A New Administration, Tired Old Policies

In Part I of his year-end analysis, money manager and market strategist Jeremy Grantham assessed the global economic crisis:

"Greed + Incompetence + A Belief in Market Efficiency = Disaster. Greed and reckless overconfidence on the part of almost everyone caused (risk avoidance) to a degree that is probably unparalleled in breath and depth in American history." The aftershocks hit everywhere. Tremors continue. No safe harbors exist. Buckle up. Turbulence and convulsions are ahead. Grantham is worried and angry.

The current disaster could have been avoided by moving early against asset bubbles. We didn't, so it will "be devilishly hard" to fix things. "We are deep in the pickle jar, and it seems likely that, in terms of economic pain, 2009 will be the worst year (ever) in the lives" of most everyone.

Blame it on failed leadership, including under Greenspan and Bernanke at the Fed. Neither thought bubbles existed even though Bernanke is a Great Depression scholar. What did he learn?

On January 3, Michael Lewis and David Einhorn addressed "The End of the Financial World as We Know It" in the New York Times and said Americans are viewed around the world as "financial lunatics." It goes beyond greed. People who matter:

-- sacrificed "long-term interests for short-term gains;"

-- the "tyranny of the short-term" took over;

-- players unwilling to go along risked being fired;

-- credit agencies risked loosing customers;

-- investors missed losing market gains and failing to keep up with their peers;

-- the SEC was nowhere in sight; and

-- neither was the media, but The Times writers failed to say it. Neither did they indict the Bush administration for its criminal complicity. They continued:

"....here's the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing (that works) has been done (to reverse) bad incentives that (got) us here in the first place."

Here's the record. "In the past year, there have been at least seven different bailouts, and six different strategies." Nothing is working. Failure begot more failure. Promises were made and broken. Billions were given away and lost. "If you want banks to make prudent loans," don't reward them for bad ones. As it's turned out, Wall Street took the money and ran, and the financial world as we know it is collapsing.

Grantham assesses losses so far with lots more coming ahead in his judgment:

-- US equity "write-downs of 50%;"

-- housing around 35%; and

-- commercial real estate 35 - 40% for a total of around $20 trillion of lost wealth in a "$13 trillion" economy, given its decline from around $14 trillion through end of Q 3 2008.

The current debt level is so excessive that Grantham says that $10 - $15 trillion more "will have to disappear." How is the question. There's no easy cure at a time when biting the bullet may be a "grenade." Grantham is supremely unimpressed with Obama's economic team - the same "Rubinesque retreads, yes men, none of whom (saw) the most obvious bubbles in the history of finance; a spineless group" overall.

"There was plenty of intelligence, just not too much wisdom," and not a whisleblower in the bunch to point out the "spiraling Ponzi scheme that our leveraged financial system had become."

Even worse, 2008 "capped in incompetence what will be remembered as the most incompetent eight years of government in modern times, and a contender even" including ancient ones. We "tore up the social contract;" rigged the tax code for the rich; handed the nation's wealth to the super-rich, and, in the process wrecked the economy and "took some giant steps toward ruining the planet" besides. "If you ended the year without becoming disillusioned, you were not paying attention."

Looking ahead, few rays of light are in sight with Grantham expecting S & P values to hit 600 or below before he's ready to signal an all-clear. And knowing how hugely markets over-correct, even that level may be high given the world's greatest ever economic crisis and an administration so far proposing tired old policies in new wrapping.

The "Immoral Hazard" of Multiple Imploding Bubbles

In a spring 2008 analysis, Grantham spoke out about "immoral hazard." More recently, Pimco's managing director, Bill Gross, called America a "Bailout Nation (in) our Ponzi-style economy." Economist Michael Hudson didn't expect American capitalism to become a "kleptocracy" with "handouts" to fraudsters, and financial writer Ellen Brown got right to the point explaining "the collapse of a 300 year Ponzi scheme. All the king's men cannot put the private banking system together again, for the simple reason that (it) reached its mathematical limits."

It needs new borrowers, but doesn't have them. The racket has gone on for 300 years "ever since the founding of the Bank of England in 1694." The world now is "mired in debt to the bankers private money monopoly." The dirty game is exhausted. "The parasite has finally run out of its food source."

Michael Hudson agrees and said "The economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but (at) the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored." Bailouts throw good money after bad and postpone a later reckoning. Yet Obama pledges more plus loads of fiscal stimulus. The question is who'll benefit, who won't, and who'll end up worse off ever than before. More on that below.

Decades of Sound Money Debasing

On January 17, James Turk addressed it in his article titled: "The Fed's blueprint for market intervention" and began with its longest serving chairman, William McChesney Martin (April 1951 under Eisenhower - January 1970 under Nixon). Turk discovered a "1961 (previously) Top Secret Fed Reserve Gold Exchange Report" writer/researcher Elaine Supkis posted on her blog site.

It's from Martin's Missouri Historical Society papers with a copy at the St. Louis Federal Reserve Bank. He's remembered for having said it's the Fed's job "to take away the punch bowl just as the party gets going" to prevent the kind of situation we're in now. According to this document, other things apparently took precedence.

Under his tenure, the dollar went from being "good as gold to a perennially inflated fiat currency backed by nothing (more than) government promises." For nearly 19 years, US gold reserves declined by nearly half - from 633.2 million ounces to 339.5 million ounces and led to Nixon's August 15, 1971 closing of the "gold window." It ended the last link between gold and the dollar and along with it sound money. Also under McChesney, M3 (the broadest measure of total dollar currency) soared more than three-fold - from $190 billion to $616.1 billion.

By the early 1960s, dollar debasing was policy in contravention to Bretton Woods. Martin, like later Fed chairmen, was to blame, and as a consequence, gold reserves kept declining. As Grantham observed above, bad policy = disaster, so world economies are now reeling from one hodgepodge fix after another trying to head off the inevitable.

A View from the UK

On January 24, the UK Daily Mail's Glen Owen revealed that last October 10 British "banks were just three hours from collapse." City Minister Paul Myners disclosed that "the country was very close to a complete banking collapse after major depositors attempted to withdraw their money en masse."

The Treasury was preparing for the worst. "Only frantic behind-the-scenes efforts averted financial meltdown." If it failed, the entire system would have been nationalized. Shareholders would have lost everything, but that possibility may resurface.

Arbuthnot Banking Group economic advisor Ruth Lea said "We are not out of the woods yet" given the fragility of the system, and if conditions keep weakening the government will have no choice but to intervene and "nationalise the entire financial system."

On January 26, The Daily Telegraph's Ambrose Evans-Pritchard headlined his article: "Bad news: we're back to 1931. Good news: it's not 1933 yet." His evidence....take your pick:

-- contracting world economies;

-- huge job losses globally;

-- "the collapse of global trade....setting off another stage of the crisis;" export-dependent Japan had a 35% drop in December; China is sinking fast;

-- "Citigroup and Bank of America have more or less disintegrated; JP Morgan's health is failing fast;"

-- the big three US carmakers are on life support and in the end may go under;

-- as in 1931, we may be entering the depression's "second phase;" that's when things get really dicey; and

-- today's "wash of money" may only buy time, not solve "the deeper problem:" the West's addiction "to Ponzi credit (that so far) has put off the day of reckoning with ever more extreme monetary (madness) with each downturn, stealing prosperity from the future."

Righting things from here remains hazardous. "This will be Barack Obama's grim test of statesmanship," but given his faith in markets and ties to Wall Street, precious little of it is in sight.

In his February 3 Financial Times column, Martin Wolf largely agrees. He slammed the Obama administration for its absence in Davos and said the "crisis had much to do with mistakes its policymakers and private institutions made...."

It's vital, in his view, for America to lead the way to a solution, but instead "what is coming out of the US is desperately discouraging." Instead of well-directed stimulus, what's "emerging is too small, too wasteful, and too ill-focused." Instead of sound practice, "the US may be returning to the immoral and ineffective policy of bailing out those who now hold the 'toxic assets.' Instead of acting as a global leader, there is resort to protectionism and a 'blame game.' This way lies a catastrophe."

Martin Weiss Warning

In his January 26 commentary, financial expert and investor safety advocate Martin Weiss warns that Bank of America and Citigroup "are on life support," and JP Morgan Chase is close behind - in spite of billions in cash infusions to save them.

They're in such bad shape that their stock prices are collapsing, and it's impossible for them to raise capital from investors. "In light of these facts, how can the government save (them). Wall Street is hoping that the Obama administration will create a separate, government-run "bad bank" (a so-called "aggregator bank") to take bad assets off their hands." Others think nationalization is the answer. "Neither approach addresses" the underlying problem: "excess debts and risk-taking" so whatever solution is proposed it most likely will "pile on more of the same (by) spread(ing) and transform(ing) the contagion from a Wall Street debt crisis" to a Washington one given that public debt is already exploding.

Weiss' forecast: "Washington will ultimately lose this epic battle." No matter what it does, it can't "patch back together the busted market for mortgages, derivatives and especially credit default swaps. It cannot stop a pandemic of loan losses among large AND small banks as the economy sinks and traditional bank lending goes bad. It cannot stop the contagion of falling confidence, fear and panic. It cannot outlaw gravity, stop investors from selling," or reverse decades of financial excess. That's Obama's dilemma, but so far he's failing to address it.

On February 1, Weiss added more warnings:

-- Washington faces a "day of reckoning;" its plans to stop economic collapse won't work;

-- ahead will be "a tidal wave of bankruptcies, despair, and even homelessness;" and

-- America's resources are limited; its "credit lines will be severed;" its borrowing needs are exploding; the currency is being debased; buyers are increasingly worried; sovereign ones are slowing their purchases; last year, China dumped $26.1 billion in Fannie and Freddie bonds and ended all new investments in some US companies; "Japan, Russia, Western Europe, the Middle East, and Latin America (are) slowing down, stepping back, or even (selling) US investments."

Bottom line on what's ahead:

-- America's enormous borrowing needs come down to two choices - either pay future interest rates that will "kill the economy" or abandon bailout plans altogether;

-- as a result, the economy, companies, perhaps whole industries, and markets will collapse; "the carnage will be traumatic and terrifying....if you thought 2008 was a nightmare, brace yourself" for what's coming - months "likely to be far more brutal than anything we've seen so far."

