Today's Stories

March 26, 2009

Paul Craig Roberts
Is the Bail Out Breeding a Bigger Crisis?

March 25, 2009

Robin Blackburn
Media Revolution or Mirage?

Conn Hallinan
Europe in Crisis

David Rosen
Sexting: a First Amendment Challenge for Obama

Jonathan Cook
Turkey's Fallout with Israel Deals Blow to Settlers

Dean Baker
Billions More for Failed Banks

Ron Jacobs
Karzai on a String

Russell Mokhiber
Corporate Liberals vs. Single-Payer

David Macaray
Slice and Dice on Card Check

Dave Lindorff
Geithner's Power Grab

Sarah Knopp
LA Teacher's Sit-In Over Layoffs

Website of the Day
How to Create an Animal Rights "Terrorist"

March 24, 2009

Robert Sandels
Obama and Cuba: Real Change or Minor Tweaks?

Harvey Wasserman
People Died at Three Mile Island

Franklin Lamb
Who Tried to Kill Palestinian Ambassador Abass Zaki and Why?

Michael Donnelly
Obama's Team of Losers

Norman Solomon
Denial and Evasion on Afghanistan

Elizabeth Schulte
The Stark Facts About Violence Against Women

John Goekler
The Most Dangerous Person in the World?

Nicole Colson
Is Justice Finally in Sight for Sami Al-Arian?

Global Balkans
NATO's 78-Day Bombing of Yugoslavia: Ten Years On

William S. Lind
Cat-and-Mouse Off Hainan Island

Website of the Day
Video: IDF Fired on Medics in Gaza

March 23, 2009

M. Shahid Alam
Capitalism From the Standpoint of Its Victims

Uri Avnery
Israel's Most Revolting Law?

Mike Whitney
Zombie Economics: Judgment Day for Geithner

Ralph Nader
Bush the Teacher

Brian Cloughley
Tilting at Afghan Windmills

Dave Lindorff
Toxic Bailouts

Amira Hass
The Rules of Engagement in Gaza: Open Fire on Rescuers

Chris Irwin
When Nonprofit Groups Go Bad

Binoy Kampmark
The Celebrity of Celebrity

Michael Dickinson
Tollbridge Over Troubled Waters

Website of the Day
State of the Birds

March 20-22, 2009

Alexander Cockburn
On the Edge of the Volcano

Paul Craig Roberts
When Things Fall Apart

P. Sainath
Slumdogs vs. Billionaires

Robert Weissman
Lessons From AIG

Saul Landau
Sliding Down in Anger: If We Bail Out the Banks, Why Shouldn't We Own Them?

David Michael Green
Obama and the Altar of Greed

Greg Moses
Winter Soldiers Come to Texas

Ron Jacobs
Pakistan in Turmoil: an Interview with Farooq Tariq

Michael D. Yates
A Nation of Immigrants

John V. Whitbeck
Happy New Year, Iran!

Andy Worthington
The Case of Ahmed Zuhair

Linn Washington Jr.
Supreme Test: the Latest Twist in the Mumia Case

David Ker Thomson
Actions: Things to Do Instead of Hailing the Chief

Laurent Jacque
Is the Euro Doomed?

Rannie Amiri
The Middle East's Jittery Monarchies

Reiko Redmonde /
Larry Everest
The Cold-Blooded Murder of Oscar Grant

David Macaray
The Myth of the Powerful Teachers' Union

Kenneth Couesbouc
Where has the Consumption Gone?

Martha Rosenberg
Meltdown in the Drug Industry

Alan Farago
The Recession, the Developers and Baseball

Missy Beattie
Still Waiting for Change

Richard Rhames
Invisible But Not Completely Insolvent

Stephen Martin
Barack and the Jets

Charles R. Larson
Impeach Obama!

David Yearsley
On Bach's Birthday

Lorenzo Wolff
Manic Levity

Poets' Basement
Three Poems by Gary Corseri

Website of the Weekend
Teachers for CEO Merit Pay!

March 19, 2009

Dave Marsh
Sir Bono: the Knight Who Fled From His Own Debate

Paul Craig Roberts
Was the Bailout Itself a Scam?

