The Cat's Outta the bag

Subprime lending problems ensnaring big Wall Street firms
By Michael Hudson
THE WALL STREET JOURNAL
Sunday, Jul. 01 2007

Twelve years ago, Lehman Brothers Holdings Inc. sent a vice president to
California to check out First Alliance Mortgage Co. Lehman was thinking about
tapping into First Alliance's lucrative business of making "subprime" house
loans to consumers with sketchy credit.

The vice president, Eric Hibbert, wrote a memo describing First Alliance as a
financial "sweat shop" specializing in "high-pressure sales for people who are
in a weak state." At First Alliance, he said, employees leave their "ethics at
the door."

The big Wall Street investment bank decided First Alliance wasn't breaking any
laws. Lehman went on to lend the mortgage company roughly $500 million and
helped sell more than $700 million in bonds backed by First Alliance customers'
loans. But First Alliance later collapsed. Lehman landed in court, where a
federal jury found the firm helped First Alliance defraud customers.

Today, Lehman is a prime example of how Wall Street's money and expertise have
helped transform subprime lending into a major force in the U.S. financial
markets. Lehman says it is proud of its role in helping provide credit to
consumers who might otherwise have been unable to buy a house, and proud of the
controls it has brought to a sometimes-unruly business.

Now, however, that business is in deep trouble, and some consumer advocates and
policymakers are pointing the finger at Wall Street. Roughly 13 percent of
subprime loans stand in or near foreclosure, bringing turmoil and sometimes
eviction to tens of thousands of homeowners. Dozens of lenders have gone out of
business. Bear Stearns Cos. is trying to bail out a hedge fund it manages that
was hurt by subprime mortgage losses.

Critics say Wall Street firms helped create the mess by throwing so much money
at the market that lenders had a growing incentive to push through shaky loans
and mislead borrowers.

At a hearing in April, Sen. Robert Menendez, D-N.J., said Wall Street firms
"looked the other way" as they profited from questionable loans, "fueling a
market that has very little discipline over itself."

Federal Reserve chief Ben Bernanke said in a May speech that some lenders
focused more on feeding the marketplace than on the quality of loans, in part
because most of the risks that loans would go bad were passed on to investors.
As a result, "mortgage applications with little documentation were vulnerable
to misrepresentation or

overestimation of repayment capacity by both lenders and borrowers," he said.

A generation ago, housing finance was different. Bankers took in deposits, lent
that money to house buyers and collected interest and principal until the
mortgages were paid. Wall Street wasn't much involved.

Now it plays a central role. Wall Street firms provide working capital that
allows thousands of mortgage firms to make loans. After lenders sign up
consumers for home loans, investment banks pool the income streams from these
loans into bonds known as mortgage-backed securities. The banks sell them to
yield-hungry investors around the world.

Before the mid-1990s, mortgage-backed securities consisted mostly of loans to
borrowers with good credit and cash to make ample down payments. Then
investment banks found they could do the same with riskier loans to borrowers
with modest incomes and flawed credit. Pooling the loans created a cushion
against defaults by diversifying the risk. The high interest rates on the loans
made for bonds with high yields that investors savored. New technology helped
make it easier for lenders to collect and collate mounds of information on
borrowers.

Lehman, one of Wall Street's biggest players in the subprime boom, says it has
gone to great lengths to screen loans for fraud and vet the lenders it works
with.

At the sector's peak in 2005, with the housing market booming, loan defaults
remained low. Wall Street pooled a record $508 billion in subprime mortgages in
bonds, up from $56 billion in 2000, according to trade publication Inside
Mortgage Finance. The figure slid to $483 billion last year as the housing
market slumped and subprime defaults picked up.

Lehman topped other Wall Street firms over the last two years, packaging more
than $50 billion in subprime-mortgage-backed securities in both 2005 and 2006.
Overall, Lehman officials say, the subprime business has accounted for 3
percent of the firm's overall revenue in recent quarters, or roughly $500
million in 2006.

Lehman has also been a leader in investment banks' push to buy their own
lenders. Through its subprime unit BNC Mortgage Inc., it lends directly to
consumers, bringing in more fees and giving it more control over the quality of
the loans.

Lehman's deep involvement in the business also has made the firm a target of
criticism. In more than 15 lawsuits and in interviews, borrowers and former
employees have claimed that the investment bank's in-house lending outlets used
improper tactics during the recent mortgage boom to put borrowers into loans
they couldn't afford.

Twenty-five former employees said in interviews that front-line workers and
managers exaggerated borrowers' creditworthiness by falsifying tax forms, pay
stubs and other information, or by ignoring inaccurate data submitted by
independent mortgage brokers. In some instances, several ex-employees said,
brokers or in-house employees altered documents with the help of scissors, tape
and Wite-Out.

"Anything to make the deal work," said Coleen Columbo, a former mortgage
underwriter in California for Lehman's BNC unit. She and five other
ex-employees are pursuing a lawsuit in state court in Sacramento that claims
BNC's management retaliated against workers who complained about fraud.

Lehman officials say there's no evidence to support such claims. They say the
firm has tough antifraud controls and goes to great lengths to ensure that it
works with mortgage brokers and lenders who meet high standards and that loans
are based on accurate information.

Lehman said company records clearly refute specific details of the accounts
given by these former employees. It said most of them never raised concerns
during their tenures at Lehman lending units, even though that was a
requirement of their jobs. Some employees contacted by The Wall Street Journal
said they weren't aware of improper practices.

"We think it is misleading to extrapolate from a handful of cases, in each of
which we have a strong defense, and make a judgment about the way we conduct
our business," Lehman said.

What a travesty!

Bush Commutes Libby Prison Sentence

Tuesday July 3, 2007 1:16 AM

By BEN FELLER

Associated Press Writer

WASHINGTON (AP) - President Bush spared former White House aide I. Lewis ``Scooter'' Libby from a 2-year prison term in the CIA leak case Monday, delivering a political thunderbolt in a highly charged criminal case. Bush said the sentence was just too harsh. Bush's move came just five hours after a federal appeals panel ruled that Libby could not delay his prison term.

That meant Libby was likely to have to report soon, and it put new pressure on the president, who had been sidestepping calls by Libby's allies to pardon Vice President Dick Cheney's former chief of staff.

``I respect the jury's verdict,'' Bush said in a statement. ``But I have concluded that the prison sentence given to Mr. Libby is excessive. Therefore, I am commuting the portion of Mr. Libby's sentence that required him to spend thirty months in prison.''

Bush's decision enraged Democrats and cheered conservatives - though some of the latter wished Bush had granted a full pardon.

``Libby's conviction was the one faint glimmer of accountability for White House efforts to manipulate intelligence and silence critics of the Iraq war,'' said Senate Majority Leader Harry Reid. ``Now, even that small bit of justice has been undone.''

House Speaker Nancy Pelosi, D-Calif., said Bush's decision showed the president ``condones criminal conduct.''

Unlike a pardon, which would have wiped away Libby's criminal record, Bush's commutation voided only the prison term.

The president left intact a $250,000 fine and two years probation for his conviction of lying and obstructing justice in a probe into the leak of a CIA operative's identity. The former operative, Valerie Plame, contends the White House was trying to discredit her husband, a critic of Bush's Iraq policy.

Bush said his action still ``leaves in place a harsh punishment for Mr. Libby.''

Libby was convicted in March, the highest-ranking White House official ordered to prison since the Iran-Contra affair.

Testimony in the case had revealed the extraordinary steps that Bush and Cheney were willing to take to discredit a critic of the Iraq war.

Libby's supporters celebrated the president's decision.

``President Bush did the right thing today in commuting the prison term for Scooter Libby,'' said House Republican Whip Roy Blunt of Missouri.

``That's fantastic. It's a great relief,'' said former Ambassador Richard Carlson, who helped raise millions for Libby's defense fund. ``Scooter Libby did not deserve to go to prison and I'm glad the president had the courage to do this.''

Already at record lows in the polls, Bush risked a political backlash with his decision. President Ford tumbled in the polls after his 1974 pardon of Richard M. Nixon, and the decision was a factor in Ford's loss in his bid for re-election.

White House officials said Bush knew he could take political heat and simply did what he thought was right. They would not say what advice Cheney might have given the president.

On the other hand, Bush's action could help Republican presidential candidates by letting them off the hook on the question of whether they would pardon Libby.

A message seeking comment from Special Prosecutor Patrick Fitzgerald's office was not immediately returned.

Bush said Cheney's former aide was not getting off free.

``The reputation he gained through his years of public service and professional work in the legal community is forever damaged,'' Bush said. ``His wife and young children have also suffered immensely. He will remain on probation. The significant fines imposed by the judge will remain in effect. The consequences of his felony conviction on his former life as a lawyer, public servant and private citizen will be long-lasting.''

A spokeswoman for Cheney said simply, ``The vice president supports the president's decision.''

The White House said Bush came to his decision in the past week or two and made it final Monday because of the ruling of the appeals panel, which meant Libby would be going to prison soon.

The president's announcement came just as prison seemed likely for Libby. He recently lost an appeals court fight that was his best chance to put the sentence on hold, and the U.S. Bureau of Prisons had already designated him inmate No. 28301-016.

Bush's statement made no mention of the term ``pardon,'' and he made clear that he was not willing to wipe away all penalties for Libby.

