research of Ted Seides, as republished by John Mauldin in his Nov 26th "Outside the Box" weekly e-letter.  Seides  entitled his essay The Next Dominos, Junk Bond and Counterpary Risk. In his article, Seides makes the point that the total amount of derivatives issued by the financial institution bundling mortgage debt, pales in comparison with the amount of deriivatives (CDS) that are in circulation, built not on mortgages but around corporate Junk Bonds, which, he points out, are by definition are high risk vehicles.

According to Seides, there are $45 trillion (yes, trillion with a T or more than three years of US GNP) of these derivatives sitting on the balance sheets of financial institutions around the world. He also makes the searing point that there are no reserves (or counterparts, as he calls them) to back these CDS's up. The issuing banks and hedge funds are the guarantors and they have not been required to set any countervailing funds aside to support the paper they've issued.

Here are a selection of attention-grabbing quotes from Seides piece that, unfortunately does not appear to be available on line, yet:

........

.....

.....

Does this all sound familiar?  It should if you've followed the sub-prime debacle!

The Black Swan in the Room

We take our lead from Nassim Nicholas Taleb, mathematician, empiricist and trader, who can be fairly ranked as one our worthiest contemporary anti-pundits. NNT, as he likes to refer to himself is, most recently, the author of The Black Swan, The Impact of the Highly Improbable.  In this book and others, Taleb argues that contrary to the thinking of the punditry, or all those who would predict the future based on the norms of the past, randomness plays a much greater role in the outcome of history than is even vaguely appreciated by those whose world is routinely described by the bell curve of probabilities. For Taleb, it's not just that backward looking statistics lie but when it comes to seeing what might lie ahead, they are as useless as an ice cube in hell.

The Black Swan is, of course, his metaphor, for something that is totally unexpected  (by all, but those close to it, and even they often don't realize the true extent --remember Watson, the founder of IBM predicted there might be a market for four of his machines!) until it is actually developed and injected into the system. In the world of mediocrity, the land of the pundits and politicians, there are no black swans but, as NNT points out, we do not live in "Mediocristan" but instead in "Extremistan". Taleb, of course, can easily point to a string of even recent developments that have appeared "unexpectedly" that have radically and irreversibly changed the way the world functions, from central processing computer chips to the Internet, to mobile phones, (to, yes, the subprime loan debacle that was on no MSM analyst's radar up to just a few months ago), etc.

Mediocristan or Extremistan?

As we've said often in these pages, it sure doesn't look like Mediocristan out there as we watch the markets jerk up and down like vaporetto commuters in Venice, even as we watch the bailouts big and small at banks all over the globe and as we mull over all those unregulated hedge funds --the new counterparties-- going after "absolute profits" for themselves and their clients.

In Mediocristan it all shakes out, reason trumps greed and the beat goes on,,lati lati do!  

If you haven't noticed, Alan Greenspan, the former Fed chief has been as busy as a hero in a Univision telenovela as he makes the circuit plugging his new book. Greenspan, once one of the most powerful men on earth, has returned to private citizenry and is taking the opportunity to make a few bucks off of his outsized notoriety while he repels charges made at him from left and right.

Like an Iranian poobah, Alan has taken it upon himself to categorically deny the reality of his responsibility for any of the myriad financial crises left in his wake. Did Alan have anything to do with the lame dollar that won't even get you a postage stamp in Rome, or the billions poured down the Iraq quagmire (much gone missing, BTW), or the monstrous US domestic and trade deficits, or 20 years of stagnating middle class wages in the wake of blind-eye trade policies, or the soaring price of oil, or the retreat of the US on the world development stage or the Tech Boom and Bust or the Housing Boom and Bust or the threat of trillions in phony paper derivatives busting or....... you name it?

The answer, of course, is, NOT!.  The Mago of the Fed whose every pause could shake markets from Shanghai to Chicago argues that in fact he was hardly listened to.

His advice to Bush to go into Iraq to ensure the flow of oil? Well, he did say it but he believes the administration when they say it had nothing to do with their own reasons for negating the UN Charter and launching a preemptive war of occupation.  As for his support of the Bush tax cuts for the top echelons? Well, according to Alan that support was given with a number of caveats regarding spending.  Unfortunately, he laments, no one in the Republican controlled Congress or the White House listened to him and when he finally began raising Fed fund prices to force up long term rates that would impact mortgage rates? .... Well, the markets just did not take the Fed's lead, despite the 100's of PhD's on its payroll.   

Celebrity and the Media  

Books, of course, sell best if they contain some juicy insights into the real thinking of those wizards who finally come out from behind the draperies.  In Alan's case, it's his take on Administration spending and the reasons for war that have particularly stuck in the craw of his former conservative allies who, after successfully lobotomizing the media, have been busily running the country into the ground while making sure nobody is really noticing.

The Exes

They don't need their ex-generals telling everybody about their screw-ups and they certainly don't need their ex-Fed Governor moving key economic blunders into perspective in his rear-view mirror.  Hand it to Alan that he has been willing to go on just about every talk show that would host him from Democracy Now to Fox News.

We live in a top down media world that allows ample room for the great to paper over their worst mistakes and in some cases to handily point the blame elsewhere. Needless to say, the Oracle of Constitution Ave. is no fool and is quite aware that he, in his capacity as Chief Guru, has very well served what he can't help implicitly acknowledging to be one of the worst administrations in our long history.

Greenspan has presided economically over one of the most transformative periods in our economic history.  He has encouraged free trade even if it is highly unfair trade, he has aided and abetted the running up of deficits that in this one administration have created more debt than in all prior administrations combined, he has blessed tax cuts that were earmarked for the wealthiest strata and his interest rate policies have fanned bubbles that most benefit the financially agile and plugged in.  During the same period the working segment of the US population both in manufacturing and services has seen weak job growth (in services with losses in manufacturing jobs)  no growth in real wages and a crippling loss in benefits, particularly health and pension benefits, the same benefits  that Greenspan now warns are about to drag the entire economy down.

It's here where the Mago has to do his heaviest tap dancing and he takes on the task by putting on a halo and a twinkle.  He is, he says, quite worried that great imbalances in wealth will come to undermine the stability of our political system. The founders, he decries, didn't find a solution to that problem. Quite astonishingly a number of highly sophisticated interviewers of the Rehm, Rose ilk let him get away with that one. The corrosiveness of great inequality in the Greenspan Age?  Well just blame it on the founding fathers!

Dianne Rehm even noted that he had something in common with John Edwards on his protestations regarding the great inequalities in our society, as if Greenspan single handedly has not had more to do with these inequalities than any other member of this Administration or Congress!

In other words, forget about the Fed dropping interest rates to below zero in real terms and the resulting housing bubble, import bubble and finally in a currency crisis that is still in the early stages of unfolding as we write this. Greenspan has said adios, has moved comfortably to the sidelines, his legacy papered over, he hopes, for all to hear.

Alan protests that he is also keenly worried about our loss of civil liberties although he makes it clear (he long ago mastered the art of having as many hands as a Hindu god) that personally he thinks that Cheney and Rumsfeld, whom he has known since his Ford Administration days, are honorable men.  Someone, he worries, ingenuously, is stealing our most sacred liberties but how it is coming about, he can't really say.

Destilando Petroleo

But where Alan has had his biggest pushback (and "resonance", also among the liberal blogosphere as Charlie Rose was ready to derisively point out) has been in his candid comments on the Iraq War and petroleum.  Forget the conservative bellyaching over the deficit, it didn't affect their love for Reagan, who paved the way on this, it's on the oil and Iraq paragraphs in his book that the maestro touched the real third rail of the Bush presidency. 

Alan, as good a weaver as can be in a very tight circle, is not a great open-field runner, it turns out.  He pauses, he staggers and he hems and haws to draw breath when he should be juking. But on the question of the world's energy supply, the significance of a bottleneck at the Straight of Hormuz and the potential for incredible disruption that the narrow supply line has become, Alan is uncharacteristically straightforward.

