The Hits Just Keep Coming...

Army Suspends Munitions Contractor

By LOLITA C. BALDOR – 6 hours ago

WASHINGTON (AP) — The Army has suspended a Miami Beach company from government contract work for reportedly providing Chinese-made ammunition to the Afghanistan army, in violation of its contract and U.S. law.

AEY Inc., a firm with just eight employees, is under criminal investigation for reportedly claiming that the munitions were made in Hungary, according to documents obtained Thursday by The Associated Press.

Also, there have been ongoing complaints from the U.S. military in Afghanistan that the ammunition arrived there poorly packaged, including instances in which they found loose cartridges in brown paper bags.

Pentagon spokesman Bryan Whitman said there have been no reports that the ammunition was unsafe or failed to work properly. But he says some of it may not have been used because of concerns that it was not packaged well.

In a letter Tuesday, the Army told company owner Efraim Diveroli that the investigation could lead to AEY being barred from any U.S. government work.

Diveroli's attorney, Hy Shapiro, said Thursday he had not seen the Army's letter yet and declined further comment until he had. No one answered the door at the Miami Beach apartment listed as Diveroli's in Florida state records.

According to an Army Legal Services memo, AEY began contracting for the Defense and State departments in 2004, and to date has been awarded more than 150 contracts, worth in excess of $200 million.

The key contract was awarded in 2007, and was for various types of ammunition for the Afghan National Army and the Afghan National Police. It included munitions for machine guns, assault rifles, shotguns and pistols.

After questions arose about the origin of the munitions, U.S. Army investigators in January reviewed shipments at an Afghan Army weapons depot. Stamps on munitions in 14 containers showed that the ammunition was manufactured in factories in China, the memo said.

According to the contract, based on federal law, companies doing business with the U.S. government cannot buy any munitions directly or indirectly from a Chinese military company, or any entity that is part of China's defense industrial base.

In addition to providing the munitions, the small, fledgling company also at times sold a variety of other products to the Pentagon and State Department, including weapons, grenades, grenade launchers, rockets and clothing.

While the inspections at the Afghan depot were in January, the Army did not invoke the suspension until this week, just as the issue was becoming public.

The ammunition problems were first reported Thursday by The New York Times.

Fed's rescue halted a derivatives Chernobyl

When the Federal Reserve stepped in to save Bear Stearns, most people had no idea what was at stake, writes Ambrose Evans-Pritchard

We may never know for sure whether the Federal Reserve's rescue of Bear Stearns averted a seizure of the $516 trillion derivatives system, the ultimate Chernobyl for global finance.

The financial crisis in full Read more by Ambrose Evans Pritchard The rollercoaster week: Click to enlarge "If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital. "There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system." All through early March the frontline players had watched in horror as Bear Stearns came under assault and then shrivelled into nothing as its $17bn reserve cushion vanished. Melcher was already prepared - true to form for a man who made a fabulous return last year betting on the collapse of US mortgage securities. He is now turning his sights on Eastern Europe, the next shoe to drop. advertisement "We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen," he said. News and analysis from the banking sector Fed chairman Ben Bernanke has moved with breathtaking speed to contain the crisis. Last Sunday night, he resorted to the "nuclear option", invoking a Depression-era clause - Article 13 (3) of the Federal Reserve Act - to be used in "unusual and exigent circumstances". The emergency vote by five governors allows the Fed to shoulder $30bn of direct credit risk from the Bear Stearns carcass. By taking this course, the Fed has crossed the Rubicon of central banking. To understand why it has torn up the rule book, take a look at the latest Security and Exchange Commission filing by Bear Stearns. It contains a short table listing the broker's holding of derivatives contracts as of November 30 2007. Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in "notional" terms. The contracts were described as "swaps", "swaptions", "caps", "collars" and "floors". This heady edifice of new-fangled instruments was built on an asset base of $80bn at best. On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit. "Twenty years ago the Fed would have let Bear Stearns go bust," said Willem Sels, a credit specialist at Dresdner Kleinwort. "Now it is too interlinked to fail." The International Swaps and Derivatives Association says the vast headline figures in the contracts are meaningless. Positions are off-setting. The actual risk is magnitudes lower. The Bank for International Settlements uses a concept of "gross market value" to weight the real exposure. This is roughly 2 per cent of the notional level. For Bear Stearns this would be $270bn, or so. "There is no real way to gauge the market risk," said an official "We don't know how much is backed by collateral. We don't know what would happen in a crisis, and if we don't know, nobody does," he said. Under the rescue deal, JP Morgan Chase will take over Bear Stearns' $13.4 trillion contracts - lock, stock, and barrel. Ben Bernanke, the Fed chairman, took decisive action when Bear Stearns began to collapse But JP Morgan is already up to its neck in this soup, with $77 trillion of contracts. It will now have $90 trillion on its books, a sixth of the global market. Risk is being concentrated further. There are echoes of the old reinsurance chains at Lloyd's, but on a vaster scale. The most neuralgic niche is the $45 trillion market for credit default swaps (CDS). These CDS swaps are a way of betting on the credit quality of companies without having to buy the underlying bonds, which are less liquid. They have long been the bête noire of New York Fed chief Timothy Geithner, alarmed that 10 banks make up 89 per cent of the contracts. "The same names show up in multiple types of positions. These create the potential for squeezes in cash markets, magnifying the risk of adverse dynamics," he said. "They could increase systemic risk, by amplifying rather than dampening the movement in asset prices," he said. This is what happened as the banking crisis gathered pace. The CDS spreads measuring default risk on Bear Stearns debt rocketed from 246 to 792 in a single day on March 13 amid - untrue - rumours that the broker was preparing to invoke bankruptcy protection. Was it the spike in spreads that set off the panic run on Bear Stearns by New York insiders? Or are the CDS spreads merely serving as a barometer? In the old days it was hard for speculators to take "short" bets on bonds. Credit derivatives open up a whole new game. "It is now much easier to short credit, " said James Batterman, a derivatives expert at Fitch Ratings in New York. "CDS swaps can be used for speculation, and that can cause skittish markets to overshoot," he said. For now the meltdown panic has subsided. Yet the hottest document flying around the City last week was a paper by Barclays Capital probing what might happen in a counterparty default. It is not for bedtime reading. Direct losses from a CDS breakdown alone could be $80bn, but the potential risks are much greater. In theory, the contracts are matching. One sides loses, the other gains, operating through a neutral counterparty (ie Bear Stearns). But if the system seizes up, the mechanism is not neutral at all. It becomes viciously one-sided. "Upon the default of the counterparty, [traded] derivatives would be immediately repriced, with spreads widening dramatically," said the Barclays report. This is "gap risk", the stuff of trading nightmares. Fortunes can vanish in a moment. One side would suddenly be trapped with staggering losses on their books. Yet the winners would be unable to collect their prize from the insolvent bank in the middle. It would take years to unravel all the claims in court. By then the financial landscape would be a scene of carnage.