The president noted Libby supporters' argument that the punishment did not fit the crime for a ``first-time offender with years of exceptional public service.''

Yet, he added, ``Others point out that a jury of citizens weighed all the evidence and listened to all the testimony and found Mr. Libby guilty of perjury and obstructing justice. They argue, correctly, that our entire system of justice relies on people telling the truth. And if a person does not tell the truth, particularly if he serves in government and holds the public trust, he must be held accountable.''

Bush then stripped away the prison time.

The leak case has hung over the White House for years. After CIA operative Valerie Plame's name appeared in a 2003 syndicated newspaper column, Special Prosecutor Fitzgerald questioned top administration officials, including Bush and Cheney, about their possible roles.

Nobody was ever charged with the leak, including Deputy Secretary of State Richard Armitage or White House political adviser Karl Rove, who provided the information for the original article. Prosecutors said Libby obstructed the investigation by lying about how he learned about Plame and whom he told.

Plame believes Libby and other White House officials conspired to leak her identity to reporters in 2003 as retribution against her husband, Joseph Wilson, who criticized what he said was the administration's misleading use of prewar intelligence on Iraq.

Attorney William Jeffress said he had spoken to Libby briefly by phone and ``I'm happy at least that Scooter will be spared any prison time. ... The prison sentence was imminent but obviously the conviction itself is a heavy blow to Scooter.''

White House Advisory

Remember when the administration advised us to go out and purchase duct tape and plastic to seal off our houses in case of an anthrax attack? This warning is still on the White House website.

What to do to prepare for a chemical or biological attack

• Assemble a disaster supply kit (see the “Emergency Planning and Disaster Supplies” chapter for more information) and be sure to include:
• Battery-powered commercial radio with extra batteries.
• Non-perishable food and drinking water.
• Roll of duct tape and scissors.
• Plastic for doors, windows and vents for the room in which you will shelter in place—this should be an internal room where you can block out air that may contain hazardous chemical or biological agents. To save critical time during an emergency, sheeting should be pre-measured and cut for each opening.
• First aid kit.
• Sanitation supplies including soap, water and bleach.

Mutually Assured Mayhem

Mutually Assured Mayhem

Wall Street is on edge, scrambling to buck up Bear Stearns and avert a domino-effect debacle

On June 26 managers of Credit Suisse's (CS ) alternative investment group sent an e-mail to investors reassuring them that its portfolios "have minimal direct exposure" to subprime mortgages and "do not have any direct exposure" to the two Bear Stearns & Co. (BSC ) hedge funds that had nearly collapsed the week before. As that note was wending its way through the ether, other investors were quietly trying to sell their stakes in hedge funds full of subprime securities. Some were noting that Toronto bank CIBC holds many subprime bonds. Paris bank BNP Paribas (BNPQY ) was fending off questions about its investment in the Bear fund with heaviest losses.

It's white-knuckle time on Wall Street as firms try to prevent the subprime mess from spreading. The hedge fund blowup has suddenly thrown the world's biggest financial institutions into a game of brinkmanship that will end in one of three ways: a quick, brutal crash of the subprime mortgage market and possibly the broader corporate bond market; a slow, painful meltdown of one or both lasting many months; or a short-term blip that, over time, will be forgotten as conditions return to normal.

Disaster has been averted so far. But pressure continues to come from all sides. The decisions made by Wall Street's bankers, hedge fund managers, and bond raters over the next several weeks will determine which way the game plays out. One twitchy move by any of them could lead to mutually assured destruction.

ELBOW DEEP
At first the subprime mess looked more or less like a Bear Stearns problem. When its funds stumbled, it was Bear that put up a staggering $1.6 billion in loans to stanch the bleeding. It was Bear's stock that took the biggest hit of any brokerage house, falling some 3.2% in a day. And it was Bear that, as reported by BusinessWeek.com on June 25, drew the scrutiny of the Securities & Exchange Commission, which has opened up a preliminary investigation into what went wrong inside the 84-year-old firm led by CEO James E. Cayne.

Ordinarily, rivals wouldn't shed tears if Bear Stearns were suffering—they'd pounce on the weakness. But much of Wall Street is elbow-deep in the same troubled securities, all created during the height of the mortgage boom, that are now coming back to bite Bear. Last year, Wall Street churned out some $550 billion in so-called collateralized debt obligations (CDOs): complex bonds often backed by subprime loans that pay high yields in good times but are dangerous when the market gets rocky, as it is now. "This is not [only] a Bear Stearns problem," says Joseph R. Mason, associate professor of finance at Drexel University's LeBow College of Business.

A DOZEN PROBES
CDOs are especiallY troublesome in a choppy market because they're illiquid— difficult not only to sell but even to value. Until now, accounting rules have let firms peg their CDOs at roughly the price they paid for them. But if the market sets new prices, then others must use those prices to value their holdings. What gives Wall Street nightmares is the possibility that Bear Stearns' struggling hedge funds, which once controlled $16 billion in assets, will be liquidated by their creditors. A shotgun sale of poorly performing securities would provide Wall Street with a true price for valuing the slumping assets. "Nobody wants to officially acknowledge the worthless nature of these products," says Peter Schiff, president of Euro Pacific Capital, a Darien (Conn.) money management firm. Indeed, SEC Chairman Christopher Cox, during a hearing on Capital Hill on June 26, disclosed that regulators have opened a dozen separate probes on the subprime market and the issue of CDO pricing, in addition to the Bear inquiry.

If Bear's holdings were auctioned off at, say, 60 cents on the dollar and other firms marked down their CDOs accordingly, losses would spread. Firms would start dumping their CDOs to get what they could for them. Thus would begin a quick, brutal crash.

That's one reason Wall Street firms such as Merrill Lynch (MER ), JPMorgan Chase (JPM ), Goldman Sach (GS )s, and Deutsche Bank (DB ), all of which had financed the funds in the first place, have been in no rush to liquidate them. A liquidation would have hurt everyone.

There's another force bearing down on CDO holders: credit rating agencies such as Moody's Investors Service (MCO ) and Standard & Poor's, which like BusinessWeek is a unit of The McGraw-Hill Companies (MHP ). If the ratings agencies were to downgrade the CDOs, it would force holders to mark down their values accordingly, potentially igniting the same sort of disaster scenario. That hasn't happened yet. "Our surveillance involves significant testing and analysis, and our long-term record is excellent," says an S&P spokesman. Noel Kirnon, head of global CDO ratings at Moody's, says the firm has a rigorous process for monitoring CDOs, and adds that deterioration in the underlying assets "has not exceeded expectations."

The wild card is institutional investors such as pension funds, university endowments, and foreign governments. If they get more nervous about the hedge funds they're invested in, they could start looking to cash out—as some have done already. If they rush for the exits, hedge funds will feel pressure to get out of CDOs, perhaps prompting a downward spiral.

The broader housing market also presents a potential threat. In Maricopa County, Ariz., which includes Phoenix, houses are entering foreclosure at a rate of more than 50 a day, according to Foreclosure.com, up 60% from last year, as recent buyers are hit by high payments and falling equity. The faster foreclosures rise, the more it may become apparent that the loans held by the CDOs are in trouble and the greater the risk of CDO downgrades.

In this high-stakes game, the risks to other lines of business are major. Already, concerns are growing that the Bear situation may be spilling over to junk bonds and leveraged loans—two red-hot markets that have kept leveraged buyouts booming and generated big profits for big banks. An index of leveraged loans has fallen 2% the past two weeks. Junk bonds are down as well. Steven C. Miller, managing director of Standard & Poor's LCD, a loan market research service, says that for the first time in two years, investment bankers have had to issue "bridge" or back-up financing for an LBO after running into difficulty selling junk bonds to fund the deal. LBO firms are going back and offering investors higher yields and better protections to raise money for pending buyouts such as the one for retailer ServiceMaster Co. (SVM ), owner of Terminix and Merry Maids. "There's a much more sober view in the leveraged finance market right now," says Miller.

For all the pressure on CDOs, though, a crisis hasn't yet been touched off. Some observers are downplaying the significance of the hedge fund blowup to Bear Stearns' bottom line. Roger Freeman, an analyst at Lehman Brothers Inc. (LEH ), says in a June 26 research note that the matter will not have "a meaningful impact on Bear's earnings." Likewise, Miller of S&P LCD predicts that, for all the consternation over Bear, the LBO pace will only slow, not stop. CIBC, meanwhile, rejects suggestions that it could be the next firm to tumble. The assumptions about its subprime exposure "are simply not true," says bank spokesman Stephen Forbes. Paribas declined to comment.

Wall Street's strategy from here will be to try to maintain the status quo, putting out new fires quickly. "They are hoping to buy themselves as much time as possible," says James Melcher, founder of Balestra Capital, a hedge fund. "The game could work out if the top dozen firms get together to hold the market and gradually deflate it over time."

But the prospect of a meltdown is on everyone's mind. On June 26, UBS (UBS ) analysts held a conference call with money managers to review the Bear situation. "There's a search for contagion going on," says Douglas J. Lucas, a UBS analyst on the call. "I've talked to people from as far away as Australia." Everyone is watching to see who might blink.

Robert Kiyosaki

During the height of the real estate bubble, I wrote a column saying that the crash was coming and suggested selling any piece of real estate that was overpriced, questionable, or non-performing. As expected, I received angry replies.

