Hear an interview with Bliss Blood on Ali Lexa's KPFK ukulele radio show!

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Big 3 Auto Rescue Bill Bails Out Transit SILO Tax Shelters
Grassley said the tax shelter bailout within the auto bailout is related to abusive leasing transactions called SILOs, where transit agencies have sold public transportation assets like rail lines, only to lease them back from purchasers, with the result of providing tax depreciation deductions to the purchasers. Such transactions were motivated solely by collection of fees on one side and tax benefits on the other, rather than any change to the services provided by transit agencies.

Nick Turse: It's Time for a Trillion-Dollar Tag Sale at the Pentagon

It's Time for a Trillion-Dollar Tag Sale at the Pentagon

By Nick Turse, Tomdispatch.com

Wars, bases, and money. The three are inextricably tied together.

In the 1980s, for example, American support for jihadis like Osama bin Laden waging war on (Soviet) infidels who invaded and constructed bases in Afghanistan, a Muslim land, led to rage by many of the same jihadis at the bases (U.S.) infidels built in the Muslim holy land of Saudi Arabia in the 1990s. That, in turn, led to jihadis like bin Laden declaring war on those infidels, which, after September 11, 2001, led the Bush administration to launch, and then prosecute, a Global War on Terror, often from newly built bases in Muslim lands. Over the last seven years, the results of that war have been particularly disastrous for Iraqis and Afghans. Sizable numbers of Americans, however, are now beginning to suffer as well. After all, their hard-earned taxpayer dollars have been poured into wars without end, leaving the country deeply in debt and in a state of economic turmoil.

In his 1988 State of the Union message, President Ronald Reagan called the jihadis in Afghanistan "freedom fighters." They were, of course, fighting the Soviet Union then. He, too, pledged eternal enmity against the Soviet Union, which he termed an "evil empire." For years, conservatives have claimed that Reagan not only won his Afghan War, but by launching an all-out arms race, which the economically weaker Soviet Union couldn't match, bankrupted the Soviets and so brought their empire down.

While that version of history may be disputed, today, it is entirely possible that one of Reagan's freedom fighters, Osama bin Laden, actually returned the favor by perfecting the art of financially felling a superpower. While Reagan ran up a superpower-sized tab to outspend the Soviets, bin Laden has done it on the cheap. Essentially for the cost of box cutters and flight training, he got the Bush administration to spend itself into penury, without a superpower in sight.

Since bin Laden's supreme act of economic judo in 2001, the U.S. military has spent multi-billions of tax dollars on a string of bases in Iraq and Afghanistan, failed wars in both countries, and a failed effort to make good on George W. Bush's promise to bring in bin Laden "dead or alive." Despite this record, the Pentagon still has a success option in its back pocket that might help bail out the American people in this perilous economic moment. It could immediately begin to auction off its overseas empire posthaste. To head down this road, however, U.S. military leaders would first have to take a brutally honest look at the real costs, and the real utility, of their massively expensive weapons systems and, above all, those bases.

Today, the Pentagon acknowledges 761 active military "sites" in foreign countries -- and that's without bases in Iraq, Afghanistan, and certain other countries even being counted. This "empire of bases," as Chalmers Johnson has noted, "began as the leftover residue of World War II," later evolving into a Cold War and post-Cold War garrisoning of the planet.

With those bases came a series of costly wars in Korea in the 1950s, Vietnam in the 1960s and 1970s, and the Persian Gulf in the early 1990s. An extremely conservative estimate of their cost by the Congressional Research Service -- $1 trillion (in 2008 dollars) -- tops the present economic bailout. Add in brief cut-and-run flops like Lebanon in 1983 and Somalia, from 1992-1995, as well as now-forgotten hollow victories in places like the island of Grenada and Panama, and you tack on billions more with little to show for it.

Since 2001, the Bush administration's Global War on Terror (including the wars in Afghanistan and Iraq) has cost taxpayers more than the recent bailout -- more than $800 billion and still climbing by at least $3.5 billion each week. And the full bill has yet to come due. According to Noble Prize-winning economist Joseph Stiglitz and Harvard University professor Linda Bilmes, the total costs of those two wars could top out between $3 trillion and $7 trillion.

While squandering money, the Global War on Terror has also acted as a production line for the creation of yet more military bases in the oil heartlands of the planet. Just how many is unknown -- the Pentagon keeps exact figures under wraps -- but, in 2005, according to the Washington Post, there were 106 American bases, from macro to micro, in Iraq alone.

If you were to begin the process of disentangling Americans from this world of war and the war economy that goes with it, those bases would be a good place to start. There is no way to estimate the true costs of our empire of bases, but it's worth considering what an imperial tag sale could mean for America's financial well-being. One thing is clear: in getting rid of those bases, the United States would be able to recoup, or save, hundreds of billions of dollars, despite the costs associated with shutting them down.

Tag Sales and Savings

If the Pentagon sold off just the buildings and structures on its officially acknowledged overseas bases at their current estimated replacement value, the country would stand to gain more than $119 billion. Think of this as but a down payment on a full-scale Pentagon bailout package.

In addition, while it leases the property on which most of its bases abroad are built, the Pentagon does own some lucrative lands that could be sold off. For instance, it is the proud owner of more than 11,000 acres in Abu Dhabi, "the richest and most powerful of the seven kingdoms of the United Arab Emirates." With land values there averaging $1,100 per square meter last year, this property alone is worth an estimated $48.9 billion. The Pentagon also owns several thousand acres spread across Oman, Japan, South Korea, Germany, and Belgium. Selling off these lands as well would net a sizeable sum.

Without those bases, billions of dollars in other Pentagon expenses would immediately disappear. For instance, during the years of the Global War on Terror, the Overseas Cost of Living Allowance, which equalizes the "purchasing power between members [of the military] overseas and their U.S.-based counterparts," has reached about $12 billion. Over the same period, the price tag for educating the children of U.S. military personnel abroad has clocked in at around $3.5 billion. By shutting down the 127 Department of Defense schools in Europe and the Pacific (as well as the 65 scattered across the U.S. mainland, Puerto Rico, and Cuba) and sending the children to public schools, the U.S. would realize modest long-term savings. Once no longer garrisoning the globe, the Pentagon would also be able to cease paying out the $1 billion or so that goes into the routine construction of housing and other base facilities each year, not to mention the multi-billions that have gone into the construction, and continual upgrading, of bases in Iraq and Afghanistan.

And that's not the end of it either. Back in the 1990s, the Pentagon estimated that it was spending $30 billion each year on "base support activities" -- though the exact meaning of this phrase remains vague. Just take, for example, five bases being handed back to Germany: Buedingen, Gelnhausen, Darmstadt, Hanau and Turley Barracks in Mannheim. The annual cost of "operating" them is approximately $176 million. Imagine, then, what it has cost to run those 750+ bases during the Global War on Terror years.

