The Coming Climate Dictatorship

from Investors.com - Posted 11/12/2009 07:43 PM ET

Control: The House and Senate climate bills contain a provision giving the president extraordinary powers in the event of a "climate emergency." As chief of staff Rahm Emanuel says, a crisis is a terrible thing to waste.

If you thought the House health care bill that nobody read has hidden passages that threaten our freedoms and liberty, take a peak at the "trigger" placed in the byzantine innards of both the House-passed Waxman-Markey bill and the Kerry-Boxer bill just passed by Democrats out of Sen. Barbara Boxer's Environment and Public Works Committee.

As Nick Loris of the Heritage Foundation points out, the Kerry-Boxer bill requires the declaration of a "climate emergency" if the concentration of carbon dioxide and other declared greenhouse gases in the atmosphere exceeds 450 parts per million (ppm). It was at about 286 ppm before the Industrial Revolution and now sits at around 368 ppm.

That figure was picked out of a hat because the warm-mongers believe that's the level at which the polar ice caps will disappear, boats can be moored on the Statue of Liberty's torch and dead polar bears will wash up on the beaches of Malibu.

The Senate version includes a section that gives the president authority, under this declared "climate emergency," to "direct all Federal agencies to use existing statutory authority to take appropriate actions ... to address shortfalls" in achieving greenhouse gas (GHG) reductions.

What the "appropriate actions" might be are not defined and presumably left up to the discretion of the White House. Could the burning of coal be suspended or recreational driving be banned? Sen. David Vitter, R-La., asked the EPA for a definition and received no response.

Competitive Enterprise Institute scholar Chris Horner says "this agenda transparently is not about GHG concentrations, or the climate. It's about what the provision would bring: almost limitless power over private economic activity and individual liberty for the activist president and, for the reluctant leader, litigious greens and courts" packed by liberal Democrat appointees.

Writing in the Financial Times recently, Czech President Vaclav Klaus, author of the book, "Blue Planet, Green Shackles," said: "As someone who lived under communism for most of his life, I feel obliged to say that I see the biggest threat to freedom, democracy, the market economy and prosperity now in ambitious environmentalism, not communism."

Klaus, who has challenged Al Gore to a debate and has rejected Europe's embrace of Kyoto, told the Cato Institute recently that "environmentalism is a religion" that accepts global warming on faith and seeks to exploit it to reshape the world and economic order.

"Environmentalism only pretends to deal with environmental protection," he told the libertarian think tank. "Behind the terminology is really an ambitious attempt to radically reorganize the world."

The Minnesota Free Market Institute recently hosted an event at Bethel University in St. Paul, Minn. Keynote speaker Lord Christopher Monckton, former science adviser to British Prime Minister Margaret Thatcher, warned of one of the consequences of Copenhagen — the loss of American sovereignty.

"I read that treaty," Lord Monckton said, "and what it says is this: that a world government is going to be created. The word 'government' actually appears as the first of three purposes of the new entity. The second purpose is the transfer of wealth from the countries of the West to Third World countries, (to satisfy) what is called, coyly, 'climate debt' — because we've been burning CO2 and they haven't."

This nation was founded and built by those yearning to breathe free. Its freedoms are imperiled by those demanding that we breathe pure. We are human sacrifices to the earth goddess Gaia. Loss of sovereignty to both a federal and a world government and redistribution of wealth on a global scale — all this in the name of saving the planet from a concocted threat.

As we have said, the road to Copenhagen is being paved with good intentions.

Ron Paul: Let the dollar prove itself

By Ron Paul, Special to CNN
October 30, 2009 7:46 a.m. EDT

Washington, D.C. (CNN) -- A growing number of Americans are becoming aware of the Federal Reserve System, what it is, how it has precipitated our financial crisis, and how it continues to pursue policies that delay economic recovery and weaken the dollar.

The Fed's actions, combined with the federal government's bailout bills and stimulus packages, have struck a nerve in the American people.

Recent polls have shown that more than 75 percent of Americans support efforts to audit the Fed, something which my bill, HR 1207, the Federal Reserve Transparency Act, aims to do. HR 1207 has the support of 304 members of Congress, and the Senate version of the bill, S. 604, is supported by 31 U.S. senators.

Fed Chairman Ben Bernanke has embarked on an ambitious program of monetary expansion, more than doubling the monetary base to almost $1.9 trillion and doubling the size of its balance sheet to over $2 trillion, placing the American economy in a precarious position.

If all this excess money begins to be loaned out, the Fed risks creating a hyperinflationary crisis similar to 1920s Germany. If the Fed contracts this money, it risks harming the banks it desperately wants to see bailed out.

It is imperative that the American people know what the Fed is up to, how much money it loans to banks and what types of agreements it enters into with foreign banks and governments. Just about all of this information is exempt from audit or oversight. The Fed's actions directly affect the value of the dollar, which is coming under increasing pressure from our foreign creditors. If we do not wish to see a complete collapse of the dollar, the Fed needs to be subject to a strict audit of its actions, if not an outright abolition of its charter.

While I would like nothing more than to see the Federal Reserve abolished, it is not absolutely necessary to do so with direct legislation.

