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The Pentagon Is the President’s Private Army

Wednesday, November 5th, 2008

By Fred Reed | The Pentagon, methinks, is out of control. We no longer have a military in service to the state, but a state in service to the military. Few notice (I suspect) because of two ingrained habits of mind.

First, we think of the President as just that, the President, the country’s civilian governor who, oh yeah, is technically the Commander-in-Chief. “Technically,” because he isn’t really in the military and doesn’t strut about in a uniform with ribbons and feathers. He seems more a CEO than a general.

Second, we tend to think of the military as a federal department under civilian control. The Pentagon carries out policy, we believe, but doesn’t make it.

Would it were so. The military today is hardly under civilian control. Note that Congress long ago gave up its power to declare war. This is crucial. Politically it is far safer to acquiesce in a war than to declare one.

In practical terms, the checks and balances in the Constitution no longer restrain the Commander-in-Chief, and thus not the soldiery. (The Supreme Court has become a mausoleum. It might be replaced by a wax museum without anyone’s noticing.) The Pentagon is now the private army of any president who chooses so to use it.

Our foreign policy has been militarized. This is not just a matter of countless alliances and bases abroad. A few days ago, the military attacked Syria. This, an act of war, was a result not of national but of military policy. So far as I know, the attack was neither ordered nor authorized by Congress. The soldiers do as they please, and we find out about it later. This is not civilian control.

Such occurrences are inevitable when the military controls policy. Soldiers are truculent by nature, think quickly of military solutions, and need enemies to justify both their existence and their budget. Among recent consequences: attacking Syria, occupying Iraq and Afghanistan, bombing Pakistan, bombing Somalia, threatening Iran, threatening North Korea, encouraging Israel to bomb Beirut, arming Georgia, and aggressively expanding NATO to encircle Russia.

Ominously, we now accept that the behavior of the armed forces is none of our business. Note the years of expectancy as we waited to see whether the Commander-in-Chief, a de facto six-star general, would attack Iran.

I suspect that few realize how militarized the United States itself has become. The transformation has been inconspicuous. The Pentagon avoids undue attention. Quietly it has expanded its reach.

Abolishing the draft was an important step, since it severed any connection between the upper levels of society and the armed forces. The educated don’t much care what the army does as long as they don’t have to help do it.

The economy also has been militarized. Although the United States has no national enemies, it spends phenomenally on a martial empire whose only purpose is to be a martial empire. Add up the “defense” budget (it was last used for defense in 1945), the war bills, black programs, Veterans Administration’s budget, on and on, and you reach a trillion dollars a year. A country in decline cannot long waste so much money. Perhaps as important, the military cannot spend so much without gaining great if unnoticed political power. In particular, the production of hugely pricey weapons has been woven into the economy to such an extent that it cannot be brought under control. Cancel the F22, the JSF, and suchlike, and the economies of politically powerful states go into recession. None dare do it. Close big bases? Whole towns would shut down.

The country has no need of such a military, and especially not of the formidably costly weapons. Having no plausible enemy of any sophistication, the Pentagon exercises itself by attacking primitive nations in the Third World, and usually losing. For this you do not need an F22. You could lose as well with slingshots.

The spectacle of an alleged superpower struggling to beat yet another collection of ragtag guerrillas may seem darkly comical, but winning or losing isn’t the point; the endless wars keep the contracts flowing, the promotions coming, and fuel demands for a larger army.

We would do well to bear in mind the dangers of excessive military influence in national life. Professional soldiers have little in common with the rest of the country. We like to think of them as Our Boys in Uniform, the brave and the true and the patriotic, defenders of democracy, and so on. It isn’t so. The officer corps is authoritarian to the roots of its soul, has little use for democracy, and prides itself on blind obedience. Soldiers do not readily distinguish between dissent and treason. Further, they regard civil society as an unworkable anarchy of weaklings who lack the will to fight.