Some recent Pentagon contracts for general operations and support functions overseas are instructive. In March, for instance, Bahrain Maritime and Mercantile International was awarded a one-year contract worth $2.8 billion to supply and distribute "food and non-food products" to "Army, Navy, Air Force, Marine Corps and other approved customers located in the Middle East countries of Bahrain, Qatar and Saudi Arabia."

In July, the French foodservices giant Sodexo received a one-year contract worth $180 million for "maintenance, repair and operations for the Korea Zone of the Pacific Region." These and other pricey support contracts for food, fuel, maintenance, transport, and other non-military expenses, paid to foreign firms, would disappear along with those U.S. garrisons, as would enormous sums spent on all sorts of military projects overseas. In 2007, for instance, the Army, Navy, and Air Force spent $2.5 billion in Germany, $1 billion in Japan, and $164 million in Qatar. And this year, the Pentagon paid a jaw-dropping $1 billion-plus for contracts carried out in South Korea alone.

Men and Materiel

With most or all of those 761 foreign bases off the books, and a much reduced global military "footprint," the U.S. could downsize its armed forces. As Andrew Bacevich notes in his book The Limits of Power, it already costs the Pentagon a bailout-sized $700 billion a year to "train, equip, and sustain the current active-duty force and to defray the costs of on-going operations." Even if current U.S. forces were simply brought home, there would still be significant savings (including, of course, the $10 billion a month going into the Iraq and Afghan wars).

The very opposite, however, is happening. Facing manpower demands on an overstretched military, the Pentagon is planning to ramp up the size of the armed forces by 92,000 over the next several years. That expansion comes with a sure-to-rise price tag of $108 billion. This step has the support of large majorities in Congress and both presidential candidates. John McCain has denounced the notion of "roll[ing] back our overseas commitments" and instead proposes "to increase the size of the Army and Marine Corps." Barack Obama agrees, but has been more specific. He has long touted plans, echoing the Pentagon's desires, to "increase the size of the Army by 65,000 troops and the Marines by 27,000 troops."

Just attracting this many recruits would cost a small fortune. This year, the Army had to spend $240 million on advertising alone to help meet its recruiting goals. On top of that, it paid out $547 million in bonuses to recruits -- a 164% increase since 2005. And this is to say nothing of how much it costs to train, equip, feed, and pay these future troops.

Capping, if not decreasing, the size of the military and bringing troops home would be the foundation for a new foreign policy based on non-aggression and fiscal responsibility. This would, of course, be a major departure for the military. In the 120 years between 1888 and 2008, according to a study by the Congressional Research Service, only seven -- using generous criteria -- were without "notable deployments of U.S. military forces overseas." Beginning in 2009, U.S. forces could aim for a complete reversal of this trend for the next 120 years, enabling the slashing of budgets for force-projection weapons systems.

Take the F-22A Raptor, a fighter plane designed to counter advanced Soviet aircraft that were never built. Pentagon budget documents released earlier this year put the estimated cost of the program, 2007 to 2013, at almost $3.7 billion. With no advanced Soviet fighters around to dogfight -- Russian aircraft had trouble enough in their recent Georgian encounters -- and no need for its "global strike" capabilities, the program could be scrapped. Such a step is not without precedent. As Wired magazine's Danger Room blog reported last month, Congress "all-but-eliminated funding for the so-called 'Blackswift' program," a prototype hypersonic aircraft for which the Pentagon had requested almost $800 million in 2009 start-up funding. If the project remains stillborn, that alone will mean billions in future savings.

This year, for example, the Air Force is spending nearly $65 billion on new weapons systems. By shutting current and future weapons programs not meant for actual defense of the United States, Americans would be looking at hundreds of billions of dollars in savings in the near term. If the Pentagon demilitarized and sold off existing equipment as well, including, for instance, some of its 120,000 Humvees, at least 280 ships, and 14,000 aircraft, you're talking about another significant infusion of cash.

Bases Gone Bust

If history suggests anything, it's that one way or another, on a long enough timeline, all imperial garrisons fall. Some, of course, go bust sooner than others. As one Army publication noted in the 1970s, "[t]he ravages of rot, jungle, and weather have left only memories of the once-mighty World War II bases of the South Pacific." The fate of many bases built since has been no less inglorious.

While it would be difficult to total up just how many firebases, camps, airbases, port facilities, and base camps the U.S. had in Indochina during the Vietnam War, or what it cost to build and upgrade them, the numbers would surely be staggering. What we do know is instructive. For instance, the U.S. Army-Vietnam headquarters complex at Long Binh, about 16 miles from Saigon, had a value of more than $100 million in 1972 -- the year the U.S. gave it away to its South Vietnamese allies. They, in turn, lost it when the Saigon regime collapsed in 1975. Today, it's an industrial park. Similarly, the U.S. poured huge sums into its naval base at Cam Ranh Bay. By 1979, the Soviet Navy was using it and, after abandoning it earlier this decade, may do so again.

Similarly, in the 1990s, the U.S. got kicked out of its massive bases in the Philippines. A volcano laid waste to Clark Air Base and the Philippine Senate rejected U.S. efforts to extend the lease on its massive installation at Subic Bay. Just moving out personnel and equipment afterwards cost billions. More recently, the same process played out on fast forward in Central Asia. As adjunct professor at the Air Force's Air Command and Staff College Stephen Schwalbe pointed out in an article in Air & Space Power Journal, after the U.S. negotiated the right to use Uzbekistan's Karshi-Khanabad Air Base in 2001, as part of its Afghan War plans, it pumped millions of dollars into the base to improve infrastructure and facilities -- from increased aircraft parking space to a movie theater. It also ponied up a $15 million fee for its use.

In 2005, however, Uzbek security forces perpetrated a massacre of domestic protesters, leading to a Bush administration demand for an investigation. In the end, all the money spent on the base was wasted. Not long after the American request, Uzbekistan gave the U.S. military 180 days to leave the base and the country -- and promptly signed friendship pacts with Russia and China.

The buildings and structures at the U.S. base at Ecuador's Manta Air Field are valued at over $176 million and are also soon to move into the Pentagon's loss column. Last year, Ecuadorian president Rafael Correa offered the following terms for continued use of Manta after 2009: "We'll renew the base on one condition: that they let us put a base in Miami -- an Ecuadorian base." The U.S. did not take him up on the proposal. Correa has since offered to lease the base to China for commercial use.

The Pentagon stands to lose billions more when it finally withdraws from Iraq and Afghanistan. The cost of manning, maintaining, and regularly upgrading the mega-bases in Iraq, in particular, is already a significant financial burden on American taxpayers, but it would be dwarfed by the losses incurred if they had to be abandoned. As such, getting out, even in today's depressed real-estate market, would be the financially prudent thing to do.

Similarly, closing down the Bush administration's notorious torture bases might yield significant financial savings (while enhancing global opinion of the U.S.). Selling off the Pentagon's facilities on the British-owned island of Diego Garcia in the Indian Ocean, for instance, where Global War on Terror "ghost prisoners" have been held (and U.S. air raids on Iraq and Afghanistan have been regularly launched), could yield $2.6 billion. Saying goodbye to the facilities at Guantanamo Bay in Cuba could net another $2.2 billion -- and some global cheers.