Unemployment will top 10%. Including discouraged and part-time workers "at least 16%." The 2009 federal deficit will balloon to "at least $2 trillion." Companies like the auto giants will go bankrupt or be downsized to a shadow of their former selves. Job losses will be enormous. The Dow is headed for 5500. A new, "more advanced" real estate collapse is coming. Home price declines and foreclosures are continuing. Personal bankruptcies will surge. Commercial real estate will plunge, and overall, "2009 will be the year of the Great Financial Dustbowl." It will be remembered as "the year in which America suffered a great money famine of epic proportions." In addition, spending and income will "take a massive hit."

Mike Larson writes often on personal finance, investing, housing, and the mortgage industry. On January 16, he wrote that "the more black holes DC fills, the more open up" and named three:

(1) "Federal Home Loan Banks (FHLBs in 12 cities) following Fannie, Freddie, (and) private banks over a cliff?" FHLBs are burdened with mortgage backed securities (MBSs) worth far less than their purchase price. Compounding the problem are the derivatives they own.

Moody's recently warned that eight of the twelve banks took tens of billions in losses and face capital problems as a result. Collectively, they hold $1.25 trillion in debt and are the country's biggest borrower after the government.

Larson: "If you thought (bailing out Fannie and Freddie was expensive), just you wait; (if) the FHLBs need a bailout, there's no telling how much it will cost;" he calls it "yet another gigantic black hole!"

(2) "Insurance industry's capital and surplus cushions are eroding fast" thanks to their residential mortgage securities, commercial real estate, and other losses. They're also burdened by minimum variable annuity return guarantees. Growing numbers need bailouts of up to $50 billion collectively, and capital markets can't help them.

(3) "Pension funding picture deteriorates dramatically" and affects corporations, states and municipalities. Given current conditions, their promised returns "are being blown to smithereens, causing funding shortfalls of epic proportions" - as high as $409 billion by one estimate. It means issuers must either make up the difference or renege on their obligations to retirees.

Larson explains that the government-backed Pension Benefit Guaranty Corporation (PBGC) "insures basic benefits for more than 29,000 plans. But with so many companies (failing), it's increasingly likely the insurance premiums the PBGC receives won't be enough to cover its obligations." It's already over $11 billion in the red, and that total "is poised to rocket higher."

Bottom line: can Washington bail out everyone? Can the Fed and Treasury fill every black hole? "At what point (will) policy makers (give it up) and let more banks (and companies) fail, and more asset markets trade down" to where they're heading anyway instead of wasting hundreds of billions more dollars trying to stop the inevitable?

Using the "Groundhog Day" analogy, Larson also weighs in on "Another banking 'solution' or yet another failure?" One bad plan begets another, then another. Now we're "shoveling (more) hundreds of billions into (insolvent banks) via TARP (and) guaranteeing (that amount more) of crummy assets (with) taxpayers on the hook for billions in future losses from bad mortgages, bad commercial loans, bad securities," and bad judgment.

Global financial institutions have already written off over $3 trillion, and trillions more may follow. Yet, Wall Street is euphoric about a "bad bank" to buy toxic junk at inflated prices. The idea is to improve bank balance sheets and get credit again flowing. Larson is justifiably skeptical in saying:

"The latest scheme to save the world will fail just like all the others. That is because nothing....NOTHING....can prevent a painful adjustment process" that must run its course for the economy to regain its health. No amount of bad plans or "Washington happy talk" will do it.

"Aggregator Bank" Solution on the Minds of Independent Strategy President David Roche and Paul Krugman.

Both want a "bad" bank but not an "aggregator" one. Krugman raises the specter of "voodoo economics." First Roche.

In a January 22 Wall Street Journal online op-ed, he believes we've "entered the next stage of the financial crisis - most likely the last chapter in this horror story." For America and Britain nationalizing major financial institutions are likely coming, and Roche asks: "How has it come to this?" He cites "both ultimate and proximate causes:"

-- the ultimate one is decades of "ingrained social behavior" in America, the UK and other major economies "that put instant gratification of consumption over the ability to pay for it;" consumerism trumped thrift, and the result is "global imbalances and distortions;"

-- the proximate cause is how "excesses were financed through liquidity creation in innovative" excessive ways.

The party was great while it lasted. Now the bill is due, but measures to restore equilibrium fall way short of the mark. "Policy makers have avoided the painful solution" by misguided bailouts, fiscal stimulus, and the like to keep asset prices inflated, when what's needed is to let them "fall to market levels so they can be cleared. (Instead), "policy makers have just prolonged the crisis."

Workable solutions aren't "rocket science. (They were) successfully carried out by the Scandinavian authorities in 1991." Banks must disclose their bad assets, write them down to market prices, and let equity and fixed income holders take the pain, not taxpayers. "If that means most banks become insolvent, then so be it." The clear fact is they are already so don't hide it. Don't throw good money after bad, buy nothing for the effort, and wind up with a greater problem in the end.

Follow the Swedes example in the early 1990s by setting up a "bad bank." It cleared toxic assets off the books by buying them at market prices and forcing good banks to write them down and take losses. What's worrisome is that an "aggregator bank" may buy them at inflated prices and "become a bad bad bank."

US, UK and EU policy makers so far "have rejected the good bad-bank approach (so we're now into) the third year of credit crunch." Most banks remain on their knees. Some big ones may likely go under, and governments "are still in denial." As a result, "the system remains as corrupted as before." The Obama administration offers more of the same. Bad assets "will continue to suck resources out of the economic system," things will go from bad to worse, so nationalizations will be inevitable.

Even if bad policy for a time works, the result will be new bubbles for old, "with the same ultimate consequences of collapse, though on an even grander scale (making) today's look like kids stuff." As the old saying goes, you can pay me now or a hellova lot more later.

For his part, Krugman worries that Obama policy makers "have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals (of throwing good money after bad) we can keep dead banks walking." Major banks in the country are zombies, yet bailouts and more promises keep them afloat.

Krugman prefers the Savings and Loan crisis solution - seizing defunct banks, letting shareholders take the pain, transferring their bad assets to a "special institution," the Resolution Trust Corporation, paying off the bad debt (with taxpayer dollars), and selling "fixed-up banks to new owners."

An "aggregator bank" would buy assets at "fair value," but "what does (that) mean?" Should government decide, save shareholders, socialize the costs, and get no solution anyway? Krugman calls it "bait and switch: a policy that (resembles the S & L) cleanup, but in practice amounts to making huge gifts to shareholders at taxpayer expense, disguised as 'fair value' purchases of toxic assets. Why go through these contortions?"

The big banks are "already wards of the state, utterly dependent on taxpayer support, but nobody (suggests) the obvious solution: an explicit, though temporary, government takeover." Voodoo indeed with officials thinking "financial rituals can reanimate dead banks." It looks like another rescue scheme is coming that will throw more good money after bad and make things even worse in the end. So much for "change to believe in."

On February 1, Krugman continued in his New York Times "Bailout for Bunglers" column saying that the Obama administration should nationalize bad banks in trouble, not bail them out with "other people's money. If taxpayers are footing the bill for rescuing the bank, why shouldn't they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome."

In return for "a huge subsidy to stockholders, taxpayers will get, well, nothing," but the bill. "There's more at stake than fairness." Saving the economy will be very expensive with "$800 billion....just a down payment. We can't afford to squander money giving huge windfalls to banks and their executives, merely to preserve the illusion of private ownership."

On February 1, Bloomberg reported Joseph Stiglitz's views on an "aggregator bank." From Davos he said it swaps "cash for trash" and throws good money after bad at a time the national debt is exploding. Taxpayers will be stuck for years and Washington will be deprived of vital funds for domestic priorities.

On January 26, Stiglitz told CNN that "financial alchemy" caused this mess in the first place. Now "there is a notion that by moving (bad) assets around, putting (them) in an aggregator bank run by the government, things will get better. Is the rationale that government is better of disposing of garbage, while the private sector is better at making loans? The record....provides little convincing evidence."

"But even if we do this, there is still no assurance" that banks will resume lending. "We are moving in uncharted waters." No one knows what will work. What's being proposed won't square the circle. We need an alternative. Stiglitz proposed the Swedish solution explained above by David Roche, but Obama apparently isn't listening.

On January 29, Bloomberg.com reported that Oppenheimer & Co. banking analyst Meredith Whitney said creating a "bad bank" to buy toxic assets won't get banks to start lending. They won't participate if the Obama administration offers fair market value as their "capital hits would be too dear." Whitney's proposal: have banks sell "crown jewels" to cover losses or as much of them as possible. Further, if banks sell "bad assets to a bad bank, it would still be left with lower earnings power from higher losses on good loans and the requirements to build reserves, lower earnings power from lower assets, and a higher legacy expense structure or both."

Whitney was one of the first to be bearish on banks, and last November said Citigroup was "such a mess Stephen Hawking couldn't turn this company around." Much the same is true for most major banks, deep in red ink and insolvent. Only government largese keeps them going, and Michael Hudson's latest article is instructive: "Obama's New Bank Giveaway."

Plans emerging are for new giveaways to follow old ones. A trillion here, a trillion there, pretty soon we'll stop counting as the currency is relentlessly debased. Hudson asks:

"How many families would like a 'give-back' on every bad investment they've ever made?....No do-over for anyone but the hundred or so billionaires who have just been endowed with enough free money to become America's ruling elite for the rest of the 21st century."

It's a dirty game - privatizing profits, socializing losses. Taxpayers foot the tab, and the super-rich get super-richer. Hudson explains the details of "the new, larger but definitely not improved bank giveaway of between $2 and $4 trillion more" so Mafia dons in Davos can celebrate.

He says that since the 1980s "the financial sector has made a sustained money grab at the expense of labor and 'taxpayers.' More accurately, it has been a debt grab....(with) 'taxpayers' (paying) interest."

"Saving the economy" Obama-style won't work. It'll hurt. Unfreezing credit is the idea to free up lending. Maxed out households (borrowers) are asked to assume more debt instead of reducing their overload.

"But this neglects the fact that today's looming depression is caused by debt deflation. Families, businesses and government (have) to spend more wage income, profits, and tax revenues on debt service instead of buying goods and services." How can assuming more debt solve a "debt overhead? Is there not something more crazy here?"