The Fed's influence comes about because of its monopolization of the creation of money. If we could abolish the government monopoly on the creation of money, the Federal Reserve would be forced to clean up its act or go out of business. Economists know that monopolies lead to reduced output and higher prices, a suboptimal allocation of resources. This applies as well to the market for circulating currency as it does to markets for any other good.

In the previous Congress I introduced legislation that would eliminate the three major barriers to competition in currency and break the Fed's stranglehold on money.

The first barrier: Legal tender laws, which Congress does not have the Constitutional authority to enact. Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency.

Gresham's Law describes this phenomenon, which can be summed up in one phrase: Bad money drives out good money. In the absence of legal tender laws, Gresham's Law no longer holds. If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society.

The second barrier: laws that prohibit the operation of private mints. Certain sections of U.S. code classified as anti-counterfeiting statutes were in fact intended to shut down private mints that had been operating in California. There is no reason to ban private companies from minting gold and silver coins to compete with the dollar.

All currencies are based on trust, trust that the issuing authority will not debase the currency. If it becomes known that the issuer of a particular currency is minting underweight coins, people will stop accepting that currency and that company will go out of business. If someone else attempts to counterfeit that currency and pass those coins, there are sufficient counterfeiting laws on the books to prosecute those counterfeiters.

Merchants and individuals are free to choose which currencies they accept, and in the absence of legal tender laws I believe that alternative currencies will gain more traction.

Stores today can accept whatever currency they like. In Washington, DC a few years ago, some stores began accepting euros from international tourists. Harrod's in London accepts pounds, euros, and dollars. There is no legal requirement in the United States for a store to accept dollars for non-debt transactions.

If you walk into a 7-11 to buy a soda, the clerk doesn't have to accept your dollars, he could demand euros, silver, or copper. But because legal tender laws backing the dollar have caused the dollar to drive other currencies out of circulation, it is easier for stores to accept dollars.

However, most stores also accept credit cards, personal checks, and debit cards, none of which are legal tender. Some stores are moving to credit card-only transactions to minimize costs, which they are allowed to do.

Under a system of competing currencies, it would be to the advantage of stores to accept as many currencies as they could, in order to attract a wide range of customers. Stores that only accepted one currency would see their customer base shrink. The use of credit cards could simplify things just as it does today when Americans travel to Europe. They pay in euros with their credit card, and their card company bills in dollars. The market will find a solution to any problems that might arise.

The final barrier to competing currencies: Laws that assess capital gains and sales taxes on gold and silver coins. Under federal law, coins are considered collectibles, and are liable for capital gains taxes. These taxes actually tax monetary debasement. The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases because of a weak dollar, the federal government considers this an increase in wealth and assesses taxes.

Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals. For individuals who may wish to use gold and silver in everyday transactions, this can quickly become a complicated and costly burden.

The long-term strength of the dollar will only be weakened by maintaining the Fed's monopoly on our monetary system. Our foreign creditors are already moving to dethrone the dollar as the world's currency.

The prospect of American citizens also turning away from the dollar toward alternate currencies should provide an impetus to the U.S. government to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency, and provide stability to the financial system. With a sound currency, everyone is better off, not just those who control the monetary system.

The opinions expressed in this commentary are solely those of Rep. Ron Paul.

Editor's note: Ron Paul is an 11-term Republican U.S. representative from Texas who made a bid for the GOP presidential nomination in 2008. His book, "End the Fed," was recently published by Grand Central Publishing.

Commentary: What Wall Street owes you

• Story Highlights
• Tavakoli: Goldman Sachs reported record second-quarter profits
• She says Goldman and Wall Street helped bring down the U.S. economy
• Goldman reaped huge profit enabled by help it got in federal bailout, she says
• Tavakoli: Taxpayers deserve a large share of what Goldman made

By Janet Tavakoli
Special to CNN

Editor's note: Janet Tavakoli is president of Chicago-based Tavakoli Structured Finance and the author of "Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street" (Wiley, 2009), a book about the causes of the global financial meltdown. Her company is a consulting firm for institutions and institutional investors on derivatives, the securitization of assets, and mergers and acquisitions. Her firm has done work for investment banks but not for Goldman Sachs; she worked for the company in the 1980s.

CHICAGO, Illinois (CNN) -- Goldman Sachs Group Inc. announced record earnings Tuesday of $3.44 billion for the second quarter of 2009.

Goldman's stock price leapt 77 percent for the first half of 2009, and closed Tuesday at $149.66 a share.

Without an ongoing series of front- and backdoor bailouts financed by U.S. taxpayers, most of Goldman's record profits would not have been possible.

In April 2009, Goldman Sachs' CEO, Lloyd Blankfein, who received record salary and bonus compensation of $68.5 million in 2007, said that bonus decisions made before the credit crisis looked "self-serving and greedy in hindsight." Now, they look self-serving and greedy with foresight.

Goldman set aside $11.4 billion for employee compensation and benefits, up 33 percent from last year. That's enough to pay each employee more than $390,000, just for the first six months of this year.

In June, Goldman bought back its preferred shares, repaying $10 billion it received from the government's Troubled Asset Relief Program, or TARP, and setting it free of limits on executive compensation and dividends.