The Pentagon Comes Home

While we may never know if it was bin Laden's knowledge of America's "expeditionary" history that drove him to plan out the 9/11 attacks, he certainly goaded the Bush administration into a Soviet-style military spending spree, complete with a Soviet-style ruinous war in Afghanistan. With some caves for bases, he managed to sink Americans into a multi-trillion dollar financial quagmire.

If the United States had never wasted the better part of a trillion dollars fighting a war in Vietnam and, following defeat there, embarked on a scheme to saddle the Soviets with a similarly ignominious loss -- which has now led to wars with a multi-trillion dollar price tag -- the United States might not be in such dire financial straits today. And yet, despite the worst economic downturn since the Great Depression, the U.S. continues to sink money into costly wars fought from expensive bases overseas with no end in sight. The result is sheer waste in every sense of the word.

When Americans want to get serious about a long-term bailout strategy that brings genuine financial and national security, they'll look to real cost-cutting options like stopping America's string of costly wars and getting rid of the Pentagon's vast network of overseas bases. Until then, they are simply helping Ronald Reagan's freedom fighter, Osama bin Laden, be a better Reagan than Reagan ever was.

Nick Turse is the associate editor and research director of Tomdispatch.com. His first book, The Complex: How the Military Invades Our Everyday Lives, an exploration of the new military-corporate complex in America, was recently published by Metropolitan Books. His website is Nick Turse.com.

Rep. Elijah Cummings: "We contacted the resort where AIG held this week-long event, and we requested copies of AIG's bills. We learned that AIG spent nearly half-a-million dollars in a single week at the—at this hotel. Now, this was right after the bailout."

AIG has already used up $61 billion of its $85 billion government loan.

NAOMI KLEIN: When Milton Friedman turned ninety, the Bush White House held a birthday party for him to honor him, to honor his legacy, in 2002, and everyone made speeches, including George Bush, but there was a really good speech that was given by Donald Rumsfeld. I have it on my website. My favorite quote in that speech from Rumsfeld is this: he said, "Milton is the embodiment of the truth that ideas have consequences."


So, what I want to argue here is that, among other things, the economic chaos that we're seeing right now on Wall Street and on Main Street and in Washington stems from many factors, of course, but among them are the ideas of Milton Friedman and many of his colleagues and students from this school. Ideas have consequences.


More than that, what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed, because what we have been living, since Reagan, is a policy of liberating the forces of greed to discard the idea of the government as regulator, of protecting citizens and consumers from the detrimental impact of greed, ideas that, of course, gained great currency after the market crash of 1929, but that really what we have been living is a liberation movement, indeed the most successful liberation movement of our time, which is the movement by capital to liberate itself from all constraints on its accumulation.





So, as we say that this ideology is failing, I beg to differ. I actually believe it has been enormously successful, enormously successful, just not on the terms that we learn about in University of Chicago textbooks, that I don't think the project actually has been the development of the world and the elimination of poverty. I think this has been a class war waged by the rich against the poor, and I think that they won. And I think the poor are fighting back. This should be an indictment of an ideology. Ideas have consequences.


Now, people are enormously loyal to Milton Friedman, for a variety of reasons and from a variety of sectors. You know, in my cynical moments, I say Milton Friedman had a knack for thinking profitable thoughts. He did. His thoughts were enormously profitable. And he was rewarded. His work was rewarded. I don't mean personally greedy. I mean that his work was supported at the university, at think tanks, in the production of a ten-part documentary series called Freedom to Choose, sponsored by FedEx and Pepsi; that the corporate world has been good to Milton Friedman, because his ideas were good for them.


But he also was clearly a tremendously inspiring teacher, and he had a gift, like all great teachers do, to help his students fall in love with the material. But he also had a gift that many ideologues have, many staunch ideologues have—and I would even use the word "fundamentalists" have—which is the ability to help people fall in love with a perfect imagined system, a system that seems perfect, utopian, in the classroom, in the basement workshop, when all the numbers work out. And he was, of course, a brilliant mathematician, which made that all the more seductive, which made those models all the more seductive, this perfect, elegant, all-encompassing system, the dream of the perfect utopian market.





Now, one of the things that comes up again and again in the writings of University of Chicago economists of the Friedman tradition, people like Arnold Harberger, is this appeal to nature, to a state of nature, this idea that economics is not a political science or not a social science, but a hard science on par with physics and chemistry. So, as we look at the University of Chicago tradition, it isn't just about a set of political and economic goals, like privatization, deregulation, free trade, cuts to government spending; it's a transformation of the field of economics from being a hybrid science that was in dialogue with politics, with psychology, and turning it into a hard science that you could not argue with, which is why you would never talk to a journalist, right? Because that's, you know, the messy, imperfect real world. It is beneath those who are appealing to the laws of nature.


Now, these ideas in the 1950s and '60s at this school were largely in the realm of theory. They were academic ideas, and it was easy to fall in love with them, because they hadn't actually been tested in the real world, where mixed economies were the rule.


Now, I admit to being a journalist. I admit to being an investigative journalist, a researcher, and I'm not here to argue theory. I'm here to discuss what happens in the messy real world when Milton Friedman's ideas are put into practice, what happens to freedom, what happens to democracy, what happens to the size of government, what happens to the social structure, what happens to the relationship between politicians and big corporate players, because I think we do see patterns.





Now, the Friedmanites in this room will object to my methodology, I assure you, and I look forward to that. They will tell you, when I speak of Chile under Pinochet, Russia under Yeltsin and the Chicago Boys, China under Deng Xiaoping, or America under George W. Bush, or Iraq under Paul Bremer, that these were all distortions of Milton Friedman's theories, that none of these actually count, when you talk about the repression and the surveillance and the expanding size of government and the intervention in the system, which is really much more like crony capitalism or corporatism than the elegant, perfectly balanced free market that came to life in those basement workshops. We'll hear that Milton Friedman hated government interventions, that he stood up for human rights, that he was against all wars. And some of these claims, though not all of them, will be true.





But here's the thing. Ideas have consequences. And when you leave the safety of academia and start actually issuing policy prescriptions, which was Milton Friedman's other life—he wasn't just an academic. He was a popular writer. He met with world leaders around the world—China, Chile, everywhere, the United States. His memoirs are a "who's who." So, when you leave that safety and you start issuing policy prescriptions, when you start advising heads of state, you no longer have the luxury of only being judged on how you think your ideas will affect the world. You begin having to contend with how they actually affect the world, even when that reality contradicts all of your utopian theories. So, to quote Friedman's great intellectual nemesis, John Kenneth Galbraith, "Milton Friedman's misfortune is that his policies have been tried."

This process of measuring an elegant perfect, beautiful, inspiring ideology against a messy reality is a painful process, and it's a process that anyone who has tried to free themselves from the confines of fundamentalist thinking, from ideological constraints, has faced. My grandparents, for instance, were pretty hardcore Marxists. In the '30s and '40s, they believed fervently in the dream of egalitarianism that the Soviet Union represented. They had their illusions shattered by the reality of gulags, of extreme repression, hypocrisy, Stalin's pact with Hitler.