Hillary: The New Queen of Mean?

By flouting the popular vote in favor of elitist superdelegates, candidate Clinton ignores the new realities of leadership in the 21st century

by Shoshana Zuboff

The original Queen of Mean, Leona Helmsley, met her downfall when she disdainfully observed that paying taxes was for "the little people." Make way for the new Queen of Mean, Senator Hillary Clinton (D-N.Y.). This time it's not about taxes, but about the very essence of democracy: voting.

Hillary Clinton began her run for the White House assuming she could phone in her campaign. But the American people didn't get the message. Hell hath no fury like a control freak thwarted. Because she lags behind Senator Barack Obama (D-Ill.) in electoral delegates and popular votes, her Presidential ambitions are likely to rest on the Democratic Party elites known as superdelegates. Clinton appeared on the Today Show, fresh from her Ohio victory, and let slip what she really thinks of the electorate.

When asked whether those party insiders had a responsibility to align themselves with the popular vote, she responded: "That's not the way the process works.… [Superdelegates] are to exercise independent judgment. It's very important that they exercise that judgment based on who they believe will lead to the best nominee.… Superdelegates are supposed to take all that information on board and supposed to be exercising the judgment that people would have exercised if this information and challenges had been available several months ago."

O.K., I get it. Despite all these heady months of spirited, hopeful, and, yes, joyful participation in caucuses and primaries, it's alright that our votes are ignored because we are simply not in the loop. If the superdelegates override the popular will, it means we were just playing "democracy"—like playing "dress-up" or "doctor." When it comes to the serious work of choosing the Democratic nominee, the little people must step aside and let the insiders do what we would have done if only we had known better. We told ourselves our voices mattered. What were we thinking?

False Consciousness

Senator Clinton's endorsement of the elite's right to override the people's vote puts her smack in the middle of the 20th century and its dominant leadership model. That model was invented to concentrate and manage complexity at the top, when most of the rank and file was uneducated and considered ill-equipped for meaningful participation. Large centralized hierarchies, including political parties, unions, corporations, and government bureaucracies, were its hallmark. Information stayed at the top. Only commands flowed down.

This kind of leadership found support in the notion of "false consciousness" that originated in the philosophical writings of Marx and Engels. They thought the working class was incapable of perceiving the nature of its own oppression. Any contentment a worker felt was therefore an illusion brought on by an inability to grasp economic reality.

False consciousness became a dangerous idea. Once monarchy ended, it provided the intellectual cover the new elites needed to justify their power. The thinking was, those at the top "know better" based on their expert training and access to information. They therefore had a responsibility to impose the "correct" solution, even in the face of popular opposition. So party bosses could rule from behind the scenes, and corporate bosses could safely ignore employee or customer views. (Recall how Henry Ford's "they can have any color as long as it's black" led to the demise of Ford's (F) Model T.)

Soviet leaders famously used "false consciousness" to legitimize their authoritarianism. ("But collective farming will be fun!") President Bush says he has to do what is "right" based on intelligence information, even though it means ignoring the public outcry against the Iraq War.

Now Senator Clinton has implied Obama supporters are the sorry victims of false consciousness. In a classically elitist catch-22, the proof of their delusion lies in their inability to grasp her superiority as a candidate. So it's time to bring in the experts to set the people straight.

A Disconnect

Since the last brokered Democratic convention at mid-century, the huddled masses have been reborn as a nation of wired individuals. The greatest symbol of this shift is education. In 1900, only 2.3% of the United States' young adults were enrolled in college. By 1940 that proportion had inched up to 9.1%, but by the end of the century it had exploded to 55.7%. With tens of millions of blogs, 211 million Internet users, and more than two hundred million cell phones, these folks don't want to be cogs in some vast machinery of Big Politics or Big Business. They want a voice and they want their voices to matter. They don't want to simply take orders; they do want to make a difference.

This demand for voice is especially acute among the approximately 90 million Americans between the ages of 15 and 43. According to a major recent study of civic engagement by Rutgers Professor Cliff Zukin and his colleagues, these Americans are "disconnected" from conventional 20th century-style political activity, though they are deeply involved in community work where they can experience directly the results of their efforts.

Senator Obama's campaign has defied this trend, igniting hope among the young that the 20th century might finally be over. These "disconnected" Americans have gratefully made his campaign the richest, most broadly funded in political history. They have rebooted the Democratic Party in the process. Are its leaders really so freeze-dried they will squander this gift?

My teenage children watched Senator Clinton on the Today Show, mouths agape. They attended our local caucus with me and saw hundreds of our friends and neighbors gathered in the elementary school gym on that Sunday afternoon, despite an ugly Maine snowstorm. They listened to the thoughtful searching debates and saw us cast our votes. How could anyone suggest we didn't know exactly what we were doing? "What's the point of electing someone who doesn't believe in the American people?" they asked. "If she wants to ignore us now when she's only a candidate, what will she do as the President?"

Leap of Faith

Hillary Clinton has laid bare the urgency of Barack Obama's call for a new kind of politics more effectively than he could have done in a lifetime of speeches. We are already knee-deep in a new social paradigm based on inclusion, voice, and shared responsibility. If it still seems a little vague, that's as it should be. By definition, such a paradigm can't be imposed from the top. A new kind of politics, like a new approach to management, can only emerge by trial and error. It's a process of invention we must all share, just as no group of experts could have decreed Facebook, YouTube, Craigslist, or the blogosphere.

By planting her flag on the side of the elites, Clinton has crystallized what's at stake. The rules that give super-powers to superdelegates are anachronistic. The Democratic Party is on a collision course with history, racing to secure its place as the General Motors (GM) of U.S. political life—inwardly focused, out of touch, irrelevant. Senator Clinton should reject those rules and take her own leap of faith into a new century where most of us are already at work building a different community.