The gap between military and civilian consciousness is huge. The ideal officer goes to a service academy where, in late and impressionable adolescence, he learns to walk in squares, always obey, and regard the polish of his belt buckle with insane concern. Thereafter the only answer he knows is “Yessir.” To a civilian, the conformism, the lack of independence and, yes, the pride in the lack are incomprehensible. Then, for thirty years, the soldier spends most of his time with similar people and comes to believe that it is not just a reasonable but the best way to live. Like cops, soldiers tend to socialize among themselves because they fit awkwardly into civil society. Watch a colonel at a civilian cocktail party. He isn’t sure whether he is “Sir” or “Bob.”

And soldiers seek war. They will say they don’t, of course. Can you imagine Tiger Woods spending thirty years practicing his golf swing without wanting to get into a tournament?

The military mindset is not American, not consonant with the ideals the country stands for and to some extent achieves. Most imperfectly, yet genuinely, America has cherished dissent and eccentricity and freedom. Yes, I know about the intolerance of small towns and I grew up in the South. But compare America at its worst to any military dictatorship.

Which is where we seem to be heading. Today the Pentagon – again, Mr. Bush is the Pentagon – openly seeks domestic power. For example, (this from Salon) Army combat troops will now be “assigned on a permanent basis to engage in numerous domestic functions” – including, as the article put it, “to help with civil unrest and crowd control.” That is, the Pentagon will be able to crush dissent. One expects this from Guatemala, which we seem bent on becoming.

Recall further that the Pentagon has been calling for the power to conduct domestic surveillance of the general population, as for example in its program of Total Information Awareness. The NSA, CIA, the Commander in Chief are all military or paramilitary, and Homeland Security is very much in the vein of military dictatorships everywhere. The new rights of the FBI to spy on everything from library records to habits of travel fit the pattern well. The FBI is not military but its behavior is authorized by the Commander-in-Chief. The lines are blurring.

We are going to pay for this.

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Children in the Cross-hairs

Wednesday, November 5th, 2008

Media Lens | On the afternoon of Thursday 28 February, 2008, a group of Palestinian boys were playing football on some open ground near their homes in the Gaza Strip. At around 3.20pm, an Israeli aircraft fired a missile at the boys, killing four of them instantly and seriously injuring another three. The four dead boys were Omar Hussein Dardouna, aged 14, Dardouna Deib Dardouna, aged 12, Mohammed Na’im Hammouda, aged 9, and Ali Munir Dardouna who was just 8.

Palestinian human rights fieldworkers investigated the circumstances of this attack by Israeli forces. They concluded there was no Palestinian resistance in the area at the time and that the boys “must have been clearly visible to the [Israeli] aircraft that fired the missile.”

Similar cases abound. A new study by the Palestinian Centre for Human Rights reports that 68 children died in Gaza between June 2007 – June 2008 (PCHR press release, October 21, 2008; http://www.pchrgaza.org/files/PressR/English/2008/2008/43-2008.html). Over the same period, 12 children were killed by Israeli forces in the West Bank. The report highlights the “deliberate targeting of civilians, including children”. (Palestinian Council for Human Rights, ‘Blood on their hands. Child killings by the Israeli Occupation Forces (IOF) in the Gaza Strip. June 2007 – June 2008’, October 22, 2008, p. 4; http://www.electronicintifada.net/downloads/pdf/081021-pchr-childkillings.pdf)

Since the Second Intifada, which began in September 2000, Israeli forces have killed 859 children in the Gaza Strip and the West Bank. The child death toll rose dramatically during the first six months of 2008, mostly as the result of a large-scale Israeli military operation in the Gaza Strip. The massive assault, code-named ‘Operation Winter Heat’, was launched on February 27. The Israeli military killed more children (47) in the Gaza Strip during the first four months of 2008 than during the whole of 2007 (32 children). A total of 110 civilians were killed during ‘Operation Winter Heat’ in February-March 2008. (See our earlier Media Alerts: ‘Israel’s Illegal Assault On The Gaza “Prison”’, March 3, 2008, http://www.medialens.org/alerts/08/080303_israels_illegal_assault.php; and ‘Israeli Deaths Matter More’, March 11, 2008, http://www.medialens.org/alerts/08/080311_israeli_deaths_matter.php)