I bring this up, because the left has been held accountable for the crimes committed in the name of its extreme ideologies, and I believe that it's actually been a very healthy process for the left, one that isn't over, that is continuing. But I think that the process of having to examine the unacceptable compromises that were made in the name of hard ideology, that they are paying off in the way the left today is being reborn and re-imagined.


You know, the most left-wing place on the planet at the moment is, interestingly enough, the first place where Chicago School ideology made that leap from the textbook into the real world, and that's Latin America. And that happened for a very specific reason, as you know. This—in the 1950s, there was great concern at the State Department about the fact that Latin America, then as now, as it seems to do, was moving to the left. There was concern about what they called the "pink economists," the rise of developmentalism, import substitution, and, of course, socialism. And, of course, this was a concern because it greatly affected American and European interests, because the crux of the argument of import substitution was that countries like Chile and Argentina, Guatemala, should stop exporting their raw natural resources to the north and then importing expensive processed goods to the south, that it didn't make economic sense, that they should use the same tools of protectionism, of state supports, that built the economies of Europe and North America. That was that crazy radical idea, and it was unacceptable.





So, this plan was cooked up—it was between the head of USAID's Chile office and the head of the University of Chicago's Economics Department—to try to change the debate in Latin America, starting in Chile, because that's where developmentalism had gained its deepest roots. And the idea was to bring a group of Chilean students to the University of Chicago to study under a group of economists who were considered so extreme that they were on the margins of the discussion in the United States, which, of course, at the time, in the 1950s, was fully in the grips of Keynesianism. But the idea was that there would be—this would be a battle to the—a counterbalance to the emergence of left-wing ideas in Latin America, that they would go home and counterbalance the pink economists.


And so, the Chicago Boys were born. And it was considered a success, and the Ford Foundation got in on the funding. And hundreds and hundreds of Latin American students, on full scholarships, came to the University of Chicago in the 1950s and '60s to study here to try to engage in what Juan Gabriel Valdes, Chile's foreign minister after the dictatorship finally ended, described as a project of deliberate ideological transfer, taking these extreme-right ideas, that were seen as marginal even in the United States, and transplanting them to Latin America. That was his phrase—that is his phrase.





But today, we see that these ideas are reemerging in Latin America. They were suppressed with force, overthrown with military coups, and then Chile and Argentina, Uruguay and Brazil all became, to varying degrees, laboratories for the ideas that were taught in the classrooms of the University of Chicago. But now, because there was never a democratic consent for this, the ideas are reemerging.


But one of the things that's interesting about the new left in Latin America is that democracy is at the very center. And, you know, the first thing that Rafael Correa did when he was elected president of Ecuador, for instance—well, the first thing he did was give an interview. They said, "What can we expect of your economic program?" He said, "Well, let's put it this way: I'm no fan of Milton Friedman's." And then he called a constituent assembly. He created an incredibly open political process to rewrite the country's constitution. And that's what happened in Bolivia, and that's what's happened in many Latin American countries, because democracy is being put at the center of these projects, because there has been a learning process of looking at the mistakes that the left has made in the past, the ends-justify-the-means mistakes.





So, I think all ideologies should be held accountable for the crimes committed in their names. I think it makes us better. Now, of course, there are still those on the far left who will insist that all of those crimes were just an aberration—Mao, Stalin, Pol Pot; reality is annoying—and they retreat into their sacred texts. We all know who I'm talking about.


But lately, particularly just in the past few months, I have noticed something similar happening on the far libertarian right, at places like the Cato Institute and the Reason Foundation. It's a kind of a panic, and it comes from the fact that the Bush administration adapted—adopted so much of their rhetoric, the fusing of free markets and free people, the championing of so many of their pet policies. But, of course, Bush is the worst thing that has ever happened to believers in this ideology, because while parroting the talking points of Friedmanism, he has overseen an explosion of crony capitalism, that they treat governing as a conveyor belt or an ATM machine, where private corporations make withdrawals of the government in the form of no-bid contracts and then pay back government in the form of campaign contributions. And we're seeing this more and more. The Bush administration is a nightmare for these guys—the explosion of the debt and now, of course, these massive bailouts.





So, what we see from the ideologues of the far right—by far right, I mean the far economic right—frantically distancing themselves and retreating to their sacred texts: The Road to Serfdom, Capitalism and Freedom, Free to Choose. So that's why I've taken to calling them right-wing Trotskyists, because they have this—and mostly because it annoys them, but also because they have the same sort of frozen-in-time quality. You know, it's not, you know, 1917, but it's definitely 1982. Now, the left-wing Trots don't have very much money, as you know. They make their money selling newspapers outside of events like this. The right-wing Trots have a lot of money. They build think tanks in Washington, D.C., and they want to build a $200 million Milton Friedman Institute at the University of Chicago.


Now, this brings up an interesting point. It's an interesting point about the think tanks, in general, which has to do with the fact that it does seem to take so much corporate welfare to keep these ideas alive, which would seem to be a contradiction of the core principle of free market ideology—I mean, and particularly now, in the context of the Milton Friedman Institute. I mean, I could see it in the '90s, but now, is the world really clamoring for this? Is there really a demand that you are supplying here? Really?





I think this points to a larger issue, and this comes up—has come up for me again and again in talking about this ideology, this ideological campaign. You know, is it—is it really fueled by true belief, and—or is it just fueled by greed? Because it's not—the thoughts are so very profitable. So they are distinctive in that way, distinctive from other ideologies. And, of course, you know, certainly we know that religion has been a great economic partner in imperialism. I mean, this isn't an entirely new phenomenon. But this is a question that comes up a lot. And I think it's very difficult to answer, and it's clear, certainly at this school, that much of it is fueled by belief, by true belief, by falling in love with those elegant systems.


But I think we also need to look particularly at this moment, who this ideology benefits directly economically, keeping it alive in this moment, and how, even in this moment, when everybody is saying, you know, this is the end of market fundamentalism, because we're seeing this betrayal of the basic tenets of the non-interventionist government by the Bush administration—you know, I believe this is a myth and that the ideology has just gone dormant, because it's ceased to be useful. But it will come roaring back, and I'll talk a little bit more about that.





But, you know, I was interested that yesterday the Heritage Foundation, which has always been a staunch Friedmanite think tank, that they came out in favor of the bailout. They came out in favor of the bailout; they said it was vital. And what's interesting about that is, of course, the bailout is creating a crisis in the economic—in the public sphere. It's taking a private crisis, a crisis on Wall Street, which of course isn't restricted to Wall Street, and it will affect everyone, but it is moving it, moving those bad debts, onto the public books.