He did, he says, encourage Bush to invade Iraq because he perceived Saddam Hussein to be intent upon the goal of putting a stranglehold on the world's major supply of energy. Greenspan worried, he says, that Saddam Hussein would purchase a stray nuclear device, say from a hoisted stockpile of the ex Soviet Union.  And so, when asked, he says, he urged on military action.

In his Diane Rehm interview, which came after Cheney came out of hiding to blast him in the Wall Street Journal over his Iraq oil remarks, Greenspan demurred, claiming not to have any real clout in the matter.  Nonetheless he then went on to reiterate his warning that the oil supply was of major concern to him in his past official position and today as a citizen. Interestingly, when asked by Rehm if he felt the same about Iran today as he did about Saddam then, Greenspan offered that he thought the situation in Iran was more nuanced with what he saw as a counterbalance of political forces there, something that didn't exist in Iraq.

Mirror, Mirror on the Wall

What then becomes most obvious in all this is our utter inability through the media spectrum to deal with our most pressing issues even when they are staring us in the face and even when decidedly non-blogger guru's like Alan Greenspan lay them out on the table front and center.  In all the interviews we tuned into, Greenspan was allowed to back away, in face of the Cheney refutation in the Wall Street Journal from any interpretation of his words that might be taken as providing a real motive to the old boy oilmen for going in and planting  160,000 US troops on top of an alleged 112 gigabarrels --according to a Wikipedia entry this puts it as the third largest proven reserve after neighboring Saudi Arabia and Iran-- of untapped oil.  To put that in perspective, today's largest producer, Saudi Arabia presently produces 4 gigabarrels --again from the same Wikipedia article--  per year and may have already tapped much of the oil it claims to still have under its sands.

$80 a Barrel Oil

Here's it is:  In 2007 and to no one's surprise the amount of oil being consumed is exceeding the amount being discovered.  We are, and have for half a century, been pulling down world reserves to the point that we have probably used up more than half of all the oil we are ever going to be able to extract at a reasonable cost even as folks in large population countries like China and India look forward to buying their own energy guzzling versions of the American way of life.

What's also not being really noted is that the price of oil is at an all time high in dollar terms, having passed $80 dollars a barrel. For months the dollar has been falling in the face of rising oil costs and that is putting further strains on the world economic system that still relies on the dollar as the ultimate reserve currency.

And so the US Federal Reserve, has a very tricky role to play in all this.  They have the responsibility of keeping the economy on track while avoiding either a rapid jump or drop in prices. Since the dollar has a special role as a reserve currency it is held by foreign governments around the world to shore up their own currencies. The Fed works best when foreign central bankers and the major private financial sector players go along with the concept that what is good for the US economy is good for the world economy. If too many private sector bankers see holding dollars as too costly a position to justify (remember, that as short a time as less than a decade ago you only needed 80 cents to buy a Euro and that today that same Euro will cost you over 1 buck forty-three, it's hard to see how anyone can be happy holding a sinking currency that could go into free fall should the Fed lower rates quickly to hold off the looming recession in this country), than central bankers either have to lower rates in their own countries in the face of inflationary forces that would be fanned by this, or have to go into the market and soak up the dollars that are being shed by the private sector.  Needless to say, there is no central bank in the world, including the Fed that could stem that move if the bankers and speculators, including the very hedge funds that Greenspan continues to believe are benign forces, start to smell the big profits associated with dollar blood in the water.

The Golden Goose Theory

The world's largest economy, the US, and the world's fastest growing economy, China, are still joined at the hip.  As the US dollar goes down we and the Chinese, pay more for oil that is now only nominally being priced in dollars but appears to be following hard currencies as they revalue against the floundering greenback.

This means that more and more of China's cheap dollar profits are being sucked out by the petroleum producing countries and the big distributors whose profits also climb with dearer petroleum. This is putting a heavy strain on the Europeans who don't want to be priced out of certain global markets, like automobiles, aircraft, wines, etc. by the strong valuation of their currencies. And then there's the giant question; will the Chinese and Saudi governments continue to prop up the dollar cum golden goose?

Oil and the American Century

As early as the 1960's a leading oil industry geologist, M. King Hubbert, began talking about peak oil (check out our Blowback article, Twin Peaks). The term has come to loosely signify the moment when there is less petroleum in the ground than has already been extracted. In the US, the world's leading consumer of petroleum, peak oil occurred, as Hubbert correctly predicted, some time in the mid 1970's. Since then the US has progressively expanded the percentage of oil it imports versus the amount developed domestically.

Despite the decline in local production, the US, followed by Great Britain remains by far the dominant player in the world oil industry. US companies provide the bulk of the service industry that discovers, develops and builds drilling capacity, the pipeline and shipping backbone of the distribution system and the downstream refining and marketing capacity that defines the world energy system.

Oil has been at the base of a great amount of the wealth held by leading American families, including of course the Bushs, and it is no coincidence that the growth arc of American military and political might closely parallels that of our dominance of the energy industry. 

As long as the world economy continues to grow, the demand for energy will grow apace. The great question of our time is what form future energy supplies will take and who will control that supply. Compared to its two present main rivals, coal and nuclear, petroleum appear to have clear advantages: simplistically, coal is dirtier and nuclear much more potentially toxic.

But oil's great advantage over electricity from the above sources is that it can be autonomously carried from place to place quite safely. In other words, if cars, airplanes, etc. could store enough electricity in a breakthrough battery, say,  to cover their expected ranges, electricity would suddenly emerge as a serious rival, though climate questions would remain regarding how the electricity was produced.

Oil's other great advantages: its incumbency first and foremost and its relatively competitive price, would be sorely challenged should someone announce tomorrow a new battery technology that promises durability and range and to reduce the size and weight of the electric storage to that of say, a full tank of gas. Today's hybrids would quickly turn into tomorrow's plug-ins.

There are a number of ways for electric energy to be produced efficiently without further endangering the environment; first among these is probably the conversion of ocean  and tidal movement into electricity as well as the potential of wind and solar to be developed in highly distributed settings.

Oil presents the same quandary that mainframe computers did for security 50 years ago when the government started looking around for something less central and therefore less vulnerable to a single strike.  That government funded effort, as we all know, led to the development of the highly distributed network that came to be called the Internet.

The giants of the petroleum industry (EXXON, Shell, BP) know all about peak oil, they also have understood the implications of expensive petroleum. They also know what happened to IBM once smaller servers were introduced. They know that as long as they continue to bring relatively cheap oil onto the market and box out the speedy development of alternative technologies, current market trends might be stretched out another 20 or 30 years until the new technologies --that they intend to fully control-- inevitably force a turning point. No doubt they are already planning for that shift in their business strategies. But there is also no doubt in the minds of many, and we'll include Cheney and Bush into this group, that status quo can not possibly last another decade, much less a score of years unless the Iraq oil flow is "secured", in US/UK hands and Iran is defanged.

They will resist calls for a Manhattan type project that might bring about real change and they will continue to deny petroleum's footprint in the global warming crisis.

The future of energy should be at the center of the next presidential debate. It's already quite clear that our media will follow the horserace dynamic instead and leave the issues to the political agenda of the elite.

 For once, we find ourselves in agreement with Alan.  To understand the Iraq War and a possible way out, it's necessary to understand the role oil is playing in this entire Middle East situation. Forget about Bin Laden, forget about Israel .... these are basically sideshows.

The Embedded Media

What is so irksome about the present situation is the way the media continues to be moved by the agenda of hidden forces. Why, it's as if they were "embedded" in the Administration!

The media makes no effort to get to the bottom of why Bush can wage a war without asking American's to pay for it.  Occupying now, and staying far into the future will suck trillions from our common national wealth, trillions that could pay for health care, jobs at home, social security, a cleaner environment, efficient transportation, etc. But, quite mysteriously, the financial cost of the war is forever treated as a sub-issue as if we can run up debts on this forever without sinking our role in the present world economy and sinking the prospects of the coming generations who will be paying interest on the war throughout their lives.

