The Next Hurrah

And Now the Saudis

by emptywheel

Argentine meltdown, here we come. The Saudis are showing signs of disinterest in going down the economic tubes with their friend George.

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy. [my emphasis]

As Susie points out, one of the goals of the Iraq invasion was to punish Iraq for pegging its currency to the Euro, which made Saddam a pretty penny until BushCo came and took his country away. Iran had been threatening to switch its oil trade to its own currency exchange. The idea was that if we came in and 1) scared the shit out of anyone considering a Euro or non-dollar peg and 2) sat on some of the biggest undeveloped reserves, we would be able to sustain the dollar peg past the time when the world needed it for stability. Guess that didn't work out so well.

And now our closest "allies" look to be the ones who will precipitate the move away from the dollar peg for the oil market. That's going to give the rest of the world a whole lot less incentive to keep their reserves in dollars, which is going to mean we're no longer going to be able to float George Bush's debt with 2 billion dollars a day in loans from Asia.

The whole American economy is a gigantic house of cards at this point, and it may take nothing more than one slight breeze to bring it all down. Bernanke's interest cut may have been that breeze.

$1.40

by emptywheel

Atrios points out that the Euro has just pushed past $1.40.

Let's see. In the last two days, the Fed has cut interest rates by half a point, making what is probably a futile attempt to staunch the subprime crisis. And yesterday, Henry Paulson asked Congress to raise the debt limit before we once again hit our debt limit on October 1--which will make the fifth time Bush has had to ask his creditors to increase his credit card balance.

Is anyone surprised the dollar is at record lows? Good thing my brother-in-law's wife is having a baby in South Carolina, which means the Irish in-laws will visit the states more frequently. Because Europe is going to be much too expensive for people from banana republics like the Bush-era USA.

Update: Oh jeebus. As Lurcher points out, the Canadian dollar is hovering around parity with the US dollar.

Can We Really Afford Twenty More Years of Iraq?

By Mimikatz

Fred Kaplan has a good piece at Slate on the questions that Congress should ask General Petraeus and Ambassador Crocker when they report next week.  As Kevin Drum notes, towards the end Kaplan quotes military analyst Stephen Biddle (an adviser to the Administration):

Biddle also said (again, expressing his personal view) that the strategy in Iraq would require the presence of roughly 100,000 American troops for 20 years—and that, even so, it would be a "long-shot gamble."

"The strategy" being the bottom-up attempt to achieve reconciliation among factions like the reconciliation between the US and Sunni tribal leaders in Anbar.  Leaving aside all the questions Kaplan raises about why it may be not only harder but impossible to reconcile the Iraqi factions, is this "long-shot gamble" what the Democrats in Congress really want?  And can we afford it?

Meanwhile, the GAO Report says that nearly all benchmarks are failing to be met in Iraq and that the Administration's statistics claiming to show the opposite are bogus. And the report issued by a 20-member Commission headed by retired General Jones  says that our excessive footprint in Iraq is actually counterproductive to our stated aims and also says that any declines in Baghdad sectarian violence are probably the result of  ethnic cleansing.  General Jones also says we can begin withdrawing early next year.  And everyone agrees that we will have to start bringing home some troops next year  because we don't have the replacements for them.

And yet, our Democratic Congress appears ready to give the Bush/Cheney regime its demanded $200 billion Iraq Supplemental funding even though the Bush/Cheney regime can't get its request together in a timely way.  (via Atrios.)   They appear ready to abandon the plan to impose withdrawal timetables, all in a futile effort to get a few GOPers to join them.  But why?  With the public--virtually the entire known universe on their side, why are the Dems thinking so small?  Why aren't they making the GOP own and defend this unpopular war?

And over at the economy, the jobs report showed a net loss for the first time in 4 years, the Dow Jones average is down 200 points at this moment and the subprime mortgage mess threatens to morph into a recession, at least in several of the most populous parts of the country. As if this were not enough, the cumulative debt has gone over $ 9 trillion.   This is more than the current debt ceiling of $8.965 trillion, (raised 4 times already during the Bush/Cheney regime) but there are some items that are not subject to the limit, so the Treasury may still be able to  borrow money for a short while.

With all this factual firepower and with not only the approriations power but the leverage of the debt ceiling, why oh why can't the Democrats learn to stand strong and do what the public wants instead of capitulating to the Bush/Cheney regime at every turn?