The website Remember These Children reports that 123 Israeli children have been killed by Palestinians and 1,050 Palestinian children have been killed by Israelis since September 29, 2000. (http://rememberthesechildren.org/about.html)

Most children killed in recent years in the Gaza Strip have died as a result of bombardment, surface-to-surface missiles, or missiles fired from aircraft. The Palestinian human rights investigation notes that Israel has “consistently bombed either inside or extremely close to densely populated residential areas, including schools and areas in close proximity to schools.” It uses “disproportionate and excessive force across the OPT [Occupied Palestinian Territories], without regard for civilian life, including the lives of children.”

But the report is even more damning than that. It concludes that Israeli forces “deliberately target unarmed civilians, including children, as part of their policy of collective punishment of the entire Palestinian civilian population.”

The human rights investigation also concludes that:

“There is also strong and consistent evidence to suggest that [Israeli forces] deliberately kill Palestinian children in reprisal for the deaths of Israeli civilians or members of the [Israeli forces], which amounts to a war crime.” (PCHR, op. cit., p. 46)

According to international humanitarian law, children are to be afforded special protection during international armed conflicts. This includes military occupation such as exists in the Palestinian territories under Israel. Legal protection is provided by the 1949 Fourth Geneva Convention, as well as by the 1989 United Nations Convention on the Rights of the Child (CRC). Israel signed the CRC in 1991.

Protection was strengthened by the (CRC) Optional Protocol on the Involvement of Children in Armed Conflict. The Protocol reaffirms “that the rights of children require special protection” and condemns “the targeting of children in situations of armed conflict and direct attacks on objects protected under international law, including places that generally have a significant presence of children, such as schools and hospitals.” Israel signed the Optional Protocol on 14 November 2001 (PCHR, op. cit., p. 14), but it endlessly tramples the legal agreements to which it is a signatory.

Finally, the PCHR report notes that Israel has consistently failed to investigate Israeli killings of unarmed civilians, including children. On the rare occasions that official investigations are launched, these have been conducted by the Israeli forces themselves. The persistent result is a whitewash, and a travesty of justice.

And while Israel continues to kill unarmed civilians with impunity, the international community has failed to intervene effectively to exert pressure on Israel to stop killing Palestinian civilians, including children. These killings ought to be publicly condemned by the international community who, as High Contracting Parties to the Fourth Geneva Convention, are obliged to act immediately in order to protect all unarmed civilians from Israeli attacks.

As the PCHR observes:

“The lives of Palestinian children are as sacred as the lives of children from Israel, Europe or anywhere else in the world.”

Minimal Response From A Protective Media

The report from the Palestinian Centre for Human Rights was shocking. Guy Gabriel, an adviser to the London-based Arab Media Watch, told us that the group “is a credible organisation with a lot to commend it, and is better placed than many – in terms of location, resources and support – to inform the wider world about the situation in Gaza.” (Email, October 31, 2008). Journalist John Pilger commented: “The Palestinian Centre for Human Rights is, in my experience, a highly credible statistics gathering body.” (Email, October 27, 2008)

This credible human rights group, then, had produced compelling evidence of a persistent pattern of deliberate targeting of Palestinian civilians, including children, by the Israeli military. Surely this would have been headline news everywhere.

Sadly no. In the entire British press there was a giant, gaping hole in coverage.

The only exception we could find was a short, 400-word piece in the Guardian on the day of the report’s publication: Rory McCarthy, ‘Palestinian group says Israel killed 68 children in Gaza in year’, The Guardian, October 21, 2008; http://www.guardian.co.uk/world/2008/oct/21/israel-palestinian-children

As McCarthy pointed out:

“A prominent Palestinian human rights group says it has found evidence that 68 children were killed in the Gaza Strip in the 12 months to June this year as a result of ‘disproportionate and excessive lethal force’ by the Israeli military.”