About $1 trillion can let "the market" cure the debt problem "in the context of renewed debtor-oriented bankruptcy laws." But that's not the scheme being advanced. "The financial sector....has replaced the government as economic planner....today's looming economic depression is manmade." Looting the Treasury will continue. Taxpayers are on the hook for the pain. Obama is exploiting Main Street to benefit Wall Street.

Updating the Global Europe Anticipation Bulletin (GEAB), LEAP/E2020's View of a "Systemic Economic Crisis"

In 2007, LEAP/E2020 believed "US banks and consumers were both insolvent. (Now it) estimates that a new sequence of the fourth ('decanting') phase....has begun: the sequence of global insolvency" in a convulsive 2009.

"Historic interest rate drops and unlimited money creation is not a cause but a consequence of the current crisis....insolvency....is digging black holes where liquidities disappear" in bank balance sheets, households, corporations, and governments.

LEAP/E2020 believes "the world is now facing a situation of general insolvency" with heavily indebted countries, public and private organizations, and those over-dependent on financial services most affected. It believes that "the entire financial sphere is suspected of being a giant black hole:"

-- household debt is over-extended;

-- corporate bankruptcies are increasing;

-- profit eroding;

-- public debt has exploded;

-- corporate outlooks are unreliable because customers stop buying and cancel orders;

-- states and municipalities are in trouble; and

-- America's solvency is in question; the same is true for Britain, Russia, other countries, and "large capital-based pension funds."

As a result, LEAP/E2020 concludes that a process of "global insolvency" has begun, and policy measures aren't stopping it. It's why Michael Hudson calls "handouts" to fraudsters a "con game....unprecedented giveaway of financial wealth." Congress, the Treasury and Fed are wrecking the economy, not stabilizing it. Newly issued debt is eating into the domestic market for goods and services, shrinking sales and profits, and heading the nation for "the very bankruptcy that the bailout (is) supposed to prevent."

As for Obama's economic stimulus, it looks like more of the same - handouts to the rich and precious little for distressed households. Federal funds will go for state infrastructure projects, and those Washington controls will be for private financial, real estate, and other corporate interests as Michael Hudson explains:

Federal, state and local infrastructure spending creates a "vast windfall" for real estate interests and their backers. "To a mortgage banker, a commercial developer or real estate company is a prime customer, the bulk of (its) balance sheet. It's hard to imagine a new American infrastructure program (federal, state, or local) not turning into a new well of real estate gains for the FIRE sector (finance, insurance and real estate). Real estate owners on favorably situated sites will sell out to buyers-on-credit, creating a vast new profitable loan market for banks. The debt spiral will continue upward," public tax dollars will finance it, and an out-of-control problem will get greater.

Obama's idea of change is keep looting the Treasury, direct more wealth to the rich, pay lip service to millions of distressed households, do little to bail them out, nothing to prevent home foreclosures, and not a lot for tens of thousands daily losing jobs. Given the dire state of things, Obama wants "markets" to fix things, unmindful that "markets" created the problem in the first place, and his "economic dream team" bears much of the responsibility.

Nouriel Roubini: "Expect the World Economy to Suffer Through 2009" with Financial System Losses Hitting $3.6 Trillion

He believes that optimists thinking the worst is over are in for a rude awakening. "We enter the new year grappling with the most serious global economic and financial crisis since the Great Depression." At best, we're halfway through it, but the worst is still ahead. Around $3 trillion in credit losses leaves the US financial system insolvent along with all advanced and most emerging economies in recession "facing severe financial pressure."

"Policy remedies will have limited effect as insolvency problems constrain the effectiveness of monetary stimulus, and the risk of rising interest rates (because of burgeoning public debt) erodes the growth effects of fiscal stimulus. Only when insolvent banks are shut down, others cleaned up, and the debt level of insolvent households is reduced will conditions ease." Achieving that is a long way off with plenty of pain still to come.

"Politics will make matters worse" because governments are "intervening in their economies more broadly and deeply than at any time" since WW II. Stimulus packages contain subsidies, protections, and new rules and regulations that pose dangers for global markets ahead. Coordinated policy isn't happening, and local politics pose "the biggest risk" going forward. It's as true in America and the EU as in China, Russia, India, Brazil, and emerging economies. Add militancy to the mix and instability increases. Sum it up: "The world's first global recession is just getting started," and who can know where it ends or how hard its impact before it does.

Six months ago, Roubini rated "depression" chances at 10%. Given policy blunders to date, he now says it's one-third. "The time to stop dithering is well past; and the time to implement a program of forceful, coherent, credible, globally-coordinated monetary, fiscal, financial clean-up and debt-resolution is now. The US and global economy are truly risking a near-depression if the policy reaction is not bold, aggressive, sustainable and credible." Barely a whiff of it in sight so far. Buckle up. The year ahead will be convulsive.

Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.

Also visit his blog site at sjlendman.blogspot.com and listen to The Global Research News Hour on RepublicBroadcasting.org Monday through Friday at 10AM US Central time for cutting-edge discussion with distinguished guests on world and national topics. All programs are archived for easy listening.

http://www.globalresearch.ca/index.php?context=va&aid=12096

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Why Not Cut Military Spending?

Editor’s Note: Though many of the Bush-Cheney neoconservatives are now out of government, neocons remain a dominant force in Washington media, especially in the Washington Post’s editorial section – and one of their new themes is that military spending must not be cut.

For instance, on Feb. 3, neocon columnist Robert Kagan lambasted the idea of a 10 percent reduction in military spending. However, in this guest essay, David Swanson writes that the Pentagon’s bloated spending should not be exempt from the budget knife:

In the ordinary course of things in Washington, D.C., and on television, there are two separate conversations.

In one conversation, everything that the government spends money on (schools, transportation, police, etc.) must be trimmed back to save money. In the other conversation, the expenses of wars and the military must be unquestioned.

After what he said this week on ABC, it will be interesting to see whether Congressman Barney Frank is permitted on television anymore. He combined the two conversations.

After a right-winger proposed more tax cuts to "stimulate" the economy and denounced any spending programs as not being "stimulus," Frank pointed out that the largest spending program we've seen is the war on Iraq.

Host George Stephanopoulos clearly felt the force of some galactic wind about to suck him into a different dimension in which the two conversations are permitted to overlap. He jumped in and said "That is a whole 'nother show." But Frank faced the taboo head-on, saying:

"No it isn’t. That's the problem. The problem is that we look at spending and say oh don't spend on highways, don't spend on healthcare, but let's build cold war weapons to defeat the Soviet Union when we don't need them, let's have hundreds and hundreds of billions of dollars going to the military without a check. Unless everything is on the table then you're going to have a disproportionate hit in some places."

Late last year, Frank proposed cutting the military by 25 percent. When I spoke with his chief of staff, he told me that he thought 10 percent could come from ending the occupation of Iraq.

So, Frank is apparently thinking of the military and war budgets as a whole and proposing to cut a quarter, with 15 percent coming out of the standard military budget. "If we are going to get the deficit under control without slashing every domestic program, this is a necessity," Frank said.

Now, I'll be the first to point out that 25 percent is grotesquely insufficient, and that there is a perverse sort of unstated public apology here, in that Frank led the charge to throw $700 billion at Wall Street tycoons and has sat by as trillions more have flown out that golden door without any pretense of oversight. But when someone in power gets something right, our focus should be on moving it forward, not analyzing the purity of heart of a politician.

While it is shocking for anyone on television to admit that the military costs money, the public knows it. And when the public sees the military budget in detail, we scream "Slash it!"

In a March 2005 report called "The Federal Budget: the Public's Priorities," the Program on International Policy Attitudes (PIPA) told people the basic distribution of funds in the federal budget and asked how they would rearrange the funding if they could.

Americans from across the political spectrum, on average, said they would cut the military budget by 31 percent. That's more than double Frank's 15 percent. Congressman Dennis Kucinich has in the past proposed a 15 percent cut and been denounced as a radical. Congresswoman Lynn Woolsey has long proposed a shift of resources away from the military but has never named a specific number at all.

We the people are, as usual, out ahead of our leaders.

Sixty-five percent of Americans, when they saw how much money the military had, told PIPA they favored taking at least some of it away. Majorities favored reducing spending on the capacity for conducting large-scale nuclear and conventional wars. And second highest on the list of cuts after the "defense" budget was the wars on Iraq and Afghanistan.

Majorities of ordinary people taking this survey were also able to do what Congress members and TV pundits have declared impossible, distinguish between wars and soldiers. They favored slashing money for wars and the military, while increasing funds for veterans and preserving funds for those on active duty.

The biggest increases in the PIPA survey went to education, job training, employment, and medical research. And the largest increase in percentage terms went to conserving and developing renewable energy: 70 percent of Americans favored an increase, which averaged 1,090 percent (yes, over a thousand percent).

But exactly how much money can we cut out of war waste and military misspending?

Well, for fiscal year 2009, we're looking at $653 billion for the Pentagon, plus $162 billion in supplemental spending for Iraq and Afghanistan. A quarter of $815 billion is $203.75 billion. Anyone who couldn't figure out where to cut $203.75 billion from the military and wars is probably a danger to themselves and others.

You could get $162 billion by ending two horribly damaging foreign occupations. You could get $73.7 billion just by ending the Defense Advanced Research Projects Agency (DARPA), the people who brought you mechanical killer elephants and telepathic warfare and who are now researching exploding frisbees, cyborg wasps, and Captain America no-meals and no-sleep soldiers. That'd be $235.7 billion right there.

Imagine if you also shut down just a few of the 1,000 or so bases we're imposing on other people's countries building animosity around the globe. (A mammoth new base in Italy is being constructed right now despite fierce opposition from the Italian public: http://www.nodalmolin.it )

An upcoming conference in DC on closing foreign bases might have a chance of being heard if it lets Congress know that some $130 billion could be saved by an action that would improve U.S. foreign relations.

Or what if we were to shut down "missile defense" or abandon all space weapons programs until, you know, there was a sane argument for them. President Obama has already backed a ban on space weapons.