Mike Whitney
Why Business is Hysterical About Card Check (And Why America Needs It)

Sam Smith
The Economy in Two Eras of Democrats

Harvey Wasserman
The Crash of France's Nuclear Poster Child

Binoy Kampmark
Back Into NATO: the End of French Exceptionalism

Kathy Sanborn
Broken Culture: the Desecration of Iraq's Art Treasures

Christopher Brauchli
Taxing Problems

George Wuerthner
Permanent Damage From Temporary Logging Roads

Diann Rust-Tierney
New Mexico Abolishes the Death Penalty

Website of the Day
Bailout Plan: "Cross Your Fingers and Hope"

March 18, 2009

Michael Hudson
The Real AIG Conspiracy

Paul Craig Roberts
Israel's American Chattel

Nelson P. Valdés
Why Obama's New Cuba Rules Violate the Constitution

Jonathan Cook
Bedouin Villages Left in the Dark Ages

John Ross
The Death of the American Newspaper

Yifat Susskind
Where Are We Leaving Iraqi Women?

Dave Lindorff
Who's Calling the Shots Now?

Frances Moore Lappé
The City That Ended Hunger

Richard Grossman
Beware the Madoff Diversion!

Rev. William E. Alberts
On Being Whole Not Holy

Website of the Day
Three Weeks in Cuba: a Painter's Perspective

March 17, 2009

Michael Hudson
Mr. Bernanke Spreads the Fire

James G. Abourezk
Show Business: AIG and the Posturing Democrats

Harry Browne
Ireland's Blast From the Past

Joanne Mariner
U.S. Human Rights Abuses in the War on Terror

Alan Farago
The National Ponzi Scheme

Dean Baker
Getting Lehman Bros. Wrong ... Again

Peter Morici
Cuts for Autoworkers, Bonuses for Derivatives Traders

Bill and Kathleen Christison
Obama and the Empire

Richard Gott
Victory for the Left in El Salvador

Walter Brasch
Dog Mutilations vs. Cosmetics

Website of the Day
Single-Payer Action

March 16, 2009

Pam Martens
Has a Comedian Just Saved America?

Uri Avnery
The Rape of Washington

Mike Whitney
Bernanke's Witness Protection Program

Ralph Nader
Americans Want Justice for Wall Street Crooks

Nikolas Kozloff
Down But Not Out: the Latin American Right

John Walsh
Redbaiting on the Left

Ron Jacobs
A Call for Common Sense

Binoy Kampmark
The Case of Tim K

Stephen Fleischman
Coxey's Army Will March Again!

Christian Christensen
A 25-Year Misunderstanding: Springsteen's "Born in the USA"

Scott Handleman
Shooting Tristan Anderson

Website of the Day
Clean, Green, Sustainable

March 13 / 15, 2009

Alexander Cockburn
The Parable of the Shopping Mall

Peter Lee
What the Chas Freeman Fight Was Really About

Diana Johnstone
NATO's Global Mission Creep

David Harvey
Is This Really the End of Neoliberalism?

Petrino DiLeo
Inside Obama's Housing Plan: Will Millions be Left Out in the Cold

David Ker Thomson
Tender to the Earth

Eric Ruder
Massacre in Slow Motion: an Interview with Haider Eid on Gaza

Fred Gardner
Cannabidiol Now!

David Yearsley
Music Torture

Saul Landau
How Israel Gives Jews a Bad Name

Laura Carlsen
Drug War Doublespeak

Robert Weissman
We Told You So

John Goekler /
Merle Lefkoff
The Struggle in Saffron

Tom Barry
Imprisoning Immigrants for Profit

Kathy Sanborn
Money Out of Thin Air

Chris Mobley / Leela Yellesetty
Criminalizing Poverty: the Jail Seattle Doesn't Need

David Michael Green
The Perils of Being Right and Wrong

Alan Maass /
Lee Sustar
A Socialist Moment?

Christopher Brauchli
Pity, the Poor Tax Collectors

Richard Morse
Clinton in Haiti

Lorenzo Wolff
Taking It From the Streets: From Springsteen to the Wu-Tang Clan

Poets' Basement
Springate and Johnston

Website of the Weekend
Hear the Buffalo

March 12 , 2009

Sharon Smith
Bottom Feeders at the Trough

Christopher Ketcham
Full Spectrum Penetration: Israeli Spying in the United States

Mike Whitney
Haircut Time for Bondholders

Ray McGovern
Obama Caves to the Lobby

Eric Toussaint /
Damien Millet
The Doublespeak of a Discredited IMF

John Ross
The War is Not Over

M. Reza Pirbhai
Men in Black: Another View of Pakistan

Chris Floyd
Lost Liberty Blues: Prisons, Profits and the Banality of Evil

Steve Early
Why Labor Doesn't Need a "House of Lords"

Quentin Gee
Hiding the Costs of Coal

Website of the Day
Amadee Coral Reef: a Spherical Panorama

March 11 , 2009

Mike Roselle
From Birmingham to Coal River: Why is the Environmental Movement So Timid?