112 Gigareasons

But the worst blunder in the public discourse is not understanding Bush/Cheney's resolve to sit in Iraq as long as possible. There are myriad arguments and nuances to deal with when it comes to getting out of this mess, that is our reality. Politicians and commentators argue the various merits and come down across the spectrum.  What isn't grasped is that Bush/Cheney have no doubt why we are there for as long as sustainable...check that!  .... B/C have 112 gigareasons why they have put American troops, at whatever cost, on top of the sands of Mesopotamia for as long as it takes to secure that country and the region.

There are deep subterranean rumblings out there. Something very serious is looming and it may impact all of us, whether we are deep into the markets or mere bystanders going about our business.  The Cassandra's have had their eyes on it for a long time, ever since tens of millions among us were enticed, often by gimmickry, into a wallet full of plastic, investment schemes we couldn't fathom, houses we couldn't afford and home refinancing offers that drained the equity out of our homes.

What many investors and the public don't understand is that any crisis in the household finance market spills over into the broader financial markets in ways that are impossible to predict. It's very possible we are looking up at a coming avalanche that was triggered a few weeks ago when two hedge funds run by mortgage bond experts at Bear Stearns virtually collapsed creating as much as $20 billion in losses.  Bear Stearns has pledged over $3 billion to prop the funds but the reality is that the securities they hold, mainly on borrowed money, are virtually worthless should they be put to the test of an open market sale.

But these are, as we say, rumblings, treated by the mainstream press as background noise, the kind of arcane stuff that happens from time to time among the bankers with little chance for blowback. The reality couldn't be further from the truth. The Bear Stearns collapse is merely a canary in the mine or an important marker in a timeline.

What you do see reported these days is an unfolding disaster in the home building market.  Sales for new homes continue to decline; according to a July 26th New York Times article, "The Commerce Department reported that sales of new homes dropped 6.6 percent in June, and that sales in previous months were lower than first estimated. In the last year, new home sales have fallen 22 percent."

Along with falling sales come falling prices. In some parts of the country, Miami's just an extreme example, prices have dropped so fast that buyers are backing out of contracts, taking big hits in penalties rather than taking claim to properties that have lost a third of their value since the peak. All of this, painful as it might be to some, could merely be part of the customary ebb and flow of markets, thus limited to the home building sector and related parts of the economy.  It could, but it isn't, because of something that's come to be called toxic waste in the arcane world of investment-grade securities.

It was toxic waste that brought down the Bear Stearns funds last month and it is toxic waste that is now impacting on the sale of Daimler Chrysler and it is toxic waste that will weigh on the outcome of a long string of leveraged buyouts that have already been announced but that will require creative financing to close.

Toxic Waste has polluted the Entire Stream of Financing

On Wednesday July 25th there was yet another serious rumble and once again the stock markets took notice.  The nation's largest mortgage lender,  Countrywide Financial announced a 33% drop in quarterly earnings and 10% stock drop on Tuesday. What was particularly seismic however was this: "The culprit," the company said, "was a surprising jump in delinquencies by prime borrowers who had taken out home-equity loans". This was ominous news because it means that problems in the housing market had metastasized into what are considered, prime, or safer mortgages in addition to the sub-primes that were seen as the heart of the problem.  And here's where it starts to get tricky:

In today's world of hedge funds, easy money, high leverage, and derivatives (CDO's LDO's and RMBS's), new money can be manufactured out of anything, even the most risky housing loans.  This Wall Street magic, practiced by such bond stalwarts as Bear Stearns, Lehman Brothers, etc. works something like this:  a family buys a Mac mansion somewhere outside of Bakersville by taking out a teaser loan (for the first couple of years they do not pay any principle back only a small percentage of the real interest they have contracted for) that they could barely shoehorn into their budget (they didn't have to show any papers proving their income), and may have been told that by the time their real monthly payments kicked in two years down the road, the house they bought would have gone up in value so they would be able to refinance in a way that pulled out enough cash to keep up future payments. In other words, if everything goes perfectly, they might just be able to sneak in. Then Lehman Bros, say, buys this mortgage from the lender along with a number of other such and bundles them into bonds called Collateralized Debt Objects (CDO's) or Residential Mortgage-Backed Securities (RMBS's) that are sliced, diced and marketed on the basis of a risk calculation for the entire bundle.  The portion (tranche) of these securities that have the most sub-prime mortgages packaged together are called toxic waste by the industry. But even so-called investment-grade securities have a sub-prime component and it now appears that there has been collusion on the part of the bond rating firms (like Moody's and Standard & Poors) to make these securities compatible to large investors, like pension funds and university endowments that are restricted by charter from purchasing more risky bonds.

But collusion has been spread around, from the mortgage writers who have nothing to lose in getting the family into their dream home, as they pass the loan off to Wall Street, to the rating firms who claim they are not responsible for their ratings to the hedge funds that borrow against them to leverage their bets to the Feds who regulate the banking system and who have cast a blind eye on the pyramid.

Some will say, well, that's the market and these are sophisticated investors making choices, the markets are just working their magic.  If too many sub-primes default, some guys in Wall Street get hurt, big deal. Unfortunately, however, in today's gigantic money creation game, derivatives like CDO's don't only constitute the bottom of the spiral, in some cases they are way up on the chain.

In the Bear Stearns funds meltdown, for instance, less than a $1 billion in already risky paper was used to borrow another $20 billion! And the piper has not been paid, banks that are holding CDO's like these, have assigned a value to them on their books even though the CDO's are rarely brought to market.  But at some point they will have to revalue these holdings and potentially show major losses.  It is estimated that Wall Street has created $1.8 trillion in loans on top of just the sub-prime portion of the mortgage market and a further $10 billion on the primes, in the last few years. Put in perspective, $1.8 trillion equals about 1/7 of the entire US economy ($13+ billion) for a whole year.

As we've said, the other big holders of CBO's beyond the unregulated hedge funds and the banks, thanks to the credit raters like S&P and Moodys, are the major pension funds. That's important because while the banks might agree among themselves not to force a sale or mark to market their holdings for strategic reasons, the pension funds are by charter not allowed to hold anything less than "investment-grade" securities as determined by the credit rating agencies.  In other words, should the raters have to face reality and lower their ratings, the pension funds will have no choice but to put their holdings up for sale, and a fire sale it will be.  Once that happens the banks will have to recalculate the value of their holdings. This will not be pretty!

"......Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by sub-prime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets." (Bloomberg)

Remember, failing mortgages cause foreclosures, foreclosures put more houses back into the market forcing prices down, making it impossible for mortgage holders who need to refinance to meet the obligations of the 2/28 (2 years at a teaser rate, 28 at market rates) loans they have that are about to come out of the teaser period .... in California, one of the nation's largest home markets, by 2005 nearly 1 out of every 4 loans issued was a 2/28 sub-prime. No wonder, investors took heed when Countrywide Financial announced the depth of its woes.

Another rumble came with the Daimler Chrysler deal; it too, is not insignificantly impacted by that family struggling to pay off its mortgage.  Wall Street has been powered by a rush of private equity buyout deals that rely on leveraging.  The deals happen because investors are willing to step in and buy derivatives based on the future potential of companies that are sometimes being purchased for twice their market caps. Like speculating in houses, these kinds of deals work when everything is going up and lenders are willing to take on risk at a small premium.  At one point in this cycle, the difference between the riskiest rates and the best was only 3%.  Customarily that gap is closer to 9%; in other words sell me your toxic waste but pay me amply for the extra risk, is fast becoming the new mantra as fear sweeps in. Once that happens, deals structured on cheap money, cave in.

Best of Times and Worst of Times

These have arguably been the best of times for the masters of the universe. They have (in their genius) managed to create an electronic  mountain of money that has, by its virtuality, defied up to now linkage to anything in the molecular universe. For many, Wall Street has, through the tricks of the hedge-fund filter, been made immune to the laws of economic gravity.