We could cut a couple of billion dollars by ending the new practice of basing U.S. troops on our own soil for "crowd control" through Northern Command. Ending torture will save money, but how much would ending illegal propaganda save? Let's face it, Frank's proposal is disgustingly and immorally conservative, but it's a good start.

It's safe to assume the $162 billion for Iraq and Afghanistan will actually be double that by the end of the year. There's also about $150 billion in the military portions of departments other than "Defense." And that's not counting veterans' benefits or the interest on debt for past military spending.

The total tax dollars we devote to killing each year now is over a trillion and a half, which compares to some $1.2 trillion we devote to living, not counting trust funds like Social Security and not counting Paulson's Plunder.

In fact, what we spend on the military is now more than all other nations combined. We should be thinking in terms of cutting at the very least a quarter of the whole $1.5 trillion, or $375 billion. And that doesn't include warrantless and other unjustified spying, which is ongoing, or detentions, renditions, prison camps, and torture not done by the military, which may be ending.

To believe Fox News, a senior U.S. "defense" official says that President Obama has asked the Joint Chiefs of Staff to cut the military budget request for the Fiscal Year 2010 by 10 percent. That's a start.

Back in November, the Defense Business Board, an internal management oversight body in the U.S. military stated in briefings that major systemic cuts were absolutely necessary. As the Boston Globe reported:

"The briefings do not specify which programs should be cut, but defense analysts say that prime targets would probably include the new F-35 fighter jet, a series of Navy ship programs, and a massive Army project to build a new generation of ground combat vehicles, all of which have been skyrocketing in cost and suffering long development delays."

The Inspector General for Iraq Reconstruction also pointed out in a report this week that over $50 billion has been spent on reconstruction without reconstructing much, and another $50 billion spent on other contractors in Iraq, with the primary item produced being new innovations in fraud, scams, rip-offs, and profiteering.

This is not new to anyone who followed the work of Congressman Henry Waxman who chaired the Committee on Oversight and Government Reform during the last Congress, before he decided for partisan reasons that the upcoming two years would not require any oversight.

Fraud finds new paths during wars, but it is the chief product of Pentagon contracts unrelated to particular wars as well. Often, in fact, it's devoted to preparation for wars that could never happen. This week Chalmers Johnson published an article called "The Looming Crisis at the Pentagon: How Taxpayers Finance Fantasy Wars," in which he wrote:

"The Air Force and the Army are still planning as if, in the reasonably near future, they were going to fight an old-fashioned war of attrition against the Soviet Union, which disappeared in 1991; while the Navy, with its eleven large aircraft-carrier battle groups, is, as William S. Lind has written, 'still structured to fight the Imperial Japanese Navy.'"

Johnson named a few specific items worthy of the chopping block:
"Given the present major recession, whose depths remain unknown, the United States has better things to spend its money on than Nimitz-class aircraft carriers at a price of $6.2 billion each (the cost of the USS George H. W. Bush, launched in January 2009, our tenth such ship) or aircraft that can cruise at a speed of Mach 2 (1,352 miles per hour).

"… Gates is also sympathetic to the desire of a few reformers in the Pentagon to dump the Lockheed-Martin F-22 'Raptor' supersonic stealth fighter, a plane designed to meet the Soviet Union's last proposed, but never built, interceptor.

"… Gates has not yet found the nerve -- or the political backing -- to pull the plug on the F-22; nor has he even dared to bring up the subject of canceling its more expensive and technically complicated successor, the F-35 'Joint Strike Fighter.'"

Johnson tells the familiar story of how military industrial congressional corruption works, with projects underpriced for initial approval and then costs soaring during development, and with jobs scattered across lots of congressional districts. The important piece of information that, as far as I know, even Barney Frank has not mentioned on TV is that military money is not actually a good way to create jobs.

In "The U.S. Employment Effects of Military and Domestic Spending Priorities," Robert Pollin and Heidi Garrett-Peltier of the Political Economy Research Institute at University of Massachusetts - Amherst found that investing public dollars in military jobs at home in the United States produces fewer and lower-paying jobs for the U.S. economy than does public investment in healthcare, education, mass transit, or home construction.

Needless to say, the comparison must weigh more strongly against the military when its investment is overseas. (And any benefit to the occupied nations of U.S. bases has to be weighed against those nations' share of the cost of the bases.) And that's all before considering the non-financial benefits of investing in living rather than in killing.

There is wide agreement among reformers inside the Pentagon and out about some of the areas that can and should be cut.

In its "Report of the Task Force on A Unified Security Budget for the United States, FY 2009", the Institute for Policy Studies identified $61 billion that it recommends cutting from the military budget, including a $25 billion reduction in the nuclear arsenal combined with keeping "missile defense" in the research stage and stopping the weaponization of space, plus another $24 billion from scaling back or stopping research on unneeded weapons, $5 billion from unneeded conventional forces, and $7 billion in waste and pork.

Oddly, IPS recommends "scaling back" ill conceived weapons systems like the F/A-22 Raptor, missile "defense," the Virginia-class submarine, the V-22 Osprey, the F35 Joint Strike Fighter, and offensive space weapons. Eliminating these programs would save significantly more than scaling them back.

George C. Wilson this week proposed this list of programs to send first to the chopping block:

• Army Future Combat Systems. The Pentagon estimates in its latest SAR that 15 systems in the Army program will cost $159.3 billion, or $10.6 billion for each system. The FCS has all kinds of problems.

• Air Force F-22 fighter. In another example of a mismatch, the F-22 has not been deployed to fight terrorists. The Pentagon’s own price tag for this plane, designed to take on the now-defunct Warsaw Pact air forces, stands at $351 million a copy, according to the Pentagon’s SAR figures, which include research and development costs.

• Navy Littoral Combat Ship. Can you believe, Mr. President, the cost of this supposedly simple ship for brown-water operations is now priced at $1.4 billion each?

• Marine V-22 Osprey. Several Defense secretaries tried to cancel this $118 million aerial taxi cab but got rolled by Congress. Why keep buying such an expensive limo?

Lawrence Korb, former Assistant Secretary of Defense under Ronald Reagan, and former employee of Raytheon, told RealNews.com a couple of weeks ago that we should stop paying for weapons suited to outdated conflicts. He named the F-22 and the DD(G-1000) Navy destroyer (which is intended for open-ocean warfare), two weapons which IPS recommended scaling back and eliminating, respectively.

Asked about nuclear weapons, Korb praised President Obama's comments in support of reducing and eliminating nuclear weapons. Cutting the U.S. arsenal back to 1,000 nuclear weapons would save $20 billion per year, he said. Korb also expressed optimism that "missile defense" bases in Poland and the Czech Republic might not happen.

Back in 2007, the Institute for Policy Studies and Foreign Policy In Focus put out a report called "Just Security," which proposed $213 billion in cuts, including $99.1 billion from the war on Iraq, $45.9 billion in cuts to overseas bases, $10.8 billion in overseas military "aid," $7 billion in waste and fraud, $5 billion in force structure, $2 billion in recruitment, and $43.9 billion in unnecessary weapons, including the usual lineup: the F/A 22 Raptor, missile "defense", Virginia class submarine, DD(G-1000) destroyer, V-22 Osprey, C-130J transport plane, F-35 Joint Strike Fighter, offensive space weapons, Future Combat System, R&D, and nuclear weapons.

As someone disgusted and repulsed by all military weapons, my initial inclination has never been to distinguish among them, but doing so makes it much easier to eliminate the craziest of the bunch.

The Center for Defense Information's Military Almanac 2007 provides a very useful guide. The same group has also just published America's Defense Meltdown: Pentagon Reform for President Obama and the New Congress. This is a guide to corruption and reform from military insiders.

There are cultural barriers between the so-called military reform movement and the peace movement. One group wants to eliminate waste but build weapons that kill faster. The other group wants to eliminate waste primarily because the waste is on weapons, no matter how well those weapons work.

Clearly these barriers need to be broken down, something the Backbone Campaign has been helping with (this activist group has made military reformer Chuck Spinney a nominee for Secretary of Defense in the Progressive Cabinet).
While only those who study the military closely know the best pieces to cut, only peace and justice advocates have a vision of a society and an economy that has moved beyond militarism. We bring to the discussion the works of authors like Seymour Melman, whose expertise was in conversion from a military to a civilian economy.

If the Chalmers Johnson article above interests you, you'll probably also enjoy reading "The American Way of War" by Eugene Jarecki, who earlier produced a film of the same title. This book also helps with the cultural divide.The early chapters address the rise of imperial presidential war powers and the military industrial congressional complex.

Jarecki covers topics much loathed by war supporters, including the provocation of Japan into attacking Pearl Harbor, the unnecessity of dropping atomic bombs on Japan to end the war, and the damage wrought by the 1947 National Security Act, the CIA, the National Security Advisor, and the Air Force.

But then the book slides into a discussion of how the war on Iraq could have been better run, which is -- of course -- not what opponents of war would have wanted. From there, Jarecki moves to an account of the military reform movement and the corruption of military contracting.

But the final chapter pulls it back together with an account of the leap forward in abusive imperial power seized by Bush-Cheney.And in the conclusion, Jarecki proposes smart progressive solutions to the political disaster that is our nation's capital, even throwing in a pair of sentences for those who would like to see the rule of law brought back in substance as well as form:

"To institute such fundamental changes as reducing the influence of money in politics and rebalancing power between the branches by way of a new national security act, one must overcome inevitable resistance among those who benefit from how things presently work.

“To this end, particularly given the extreme abuses of the Bush years, any effort at meaningful reform must begin with serious efforts to hold those who committed such abuses accountable. Without accountability, there is insufficient motivation for reform."

The lesson that I hope will be drawn from all of this is that if we want to fund healthcare and schools and green energy we will have to cut war waste and military money, and to do that we will have to wound the military industrial congressional complex, and to do that we will have to start enforcing penalties against those in power who break laws, including commanders in chief.

David Swanson is the author of the upcoming book Daybreak: Undoing the Imperial Presidency and Forming a More Perfect Union. He is co-founder of AfterDowningStreet.org.