She should signal her trust in this community and insist the nomination be decided by popular vote and electoral delegates. Embracing the tactics of elitism might mean a nominating victory for Senator Clinton, but it would be a death knell for the Democratic Party. The biggest losers? That would be the American people.

Jim Willie

My warning quip to the idealists among us has been often used lately, when people salivate over the prospect of chronic conmen suffering deep losses, enduring insolvency, incapable of shame, yet almost certain to end up in some form of bankruptcy. My stated line is "Beware when billionaires face bankruptcy, since they make a phone call and change the rules. Often those rules conflict with your strategy and plans." This time the rules might be concerning gathering wealth from strategies that oppose the defense of a national financial integrity. This time those attempting to secure their wealth and protect it from illicit national grabs and seizures might be labeled as unpatriotic. This time the system has been virtually broken by decades of destructive inflation, of misspent funds, of grand theft (see Fannie Mae and military contractors), of encouraged abandonment of the manufacturing sector, of destructive emphasis of a war economy footing, of irresponsible Medicare guarantees, of harmful demographic shifts, and lately of incredibly deep bond fraud. The bond fraud episode is the crowning finale of the US banking system, with toxic outlets to most global banking centers. One might wonder if it were planned.

Gold hits record at $1,000 an ounce

By Javier Blas and Chris Flood in London

Published: March 13 2008 16:49 | Last updated: March 13 2008 16:49

Gold prices hit a record of $1,000 a troy ounce on Thursday as investors sought refuge from the weakening US dollar.

The trades above $1,000 an ounce in the London spot bullion market were confirmed by several banks, although the actual level was the subject of some controversy as it was not reflected on several of the trading systems used by banks in London and New York.

Gold traders at UBS in London said they traded at above $1,000 an ounce. Société Générale in London also confirmed the trades and other bankers said they saw spot prices above $1,000 an ounce.

A spokesman for the London Bullion Market Association, the industry body, confirmed trades above $1,000 an ounce on the EBS electronic platform. The afternoon fix was set at $995.00 an ounce, the LBMA said.

Spot bullion in London, the industry main benchmark, rose to an all-time high of $1,000.45 an ounce, up nearly $17 on the day, on the EBS screens. In New York, the less significant Comex gold future prices hit a record of $1,006.3 an ounce.

The surge came as the dollar fell to a record low against the euro and to a 12-year low against the yen. Precious metal analysts warned that further prices rise were likely if the weakness of the dollar continued.

The goose is cooked

ARROYO GRANDE, Calif. (MarketWatch) -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.

"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.

Also fresh on Buffett's mind: His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street's big shots look like amateurs.

Buffett tried to sell off Gen Re's derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a "financial weapon of mass destruction." That was 2002.

Derivatives bubble explodes five times bigger in five years

Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:

1. Sarbanes-Oxley increased corporate disclosures and government oversight
2. Federal Reserve's cheap money policies created the subprime-housing boom
3. War budgets burdened the U.S. Treasury and future entitlements programs
4. Trade deficits with China and others destroyed the value of the U.S. dollar
5. Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.

Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:

• U.S. annual gross domestic product is about $15 trillion
• U.S. money supply is also about $15 trillion
• Current proposed U.S. federal budget is $3 trillion
• U.S. government's maximum legal debt is $9 trillion
• U.S. mutual fund companies manage about $12 trillion
• World's GDPs for all nations is approximately $50 trillion
• Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
• Total value of the world's real estate is estimated at about $75 trillion
• Total value of world's stock and bond markets is more than $100 trillion
• BIS valuation of world's derivatives back in 2002 was about $100 trillion
• BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

Also, keep in mind that while the $516 trillion "notional" value (maximum in case of a meltdown) of the deals is a good measure of the market's size, the 2007 BIS study notes that the $11 trillion "gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets."

Bubbles, domino effects and the 'bad 2%'

However, while that may be true as far as the parties to an individual deal, there are broader risks to the world's economies. Remember back in 1998 when LTCM's little $5 billion loss nearly brought down the world's banking system. That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market and the world economy down with it.

This cascading "domino effect" was brilliantly described in "The $300 Trillion Time Bomb: If Buffett can't figure out derivatives, can anybody?" published early last year in Portfolio magazine, a couple months before the subprime meltdown. Columnist Jesse Eisinger's $300 trillion figure came from an earlier study of the derivatives market as it was growing from $100 trillion to $516 trillion over five years. Eisinger concluded:

"There's nothing intrinsically scary about derivatives, except when the bad 2% blow up." Unfortunately, that "bad 2%" did blow up a few months afterwards, even as Bernanke and Paulson were assuring America that the subprime mess was "contained."

Bottom line: Little things leverage a heck of a big wallop. It only takes a little spark from a "bad 2% deal" to ignite this $516 trillion weapon of mass destruction. Think of this entire unregulated derivatives market like an unsecured, unpredictable nuclear bomb in a Pakistan stockpile. It's only a matter of time.

World's newest and biggest 'black market'

The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today's slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco's bond fund king Bill Gross said "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't "figure out" the world's $516 trillion derivatives.

Why? Gross says we are creating a new "shadow banking system." Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic "shadow banking system" that has become the world's biggest "black market."

That's crucial, folks. Why? Because central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives don't. They're not "real money." They're paper promises closer to "Monopoly" money than real U.S. dollars.

And it takes place outside normal business channels, out there in the "free market." That's the wonderful world of derivatives, and it's creating a massive bubble that could soon implode.

Comments? Yes, we want to hear your thoughts. Tell us what you think about derivatives: as "financial weapons of mass destruction;" as a "shadow banking system;" as a "black market;" as the next big bubble dangerously exposing us to that unpredictable "bad 2%."

Area Tap Water Has Traces of Medicines

Tests Find 6 Drugs, Caffeine in D.C., Va.

By Carol D. Leonnig
Washington Post Staff Writer
Monday, March 10, 2008; B01

The Washington area's drinking water contains trace amounts of six commonly used drugs that typically turn up in wastewater and cannot be filtered out by most treatment systems.

The pharmaceuticals -- an anti-seizure medication, two anti-inflammatory drugs, two kinds of antibiotics and a common disinfectant -- were found in very small concentrations in the water supply that serves more than 1 million people in the District, Arlington County, Falls Church and parts of Fairfax County. But scientists say the health effects of long-term exposure to such drugs are not known.