Today, I'm predicting the next crash, what I believe will cause it, and why it'll be a severe blow to the global economy. The signs are already here.

Busts Beat Booms

First of all, it's no big deal to predict booms and busts. All markets boom and bust. It's just easier to predict a bust because the signs are so obvious -- like excess euphoria, easy access to money, huge profits, and scores of happy amateurs entering the market.

Booms are harder to predict. They start silently, like oak acorns buried in the ground -- you don't notice them until they're towering trees. For example, few people recognized Microsoft or Google for the giants they were until after they'd become major players and the big profits had been made.

Paradoxically, that means busts are better because we can see them coming. This gives us time to prepare, and makes it easier to capitalize on them.

The Year the Dollar Died

The coming bust started in 1971. That was the year Richard Nixon took the United States off the gold standard, thus converting the U.S. dollar from money to currency -- that is, from an asset to a liability, and an instrument of debt. That was the year the dollar died.

After Nixon was forced out of office, the U.S. economy went into a slump under presidents Ford and Carter. We had high inflation and low growth, otherwise known as "stagflation," before Ronald Reagan and his dedication to supply-side economics -- Reganonomics -- came along.

Reagan cut taxes and started borrowing money, increasing the national debt. As a nation and as a people, we began borrowing and spending to spur the economy. And the economy boomed until 2000.

A World of Debt

It began to sink after 9/11. We lowered interest rates and began printing more money. In 2003 and 2004, the Bank of Japan created 35 trillion yen to save the dollar and their economy. It was like a loan of $320 billion to the United States, and probably prevented a run on the dollar.

This loan kept interest rates low, which prolonged the boom with easy money from cheap debt. The problem is that interest rates are now beginning to rise, and the mountains of debt will have to be paid back. If interest rates rise and the economy slows, a severe crash could occur -- a crash caused by years of accumulating debt in order to spur the economy.

The world has never been in this position before -- and the whole world is involved. That's because Nixon's actions in 1971 made the United States into a virtual empire. As an empire, we began dictating the terms of world trade: If you wanted to do business with us, you had to accept our new dollar as gold. Unfortunately, the world complied.

The New Money

Today, China ships us products and we ship them dollars. The problem is that the Chinese can't spend those dollars. If they do, the price of their currency, the yuan, would go up. Why? It's simply a matter of supply and demand.

So instead of spending their U.S. dollars in China, the Chinese buy our assets, especially U.S. bonds, with them. Because they buy our bonds, interest rates in the U.S. remain low, and low interest rates encourage Americans to borrow more money. This causes bubbles in real estate and the stock market.

The problem is almost as bad in China. The Chinese are using U.S. debt as collateral in borrowing yuan to finance projects within their country. With the Chinese economy booming and in preparation for the 2008 Olympics, the Chinese have gone shopping -- they want to look good for the world.

Using Chinese debt collateralized by U.S. debt, they've been buying natural resources from all over the world. Consequently, countries that are rich in natural resources -- such as Canada and Australia -- are booming. Real estate and stock markets in those countries are hot.

But the global boom is clearly built on a mountain of debt.

A Familiar Cycle

This type of boom has happened before. In 1971, Japan was finally emerging from the effects of World War II and becoming a world economic power. The Japanese were exporting cars and televisions to the United States, and because we were importing more than we exported, the Japanese took payment in U.S. gold. In fact, one of the reasons President Nixon converted the dollar from money to a currency was to stop this hemorrhage of gold.

In the 1980s, instead of using gold to finance their economy, the Japanese used U.S. debt as collateral for Japanese debt. This caused the Japanese economy to boom just as the Chinese economy is booming today, and it made the Japanese look like geniuses. Business books and magazines trumpeted the magic of Japanese business management.

Then, in the early 1990s, the Japanese boom busted. Their stock market crashed and the most expensive real estate in the world became cheap. Today, the Japanese economy continues to struggle.

China Isn't Japan

China's advantage is that it learned from Japan's mistakes. That's why the Chinese stubbornly refuse to revalue their currency -- they don't want to make it more expensive the way the Japanese did theirs.

Currently, the Chinese yuan is pegged at 7.6 yuan to one U.S. dollar. This makes the United States accuse China of being unfair; we'd like to see the yuan float the way the Japanese let the yen float. This would make it easier for us to reduce our balance of trade, as well as pay back our debt with cheaper dollars.

The problem is that the Chinese know from the Japanese experience that we can talk tough but not act tough -- they simply hold too much of our debt for us to take measures. And if the Chinese started dumping U.S dollars and bonds on the world market, the world economy might well crumble, just as the Japanese economy crashed nearly 20 years ago.

Time for a New Standard

While it's tough to predict the future, one thing is for certain: The U.S. dollar will continue to go down in value, and savers will be losers. With people all over the world piling debt upon debt and spending like fools, it might be best to follow the Chinese.

They've never trusted banks, but have always trusted gold. Maybe it's time we started doing the same.

Milk builds bones, breaks wallets

Prices surge toward record highs set in June 2004

By ELIZABETH LEE
The Atlanta-Journal Constitution
Published on: 06/20/07

Sticker shock at the gas pump is almost routine. But at the dairy case?

Get ready. Milk prices are nearing record highs set in June 2004, and there's no sign yet of leveling off.

At metro Atlanta's three largest grocery chains on Tuesday, the cost of a gallon of store brand whole milk ranged from $3.69 to $3.79. Retail prices have been edging up for weeks, following soaring prices paid to farmers.

Karel Burns, shopping with her three children recently at a Kroger near Marietta, has noticed the run-up.

"I'll go wherever it's on sale," says Burns, who buys up to four gallons each week.

Food prices are rising across the board, spurred by higher demand for corn, used to produce ethanol as well as livestock feed and many processed foods.

Milk costs are increasing even faster, for reasons that include a drought in Australia, tighter supplies from the European Union and higher demand for milk products, such as whey for food processing. Americans are drinking more milk, too, with the first consecutive years of increases since 1990.

Dean Foods Co., the largest milk processor in the United States and owner of the Mayfield Dairy Farms brand, recently scaled back its earnings estimates for 2007 because of high raw milk prices. The company told analysts this month that it expects those prices will reach record highs by the fall before moderating.

The federally set minimum price that processors must pay to U.S. farmers has increased 66 percent in the past year, according to the International Dairy Foods Association, a trade group for dairy processors.

Retail prices typically don't rise as steeply. Manufacturers and supermarkets may not pass along all of their increased costs, especially grocery stores that use low milk prices as a way to bring in shoppers, says Ephraim Leibtag, an economist for the U.S. Department of Agriculture.

Estimates vary on how much more consumers will pay by the end of the year. Leibtag predicts 15 cents to 30 cents more, but says that could increase if farm prices pass record levels.

Prices are also higher in the Southeast, with fewer dairies and thus greater transportation expenses for milk. Southerners paid an average of $3.69 a gallon in May, 43 cents higher than the national average.

To keep costs in line, Carrie Price of East Cobb switched the type of milk she buys. She plans to supplement with cheese to make sure her three daughters get enough calcium.

But the price of foods that contain milk, such as butter, ice cream, yogurt and cheese, also is going up. At $3.79, a gallon of milk costs 40 cents more at Publix than it did six weeks ago. Suppliers' prices have risen for each of the past three months, and Publix expects another increase in July, says spokeswoman Brenda Reid.

In early May, Publix switched to milk free of synthetic growth hormones, a type of milk that often costs more. The higher prices for milk aren't connected to the switch, Reid says. At Kroger, which stocks conventional milk, a gallon of store brand whole milk also costs $3.79.

Whole Foods Market, which also owns Harry's Farmers Market, is holding the line for now at $2.99 a gallon for milk, says spokeswoman Darrah Horgan.

Leibtag, the economist, says prices may vary significantly depending on where you shop.

"Some companies will continue to use milk as a loss leader," he says.

Burns is willing to change where she shops to get a better price, but doesn't intend on altering her family's diet.

"I'll still buy milk," she says. "It's a necessity."

Matt Taibbi

The American Left's Silly Victim Complex May 23, 2007

---

The biggest problem with modern American liberalism may be the word itself. There’s just something about the word, liberal, something about the way it sounds – it just hits the ear wrong. If it were an animal it would be something squirming and hairless, something that burrows maybe, with no eyes and too many legs. No child would bring home a wounded liberal and ask to keep it as a pet. More likely he would step on it, or maybe tie it to a bottle-rocket and shoot it over the railroad tracks.

The word has a chilling effect even on the people who basically agree with most of what it stands for. I myself cringe, involuntarily as it were, every time someone calls me a liberal in public. And I’m not the only one. When I called around for this article about the problems of American liberalism to various colleagues who inhabit the same world that I do – iconoclastic columnists and journalists who’ve had bylines in places like The Nation – they almost universally recoiled in horror from the topic, not wanting to be explicitly linked in public with the idea of the American left.

“Fuck that,” responded one, when I asked if he wanted to be quoted in this piece. “I’d rather talk about my genital warts. I’d rather show you pictures of my genital warts, as a matter of fact.”

“Ugh. Not sure I want to go there,” read one e-mail.

“I really wish I wasn’t associated with the left,” sighed a third.