But pay is not the key issue. U.S. taxpayers deserve a large cut of the profits, not the chump change -- less than a half-billion dollars -- they got from preferred shares in the company and the relatively small amount they could get from warrants in its stock.

U.S. taxpayers should insist that a large part of Goldman's revenues and profits belong to the American public. TARP money was just part of a series of bailouts and concessions that allowed Goldman to prosper at the expense of a flawed regulatory system.

In March 2008, Goldman, a primary dealer in Treasury securities, was among the beneficiaries of a massive backdoor bailout by the Federal Reserve Bank. At the time, Henry Paulson, former CEO of Goldman Sachs, was treasury secretary.

In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed.

The bailout of American International Group, or AIG, ballooned from $85 billion in September 2008 to $182.5 billion. Of that money, $90 billion was funneled as collateral payments to banks that traded with AIG. American taxpayers may never see a dime of their bailout money again, but Goldman saw plenty.

Goldman may be the largest indirect beneficiary of AIG's bailout, receiving $12.9 billion in collateral, including securities lending transactions, from AIG after the government bailed out the insurance company.

The key question is whether Goldman asked AIG to insure products that were as dodgy as the doomed deal from Goldman Sachs Alternative Mortgage Products exposed by Fortune's Allan Sloan in his October 16, 2007, Loeb Award-winning article: "Junk Mortgages Under the Microscope."

If the federal government had not intervened and if AIG had gone into bankruptcy, Goldman probably would not have received its $12.9 billion from AIG. U.S. taxpayers and the American economy are owed some of the bailout money passed directly through AIG to Goldman.

Wall Street firms also reaped trading windfalls when AIG needed to close out its derivative transactions. This was the most lucrative windfall business in the history of the derivatives markets. When AIG left money on the table, it was U.S. taxpayer money.

Goldman Sachs was granted bank holding company status in the fall of 2008. It already had the temporary ability to borrow from the Fed through the TSLF, which would have expired in January 2009. Now it has permanent access to lending from the Fed.

Goldman can now compete with the largest U.S. banks and borrow money at interest rates pushed as close to zero as possible by the Fed. Goldman gets a further benefit: favorable accounting rule changes. In addition, Goldman issued $30 billion of debt with a valuable government guarantee that remains outstanding.

Meanwhile, the American public faces a rising unemployment rate, falling housing prices, rising unemployment, higher local taxes and a dismal economic outlook.

Interested men with reputations and fortunes at stake rode roughshod over public interest. The American public is owed part of the profits Goldman was able to make because of the largesse of our Congress.

Wall Street's "financial meth labs," including Goldman's, massively pumped out bad bonds and credit derivatives that have melted down savings accounts, pension funds, the municipal bond market and the American economy. Risky assets, leverage and fraud led to acute distress in the global financial markets.

The biggest crime on the American economy may go unpunished with no consequences to the perpetrators. The biggest crime was not predatory lending, but predatory securitizations, packages of loans that did not deserve the ratings or prices at the time they were sold. They ballooned what should have been a relatively small problem into a global crisis.

Wall Street owes the American public for its key role in bringing the global economy -- and in particular, the U.S. economy -- to its knees. Goldman is not alone in owing the American public. It is not the worst of all of the Wall Street firms. But among all of Wall Street's offenders, it is the most well-connected, and Goldman was the firm that cleaned up the most as the result of government bailouts.

The opinions expressed in this commentary are solely those of Janet Tavakoli.

From Mike Swanson (excerpt)

A former assistant treasury secretary made some interesting comments about the bank bailout and who Geithner really works for:

Craig Roberts: Bank bailout was a fraud and it won't succeed. Don't know what sort of stupidity the Treasury Secretary and the Federal Reserve will resort to next.

Max Keiser: Quick question. What should the Treasury Secretary be doing?

Craig Roberts: He should be trying to save the dollar as the world's reserve currency which means stopping the wars, reducing the bailout money, and trying to reduce the trade and budget deficits in order to save the dollar. That's what he should be doing.

Max Kesier: Does the treasury secretary work for the people or does he work for the banking system on Wall Street?

Craig Roberts: He works for Goldman Sachs.

From Mike Swanson (excerpt)

There is no economic recovery. Obama's stimulus bill is a failure. When he passed it he said it would "save" one million jobs and according to a story in the New York Times yesterday it has only saved 150k jobs. There is talk of having to pass another stimulus bill among aggressive Democrats. Republicans oppose it saying the first one is doing more harm than good and Obama administration is uneasy in fear that eventually the growing deficit will cause interest rates to rise which would offset the stimulus and hurt real estate. So we are in tough spot right now.

AIG suks!