Pharmaceuticals, along with trace amounts of caffeine, were found in the drinking water supplies of 24 of 28 U.S. metropolitan areas tested. The findings were revealed as part of the first federal research on pharmaceuticals in water supplies, and those results are detailed in an investigative report by the Associated Press set to be published today.

In addition to caffeine, the drugs found in water treated by the Washington Aqueduct include the well-known pain medications ibuprofen and naproxen, commonly found in Aleve. But there were also some lesser-known drugs: carbamazepine, an anti-convulsive to reduce epileptic seizures and a mood stabilizer for treating bipolar disorders; sulfamethoxazole, an antibiotic that can be used for humans and animals in treating urinary tract and other infections; and monensin, an antibiotic typically given to cattle. In addition, the study uncovered traces of triclocarban, a disinfectant used in antibacterial soaps.

That the drugs were found so commonly nationwide highlights an emerging water dilemma that the public rarely considers. The drugs we use for ourselves and animals are being flushed directly into wastewater, which then becomes a drinking water source downstream. However, most wastewater and drinking water treatment systems, including Washington's, are incapable of removing those drugs.

And although the chemicals pose no immediate health threat in the water, the health effects of drinking these drug compounds over a long period is largely unstudied. Some scientists said there is probably little human health risk; others fear chronic exposure could alter immune responses or interfere with adolescents' developing hormone systems.

Washington's water regulators and utility officials say they are not alarmed by the findings because the drugs are found at such low levels -- parts per trillion, a tiny fraction of the amount in a medical dose. But they do view these "emerging contaminants" with concern.

"What concerns me is we're finding pharmaceuticals in the river that we rely upon for drinking water," said Thomas P. Jacobus, general manager of the Washington Aqueduct. "If we can't get them out, we have to find a way to neutralize them if we find there's a health effect from them."

Jacobus said the aqueduct leadership will recommend in the next few months likely upgrades for water treatment to deal with an array of newly identified and increasing contaminants in the water. The aqueduct uses chlorine, which kills a wide group of bacteria and breaks down some chemicals but cannot disrupt pharmaceuticals. Studies show ozone water treatment is the most effective in zapping such drugs.

The U.S. Geological Survey and the U.S. Department of Agriculture have been screening Washington's and other cities' water supplies for pharmaceuticals in the first research project on pharmaceuticals in the water. The Washington Aqueduct, an arm of the U.S. Army Corps of Engineers, does not regularly screen for caffeine or pharmaceuticals, nor do most water utilities.

The drugs discovered in testing over the past two years typically get into the water supply because they pass through a user's body and are flushed downstream. The U.S. Environmental Protection Agency is studying some pharmaceuticals for their impact on public health but has not set safety standards for any of the drugs.

"We recognize it is a growing concern, and we're taking it very seriously," Benjamin H. Grumbles, the EPA's assistant administrator for water, said of the drugs' presence.

There is no clear evidence of a human health threat from such low levels of pharmaceuticals. But scientists warn that, because there has been very little study of the long-term or synergistic effects of this kind of drug exposure, water providers and regulators need to exercise caution. Although experts agree that aquatic life are most at risk from exposure to the drugs in rivers and streams, researchers are concerned about what they don't know about human health effects.

In other findings from its reporting, the AP said officials in Montgomery County and Fairfax have found numerous pharmaceuticals in their environmental watersheds but do not test their drinking water supplies for the same chemical compounds.

Nationwide, the AP reported that researchers found anti-depressants, antacids, synthetic hormones from birth control pills, and many other human and animal medicines in the water. In San Francisco, tests found a sex hormone. In New York, the water tested positive for heart medicines and a prescription tranquilizer.

The Associated Press contributed to this report.

Sorting Through the Rubble in Post-Bubble America

March 8-9, 2008

By MIKE WHITNEY

“Market conditions are the worst anyone in this industry can ever remember. I don't think anyone has a recollection of a total disappearance in liquidity...There are billion of dollars worth of assets out there for which there is just no market.” Alain Grisay, chief executive officer of London-based F&C Asset Management Plc; Bloomberg News

The hurricane that began with subprime mortgages, has swept through the credit markets wreaking havoc on municipal bonds, hedge funds, complex structured investments, and agency debt (Fannie Mae). Now the first gusts from the Force-5 gale are touching down in the real economy where the damage is expected to be widespread. The Labor Department reported on Friday that US employers cut 63,000 jobs in February, the biggest monthly decline in five years. The cut in payrolls added to the 22,000 jobs that were lost in January. 52,000 jobs were cut in manufacturing, while 331,000 have been lost in construction since September 2006.

The Labor Department also reported on Wednesday that worker productivity slowed significantly in the last quarter of 2007. When productivity is off; labor costs go up which adds to inflationary pressures. That makes it harder for the Fed to lower rates to stimulate the economy without inviting the dreaded “stagflation”---slow growth and rising prices.

The news on commercial construction is equally bleak. The Wall Street Journal reports:

“For the second month in a row, the Commerce Department reported a decline in spending on nonresidential construction -- which includes everything from hospitals to office parks to shopping malls....Signs of trouble cropped up at the end of the year. As credit markets tightened, office space sold in the fourth quarter dropped 42 per cent from a year earlier, and sales of large retail properties declined 31 per cent, says Real Capital Analytics, a New York real-estate research group....If spending continues to slow, construction workers, who are reeling from the housing slowdown, face more layoffs.” (“Building Slowdown Goes Commercial”, Wall Street Journal)

Commercial real estate is the next shoe to drop. There's a tremendous oversupply of retail space nationwide and the bloodletting has just begun. Builders have continued to put up shopping malls and office buildings even though residential real estate has gone off a cliff. Now the battered banks will have to repossess thousands of empty buildings in strip malls with no chance of leasing them out in the near future. It's a disaster . From December 2007 to January 2008 spending on commercial construction took its steepest drop in 14 years. The sudden downturn is adding more and more people to the unemployment lines.

So, what does it all mean? Unemployment is up, productivity is down, inflation is increasing, the dollar is underwater, commercial real estate is in the tank and the country is sliding inexorably into recession.

As for the housing market:

“Housing is in its "deepest, most rapid downswing since the Great Depression," the chief economist for the National Association of Home Builders said Tuesday, and the downward momentum on housing prices appears to be accelerating.