Paul Craig Roberts
The Criminal Injustice System

Henry A. Giroux
Academic Labor in Dark Times

Nikolas Kozloff
The Death Cries of the Salvadoran Right

Norm Kent
I am Patient Number 380206011

Mitu Sengupta
Reforming the World Bank: Different Image, Same Tune?

Ludwig Watzal
The Structure of Israel's Occupation

David Macaray
The Battle Over EFCA Has Begun

William S. Lind
Rounding Up the Usual Suspects

Martha Rosenberg
A Merger From the Folks Who Brought You Vytorin

Website of the Day
American Indicator: One in Fifty Kids are Homeless

March 10 , 2009

Franklin Spinney
What Israeli Peace Process?

Vijay Prashad
What Did Hillary Clinton Do?

Stan Cox
There's No Free Lunch on Your Browser: the Internet's Energy Drain

Zoltan Grossman
Coffee Strong: Listening to the G.I. Voice at Fort Lewis

Reuven Kaminer
Pure and Unadulterated Racism

Jonathan Cook
Memoricide in the West Bank

Dave Lindorff
Business Rules

Brian McKenna
How Anthropology Disparages Journalism

Harvey Wasserman
Is This the End of the Age of the Automobile?

Corey Pein
He Told You So

Website of the Day
AIG and Systemic Failure: $1.6 Trillion in Insured Deriviatives

March 9 , 2009

Pam Martens
Madoff and the Sorkin Affair

Ralph Nader
Too Big...Period

Peter Lee
Meet Gulbuddin Hekmatyar: the US's Worst/Best Hope for Afghanistan?

Mike Whitney
Geithner's Charade

Peter Morici
Fixing the Banks: Treasury's Doomed Strategy

Dean Baker
Why Do We Need a Private Health Insurance Industry, Anyway?

Steve Ault
Kiss Thailand's Tolerance for Gays Goodbye

Stephen Lendman
Guantánamo Under Obama

Farooq Sulehria
Tennis Without Spectators

Belén Fernández
Chávez, a Cockfight and the Caracazo

Website of the Day
How Lincoln Learned to Read

March 6-8 , 2009

Alexander Cockburn
Harlots High and Low

Chris Floyd
Tangled Up in Karl

Uri Avnery
Remember Ophira?

Dave Lindorff
Kiss the Banks Goodbye

Mark Weisbrot
The Crisis vs. the Dogma

David Ker Thomson
Against Work

Phil Aliff
Soldier Suicides

Rebekah Ward
Georgia Injustice: Another Young Life Wrecked

Tracey Briggs
How Capitalism Feels in the Head

Dean Baker
Depression Nostalgia?

Daniel P. Wirt, M.D.
Remove the Handle From the Health Insurance Misery and Death Pump

Carl Finamore
The Recovery Plan: Save Us From Those Who Would Save Us

Wajahat Ali
The Pakistani Monster

David Michael Green
Smart is the New Stupid

David Macaray
The Minimum Wage Revisited

Michael Dickinson
On Financial Fools Day

Susie Day
Line in the Sand

Bob Sommer
Echoes of the Townhouse Explosion

Ben Sonnenberg
No Forgiveness for the Bourgeoisie: Buñuel's "The Exterminating Angel"

David Yearsley
Sonic Fakery in "Slumdog" From the Mozart of Chennai

DC Larson
They're Writing Those Depression Songs, Again

Lorenzo Wolff
Live Truth: Music Sans Headphones

Poets' Basement
Dominquez, MacNeil and Buknatski

Website of the Weekend
The Environment & Obama: a Conversation with Jeffrey St. Clair

March 5 , 2009

James G. Abourezk
This Time It's Mrs. Clinton's Turn

Kathleen and Bill Christison
U.S. Military Aid to Israel

Robert Weissman
Wall Street's Best Investment: Paying for Public Policy

Patrick Cockburn
My Day at the Terror "Charity"

William Blum
Being Serious About Torture...Or Not

Robert Fantina
From Iraq to Afghanistan: Augmentation All Over Again

Saul Landau
The Unseen Crisis

Benjamin Dangl
Striking a Blow Against the Beer Cartel: a Grassroots Victory in Utah

Christopher Brauchli
The New Leaders of the GOP

Website of the Day
The Angola 3: 36 Years of Solitude

March 4, 2009

Marjorie Cohn
Blueprints for a Police State

Mike Whitney
Blowing Up the Economy: How Securitization Lit the Fuse

Ron Jacobs
The Banality of Occupation: the Rand Papers

Ashley Smith
War by Another Name

Joanne Mariner
Obama's War on Terror

Dan Bacher
The California Water Wars: Why It's Not a Conflict Between Fish and People

Mark Engler
Will the Winds of Change Reach El Salvador?

