Harnessing the Energy of Trash

by Alyssa A. Lappen
InFocus | Aug. 31, 2009
FALL 2009 | VOLUME III: NUMBER 3

Among the greatest ironies of President Barack Obama’s environmental policies is his federal budget proposal to “cap and trade” greenhouse gas emissions. The plan would roughly double electricity rates nationwide. It would weigh heavily on businesses during the worst recession since World War II, and about double all end-user utility costs. The irony stems from Obama’s oft-repeated promise on the campaign trail not to raise taxes on American families earning less than $250,000 annually. But “cap and trade” might be better termed “cap and tax” for the crushing tax impact it will have on Americans.

The American Recovery and Reinvestment Act (ARRA) and the proposed 2010 federal budget promote many potential “clean” and “renewable energy” projects. However, they ignore one of the most economical and environmentally friendly ways of improving energy efficiency and cutting carbon emissions: harnessing the potential energy of trash.

Waste-to-Energy

In 2006, the state of California enacted a “Roadmap for the Development of Biomass” to increase wind, solar and biomass projects—and to eventually extract 22 percent of its energy feeds from urban waste. The same year, the Los Angeles City Council unanimously voted to replace citywide garbage disposal with waste-to-energy (WTE) by 2016. The goal is to improve energy efficiency and eliminate the high costs and pollution from trash transports.

The federal government, District of Columbia, and at least 11 states include waste-to-energy on their lists of viable, renewable energy resources, according to Ted Michaels of Washington, D.C.’s Energy Resource Council. Yet the U.S. lags the rest of the world in WTE development. Of more than 600 state-of-the-art WTE plants worldwide, only 90 operate in the U.S. Waste-to-energy plants like those in Cape Cod, MA, Palm Beach, FL, Hempstead and Onondaga County, NY, prove that municipal and solid wastes can serve as significant and effective biomass energy sources, generating clean electrical energy.

In total, U.S. WTE plants generate 2,800 megawatts of electricity annually, saving 1.4 billion gallons of fuel oil. That’s equivalent to current U.S. geothermal energy production, and far more than from wind and solar energy, according to Columbia University Professor Nicholas Themelis.

Untapped Potential

The U.S. could recover far more energy from trash. Some 300 million Americans generate nearly 1.4 billion pounds of municipal solid waste daily, more than 500 billion pounds annually. From that supply of residential waste alone, the U.S. could more than septuple its waste-produced energy to 21,000 megawatts of electricity per year. That could save nearly 14 billion gallons of fuel oil. Add industrial and agricultural wastes, and total U.S. energy gains could skyrocket.

So far, Europe is far ahead. By late 2005, European WTE plants generated sufficient energy to supply 27 million people a year with electricity â€“ or to heat 13 million homes, reports Dr. Ella Stengler, Managing Director of the Brussels-based Confederation of European Waste-to-Energy Plants.

By 2006, Holland generated 14.3 percent of its renewable energy from waste, Belgium 13.3 percent, Denmark 12.5 percent, and Germany, 7.5 percent. Germany has since further enhanced its WTE program to include agricultural and industrial waste. In fact, Germany now recycles 60 percent of its municipal solid waste at 72 plants despite having cut overall waste production by more than one fifth since 2002.

Unexpected Enemies

Surprisingly, a huge roadblock to WTE in the U.S. stems from local, state, national, and global environmental organizations like the New York Public Interest Research Group (NYPIRG), the Sierra Club, and the Global Alliance for Incinerator Alternatives (GAIA). Even some government officials adamantly oppose WTE, including New York deputy environmental secretary Judith Enck, a former NYPIRG activist and a potential presidential pick to serve as a regional administrator for the Environmental Protection Agency (EPA).

These and other opponents believe that WTE plants could eliminate incentives to recycle. Citing obsolete data, they also erroneously assert that WTE can cause harmful emissions. Ultimately, their opposition may stem from an unrealistic goal of creating a utopian society that generates zero waste.

This, according to Columbia University’s Jack D. Lauber, is an idealistic impossibility. While zero waste is a pipe dream, working toward zero waste disposal would significantly increase recycling in the U.S., which will thrive as long as it offers profit potential. It would also substantially cut trash transport expenses nationwide, not to mention the transports’ annual release of hundreds of tons of atmospheric gaseous and particulate toxins. Indeed, a 2002 Australian study found that diesel trucks spew five times more atmospheric particulates than municipal waste plants.