This was welcome coverage. But, crucially, there was no mention of the military policy of deliberately targeting civilians, including children. In his report, McCarthy said he was unable to obtain any response to the study from an Israeli official (it was a Jewish religious holiday). He then inserted the standard Israeli disclaimer:

“[Israel] has in the past repeatedly defended its military actions in Gaza, saying it does not intentionally target civilians, and noting that Palestinian militants frequently fire from civilian areas.”

On October 27, 2008, we emailed McCarthy and praised him for reporting the publication of the study. We then pointed to the study’s central, repeated message – backed by multiple eye-witness testimony – that Israel deliberately targets civilians, including children. We asked why his Guardian article had omitted this core conclusion. McCarthy did not respond to our email, nor to a second sent on October 29.

As for the “balanced” and “impartial” BBC, the corporation appears to have performed its usual role of protecting the powerful. Judging by the PCHR report’s apparent absence from headline BBC news coverage and the BBC’s website, the corporation has buried the report’s findings. As far as we could determine, the same shameful silence characterised ITN and Channel 4 News.

By contrast, Al Jazeera aired a three-minute segment on the report that included a moving interview with a bereaved mother. There was also disturbing footage of injured and traumatised children, one of whom had seen his father killed by an Israeli missile (Al-Jazeera, October 22, 2008; http://au.youtube.com/watch?v=PTzQOsO32ro). In the Al Jazeera news piece, Hamdi Shokri of the Palestinian Centre for Human Rights emphasised:

“We have clear evidence to suggest and to say that there were patterns of deliberate killing and deliberate targeting of children.”

We emailed Jeremy Bowen, the BBC’s Middle East editor, on October 26, 2008. We asked him why the BBC had done so little, if anything, to bring this damning human rights report to the public’s attention. Why had the BBC failed to expose a deliberate Israeli practice of targeting children? In short, why can’t the BBC do better in its coverage of the occupied territories? Bowen did not respond.

Greg Philo, of the world-renowned Glasgow Media Group, recently commissioned YouGov to ask a sample of 2,086 UK adults whether they thought that more news coverage should be given to the Israeli point of view, or more to the Palestinians, or equal for both. Nearly twice as many people thought that the Palestinians should have the most as compared with the Israelis, but the bulk of the replies (72%) were that both should have the same. A staggering 95% of the population were unhappy with the main news output of the broadcasters. (Philo, ‘More News, Less Views’, September 30, 2008; http://www.gla.ac.uk/centres/mediagroup/MoreNews.html)

Routine silences and omissions in coverage of the Middle East are symptoms of a deep-rooted bias that suppresses public awareness of the true gravity of Israel’s human rights abuses. Rarely, if ever, do we hear of the “indiscriminate beating, tear-gassing, and shooting of children”, as documented in a thousand-page study from Save the Children. The average age of the victims was ten years old; the majority of those shot were not even participating in stone throwing. In 80 per cent of cases where children were shot, the Israeli army prevented the victims from receiving medical attention. The report concluded that more than 50,000 children required medical attention for injuries including gunshot wounds, tear gas inhalation and multiple fractures.

In 1989, a bulletin from the Israeli League for Human and Civil Rights, titled ‘Deliberate Murder’, reported the targeting of Palestinian children in leadership roles. Israeli army and snipers from “special units” had “carefully chosen” the children who were shot in the head or heart and died instantaneously. Other evidence, from Israeli human rights groups and the Israeli press, point to extensive use of torture, such as severe beating and electric shocks, against detainees including children. (Mike Berry and Greg Philo, ‘Israel and Palestine – Competing Histories’, Pluto Press, London, 2006, pp. 86-87)

Amnesty International has also reported that groups of Palestinian civilians, including children, appear, “on many occasions, to have been deliberately targeted”. Israeli soldiers themselves have admitted that they have deliberately shot and killed unarmed civilians including children (Ibid., p. 116). Indeed, for many years, Amnesty has documented and condemned Israeli violations of human rights against Palestinians living in the Occupied Territories. Most of these violations are grave breaches of the Fourth Geneva Convention and are therefore war crimes. (Ibid., pp. 60-61).