Everybody's a player, the Fed's a player, the Comptroller of the Currency is a player, even the bond rating agencies have become players. The new Wall Street masters' alchemy is complex: with the sweep of a wand you turn bad debt (the new toxic waste) into investment grade "securities", you borrow against those securities to boost your bets; at the government level you bring the dollar to record lows thereby boosting, on paper (foreign profits in Euro's, say, translate into more dollars), multinational corporate profits, you flood the international financial system with the next round of newly generated money and voilá, like never before, all markets --bonds, stocks, commodities, derivatives, rise simultaneously.

Never mind the $12 billion a month being spent a month on the war --it's borrowed, anyway-- forget about the ballooning trade deficit --we'll just print some more dollars for that-- everybody wants dollars!

 Manufacturing, American Style

Having transcended the grimy steps, i.e.; workers (not counting a dozen or so million illegals at minimum wage to keep the rest of us waited upon and neat), unions, machines, factories, ERP, warehouses, shipping costs, the new business of America is to manufacture wealth directly in all number of packages, from consumer loans, to "teaser" mortgages,  to options, to derivatives, to CDO's to LDO's, to IPO's to... well, anything that supposedly spreads the risk, and more importantly, spreads the dollars to places like India and China where they will be taken, no questions asked. As the song says: "Nice work if you can get it."

Think of the Dollar as a century old brand name and that in our brave new world, most conveniently, the  Federal Reserve --the guys who are supposed to protect its value-- has licensed that brand to Wall Street, for nothing in return but the potential down the road for a Herculean hangover.

Bear Stearns, or the First Big Crack

Here's how the manufacturing process works: the base ingredient --yes, we exaggerated,  there is something sort of real underneath it all-- is a mountain of expanding debt at every level.  That's the beauty of it, if you happen to be an American working stiff, you get to borrow through your government, through Wal-Mart, through the plastic in your wallet, your house, if you have one, or through a specially tailored mortgage, that gets you into one.

The government gets to borrow like crazy too, and to spend money it doesn't have --nobody likes taxes-- for it's various enterprises, knowing you and your children will still be paying for these various enterprises far into the future. Wal-Mart and Nieman Marcus alike, take your plastic generated money and send it off to some exotic sweatshop where the prevailing wage is a dollar or so a day. The mega petroleum companies get another piece out of you as you drive back and forth to work --they know the real value of your dollar, even if you don't, and have adjusted accordingly-- the credit card companies take your interest payments and penalties, leaving the debt portion alone, and your mortgage company gets its interest-only payment for your house.  Who needs a raise in pay if all you've got to do is borrow some more! Didn't you just get another offer to consolidate all yours debts for 0%* (the asterisk explains what your real rate will be) from some other credit card company today?

If the motto of Wall Street many bubbles ago, was Gordon Gecko's rallying cry, "Greed is Good", today, for those masters the new motto has to be "Debt is Good".  The great revelation for the 21st Century is that people with little means make the best borrowers.  They pay more fees and penalties, and higher interest rates for longer times and that poor and rich alike around the world will take all the newly printed dollars we can make.

Billions and Billions of Dollars

Foreclosure filings in the U.S. jumped to 147,708 in April, up 62% from a year earlier, as sub-prime borrowers stopped making mortgage payments, according to data released by research company RealtyTrac Inc. on May 15. As foreclosures rise, the sub-prime-mortgage-backed securities in CDOs begin to crumble.

"How much could the losses be? It depends on who you ask, but estimates of $150 billion or more are quite common. Institutional Risk Analytics, a Hawthorne, California-based company that writes computer programs for accounting firms, says 25% of the face value of CDOs is in jeopardy, or $250 billion. But no one really knows. It is all guesswork, except that everyone seems to agree it will be large. " (Bloomberg Markets, "The Ratings Charade" by Richard Tomlinson and David Evans)

"More than a thousand U.S. companies were acquired in leveraged buyouts in 2006 -- a record $194 billion of deals, according to data provider Dealogic. More than $163 billion was borrowed to pay for those buyouts, according to S&P Leveraged Commentary & Data, more than total borrowings for the previous two years of buyouts combined. This year, through mid-June, $103 billion of debt was raised to fund buyouts. Over the next few months, more than $100 billion in loans will be sold to fund mammoth deals such as Cerberus Capital Management's acquisition of Chrysler Group and the privatization of SLM Corp., also known as Sallie Mae." (Wall Street Journal)

The trouble goes way beyond Bear Stearns and right to the heart of the way hedge fund managers get paid and hedge fund sponsors, like Bear Stearns, make their money.  CDO's, CLO's and their children are highly exotic mixes of different kinds of loans, some more risky than others.  They don't trade in any markets, like stocks and bonds, so it's anybody's guess what they really are worth until they get "marked to market".

Hedge fund managers get a hefty piece of the profits, around 20% in many cases.  They have every incentive to value their CDO and CLO holdings as high as possible and little incentive to mark them down as, in this case, mortgage failures start to crop up in major markets where housing prices are falling.

Against a background of higher interest rates, Fed tightening and Wall Street skittishness, sub-prime lenders have stopped pushing their wares with the same abandon.  Median house prices have been falling around the country and in some of the once hottest areas, prices have dropped dramatically.  To make matters worse, many of the sub-prime loan holders were directly involved in a house building industry that is cutting back. With fewer jobs, lower home values and rising payments, loan holders have no choice but to walk away from their properties. This tragic, perfect storm for the individuals could fuel a perfect storm in the financial markets that have fanned the boom.

An Air of Unreality

There is always an air of unreality on Wall Street.  The Bear Stearns crack was no exception. Had the funds been allowed to collapse a potential correction might have been put into motion.  Instead, what observers got was a charade, a game of chicken between two Wall Street powerhouses. When Merrill Lynch threatened the leaders at Bear Stearns that they would  bring the "collateral" (the CDO's Bear put up against their loans) to market, all eyes fixated.

Of course, in the end even Bear Stearns, a company not known for its cooperative spirit --they were the only big Wall Street firm to stay out of the multibillion dollar Long Term Capital Fund bailout when that fund collapsed in the '90's-- had to cave. In the end, they had agreed to put in $3.2 billion to bail out the less leveraged of the two funds. The first chapter in the sub- prime meltdown had closed with nothing more than a haircut for some punters, and the bruising of some very large egos.

One of the most anticipated stock market moves of the year took place a couple of weeks ago.  A major player in the leveraged buyout game, the wildly profitable private investment firm, Blackstone, with the Chinese government kicking in, launched what looked to be an IPO hearkening back to the Tech Stock years.  Public market investors in BX, were, as of this week down over 10% on the stock. Could it be that investors are aware that rather than getting in on the ground floor, they were getting to throw good money into a CLO-driven game that may have already played out? The BX guys were just cashing out.

EASY MONEY

Back in the late 1980's, the pioneering Wall Street leveraged buyout firm, KKR, had the temerity to attempt to buy out one of the pillars of the Dow Jones Industrial Average, the great American conglomerate Nabisco, a food company that also happened to own one of the major tobacco companies, Philip Morris.  KKR reckoned that given Nabisco's stock price, the total assets of all its various components along with the cash flow generated by Philip Morris,  far outweighed the company's market cap. They had generated the numbers to prove it, along with a plan to sell off some of the companies in the Nabisco  portfolio and a path to paying back the money they would have to borrow to make the deal.  They offered, for the time, a stunning $25 billion for Nabisco, an offer well above the per share price; the stockholders couldn't resist.  The only problem was that in order to swing the deal, KKR, a small private equity firm made up by a small group of money men, had to go into the banks and amass enough in loans (over $13 billion) to make the deal stick.  The landmark deal was so big for the time, that in order to pull it off, the US banks had to let in a number of foreign banks into the deal, and even then KKR had to find another $2 billion from smaller players to finally seal the deal.