"Housing is in a major contraction mode and will be another major, heavy weight on the economy in the first quarter," said David Seiders, the NAHB's chief economist.” (“Rapid Deterioration”, MarketWatch)

Home sales are down 65 per cent from their peak in 2005. Inventory is stacked a mile-high. Vacant homes now number about 2 million; an increase of 800,000 since 2005. Demand is weak and prices are plummeting. It's all bad. Meanwhile, the Federal Reserve and the Bush administration are scrambling to devise a plan that will keep homeowners from packing it in altogether and walking away from their mortgages. But what can they do? Will they really write-down the principle on the mortgages like Bernanke recommends and face years of litigation from bond holders who bought mortgage-backed securities under different terms? Or will they simply allow the market to clear and send 2 million homeowners into foreclosure in 2008 alone?

The deflating housing bubble is finally being felt in the broader economy. Home equity is vanishing which is putting downward pressure on consumer spending and shrinking GDP. Also, the dollar is at historic lows, and an intractable credit crunch has left the financial markets in disarray. Experts are now predicting that consumer spending won't rebound until housing prices stop falling which could be late into 2009. When Japan experienced a similar credit/real estate meltdown; it took more than a decade to recover. There's no reason to believe that the present crisis will unwind any faster.

On Friday, banking giant USB estimated that credit woes would end up costing financial institutions $600 billion, three times more than their original estimate of $200 billion. But USB's forecast does not take into account the $6 trillion of lost home equity if housing prices fall 30 per cent in the next two years. (which is very likely) Nor does it account for the potential losses in the structured finance market where $7.8 trillion of loans (which are presently in “pooled securities”) have gone into a deep-freeze. There's no way of knowing how much capital will be drained from the system by the time all of this plays out, but if $7 trillion was lost in the dot.com bust, then it should greatly exceed that figure.

The housing bubble was entirely avoidable. It was the policies of the Federal Reserve which made it inevitable. By fixing interest rates below the rate of inflation for almost 3 years, Greenspan ignited speculation in housing and created a false perception of prosperity. In truth, it was nothing more than asset-inflation through the expansion of debt. The Fed's actions were complimented by repeal of regulatory legislation which prevented the commercial banks from dabbling in securities trading. Once the laws were changed, the banks were free to peddle their mortgage-backed securities to investors around the world. (A-rated mortgage-backed bonds are currently fetching just 13 per cent of their face value!) Now, those sketchy bonds are blowing up everywhere leaving large parts of the financial system dysfunctional.

As investors continue to run away from anything remotely connected to mortgages; the price of risk, as measured by the spread on corporate bonds, has skyrocketed. In fact, investors are even shunning overextended GSEs like Fannie Mae and Freddie Mac. As the number of foreclosures continues to soar, the aversion to risk will intensify triggering a savage unwinding of leveraged bets in the hedge funds as well as a wider paralysis in the finacial markets.

There's absolutely no doubt now that the storm that is currently ripping through the financials will soon bring Wall Street to its knees. It may be a good time to remember that on March 24, 2000, the NASDAQ peaked at 5048. On October 9, 2002 it bottomed-out at 1114; a loss of nearly 80 per cent. Could it happen again?

You bet. Expect to see the Dow hugging 7,000 by year end.

The Wall Street Journal ran an article on Tuesday which outlined how the banks changed standards at the Basel meetings in Switzerland to give them greater autonomy in deciding issues that should have been governed by strict regulations:

“Some of the world's top bankers spent nearly a decade designing new rules to help global financial institutions stay out of trouble...Their primary tenet: Banks should be given more freedom to decide for themselves how much risk they should take on, since they are in a better position than regulators to make that call.” (“Mortgage Fallout Exposes Holes in New Bank-risk Rules”, Wall Street Journal)

It is a classic case of the foxes deciding they should oversee the hen-house.

The Basel Committee on Banking Supervision is an industry-led group comprised of the central bank governors from the G-10 countries; Belgium, Canada, France, Italy, Japan, the Netherlands, Sweden, Switzerland, Britain and the US. Basel is supposed to establish the rules for maintaining sufficient capitalization for banks so that depositors are protected. But it's a sham. It appears to be more focused on maintaining US and European dominance over the developing world and making sure the levers of financial power stay in the manicured paws of western banking mandarins.

Now that the financial system is in terminal distress; many people are questioning the wisdom of handing over so much power to organizations that don't operate in the publics interest. Thomas Jefferson anticipated this scenario and issued a warning about the perils of abdicating sovereignty to unelected, profit-oriented bankers. He said:

“If the American people ever allow private banks to control the issue of our currency, first by inflation, then by deflation, the banks and the corporations that will grow up will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

Even though the nation is stumbling towards an economic hard-landing; the banks are still only interested in finding a way to save themselves. Last week, the New York Times revealed a “confidential proposal” from Bank of America to members of Congress asking the US government to guarantee $739 billion in mortgages that are at “moderate to high risk” of defaulting to save the banks from potential losses. On Thursday , Rep. Barney Frank--operating in the interests of his banking constituents--made an appeal in the House of Representatives on this very issue, saying that congress should consider buying up some of these sinking mortgages to help struggling homeowners. But why should the taxpayer pay for the mistakes of privately-owned banks; especially when those banks have been bilking the public out of billions of dollars through the sale of worthless subprime securities?

The Fed has already lowered the Fed Funds rate by 2.25 basis points to 3 per cent (more than a full-point below the current rate of inflation) to help the banks recoup some of their losses from their bad bets. Bernanke has also opened a Temporary Auction Facility (TAF), which allows the banks to use mortgage-backed securities (MBS) and other structured investments as collateral at 85 per cent their face-value.(even though the bonds are only worth pennies on the dollar on the open market) So far, the TAF has secretly loaned out $75 billion to capital-depleted banks, which Bernanke thinks is a positive development. But why is the Fed chief encouraged by the fact that the country's largest investment banks need to borrow billions of dollars at bargain rates just to stay solvent? The truth is that many of the banks are just padding their flagging balance sheets so they can scour the planet looking for investors to buy parts of their franchises.

On Tuesday, Bernanke addressed the Independent Community of Bankers of America exhorting them to take whatever steps are required to keep homeowners with negative equity from walking away from their mortgages. Along with the proposed “rate freeze” on adjustable rate mortgages (ARMs); the Fed chief also suggested that the lenders lower the principle on the mortgages to entice homeowners to keep making nominal payments on their loans. But, clearly, foreclosure is the wisest choice for many homeowners who may otherwise be chained to an asset of steadily declining value for the rest of their lives. Homeowners should base their decisions on what is in their best long-term financial interests, just as the bankers would do. If that means walking-away, then that is what they should do. The homeowner is in no way responsible for the problems deriving from the subprime/securitization scam. That was entirely the work of the bankers.