And now the Bush administration has already left the next administration, whoever it is, with an economic crisis on their hands, but with this proposed transfer, they're dramatically increasing that crisis. So, we can count, I would argue, on the Heritage Foundation refinding their faith, refinding their faith when it becomes necessary and useful to once again argue that the way to revive the American economy is to cut taxes, cut regulation, to stimulate the economy—and, by the way, we can't afford Social Security; we're going to have to privatize it, because we've got this terrible debt and deficit on our hands. So, the ideology is far from dead, and what we are, I think, seeing with this proposed monument to Friedmanism is really a way of entrenching it and making sure that it is always available to come back, to come roaring back.


So, I said I would talk a little bit about Friedmanism and the links to the current crisis. And, you know, it's pretty direct. Milton Friedman is pretty much accepted as the godfather of deregulation. And this was—this ideology was the rationale for turning the financial sector into the casino that we see today. You know, Milton Friedman was clear about this. He believed that "history took a wrong turn," and that's a quote; it's a quote from a letter he wrote to Augusto Pinochet. He said, "History took a wrong turn in your country, as well as mine." And he was referring to the responses to the Great Depression. In Chile, it was the rise of import substitution and developmentalism. But in the United States, he was of course referring to the New Deal.





And I think that the Chicago School of Economics is properly understood as a counterrevolution against the New Deal, against regulations like Glass-Steagall, that was put in place in 1934 after having seen people lose their life savings to the market crash, and it was a firewall, a very simple, sensible law that said if you want to be an investment bank, if you want to gamble, gamble with your investors' money, but the government isn't going to help you because it's your own risk. You can fail. And if you want to be a commercial bank, then we will help you. We will offer insurance to make sure that those savings are safe, but you have to restrict the risks that you take. You cannot gamble. You cannot be an investment bank. And a firewall was put up between investment banks and consumer banks.


And now we look at the way in which this crisis is supposedly being solved, and what we see, actually, is a wave of mergers in the banking sector, a wave of mergers with the banks getting bigger and bigger until ultimately—you know, the Financial Times was predicting today that eventually the United States will have three big banks, just like Japan does. That's where it's heading. And, of course, all of those banks will be too big to fail. So they all have this implicit guarantee; it's not just Fannie and Freddie. It's any function that is too important to fail has this implicit guarantee.





Phil Gramm is the person, you know, on the legislative side who did the most to create the legislative context for what we're seeing right now in the financial sector. You know, I think everyone knows that Phil Gramm, most famously, recently is the one who said that America was in a mental recession and a bunch of whiners and all of that. And so, he's not officially an adviser to McCain, but there is talk that if he were to win the elections, he would be Treasury Secretary. You know, I point—I bring him up because Phil Gramm was a Milton Friedman fanatic. I think you know this. In 1999, the same year that he led the charge to strike down Glass-Steagall, he also—Phil Gramm—pressed Congress to get the Medal of Honor for Friedman. When he ran in the—when he made his 1996 presidential run, McCain was the co-chair of his campaign. Phil Gramm was asked, "If you had to rely on a single person as your foremost economic policy adviser, who would it be?" And he replied, "Dr. Milton Friedman." So we see the connections between deregulation and Friedmanism.


I also think there's something else at play in the kind of politicians that are attracted to this particular ideology. You know, Reagan was the first really to embrace it, and Nixon was the great disappointment to Friedman. I'm sure you all know that. You know, he writes in his memoir that when Nixon was elected, he was euphoric. I mean, he couldn't imagine an American president more closely aligned ideologically than Richard Nixon. But Richard Nixon insisted on governing, and he wanted to win elections, and he imposed wage and price controls. And Milton Friedman sort of had a bit of a temper tantrum and declared him the most socialist president in modern American history. But, you know, it was—so it was really Reagan who campaigned, you know, with his copy of Capitalism and Freedom on the campaign trail, who was the first person to really put Friedmanism into practice.


And I raise this because, you know, one of the things that we hear about McCain is that he doesn't really know about economics, and so I think that makes us inclined not to take his economic ideas seriously, not to think he would be a really serious economic force. I think just the opposite. And I think if you look at his campaign platform, you see just the opposite. He wants to privatize Social Security. He is saying that in the first 100 days they'll look at every single government program, and they will either reform it or shut it down if it is not serving taxpayers. I mean, they are talking about a sort of hundred-day economic shock therapy period. And I think it's the fact that he doesn't know about economics, and that Sarah Palin, I suspect, knows a little less, that actually makes them so dangerous.




And I don't—you know, I don't think it is—not to be too flippant—I'm sure that I've, you know, offended everyone, so I may as well just say bad things about Ronald Reagan—but I do think that, you know, that it isn't a coincidence that, you know, a movie star president champions these ideas, or a body-builder governor, you know, who says, "Dr. Friedman changed my life"—I don't know if you've seen Arnold Schwarzenegger's introductions to Freedom to Choose, but they're good. You should. YouTube them. But the appeal of these ideas, I think, to politicians who are actually in over their head on economics—and, by the way, this goes for military dictators, too, like Pinochet—who get control over a country and are totally clueless about how to run an economy, is that it lets them off the hook completely. It says government is the problem, not the solution. Leave it to the market. Laissez-faire. Don't do anything. Just undo. Get out of the way. Leave it to us.

This crisis moment, of course, is going to play out in a lot of different ways. And, you know, the other major contribution—another major contribution of Friedmanism to the policy framework is not just deregulation, but privatization, of everything. And, you know, in Capitalism and Freedom, he lays out his wish list, everything from the post office to national parks. So I think it's interesting to think about how this crisis will effect future plans for privatization.


And, in fact, it already is, because the next big bubble—and, by the way, this idea of bubbles is intimately connected to the idea of governments who think that their role is simply to create the context for maximum profit seeking—I mean, that you just get out of the way; anything that makes money is good, even if, you know, it's entirely divorced from the real economy, if it inflates—your GDP is still going up. And the next big bubble—they went from dotcom to housing—is projected to be infrastructure.




The crisis, you know—and this is where Friedmanism becomes a kind of a self-fulfilling prophecy, because you neglect the public sphere and—because you have tax cuts and because you've derided the public sphere, and we certainly saw this in New Orleans during Hurricane Katrina, which was not a natural disaster; it was a disaster borne of a collision between heavy weather and a weak infrastructure. But then, that was used to rationalize really just erasing the public sphere altogether, closing Charity Hospital, the only hospital that treats the uninsured in New Orleans, closing down the public housing projects. Richard Baker, Republican congressman, said, "We couldn't clean out the housing projects, but God did."


Milton Friedman—and I start the book with this story—wrote a piece; it was one of his last pieces of writing, his last major policy recommendation. He wrote a piece for the Wall Street Journal, saying that it was an opportunity, the fact that parents and teachers and children were scattered across the United States after Hurricane Katrina, an opportunity to radically remake the education system. Now, that—and, of course, turned into a voucher system.


Now, that neglect of public sphere that we saw in New Orleans is, of course, a national crisis. The American Society of Civil Engineers estimates that there is a deficit, an infrastructure deficit of between $1.5 trillion and $2 trillion, just to bring the roads and bridges up to safety standards. And the solution, up until very recently, that was being held up, was public-private partnerships, was privatization of essential infrastructure. You know this in Chicago, because the airport is one of the ones on the block.