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Change to a Multipolar World

In a period less than a decade, American ideologues head-mastered by groups of cold warriors angrily rejected any idea of a multi-polar world, declaring that no other country except the U.S. is qualified to be at the head of the `new world order.`

by Ardeshir Ommani

The U.S. at the head of the western powers tries as much as possible to hold onto some aspects of the unipolar status that it gained after the fall of the Soviet Union in 1991. In a period less than a decade, American ideologues head-mastered by groups of cold warriors angrily rejected any idea of a multi-polar world, declaring that no other country except the U.S. is qualified to be at the head of the “new world order.”

This claim went unchallenged until the U.S. occupation of Iraq exposed the vulnerabilities of the U.S. as a single superpower on the world stage.

Today, after the U.S.-hatched quagmires in Iraq, Afghanistan and now Pakistan, to say nothing of Palestine, and in the eye of an economic hurricane, that claim sounds like an expression of idiocy. During the last decade of the 20th century there were “moments” that the U.S. administration prided itself on having achieved the unipolar status and those moments coincided with U.S. military attacks on other countries, specifically Iraq, Yugoslavia, Haiti, and threats against North Korea and Iran.

Today even the most power hungry strata within the American ruling class, including the Republican Party and a right-wing faction of the Democrats, admit that the future belongs to a multi-polar world order. The question is how fast at this juncture the world economic crisis, whose focal points are in the U.S. and Britain, would accelerate the trend of diminishing economic and consequently military power of the U.S. and Europe.

According to the most recent forecast by the U.S. National Intelligence Council (NIC), Global Trends 2025, by mid 20’s “the international system will be a global multi-polar one with disparity in national power continuing to narrow between developed and developing countries.”

With little ambiguity, the intelligence report reveals that “owing to the rise of emerging powers, a globalizing economy, an historic transfer of relative wealth and economic power from west to east, and the growing influence of non-state actors…the international system- as constructed following the Second World War – will be almost unrecognizable.”

In a report cited this month in the Financial Times, the People’s Republic of China bypassed Germany in terms of the size of its Gross Domestic Product (GDP) and attained the rank of the world’s third largest economy, behind the U.S. and Japan. The report also forecasted that within a period less than a decade, China will overtake Japan in terms of purchasing power parity.

By all indications, the current financial and economic crisis will intensify the woes resulting from U.S. economic stagnation and magnify the ever-increasing size of the U.S. debt to the rest of the world. “The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the U.S. and Europe,” says Roger C. Altman in the most recent issue of Foreign Affairs magazine. “Over the medium term, Washington and European governments will have neither the resources nor the economic credibility to play the role in global affairs that they otherwise would have played.”

The inadequacy of the NIC forecast is that it was prepared well before the full force and devastating impacts of the current crisis of the economy became apparent. Therefore, the forecast mainly considers the Western economies and geopolitical descent as a long drawn-out and extended process.

By focusing only on the BRIC countries – Brazil, Russia, India, and China – the NIC forecast concludes that it will take them another 30-35 years before they could collectively match the wealth of the present Group of Seven industrialized countries of the U.S., Britain, Japan, Germany, France, Italy and Spain.

The most probable case would be that many oppressed and strangulated nations and countries under the present world order would join hands within or outside of the BRIC to establish new trade pacts, capital investment cooperatives, and even security alliances well before 2040-2045, as the forecast predicts.

By now, after a decade of wars, it is brilliantly clear that the overwhelming majority of humanity across the globe cannot wait to see that the U.S.-imposed mono-polar world order is left behind us and a new, much more humane and inclusive system rises out of the ashes of the old.

--Mathaba author Ardeshir Ommani is an Iranian-born writer and an activist in the U.S. anti-war and anti-imperialist struggle for over 40 years, including against the Vietnam War, and now the Iraq-Afghanistan-Pakistan war. During the past seven years, he has participated in the U.S. peace movement, working to promote dialogue and peace among nations and to prevent a U.S.-spurred war on Iran. He holds two Masters Degrees: one in Political Economy and another in Mathematics Education. Co-founder of the American Iranian Friendship Committee, (AIFC), he writes articles of analysis on Iran -U.S. relations, the U.S. economy and has translated articles and books from English into Farsi, the Persian language. After many years of absence, he has been traveling back to Iran and is witnessing first-hand the myriad of changes in all spheres of life inside his homeland. Please visit AIFC’s website to learn more about Iran and Global issues at www.iranaifc.com.

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The BBC, Impartiality, and the hidden logic of massacre

Writing in the Independent last week, Robert Fisk commented on the BBC's refusal to broadcast an appeal for Gaza by the Disasters Emergency Committee (DEC):

"The BBC's refusal to handle an advertisement for Palestinian aid was highly instructive. It was the BBC's 'impartiality' that might be called into question. In other words, the protection of an institution was more important than the lives of children."
(http://www.independent.co.uk/opinion/ commentators/fisk/robert-fiskrsquos-world- when-did-we-stop-caring-about-civilian-deaths-during- wartime-1521708.html)

Even taken at face value, then, the BBC's decision was monstrous. But the idea that it was primarily motivated by a commitment to impartiality makes little sense.

In 1999, the corporation allowed its own high profile newsreader, Jill Dando, to present a DEC appeal for Kosovo at the height of NATO's 78-day bombing campaign against Serbia. This, also, was an ongoing and highly controversial conflict, one that involved fraudulent US-UK government and media claims of a Serbian "genocide" in Kosovo (claims which have since been quietly abandoned).

Shortly after broadcasting the appeal, with bombing still underway, the BBC reported:

"Millions of pounds of donations have been flooding in to help the Kosovo refugees after a national television appeal for funds." ('UK Millions pour in to Kosovo appeal,' BBC online, April 6, 1999. See David Bracewell's excellent work on this in our forum: http://www.medialens.org/ forum/viewtopic.php?t=2934)

This article linked to related reports on the conflict, which included comments from then prime minister Tony Blair:

"This will be a daily pounding until he [Serbian leader Slobodan Milosevic] comes into line with the terms that Nato has laid down." (http://news.bbc.co.uk/1/hi/uk_politics/312024.stm)

The BBC apparently had no concerns that this might damage its alleged reputation for impartiality.

The BBC argument is also made absurd by its consistent and very obvious pro-Israeli bias. An early version of a January 28 BBC online article (since amended) commented:

"Israel has carried out an air attack in the Gaza Strip and launched an incursion with tanks and bulldozers across the border... The incursion follows a bomb attack which killed one Israeli soldier and wounded three near the Gaza border." (http://news.bbc.co.uk/1/hi /world/middle_east/7853803.stm)

As usual, this presented the Israeli attack as a response to Palestinian violence. The BBC's Middle East correspondent, Jeremy Bowen, told one Media Lens reader that this was reasonable since the killing of the Israeli soldier "is the most serious incident since the ceasefire because it is the first loss of life on either side since then." (Media Lens message board, January 27, 2009)

This was the standard view for anyone uninterested in the facts - most mainstream journalists. Alison Weir noted on Counterpunch:

"Virtually every media outlet reported this action as a major breach in the ceasefire that had begun on January 18th: CNN, AP, NPR, the New York Times, The Washington Post, Fox News, ABC, CBS, the Christian Science Monitor, the LA Times, the McClatchy Newspapers, etc, all pinned the resumption of violence on Palestinians."

Weir added:

"There's just one problem. Israeli forces had already violated the ceasefire at least seven times:

"Israeli forces killed a Palestinian farmer in Khuza'a east of Khan Yunis on Jan 18

"Israeli forces killed a Palestinian farmer east of Jabalia on Jan. 19

"Israeli naval gunboats shelled the Gaza coastline, causing damage to civilian structures

"Israeli troops shot and injured a child east of Gaza City on Jan 22

"Israeli gunboat fire injured 4-7 Palestinian fishermen on Jan 22

"Israeli shelling set a Palestinian house on fire on Jan 22

"Israeli tanks fired on the border town of Al Faraheen, causing damage to homes and farms on Jan 24." (Weir, 'Killing Palestinians Doesn't Count,' Counterpunch, January 29, 2009; http://www.counterpunch.org/ weir01292009.html)

Senior BBC journalists and managers like to claim that the high volume of complaints from both sides of the debate indicates that they are getting the balance about right. But complaints sent by pro-Israeli individuals and groups (fiercely active in Israel and the US) defending their own perceived interests do not have the same credibility as emails sent by people arguing that Palestinians should not be subordinated to those interests. Of course self-interest also promoted pro-Palestinian complaints. But of the 22,000 emails sent to the BBC in complaint, we received hundreds from individuals whose only concern was the protection of human life. The difference is real and matters.

The letters page of the latest issue of Ariel, the BBC's internal staff magazine, featured ten letters on the BBC's refusal to air the Gaza appeal: all were critical of the decision. Jonathan Renouf, a BBC series producer, commented courageously:

"There is a smell of fear about this decision - fear of controversy, fear of criticism, fear of repercussions. Perhaps this is the true fallout from the Hutton report, Queengate and Jonathan Ross; an organisation so mired in fear that it finds itself able to sacrifice aid to the victims of war for a principle that nobody (outside the BBC higher echelons) seems to believe was at stake."

The title of the BBC's letters page was "In blocking Gaza appeal we are taking sides." As the Roman proverb tells us:

"The Senate is a beast, the senators are good men."

The Impartiality Delusion

God and love aside, it seems to us that more nonsense has been written about "impartiality" than any other issue.

The legendary Guardian editor C.P. Scott righteously observed: "Comment is free, but facts are sacred." (Manchester Guardian, May 5, 1921)

But facts are not sacred, pristine, untouchable. They are gathered by human beings on the basis of imperfect, worldly, often compromised motives. And anyway, to mention 'this' fact over 'that' fact is already to express an opinion. To highlight 'this' fact over 'that' fact is to comment. Facts are comment!

The media would have us believe that news reporting is an almost technical task. Journalists are presented as collecting 'hard facts' on the ground much as a geologist collects rocks for research. In reality, journalists report on a world controlled, and harmed, by the same powerful interests. The harm needs to be exposed; but the control makes it a simple matter to punish those who would do the exposing.

This is why journalistic truth-telling requires far more than mere professional competence. Success depends on quite rare human qualities: compassion, independence of thought; the willingness to disobey authority, to disregard the carrots of conformity (status, wealth, power).