Israeli Terror: Not Terror, By Definition

In his 2002 documentary, ‘Palestine Is Still The Issue’, John Pilger interviewed Dori Gold, then Senior Adviser to the Israeli Prime Minister. Pilger asked why Israel fails to condemn its own leaders for their terrorist acts in the same way that they condemn terrorist acts against Israel:

John Pilger (JP): When those Israelis, who are now famous names [Menachem Begin, Yitzak Shamir and Ariel Sharon], committed acts of terrorism just before the birth of Israel, you could have said to them, nothing justifies what you’ve done, ripping apart all those lives. And they would say it did justify it. What’s the difference?

Dori Gold (DG): I think we have now, as an international community, come to a new understanding. I think after September 11th the world got a wake-up call. Because terrorism today is no longer the mad bomber, the anarchist who throws in an explosive device into a crowd to make a point. Terrorism is going to move from the present situation to non-conventional terrorism, to nuclear terrorism. And before we reach that point, we have to remove this scourge from the Earth. And therefore, whether you’re talking about the struggle here between Israelis and Palestinians, the struggle in Northern Ireland, the struggle in Sri Lanka, or any of the places where terrorism has been used, we must make a global commitment of all free democracies to eliminate this threat from the world. Period.

JP: Does that include state terrorism?

DG: No country has the right to deliberately target civilians, as no organisation has a right to deliberately target civilians.

JP: What about Israeli terrorism now?

DG: The language of terrorism, you have to be very careful with. Terrorism means deliberately targeting civilians, in a kind of warfare. That’s what the terrorism against Israeli schools, coffee shops, malls, has been all about. Israel specifically targets, to the best of its ability, Palestinian terrorist organisations.

JP: All right, when an Israeli sniper shoots an old lady with a cane, trying to get into a hospital for her chemotherapy treatment, in front of a lot of the world’s press for one, and frankly we’d be here all day with other examples, isn’t that terrorism?

DG: I don’t know the case you’re speaking about, but I can be convinced of one thing. An Israeli who takes aim – even an Israeli sniper – is taking aim at those engaged in terrorism. Unfortunately, in every kind of warfare, there are cases of civilians who are accidentally killed. Terrorism means putting the crosshairs of the sniper’s rifle on a civilian deliberately.

JP: Well that’s – that’s what I’ve just described.

DG: That is what – no. I can tell you that did not happen.

JP: It did happen. And – and I think that’s where some people have a problem with the argument that terrorism exists on – on one side. Your definition is absolutely correct, about civilians. And those suicide bombers are terrorists.

DG: If you mix terrorism and counter-terrorism, if you create some kind of moral obfuscation, you will bring about not just a problem for Israel, but you will bring ab – bring about a problem for the entire western alliance. Because we are all facing this threat.

As John Pilger concluded:

“It’s hard to see the difference between what the Israelis call ‘counter-terrorism’ and terrorism. Whatever the target, both involve the killing of innocent people.” (John Pilger, ‘Israeli Terror’, http://www.johnpilger.com/page.asp?partid=143; ‘Palestine Is Still The Issue’ documentary can be viewed here: http://video.google.co.uk/videoplay?docid=1259454859593416473; Dori Gold interview starts at around 34 mins:32 secs)

Today, Dori Gold “spends his time traveling around the world raising awareness about the situation going [sic] in Israel and the fight over Jerusalem [and] is available for speaking engagements, fundraisers and corporate events.” (http://www.bookthebest.com/profile/dori_gold)

We asked John Pilger for his response to the new study from the Palestinian human rights group and the report’s effective burial by the corporate media. He told us:

“That this shocking report has been virtually ignored across the mainstream media, with the exception of the Guardian, is a striking example of the media’s two classes of humanity in Palestine. There is first class humanity, worthy of meticulous, often emotive coverage; these are the Israelis, including those guilty of great crimes, such as Ariel Sharon. And there is second class humanity, unworthy of even acknowledgement of their brutalising let alone the epic injustice done to them; these are the Palestinians. No, ‘second class’ is too high. They are third and fourth class victims, for not even the suffering and murder of their children is considered human enough to warrant reporting.” (Email, October 27, 2008)

We are reminded of British historian Mark Curtis’s term, “Unpeople”, to describe those on the receiving end of the West’s policies, actions and massive firepower. For those unfortunate individuals in the crosshairs of Western violence, their human aspirations, hopes, dreams, loves and lives are simply of no value.