Unexpected Allies

While the ideologues try to achieve the unachievable, WTE has attracted allies from some unexpected quarters, including a wildlife pathologist from New York’s Department of Environmental Conservatism, Ward Stone, who in September will receive a Sierra Club lifetime achievement award for his scientific work.

“WTE is a smart way to go,” Stone says. While “some people have made careers of fighting waste incineration,” as a scientist, Stone well understands “we won’t have dioxin emissions.”

Stone refers to the fact that new-generation, multistage WTE plants have virtually eliminated emissions. In fact, according to the EPA, the plants have cut dioxin and other toxic emissions upwards of 99 percent. Total combined waste-to-energy plant emissions in the U.S. are only 12 grams of dioxin annually, less than 0.5 percent of all dioxins produced nationwide. Moreover, the residue produced can be recycled into road building, construction materials, and valuable metals.

There is no getting around the fact that these plants incinerate waste. The very word “incineration” can evoke an image of unregulated back yard burning, sending curls of black smoke into the air. However, modern mechanical and chemical engineers worldwide (U.S., Japan, Germany and elsewhere) have devised remarkably innovative toxin extraction methods. Multiple-burn technology, for example, re-circulates dioxins into high-temperature combustion zones, cutting their concentrations and all but eliminating them. In another extraction technique, introducing lime directly into refuse-derived fuel causes calcium to react with toxins to form removable particulates.

Thus, even though WTE involves incineration, Stone considers it a potential boon to the energy resource and recycling industries. “It is better to eliminate unnecessary use or waste of anything,” he says.

Stone also notes that multiple-burn WTE technology allows for technological and economic flexibility. During recessionary periods like the current one—when “trash crashes,” and plastic and paper prices decline deeply, rendering recycling costly and unprofitable—WTE plants can burn increased material loads. The high-tech incinerators simply pick up the economic slack, and generate more electricity until raw material prices recover sufficiently to again warrant sales to factories and other recyclers.

Urban Mining

The idea of utilizing WTE technology becomes particularly appealing when considering that the alternative is landfills. One ton of municipal solid waste in a landfill produces 200 normal cubic meters (Nm3) of methane. According to the National Oceanic and Atmospheric Administration, methane is a greenhouse gas that is 25 times more potent than carbon dioxide. Even the operating landfills that reclaim methane emit far more greenhouse gas than WTE plants.

Emissions are not the only problem. New York City, for example, buried over 150 million tons of municipal solid waste in Staten Island — without liners — before closing the Fresh Kills dump in March 2001. Without further intervention, toxins will pollute the adjacent wetlands and air throughout the 21st century. This is why Europe largely bans municipal solid waste landfills.

New York is now spending millions on ‘remediation’ and building public parks on top of Fresh Kills. Instead, it could be mining these landfills, and turning waste to energy.

Other countries have already engaged in “urban mining.” Japan’s private and government sectors have partnered to mine 20th century “landfill mountains” for their wealth in recyclable and precious metals, as well as plastic, newspaper, combustible materials, and methane.

Using WTE technology, treasure can be found beneath the trash in Fresh Kills—at least $50 per ton via municipal waste-to-energy electricity generation. Multiply that buried treasure times thousands of U.S. municipal and state landfills, and one can understand the vast potential in WTE. This does not include the value to be captured in recovering paper, plastic, metals, combustibles, and gas.

Will Washington Embrace Waste?

Despite its promises to embrace all forms of renewable energy, the Obama administration may not have a taste for waste. Indeed, for Congress to even consider a switch to WTE technology would likely require the “cap and tax” scheme to wither on the vine, as a growing chorus of analysts now suggest might happen.

However, the battle would not end there. The waste disposal industry would then need to navigate around ideologically charged environmental activists, such as Enck, who put politics before the planet.

In the end, however, if Washington is to embrace WTE, it will likely stem from popular demand. Indeed, when the broader public learns of WTE’s multiple benefits, the American people will insist that government put this available technology to work on a broader scale.