AIG timeline

9/16/08	AIG gets $85 billion bailout
10/8/08	Bailout grows to $122.8 billion
11/10/08	Bailout grows to $152.5 billion
11/25/08	CEO Ed Liddy takes $1 salary
3/2/09	AIG posts largest ever quarterly loss in U.S. history
3/2/09	Bailout grows to $182 billion
3/15/09	$165 million in bonuses revealed
3/18/09	House Dems introduce bill to kill bonuses
3/18/09	Liddy asks for return of half of bonuses
5/21/09	Liddy announces plans to step down
6/30/09	Taxpayers oust six AIG directors
7/9/09	AIG asks government to OK future bonuses

Marie Digby - Feel - Official Japanese Video

Lots of Tax Hikes Coming in 2011

Tax increases will hit businesses and individuals, and don’t think for a minute that only the wealthy will feel the pain.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

April 24, 2009

Think taxes are too high now? Just wait: Congress is all but certain to raise them a couple of years from now. Tax increases will hit both businesses and individuals -- and not just singles making more than $200,000 a year and married couples over $250,000 a year. They’ll be the first to get pinched, but not the last. There’s just not enough revenue that can be drawn from the wealthy without crippling the economy, so in time, middle incomers will feel a bigger bite, too.

Higher taxes will be part of a major overhaul designed to simplify the tax code, though it won’t do more than tinker around the edges. The legislation will have cuts as well as hikes, though more of the latter. Putting everything in a catchall piece of legislation dilutes opposition to any one unpopular provision. Figure on tax increases taking effect in 2011, assuming the economy is growing steadily. At that point, reducing the deficit will be the top priority. The debt is simply unsustainable over the long term.

Here’s what’s rising to the top of the list of probable hikes for individuals:

• Boosts in top marginal rates from 33% and 35% to 36% and 39.6%. No change in the other marginal rates seems likely.
• A higher rate on capital gains and dividends, but only for those in the top brackets. They will probably be hit with a 20% rate, though it could go a little higher.
• Caps on itemized deductions for top earners. Obama’s push to limit the value of deductions at 28% ran into a wall of opposition from charitable groups, but he’s not giving up. Some way of curtailing the tax break still seems likely by 2011.
• No repeal of estate taxes, but count on an exemption of at least $3.5 million, and it could be set as high as $5 million if the Senate prevails. Estate tax legislation will include spousal transfers, making the exemption $7 million or more for couples. The estate tax rate will be capped at 45%, the same as it is now.
• More easings for the alternative minimum tax, but no repeal.

Businesses can expect a mixed bag of hikes and cuts, but with a higher total tax bill. Among the changes:

• Higher SECA taxes for owners of S firms and partnerships by blocking them in the future from skirting payroll taxes by taking their compensation as dividends instead of salary.
• New restrictions on worker classification to make it easier for the IRS to crack down on firms that treat workers as contractors who are really employees.
• And elimination of some tax breaks for big corporations, including the deduction for domestic production, accelerated depreciation and incentives for foreign income and oil production.

But there may be a silver lining, at least for big corporations: Congress will consider lowering the 35% top corporate tax rate by several percentage points.

Longer term, tax hikes will go even further and hit more people and businesses. The only other option is deep cuts in spending, including Social Security, Medicare and defense, and the public won’t buy that. As a result, anyone making more than $100,000 a year will be at risk for higher taxes. The most likely option is to raise the cap on income subject to payroll taxes. It now stands at $106,800.

The increases will make many unhappy. They already see the burden as high, a point made clearly at those “tea parties” on April 15. Lumping together income, excise, payroll and other taxes, the average rate paid today is 21¢ on every dollar of income, according to a recent Congressional Budget Office analysis of data from 2006, the most recent year for which data are available. That’s the same as in 1982, after the Reagan tax cuts, and 2¢ less than at its peak under Clinton. For the top 20% of taxpayers, the average rate is higher: 26¢. That compares with 24¢ in 1982.

AP IMPACT: Tons of released drugs taint US water

By JEFF DONN, MARTHA MENDOZA and JUSTIN PRITCHARD, Associated Press Writers - Mon Apr 20, 1:45 AM

- U.S. manufacturers, including major drugmakers, have legally released at least 271 million pounds of pharmaceuticals into waterways that often provide drinking water — contamination the federal government has consistently overlooked, according to an Associated Press investigation.

Hundreds of active pharmaceutical ingredients are used in a variety of manufacturing, including drugmaking: For example, lithium is used to make ceramics and treat bipolar disorder; nitroglycerin is a heart drug and also used in explosives; copper shows up in everything from pipes to contraceptives.

Federal and industry officials say they don't know the extent to which pharmaceuticals are released by U.S. manufacturers because no one tracks them — as drugs. But a close analysis of 20 years of federal records found that, in fact, the government unintentionally keeps data on a few, allowing a glimpse of the pharmaceuticals coming from factories.

As part of its ongoing PharmaWater investigation about trace concentrations of pharmaceuticals in drinking water, AP identified 22 compounds that show up on two lists: the EPA monitors them as industrial chemicals that are released into rivers, lakes and other bodies of water under federal pollution laws, while the Food and Drug Administration classifies them as active pharmaceutical ingredients.

The data don't show precisely how much of the 271 million pounds comes from drugmakers versus other manufacturers; also, the figure is a massive undercount because of the limited federal government tracking.

To date, drugmakers have dismissed the suggestion that their manufacturing contributes significantly to what's being found in water. Federal drug and water regulators agree.

But some researchers say the lack of required testing amounts to a 'don't ask, don't tell' policy about whether drugmakers are contributing to water pollution.

"It doesn't pass the straight-face test to say pharmaceutical manufacturers are not emitting any of the compounds they're creating," said Kyla Bennett, who spent 10 years as an EPA enforcement officer before becoming an ecologist and environmental attorney.