But one interesting thing that happened today is that the biggest—the biggest test case for infrastructure privatization is the Pennsylvania Turnpike, which was on the verge of being handed over to a consortium of private companies on a seventy-five-year lease, and that deal fell through today. And I think part of the reason why it fell through is because one of the companies leading the consortium was Citigroup. And the idea of putting more essential services, more things that are far too important to fail, in the hands of the same people that have made such a mess of the financial sector suddenly seems like insanity. But on the other hand, the economic pressures on states, on the federal government, is only going to increase, right? Because it seems inevitable that those private debts are going to be transferred onto the public books. So, nothing can be taken for granted in this moment.


The other way where we—the other place where I think we see the legacy of Friedmanism in this moment is in the backlash to the Wall Street bailout, the backlash that essentially killed the bill in Congress, although it's clear that it's going to be revived. People got very, very frightened yesterday when the stock market had its worst day, and they called their Congress people with another message. And I just want to say, on that front, that it's easy to conclude from that that people are just untrustworthy, and they shouldn't really have a say in the economy, which is, I think, probably what Milton Friedman would say. And this was part of the impulse toward specialization and treating everything economic as hard science, because that means, you know that it's out of reach of democracy. It's not subject to any debate; these are hard rules.




Now, I think that the sort of volatility we've seen on the—in the markets the past few days is at least partially the result of the incredible recklessness of the Bush administration in dangling a $700 billion bailout, just free money, saying we're going to do this, before they had any guarantee that they were going to be able to do it. So, of course, the stock market rallies at the prospect of free money. Why wouldn't it? And then, when it falls through, of course, it dips. And I'm not saying this is all planned, but this sort of rollercoaster we've been on has just been part of this pattern of incredibly poor management, poor government, that infuses every aspect of this crisis.



And this, of course, is also part of the ideology, because the Bush administration, far from being an aberration, is really the culmination of the idea that government is the problem, not the solution. I think they really believe that and totally abdicate it, their responsibility to manage, to govern. The popping of the housing bubble was a surprise to no one. But the only preparation was a two-and-a-half-page plan presented by Henry Paulson that said, "Give me $700 billion, and don't ask any questions." That is not preparing, right? This was laissez-faire in action, a really scary kind of laissez-faire.


But the anger is, of course—the anger at Wall Street, this sort of—you know, there was a vindictive quality to a lot of what the Congress people heard from their constituents: "Why should we bail them out? Look at what they've done to us." And it was Main Street versus Wall Street. And this is—you know, this is another failure of Friedmanism, because the idea of the ownership society was that class-consciousness was supposed to disappear, right? Because union members were not going to think of themselves as workers, because everybody owned a piece of the stock market, and everybody was going to have a mortgage, so they would think like owners, they would think like bosses, they would think like landlords, not like tenants, not like workers. Class is suddenly back in America, with a vengeance, and it is the result of this class war that was waged from this school.




Now, interestingly, there is another Chicago boy, and Barack Obama is responding to the market crisis by turning his campaign really into a referendum; though he wouldn't call it a referendum on Friedmanism, he seems to be turning it into a referendum on Friedmanism. He's saying that essentially what we're seeing on Wall Street is the culmination of an ideology of deregulation and trickle-down economics—give a lot at the top and wait for it to trickle down to the people at the bottom—and that is precisely what has failed. And what's interesting is that the more he says that, the higher his ratings go in the polls.

So I think we can see a couple of scenarios for the future. One, McCain wins, and it's economic shock therapy. You know, the thesis of The Shock Doctrine is that we've been sold a fairy tale about how these radical policies have swept the globe, that they haven't swept the globe on the backs of freedom and democracy, but they have needed shocks, they have needed crises, they have needed states of emergencies. It doesn't necessarily have to be an outright military coup, which are the conditions in which this ideology had its first laboratories. It can just be a bad-enough economic crisis, a bad-enough hyperinflation crisis, in an electoral democracy that allows politicians to say, "Sorry about everything we said during the campaign. Sorry about the usual ways in which we make decisions, debate discussion. We're going to have to haul up, form an emergency economic team and impose shock therapy," usually with the help of the International Monetary Fund and the World Bank.



Milton Friedman understood the utility of crisis. And this is a quote—you know, I use it a lot, but I'll use it now again, because I think it's important—which he has at the beginning of the 1982 edition of Capitalism and Freedom: "Only a crisis, actual or perceived, produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable."




Now, because I've been studying the utility of crisis for this free market project, which I consider to be very anti-democratic, it's really attuned me to looking for the ideas that are lying around. And I've been paying really close attention to people like Grover Norquist, Newt Gingrich, the Republican Study Committee, these past few weeks. And I have an "ideas lying around" file, which are the ideas that they are floating right now in the midst of this economic crisis. And a lot of them are familiar, but the point is is that they're being repackaged now as the way out of this economic crisis. So, it's suspending the capital gains tax, getting rid of the post-Enron regulations, getting rid of mark-to-market accounting. In other words, more deregulation and less money in the public coffers. And it is interesting that the way in which this bill—the way the senators were trying to get the bailout bill through the Senate, after it had failed to go through Congress, was by adding tax cuts, a package of $118 billion worth of tax cuts. Some of them are good, some of them are not. But it's a deepening of this crisis.


So, we know that the crisis is coming, and the question is, how are we going to respond? I think there needs to be better ideas lying around. I think the Milton Friedman Institute is about keeping the same old ideas that have been recycled so many times, that actually make these public crises worse, making sure that they are the ones that are ready and available whenever the next crisis hits. I think that is what—at its core, that's what so many of the right-wing think tanks are for, and that's what the Institute is for. And I think that is a waste of the fine minds at this university. I think it is a waste of your minds, your creativity, because all of these crises—climate change, the casino that is contemporary capitalism—all of these crises do demand answers, do demand actions. They are messages, telling us that the system is broken. And instead of actual solutions, we're throwing ideology, very profitable ideology, at these problems. So we need better ideas lying around.

/p>

We need better ideas responding to what a Barack Obama presidency would absolutely face. As soon as he comes to office, "Yes, you can" turns into "No, you can't; we're broke." No green jobs, no alternative energy, no healthcare for everyone. You know, his plan for—to give healthcare to every child in America costs $80 billion. Bailing out AIG cost $85 billion. They're spending that money. They're spending those promises. So, the people who are going to say, "No, you can't," who are going to use this crisis to shut down hope, to shut down possibility, are ready.


And I think it would be so wonderful to have the brilliant young economists of the University of Chicago—I don't know if any of them bothered to come out tonight—but to have your minds at work meeting this crisis. We need you. We need open minds. We need flexible minds, as creative as possible. The Milton Friedman Institute, in its name and essence, is about trying to recapture a moment of ideological certainty that has long passed. It has long passed because reality has intervened. It was fun when it was all abstract. It was fun when it was all in the realm of promise and possibility. But we are well past that. Please, don't retreat into your sacred texts. Join us in the real world.