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The Dark Side of Global Credit System Redesign

Wednesday, November 5th, 2008

By Geraldine Perry |

With the credit bubble still deflating, “bad assets” still “unwinding” and taxpayers put on the hook for virtually every rescue scheme, the blame game has begun. Scapegoats abound, diverting public attention away from the anti-democratic fact that the current global financial/money creation system — now heavily weighted in “bad asset” derivatives or debt on debt — has grown so enormous that it has taken on a veritable life of its own. Like it or not, this mathematically impossible and easily corruptible system comes complete with its own set of continually evolving de facto rules and “arrangements” which may soon become a legal part of the global regulatory framework.

While too few have chosen to seriously consider the consequences, there are those who have sounded alarms. For example, in a working paper titled “Governing Global Finance”, author William D. Coleman “explore[d] the relationships between derivatives markets and the capacity of nation-states to govern” and “raise[d] the question whether the very global character of these markets and of their key players restricts the freedom of states to follow policy styles consistent with domestic institutional arrangements.” Coleman further argued that “global governance arrangements have supplanted to some extent the efforts undertaken by nation-states.”¹

No surprise then that while the public and their elected officials occupy themselves with assigning blame to isolated scapegoats, leading policy and opinion-makers have begun to openly call for the creation of a new “global authority” to fill the financial regulatory vacuum. Issues of national sovereignty notwithstanding, it is almost impossible to imagine how any such “authority” might neutralize, much less overcome, the systemic risk posed by derivatives given the structural flaws inherent within them. This is especially — though far from exclusively — true for OTC derivatives.

With seemingly rare insight and three years before Warren Buffet penned his famous warning about derivatives in 2002, Martin Mayer, Nonresident Guest Scholar, Economic Studies, at the Brookings Institute wrote that …

derivatives create a felt need for their own employment. … Unfortunately, over the counter derivatives—created, sold and serviced behind closed doors by consenting adults who don’t tell anybody what they’re doing—are also a major source of the almost unlimited leverage that brought the world financial system to the brink of disaster last fall [of 1998, due to the threatened implosion of the relatively small Long Term Capitol Management]. These instruments are creations of mathematics, and within its premises mathematics yields certainty. … But … The more certain you are, the more risks you ignore; the bigger you are, the harder you will fall. … The one lesson history teaches in the financial markets is that there will come a day unlike any other day. At this point the participants would like to say all bets are off, but in fact the bets have been placed and cannot be changed. The leverage that once multiplied income will now devastate principal.²

Bad as the aforementioned pitfalls of irrational exuberance coupled with nearly unlimited leveraging, high risk and built-in lack of transparency may be, there is much more to the myriad of problems associated with derivatives in general, as Professor Coleman and others clearly detail. For example, derivatives — along with other speculative tools — are illiquid assets due to the fact that their performance determines the timing and amount of pay-offs.

So it was that in the early 19th century, well before the modern age of OTC derivatives, small country banks would help speculators build up localized asset bubbles through leveraged loans on assets such as land or railroads. As with the modern derivatives trade — much of which is based on bundled loans or debt on debt — when the speculative fever forced prices to an unsustainable level, the bubble burst. Asset illiquidity then forced a dramatic drop in prices and bad debt forced banks out of business — taking with them whatever assets ordinary citizens may have placed in their trust and simultaneously creating a credit contraction. Those lucky few still left with money in their hands then bought up depressed assets for “a dime on a dollar”and another transfer of wealth took place.

Devastating as they were to ordinary people and their communities, these were isolated bubbles with relatively limited causative factors and effects. Today, the very size and nature of the global derivatives bubble looms large as the newest and most ever-present threat of the seize up, and subsequent destruction, of the entire global marketplace. The negative effects of the predictable deflating of the credit bubble will be felt most acutely and for years to come by ordinary citizens around the world, with the U.S. leading the way as more and more of its now enticingly priced resources are sold to the highest bidder and more and more of its citizens are forced to accept ever lower wages, fewer jobs, increasing taxes and reduced expectations.