KKR showed the way. And by today's standards, all that is as primitive as the gold standard, when paper money could only be printed if a deposit of gold stood behind it. Because of the system-wide debt orgy we've been on, now there're floods of  dollars out there looking for a home. Investors hungry to earn more than they can get from ultra-safe Treasuries, have been willing to accept all manner of CDO's  for a very small premium. It's this willingness, that's driving the leveraged buyout boom. Today, the spread between lower credit bonds and US Treasuries is at a historical lows.  This lack of a risk premium makes it easy for buy-out companies to raise money. In the remaining months of this year, they have been expecting to float another record amount of over $200 billion for buyouts that have already been announced.

"In late April, a Bank of England report noted parallels between the markets for sub-prime mortgages and for poorly rated corporate credit, heightening concern about the CLO market. CLO's are a form of collateralized debt obligation, or CDO. Besides corporate loans, CDO's often hold mortgage bonds and junk bonds." (WSJ)

"CLO's, as they're called, are giant pools of bank loans bundled together by Wall Street and sold off to investors in slices. They aim to spread default risk an inch deep and a mile wide. Last year, more than half of the loans behind the record wave of buyouts were parceled out to investors as CLO's, bankers say."

."CLO's are the equivalent of the savings and loans in this cycle," says Kenneth Buckfire of Miller, Buckfire & Co., a restructuring advisory firm. Savings-and-loan institutions gobbled up a mountain of junk bonds issued to fund the 1980s buyout boom. A spike in corporate defaults during the recession of the early 1990s, coupled with a sharp downturn in real-estate markets, caused many S&Ls to fail." (WSJ)

What's all the more amazing is that this latest bubble has occurred under the watchful eye of Allan Greenspan --a former disciple of Ayn Rand and supporter of the "hard money" gold standard-- and now his hand-picked successor, Ben Bernanke.

Maxxing Out

Debt, of course, is endemic, like the massive trade deficit that the US has run up mainly with China, Japan and Saudi Arabia. This deficit is now climbing upwards towards $1 trillion dollars a year.  As a direct result China, alone, now holds over a trillion dollars in US dollar reserves, money that is recycled back into the pool.  To further fuel the need to borrow, the US government also runs a domestic deficit that is somewhere close to $400 million per year. Individuals are no slackers either:  In recent years Americans have taken out cash from their home equity by floating new mortgages.  In addition,  Wall Street has made credit card borrowing as easy as sub-prime borrowing by flooding customers with offers for new cards that consolidate the debt already run up on other cards. As a result the average household in the US owes an astounding  $28,000 in plastic debt.

The Federal Reserve, once viewed as the bank of last resort, in place to guard against a meltdown, has in recent years become the great not so invisible hand that guides the markets.  When the Fed sees an economic situation it doesn't like, it has the power to move interest rates up and down.  What the Fed saw after the great tech bubble burst, the ensuing corporate scandals at companies like Enron, and at the investment banks that manipulated the stock market in the late 90's, and then 9/11, it launched a highly aggressive policy that produced some of the lowest interest rates in history.  Not only did the Fed open the gates of money with these low rates but it also lowered the standards in which it controlled the terms banks could lend money.

Perhaps there are several hundred million people out there in the world still ready to take any dollars that might come their way and perhaps someone will come up with a machine even more powerful than the Chinese government to create a way.  If so, the party will continue, if not, we fear there will be plenty of blood on the floor before this is all over.

In this wash of borrowed money, an important component has been the Iraq War, that has been financed on credit.  Bush has never asked any taxpayer to open his wallet in this struggle that he has determined, as late as just this week, as an existential fight for our country's survival.  Rather, he has chosen to lower taxes for the duration! No pain has worked pretty much so far but Americans are fighting for schools, healthcare, highways, the environment, pensions, wages in costs that look silly next to the $12 billion a month the war is now costing, even before we start adding in the price of supporting the displaced persons, the permanently disabled,  the Iraqi militaries, infrastructure in Iraq, etc. that is sure to weigh on the next phase. As the economy does a Hindenburg, more and more Americans are going to be looking at the cost of the Iraq enterprise, the rumbles are already clear.

Technorati Tags: Wall Street, financial markets, CDO's, toxic waste

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

                W. B Yeats, The Second Coming

With so much going on, you have to wonder why there's no real national discussion on the burning issues of how to get out of this War and, perhaps at the same time, how to deal with a failed presidency with some 600 days still to go. Yes, we've come a long way from the kind of silence that Cindy Sheehan pierced two summers ago. At that time the stranglehold on discourse was all but suffocating; only the public was ahead of the politicians and the press pack that follows them like a chorus line.

Today, the President rests at about 28% approval and most of us, (6 out of 10 according to the latest New York Times/CBS poll agree that we should never have got into the Iraq War), including much of the MSM,  have come to the conclusion that the War has been a disaster and that we need to find a way to get out of there; yet there is a near total dearth of fact-grounded serious discussion on the major TV stations or in the mainstream press as to how we might best get out.

There are, after all, several simple truths to the story that get chopped up in the sound bytes:  the Iraqi government we are "buying time for" tramps Shiite waters with US military issue water wings. The Iraqi streets from North to South are de facto controlled by the various militias with tribal and religious affiliations.  There is no other military force the Green-Zone-bound government can rely upon except the US Army.

That means that as good as Gen. Petraeus might be, he is, in any case, years late and many troops short by any real doctrine. All the opposing forces know this, including the government, itself. Thus, America bleeds real soldier blood (as much as the stream of body bags and wounded is still kept hidden) and the cost of war gets finessed by all who don't link it to a weaker dollar, higher oil prices, and an out of control future deficit when there is a real reckoning, one that --and you can bet your bottom dollar on this-- will be, indeed,  linked to the next pitch for sacrifices on the back of Medicare and Social Security. 

A Sea of Half Truths

 Is it our fate to see the discourse forever bogged down in a sea of half truths, slogans and talking points that serve only to oversimplify, even while it's been the fud of oversimplification and threats that's gotten us into this terrible national dilemma? Many people peripherally familiar with the country knew that Iraq's Shiite majority was being severely repressed by Saddam Hussein's Sunni government and the Kurds in the North would want nothing but autonomy or better in a future country if given half a chance.  They also knew of the deep links between the Iranian government and the Shiite mullahs who served as the leaders of the Shiite population.  This was far from a secret when we stopped short of going into Baghdad the first time around.

For instance, it was also no secret that Saddam mercilessly slaughtered Shiites in the South as soon as we let him take back control of air space there. Anybody familiar with the region knew a lot about the failed history of military occupations of  Arab countries by non-Muslims, no secret since the Crusades! Many people in the military and intelligence communities also knew just how weakened Saddam was by the air blockade we'd carried out along with the Brits --which in retrospect looks pretty effective compared to what we've got now. They knew Saddam had not reconstituted his major arms programs and yet that information was buried by the hawks but put in plain site by Hans Blix's UN team.  And, yes, the informed intel community also knew that Saddam Hussein was no friend of bin Laden and clearly would have had nothing to do with 9/11.

All that's important because it illustrates just how insidious half truths become in a point-counterpoint, "balanced", media world. Yes, Saddam Hussein sent money to Palistinian suicide bombers' families.  That's ugly but it does not mean that he supported terror in the sense that Bush and Cheney are now talking about, post 9/11. It was also reported that Saddam had a training base for plane hijacking, which turned out, to be a counter-plane hijacking center.  There was also supposed to be an Al Qaeda camp in Iraq and that for anyone who has been following closely, turns out to have been in Kurdish territory --under our air protection-- near the Iranian border not under Saddams control and probably aimed at Iran. Half truths, are easy, if you have an office full of spinners at your beck and call.

The latest half truths hearken South Korea, Japan and Germany as examples of democratic nation building gone well as if there were any similarity to the situation in Iraq.

In the same insidious, spinful vein the President, even today, in his War-on-Terrorism mode, continues to characterize the War in Iraq as basically an American/ Al Qaeda struggle with the Iraqi Sunnis and Shiites as somehow little more than the window dressing. In reality, the foreigners in Iraq are most significant when viewed as symptomatic of the strategic failure.  They would not be given shelter and protection if they were anathema to the far from helpless, well-armed local Sunni populations they live among, many of whose chiefs are on the US payroll.