Pilot studies in the U.S. and abroad are now confirming those doubts.

Last year, the AP reported that trace amounts of a wide range of pharmaceuticals — including antibiotics, anti-convulsants, mood stabilizers and sex hormones — have been found in American drinking water supplies. Including recent findings in Dallas, Cleveland and Maryland's Prince George's and Montgomery counties, pharmaceuticals have been detected in the drinking water of at least 51 million Americans.

Most cities and water providers still do not test. Some scientists say that wherever researchers look, they will find pharma-tainted water.

Consumers are considered the biggest contributors to the contamination. We consume drugs, then excrete what our bodies don't absorb. Other times, we flush unused drugs down toilets. The AP also found that an estimated 250 million pounds of pharmaceuticals and contaminated packaging are thrown away each year by hospitals and long-term care facilities.

Researchers have found that even extremely diluted concentrations of drugs harm fish, frogs and other aquatic species. Also, researchers report that human cells fail to grow normally in the laboratory when exposed to trace concentrations of certain drugs. Some scientists say they are increasingly concerned that the consumption of combinations of many drugs, even in small amounts, could harm humans over decades.

Utilities say the water is safe. Scientists, doctors and the EPA say there are no confirmed human risks associated with consuming minute concentrations of drugs. But those experts also agree that dangers cannot be ruled out, especially given the emerging research.

___

Two common industrial chemicals that are also pharmaceuticals — the antiseptics phenol and hydrogen peroxide — account for 92 percent of the 271 million pounds identified as coming from drugmakers and other manufacturers. Both can be toxic and both are considered to be ubiquitous in the environment.

However, the list of 22 includes other troubling releases of chemicals that can be used to make drugs and other products: 8 million pounds of the skin bleaching cream hydroquinone, 3 million pounds of nicotine compounds that can be used in quit-smoking patches, 10,000 pounds of the antibiotic tetracycline hydrochloride. Others include treatments for head lice and worms.

Residues are often released into the environment when manufacturing equipment is cleaned.

A small fraction of pharmaceuticals also leach out of landfills where they are dumped. Pharmaceuticals released onto land include the chemo agent fluorouracil, the epilepsy medicine phenytoin and the sedative pentobarbital sodium. The overall amount may be considerable, given the volume of what has been buried — 572 million pounds of the 22 monitored drugs since 1988.

In one case, government data shows that in Columbus, Ohio, pharmaceutical maker Boehringer Ingelheim Roxane Inc. discharged an estimated 2,285 pounds of lithium carbonate — which is considered slightly toxic to aquatic invertebrates and freshwater fish — to a local wastewater treatment plant between 1995 and 2006. Company spokeswoman Marybeth C. McGuire said the pharmaceutical plant, which uses lithium to make drugs for bipolar disorder, has violated no laws or regulations. McGuire said all the lithium discharged, an annual average of 190 pounds, was lost when residues stuck to mixing equipment were washed down the drain.

___

Pharmaceutical company officials point out that active ingredients represent profits, so there's a huge incentive not to let any escape. They also say extremely strict manufacturing regulations — albeit aimed at other chemicals — help prevent leakage, and that whatever traces may get away are handled by onsite wastewater treatment.

"Manufacturers have to be in compliance with all relevant environmental laws," said Alan Goldhammer, a scientist and vice president at the industry trade group Pharmaceutical Research and Manufacturers of America.

Goldhammer conceded some drug residues could be released in wastewater, but stressed "it would not cause any environmental issues because it was not a toxic substance at the level that it was being released at."

Several big drugmakers were asked this simple question: Have you tested wastewater from your plants to find out whether any active pharmaceuticals are escaping, and if so what have you found?

No drugmaker answered directly.

"Based on research that we have reviewed from the past 20 years, pharmaceutical manufacturing facilities are not a significant source of pharmaceuticals that contribute to environmental risk," GlaxoSmithKline said in a statement.

AstraZeneca spokeswoman Kate Klemas said the company's manufacturing processes "are designed to avoid, or otherwise minimize the loss of product to the environment" and thus "ensure that any residual losses of pharmaceuticals to the environment that do occur are at levels that would be unlikely to pose a threat to human health or the environment."

One major manufacturer, Pfizer Inc., acknowledged that it tested some of its wastewater — but outside the United States.

The company's director of hazard communication and environmental toxicology, Frank Mastrocco, said Pfizer has sampled effluent from some of its foreign drug factories. Without disclosing details, he said the results left Pfizer "confident that the current controls and processes in place at these facilities are adequately protective of human health and the environment."

It's not just the industry that isn't testing.

FDA spokesman Christopher Kelly noted that his agency is not responsible for what comes out on the waste end of drug factories. At the EPA, acting assistant administrator for water Mike Shapiro — whose agency's Web site says pharmaceutical releases from manufacturing are "well defined and controlled" — did not mention factories as a source of pharmaceutical pollution when asked by the AP how drugs get into drinking water.

"Pharmaceuticals get into water in many ways," he said in a written statement. "It's commonly believed the majority come from human and animal excretion. A portion also comes from flushing unused drugs down the toilet or drain; a practice EPA generally discourages."