As the world’s largest economy, the United States has long played a leading role in the global financial system and cannot escape its share of blame in the current fiasco. Its policies and actions have unquestionably played a key role in the most recent explosion of both U.S. and global use of derivatives — not only as money-making tools, but also as an extremely privileged “off-balance sheet” money creation tool.

In 1997, Thomas F. Siems, who is a senior economist and policy adviser at the Federal Reserve Bank of Dallas penned a Policy Analysis titled “10 Myths About Financial Derivatives.” Here he posited that “the explosive use of financial derivative products in recent years was brought about by three primary forces: more volatile markets, deregulation, and new technologies.”

Ten years later, in 2007 testimony before Congress, economist and former investigator for the Senate Banking Committee Robert Kuttner was able to draw a number of parallels between what is happening today and the “unregulated” 1920s. Government response to the 1920s fiasco led to the 1933 adoption of the Glass-Steagall Act, the purpose of which was to regulate the banking industry. Echoing Siems earlier assertions, Kuttner also discussed the long history of both de facto and legalized deregulatory efforts which have occurred since Glass-Steagall and the manner in which new technologies and volatility have interplayed with deregulation to “supercharge” old problems, while “federal breakwaters” have served — up until now — to stave off collapse:

Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s — lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn’t paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction — assuming perpetually rising asset prices — so in a credit crisis they can act as net de-stabilizers. …

… Beginning in the late 1970s, the beneficial effect of financial regulations has either been deliberately weakened by public policy, or has been overwhelmed by innovations not anticipated by the New Deal regulatory schema…

Of course, there are some important differences between the economy of the 1920s, and the one that began in the deregulatory era that dates to the late 1970s. The economy did not crash in 1987 with the stock market, or in 2000-01. Among the reasons are the existence of federal breakwaters such as deposit insurance, and the stabilizing influence of public spending, now nearly one dollar in three counting federal, state, and local public outlay, which limits collapses of private demand.³

Following close on the heels of the 1999 repeal of the Glass-Steagall Act (through the Gramm-Leach-Bliley Act) mentioned by Mr. Kuttner, came the Commodity Futures Modernization Act. Passed by a lame-duck session of Congress in the fall of 2000, it was signed into law by then President Bill Clinton. Known as the “Enron Loophole,” this Act was considered to be the most significant modification to the regulation of derivatives trading to occur in 25 years.

While the loophole specifically refers to exemption from meaningful oversight and regulation of the electronic energy commodities market, the Act itself may have had much broader ramifications for the securities markets. At the very least, according to independent analyst Mike Whitney, this bill “effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts…” (”The Bernanke Politburo’s Next Big Plan,” Mike Whitney, Market Oracle.)

Defacto and actual derivatives deregulation aside, there are a number of additional factors which have contributed to the veritable explosion in global growth of the derivatives trade seen over the last seven or eight years, with ominous implications for both policy-making decisions and the economic climates of the world’s nation states. Analysts say this explosive growth has essentially been fueled by the United States through a number of key, converging factors that include:

The Fed’s cheap money policies which then led to the current sub-prime crisis, global in its reach and effect
Ballooning public outlays for war-related expenditures which extend down to the local level, as a response to the new, open-ended “war on terror”, again global in its reach and effect
Burgeoning trade deficits and corresponding increase of foreign ownership of U.S. assets, occurring as a result of “economic globalization” which in turn is enforced through a growing plethora of “free” trade/investment agreements and rising militarism around the world

Preferential tax treatment of derivatives is yet another factor contributing to their growth in recent years in the U.S. and elsewhere. So favorable has this tax treatment been that Alex Raskolnikov, a Columbia Law School expert on federal income taxation and tax policy, told members of the House Ways and Means Committee’s Subcommittee on Select Revenue Measures in March of this year that “financial derivatives offer unprecedented opportunities to reduce or eliminate capital income taxation.”