When the people who are the public voice of a political class are afraid to even wear the party colors in public, that’s a bad sign, and it’s worth asking what the reasons are.

A lot of it, surely, has to do with the relentless abuse liberalism takes in the right-wing media, on Fox and afternoon radio, and amid the Townhall.com network of newspaper invective-hurlers. The same dynamic that makes the junior high school kid fear the word “fag” surely has many of us frightened of the word “liberal.” Mike Savage says liberalism is a mental disorder, Sean Hannity equates liberals with terrorists, Ann Coulter says that “liberals love America like O.J. loved Nicole.” These people have a broad, monolithic audience whose impassioned opinions are increasingly entrenched. In the pseudo-Orwellian political landscape that is modern America, to self-identify as a liberal is almost tantamount to thoughtcrime, a dangerous admission that carries with it the very real risk of instantly and permanently alienating a good half of the population, in particular most of middle America. That reason alone makes it, in a way, wrong and cowardly to abandon liberalism and liberals. If Ann Coulter wants to call all of us fags, well, then, fine, I’m a fag. For the sake of that fight, I’ll stay a liberal till the end of time. But between you and me, between all of us on that side of things, liberalism needs to be fixed.

At a time when someone should be organizing forcefully against the war in Iraq and engaging middle America on the alarming issue of big-business occupation of the Washington power process, the American left has turned into a skittish, hysterical old lady, one who defiantly insists on living in the past, is easily mesmerized by half-baked pseudo-intellectual nonsense, and quick to run from anything like real conflict or responsibility.

It shies away from hardcore economic issues but howls endlessly about anything that sounds like a free-speech controversy, shrieking about the notorious bugbears of the post-9/11 “police state” (the Patriot Act, Total Information Awareness, CARNIVORE, etc.) in a way that reveals unmistakably, to those who are paying close attention, a not-so-secret desire to be relevant and threatening enough to warrant the extralegal attention of the FBI. It sells scads of Che t-shirts ($20 at the International ANSWER online store) and has a perfected a high-handed tone of moralistic finger-wagging, but its organizational capacity is almost nil. It says a lot, but does very little.

The sad truth is that if the FBI really is following anyone on the American left, it is engaging in a huge waste of time and personnel. No matter what it claims for a self-image, in reality it’s the saddest collection of cowering, ineffectual ninnies ever assembled under one banner on God’s green earth. And its ugly little secret is that it really doesn’t mind being in the position it’s in – politically irrelevant and permanently relegated to the sidelines, tucked into its cozy little cottage industry of polysyllabic, ivory tower criticism. When you get right down to it, the American left is basically just a noisy Upper West side cocktail party for the college-graduate class.

And we all know it. The question is, when will we finally admit it?

Here’s the real problem with American liberalism: there is no such thing, not really. What we call American liberalism is really a kind of genetic mutant, a Frankenstein’s monster of incongruous parts – a fat, affluent, overeducated New York/Washington head crudely screwed onto the withering corpse of the vanishing middle-American manufacturing class. These days the Roosevelt stratum of rich East Coasters are still liberals, but the industrial middle class that the New Deal helped create is almost all gone. In 1965, manufacturing jobs still made up 53 percent of the US economy; that number was down to nine percent in 2004, and no one has stepped up to talk to the 30 million working poor who struggle to get by on low-wage, part-time jobs.

Thus, the people who are the public voice of American liberalism rarely have any real connection to the ordinary working people whose interests they putatively champion. They tend instead to be well-off, college-educated yuppies from California or the East Coast, and hard as they try to worry about food stamps or veterans’ rights or securing federal assistance for heating oil bills, they invariably gravitate instead to things that actually matter to them – like the slick Al Gore documentary on global warming, or the “All Things Considered” interview on NPR with the British author of Revolutionary Chinese Cookbook. They haven’t yet come up with something to replace the synergy of patrician and middle-class interests that the New Deal represented.

Bernie Sanders, the new Senator from Vermont and one of the few American politicians in history to have survived publicly admitting to being a socialist, agrees that this peculiar demographic schism is a fundamental problem for the American political opposition.

“Unfortunately, today, when you talk about the ‘American left,’” he says, “as often as not you’re talking about wealthy folks who are concerned about the environment (which is enormously important) who are concerned about women’s rights (which are enormously important) and who are concerned about gay rights (which are enormously important).

“But you’re not really referring to millions of workers who have lost their jobs because of disastrous trade agreements,” he says. “You’re not talking about waitresses who are working for four bucks an hour.” As often as not, he says, you’re talking about “sophisticated people who have money.”

David Sirota, author of Hostile Takeover: How Big Money and Corruption Conquered Our Government – and How We Can Take it Back, is a guy who frequently appears on television news programs defending the “left” in TV’s typical Crossfire-style left-right rock-‘em-sock-‘em format. Like a lot of people who make their living in this world, he’s sometimes frustrated with the lack of discipline and purpose in American liberalism. And like Sanders, he worries that there is a wide chasm between the people who speak for the left and sponsor left-leaning political organizations, and the actual people they supposedly represent.

“Perhaps what the real issue is that the left is not really a grassroots movement,” he says. “You have this donor/elite class, and then you have the public . . . You have these zillionaires who are supposedly funding the progressive movement. At some point that gets to be a problem.”

Sanders agrees, saying that “where the money comes from” is definitely one of the reasons that the so-called liberals in Washington – i.e. the Democrats – tend not to get too heavily into financial issues that affect ordinary people. This basically regressive electoral formula has been a staple of the Democratic Party ever since the Walter Mondale fiasco in the mid-eighties prompted a few shrewd Washington insiders to create the notorious “pro-business” political formula of the Democratic Leadership Council, which sought to end the party’s dependence upon labor money by announcing a new willingness to sell out on financial issues in exchange for support from Wall Street. Once the DLC’s financial strategy helped get Bill Clinton elected, no one in Washington ever again bothered to question the wisdom of the political compromises it required.

Within a decade, the process was automatic – Citibank gives money to Tom Daschle, Tom Daschle crafts the hideous Bankruptcy Bill, and suddenly the Midwestern union member who was laid off in the wake of Democrat-passed NAFTA can’t even declare bankruptcy to get out from the credit card debt he incurred in his unemployment. He will now probably suck eggs for the rest of his life, paying off credit card debt year after year at a snail’s pace while working as a non-union butcher in a Wal-Mart in Butte. Royally screwed twice by the Democratic Party he voted for, he will almost certainly decide to vote Republican the first time he opens up the door to find four pimply college students wearing I READ BANNED BOOKS t-shirts taking up a collection to agitate for dolphin-safe tuna.

But money and campaign contributions aren’t the only reason “liberal“ politicians screw their voters.

“It’s also a cultural thing,” Sanders says. “A lot of these folks really don’t have a lot of contact with working-class people. They’re not comfortable with working-class people. They’re more comfortable with environmentalists, with well-educated people. And it’s their issues that matter to them.”

This is another dirty little secret of the left – the fact that, at least when it comes to per-capita income, those interminable right-wing criticisms about liberals being “elitists” are actually true. According to a 2004 Pew report, Americans who self-identify as liberals have an average annual income of $71,000 – the highest-grossing political category in America. They’re also the best-educated class, with over one in four being post-graduates.

The same is true of the political media in Washington – not just the few journalists on the left, but all of the media. Reporters in Washington of both the liberal and conservative variety tend mostly to be interested in issues that they themselves care about, and as a result they end up defining the political landscape in terms of orthodoxies that make sense to them.

“With the media, it’s like, ‘Are you pro-choice? Yes? Then you’re a liberal.’ It’s bullshit,” scoffs Sanders. The senator went on to point out that a recent Senate hearing on veterans’ issues attracted over 500 angry war veterans – and no reporters. “It’s just not their thing,” he sighs.

Progressive politicians in Washington frequently complain that the political mainstream’s abandonment of working-class issues opens the door for Republicans to seize the ignored middle-American electorate, mainly by scaring them with bugaboo images of marrying queers, godless commie academics, dirty bearded eco-terrorists, and so on.

To them, the essentially patrician structure of the political left is mostly a logistical political problem, one that can theoretically be solved, as Sanders solved it in his state, by shunning corporate campaign donors, listening to voters again, and re-emphasizing working-class issues.

But having rich college grads acting as the political representatives of the working class isn’t just bad politics. It’s also silly. And there’s probably no political movement in history that’s been sillier than the modern American left.

What makes the American left silly? Things that in a vacuum should be logical impossibilities are frighteningly common in lefty political scenes. The word “oppression” escaping, for any reason, the mouths of kids whose parents are paying 20 grand for them to go to private colleges. Academics in Priuses using the word “Amerika.” Ebonics, Fanetiks, and other such insane institutional manifestations of white guilt. Combat berets. Combat berets in conjunction with designer coffees. Combat berets in conjunction with designer coffees consumed at leisure in between conversational comparisons of America to Nazi Germany.

We all know where this stuff comes from. Anyone who’s ever been to a lefty political meeting knows the deal – the problem is the “spirit of inclusiveness” stretched to the limits of absurdity. The post-sixties dogma that everyone’s viewpoint is legitimate, everyone‘s choice about anything (lifestyle, gender, ethnicity, even class) is valid, that’s now so totally ingrained that at every single meeting, every time some yutz gets up and starts rambling about anything, no matter how ridiculous, no one ever tells him to shut the fuck up. Next thing you know, you’ve got guys on stilts wearing mime makeup and Cat-in-the-Hat striped top-hats leading a half-million people at an anti-war rally. Why is that guy there? Because no one told him that war is a matter of life and death and that he should leave his fucking stilts at home.