Alyssa A. Lappen, a former senior editor at Institutional Investor magazine and former associate editor at Forbes, is a U.S.-based investigative journalist.

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A Caliphate of Toxic Assets

by Alyssa A. Lappen
Frontpage Magazine | Jun. 29, 2009

When a pro-terrorist organization announces its intention to launch a financial jihad against the West, it is well worth learning their methods — especially when they promote a religious pseudo-financial scheme through largely unregulated practices purported to be safer than the conventional. But ultimately, the new brand of assets are constructed with as little, and perhaps considerably less, transparency than the last wave of toxic assets that hit the economy, with catastrophic results.

The Muslim organization Hizb Ut Tahrir capitalizes on Muslim Brotherhood founder Hassan al-Banna’s 20th century derivative, encouraging followers to build a parallel financial structure. Al-Banna envisioned the resultant shari’a-compliant finance as a “back door” into Western financial markets and institutions through which to supplant liberty and prosperity with Islam. Muslim clerics including MB spiritual leader Yusuf al-Qaradawi promote Shari’a finance as generally safer than Western investments, a diversification method to steady personal assets—and a stable economic system that should replace capitalism. Call it “financial replacement theology,” if you wish.

In July, Hizb Ut Tahrir plans to launch its U.S. arm with a huge Chicago “Khalifah conference” heralding the coming Caliphate and global Islamic supremacism. After 9/11, Germany and Sweden outlawed Hizb Ut Tahrir. In July 2005, Pakistan’s then-president Pervez Musharaf warned Britain not to tolerate its continued U.K. presence. But in the U.S., Hizb Ut Tahrir has proudly announced intentions to replace Capitalism with Islam.

Founded in 1953 — five years into Jordan’s illegal occupation of East Jerusalem — Hizb Ut Tahrir labels itself “peaceful,” but strategically objects to violence only for the time being. The group sympathizes with the Muslim Brotherhood, considers Europe’s democracies “a farce”—and the U.S., U.K. and Israel, works of “the devil“—and seeks to impose Islamic law (shari’a) worldwide.

Major banks from Citigroup, HSBC, Chase, Bank of America and Lloyds TSB — probably unaware of the etymology of Islamic finance — established subsidiaries offering shari’a-compliant products. Mutual funds at Principal Financial Group, UBS, Amana Funds and SEI Investments, among others, followed suit. Especially late last year as the devastating toll of sub-prime mortgage lending mounted, clients were assured that Islamic banking — in many respects a dangerous financial fad — was much safer than other banks and investment houses.

Yet bad economic news has not escaped the supposedly secure Islamic investing sector. Islamic securities can also (like all other asset classes) go into default, moreover. Holders of East Cameron Partners LP’s “safe,” asset-backed Islamic bonds (sukuk) now line up before a Louisiana bankruptcy judge with all the other hapless creditors of the Texas-based Easter Cameron Oil and Gas Co. that filed for Chapter 11 reorganization last October.

The East Cameron default was no one-time Islamic finance anomaly, either. In May, Kuwait’s Investment Dar Co. — 50% owner of the Aston Martin Lagonda luxury car manufacturer — defaulted on a $100 million sukuk. And in June Saad Group Islamic bonds traded at a quarter of their “face” value — that is, the the roughly $650 billion price at which issued by Saudi billionaire Maan al-Sanea’s company. The Saad Trading Contracting & Financial Services subsidiary, like East Cameron, went into financial restructuring, aka bankruptcy, after the Saudi Central bank froze the al-Sanea family accounts.

As I’ve often previously warned, events now show that shari’a banking may prove more susceptible to market dislocations than other financial sectors.

Islamic bonds employ “some of the most complex” Western structured finance tools ever created. They transform liquid, traceable cash flows from interest-bearing debt into illiquid assets — that cannot be easily unwound. In the 1980s, bond sponsors transformed trillions of dollars in cash flow claims on illiquid real assets into liquid, traceable mortgage-backed “pass-throughs” and “collateralized debt obligations” (CDOs).