An honest journalist is someone who instinctively reviles the notion that he should take his side (his corporation, his class, his country, his career interests) at the expense of others. She agonises about, feels wounded by, the thought that she might be subordinating someone else's interests to her own. The honest journalist does not merely believe, but +feels+ that all happiness is of equal value, that all suffering is equal. He or she will be moved by the words of the Buddhist sage Shantideva:

"Mine and other's pain - how are they different?
Simply, then, since pain is pain, I will dispel it.
What grounds have you for all your strong distinctions?" (Shantideva, The Way Of The Bodhisattva, Shambhala, 1997, p.124)

We, also, have written for the mainstream. And we have experienced the moments of moral crisis: 'This needs to be said. But if I say it, I might not be invited back.' A reassuring set of thoughts is always on hand: 'I can do more good on the inside than on the outside - why take a chance? Nobody will notice. How much difference would it make anyway?' We have thought exactly these thoughts even though we have faced utterly trivial temptations by mainstream standards. How willing would you be to risk alienating powerful groups allied to your proprietor, or parent company, if you were paid a six-figure salary to type out a few hundred words every week?

Nobody ever talks about these choices but everyone is aware of them, on some level, all the time. Everyone knows that there are things that you just do not say about the host newspaper, the owner, the editor, the advertisers, the government, the government's allies. BBC journalists know what they should and should not say about Israel.

For some, these moments of crisis will barely reach awareness. They will be experienced as a vague sense of unease, easily ignored. Successful corporate journalists may wonder why anyone would even waste time on such nonsense. They know the barriers, the taboos (how else could they avoid them with such precision?), and they simply play by the rules. They may have convinced themselves that the 'rules' are for the best in the long run anyway (because our society is fundamentally benevolent in an otherwise primitive and threatening world).

This all casts a different light on a question posed to us last month by MA student Steve Roberts of the Open University:

"Do you think that blogs and websites such as 'medialens', 'Digg' and 'Twitter' provide a viable alternative to 'mainstream media news'?" (http://www.medialens.org/ forum/viewtopic.php?p=10082#10082)

In our view, the question should be reversed: Do the mainstream media provide a viable alternative to non-corporate sources of news and commentary? The answer is they do not and never have.

Consider, for example, that it is an unwritten rule of corporate reporting that very ugly motives cannot be imputed to our government or its leading allies. They may err and blunder, but it is unthinkable that they would kill thousands, or millions, of people because it was in the best interests of elite power. It is unthinkable that they would deliberately kill the poor to terrorise other poor people to accept poverty. It is unthinkable that they would actively seek to promote violent conflicts because they have a monopoly on violence. It is unthinkable that they would seek to create enemies because doing so has multiple benefits in pacifying the domestic population, justifying arms budgets, and providing a rationale for attacking poor people overseas.

One might speculate as to why these possibilities are deemed beyond the pale of 'respectable', expressible views, given that journalism is supposed to be a coldly clinical, technical task. An underlying rationalisation (again, not openly discussed) assumes that the media should serve the status quo called "democracy". Serving democracy, naturally, does not extend to 'undermining' a government 'freely' elected by the British electorate. This is implicit in the whole notion of professional media 'balance'. If it is the role of the media, to fairly represent the Labour, Tory and Liberal Democrat view of the world, why would it be the role of the media to suggest that these views are fraudulent, hiding much darker truths?

Bearing these comments in mind, the Israeli attack on Gaza that began on December 27, 2008 provides a good test for Steve Roberts' question. How did the mainstream and "alternative" media answer this simple question: Why did the Israeli army massacre hundreds of Palestinian civilians?

As we will see, hundreds of well-resourced journalists across the media failed to provide a credible explanation. We had to turn to a single article by a single author on an internet website to discover the answer.

The BBC has no doubts about the aims of Israel's 22-day offensive in Gaza:

"The operation was launched to halt or significantly reduce rocket fire from Gaza, and to degrade the military capability of the Hamas militant group that controls the territory." (http://news.bbc.co.uk/1/hi/ world/middle_east/7866426.stm)

These really were the goals, notice, not the declared goals. Some translation is required: the "operation" was in fact a massacre. The "Hamas militant group" that "controls the territory" is the democratically elected government of the Palestinian people.

On December 31, a Guardian leader commented of Israel: "there must be growing doubts as to whether it can achieve by military means even the modest objective it has set itself: the ending of rocket fire on southern Israel." (Leader, 'Gaza: Quiet of the grave,' The Guardian, December 31, 2008)

The Guardian, then, was also happy to accept Israel's claim that it was "targeting Hamas" with a view to ensuring "the ending of rocket fire".

For the Times, the intention was clear:

"The goal for Israel in targeting Hamas is to hamper the ability of terrorist groups to operate." (Leader, 'Security Dilemmas in Gaza - Israel is entitled to defend its civilians against rocket attacks, but its military options are constrained and shrewd diplomacy would serve its interests,' The Times, December 31, 2008)

It was of course inconceivable that the Israeli Defence Force - then terrorising the entire civilian population of Gaza - could be deemed a "terrorist group", just is it could not be considered a "militant group".

The rest of the media followed the same pattern of reporting.

But this mainstream version of events did not explain the sadistic destruction of civilians and civilian infrastructure: the targeting of medical facilities, UN buildings and schools, apartment blocks, farmland. The Observer reports that between 35% and 60% of the agriculture industry in Gaza was wrecked by the Israeli attack. Scores, perhaps hundreds, of wells and water sources were damaged and several hundred greenhouses flattened, as well as severe damage inflicted on between a third and one-half of Gaza's farmable land. (http://www.guardian.co.uk/ world/2009/feb/01/gaza-food-crisis)

The mainstream explanation is also strongly counter-intuitive. We know from any number of imperial and colonial wars - not least the wars in Vietnam, Afghanistan and Iraq - that while high-tech military force can certainly terrorise civilians it is a blunt instrument against insurgents. Resistance fighters melt away into civilian populations, into residential areas - there are few military "assets" to target with laser-guided bombs and missiles.

The fact is that, despite the input of hundreds of journalists working for numerous large, well-resourced corporations, we were unable to find a mainstream account that made sense of what was happening in Gaza. For a detailed credible explanation, we had to turn to a lone, non-corporate source: Noam Chomsky.

Pre-Planned - "Go Crazy"

Chomsky presented his explanation in an article on Znet, '"Exterminate all the Brutes": Gaza 2009,' on January 19 (http://www.zcommunications.org/znet/viewArticle/20316).

He commented on Israel's offensive:

"The planning had two components: military and propaganda. It was based on the lessons of Israel's 2006 invasion of Lebanon, which was considered to be poorly planned and badly advertised. We may, therefore, be fairly confident that most of what has been done and said was pre-planned and intended.

"That surely includes the timing of the assault: shortly before noon, when children were returning from school and crowds were milling in the streets of densely populated Gaza City. It took only a few minutes to kill over 225 people and wound 700, an auspicious opening to the mass slaughter of defenseless civilians trapped in a tiny cage with nowhere to flee." (Ibid.)

Chomsky was suggesting that Israeli leaders had actually +intended+ to kill large numbers of Palestinian civilians for reasons which, from their perspective, were entirely rational. In support of this claim, Chomsky quoted an article by the New York Times correspondent Ethan Bronner, 'Parsing gains of Gaza War.' Bronner argued that Israel calculated that it would be advantageous to appear to "go crazy," by causing massive destruction:

"The Israeli theory of what it tried to do here is summed up in a Hebrew phrase heard across Israel and throughout the military in the past weeks: 'baal habayit hishtageya,' or 'the boss has lost it.' It evokes the image of a madman who cannot be controlled.

"'This phrase means that if our civilians are attacked by you, we are not going to respond in proportion but will use all means we have to cause you such damage that you will think twice in the future,' said Giora Eiland, a former national security adviser." (Bronner, 'Parsing gains of Gaza war,' New York Times, January 18, 2009)

Bronner added:

"The Palestinians in Gaza got the message on the first day when Israeli warplanes struck numerous targets simultaneously in the middle of a Saturday morning. Some 200 were killed instantly, shocking Hamas and indeed all of Gaza." (Ibid.)

Israeli Foreign Minister Tzipi Livni had earlier said that the offensive had "restored Israel's deterrence... Hamas now understands that when you fire on its citizens it responds by going wild - and this is a good thing". (Kim Sungupta and Donald Macintyre, 'Israeli cabinet divided over fresh Gaza surge,' The Independent, January 13, 2009; http://www.independent.co.uk/news/world/middle-east/ israeli-cabinet-divided-over-fresh-gaza-surge-1332024.html)

An Israeli soldier who gave only his first name, Alon, provided a first-hand account of Israel's military tactics to the Times:

"I'm not a newcomer in the army. Both my brothers served in combat units that saw action in Gaza. And I can say that this is the most aggressive line that we have ever taken towards fighting the Palestinians. As you say in English, the gloves were off." (Sheera Frenkel, 'Gaza: Israeli troops reveal ruthless tactics against Hamas,' The Times, January 14, 2009; http://www.timesonline.co.uk/tol/news/ world/middle_east/article5512123.ece)

Alon said he was shocked by some of the scenes inside Gaza, describing how whole neighbourhoods had been razed to the ground:

"It doesn't look like we've been there a few weeks - it looks destroyed, demolished, like we were bombing it for years. You can't imagine what damage we have done." (Ibid.)

The tactic of "going crazy" appears to have been successful, Bronner concluded in the New York Times, with "limited indications that the people of Gaza felt such pain from this war that they will seek to rein in Hamas". (Bronner, op. cit)

This is the "mad man" theory of international relations in action. In a key document from 1995, the US Strategic Command (STRATCOM) advised that American planners should not portray themselves "as too fully rational and cool-headed". Instead, the impression that the US "may become irrational and vindictive if its vital interests are attacked should be a part of the national persona we project." It is "beneficial" for our strategic posture if "some elements may appear to be potentially 'out of control.'" (Quoted, Chomsky, 'Hegemony Or Survival,' Hamish Hamilton, 2003, p.218)

Intolerable Acts Of Diplomacy

Chomsky cited another example of Israel deliberately going "crazy". In June 1982, the Israeli invasion of Lebanon opened with the bombing of the Palestinian refugee camps of Sabra and Shatila:

"The bombing hit the local hospital - the Gaza hospital - and killed over 200 people, according to the eyewitness account of an American Middle East academic specialist. The massacre was the opening act in an invasion that slaughtered some 15-20,000 people and destroyed much of southern Lebanon and Beirut, proceeding with crucial US military and diplomatic support." (Chomsky, '"Exterminate all the Brutes": Gaza 2009,' op. cit)

Thirty years ago, Israeli Chief of Staff Mordechai Gur commented that since 1948, "we have been fighting against a population that lives in villages and cities." Israel's most prominent military analyst, Zeev Schiff, summarised Gur's remarks: "the Israeli Army has always struck civilian populations, purposely and consciously... the Army, he said, has never distinguished civilian [from military] targets...[but] purposely attacked civilian targets." (Ibid.)