Then there’s the tone problem. A hell of a lot of what the left does these days is tediously lecture middle America about how wrong it is, loudly snorting at a stubbornly unchanging litany of Republican villains. There’s a weirdly indulgent tone to all of this Bush-bashing that goes on in lefty media, a tone that’s not only annoyingly predictable in its pervasiveness, but a turnoff to people who might have tuned in to that channel in search of something else.

“I share the position of a lot of those people, and some of that feel-good Bush-bashing is okay, I guess, but also – can I get some information here?” says Christian Parenti, a journalist who frequently writes for The Nation. “I think just reporting the facts can be enormously empowering, but there’s not enough of that. That moralistic thing . . . I think it’s something that’s built deep into the culture, not just on the left but everywhere.”

But to me the biggest problem with American liberalism is that it hasn’t found a new legend for itself, one to replace the old one, which is more and more often no longer relevant. I’ve got no problem with long hair and weed and kids playing “Imagine” on acoustic guitars at peace marches. But we often make the mistake of thinking that the “revolution” of the sixties is something that rightly should continue on to today.

While it’s true that we’re still fighting against unjust wars and that there’s unfinished business on the fronts of women’s rights, civil rights, and environmental preservation, there’s no generational battle left for America’s rich kids to fight. In the sixties, college kids had to fight for their right to refuse to become bankers, soldiers, plastics executives or whatever other types of dreary establishment lifestyles their parents were demanding for them. And because they had to fight that fight, the interests of white college kids were briefly and felicitously aligned with the blacks and the migrant farm workers and the South Vietnamese, who were also victims of the same dug-in, inflexible political establishment. Long hair, tie-dye and the raised black fist all had the same general message – screw the establishment. It was a sort of Marxian perfect storm where even the children of the bourgeoisie could semi-realistically imagine themselves engaged in a class struggle.

But American college types don’t have to fight for shit anymore. Remember the Beastie Boys’ Licensed to Ill album? Remember that song “Fight for Your Right to Party”? Well, people, that song was a joke. So was “We’re Not Gonna Take It” and “And the Cradle Will Rock.” The only thing American college kids have left to fight for are the royalties for their myriad appearances in Girls Gone Wild videos. Which is why they look ridiculous parading around at peace protests in the guise of hapless victims and subjects of the Amerikan neo-Reich. Rich liberals protesting the establishment is absurd because they are the establishment; they’re just too embarrassed to admit it.

When they start embracing their position of privilege and taking responsibility for the power they already have – striving to be the leaders of society they actually are, instead of playing at being aggrieved subjects – they’ll come across as wise and patriotic citizens, not like the terminally adolescent buffoons trapped in a corny sixties daydream they often seem to be now. They’ll stop bringing puppets to marches and, more importantly, they’ll start doing more than march.

That, in sum, is why I don’t call myself a liberal. To me the word “liberalism” describes an era whose time is past, a time when a liberal was defined more by who he was fighting against – the Man – than what he was fighting for. A liberal wielding power is always going to seem a bit strange because a liberal always imagines himself in an intrepid fight against power, not holding it. I therefore prefer the word “progressive,” which describes in a neutral way a set of political values without having these class or aesthetic connotations. To me a progressive is not fighting Mom and Dad, Nixon, Bush or really any people at all, but things – political corruption, commercialism, pollution, etc. It doesn’t have that same Marxian us-versus-them connotation that liberalism still has, sometimes ridiculously. It’s about goals, not people.

In a few years it will be half a century since the 1960s began. The Baby-Boomer generation that shaped modern liberalism will soon be moving on to the nursing home, many of its battles – for civil, gay, immigrant and women’s rights, for workplace protections, and against the Vietnam war and Richard Nixon – already won. They did a lot of good things, but their fight doesn’t always make sense anymore. In any case, you can smell something new rising out of the mess in Iraq and the changed American labor market. From among the veterans of this new bad war and the refugees of the global economy, some kind of movement is bound to arise. Who knows what that will be called – but it’s safe to say it won’t be called liberalism.

_Matt Taibbi is a contributing editor to Rolling Stone. His next book, Smells Like Dead Elephants, is due out next year.

{commentclosed}

Getting Greener and Greener by Bill Bonner

A man who doubts the global warming hypothesis is asking for trouble. He
might just as well question the virgin birth in St. Peter's or praise a
sirloin steak in Benares. He is sure to be damned by everyone.

The whole earth is going green. Every newspaper tells us so. And anyone
who stands in the way of this great trend will be treated like a holocaust
denier - that is, like a wicked kook.

Communism, famine, plague, the Huns - all the old enemies are in retreat.
Now, climate change and terrorism are the threats du jour. All a good
citizen has to do is pick one...or both. Then, he can be properly lined up
and enrolled in the crusade - cajoled, connived and conscripted into
fighting a battle in which he is almost sure to be the loser.

Climate change got off on the wrong foot in 1974, when TIME magazine's
cover pronounced the coming of "Another Ice Age," somewhat prematurely, it
turned out. Now, the same TIME magazine is warning us that the old globe
is on the verge of burning up, but no one giggles.

Instead, the media and the activists march along with the serene
confidence of a religious cult, convinced that the world is in imminent
danger and only they can save it. Politicians, corporate do-gooders, and
investors are not far behind...each hoping to get something out of the
whole things. And bringing up the rear guard are the yeomen soldiers...the
poor grunts who will go along with anything, so long as it's sufficiently
idiotic.

Our beat here at The Daily Reckoning is, of course, money...not politics.
But there are billions of dollars at stake in global warming...in
subsidies, tax incentives, contracts, taxes, carbon credits, the whole
shebang. Besides, like any great public spectacle, global warming has its
comedic dividends as well as its financial returns.

Why are rising temperatures a threat, anyway? Practically everyone we know
welcomes warm weather...and looks forward to the mosquito months more than
a white Christmas. You'd think a few more days of sunny skies and outdoor
barbecues would be to their liking.

Today, in Paris, we saw several groups of American tourists - dressed for
summer, with their shorts and flip-flops. How they must wish Europe were
more like Florida and not gray and chilly.

Rising temperatures would be good for tourism, and for more practical
reasons too. Growing seasons would be longer. The well-fed complainers
have fingered carbon dioxide as the culprit, but we know that plants are
fond of CO2. Longer growing seasons plus higher levels of CO2 boost crop
yields, say the experts. And that helps keep people from starving.

Nonetheless, for reasons never fully explained to us, global warming is
viewed not as a boon to humanity but as the dawn of its doomsday.

Mr. Ban Ki Moon, as we mentioned earlier this week, is both the current
Secretary General of the United Nations and a man whose feet seem to have
left Mother Earth. Writing in the IHT, the U.N. man asserts, "the science
is clear. The earth's warming is unequivocal; we humans are its principle
cause." We are always impressed with people like Mr. Moon. As a scholar of
climate change, we suspect his credentials are as good as ours, which is
to say - he has no idea what he is talking about. Most people would hedge
their bets...roll meal around in their mouths...mutter under their
breath...on one hand this, on the other that. But Mr. Moon comes down,
unequivocally, like a hammer on an egg, with a bold, powerful lie.

The science is anything but clear. Even some of the world's greatest
scientists are scratching their heads. The idea of global warming rests on
three major things: A series of observations - melting ice, rising
temperatures in certain places; a guess about how the earth's climate
works - the so-called greenhouse hypothesis; and a proof, of sorts, based
on some further observations that suggest that as CO2 levels have risen
over the last century or so, temperatures have, as well. The hypothesis
further supposes that higher CO2 levels are caused by humans.

But a quick reading of the literature yields more questions than proof.
Atmospheric CO2 concentrations have apparently risen 21% in the last
century. But, during the Depression of the 1930s, when human CO2 emissions
dropped 30%, CO2 in the atmosphere continued to rise. Maybe human activity
really doesn't contribute that much to global CO2 levels. Even during the
Eocene era, there was three to four times as much CO2 in the atmosphere,
and that was 20 million years before the first SUV was built.

One of the great scientists of our time, Freeman Dyson, concludes:

"Concerning the climate models, I know enough of the details to be sure
that they are unreliable. They are full of fudge factors."

Yet, those very same climate models are now read by many as passing
Biblical judgment on the entire planet. "The Big Thaw," proclaims the
cover of this month's National Geographic. The cover shows a photo of a
polar bear on a melting iceberg. The reader thinks the poor animal is
doomed...and guesses that he must be doomed too.

But no problem is so pressing and so monumental that heads of state can't
get together and turn it into a carnival sideshow. Today's International
Herald Tribune carries a photo of George W. Bush, Vladimir Putin and
Angela Merkel sitting together, apparently enjoying a lighthearted moment.
The headline tells us that they are getting close to solving the problem;
the American president has signed on to "consider" cutting carbon-dioxide
emissions.

This is surely a historic moment. Future historians will look back and
label it a turning point. For now, the chief of the world's chief carbon
dioxide-emitting tribe, has taken the first step towards saving the planet
from the evil of warmer weather. The world still has a chance, dear
reader.