The FDIC has begun to increase staff at many of its regional offices to deal with the anticipated rash of bank failures in states hardest hit by the housing bust. California, Florida and parts of the southwest will definitely need the most attention. These states are undergoing a housing depression and many of the smaller banks which issued the mortgages and commercial real estate loans are bound to get hammered. They simply do not have the capital cushion to withstand the tsunami of defaults and foreclosures that are coming. Depositors should make sure that all their savings are covered under FDIC rules; no more than $100,000 per account. Money markets are not insured.

Also, the G-7 nations announced last week that if “irrational” price movements persist, they would “collectively take suitable measures to calm the financial markets”. The group added that they would conduct their activities secretively for maximum effect. Consider how desperate the situation must really be for G-7 finance ministers to issue a public warning that they are planning to intervene in the market to prevent a calamity. This is stunning. The group did not specify whether they were talking about propping up the stumbling greenback or buying up futures in the equities markets like a global Plunge Protection Team. Nevertheless, their comments add to the growing perception that things are out of control and deteriorating quickly.

With oil, gold and food prices soaring, the Fed has been roundly criticized for cutting rates and risking further erosion to the value of the dollar. (This morning the dollar fell to $1.53 on the euro!) But Bernanke is right; the real danger is deflation. We are at the beginning of a consumer-led recession; characterized by weakening demand, lack of personal savings, declining asset-values (particularly homes) and over-indebtedness. The Fed's increases to the money supply via low interest rates will not effect the dramatic economic slowdown that will be evident within the year. Trillions of dollars of derivatives, over-leveraged subprime assets and otherwise bad bets are all unwinding at the same time draining an ocean of virtual capital from the economy. If credit keeps getting destroyed at the present pace, the country will be in the grips of a depression-like slump by 2009. The Wall Street Journal's Greg Ip puts it like this in his article “For the Fed, a Recession—Not Inflation—Poses Greater Threat”:

“So why is the Fed more worried about growth than inflation? First, it thinks run-ups in commodity prices explain the increases, not only in overall inflation but also in core inflation: higher energy costs have "passed through" to other goods and services. Core inflation rose and fell with energy inflation between early 2006 and mid-2007, and the Fed thinks the same thing is probably happening now. If energy and food prices stop rising -- they don't have to actually fall -- both overall and core inflation should recede.
Ip continues: “Fed officials don't think the latest jump (in food and energy) can be justified by fundamental supply and demand....A more likely explanation, investors perhaps alarmed by the Fed's dovish stance, are pouring money into commodity funds and foreign currencies as a hedge against inflation. ...But speculative price gains can't be sustained if the fundamentals don't support them. If the Fed and the futures markets are right, prices will be lower, not higher, a year from now.”

Note: I disagree with this. Bernanke has been wrong on everything else, why should he get this right? American demand might certainly drop, but it's been demand from emerging countries that has driven oil prices higher, not to mention the fact that peak oil is a reality regardless of what some say.

Bernanke is right on this point. Temporary price increases are not the result of shortages, increased production costs, or fundamentals, but speculation. In fact, demand for petroleum products has been down by 3.4 per cent over the last four weeks compared to the same time last year, which means that prices will probably drop steeply once the commodities frenzy runs out of steam. Investors are simply looking for somewhere to put their money rather than in shaky corporate bonds or overpriced equities. Commodities are the logical alternative. But as soon as consumer spending stalls; all asset-classes will fall accordingly, including gold and oil. (And, yes, the dollar should recover some lost-ground, however temporary.)

Many analysts believe oil's rally will be short-lived. Falling demand for overall petroleum products, which was down 3.4 percent over the last four weeks compared to the same time last year, suggest prices could drop steeply once the dollar-driven oil investment frenzy runs out of steam, analysts said.

Cyclical downturn or post-bubble recession?

An article in the New York Times by Morgan Stanley's Asia chairman, Stephen Roach, states that the country is not in a cyclical downturn, but post-bubble recession. There is a big difference. The Fed's interest rate cuts and Bush's “Stimulus Plan” are unlikely to stop housing prices from continuing to fall nor will they miraculously fix the problems in the credit markets. The massive expansion of credit in the last 6 years has created a $45 trillion derivatives balloon that could implode or just partially unwind. No one really knows. And no one really knows how much damage it will cause to the global financial system. Stay tuned.

Roach notes that the recession of 2000 to 2001 was a collapse of business spending which only represented a 13 per cent of GDP. Compare that to the current recession which “has been set off by the simultaneous bursting of property and credit bubbles.... Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago.”
Not only will the impending recession be six times more severe; it will also be the fire-siren for America's consumer-based society. Attitudes towards spending have already changed dramatically since prices on food and fuel have increased. That trend will only grow as hard times set in.

Roach adds: “For asset-dependent, bubble-prone economies, a cyclical recovery — even when assisted by aggressive monetary and fiscal accommodation — isn’t a given....Washington policymakers may not be able to arrest this post-bubble downturn. Interest rate cuts are unlikely to halt the decline in nationwide home prices...Aggressive interest rate cuts have not done much to contain the lethal contagion spreading in credit and capital markets.
A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure.

The Federal Reserve and Washington policymakers are still stuck in the past trying to revive consumer spending by creating another equity bubble with low interest rates and their $600 per person “stimulus” giveaways. Wrong way. Invest in infrastructure and environmentally-friendly technologies, rebuild the economy from the ground up, reestablish fiscal sanity and minimize deficit spending, put America back to work making things that people use and that improve society, and (as Roach says) “help the innocent victims of the bubble’s aftermath — especially lower- and middle-income families”. And, most importantly, abolish the Federal Reserve and give the control of our money back to our elected representatives in Congress. That is the only way to put America's economic future back in the hands of the people.

That's a plan we can all get behind. It's time to split the new wood and start fresh.

Mike Whitney lives in Washington state. He can be reached at:

Bush’s Veto of Bill on C.I.A. Tactics Affirms His Legacy

War criminal!


March 9, 2008

By STEVEN LEE MYERS

WASHINGTON — President Bush on Saturday further cemented his legacy of fighting for strong executive powers, using his veto to shut down a Congressional effort to limit the Central Intelligence Agency’s latitude to subject terrorism suspects to harsh interrogation techniques.