His position echoes that of a line of federal drug and water regulators as well as drugmakers, who concluded in the 1990s — before highly sensitive tests now used had been developed — that manufacturing is not a meaningful source of pharmaceuticals in the environment.

Pharmaceutical makers typically are excused from having to submit an environmental review for new products, and the FDA has never rejected a drug application based on potential environmental impact. Also at play are pressures not to delay potentially lifesaving drugs. What's more, because the EPA hasn't concluded at what level, if any, pharmaceuticals are bad for the environment or harmful to people, drugmakers almost never have to report the release of pharmaceuticals they produce.

"The government could get a national snapshot of the water if they chose to," said Jennifer Sass, a senior scientist for the Natural Resources Defense Council, "and it seems logical that we would want to find out what's coming out of these plants."

Ajit Ghorpade, an environmental engineer who worked for several major pharmaceutical companies before his current job helping run a wastewater treatment plant, said drugmakers have no impetus to take measurements that the government doesn't require.

"Obviously nobody wants to spend the time or their dime to prove this," he said. "It's like asking me why I don't drive a hybrid car? Why should I? It's not required."

___

After contacting the nation's leading drugmakers and filing public records requests, the AP found two federal agencies that have tested.

Both the EPA and the U.S. Geological Survey have studies under way comparing sewage at treatment plants that receive wastewater from drugmaking factories against sewage at treatment plants that do not.

Preliminary USGS results, slated for publication later this year, show that treated wastewater from sewage plants serving drug factories had significantly more medicine residues. Data from the EPA study show a disproportionate concentration in wastewater of an antibiotic that a major Michigan factory was producing at the time the samples were taken.

Meanwhile, other researchers recorded concentrations of codeine in the southern reaches of the Delaware River that were at least 10 times higher than the rest of the river.

The scientists from the Delaware River Basin Commission won't have to look far when they try to track down potential sources later this year. One mile from the sampling site, just off shore of Pennsville, N.J., there's a pipe that spits out treated wastewater from a municipal plant. The plant accepts sewage from a pharmaceutical factory owned by Siegfried Ltd. The factory makes codeine.

"We have implemented programs to not only reduce the volume of waste materials generated but to minimize the amount of pharmaceutical ingredients in the water," said Siegfried spokeswoman Rita van Eck.

Another codeine plant, run by Johnson & Johnson subsidiary Noramco Inc., is about seven miles away. A Noramco spokesman acknowledged that the Wilmington, Del., factory had voluntarily tested its wastewater and found codeine in trace concentrations thousands of times greater than what was found in the Delaware River. "The amounts of codeine we measured in the wastewater, prior to releasing it to the City of Wilmington, are not considered to be hazardous to the environment," said a company spokesman.

In another instance, equipment-cleaning water sent down the drain of an Upsher-Smith Laboratories, Inc. factory in Denver consistently contains traces of warfarin, a blood thinner, according to results obtained under a public records act request. Officials at the company and the Denver Metro Wastewater Reclamation District said they believe the concentrations are safe.

Warfarin, which also is a common rat poison and pesticide, is so effective at inhibiting growth of aquatic plants and animals it's actually deliberately introduced to clean plants and tiny aquatic animals from ballast water of ships.

"With regard to wastewater management we are subject to a variety of federal, state and local regulation and oversight," said Joel Green, Upsher-Smith's vice president and general counsel. "And we work hard to maintain systems to promote compliance."

Baylor University professor Bryan Brooks, who has published more than a dozen studies related to pharmaceuticals in the environment, said assurances that drugmakers run clean shops are not enough.

"I have no reason to believe them or not believe them," he said. "We don't have peer-reviewed studies to support or not support their claims."

The Quiet Coup

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

by Simon Johnson

The Quiet Coup

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.




Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.


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Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.


The Wall Street–Washington Corridor

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.


America’s Oligarchs and the Financial Crisis

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.


The Way Out

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.


Two Paths

To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Early photo of New York

NEW YORK (CNN) -- One of the earliest photographs in existence sold for $62,500 at Sotheby's auction house in New York.

The photo, which was estimated to bring in anywhere from $50,000 to $70,000, was sold to an unidentified buyer.

The 5.5-by-4-inch, black and white daguerreotype shows a New York country estate.

The half-plate daguerreotype dating from 1848 shows what was then known as old Bloomingdale Road and referred to as "a continuation of Broadway."

In the foreground, the dirt road leads to an entry gate to the fence that surrounds the grounds.

A home sits perched above what appears to be a fenced-in pasture or grazing field surrounded by evergreens.
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The use of daguerreotype, which was invented by French artist Louis-Jacques-Mandé Daguerre, was common in the 1840s and 1850s, according to Daguerre.org.

To create a daguerreotype, the image is exposed directly onto a polished surface of silver with a coating of silver halide and particles deposited by vapor, giving it a mirror-like, reflective finish.

Newspapers fold as readers defect and economy sours

* Story Highlights
* NEW: Charlotte Observer announces it will cut staff by nearly 15 percent
* Ann Arbor (Michigan) News announces it will shut down in July
* After 138 years, the Tucson Citizen will fold if it doesn't find a buyer soon
* Two-newspaper towns may be extinct by the end of this year, some experts say

By Stephanie Chen
CNN

(CNN) -- The Rocky Mountain News, gone. The Seattle Post-Intelligencer, gone.