Franklin Lamb
"What's Hezbollah Done for Us Lately?"

Cal Winslow
Slugging It Out in California

David Mandelzys
Apartheid Week

Website of the Day
Guantánamo: the Definitive Prisoner List

March 3, 2009

Conn Hallinan
Ethnic Cleansing and Israel

Fawzia Afzal-Khan
The Long, Dark Night of Pakistan

Brian M. Downing
The Changing Game in Afghanistan

Robert Larson
External Damnation: Companies are Designed for Destruction

Daniel P. Wirt, MD
Single-Payer Health Reform

Russell Mokhiber
Burn Your Health Insurance Bill!

William Loren Katz
Obama, One Ape and Two Newspapers

Kathy Sanborn
The Lazy Man's Guide to the Economic Crisis

Pauline Imbach
A New Start for the World Social Forum?

Christopher Ketcham
The Best Journalism You'll Write is Priceless

Website of the Day
The Surveillance Self-Defense Project

March 2, 2009

Andrea Peacock
A Poisoned Town's Shot at Justice

Paul Craig Roberts
Obama's Budget

Peter Lee
Pakistan Lurches Toward the Abyss

John Blair
Locking Down Big Coal

Peter Morici
Treasury's Flawed Plan for Citigroup

Uri Avnery
10 Ways to Kill Fatah

Michael Donnelly
Resistance to the War on the Wild

Fred Gardner
The Judge Who Ruled Marijuana is Medicine

Sonia Nettnin
Middle East Medical Mission Heroes

Andrew Lehman
A New Deal for the Web

Website of the Day
Pentagon Papers II?

Eric Holder and the Whitewashing of Racism

Tom Barry
Napolitano's Hard Line

Harvey Wasserman
Obama's Excellent Atomic Omission

Adam Turl
The Enemies of Unions and the Lies They Tell

David Macaray
When People are Fired Illegally

James McEnteer
Rush to the Rescue: Limbaugh's Secret Plan to Save the Economy

Website of the Day
The Carbon Casino

March 26, 2009

Three Bad Assumptions

Why the Geithner Plan Will Fail

By PATRICK MADDEN

This week the Obama administration released the details of its plan to stimulate the flow of credit and reduce the cost of borrowing by subsidizing the purchase of mortgage and other debt-backed securities, the market for which has completely dried up since the onset of the crisis.  The plan is designed to encourage so-called public-private-partnerships (PPPs) between private investors and the US government, in an arrangement in which the US Treasury will put up billions in low-interest, nearly risk free loans to private investors willing to purchase the toxic assets- now politely dubbed ‘legacy assets’ by the administration- that have been straining the balance sheets of the banks that hold them.  The idea is that if investors can be enticed into buying these debt instruments, then the banks will be able to move them off of their balance sheets and thus be able to begin issuing new loans to consumers, in turn helping to stimulate the debt-fueled demand that has fallen off sharply since the bursting of the housing bubble and the collapse of the ‘originate-and-distribute’ model of debt creation. 

After Treasury Secretary Tim Geithner divulged the details of the plan on the morning of 23 March, the markets responded by surging upwards, with banks leading the way: the S&P Financial index gained an impressive 19%, driving overall gains of 7% in the broader S&P 500.   Optimists began suggesting that the ‘bottom’ is in sight, perhaps marking a turning point in a global recession in which 50 trillion in global wealth has faded into oblivion , stock markets have plumbed lows not seen in a decade, and global unemployment has skyrocketed.