Hence, according to analyst Paul B. Farrell, “derivatives have become the world’s biggest ‘black market,’ exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations.”⁴

The trouble is, says Farrell, that Wall Street knows derivatives provide a lucrative business despite the current slowdown and a volatile global marketplace. So it is that “[t]he financial crisis exacerbated by credit derivatives is costing so much to fix that speculators are now using those same instruments to bet on governments …”⁵

Just as troubling is the fact that the domino effect of bank failure created by irrational exuberance coupled with lack of transparency, illiquidity, heavy leveraging, and counter party risk has quietly become an embedded feature of the newly emerging “global credit system” as Warren Buffet, bond fund king Bill Gross and others well knew. No longer are the old stand-by “federal breakwaters” of deposit insurance and public spending for infrastructure or health care enough to stave off collapse of national economies.

For example, a May 2002 white paper prepared for the IMF Legal Department and IMF Institute Seminar on Current Developments in Monetary and Financial Law bore the descriptive title “Emergency Liquidity Financing By Central Banks: System Protection or Bank Bailout?” Its purpose was to

consider ways in which emergency liquidity funding (ELF) may be provided by central banks to individual banks that are experiencing financial difficulties. ELF takes the form of loans from, or guaranteed by, the central bank that are designed to assist one or more commercial banks that are either undergoing a run on deposits or as a result of concerns about safety and soundness or that are experiencing a systemic financial crisis.

The conclusion of this white paper was as follows:

The rules for providing ELF should be revisited, and the tilt toward providing financing for every bank experiencing a run addressed. At the same time, there should be sufficient flexibility in the law to allow a central bank to provide ELF on an unsecured basis when needed in a banking crisis. Central banks will do so regardless of the rules, therefore the law should reflect the practical realities. In the case of a banking crisis, as provided in the model law, consideration should be given to having the state liable for ELF, since the health of an essential part of the economy is at stake. [present author's emphasis]

Whether the rules have been changed or not seems almost a moot point because making the “state” — for example the United States government and its taxpayers — liable for “emergency liquidity funding” provided by the Fed or other central banks to individual, privately owned banks experiencing trouble is exactly what has been happening since the “credit crisis” began in earnest last August 2007. Curiously, “[t]he U.S. government’s [latest October 2008] $160 billion handout to banks from Niagara Falls to Beverly Hills is going mostly to lenders that need it least, putting weaker rivals at risk of being shut down or taken over … ”⁶

What lies ahead for American taxpayers was driven home by the recent $700 billion bank bailout and at least partially revealed in an April 9, 2008 article in the Wall Street Journal: “The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail… Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed … The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe.”⁷

Perhaps it was these “internal discussions” which led Pimco director Bill Gross, aka the Warren Buffet of the bond world, to remark last year that “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August [2007].” In essence says Gross we are operating in large part under a “shadow banking system” which uses derivatives as a new method of creating money outside the hitherto standard liquidity rules of central banking operations.⁴

So it is that, in the maniacal effort to maintain the current, mathematically impossible money creation system “we are now in the process of designing a new global economy”. How will this be done? By “redesigning the global credit system” in which “the US appears to be a helpless giant, needing all the help it can get.”⁸

The end result? A massive and continually accelerating transfer of assets and wealth from the real economy to the financial economy, compliments of governments and their taxpayers.

We can of course sit idly by, as we have long done, while the global credit system is redesigned for us and as more and more of us fall victim to the ravages of unpayable interest and the greed and corruption it breeds. We can even wait, if we choose, until the system completely collapses into cataclysmic chaos, perhaps bringing with it horrors hitherto unimagined.

OR we can demand the solution handed to us by our forefathers, that the Congress “coin” (as in create) Constitutional money and regulate the value thereof, with the states being limited to using what the Congress “coins” (or creates) as money. But maybe first, we need to understand the true function of money, which is to create abundance for all — not just the fortunate few.

Have Your Say: The Dark Side of Global Credit System Redesign
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Wednesday, November 5th, 2008

Have Your Say: Skinheads Arrested in Plot to Kill Obama
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