The reasons for the brutality were explained by the Israeli statesman Abba Eban: "there was a rational prospect, ultimately fulfilled, that affected populations would exert pressure for the cessation of hostilities." (Ibid.)

In commenting, Chomsky made the key point in his analysis:

"The effect, as Eban well understood, would be to allow Israel to implement, undisturbed, its programs of illegal expansion and harsh repression. Eban was commenting on a review of Labor government attacks against civilians by Prime Minister Begin, presenting a picture, Eban said, 'of an Israel wantonly inflicting every possible measure of death and anguish on civilian populations in a mood reminiscent of regimes which neither Mr. Begin nor I would dare to mention by name.'" (Ibid.)

In other words, Israel has repeatedly and deliberately set out to kill Palestinian and other civilians in order to terrorise them into abandoning their efforts to resist Israeli expansion. But why not pacify the same people with concessions, diplomacy and agreement?

Chomsky argued that the 1982 Israeli attack on Lebanon had nothing to do with responding to "intolerable acts of terror," as claimed at the time. Instead, it had to do with "intolerable acts: of diplomacy." Shortly after the invasion began, Israel's leading academic specialist on the Palestinians, Yehoshua Porath, wrote that PLO leader Yasser Arafat's success in maintaining a ceasefire represented "a veritable catastrophe in the eyes of the Israeli government," since it opened the way to a political settlement. The government hoped that the PLO would resort to terrorism, undermining the threat that it would be "a legitimate negotiating partner for future political accommodations." (Ibid.)

Prime Minister Yitzhak Shamir stated that Israel went to war because there was "a terrible danger... Not so much a military one as a political one." Historian Benny Morris recognised that the PLO had observed the ceasefire, and explained that "the war's inevitability rested on the PLO as a political threat to Israel and to Israel's hold on the occupied territories." (Ibid.)

Similarly, Chomsky noted that Israel's breaking of the ceasefire on November 4, killing six Palestinians, happened at a significant time. The attack came shortly before a key meeting in Cairo when Hamas and its political rival Fatah were to hold talks on "reconciling their differences and creating a single, unified government," the Guardian reported. It would have been the first meeting at such a high level since the near civil war of 2007. (http://www.guardian.co.uk/world/2008/ nov/05/israelandthepalestinians)

Chomsky wrote that the meeting "would have been a significant step towards advancing diplomatic efforts. There is a long history of Israel provocations to deter the threat of diplomacy, some already mentioned. This may have been another one." (Chomsky, '"Exterminate all the Brutes": Gaza 2009,' op. cit)

The attack also came on the day of the US presidential elections. Israeli leaders knew the world would be focusing elsewhere - this would help obscure the fact that Israel, not Hamas, had broken the ceasefire. It would also help provide a rationale for the slaughter planned for later in the month and clearly timed to end just before Obama's inauguration.

Chomsky summarised the appalling truth:

"The effort to delay political accommodation has always made perfect sense... It is hard to think of another way to take over land where you are not wanted." (Ibid.)

Machine Truth

Israel, then, consistently shows a preference "for expansion over security." Peace is actually a threat to a programme of illegal expansion that can be achieved only through violence under cover of conflict and war.

And so, from this perspective, inflicting horrific violence on a defenceless civilian population makes perfect sense. When a high-tech military power demolishes schools, mosques and medical centres it enrages, divides and demolishes the "political threat" of peaceful negotiation.

So while it is true that Israel's bombs were intended to destroy Hamas and to stop the rockets, they also had a much uglier aim. And although, as we have seen, there is serious evidence in support of this argument, it cannot be found in the mainstream press.

During the latest crisis, the Independent's Robert Fisk has not proposed Chomsky's argument in any of his numerous articles on Gaza. Instead, he commented:

"Hamas is not Hizbollah. Jerusalem is not Beirut. And Israeli soldiers cannot take revenge for their 2006 defeat in Lebanon by attacking Hamas in Gaza - not even to help Ms Livni in the Israeli elections." (Fisk, 'The self delusion that plagues both sides in this bloody conflict,' The Independent, December 31, 2008)

But according to Chomsky, the massacre was about far more than revenge, electoral success and restoring military credibility.

Similarly, the Guardian's Seumas Milne cited Israeli journalist Amos Harel who commented that, "little or no weight was apparently devoted to the question of harming innocent civilians". (Milne, 'Israel's onslaught on Gaza is a crime that cannot succeed,' The Guardian, December 30, 2008)

Again, the evidence suggests that the question of harming civilians had been carefully considered.

Only John Pilger offered essentially the same argument as Chomsky in his January 8 article in the small circulation New Statesman magazine. Pilger wrote:

"Every subsequent 'war' [since 1947] Israel has waged has had the same objective: the expulsion of the native people and the theft of more and more land." (Pilger, 'Gaza under fire,' New Statesman, January 8, 2009; http://www.newstatesman.com/middle -east/2009/01/pilger-israel-gaza-palestine)

The above analysis, then, answers the question posed to us by Steve Roberts' of the Open University (See Part 1):

"Do you think that blogs and websites such as 'medialens', 'Digg' and 'Twitter' provide a viable alternative to 'mainstream media news'?" (http://www.medialens.org/forum/viewtopic .php?p=10082#10082)

As discussed, the question should be reversed. The mainstream media will never provide a viable alternative to honest, compassionate individuals writing as free human beings outside the corporate machine.

SUGGESTED ACTION

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Email: jeremy.bowen@bbc.co.uk

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Email: mark.thompson@bbc.co.uk

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Email: david.mannion@itn.co.uk

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Email: alan.rusbridger@guardian.co.uk

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The Great College Hoax

As steadily as ivy creeps up the walls of its well-groomed campuses, the education industrial complex has cultivated the image of college as a sure-fire path to a life of social and economic privilege.

Joel Kellum says he's living proof that the claim is a lie. A 40-year-old Los Angeles resident, Kellum did everything he was supposed to do to get ahead in life. He worked hard as a high schooler, got into the University of Virginia and graduated with a bachelor's degree in history.

Accepted into the California Western School of Law, a private San Diego institution, Kellum couldn't swing the $36,000 in annual tuition with financial aid and part-time work. So he did what friends and professors said was the smart move and took out $60,000 in student loans.

Kellum's law school sweetheart, Jennifer Coultas, did much the same. By the time they graduated in 1995, the couple was $194,000 in debt. They eventually married and each landed a six-figure job. Yet even with Kellum moonlighting, they had to scrounge to come up with $145,000 in loan payments. With interest accruing at up to 12% a year, that whittled away only $21,000 in principal. Their remaining bill: $173,000 and counting.

Kellum and Coultas divorced last year. Each cites their struggle with law school debt as a major source of stress on their marriage. "Two people with this much debt just shouldn't be together," Kellum says.

The two disillusioned attorneys were victims of an unfolding education hoax on the middle class that's just as insidious, and nearly as sweeping, as the housing debacle. The ingredients are strikingly similar, too: Misguided easy-money policies that are encouraging the masses to go into debt; a self-serving establishment trading in half-truths that exaggerate the value of its product; plus a Wall Street money machine dabbling in outright fraud as it foists unaffordable debt on the most vulnerable marks.

College graduates will earn $1 million more than those with only a high school diploma, brags Mercy College radio ads running in the New York area. The $1 million shibboleth is a favorite of college barkers.

Like many good cons, this one contains a kernel of truth. Census figures show that college grads earn an average of $57,500 a year, which is 82% more than the $31,600 high school alumni make. Multiply the $25,900 difference by the 40 years the average person works and, sure enough, it comes to a tad over $1 million.

But anybody who has gotten a passing grade in statistics knows what's wrong with this line of argument. A correlation between B.A.s and incomes is not proof of cause and effect. It may reflect nothing more than the fact that the economy rewards smart people and smart people are likely to go to college. To cite the extreme and obvious example: Bill Gates is rich because he knows how to run a business, not because he matriculated at Harvard. Finishing his degree wouldn't have increased his income.

All the while students have been lulled into thinking of the extra $1 million that will be theirs, they have been forced to disgorge an ever larger fraction of it in pursuit of the degree. While the premium that college grads earn over high schoolers has remained relatively constant over the past five years, the cost of acquiring a degree has risen at twice the rate of inflation, dramatically undermining any value a sheepskin adds.

Offsetting that million-dollar income discrepancy is the $46,700 four-year cost of tuition, fees, books, room and board at a public school and $99,900 at a private one--even after financial aid, scholarships and grants. Add all this to the equation and college grads don't pull even with high school grads in lifetime income until age 33 on average, the College Board says. Even that doesn't include the $125,000 in pay students forgo over four years.

"I call it the million-dollar misunderstanding," says Mark Schneider, vice president of the American Institutes for Research, of the prevailing propaganda.

Not only are college numbers spun. Some are patently spurious, says Richard Sander, a law professor at UCLA. Law schools lure in minority students to improve diversity rankings without disclosing that less than half of African-Americans who enter these programs ever pass the bar. Schools goose employment statistics by temporarily hiring new grads and spotlighting kids who land top-paying jobs, while glossing over far-lower average incomes. The one certainty: The average law grad owes $100,000 in student debt.

"There are a lot of aspects of selling education that are tinged with consumer fraud," Sander says. "There is a definite conspiracy to lead students down a primrose path."