Meanwhile, at the grass-roots level, the fight against carbon dioxide
takes on an absurdity of its own. A group was formed recently to campaign
against airline traffic, especially on short-hauls, on the theory that
airplanes use too much fossil fuel and thus leave big "carbon footprints"
all over the skies. The activists made one good decision, deciding to call
themselves "Plane Stupid." From there on, things went into a tailspin.

To draw attention to their cause, the group decided to occupy the London
headquarters of EasyJet. They invaded the building, hung out a banner, and
locked arms around it so that neither customers nor employees could enter.
At that point, someone should have pointed out to the saps that EasyJet's
headquarters were in Luton, not London. The world-improvers had targeted
the headquarters of EasyGroup, which has nothing to do with air travel.

Is global warming worth worrying about? What do we know? But, we wouldn't
be so suspicious if there weren't so many billions of dollars at stake.
Not that we doubt the sincerity of Al Gore or the other earth savers; in
fact, we don't know how the old planet survived so long without them. But
pile up so much bread in one place and it is bound to attract rats.

The most likely remedy is a new tax on carbon-based fuels, designed to
raise prices and discourage users. Who will collect the money?
Politicians. Who will they redistribute it to? The needy and sick? No,
they will tell you that the money will go into wind, sun and sea
energy...into hydrogen and hydroelectric. But neither wind nor water makes
campaign contributions.

No, dear reader, the high-minded money will pass through the usual low,
greasy palms - cronies and contractors, oil companies, honey-tongued
lobbyists, fleet-footed hustlers, and private equity investors. Gradually
and inevitably, the Holy Cause for which the tax was imposed will be as
forgotten as the Bill of Rights and the loot will make its way into the
customary lost causes and holes in the ground, most prominently at the
Pentagon - the biggest gas guzzler this side of Hell.

Regards,

Bill Bonner
The Daily Reckoning

Blood, Sweat and Tears at New US Embassy

Blood, Sweat and Tears at New US Embassy

by David Phinney

The US Justice Department is actively investigating allegations of forced labor and other abuses by the Kuwaiti contractor now rushing to complete the sprawling 592-million-dollar US embassy project in Baghdad, numerous sources have revealed. Justice Department trial attorneys Andrew Kline and Michael J. Frank with the civil rights division have been contacting former employees of First Kuwaiti General Trading and Contracting and other witnesses for interviews and documents, but declined to comment on the investigation other than to say they are looking into allegations of labor trafficking. The two investigators are said to be looking for actual workers around the world who claim they were misled or pressured to work in Iraq against their will by the company. Rumors of forced labor in Iraq have plagued First Kuwaiti General Trading and Contracting for several years, but US government officials have discounted such allegations by workers from Nepal and the Philippines in the past, even as the company continued to rack up contracts now totaling several billion dollars from the Pentagon and US State Department. Late last year, several US citizens also said they boarded separate chartered jets in Kuwait loaded with work crews from the Philippines, India, Pakistan and Africa holding boarding passes to Dubai, but the planes then flew directly to Baghdad. More recently, another US citizen told IPS that he was told by workers from Ghana on the embassy site that they thought they would have jobs in Dubai but were then taken to work in Iraq. First Kuwaiti's general manager, Wadih al Absi, flatly dismisses the accusations as unfounded and false. "I am telling you that First Kuwaiti has never violated any visa violations or forced people to work," he said during a telephone interview last January. "In the coming months you will see that First Kuwaiti is the best company working in the Middle East." Since landing the Baghdad project, First Kuwaiti has won additional contracts worth roughly 200 million dollars more for embassy projects in Africa, India and Indonesia. The company also is believed to be competing for another large new US embassy in Lebanon. Soon after the State Department awarded the Iraq embassy contract to First Kuwaiti in July 2005, thousands of low-paid migrant workers recruited from South Asia, the Philippines and other nations poured into Baghdad to begin building the gargantuan new embassy within two years time. When completed later this summer, it will be the most fortified US diplomatic mission ever constructed, spanning 104 acres on the banks of the ancient Tigris River and holding more than 20 buildings. It will be comparable in size to the Vatican. But during First Kuwaiti's frenzied rush to the finish the project on schedule, US managers and specialists involved with the project began protesting about the living and working conditions of lower-paid workers sequestered and largely unseen behind security walls bordering the embassy project inside the US-controlled Green Zone. Among those complaints: construction crews lived in crowded quarters, ate substandard food, and had little medical care. When drinking water was scarce in the blistering heat, coolers were filled at the banks of the Tigris, a river rife with waterborne disease, sewage and sometimes floating bodies. Others questioned why First Kuwaiti held the passports of workers. Was it to keep them from escaping? Some laborers had turned up "missing" with little investigation. One US citizen said laborers told him they had been misled about their job location. When recruited, they were unaware they were heading for war-torn Iraq. After hearing similar allegations during much of 2006, Howard J. Krongard, the State Department's inspector general, flew to Baghdad for what he describes as a "brief" review on Sep. 15. His review was recently made public after inquires from Al-Jazeera about the embassy for an upcoming hour-long documentary, and he reported that the complaints had no substance. "Nothing came to our attention," he wrote in a nine-page memorandum posted on the State Department's Web site. More importantly, after interviewing an unstated number of workers from the Philippines, India, Nepal and Pakistan, Krongard said no evidence was found of labor smuggling, trafficking or other abuses. Krongard makes no mention of an ongoing investigation by the US Justice Department of First Kuwaiti and others for such alleged practices and other matters. One former labor foreman at the embassy site who recently read Krongard's review called it "bulls**t." Another former First Kuwaiti employee viewed it as "a whitewash." Had Krongard visited earlier than last September and unannounced, he may have witnessed something very different then what his memorandum relates. "Most of the allegations (from the US citizens) were true before he arrived," claims Juvencio Lopez, who says he was a high-level project manager under the US State Department over the course of two years. During a telephone interview, he said that protests over First Kuwaiti's bad food, abusive treatment from managers and unsafe working conditions were routine among many of the 2,700 workers during much of 2005 and 2006. "There were strikes and sit-downs every month," Lopez said. He left Iraq in November 2006 and is now home in San Antonio, Texas. "Sometimes there were almost riots." Lopez vividly recalls a First Kuwaiti security guard unholstering his 9mm handgun and walking among the squatting protesters telling them to get back to work. Had the guard fallen or workers tackled him to the ground, the gun might have gone off. Lopez said he immediately reported the incident to First Kuwaiti. "Someone could gotten killed or injured," he said. On another occasion, a company manager roughed up a Filipino worker, sources say. All of the other Filipinos nearby began loudly protesting as bewildered workers from other countries watched. "The workers were from 36 different countries and everyone spoke a different language," Lopez said. Supplementing Krongard's review, the coalition Multi-National Force inspector general in Baghdad interviewed 36 workers from seven different countries at the new embassy site in December. The MNF-I IG claimed it found no evidence to indicate the presence of severe forms of labor trafficking, but did find that workers from Nepal, Pakistan, Bangladesh and Sri Lanka reported deceptive hiring practices by recruitment agencies in their home countries. They said they had been promised higher pay, shorter hours and days off. "A large majority of workers" from the Indian subcontinent incurred recruiting fees of up to one year's salary. Paul Chapman, a subcontractor working with First Kuwaiti, said he is also struck by the lack of interest in workers that First Kuwaiti had listed as "missing" on its company rosters. Now home in South Carolina, Chapman said seven workers from India, Pakistan and the Philippines "just disappeared." Fearing they may have been killed and dumped into the Tigris, he began pressing embassy officials overseeing the project to investigate. "They told me to forget about it because the workers had probably found other jobs." Chapman and others also claim that standard safety procedures on the project frequently went unobserved. Many worked without safety harnesses when off the ground and had no hardhats or boots. Work clothes were dirty and tattered. Those that had them had only one set of work clothes so they were rarely washed. They became dirty and tattered, causing rashes and sores. Some worked in sandals, others in bare feet. "They had their toes curled around the rebar like birds," Lopez remembers. "Every US labor law was broken," charged one US foreman, John Owens, who said that he never witnessed a single safety meeting. Once an Egyptian worker fell and broke his back and was sent home. No one ever heard from him again. "The accident might not have happened if there was a safety program and he had known how to use a safety harness," said Owen, who left the embassy project last June.

State Department Tries To Ease Backlog

Why anyone believes that we can rely on the government to protect us, in any way shape or form is beyond me especially when you read a story like this one. When the idiots that run the government don't have the foresight to realize that as soon as they require passports for any destination outside the US that there would be a flood of applications, how can we expect them to have any kind of ability to respond to emergency situations they had no forewarning of?

POSTED: 8:07 am MDT June 8, 2007

WASHINGTON -- There's been a summer's reprieve for people heading to Canada, Mexico the Caribbean or Bermuda. The Bush administration has decided to temporarily suspend its requirement that travelers carry passports to fly to and from those countries, after the State Department was overwhelmed with millions of passport applications. Until the end of September, passengers will be allowed to fly without passports if they present a State Department receipt, showing they have applied for a passport, and a government form of identification, such as a driver's license. The suspension will give the State Department time to deal with the recent massive surge in applications. Between March and May, the department issued more than 4.5 million passports.The backlog has caused three-month delays for travelers and spoiled vacation plans for thousands of Americans.