Remember that Bankruptcy Bill We Passed...

by emptywheel

To bail out those poor, helpless little credit card companies? Well, it's time to revoke it:

As subprime borrowers began to default on their mortgages in rapidly growing numbers this year, credit card issuers increased their efforts to sign up such customers with tarnished financial histories, according to a market research firm.

Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006, according to Mintel International Group. Direct mail offers targeted at customers with the best credit fell more than 13 percent.

Yet, during this same period, defaults on subprime mortgages, which charge higher interest rates because the borrowers' blemished credit makes them bigger risks, rose significantly. In June, nearly 1 in 5 subprime mortgages were at least 60 days past due, and more than 1 in 20 were in foreclosure, according to First American LoanPerformance, a San Francisco firm that collects and analyzes mortgage data.

These are people already on the verge of bankruptcy. But credit card companies are targeting them selectively, luring them with yet another promise that they can get what they don't--and can't--pay for. And the credit card companies claim they're doing these borrowers a favor, giving the cash to ... what? Acquire tens of thousands of more debt?

The bankers running our house of cards economy just keep doubling down, it seems.

This Time, We'll Bail Out the S&Ls without a Congressional Debate

by emptywheel

The former econ professor notes that we're already bailing out big money:

Fed to the rescue.

Aug. 10 (Bloomberg) -- The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.

The Fed accepted only mortgage-backed debt as collateral for this morning's weekend repurchase agreement. Losses in U.S. subprime mortgage investments have been rippling through global credit markets, driving interest rates higher and sinking share prices. The Fed also added $24 billion yesterday, the most since April, as demand for cash increased.

The New York Fed's additions lowered the Federal funds rate to 5.375 percent, according to ICAP Plc, after it began trading at 6 percent, the highest opening rate since January 2001. The Fed's benchmark overnight rate is currently 5.25 percent.

Nothing wrong with putting money into the system to lower the federal funds rate, but this is bailing out investors in a certain kind of specific and troubled asset.[my emphasis]

I'll add just a few things to this: One, by bailing out investors without a Congressional debate, BushCo allows us to avoid any discussion about the practices that got us into this mess--and the implementation of efforts to make sure they don't happen again.

And two, one of the reasons we're jumping to giving welfare to big capital without the normal interim steps is because doing anything else--putting much more money in the system--is going to revive the word "stagflation" faster than you can spit.

Wonderful. We're going to relive the 80s fiscal crisis and the 70s fiscal crisis.

What Will You Give Up To Pay For Iraq?

By Mimikatz

Via the Boston Globe, the Congressional Budget Office is out with a new estimate on the costs of the Iraq War--over $1 trillion by the time we factor in the future costs of equipment replacement and caring for the wounded.  Recall that economic advisor Larry Lindsay was fired by Bush shortly before the war for saying that it would cost $200 billion, at a time when Paul Wolfowitz was promising Congress that the war would basically pay for itself. 

Of this amount, $500 billion has already been spent on day-to-day combat operations. 

The cost of the war in Iraq and other military operations has soared to the point where "we are now spending on these activities more than 10 percent of all the government's annually appropriated funds," said Robert A. Sunshine, the budget office's assistant director for budget analysis.    (snip)

In the coming years, the price tag will be substantially higher. Testifying before the House Budget Committee yesterday, Sunshine told lawmakers that he used two scenarios -- an optimistic one in which most US troops are withdrawn, and another in which a sizable contingent remains for several years -- to calculate anticipated costs.

If the United States gradually reduced its troop level in Iraq to 30,000 by 2010, the US Treasury would still have to provide up to $500 billion more to sustain those troops, as well as pay other expenses, he said in the report.

In the alternative scenario -- in which 75,000 US troops remain stationed in Iraq over the next five years -- the nation would have to pay an additional $900 billion, according to the analysis.

That would bring the total to $1.4 trillion.  Needless to say, Bush's escalation is also costing much more than advertised:

Representative James P. McGovern, a Worcester Democrat and a member of the budget panel, said that [deputy secretary of defense Gordon] England couldn't give a firm answer when asked how much the Pentagon needed to pay for Bush's decision to dispatch 30,000 more troops to secure Iraq earlier this year. England said the costs the Pentagon anticipated a few months ago for military operations in fiscal year 2008 -- about $142 billion -- will no longer be enough.