Yet the terms of the arrangements are suggestive of the enormity of the problem.  In order to entice private investors to buy these securities, the government is taking on almost all of the risk of the venture and loaning up to 97% of the purchase price of the securities to investors.  In order to provide such an incentive the US Treasury will put up nearly $100 billion of its own funds from the Troubled Asset Relief Program (TARP) and use its leverage from the Fed and the FDIC to borrow up to $900 billion which it will loan out to potential investors.  The New York Times described the arrangement:

[The] crucial incentive for investors — traditional fund managers, hedge funds, private equity funds, pension funds and possibly even banks — is that the government would lend as much as 85 percent of the purchase price for each portfolio of mortgages….On top of that, the Treasury would invest one dollar of taxpayer money for every dollar of private equity capital to cover the remaining 15 percent of the portfolio’s purchase price….The biggest inducement in all the programs is the government’s willingness to provide “nonrecourse” loans to institutions that buy up the unwanted assets. A nonrecourse loan is secured only by the underlying home or building….If the borrower defaults, the government would only be able to seize the real estate. If the mortgages or the securities generate bigger losses than expected, the government and not the private investors would have to absorb the brunt of those losses.

The money generated from the TARP-backed plan could result in up to $1 trillion being handed over to investors- yet this is not all.  The Troubled Asset-backed Loan Facility (TALF), will also create close to $1 trillion in loans for roughly the same purpose as the TARP fund.

How are we to explain the administration’s willingness to have the US taxpayer shoulder the risk of the TALF and TARP plans while at the same time exposing the dollar to immense inflationary pressures and potential devaluation?  Amidst the recent AIG bonus scandal public outrage has been directed at the crony-capitalism of the Fed-Treasury-Wall Street nexus exemplified by figures like Geithner, whose conflicts of interest and ties to big Wall Street firms compromise their ability to make good policy decisions.  Indeed, as David Harvey recently wrote on this site, the class-warfare dimension of the current crisis should not go un-noticed.  The current plan will no doubt continue the trend in the redistribution of wealth toward the wealthy.  We should supplement this analysis of the class-warfare dimension of the crisis with one that explains why the plan will fail, even on its own terms.

Geithner’s wager is based on three erroneous assumptions.  First, that hidden in that titanic morass of debt backed securities is value.  Second, that the fundamentals of the US economy are essentially sound.  And third, that the foreign governments that buy up our debt will continue to do so regardless of the fiscal and monetary profligacy of the Obama administration and the huge global imbalances that have been growing for half a generation.  There are significant problems with each of these assumptions, and I will deal with them in turn.
The Geithner plan assumes that the debt-securities and credit-derivatives bogging down the banks’ balance sheets are not being purchased because their values are unknown; thus, for obvious reasons, investors are loth to take on the risk these assets conceal.  Nobody knows if the low prices of these securities simply reflect an unduly large risk premium, or, alternatively, if the low prices are an indication of the underlying toxicity of the asset.  A recent Financial Times article describes the problem:

The scheme should clarify the degree to which current depressed prices of traded securities reflect a liquidity risk premium - absence of financing - as opposed to expected credit losses, and may lead to a new, higher price level being established…."We are trying to tease out the liquidity premium," said Sheila Bair, chairman of the FDIC. The plan could reveal that the liquidity risk premium was large - as Ms Bair expects. Or it could show that the premium was not that big and expected losses are very large.

Currently, the banks are caught between a rock and a hard place, as selling off their debt-securities at current prices would entail even more losses, while not selling them off will inevitably lead to future write-downs and the prolonging of the credit crisis. Geithner’s hope is that the huge incentives and cheap financing provided by the government will restart the market for these troubled assets, raising their prices and lowering their risk premiums. 

Yet it is far from clear that the Geithner plan will be able to square this circle, as the market forces driving down prices and pushing up risk premiums may be too strong to overcome.  Again, the New York Times:

Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.…The result has been a paralyzing impasse. Banks, unwilling to sell their loans at fire-sale prices, have had less capital available to make new loans. Mortgage investors, unable to leverage their investments with borrowed money, have been unwilling to pay more than fire-sale prices.

Even if the Geithner plan is able to attract investors, a further very serious problem remains: the size and scope of the plan.  According to the Financial Times, even a $1 trillion plan will remove only a portion of the debt-backed securities from the banks’ books.  The IMF has estimated that US bank losses on bad assets will reach $2.2 trillion, while Nouriel Rubini has revised his estimate upward to $3.6 trillion.

The upshot is that the current plan may be able to cover only a fraction of the assets that the banks stand to lose.  The hope is that once the government plan jump-starts the market for these securities the engine of debt-creation and speculation on debt-derivatives will start turning over, in turn stimulating credit-driven demand thus pulling the US and the rest of the globe out of the recession.  This will probably prove to be wishful thinking, as the problem facing the global economy runs deeper than the ‘financial sector.’