The Muslim Brotherhood quickly re-branded the “special purpose entities” (SPEs) — that kind that, coincidentally, sank Enron — as Islamic “special-purpose vehicles (SPVs)” Sharia banks use these vehicles to “restructure interest-bearing debt, collecting interest [as] rent or [a] price mark-up.” Issuers of sukuk al-ijara—shari’a bonds like those now in default—sell hard assets to SPVs, which sell share certificates to fund their investment and in turn lease the purchased assets back to the sukuk issuers, collecting the principal plus interest that they then pass to sukuk investors as “rent.” But now, sukuk issuers are defaulting on “rent,” implying that SPVs can’t sell or return property to issuers when their sukuks mature.

That means, in essence, shari’a finance is a sham.
“There is no such thing as interest free investment,” warns New York University MBA Joy Brighton, echoing Rice University Islamic economics and finance chairman Mahmoud el-Gamal. “All Islamic finance today is interest based,” the latter complained in the Financial Times two years ago. Furthermore, Islamic finance features a few other unique “complexities”—namely that

*”Shari’a regulations can override commercial decisions.
*Documentation is not standardized
*Inter-creditor agreements can be complex

As U.S. financial institutions crumble, rattling markets, Congress has focused on regulating the opaque, previously unregulated securities called credit default swaps that Brighton describes as guaranteed boxes of counter-party risks. “One party pays a premium, the second guarantees payment, and a third guarantees the guarantor.” AIG, for example, guaranteed payment on billions of dollars worth of sub-prime mortgage loans. “The credit default swap is the guarantee, and AIG bore the default risk burden in exchange for upfront fees on maybe trillions of dollars in loans.”

But credit default swaps are old news, Brighton says. “A new generation of toxic assets has not yet hit anyone’s radar.” While touted as such, Islamic securities aren’t immune to default. Many more Islamic issues are likely to succumb as the global economy worsens.

“Islamic banking is in the toxic derivatives genre,” says Brighton. Each counter-party agreement within its complex “boxes” of interwoven counter-party risks, is a contract for “payment” and “delivery/receipt of funds.” Issuers create derivatives when they “peel off and resell pieces” from individual securities containing multiple counter-party contracts. One default by a party to any of the interwoven contracts in a “box” can cause its whole structure to collapse.

Moreover, Islamic finance is doubly toxic. Many banking corporations have created Islamic subsidiaries, says Brighton — segregated oil wealth managed by “outside money managers” and Islamic radicals who don’t circulate money globally, but keep it “within the Islamic community, as a charity—and jihad-funding mechanism.” They’re just another economic time bomb that financiers have blindly bought.

The Budget Boondoggle

By Alyssa A. Lappen
FrontPageMagazine | Mar. 23, 2009

On March 3, days after President Barack Obama grandly unveiled a $3.6 trillion 2010 budget overview, Office of Management and Budget (OMB) director Peter Orszag testified to the House Budget Committee that this budget is “fiscally responsible,” and doesn’t constitute “big spending.” The Congressional Budget Office (CBO) disagrees. On March 20, it predicted that the Obama budget would generate some $9.3 trillion in new red ink by 2019—and unsustainable, significantly greater annual deficits than the Obama plan projected. The U.S. House Budget Committee had not yet responded.

Moreover, the 2010 budget process has only begun. The budget could still end up harboring billions in earmarks—those pet projects Congressmen slip to buddies who miraculously avoid competitive bidding or oversight. The White House and OMB “blueprint” introduced February 26 isn’t a true, line-by-line 2010 budget, explains Taxpayers for Common Sense (TCS) vice president Steve Ellis. Incumbent presidents unveil budgets in February. Until April, Obama benefits from the traditional “pass” Congress gives new administrations. Only then will his full budget appear. In May, Congress will start writing the bills that will fund the budget, Ellis says. This spring and summer, thousands of new earmarks will very likely bloom.

Indeed, the outline makes it seem that the 2010 budget will provide fertile ground for earmarks as Congressmen and Senators grapple over which cities and states will land the funds. The $4.5 billion Community Development Block Grant, for example, is supposed to rely on a new program formula “to better target economically distressed communities.” It doesn’t specify who will write the formula or decide who gets the money. The Budget likewise proposes new Department of Housing and Urban Development funding to preserve “1.3 million affordable rental units” in multifamily properties.