Demonstrators protest the U.S. Congress's proposed $700 billion bailout of the financial industry in New York City's Times Square, Sept. 27

GOP Concern Growing Over Selection of Palin

Sarah Palin: "But ultimately, what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy, helping the—oh, it's got to be all about job creation, too, shoring up our economy and putting it back on the right track. So, healthcare reform and reducing taxes and reining in spending has got to accompany tax reductions and tax relief for Americans. And trade, we have—we've got to see trade as opportunity, not as a competitive, scary thing, but one in five jobs being created in the trade sector today. We've got to look at that as more opportunity. All those things under the umbrella of job creation. This bailout is a part of that."

Capitol Hill sources are telling me that senior McCain people are more than concerned about Palin. The campaign has held a mock debate and a mock press conference; both are being described as "disastrous." One senior McCain aide was quoted as saying, "What are we going to do?" The McCain people want to move this first debate to some later, undetermined date, possibly never. People on the inside are saying the Alaska Governor is "clueless."

On Friday, conservative columnist Kathleen Parker said that after seeing Palin in interviews, she thinks the vice presidential nominee should drop out.

REP. DENNIS KUCINICH: This is a copy of the bill which will provide for a $700 billion bailout of Wall Street. It has provisions in it where it talks about helping homeowners, but when you read the fine print, you see it has language like "may" instead of "shall" and "encouraging" instead of "mandating" help for the millions of homeowners who are worried right now about whether they're going to lose their home. There's no help for them in this.



So what we have here is a rescue plan that essentially gives all the speculators a bailout and puts the bad debts in the custody of the government. The president of the Dallas Federal Reserve Bank has said that this plan could create a fiscal chasm, says that the problem isn't tight monetary policy, it's the reckless behavior of some of these investors who have now found themselves in a position where a government bailout is going to help reward their bad behavior.



AMY GOODMAN: Is it any better than when it was first introduced by the Treasury Secretary, by Henry Paulson?


REP. DENNIS KUCINICH: Well, you know, that implies that you would accept the underlying premise. I reject the underlying premise that we needed this bill. And as a matter of fact, that we're putting this up before an adjournment in an election season shows that Congress is being put under extraordinary pressure to bail out Wall Street. We haven't looked at any alternatives, Amy. This is—you know, it isn't as though, if you had a liquidity crisis, that—you know, a real one—that you'd start to look at all the alternatives. We haven't done that. We have a bill here, a bill of more than a hundred pages, that we haven't had a single hearing on the bill, you know—on the concept, yes, on what Paulson and Bernanke asked for initially. But, you know, we need to have hearings on this. There's 400 economists and three Nobel Prize-winning economists who have said, "Whoa, wait a minute! What are you doing? Why are you rushing this?" You know, this thing doesn't smell right, frankly.

AMY GOODMAN: What do you think has to happen right now?


REP. DENNIS KUCINICH: Well, you know, Congress better get ready with a plan B. If this thing goes down, we need to find a way to help Wall Street pay for its own problems. You can do that with a 20—.25 percent stock transfer tax, cancellation of dividends. You know, make the shareholders and the investors have to pay for the funny business that was going on on Wall Street. Why make the taxpayers pay? You know, the very underlying idea of this needs to be challenged, and frankly, there hasn't been enough of that going on.



Well, what we have is a transfer of wealth, actually. It's a continuation of a transfer of wealth. This whole government has become nothing more than a big machine that transfers the wealth upwards with our tax policies, our energy policies, with this fiscal policies, with the war. All the wealth of the country goes from the pockets of the people into the hands of a few. This is a very dangerous moment. You know, it's the biggest amount of injection of capital by the government in a single time since the New Deal. And frankly, there is no trickle down here. There's just rewarding bad behavior.



AMY GOODMAN: It sounds like it was mainly the House Republicans who balked, who revolted on Friday. Yet, you and a number of your colleagues are joining them. Do you believe this will pass today?


REP. DENNIS KUCINICH: It's going to be a very close vote. And I don't see this as a partisan issue, by the way. I mean, in a way, the debate that tries to make it a partisan issue is a diversion. This is really whether or not people will side with Main Street in a struggle with Wall Street, because, you know, this is not about left or right. This is about up or down, and it's about the color green.

And frankly, Wall Street has put itself on a trajectory with now we have almost a quadrillion—half a quadrillion dollars of derivatives that are out there, floating out there. People have said that if this is intended to be a fix, it's a joke, on one hand. On the other hand, who's paying for it? Why are we rushing this? Everything about this, I think, is unacceptable.


AMY GOODMAN: Congressman Kucinich, what happens if this doesn't pass?


REP. DENNIS KUCINICH: We need to be ready with plan B, which helps Wall Street restrain some of this bad conduct, which immediately, you know, puts—looks at some of the issues of liquidity that have to do with the policies of the Fed. We had a former head of the FDIC tell a group of congressmen yesterday that the Bush administration has been going around the last few weeks, actually, so tightening up on the practices of banks that they're forcing them to have bigger reserves, which in a way would, you know, kind of create—help to create the kind of tight money policies that we're saying we're trying to alleviate with this bill. So, you know, there needs to be a deeper look at this.

It seems to me there's a possibility that this crisis has a little bit of manufacture to it. And that really concerns me, because we haven't had enough time to look at this in an in-depth way, to analyze the impact of it on the economy, to see if it's going to do anything about a recession that we're obviously headed into, to see if it's going to handle the underlying concerns on Wall Street about the speculation and a lack of regulation. The bill doesn't, by the way, address anything about the speculation, anything about the lack of regulation. The SEC has failed. The Fed has failed. And we're essentially telling all the same actors, "Go for it. You know, here's another opportunity," except this time it's with taxpayers' money.

USA TODAY/Gallup Poll: Obama did better job in first debate
A new USA TODAY/Gallup Poll shows 46% of people who watched Friday night's presidential debate say Democrat Barack Obama did a better job than Republican John McCain; 34% said McCain did better.
Obama scored even better -- 52%-35% -- when debate-watchers were asked which candidate offered the best proposals for change to solve the country's problems.

It's corporate welfare, stupid

How Wall Street Killed the Economy
By A.K. Gupta, the INDYPENDENT

The "subprime mortgage" mania began in 2004 when lenders started giving out mortgages to almost anyone — with little or no proof of income — because of profits that could be made off fees, high interest rates and reselling the mortgages. To sell subprime loans, lenders gave low rates for the first two years. After this the mortgage rate would shoot up, sometimes doubling or even tripling monthly payments.

Caught between stagnant wages and rapidly increasing house values, Americans turned their homes into cash machines this decade and withdrew trillions of dollars in equity. By last year, many subprime loans were resetting at higher rates and homeowners started to default. This cooled off the housing market fast. Jobs were lost in real estate, construction and home lending, and retail spending slowed, slowing the economy.

How does this link to the financial sector?