In order for the Geithner plan to work it would have to be the case that the current crisis is confined to the banking and financial sector and that the rest of the economy is fundamentally sound.  Assuming this, the only problem is to revive the credit markets so that banks can start lending, investors start buying banks’ debt-securities, and American consumers get back to the old routine of buying cheap foreign goods with the credit that they need to supplement their stagnating incomes.  But this assumption makes the error of completely overlooking the very deep-rooted problems that lie at the heart of the global capitalist system.  In a recent interview with the Asia Pacific Journal, economic historian Robert Brenner spelled out the problem, stressing that the system wide overcapacity in the global manufacturing sector has led to a declining rate of profit, slow growth in investment in plant and equipment, stagnating wage growth, and finally the expansion of huge bubbles in equities and housing.  As Brenner puts it:

It’s understandable that analysts of the crisis have made the meltdown in banking and the securities markets their point of departure….From Treasury Secretary Paulson and Fed Chair Bernanke on down, they argue that the crisis can be explained simply in terms of problems in the financial sector….[They] assert that the underlying real economy is strong, the so-called fundamentals in good shape. This could not be more misleading. The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., Western Europe, and Japan has steadily deteriorated, business cycle by business cycle, in terms of every standard macroeconomic indicator -- GDP, investment, real wages, and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was -- by far -- the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in U.S. peacetime history.

Under the Clinton administration the US turned to a policy of low interest rates and easy money policies that allowed consumers to take on unprecedented debts, driving up asset prices and increasing the ‘paper-wealth’ of holders of securities and owners of homes. The bubbles of the last ten years must be seen as a direct result of the overproduction that has plagued the manufacturing sector since the beginning of the ‘long downturn’ in 1973.  By 1995, with the Reverse Plaza Accord agreements, the US effectively ceded the field in manufacturing to Japan, Germany, smaller Asian countries, and eventually China.  

The US agreed to maintain a high-dollar policy and an ever-growing current account balance, which it financed by issuing credit instruments to its creditor countries: this is why China now holds close to $2 trillion in dollar denominated reserves.

As long as the US’s creditor nations continued to accept credit instruments (government and corporate bonds, etc.), and hold these in dollar denominated reserves, it is conceivable that the colossal imbalances of the global capitalist system could be maintained.  This, however, is looking increasingly less likely.  Recently, China has begun questioning the stability of the dollar.  Here is Chinese premier Wen Jaibo, from a recent Financial Times article.  ‘"We have lent a huge amount of money to the United States"…."Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the US to maintain its good credit, to honour its promises and to guarantee the safety of China’s assets."’   And in a recent essay Zhou Xiaochuan, governor of the People’s Bank of China, expressed his concern over ‘the potential inflationary risk of the US Federal Reserve printing money,’ going so far as to call for a new reserve currency.   Clearly the Chinese state is not interested in financing the US current account gap indefinitely.

Geithner’s plan to pump trillions into the markets will only exacerbate the problem of international faith in the stability of the dollar.  In order to finance the purchase of the debt-backed securities, the Fed has to finance these purchases.  How does it do this?  A recent article by Stanford economist John Taylor explains: 

The Fed can borrow the funds, or it can ask the Treasury to borrow the funds, or it can do it the old-fashioned way: create money. The Fed creates money in part by printing it but mostly by crediting banks with deposits at the Fed. Those deposits are called reserve balances and are the key component - along with currency - of base money or central bank money which ultimately brings about changes in broader money supply measures….These deposits or reserves have been exploding as the Fed has made loans and purchased securities. Six months ago reserves were $8bn, in a range appropriate for its interest rate target at the time. As of last week, reserves were nearly 100 times larger at $778bn, the result of creating money to finance loans to banks, investment banks, AIG, central banks and purchases of private securities….With last week's dramatic announcement, the Fed will have to increase reserves…to $3,365bn by the end of the year if the securities purchases are financed by money creation.

The coming year will witness three interrelated pressures put on the dollar.  The first will be the current account gap, the second the enormous expansion of the money supply that will result from the bailout plan, and the third are the gargantuan budget deficits projected by the Obama administration- already estimated at $1.75 trillion for 2009.

The Geithner plan assumes that the toxic assets that the banks hold can be detoxified to re-start lending; it assumes that there is no problem with the fundamentals of the global economy; and it assumes that China and the rest of the world will have the patience and the political will to allow the US to print money at astonishing rates in order to keep the system afloat.  Maybe this is not impossible, but it is extremely unlikely.

Patrick Madden is a PhD student at the University of California at Santa Cruz. He can be reached at:  patrickjmadden@hotmail.com

Notes.

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