Mr. Bush vetoed a bill that would have explicitly prohibited the agency from using interrogation methods like waterboarding, a technique in which restrained prisoners are threatened with drowning and that has been the subject of intense criticism at home and abroad. Many such techniques are prohibited by the military and law enforcement agencies.

The veto deepens his battle with increasingly assertive Democrats in Congress over issues at the heart of his legacy. As his presidency winds down, he has made it clear he does not intend to bend in this or other confrontations on issues from the war in Iraq to contempt charges against his chief of staff, Joshua B. Bolten, and former counsel, Harriet E. Miers.

Mr. Bush announced the veto in the usual format of his weekly radio address, which is distributed to stations across the country each Saturday. He unflinchingly defended an interrogation program that has prompted critics to accuse him not only of authorizing torture previously but also of refusing to ban it in the future. “Because the danger remains, we need to ensure our intelligence officials have all the tools they need to stop the terrorists,” he said.

Mr. Bush’s veto — the ninth of his presidency, but the eighth in the past 10 months with Democrats in control of Congress — underscored his determination to preserve many of the executive prerogatives his administration has claimed in the name of fighting terrorism, and to enshrine them into law.

Mr. Bush is fighting with Congress over the expansion of powers under the Foreign Intelligence Surveillance Act and over the depth of the American security commitments to Iraq once the United Nations mandate for international forces there expires at the end of the year.

The administration has also moved ahead with the first military tribunals of those detained at Guantánamo Bay, including Khalid Shaikh Mohammed, a mastermind of the Sept. 11, 2001, attacks, despite calls to try them in civilian courts.

All are issues that turn on presidential powers. And as he has through most of his presidency, he built his case on the threat of terrorism.

“The fact that we have not been attacked over the past six and a half years is not a matter of chance,” Mr. Bush said in his radio remarks, echoing comments he made Thursday at a ceremony marking the fifth anniversary of the creation of the Department of Homeland Security. “We have no higher responsibility than stopping terrorist attacks,” he added. “And this is no time for Congress to abandon practices that have a proven track record of keeping America safe.”

The bill Mr. Bush vetoed would have limited all American interrogators to techniques allowed in the Army field manual on interrogation, which prohibits physical force against prisoners.

The debate has left the C.I.A. at odds with the Federal Bureau of Investigation and other agencies, whose officials have testified that harsh interrogation methods are either unnecessary or counterproductive. The agency’s director, Gen. Michael V. Hayden, issued a statement to employees after Mr. Bush’s veto defending the program as legal, saying that the Army field manual did not “exhaust the universe of lawful interrogation techniques.”

Democrats, who supported the legislation as part of a larger bill that authorized a vast array of intelligence programs, criticized the veto sharply, but they do not have the votes to override it.

“This president had the chance to end the torture debate for good,” one of its sponsors, Senator Dianne Feinstein of California, said in a statement on Friday when it became clear that Mr. Bush intended to carry out his veto threat. “Yet, he chose instead to leave the door open to use torture in the future. The United States is not well served by this.”

The Senate’s majority leader, Harry Reid of Nevada, said Mr. Bush disregarded the advice of military commanders, including Gen. David H. Petraeus, who argued that the military’s interrogation techniques were effective and that the use of any others could create risks for any future American prisoners of war.

“He has rejected the Army field manual’s recognition that such horrific tactics elicit unreliable information, put U.S. troops at risk and undermine our counterinsurgency efforts,” Mr. Reid said in a statement. Democrats vowed to raise the matter again.

Senator John McCain, the presumptive Republican presidential nominee, has been an outspoken opponent of torture, often referring to his own experience as a prisoner of war in Vietnam. In this case he supported the administration’s position, arguing as Mr. Bush did Saturday that the legislation would have limited the C.I.A.’s ability to gather intelligence.

Mr. Bush said the agency should not be bound by rules written for soldiers in combat, as opposed to highly trained experts dealing with hardened terrorists. The bill’s supporters countered that it would have banned only a handful of techniques whose effectiveness was in dispute in any case.

The administration has also said that waterboarding is no longer in use, though officials acknowledged last month that it had been used in three instances before the middle of 2003, including against Mr. Mohammed. Officials have left vague the question of whether it could be authorized again.

Mr. Bush said, as he had previously, that information from the C.I.A.’s interrogations had averted terrorist attacks, including plots to attack a Marine camp in Djibouti; the American Consulate in Karachi, Pakistan; Library Tower in Los Angeles; and passenger planes from Britain. He maintained that the techniques involved — the exact nature of which remained classified — were “safe and lawful.”

“Were it not for this program, our intelligence community believes that Al Qaeda and its allies would have succeeded in launching another attack against the American homeland,” he said.

Senator John D. Rockefeller IV of West Virginia, the chairman of the Intelligence Committee, disputed that assertion on Saturday. “As chairman of the Senate Intelligence Committee, I have heard nothing to suggest that information obtained from enhanced interrogation techniques has prevented an imminent terrorist attack,” he said in a statement.

The handling of detainees since 2001 has dogged the administration politically, but Mr. Bush and his aides have barely conceded any ground to critics, even in the face of legal challenges, as happened with the prisoners at Guantánamo Bay or with federal wiretapping conducted without warrants.

At the core of the administration’s position is a conviction that the executive branch must have unfettered freedom when it comes to prosecuting war.

Stephen Hess, a presidential scholar at the Brookings Institution, said Mr. Bush’s actions were consistent with his efforts to expand executive power and to protect the results of those efforts. Some, he said, could easily be undone — with a Democratic president signing a bill like the one he vetoed Saturday, for example — but the more Mr. Bush accomplished now, the more difficult that would be. “Every administration is concerned with protecting the power of the presidency,” he said. “This president has done that with a lot more vigor.”

Representative Bill Delahunt, a Democrat from Massachusetts, has been holding hearings on the administration’s negotiations with Iraq over the legal status of American troops in Iraq beyond Mr. Bush’s presidency. He said the administration had rebuffed demands to bring any agreement to Congress for approval, and had largely succeeded.

“They’re excellent at manipulating the arguments so that if Congress should assert itself, members expose themselves to charges of being soft, not tough enough on terrorism,” he said. “My view is history is going to judge us all.”

Mark Mazzetti contributed reporting.

WaMu protects exec bonuses from subprime fallout

Wed Mar 5, 2008 8:15am EST

NEW YORK (Reuters) - Washington Mutual Inc's board of directors approved a plan which helps protect its management's bonus targets from the impact of the subprime loan fallout, according to a filing with U.S. regulators.