Housing Bubble Bust

Bloomberg.com

In March, Countrywide Financial Corp., the biggest U.S. mortgage provider, stopped taking applications for no-money-down loans from risky borrowers without proof of income.

Question is, how'd it ever start doing that?

General Electric Co.'s WMC Mortgage said it would refuse mortgages to borrowers with credit scores below 600. Wells Fargo & Co., the largest U.S. subprime lender, said it changed standards effective Feb. 16 for some risky customers.

The Fed's Open Market Committee is still likely to keep its target rate for overnight loans between banks at 5.25 percent when it next meets June 27-28, according to the median forecast of economists surveyed by Bloomberg News.

Goldman Sachs Group Inc. Chief U.S. Economist Jan Hatzius today ditched his call for rate cuts this year, joining his counterpart David Rosenberg of Merrill Lynch & Co. yesterday.

Bernanke said in his speech he's open to imposing tougher regulation of lenders to prohibit ``unfair'' practices.

The Fed, which has authority to write rules for all lenders, is under pressure from Congress to further restrict predatory lending and toughen up standards. The Fed's Board of Governors in Washington will hold a public hearing on mortgage rules next week.

`Additional Measures'

``Combating bad lending practices, including deliberate fraud or abuse, may require additional measures,'' he said today. Still, the Fed must ``walk a fine line'' on regulation, Bernanke said, repeating remarks made in Chicago last month.

The Fed chief noted that he favors better disclosure and consumer education, and said regulators will continue to use supervisory guidance to remind lenders of standards.

``We have an obligation to prevent fraud and abusive lending,'' he said. ``We must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.''

Economists say Fed policies contributed to the housing boom and bust. Former Chairman Alan Greenspan, Bernanke -- at the time a Fed governor -- and others were concerned in 2003 that deflation could hit the U.S., as it did Japan for a seven-year period. They cut the key rate to 1 percent and held it there for a year.

`Measured' Pace

When they did raise rates, from June 2004, the Fed committed to a ``measured'' pace of a quarter percentage point per meeting. That helped ``hold down long-term interest rates,'' said Brian Sack, who as a Fed staff economist in 2004 helped Bernanke research the effect of communication on interest rates. Sack is now a vice president at Macroeconomic Advisers LLC in Washington.

As borrowing costs stayed low even as economic growth accelerated, home-buyers took on a record amount of mortgage debt. From 2004 to 2006, lenders wrote a $2.8 trillion in new home loans, unprecedented for any three-year period.

``The Fed was too easy for too long,'' said Ethan Harris, chief U.S. economist at Lehman Brothers and former New York Fed staff economist. The Fed's gradual pace of lifting rates ``contributed to the lack of bite from monetary policy.''

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net .

Last Updated: June 5, 2007 14:48 EDT

THE END OF DOLLAR HEGEMONY, PART I

by Hon. Ron Paul of Texas

A hundred years ago it was called "dollar diplomacy." After World War II,
and especially after the fall of the Soviet Union in 1989, that policy
evolved into "dollar hegemony." But after all these many years of great
success, our dollar dominance is coming to an end.

It has been said, rightly, that he who holds the gold makes the rules. In
earlier times it was readily accepted that fair and honest trade required
an exchange for something of real value.

First it was simply barter of goods. Then it was discovered that gold held
a universal attraction, and was a convenient substitute for more
cumbersome barter transactions. Not only did gold facilitate exchange of
goods and services, it served as a store of value for those who wanted to
save for a rainy day.

Though money developed naturally in the marketplace, as governments grew
in power they assumed monopoly control over money. Sometimes governments
succeeded in guaranteeing the quality and purity of gold, but in time
governments learned to outspend their revenues. New or higher taxes always
incurred the disapproval of the people, so it wasn't long before Kings and
Caesars learned how to inflate their currencies by reducing the amount of
gold in each coin - always hoping their subjects wouldn't discover the
fraud. But the people always did, and they strenuously objected.

This helped pressure leaders to seek more gold by conquering other
nations. The people became accustomed to living beyond their means, and
enjoyed the circuses and bread. Financing extravagances by conquering
foreign lands seemed a logical alternative to working harder and producing
more. Besides, conquering nations not only brought home gold, they brought
home slaves as well. Taxing the people in conquered territories also
provided an incentive to build empires. This system of government worked
well for a while, but the moral decline of the people led to an
unwillingness to produce for themselves. There was a limit to the number
of countries that could be sacked for their wealth, and this always
brought empires to an end. When gold no longer could be obtained, their
military might crumbled. In those days those who held the gold truly wrote
the rules and lived well.

That general rule has held fast throughout the ages. When gold was used,
and the rules protected honest commerce, productive nations thrived.
Whenever wealthy nations - those with powerful armies and gold - strived
only for empire and easy fortunes to support welfare at home, those
nations failed.

Today the principles are the same, but the process is quite different.
Gold no longer is the currency of the realm; paper is. The truth now is:
"He who prints the money makes the rules" - at least for the time being.
Although gold is not used, the goals are the same: compel foreign
countries to produce and subsidize the country with military superiority
and control over the monetary printing presses.

Since printing paper money is nothing short of counterfeiting, the issuer
of the international currency must always be the country with the military
might to guarantee control over the system. This magnificent scheme seems
the perfect system for obtaining perpetual wealth for the country that
issues the de facto world currency. The one problem, however, is that such
a system destroys the character of the counterfeiting nation's people -
just as was the case when gold was the currency and it was obtained by
conquering other nations. And this destroys the incentive to save and
produce, while encouraging debt and runaway welfare.

The pressure at home to inflate the currency comes from the corporate
welfare recipients, as well as those who demand handouts as compensation
for their needs and perceived injuries by others. In both cases personal
responsibility for one's actions is rejected.

When paper money is rejected, or when gold runs out, wealth and political
stability are lost. The country then must go from living beyond its means
to living beneath its means, until the economic and political systems
adjust to the new rules - rules no longer written by those who ran the now
defunct printing press.

"Dollar Diplomacy," a policy instituted by William Howard Taft and his
Secretary of State Philander C. Knox, was designed to enhance U.S.
commercial investments in Latin America and the Far East. McKinley
concocted a war against Spain in 1898, and (Teddy) Roosevelt's corollary
to the Monroe Doctrine preceded Taft's aggressive approach to using the
U.S. dollar and diplomatic influence to secure U.S. investments abroad.
This earned the popular title of "Dollar Diplomacy." The significance of
Roosevelt's change was that our intervention now could be justified by the
mere "appearance" that a country of interest to us was politically or
fiscally vulnerable to European control. Not only did we claim a right,
but even an official U.S. government "obligation" to protect our
commercial interests from Europeans.

This new policy came on the heels of the "gunboat" diplomacy of the late
19th century, and it meant we could buy influence before resorting to the
threat of force. By the time the "dollar diplomacy" of William Howard Taft
was clearly articulated, the seeds of American empire were planted. And
they were destined to grow in the fertile political soil of a country that
lost its love and respect for the republic bequeathed to us by the authors
of the Constitution. And indeed they did. It wasn't too long before dollar
"diplomacy" became dollar "hegemony" in the second half of the 20th
century.

This transition only could have occurred with a dramatic change in
monetary policy and the nature of the dollar itself.

Congress created the Federal Reserve System in 1913. Between then and 1971
the principle of sound money was systematically undermined. Between 1913
and 1971, the Federal Reserve found it much easier to expand the money
supply at will for financing war or manipulating the economy with little
resistance from Congress - while benefiting the special interests that
influence government.

Dollar dominance got a huge boost after World War II. We were spared the
destruction that so many other nations suffered, and our coffers were
filled with the world's gold. But the world chose not to return to the
discipline of the gold standard, and the politicians applauded. Printing
money to pay the bills was a lot more popular than taxing or restraining
unnecessary spending. In spite of the short-term benefits, imbalances were
institutionalized for decades to come.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent
world reserve currency, replacing the British pound. Due to our political
and military muscle, and because we had a huge amount of physical gold,
the world readily accepted our dollar (defined as 1/35th of an ounce of
gold) as the world's reserve currency. The dollar was said to be "as good
as gold," and convertible to all foreign central banks at that rate. For
American citizens, however, it remained illegal to own. This was a
gold-exchange standard that from inception was doomed to fail.

The U.S. did exactly what many predicted she would do. She printed more
dollars for which there was no gold backing. But the world was content to
accept those dollars for more than 25 years with little question - until
the French and others in the late 1960s demanded we fulfill our promise to
pay one ounce of gold for each $35 they delivered to the U.S. Treasury.
This resulted in a huge gold drain that brought an end to a very poorly
devised pseudo-gold standard.

It all ended on August 15, 1971, when Nixon closed the gold window and
refused to pay out any of our remaining 280 million ounces of gold. In
essence, we declared our insolvency and everyone recognized some other
monetary system had to be devised in order to bring stability to the
markets.

Amazingly, a new system was devised which allowed the U.S. to operate the
printing presses for the world reserve currency with no restraints placed
on it - not even a pretense of gold convertibility, none whatsoever!
Though the new policy was even more deeply flawed, it nevertheless opened
the door for dollar hegemony to spread.