It's hard not to remember Bush himself, in his most Richard III moment, actually taunted the foreigners with his Bring'em On  piece of bravado. As a result, they are able, through targeted suicide bomber attacks,  to raise the stakes and they are now getting the kind of invaluable training that would give any American soldier who might have to fight them in some other hostile environment, the willies. Already we get reports of these same fighters stepping up activities in Tripoli, Saudi Arabia, Algeria and Morocco.

But as the President reels from one failed project to the next, the even more publicly taboo --outside the left blogosphere, that is-- question arises as to why we are not talking seriously about impeaching him or forcing him to step down. The common wisdom has it that no one wants to see the Congress and government getting tangled over that; not the public, "looking for solutions not rancor", nor the opposition politicians and strategists, "looking forward to the next election cycle". 

The problem with that wisdom left unquestioned is that the President still has more than a year and a half in office and things will not stand still to 2009. At some point, quite soon, we may be forced to ask ourselves whether this democracy, devoid of the parliamentary check of a vote of no confidence, can live in a dangerous fast moving world with a seriously wounded duck at the top.

A potential showdown with Iran is already beginning to percolate to the top of the news cycle. This week, the US announced that it had amassed a large carrier strike force in the Persian Gulf region. A UN Atomic Energy Agency (AEIA) Report has made it clear that Iran continues to move forward full speed with what is clearly its nuclear arms program; something that the US has stated is "unacceptable".

We need to be discussing now whether we can, and if so, how, live through a major crisis with a President whose popularity remains in the Richard Nixon low range and who has basically lost all credibility with Americans and the rest of a world whose cooperation we might need? 

 The Bush Charm

President Bush held one of his infrequent press conferences in the Rose Garden at the White House a week ago, Thursday.  What we get each time is a display of his extreme verbal and mental limitations and a picture of his innate stubbornness.  The President once again demonstrated what's he like when challenged --the Press, in case you haven't noticed, has now gotten up on its knees--  without having Tony Blair to speak for him. In one pathetic sequence where he managed to string a thought together in multiple sentences, he even remarked, unembarrassed, "wait a minute I'm on a roll."

On Iraq, he insisted on the critical importance of the combat there, "the great struggle of the 21st century," and chided his opponents to speak to what would be the dire consequences if the US fails to win there. Once again, he seemed to glide blithely over the central flaw in his argument; i.e; If his War is indeed, existential as he argues ("failure is not an option"....... "the enemy would follow us here") then why are we only adding 30,000 soldiers to our force there? Why isn't he on his bully pulpit urging we go all out, do everything in our power both here at home and in Iraq to achieve success in this battle that he declares will only spill over onto American soil if not stopped in Iraq?

In reality, even Bush knows that most people familiar with the ever more fractured situation in Iraq give the Surge as it's being carried out by General Petraeus today, little or no chance of any real success, given the increasing sophistication of the enemy, the political maelstrom in Baghdad and now Kirkuk, the state of the US Army after 4 years of attrition, and the lack of public support in Iraq and at home. In fact, the violence level continues to climb, more Americans (May has been the bloodiest months for American troops this year)  and Iraqis die day in and day out,  the attacks and tactics of the enemy continue to evolve, the classes who might have served as the core of a "stable, unified government that is an ally in the War on Terrorism" ( Bush's definition of victory in his Rose Garden press conference) continue to flee the country as divisions between Sunnis and Shiites further harden and the war spreads north to the oil fields of southern Kurdistan.

Here at home, even as Bush has managed to intimidate the Congressional Democrats into a funding bill that lacks hard dates, public support for the war continues to plummet.  Only 1 in 4 Americans  --the same New York Times/CBS poll mentioned above-- , thinks the War's not being lost. The political clock in Washington is linked directly to the coming '08 election in which the Republicans could be decimated if they insist on going forward in this mode.

Après Moi, Le Deluge

On one level it all looks cynical or plain wishful, take your choice. The military proponents of the Surge know, even as they up the human losses, they are laying the groundwork for a long campaign without either the facts on the ground or the forces to back them up even as the politicians in Washington know that time is fast running out. After all, today's Congressional $100 billion only covers costs until September.  By that time, a large number of formerly safe Republicans will be staring into the bright lights of a looming election season like deer in the road

But things are not happening in a void in a region where the Administration's blunders haven't been limited to Iraq and Afghanistan. Their naively-backed elections in the Palestine territories has laid the seeds of an ongoing civil war between Hamas and Fatah with the Israelis being drawn in.

The same holds true for Siniora in Lebanon where his government is tied down in a bloody siege in the north of the country.  In his capital, a tent city stands ready to be filled by tens of thousands of Hezbollah supporters whenever the word is given. It's assumed that both Syria and Iran can pull those strings; Syria, because it wants to block the US backed Harrari murder tribunal from moving forward and Iran, the main winner along with Syria of the Iraq War, because it is holding an array of aces and trump cards as it pushes forward toward getting its nuclear weapons capability.

The Karzai government in Kabul seems ever less viable and in Pakistan, where Bin Laden seems to be safely tucked in, there's another balancing act where the outcome is far from certain.  And unlike Iran, Pakistan already has the bomb and delivery systems aimed at India and the Persian Gulf.

A Unitary Impeachment?

One looming problem is that Bush and his minions have pushed incessantly for what the scholars of the right call a "Unitary President".  It is by this theory that the President can claim by way of a singular interpretation of the Constitution broad powers with or without enabling legislation. Accordingly, Bush has added so-called signing statements to Bills he's signed negating carefully negotiated portions of the new law that he doesn't like.

A unitary president has great latitude in making decisions unhampered by the constraints of Congress, particularly in wartime.  Bush has already proclaimed that the vote that authorized Iraq further extends his intrinsic war-making powers.

The unitary president theory is also at the root of Bush's most pressing legal problem, his impeachment-level authorization of a domestic spying program that is too secret for the voters to know about. Thanks to some riveting testimony the other week by James Comey, we now do know is that such model civil libertarians as former AG, John Ashcroft, his Deputy, Comey, and the head of the FBI, Robert Mueller along with 30 others threatened resignation rather than agreeing to carry out the program.  That sounds like a smoking gun, should the occasion demand his removal (along with Cheney's, of course).

It's hard to imagine a line that even John Ashcroft wouldn't pass over but we heard last week that our present Attorney General, Alberto Gonzales, was sent by Bush to Ashcroft's hospital room along with Andy Card, the President's chief-of-staff, to try to get the ailing and heavily sedated AG to sign off on the plan, even though they knew Ashcroft had already formally appointed Comey as acting AG before he entered the hospital.

18 Months is a Long, Long Time

Eighteen months is a very long time.  A lot can happen. Bush is mainly already a lame-duck with little leverage over his own party.  One test of just how low he's sunk in that regard will come with the Immigration Bill that's now being debated in Congress. In the Senate Bush will need all of the Democrats, including Lieberman and nine Republicans to get past a filibuster threat.  In the House, Nancy Pelosi has said that she will not pass any Bill without at least 70 Republicans sighing on. Any changes to this heavily compromised piece of legislation could see pro-immigrant Democrats peeling off as well as Republicans looking for cover. A Republican defeat of the bill would further solidify the Democratic Hispanic vote for a good long time.

Anti-Mexican immigration tends to be as hot an issue among a large portion of the Republican base as the abortion issue is to a big and somewhat overlapping swath. Bush is going to have to twist a lot of arms to get this Bill through.  It's hard to see where he gets the leverage.  If the Bill fails, it will be his failure and he will have further lost power, even within his own caucus.

The question arises, will it be the Republicans, probably including the President's father, who decide that not only is their party coming apart at the seams by the combined centrifugal forces of Iraq, abortion and immigration and that a President can't function in a crisis with an approval rating in the low 20's where Bush could be heading if something else goes wrong. 