The board's human resources committee on February 26 approved bonus targets, some of which will be calculated to exclude expenses related to business re-sizing or restructuring, foreclosed real estate assets and loan loss provisions other than related to its credit card business.

The filing, made with the Securities and Exchange Commission on Monday, refers to targets for WaMu chief executive Kerry Killinger, chief financial officer Thomas Casey, chief operating officer Stephen Rotella, and retail banking chief James Corcoran.

The board's committee said in light of the challenging business environment and the need to evaluate performance across a wide range of factors it will take a three-step approach to rewarding its executives including subjectively evaluating company performance in credit risk management.

In January, Seattle-based Washington Mutual said it awarded Killinger 3.2 million stock options for 2008 to provide a "strong incentive to restore shareholder value".

WaMu's share price sank 70 percent in 2007 as mortgage losses soared.

WaMu is one of the big players in the thrift lenders industry which suffered a record $5.4 billion loss in the fourth quarter of 2007 as the housing market deteriorated.

Fed Chief Urges Breaks for Some Home Borrowers

How does this work? Banks are going to say, "Well you borrowed $200 thousand dollars from us, but what the hell, just pay us back $150 thousand. I don't see the banks jumping at this suggestion. And what about those making their payments? Will they stop paying after banks start letting borrowers off the hook?


March 4, 2008

By EDMUND L. ANDREWS

WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, urged mortgage lenders and investors on Tuesday to reduce the principal on loans for many people whose homes are no longer worth as much as the amount they still have to repay.

Noting that delinquency and foreclosure rates have soared over the last year, and that housing prices have not stopped falling, the Fed chairman warned that efforts by the government and by industry to prevent foreclosures had not gone far enough.

“Although lenders and servicers have scaled up their efforts and adopted a wide variety of loss mitigation techniques, more can, and should, be done,” Mr. Bernanke said in a speech to a conference of community bankers in Florida.

Though the Fed chairman did not explicitly endorse a new government rescue effort, he stepped up public pressure on the industry to take more drastic measures to keep people from walking away from homes when their mortgages exceed the value of their property.

“When the mortgage is ‘underwater,’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,” Mr. Bernanke said. The Fed chairman warned that a large and growing number of recent home buyers now owe more than the value of their homes and may have no incentive to keep making payments.

His comments, with an implicit call for banks to give up some of their income from mortgage loans to forestall defaults, contributed to a day of declines on Wall Street. But stocks pared their losses in the final hour of trading. The Dow Jones industrial average, down more than 200 points early in the afternoon, closed off 45.10 points at 12,213.80.

Mr. Bernanke stopped well short of calling for a government-mandated rescue operation, and delivered his recommendations mainly in the form of suggestions for what would be in the self-interest of lenders and investors.

But the Fed chairman’s remarks were at odds with the position staked out in recent days by Henry M. Paulson Jr., the secretary of the Treasury.

Mr. Paulson, who has pushed the industry to freeze interest rates for at least some subprime borrowers whose low teaser rates are about to expire, drew a clear distinction between helping people who could not keep up with rising monthly payments and helping people who, because of falling house prices, had no equity in their homes.

“While these equity considerations clearly impact homeowners’ financial situation, they are not the primary concern in the effort to prevent avoidable foreclosures,” Mr. Paulson said on Monday.

Mr. Bernanke, speaking on Tuesday, said some of the Bush administration’s efforts to address the problem thus far had been a “step in the right direction.” But he suggested that the government should take additional steps as well.

Though he noted that Congress and the administration are weighing proposals to expand the authority of the Federal Housing Administration to help refinance subprime mortgages, he suggested that “going beyond current proposals” would allow the F.H.A. to help more people.

He also encouraged Fannie Mae and Freddie Mac, the government-chartered mortgage companies, to raise additional capital in order to expand the number of mortgages they can guarantee and securitize.

“With few alternative mortgage channels today, such action would be highly beneficial to the economy,” the Fed chairman said.

Dollar: It will only get worse

Greenback likely to stay under pressure in near term but find relied by mid-year, currency experts argue.

By David Ellis, CNNMoney.com staff writer

March 1 2008: 11:15 PM EST

NEW YORK (CNNMoney.com) -- Despite all the pain the U.S. dollar has endured in recent days, the greenback may still have further to fall before seeing any sort of relief, according to currency experts.

Driving much of the dollar's decline this week were tepid remarks about the U.S. economy by Federal Reserve Chairman Ben Bernanke, who hinted that the central bank would cut interest rates once again at the Fed's March meeting.

Those comments, combined with a number of troubling signs about the strength of the U.S. economy, helped send the dollar tumbling to multi-year lows against a host of currencies including the Swiss franc, the Malaysian ringgit and Japanese yen.

"It all points towards a weaker U.S. economy and currency traders don't want to be exposed to that kind of risk," said Gareth Sylvester, senior currency strategist and self-described "dollar bear" at HFIX Plc in San Francisco.

But perhaps the most notable move of the week was the dollar hitting successive all-time lows against the euro, breaking the key psychological barrier of $1.50 for the first time since the 15-nation currency was launched in 1999.

Currency experts, however, argue that the dollar will remain under pressure at least through the next month or longer.

If next Friday's February employment report is as bad as economists are anticipating, argues Joe Francomano, manager of foreign exchange with Erste Bank in New York, the greenback could possibly hit rock bottom at that point.

"You are going to see the momentum of this week carry over as far as dollar weakness goes and culminate next Friday," said Francomano.

How far could it fall?

The prevailing forecast lately is that the dollar will hit a ceiling of $1.55 against the euro in the near term and fall further against the yen, sinking as low as ¥101 or ¥102.

Even the most bearish currency experts agree that the pressure on the dollar should abate some time around the middle of 2008, after the Fed winds down its rate-cutting campaign and as the sluggish U.S. economy starts to perk up.

But where the dollar heads after that is anyone's guess.

Greg Anderson, executive director of forex strategy at ABN AMRO, expects the greenback to move towards $1.56 against the euro as 2008 comes to a close.

Ertse Bank's Francomano, however, argues that the dollar should wind up around $1.46 against the euro by year end as investors are lured back in by a discounted greenback.

"When the bad data has been processed and the Fed has cut rates to 2 percent or so, then expect the dollar to look cheap," said Francomano.