Say you're Bank of America. You have 1,000 mortgages lying around, so you "bundle" them and create "mortgage backed securities" (MBS) to sell to banks, hedge funds and foreign investors. You get your cash back, and a steady stream of fees for managing the mortgages. To sell MBSs, you go to a ratings agency like Moody's Investor's Service or Standard & Poor's. You slice up the bundle like cuts of beef. The choicest MBSs get Aaa ratings, meaning they will almost certainly be paid back. The ratings go down — Aa, A, Baa, down to Ccc and then unrated — according to the likelihood they will be paid back.
As lenders were writing trillions of dollars in mortgages to sell, not to hold, they didn't have an interest in seeing the loan repaid. Then, lenders took risky mortgage backed securities (rated Bbb, for instance) and repackaged them as highly attractive Aaa financial products. Some of these are called "collateralized debt obligations" or CDO. Ratings firms generated huge profits from giving these dodgy products the seal of approval. Moody's earned nearly $850 million from structured finance products in 2006 alone.

The final player is "monoline" insurance companies, which insure more than $1 trillion in municipal bonds. If a city wants to build new schools or roads or expand mass transit it sells bonds. To lower costs, a city buys insurance from monoline insurers, such as MBIA or Ambac. This makes the bond more desirable to the buyer because the insurer will pay out if the city defaults.

Just as lenders pushed risky subprime mortgages, monoline insurers started insuring mortgage backed securities.

An example shows how this works. Suppose your company is Goldman Sachs. GM wants to borrow $100 million. You give it a loan at 5 percent interest, which means they pay $5 million a year in interest. To be sure your loan is safe you buy insurance from MBIA. Deciding GM is a good risk, MBIA sells you the policy at 1 percent. So while GM pays you $5 million a year, you pay MBIA $1 million a year to assume the risk. If GM defaults on the loan, MBIA will cover the loss.

These insurance contracts are known as "credit default swaps." Taking the example above, GM starts bleeding money and can't service its debt. This causes the value of your loan to decline, but the value of your insurance contract, the credit default swap, rises because it's more likely it will have to be paid out.

Here's where things get nutty. An unregulated market, totaling a breathtaking $45 trillion, grew up as banks, hedge funds, brokers and insurers sold these swaps back and forth. It's pure gambling, where buyers and sellers often do not hold the underlying debt. As hundreds of thousands of homeowners began defaulting on subprime loans, many MBSs started going bad, too. By last year, there was $1.3 trillion in CDOs worldwide and 56 percent of this was made up of mortgage backed securities. The $45 trillion is the underlying instruments, what the WSJ calls the "notional" amount. The annual U.S. market for CDO bundles was about $154 billion in 2007.

By last year, one small monoline insurer, ACA , had accumulated more than $69 billion in exposure to corporate and mortgage debt but only had $425 million of capital to cover it. Ratings agencies also review insurance firms, and ACA had a single A rating. Then it reported a loss of $1 billion last November from MBSs. A month later, it was downgraded to a junk rating of Ccc.

This made ACA 's insurance policies worthless, affecting the value of the debt they insured. Fearful this could lead to a market panic as players tried to "unwind" their swaps, banks have been negotiating to rescue the insurer, but already Merrill Lynch, CIBC and Citigroup have written off billions of dollars in losses linked to ACA. Losses this year on swaps could total $250 billion, equal to the expected losses in the subprime market.

The damage is spreading on Wall Street with large job cuts in finance and a credit crunch that's making it harder for businesses and homeowners to borrow. This creates more problems. As foreclosures multiply and property values decline, many cities and states are facing huge tax shortfalls. On the cusp of recession, they have to borrow more money to fund operations. But as monoline insurers are downgraded, the cost of insuring municipal bonds goes up. In addition to the blow of a recession, Americans will see government services slashed and having to pay more for the services that remain.

Wall Street made staggering profits from the housing and credit bubbles.

Now that they're taking a beating, the Federal Reserve and U.S. Treasury Department are bailing them out on the public's dime by pumping tens of billions of dollars into the market and by lowering interest rates, which fuels inflation. Thus, profit is private, but losses are socialized. Such is the free market.

GLOSSARY

Bond—a bond is an instrument of debt issued by corporations and governments. For example, Boeing issues $1 million bonds with a 20-year maturity at 5 percent. This means the buyer purchases the bond for $1 million, gets 5 percent interest per year ($50,000) for 20 years, and at the end gets paid back the principal of $1 million.

Collateralized Debt Obligation—a complex security that can be based on a wide variety of debts such as mortgages, credit card debt, auto loans, etc.

Mortgage Backed Securities—are either commercial or residential mortgages that are bundled to create a bond. The pool of mortgages acts as asset for the MBS and generates cash payments to the buyers in the form of interest and principal from the mortgages.

Subprime mortgages—sometimes labeled "predatory lending," this means greater than the prime rate, currently 6.5 percent, which is the lowest interest rate banks offer to their best customers.

Illustrations by Frank Reynoso



Conservatives starting to panic about Palin

Prominent conservatives are finally starting to realize that an unqualified half-term hockey mom from Alaska might not be the best choice to be a 72 year old heartbeat away from the presidency. Here's the brutal roundup.

Kathleen Parker:

It was fun while it lasted.

Palin's recent interviews with Charles Gibson, Sean Hannity, and now Katie Couric have all revealed an attractive, earnest, confident candidate. Who Is Clearly Out Of Her League.

No one hates saying that more than I do. Like so many women, I've been pulling for Palin, wishing her the best, hoping she will perform brilliantly. I've also noticed that I watch her interviews with the held breath of an anxious parent, my finger poised over the mute button in case it gets too painful. Unfortunately, it often does. My cringe reflex is exhausted. Palin filibusters. She repeats words, filling space with deadwood. Cut the verbiage and there's not much content there.

Wingnut extaordinaire K-Lo:

I'm not where my friend Kathleen Parker is — wanting her to step aside to spend more time with her family and Alaska — but that's not a crazy suggestion.

McCain campaign insiders, via Ed Schultz:

Add to this the usual lies about Democrats wanting to "forfeit" to our enemies abroad and coddle terrorists, and you had a very run-of-the-mill, almost boring Republican speech from a substance standpoint. What made it exceptional was its utter hypocrisy, its total disregard for reality, its absolute unrelation to the facts of our current political situation. After eight years of unprecedented corruption, incompetence, waste and greed, the party of Karl Rove understood that 50 million Americans would not demand solutions to any of these problems so long as they were given a new, new thing to beat their meat over.
Then there's the God stuff: Palin belongs to a church whose pastor, Ed Kalnins, believes that all criticisms of George Bush "come from hell," and wondered aloud if people who voted for John Kerry could be saved. Which tells you about what you'd expect from a raise-the-base choice like Palin: She's a puffed-up dimwit with primitive religious beliefs who had to be educated as to the fact that the Constitution did not exactly envision government executives firing librarians. Judging from the importance progressive critics seem to attach to these revelations, you'd think that these were actually negatives in modern American politics. But Americans like politicians who hate books and see the face of Jesus in every tree stump. They like them stupid and mean and ignorant of the rules.

Naomi Klein: "Now is the Time to Resist Wall Street's Shock Doctrine"

12:42 AM 

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Portrait of an Animal Researcher