The military will need more money because of the "surge" and the purchase of hundreds of armored vehicles capable of withstanding the roadside bombs responsible for most of the US combat deaths. England said the Pentagon will provide a revised 2008 cost estimate in September.

Did you grasp that the war is now costing "more than 10 percent of all the government's annually appropriated funds" according to the aptly named Mr. Sunshine?  (This excludes programs such as Social Security that do not require annual appropriations.)   

One way or another we will all pay for Bush's folly, whether through higher taxes now or higher taxes later.  With compounding deficits, we simply will not be able to grow or even inflate ourselves out of this hole.  The costs of war, which will extend for at least another 10 years, longer if troops remain beyond 2010.  If the troops are not drawn down soon, and completely withdrawn soon thereafter, the war budget will dwarf every other program that the Dems may have in their plans.  The connection between massive spending on war and the shrinking of all other government programs is no accident, but rather part of the Bush/Cheney design.

Come September when the Pentagon makes its upwardly revised request for funds, when General Petraeus reports miracles on the battlefield and Ambassador Crocker reports that not only has there been no political progress but the largest Sunni bloc has left Parliament, and with the debt ceiling about to be hit, we shall see whether enough folks in Congress will be ready to put some limits on this interminable disaster to force a showdown.  More likely, they will just send us the bill.

Update:

Abu Aardvark has more on the withdrawal of the Sunni bloc from Maliki's cabinet, evidently, rather than from Parialment, and why it is serious.  This really isn't getting any better.

Update on the Debt Limit

So now it's official--Treasury Secretary Paulson says that the federal government will hit the current debt ceiling of $8.965 trillion in early October.  And he says Congress needs to act to raise the debt limit for the fifth time during Bush's presidency.  In September.  Right around the report from General Petraeus that will give Bush his marching orders on Iraq, and Congress will finally deal with the war funding issues, and right in the middle of the debates on the appropriation bills. 

The Herald Tribune notes that 

Economists doubt Congress will refuse to raise the limit. A federal default is considered unimaginable because it would rattle bond markets, force interest rates higher and shake the economy. (snip)

In the past, Treasury has resorted to numerous accounting maneuvers to pay its bills while the government waited for Congress to expand its borrowing authority. Paulson argued against being forced to use such measures, saying they "would create unnecessary uncertainty for the financial markets and result in costs to the government." Such actions, he said. "should be reserved only for extraordinary circumstances, and should be avoided."

But these are extraordinary times.  To many of us, we are already in a constitutional crisis, with an incompetent and mendacious Attorney General presiding over an overtly political Justice Demartment that serves the interests of the GOP and its patrons rather than the country as a whole; with a President and Vice President who consider themselves a unitary monarch and thumb their collective nose at the Congress; and a Congress that has so far mostly been afraid to see much less do its constitutional duty in this crisis.

So maybe the debt limit will become a factor in the war funding battle and the fight over the appropriations bills, at least eight of which (out of 12) Bush has already threatened to veto.  Clinton won the showdown with Newt Gingrich in 1995 because the public supported the programs that he wanted funded, and viewed Gingrich, who refused to pass a funding bill after Clinton's veto, thereby shutting down the government, as a Grinch.  Now it is Bush who is unpopular.  But does the public still support the kind of spending that the Dems champion?  Part of Bush's strategy has been to make government look so incompetent that it undermines public support for government programs, traditionally part of the Dems'  appeal.  But it is likely the public still supports funding security measures at the ports, higher education, children's health and the myriad of other programs included in the spending bills. 

Every confrontation actually weakens the Bush/Cheney regime, because it fractures the GOP coalition; this one is no exception.  The Dems need to play their full funding hand and play it well, and that includes not rolling over prematurely on raising the debt limit.  There are a great many things the Bush/Cheney regime can do on their own, but authorizing borrowing and spending are the two big things that they can't do alone.  Congress must get something tangible on the war in return for accommodating Bush/Cheney's fiscal needs. 