Realizing the world was embarking on something new and mind boggling,
elite money managers, with especially strong support from U.S.
authorities, struck an agreement with OPEC to price oil in U.S. dollars
exclusively for all worldwide transactions. This gave the dollar a special
place among world currencies and in essence "backed" the dollar with oil.
In return, the U.S. promised to protect the various oil-rich kingdoms in
the Persian Gulf against threat of invasion or domestic coup. This
arrangement helped ignite the radical Islamic movement among those who
resented our influence in the region. The arrangement gave the dollar
artificial strength, with tremendous financial benefits for the United
States. It allowed us to export our monetary inflation by buying oil and
other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that
existed between 1945 and 1971. Though the dollar/oil arrangement was
helpful, it was not nearly as stable as the pseudo gold standard under
Bretton Woods. It certainly was less stable than the gold standard of the
late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and
gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were
required to rescue the system. The pressure on the dollar in the 1970s, in
spite of the benefits accrued to it, reflected reckless budget deficits
and monetary inflation during the 1960s. The markets were not fooled by
LBJ's claim that we could afford both "guns and butter."

Once again the dollar was rescued, and this ushered in the age of true
dollar hegemony lasting from the early 1980s to the present. With
tremendous cooperation coming from the central banks and international
commercial banks, the dollar was accepted as if it were gold.

Fed Chair Alan Greenspan, on several occasions before the House Banking
Committee, answered my challenges to him about his previously held
favorable views on gold by claiming that he and other central bankers had
gotten paper money - i.e. the dollar system - to respond as if it were
gold. Each time I strongly disagreed, and pointed out that if they had
achieved such a feat they would have defied centuries of economic history
regarding the need for money to be something of real value. He smugly and
confidently concurred with this.

In recent years central banks and various financial institutions, all with
vested interests in maintaining a workable fiat dollar standard, were not
secretive about selling and loaning large amounts of gold to the market
even while decreasing gold prices raised serious questions about the
wisdom of such a policy. They never admitted to gold price fixing, but the
evidence is abundant that they believed if the gold price fell it would
convey a sense of confidence to the market, confidence that they indeed
had achieved amazing success in turning paper into gold.

Increasing gold prices historically are viewed as an indicator of distrust
in paper currency. This recent effort was not a whole lot different than
the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt
to convince the world the dollar was sound and as good as gold. Even
during the Depression, one of Roosevelt's first acts was to remove free
market gold pricing as an indication of a flawed monetary system by making
it illegal for American citizens to own gold. Economic law eventually
limited that effort, as it did in the early 1970s when our Treasury and
the IMF tried to fix the price of gold by dumping tons into the market to
dampen the enthusiasm of those seeking a safe haven for a falling dollar
after gold ownership was re-legalized.

Once again the effort between 1980 and 2000 to fool the market as to the
true value of the dollar proved unsuccessful. In the past 5 years the
dollar has been devalued in terms of gold by more than 50%. You just can't
fool all the people all the time, even with the power of the mighty
printing press and money creating system of the Federal Reserve.

Even with all the shortcomings of the fiat monetary system, dollar
influence thrived. The results seemed beneficial, but gross distortions
built into the system remained. And true to form, Washington politicians
are only too anxious to solve the problems cropping up with window
dressing, while failing to understand and deal with the underlying flawed
policy. Protectionism, fixing exchange rates, punitive tariffs,
politically motivated sanctions, corporate subsidies, international trade
management, price controls, interest rate and wage controls,
super-nationalist sentiments, threats of force, and even war are resorted
to-all to solve the problems artificially created by deeply flawed
monetary and economic systems.

Regards,

Congressman Ron Paul
for The Daily Reckoning

THE LIFE AND DEATH OF GREAT CITIES

By Bill Bonner

"Funny how time changes...rearranges everything."
- The Supremes

"You can't go wrong with property in Central London," is an expression you
hear often on the banks of the Thames. "You can't go wrong with property
in central Detroit" has the same number of syllables. Eight out of nine
words are exactly the same. The final one, though, makes a big difference.
It changes the meaning, from delusional faith to desperate comedy.

Detroit was once one of the world's great English-speaking cities. But
then, Kaifeng, China, was once a great city too. A thousand years ago, it
was the world's most important city. While London had only 15,000 soggy
inhabitants...Kaifeng was the capital of the Song Dynasty, with more than
a million people. At the time, Detroit didn't even exist.

Today, London is a great city...Kaifeng is a now a small, grimy, poor
city...not even a provincial capital...without an airport. But look at
Detroit:

A friend reports:

"Detroit is a contrarian utopia - needles, drug baggies, gangs on street
corners, boarded up businesses, empty office buildings, vacant mansions.
For Sale signs everywhere. It is a hellhole. Wayne County, Michigan, home
to Detroit, lost more people from the beginning of 2005 to the end of 2006
than any U.S. county except the four counties in Louisiana and Mississippi
devastated by Hurricane Katrina, according to Census figures released in
March. Since 2001, Michigan lost more jobs than any other state in the
Union.

"Away from downtown, things are not much better. Lots of homes in the
burbs have been on the market for 2, 3, and 4 years with NO offers, and
not even so much as a low ball offer. Larger existing homes in Macomb
County can be purchased for about 40% less than replacement cost. "

There was a time, of course, on the chilly shores of Lake Michigan, when
you could say "you can't go wrong buying property in central Detroit" with
a straight face. In the early 20th century, Detroit was on top of the
world, the capital of the auto age. The internal combustion engine was
developed at first for boats and the Great Lake region was a natural place
for an industry manufacturing boat engines to emerge. There was already a
thriving carriage-making center, too. From those beginnings, Detroit soon
became the Motor City, home to the biggest new industry since the
invention of the mechanical loom. Even during wartime, the assembly lines
didn't slack off - instead, they sped up, working around the clock to
provide trucks, jeeps, tanks, to armies all over the world. War or peace,
everyone seemed to want more and more vehicles. How could you go wrong
buying property in the city that made them?

There were once dozens of automakers in Coventry, England, too. Now, there
are only a handful in the whole country and every one of them is
foreign-owned. America's automakers consolidated sooner in Detroit. They
are still operating and still in American hands, but probably not for
long.

We remember, in our own lifetimes, when the first funny-looking cars came
into the U.S. market from Germany and Japan. Cheap and stingy on fuel
consumption, the little autos gained a beachhead in the United States
during the oil crisis and inflation of the '70s. I bought a Honda Accord
in 1975. My father, a Pearl Harbor veteran, saw the thing and was
appalled. "Those people tried to kill me for three years," he said.

Congress wanted to protect the U.S. automakers in the worst possible way -
by placing a per-car tariff on imports. Both the Japanese and the Germans
responded by moving up-market so as to make more profit per car sold.
Soon, the foreign automakers were going head-to-head with America's big
luxury models too - and winning. And now, the motor city is sputtering
and threatening to conk out completely.

But investors are an arrogant and opportunistic lot. Some speculators look
upon Detroit and think they see an overturned liquor truck; they imagine
they should help themselves before the cops come. After all, cities have
good times and bad times. Detroit might be suffering nothing more than a
cyclical setback in the life of a great city. People thought Harley
Davidson was finished too...and look how it's come back. Now, it's worth
more than GM.

Let the U.S. auto industry go broke, say the optimists, as soon as
possible. Then, new, more vigorous entrepreneurs, without all GM's and
Ford's baggage, can climb into the drivers seat. And Mo'town will rock and
roll again.

If you believe that, you should get on a plane to Detroit now. Whole
skyscrapers change hands for less than the price of a 3-bedroom apartment
in Mayfair. The 65-story David Stott building, for example, is on the
market for $3.5 million. For less than a million you can buy a 12,000
square foot Italian renaissance-style mansion, complete with an intricate,
hand-carved walnut main staircase and imported wood paneling throughout.

"That may seem like a bargain," says a CNBC reporter, "considering the
1915 limestone house sits on over 2 acres and is just 3 miles from the
city center. But then again, this is Detroit, Michigan."

Speculators hope that Murder City might once again become Motor City. But
they should ask instead why it is that last year, as rental rates across
the United States rose an average of more than 6%, in Detroit, rents
couldn't even climb 1%.

Investors might do better to look at Liuzhou, China, where GM is producing
its new Wuling Sunshine mini-van. In 2002, China made a million cars and
trucks. By 2020, it's expected to produce 15 million units, more than the
United States. How can Detroit stage a comeback with that kind of
competition?

Instead, maybe, the city will join the ranks of the dead, along with
Ctesiphon, Mesa Verde, Persepolis, Kish, Harappa, Babylon, Sodom, and
Gomorrah. Soon, its apartments and mansions may sell for no more than
places in Mapungubwe, Tiahuanaco, Tyre, Nineveh, Troy, Golconda and
hundreds of other defunct metropolises.

Meanwhile, back in modern world, financial services is where the money is.
And London and New York is where the financial service industries are.
Is there any better game to be in? And is there a better place to be than
in the capital cities of this new, new money-shuffling commerce? Not in
2007. Business is booming. All over the world, companies are getting set
up, financed, bought out, refinanced, IPO'ed, taken private, merged,
acquired, re-IPOed and leveraged in more ways than you can count. It will
be a cold day in Hell when the Chinese can compete in this industry.

London and New York are on top of the world - just like Detroit once was.
Just like Kaifeng once was. Prices can only go up, right?

Bill Bonner
The Daily Reckoning