Moments of crisis require leadership and that leadership relies on its ability to be trusted by key foreign and domestic stakeholders. Crisis leadership also depends on a certain level of articulateness.  Iran alone probably has the capability to apply serious pressures in Afghanistan, Iraq and Lebanon and no doubt could seriously disrupt the flow of oil in the Persian Gulf, if it wanted to take on some self pain. But crises tend to come out of left field, as in 9/11 and Katrina, like say, a Musharif-assassination level event.

The Iraq fiasco has left the United States military, extremely vulnerable. Without Persian Gulf oil, world fuel costs would spiral to who knows what multiple of today's prices. Rationing would be required. Strategic reserves that might be tapped to soften the swing would be held back to support major military moves. The American President might have to initiate a draft, put controls on food and fuel prices, and build a coalition of significant allies.  Can anybody imagine Bush or Cheney pulling off any one of those feats?

We can imagine the President's father, along with James Baker, leading the take-down charge.  But would Bush II pay it heed especially if given the unitary president argument to rest his authority on? Would he and Cheney even obey an impeachment conviction if it came down to that?  In the Nixon case, we congratulated ourselves on the orderly transition. But at the time, the Russians hung back. This time around, outside events might not be so benign.

 TV President

We couldn't help remarking, a month or so ago, when President and First Lady Laura Bush's made a cameo on American Idol, how flat they came off.

The conventional wisdom, pre-Karl Rove, has been that TV presence trumps all else when it comes to retail politics. What Rove proved, is that given the right grouping of signals, even a very weak product can be packaged and put over the top. You need only remember the ultra smart, commander of the facts, Al Gore, huffing across the stage in frustration as his debating opponent, the Governor of Texas, successfully bumbled around the issues with meaningless slogans and a few hot buttons.

What is true is that the TV audience knows how to take its queues, Even at the dawn of TV politics, a couple of years before the Kennedy Nixon debate, the poltical  power of the media was felt.  It's more than understandable that both Bub Schulberg and Elia Kazan would have picked up on the power generated by TV's first long running reality shows, known as Kefauver, McCarthy and the House UnAmerican Activities Committee hearings, since they had both played, under Committee duress, roles in the blacklisting of some of their closest artistic collaborators. 

In 1957, on the heels of their On the Waterfront, the two teamed up for what stands out as the first major work to take a critical look at the powerful role TV would assume in pushing a merit less, prepackaged candidate onto our modern democracy. Unfortunately, the film, A Face in the Crowd, for a number of reasons, was a box-office failure that quickly relegated it to a bin in a studio warehouse. Needless to say, despite its scripting and casting flaws, the film is as relevant today as it was the day it was made.

Should He Stay or Should He Go?

This Bush may last out his term.  The Democrats are not likely to play the impeachment card unless it is thrust upon them. The script at this time probably reads more like the scene in On the Waterfront: in Marlon Brando's character's lament, "I could have been a contender," referring to the dive he took for the mob. Would Bush and Cheney take that dive?

As we've pointed out, Bush would be a major liability should things go south, somewhere.  If he were to be truly boxed in by his own party and the military, who, after all, are being severely weakened once again by his fiasco, we might see something akin to a transfer of power within the  Republican Party.  This would mean a joint resignation on the part of Bush and Cheney and the elevation of a white night among the Republicans who would be a caretaker until the election.

This is a long shot, as we've said, but it is far from impossible. Someone has to extract us from Iraq and if Bush were to refuse, hanging on to the surge until January 2009, it's somewhat likely he would be forced out, à la his ex-mouthpiece, Blair was in Great Britain.

The Case for WMD

In Washington, the hypocrisy often runs thicker than the Anacostia River. This week, it even surpassed the sludge rate at the Blue Point Water Treatment Plant.

As soon as news of Scooter Libby's conviction was announced, you had the law and order guys clamoring for an immediate presidential pardon.  These, of course, are the same guys who impeached Clinton for deposition testimony regarding his sexual peccadilloes. The only exception in their ranks was Newt Gingrich's inner circle, who had their own hairs to split. 

Scooter Libby was convicted of lying to a FBI agent as well as to a US District grand jury. By the end of the week as Bush was getting on a plane to fly to South America to 'bolster democracy' there, Gingrich, sensing the vacuum left behind McCain for 2008, was confessing on evangelical radio that he just happened to be in the midst of an extramarital affair while he was leading the charge against Clinton. Of course, he emphasized, he didn't lie under oath to anybody about it.

In Scooter's media defense the talking points had it that Libby had  fallen on his sword for Cheney. Of course it wasn't that kind of falling on your sword that has serious, irreversible, personal, consequences.. This was the stunt man and ketchup kind of falling on your sword.

The words that got Cheney and  Libby so riled, and that launched a White House whispering campaign involving the outing of a CIA agent, happened to challenge the Big Lie that Bush asserted into his State of the Union in the lead up to the war.  When Joe Wilson, who the Washington Post called a "blowhard" as recently as last week, published a New York Times Op/Ed piece stating that he'd gone to Niger for the CIA and then reported to the administration that the story about Saddam buying "yellow cake' was much less than it was purported to be, folks in the White House went berserk.

The timing of Wilson's article a couple of months after the invasion just happened to undermine the new narrative they were trying to create as it became clear that no WMD program existed in Saddam's post Desert Storm Iraq. The Administration was in the midst of concocting a plotline that ran something like this:  "Yes, it seems we might have been wrong about Saddam's WMD but so was the CIA and every other intelligence service, so who can fault us for erring on the side of security?."

Wilson's piece cast an important ripple in the pond, calling attention to the mainly untold story of the triumvirate's (Rumsfeld, Cheney, Bush) heavy handed meddling with what they were getting from the major intel agencies .  Somewhat ominously for them it also signaled a shift in support in the mainstream media  Both the Post and the NYTimes had played a major roll in the big scare that laid the foundation for Bush and Rice's mushroom cloud claims. By running the Wilson story, the Times was signaling a back peddling from what might be called, its Judith Miller period.

Fitzgerald's (the special prosecutor) investigation and eventual trial against Libby was a window into the way the innards of this White House operates and also a window into the cozy relationship between the (liberal) MSM and the political powers that be. For doing that in his highly professional and focused way, he did the rest of us who live outside that tiny circle a major service.

For Judith Miller, the high flying reporter, it meant first a fall from freedom --she ended up spending time in jail for not revealing her sources, an act that might have gained respect for her-- then a loss of job and prestige as it became clear that her reporting represented a direct link between the Times front page and the Vice President's office.

Sunday Morning

Through testimony made public by the trial, we later learned that one option considered to deflect the damage and get back at Wilson was for Cheney to go onto Tim Russert's highly influential Meet the Press show.  Since by mainstream TV standards, Russert is one of the best prepared 'adversary' interviewers,, this piece of testimony should give us all pause.  Cheney's press secretary at the time, Mary Matalin, a personal friend of Russert, figured Cheney could spin him at will. That became a twisted subplot in the trial when it turned out that one of Libby's lies regarded the same Russert. Libby told the FBI that he didn't remember his boss scribbling a note to him on a clip of Wilson's article but first got interested in the Plame/Wilson relationship when Russert brought it up in a telephone conversation a month later. Russert testified that he never made any mention of it in their conversation.

Courtroom Spectacle

In Washington where everybody knows everybody, outside of the reporters who worked the VP beat and Libby/Cheney, all agreed that the trail was the best show since Bush got to town.  For once, the spinners, and the scribes who carry their water, were forced to talk under oath. Imagine, truth with some potential consequences... perjury! 

Little wonder then, that there is such a clamor for an immediate pardon. Jailing the message crafters in Washington ranks with revoking the fishing licenses of guys who stock and then over-fish their own trout ponds. In the same editorial that the Post slammed Wilson, the editors decried the potential that their off the record leaks might dry up.  Again, that's about as likely to happen as the Titanic rising from the bottom of the sea intact and continuing on with its maiden voyage, band still playing on the deck.