Warped as the numbers are, they don't begin to account for the hidden cost of higher education: financing it. Borrowing has doubled over the past decade, to roughly $85 billion in new student loans in the 2007--08 academic year, bringing total student debt owed to well over half a trillion dollars. The average borrower went $19,200 into debt for a diploma in 2004, a 58% increase after inflation since 1993, according to the Project on Student Debt.

The proportion of students who graduate with more than $40,000 in debt jumped sixfold during that period, to 7.7% of the 1 million grads in 2004, or 77,500 people. Most will struggle for more than a decade to work it off, assuming relatively low 6.8% interest rates, the Project on Student Debt says.

For many, the terms are far worse. A decade ago nearly all student lending was of the low-cost, federally guaranteed variety, most of it with 6% to 8% interest kicking in only after a student left school. As costs outpaced such financing over the past decade, the share of student loans from "private" lenders rose from 7% to 23% of the market, or $20 billion in the 2007--08 academic year.

The rise of private student lending closely paralleled the subprime mortgage boom, which went from 8% of home loan originations in 2003 to 20% in 2006, before the housing meltdown sent that mortgage sector over a cliff. Private student loans resemble subprime mortgages in other ways, too. As banks and brokers did with subprime home loans, colleges and the lenders in cahoots with them commonly market private student loans alongside lower-cost alternatives, blurring the differences.

The key one is cost. Many private lenders tack 10% origination fees onto 18% variable interest rates (there is no legal limit), which begin accruing the moment a loan is funded. That has made private loans more than twice as profitable as government-guaranteed ones and lured heavy involvement from Citigroup, Bank of America and Wells Fargo.

New York Attorney General Andrew Cuomo has called private lending "the Wild West of the student loan industry." Some problems he notes smack of subprime mortgage lending: lax disclosure requirements, variable interest rates that compound and make paying off the principal a Sisyphean task, and kickback agreements by which lenders pay loan originators--in this case, colleges--a cut of their revenues.

State and federal authorities have taken action to curb the outright bribery. No less illustrious institutions of higher learning than Columbia University, New York University and the University of Pennsylvania paid $1 million-plus each to settle charges of wrongdoing in the student loan market.

Yet investigations still found "troubling, deceptive and often illegal practices . . . involving lenders, educational institutions and financial aid officials," according to Cuomo's office and the Congressional Committee on Education & Labor. Don't count on Washington to provide any more safeguards than it did with housing. Department of Education oversight of the student loan industry has been deemed insufficient by the Government Accountability Office.

Lacking honest input, three-quarters of high schoolers still seek to go on to college, many deluded about the financial prospects it holds, says American Institutes for Research's Schneider. "Part of the drive is the idea it pays," he says. "We need somebody making more realistic statements about the risks."

The risks are hefty. Half of students entering college never earn a degree. Six in ten African-Americans depart without one. "Hundreds of thousands of young people leave our higher education system unsuccessfully, burdened with large student loans that must be repaid, but without the benefit of the wages a college degree provides," warned a 2004 Education Trust study.

Among the half of entering students fortunate enough to get through college, millions go into debt for two-year associate degrees. These alumni outearn high school grads by only $8,400 a year. (Community colleges currently enroll 11.5 million.)

Tracy Kratzer, 27, enrolled in the International Academy of Design & Technology in Orlando, Fla. in 2003. With visions of making big bucks as a Web designer, she didn't give much thought to the interest rate on her loan from Sallie Mae, the Fannie Mae of student lending. Kratzer didn't know it at the time, but she was part of an experiment that has proved disastrous for borrowers and shareholders of Sallie's parent, SLM Corp. It's called "nontraditional" lending.

"That's not a sociological term," Albert Lord, chief executive of SLM Corp., told an audience of financial analysts last fall. "It's basically kids and parents with poor credit who are at the wrong schools."

Sallie Mae was set up by the government in 1972 and began privatizing its ownership in 1997. It began nontraditional lending in the easy-money heyday of 2002, when it cut deals with dozens of trade schools to become their preferred subprime student lender. Over the next four years Sallie doled out about $5 billion to people like Kratzer, waiving the credit scores and cosigners formerly required for its loans.

The bill arrived last year after nontraditional borrowers began entering the workforce. Of the half no longer studying, Sallie had written off 15% of loans by last June, the most recent period for which it has released figures; another 24% were delinquent. Among traditional loans for four-year universities, writeoffs ran 2% and delinquencies 4.9%.

SLM set aside $884 million to cover these bad loans in 2007 and posted its first loss. It expects nontraditional-loan writeoffs to peak this year. SLM's stock has lost 80% since the beginning of 2007, wiping out $15 billion in value. Lord, who was unavailable for comment, is a 28-year company veteran. He made $72 million as chief executive in 2007 by unloading SLM stock before it tanked. Sallie largely abandoned nontraditional lending last January.

That's little consolation to Kratzer. Shortly after graduating with an associate of arts degree, she discovered that the high-paying jobs she'd hoped to qualify for go to people with bachelor's degrees and years of experience. After a bout of unemployment, when she lived off credit cards, Kratzer recently found an hourly job as a clerk at a magazine, where she earns less than the average high school grad. In the meantime her $14,000 student loan has mushroomed to $27,000--more than she makes in a year--and continues to accrue interest at 18% a year. She says collection agents for Sallie and others hound her to hit up relatives for the money she owes.

"My mom works in a restaurant. My stepdad is in prison," says Kratzer. "There are so many people like me out there. They don't get seen. They don't get heard."

Mindy Babbitt entered Davenport University in her mid-20s to study accounting. Unable to cover the costs with her previous earnings as a cosmetologist, she took out a $35,000 student loan at 9% interest, figuring her postgraduate income would cover the cost.

Instead, the entry-level job her bachelor's degree got her barely covered living expenses. Babbitt deferred loan repayments and was then laid off for a time. Now 41 and living in Plainwell, Mich., she is earning $41,000 a year, or about $10,000 more than the average high school graduate makes. But since she graduated, Babbitt's student loan balance has more than doubled, to $87,000, and she despairs she'll never pay it off.

"Unless I win the lottery or get a job paying a lot more, my student debts are going to follow me to the grave," she says.

Babbitt is no oddity. In fact, one in four college grads takes home considerably less than the top quartile of high school grads, according to a College Board study. Even some people with doctorates earn less than people without so much as an associate degree, it shows.

For an indication of how out of touch the degree factories are with economic reality there's no need to pick on UCLA's course in queer musicology or Edith Cowan University's degree in "surf science." U.S. universities also minted 37,000 history degrees in 2006, including 852 Ph.D.s. That for a field with fewer than 500 job openings and average pay of $48,500. Plumbers, by contrast, enjoyed 16,000 new jobs that year and earned only $6,000 less than historians, census figures show.

Of course, not all history majors want to become historians. For many a bachelor's degree is nothing but a stepping-stone to a professional degree. Joel Kellum is one of those. After graduating from the University of Virginia, he got into California Western. Kellum approached a law professor about the wisdom of borrowing for the tuition.

"He said, 'Don't worry,'" Kellum recalls. "'We had the same thing when we were in school.'"

Kellum filled out a fat packet of forms in his school's financial aid office. Weeks later, he says, he got a call asking him to sign over a check to the school without any discussion of the loan terms. Kellum complied.

Only after he graduated, and his payments came due, did he dig into the details. What Kellum discovered was that, instead of cheap government loans, the bulk of his debt was in Signature loans: variable-rate debt from Sallie Mae. Kellum's variable rate has ticked as high as 9% and his ex-wife's to as much as 12%.

Like many grads, Kellum and Coultas hit bumps along their career paths. They deferred payments once when they were unemployed and twice more after their children were born. Each time, Kellum says, Sallie Mae tacked on fees for the delay. When he was a few days late making payments, he says, he got hit with more fees, which also accrued interest, and with a scolding.

"When you're a second late, you get 20 or 30 calls," he says. "It [Sallie Mae's Signature loan] is coated as a sweet government loan, but you can get better interest rates, and better treatment, borrowing from Vito in downtown Brooklyn."

Like Vito, private student lenders don't dwell on the dollar cost of compound interest. Cathelyn Gregoire says she applied for financial aid at the Tampa campus of the design school Kratzer attended and was assured she'd receive a loan at a fixed 7% rate. Three months after classes began Gregoire received a $14,000 loan. Only after graduating did she discover she was being charged a variable 13.25%, plus a "supplemental fee" of 6%. Her loan balance had jumped to $20,000 by the end of 2007.

Gregoire is now a plaintiff in a federal suit in Connecticut, accusing Sallie Mae of targeting minorities with deceptive lending. Her lawyers are trying to make it a class action.

Sallie Mae denies wrongdoing and distributes rate disclosures when students apply for loans, according to spokesperson Thomas Joyce. Sallie's disclosure document warns in capital letters that the rate a borrower sees may not be the one he gets.

Joyce says Sallie's borrowers receive detailed paperwork within ten days of funding and can rescind their loans then. In reality loan checks often go directly to schools after classes have begun. To rescind a loan a student must get the college to return the money. The student must then find new funding or drop out.

Education lenders, unlike other consumer financiers, are not required to provide Truth in Lending disclosures before reeling in borrowers. A law passed last year requires advanced disclosure, but not until 2010.

Get caught in this quagmire and you're stuck for good. Consumers who go on a credit card binge stand a good chance of getting debt discharged in bankruptcy. Not so if they take out a loan to educate themselves. Those loans, per the 2005 bankruptcy law, are not dischargeable. One reason: Without this exception, every student would run through a bankruptcy between graduation and starting a career.

Who gets stuck with these toxic loans? As with subprime mortgages, the people who can least afford them. A disproportionate number of high-interest student loans go to low-income students attending for-profit institutions, according to a 2008 study by Charlene Wear Simmons, assistant director of the California Research Bureau, an arm of the state government.

"Borrowing, combined with other risk factors for not completing higher education (such as working too many hours, lack of adequate preparation and part-time attendance), puts many students, especially low-income and first-generation students, at a particular disadvantage," says a 2005 study by Lawrence Gladieux, an education policy consultant, and Laura Perna, assistant professor of education at the University of Pennsylvania.

It's too late to save the country from the housing finance bubble. But the college bubble is not quite as far along.

Sidebars:
Docs in Hock
Subprime Student Loans

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