The chain that owns the Los Angeles Times and the Chicago Tribune is in bankruptcy. Other papers, large and small, are teetering on the brink.

On Monday, the Ann Arbor (Michigan) News announced that it will publish its last edition in July. Taking its place will be a Web site called AnnArbor.com.

Three other Michigan newspapers announced Monday they are reducing their publications to three days a week. The Flint Journal, The Saginaw News and The Bay City Times will publish print editions on Thursdays, Fridays and Sundays, according to the mlive.com Web site, as research shows those are the highest readership days for newspapers.

And the Charlotte Observer announced Monday it will cut its staff by 14.6 percent and reduce the pay of most of the employees it keeps.

The situation now looks grim for The Tucson Citizen. In the past 25 years, circulation at Arizona's oldest newspaper has dwindled from 65,000 to 17,000. The Gannett Co. paper could fold if a buyer can't be found.

At least 120 newspapers in the U.S. have shut down since January 2008, according to Paper Cuts, a Web site tracking the newspaper industry. More than 21,000 jobs at 67 newspapers have vaporized in that time, according to the site.

More bad news could be coming this week as newspapers struggle to meet challenges posed by changing reader habits, a shifting advertising market, an anemic economy, and the newspaper industry's own early strategic errors.

Amid the decline comes concern over who, if anyone, can assume newspapers' traditional role as a watchdog. For more than 200 years, that role has been an integral part of American democracy.

"I know it sounds somewhat cliché, but when you have competition with [the Arizona] Star, it makes both entities better," said Jennifer Boice, an editor who has devoted more than 25 years of her life to the Tucson Citizen.

Competition naturally breeds better journalism is the credo of many newspaper veterans. And better journalism means an engaged and informed public.

"The winner is the community," Boice said. "They get better information quicker and more of it."

Despite arguments like Boice's, newspapers are losing their relevance in the lives of a majority of Americans, particularly younger readers.

Many industry analysts agree many more papers will soon become extinct. Most two-newspaper towns will likely disappear, perhaps by the end of 2009, some experts say.

Among the next newspapers to go, experts say, are major metropolitan dailies relying on an expensive business model that requires costly newsprint consumption and gas-guzzling deliveries.

The quirky San Francisco Chronicle is reported to be circling the drain. If it were to close, San Francisco would be the first big U.S. city without a major daily paper.

The Atlanta Journal-Constitution and the Boston Globe are bleeding about $1 million a week, according to a media report issued by the Pew Center for Excellence in Journalism. Experts say more big-city papers are expected to follow the example of Gannett's Detroit Free Press, which started cutting back on print edition delivery in December.

The challenges facing newspapers long predate the worst economic slump since the Great Depression. Daily subscriptions per household began a steady decline in the 1920s, yet the newspaper industry adapted and thrived despite competition from radio and television.

But easily accessible, high-speed Internet connections and smart phones have dramatically shifted the way people get their news. Ironically, news is still in strong demand. It's abundant, accessible and usually free on the Web.

The outlook is so grim that the American Society of Newspaper Editors, a membership organization for daily newspaper editors, canceled its annual convention in April after deciding that "the challenges editors face at their newspapers demand their full attention."

To understand the financial crises plaguing the industry, one need look no further than the Tucson Citizen's parent company, Gannett, which reduced its work force by 10 percent only to see advertising and profits continue to plummet.

Things are no better at competitor McClatchy Co. The company eliminated 1,600 jobs companywide last week. McClatchy stock is trading for less than $1 a share compared with $70 a share five years ago. iReport.com: Sad to see Seattle Post-Intelligencer go

The industry's advertising revenue in 2008 was $38 billion, a staggering 23 percent drop from $49.5 billion the year before. Print media companies are failing to achieve market expectations each quarter, scaring away investors, venture capitalists and potential buyers in droves.

Still, a few deals have been struck. This week, a private equity firm in California purchased the San Diego Union-Tribune -- where advertising revenue has fallen 40 percent since 2006 -- for an undisclosed price.

"We think that the revenues from newspaper companies have been insufficient to cover their cost," explained Mike Simonton, an analyst at Fitch Ratings, who issued a negative outlook on the industry. "At that point they will need to tap into external financing to continue operations, and we believe external financing will be prohibitively expensive or not even available at all."

Job cuts are keeping many newspapers on life support.

Paul Gillin, a social media consultant, said such losses are to be expected for an industry that has failed to adapt to the influx of online publishing tools and social networking sites.

"Information has become democratized today," said Gillin, who has predicted print newspapers will disappear by 2015. "You get a lot of advice from your friends, blogs and multiple media sources. Who reads just one newspaper?"

Some of the biggest threats to newspaper profits have come from Web sites like Craigslist and Monster.com, online advertising venues that are chipping away at newspapers' classified ad sections.

Newspaper classified ad expenditures tumbled nearly 17 percent in 2007, according to the Newspaper Association of America. The recession is affecting auto dealerships, real estate companies and other local businesses, accelerating the advertising downturn.