Globalization and Terror and More Obstruction at DOJ

by emptywheel

Kudos to Congressman Bill Delahunt. He seems to be on a lonely crusade to get the US Government to treat all kinds of terrorism the same. He has been criticizing DOJ for its sloppy treatment of the terrorist Luis Posada Carriles; DOJ botched its case of immigration violations and Posada effectively went free. And now Delahunt's leading a small group of Congressman pressuring DOJ to crack down on US corporate support of Columbian terrorist groups. The LAT provides two articles today on the reasons for concern. The first article outlines DOJ's obstruction and conflicts of interest on the Chiquita case; the second describes the other US companies alleged to be supporting terror in Columbia.

Chiquita and DOJ

Given all the stories about the conflicts of interest in the Bush DOJ, the Chiquita story is real cause for concern. Chiquita just settled with DOJ, agreeing to pay a $25 million fine over five years--not exactly a punishment that will dent its profits. Yet Chiquita first admitted paying off terrorists in 2000, and DOJ prosecutors were trying to bring charges in 2004. So how did Chiquita get off with a fine three years later? Well, political appointee David Nahmias (who is now the USA in Atlanta--though he was approved via the quaint Senate approval channel) intervened:

Slow, steady, sustainable

by emptypockets

A little over a year ago, I wrote a piece here called "So what's wrong with doubling the NSF budget anyway?," where I argued that plans to double the National Science Foundation's budget through Bush's American Competitiveness Initiative made for bad policy. I gave three reasons: first, I thought it was political posturing with no action behind it; second, I thought it was a "pro-science" front used to cover up lack of funding for NIH; and third, I said that Clinton's NIH budget doubling had shown that rapid, unsustainable funding bursts create boom-and-bust cycles that, in the long run, hurt science, and that sound policy calls for slow, steady, sustainable growth. That last item bears repeating and, fortunately, a column on Science magazine's web site last week makes the point again for me:

Between 1998 and 2003, the budget of the National Institutes of Health (NIH) rose from $13 billion to more than $27 billion in a plan known as "the doubling." Now that the tsunami of cash has receded, many life scientists--especially those in the early phase of their careers--have found conditions no better, and in some ways worse, than before the process began. [...]

The NIH doubling did do a lot of good, providing billions of dollars for basic and clinical research and establishing a new, much higher baseline for funding. Still, "both the way Congress has expanded the NIH budget and the way NIH has made use of its new funds offer important cautionary lessons," writes Yuval Levin, a former associate director of the White House Domestic Policy Council, in an article in The New Atlantis. He writes that the infusion of money was "far too rapid, and not adequately tied to structural reforms that might enable NIH to best make use of its growing resources." Fifteen percent hikes for each of 5 years "built expectations and momentum that set the agency up for disappointment when the doubling was done," he writes.

The Science column links to a study by Paula Stephan, an economist at Georgia State University (PDF of PowerPoint slides) that puts some numbers on exactly how the doubling affected young scientists. I'll post some of the key charts below, but the bottom line is essentially what I'd noticed as I watch post-docs go out looking for jobs and young faculty starting up their labs. The NIH budget doubled for five years, then was cut or held flat for five years. The first phase created a lot of new lab space that was filled by scientists who now can't get grant money to fund their young labs. We're left with a decade's worth of graduate students and post-docs who see academic science as an unstable career path.

The solution? Congress should put aside politically symbolic budget doublings and pass legislation that commits to a couple of decades of slow, steady, sustainable increases in NIH funding at levels slightly higher than inflation.

Loonies and BRICs

by emptywheel

As most of you know, I live in SE Michigan, night clubs drive distance (if that's your thing) from Canada. I didn't go to my favorite Canadian ultimate tournament this year, so haven't been in Canada for a while. So I was pretty darn shocked to hear this news:

The Canadian dollar breached 94 U.S. cents for the first time in 30 years on Friday and analysts are speculating it will be worth as much as the struggling U.S. greenback by year end.

Known as the loonie because of the loon pictured on the one-dollar coin, the Canadian dollar closed at 94.22 cents in Friday trading — the highest it has been since July 1977.

It hit an all-time low of 61.79 cents on Jan. 21, 2002.

The latest surge comes after CIBC World Markets economists predicted the Canadian dollar will be worth as much as the greenback by the end of the year. That last happened in November 1976.

The Canadian dollar--the Loonie--has long been a kind of vacation time bonus for Americans. No longer, I guess. I'll actually have to pay my way the next trip I make through Canada.

And then there's this news (via Chris at AmericaBlog):