Intelligence

The real story, of course, was about the use and misuse of intelligence.  There are hundreds of thousands of full time people generating intelligence for the government at a cost of billions of dollars a year. Yet, as we know, on every assumption for the War, the intelligence was wrong.

Bush, Cheney and Rumsfeld chose to cherry pick as did the MSM. The main source of much of the information that got used in the infamous Colin Powell war case speech before the UN Security Council was derived from stuff supplied by guys, like Ahmed Chalabi, who wanted to goad the US into an invasion and other dubious types --Curveball comes to mind-- the CIA hadn't even talked to. Remember that Powell had CIA head George Tenet and later to be made Chief Spy, John Negroponte right behind him as he created the most memorably embarrassing show in New York since Nikita Kruschev's shoe banging concert.  .

Sadly, the rule of the game, of course, is that in the face of willful power, spin trumps intelligence every time. We, and especially the MSM who inform us and upon whom we depend so heavily, have to question why we gave this leader a pass until he had failed overwhelmingly. That's despite the fact that this is a guy that right from the git-go seemed... well, haughty and uninformed.  Amazingly, here's a President that did not get elected by a majority of voters but instead was inserted practically by a coup in which a majority of  "constructivist" Supreme Court judges trumped the verdict of a state's supreme court.

Controlling the Media Agenda

Ferdinand Céline, in his masterpiece, Journey to the End of the Night, describes the euphoria that engulfed all of France as the troops were being mobilized for the great, senseless, bloodbath that was to be called World War I. Perhaps, the call to war hits some ancient button buried deep within all of us.  The press implicitly feeds on excitement. For a moment they get the eyeballs and attention they think they deserve. For the media bosses, there's a chance to boost revenues.

Fear, it seems, has the same effect.  Judith Miller  made the nation's most prestigious front page writing about the potential for biological warfare and loose nukes in scary, half-guarded places in the outback of the former Soviet Union. The message was clear, guys like Bin Laden and Saddam Hussein could get a hold of these materials with little trouble.

Today,  of course, the same press is so loaded with words like 'disaster' and 'fiasco' when it comes to Bush43 and Iraq that we hesitate to use them anymore. Still, we can't help thinking about the fallout. Who gets to deal with the consequences flowing out of the fiasco? Is it all some kind of a game?  Not, of course, when you read the fine print of the Iraqi Oil Plan that is being foisted on the al-Malaki government.  Surprise, surprise, it would turn out to be the most favorable agreement for the Big Oil companies in the last 30 years.

The Administration would trumpet the adoption of he Plan as a major political victory for them and Maliki. In truth, it would only lay the groundwork for violence down the road even if the lid could get stuck on somehow in the next year or two as we back out.

We are the information society, after all. Commentators talk about information as the new currency.  Intelligence, the non military kind, that is, is drawn to the country from all over the world. We've got great universities and leading edge businesses to draw them, a large population of our own educated and informed people, we've got public radio, bloggers and the Internet and we've got a giant media competing for our eyeballs to boot. All that intelligence is trumped by what? we have to ask.

It's the Agenda, Stupid

The thread running through all this is how easy it seems to be for the Administration to set the agenda. Events play a role but it's who gets to spin them that rules. What's needed today, of course, is smarts, intelligence of the real kind, analysis and action on our part, even if it takes sacrifice. This is a particularly definitive moment now, not because of terrorist threats, nasty as they might be, but because we are completely vulnerable to a major cut-off of the world's oil supply and will be for the next decade no matter what we do.

The purported power of the Bin Laden movement among the Arabs has been his messianic cry for the unification of the Islam countries into one great Caliphate that would stretch from the eastern tip of the Philippines to the south of Spain. In reality, this would be about as likely as a call for the reinstatement of the Holy Roman Empire in Europe by a bunch of guys with sanctuary high up in the Swiss Alps. But the Arabs, who are wont to refer to the will of Allah (inshallah) regarding all things big or small, falling behind the rest of the world as this period of global economic integration takes hold, are leaderless. Lately, this leadership, even in their own backyard is inexoribly swinging towards the non-Arab Iranians, the Iraq War's big winners.

Even back in what might seem, today, like simpler times, before the nation states, there never was a Caliphate, in the sense of a political entity, and there never was a Holy Roman Empire with more than temporary and limited sway. Bin Laden's restoration would mean wiping the slate clean of all the ethnic, tribal, cultural, national and historic notions of the varied peoples, not to mention the economic underpinnings of coreligionists in countries as varied from each other as, say, Indonesia and Tunisia.

Today, Al Qaeda in Iraq, far from positioning itself as a unifying force among Muslims has clearly defined itself as a Sunni fighting force that specializes in terrorist bombings aimed at Shiites. of Iraq. This Iraq branch is also not far from the Saudi border and Saudi Arabia is Bin Laden's real target. With Saudi oil money, he would truly become as big a threat as we, by playing into his hands, have already made him out to be.

The Persian Gulf is, of course, where most of the world's oil reserves lie. Without a steady supply of that oil, the world's economy would shut down in a number of days. The area is also as unstable today as a vial of TNT in a rapper's pants pocket.  There are nuclear weapons within range, the US, Russia, Pakistan, India, and  Israel all have the weapons and delivery systems. Iran's nuclear program is producing plutonium that could be used for a dirty bomb and they appear to be inexorably moving towards the possession of warheads and delivery systems. 

While the US grinds up over 2 billion dollars a week merely sustaining its position in the theater both Iran and Saudi Arabia have oil money to spread around. Iran demonstrated this summer in Lebanon just what kind of a payback they can achieve with that money, right in Saudi Arabia's and Israel's backyard

If the advance of Iranian influence into Sunni areas like Western Iraq isn't already a great enough concern to Saudi Arabia, Bin Laden adds the particular threat of resonating with the beliefs of a large number of the Saudi population. He has already proven effective in forcing the Saudis to resist US bases inside the kingdom. Now, quite reasonably given the botched situation, a majority of the US population wants a military pull out of Iraq.

As US troops pull out either sooner or later there will be a power vacuum left behind. It's a given that the government in Baghdad will be Shiite led though not clear whether the Shiite leadership will fall to Moqtada al-Sadr  In any case, Iranian influence is assured. The Saudis will want to come to the aid of their fellow Sunnis in Iraq.  The question is how they will be able to supply military muscle to the Sunni militias and whether the central government in Baghdad will even entertain the notion of a semi-autonomous Sunnistan in some loose federation with them and the Kurds in the North.

 It is possible to imagine a grand accommodation that results in the expulsion of Al Qaeda from Iraq and some relative stability. This would require, however, some major stretches on the part of Sunnis, Shiites and Kurds inside Iraq and the Iranians, the Turks, the Saudis, the Israelis, the US, the Syrians, and some others, like Egypt and Jordan we've probably forgotten about and could easily fall apart even if accomplished.  In this scenario, Iraq ends up as a very loose federation that mainly shares oil revenues and a permanent solution is found for Israel and the Palestinians.

This unfolding, if  remotely possible, would require, even with the most intelligent US leadership in generations, and the greatest combination of feats since Hercules ran out his string. What's more likely, best case, is a muddle through that manages to keep the oil flowing for a few more years, at least.

But sooner or later the oil spigot will be shut off. A side-note is the numbers coming out of Saudi Arabia: for the last couple of years their production has come in lower than anticipated. Some of the leading geologists in the "peak oil" camp make the point that estimates of state secret Saudi reserves are unofficial and have remained level even after thirty years of steady pumping. Assuming that the supply of cheap, abundant oil is going to end either gradually or abruptly, it seems, utterly ignorant on our part to move forward in business as usual mode.

Our vote in the next election will go to the first viable (dare we say, intelligent?) candidate who promises to launch a Manhattan Project like effort to accelerate (clean) energy independence.  But even then, it may be too late to avoid what could abruptly result in a mad max scenario as countries fight desperately for energy sources.

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