Many newspaper experts expect national publications such as the Wall Street Journal, USA Today, The Washington Post and The New York Times to survive. They say the largest papers could even benefit from industry woes and grab market share because of their wide penetration.

In the meantime, these papers are facing a harsh economy. At The Washington Post, owned by Washington Post Co., earnings plunged 77 percent in the fourth quarter of 2008. The newspaper was saved by the parent company's Kaplan educational division, which raked in more than half the company's revenue that year.

The future offers the industry little comfort, with studies showing newspapers have lost a generation of young readers. A Pew Research Center report this month found only one-third of Americans polled say they would "miss" the newspaper a lot if it were no longer around.

Wife divorcing ex-CEO: $43 million not enough

36-year-old Swedish countess says she needs more than $53,000 a week

AP - updated 6:20 p.m. ET, Wed., March. 18, 2009

HARTFORD, Conn. - A 36-year-old Swedish countess divorcing a former CEO says she cannot live on $43 million.

Marie Douglas-David, a former investment banker, says she has no income and needs her 67-year-old husband, George David, to pay her more than $53,000 a week — more than most U.S. households make in a year — to cover her expenses.

David stepped down last year as chief executive at Hartford-based United Technologies Corp. but is still chairman of the board and has an estimated net worth of $329 million. He and his wife accuse each other of extramarital affairs. Their divorce trial started Wednesday.

"I'm just very sad that we are where we are," Douglas-David said. "I hope we resolve this soon so everybody can move on with their lives."

David briefly took the stand Wednesday. Asked if his marriage is irretrievably broken, he simply answered, "Yes."

Marriage was in trouble by 2004
David and Douglas-David married in 2002, but the marriage was in trouble by 2004, court papers show. Amid a series of reconciliations, the couple signed a postnuptial agreement in October 2005 that would give her $43 million when they divorce.

Douglas-David wants the agreement invalidated. She accused her husband of coercing her to sign it by preying upon her fears of being divorced and childless.

David is asking a judge to uphold the agreement. His attorneys asked for a separate hearing Wednesday on the document's validity, but the judge declined.

Douglas-David has filed court papers showing she has more than $53,800 in weekly expenses, including for maintaining a Park Avenue apartment and three residences in Sweden. Her weekly expenses also include $700 for limousine service, $4,500 for clothes, $1,000 for hair and skin treatments, $1,500 for restaurants and entertainment, and $8,000 for travel.

At that rate, Douglas-David would burn through $43 million in less than 16 years. The Census Bureau estimates that the median U.S. household income in 2007 was just over $50,000.

Anne Dranginis, an attorney for David and retired Connecticut Appellate Court judge, predicted that Douglas-David will get much less money in the divorce if she doesn't accept the terms of the postnuptial.

Wife quit her job as investment banker
In court papers, Douglas-David said she quit her job as an investment banker for Lazard Asset Management to travel and entertain with David, who still earns $1 million a year from United Technologies. While chief executive in 2007, David made nearly $27 million in salary and bonuses.

UBS admits helping tax evaders

Swiss banking giant agrees to pay $780 million and hand over account information after helping U.S. clients evade the IRS.
By Terry Frieden, CNN Justice Producer
February 18, 2009: 6:34 PM ET

WASHINGTON (CNN) -- Switzerland's largest bank, UBS, has admitted helping U.S. taxpayers hide money from the IRS, and has agreed to pay $780 million in fines and restitution, and to turn over account information.

The deferred prosecution agreement was approved Wednesday by a federal court judge in Fort Lauderdale, Fla.

"UBS admitted to conspiring to defraud the United States by impeding the IRS," the Justice Department announced late Wednesday.

The statement says that UBS, "in an unprecedented move" based on an order by Swiss authorities, has agreed "to immediately provide the U.S. government with the identities of, and account information for, certain U.S. customers of UBS's cross-border business."

UBS (UBS) also has agreed to end its business practice of providing banking services to U.S. customers with undeclared accounts.

"Swiss bankers routinely traveled to the United States to market Swiss bank secrecy to United States clients interested in attempting to evade U.S. income taxes," the Justice Department said.

The government document says Swiss bankers made a total of about 3,800 trips to discuss their clients' accounts.

The government said that because the bank has acknowledged responsibility for its actions, has cooperated fully, and has taken remedial actions, the United States will recommend dismissal of the criminal charge "provided the bank fully carries out its obligations under the agreement."

Two former UBS bankers have pleaded guilty to charges of conspiracy for similar conduct.

The acting head of the Justice Department Tax Division called Wednesday's agreement "but one milestone" in the effort to make sure U.S. citizens pay their fair share of taxes.

"The veil of secrecy has been pulled aside, and we will continue to aggressively pursue those who shirk their federal tax obligations, or assist others in doing so," said John DiCicco, acting assistant attorney general for the Justice Department Tax Division.

IRS Commissioner Doug Shulman issued a warning to the taxpayers who held the accounts, telling them to voluntarily pay up.

Shulman said the taxpayers should note that Wednesday's agreement also stipulates that the U.S. government will continue to seek enforcement of its court action.

"People who have hidden unreported income off shore need to get right with their government. They should come forward and take advantage of our voluntary disclosure process," Shulman said.