And such housing grants have been massively abused in the past (along with many other department budgets), TCS’ Ellis notes. Obama should know. As both a State and U.S. Senator, he blessed state and federal legislative aid for several developers who then received more than $700 million in grants, loans and tax credits for their projects. His Chicago law partner Allison Davis, Syrian developer Antoin “Tony” Rezko (now incarcerated on 16 political corruption charges) and Chicago slumlord Cecil Butler, for example, all profited greatly from federal funds to provide thousands of Chicago low-income apartment units—all of which were condemned or foreclosed within 10 years. Obama’s 2010 budget overview offers nor regulatory or oversight measures to prevent such situations.

Obama campaigned heavily against Washington’s heavy use of earmarks. Yet the $410 billion Omnibus law he signed on March 11 offers substantial evidence that billions of dollars in budgetary abuse could follow in 2010. The new law reportedly contained “only” 7,991 earmarks, to cost at least $5.5 billion. In fact, it includes more than 9,282 earmarks, TCS reports. The Senate had March 3 defeated Senator John McCain’s proposal to strip over 8,500 original earmarks and $32 billion from the bill. Consequently, the law added 8% to fiscal 2009 spending, increases that bought less transparency than before. Congress publicly disclosed $500 million fewer juicy earmarks than last year, according to TCS. The visible earmarks are not comforting. Senate Majority Leader Harry Reid, for example, carved out $100 million in earmarks for Nevada, including $951,000 for Las Vegas “sustainability” (whatever that means) and $1.7 million for Las Vegas and Reno “dropout prevention.” By comparison, only three other cities got “dropout prevention” grants—Riverside, Ca. ($476,000); Scottsdale, Az. ($143,000); and Jackson, Ms. ($95,000). It’s strange—unless Nevada’s cities unaccountably cornered the U.S. market for high school dropouts.

TCS provides extensive lists of earmarks appropriated through U.S. departments overseeing agriculture, commerce, justice, science, defense, energy, water, financial services, homeland security, interior, U.S. legislature, military construction, Veteran’s affairs, foreign affairs, and transportation. Hundreds of millions of earmarks for the Labor, Health and Human Services and Education departments alone take 211 pages to list. Thus we find that Nevada’s $100 million in earmarks included $6 million from the Department of Education, for example, $143,000 for Reno to develop a comprehensive online encyclopedia—although many comprehensive online encyclopedias already exist—and $143,000 for a natural history museum in Las Vegas, whose horizon is neon.

Obama grandly promises to keep the 2010 budget transparent, “pay-as-you-go,” and return the U.S. “to honest budgeting.” But every federal budget is ripe for earmarks, says TCS V.P. Ellis. “People think budgets are about numbers, but they are about priorities. Where you put money shows where the priorities are. All program funding provides an opportunity for abuse.” This proposal, moreover, also has problematical “robust growth in spending” 10 years out, and increasingly enormous deficits, Ellis says.

It also suggests a reliance on nonprofit organizations. The $1.3 billion in loans and grants “to increase broadband capacity and improve telecommunication,” education and health services in rural areas—a laudable goal—could end up a nonprofit boondoggle. So could a “Social Innovation Fund” proposed to back “innovative non-profits” addressing serious national problems. Unfortunately, the 2010 budget outline offers no oversight on who decides “what works” or how Obama will control nonprofit spending.

Obama’s February overview proposes new oversight mechanisms for financial institutions and markets, for-profit corporations and government agencies. Yet nonprofits clearly also need strict oversight—which this proposal does not provide. The Washington Post this week exposed a $250 million in earmarks to Electro-Optics Center—a supposedly innovative defense research non-profit, founded 10 years ago by Democratic Rep. John Murtha at the Pennsylvania State University to create new industry and jobs in Western Pennsylvania. Instead, Electro-Optics spent much of that funding at companies supporting Murtha. Likewise, the Omnibus law allocates $190,000 to a new New Orleans community center to be constructed by a nonprofit. Founded by Sen. Mary Landrieu’s brother, that nonprofit organization no longer exists.

Unfortunately, Obama’s $3.6 trillion plan also includes no strategy to limit the very haphazard way Congress “throws money at infrastructure, agriculture, energy, health care” and so on. In fact, the plan may well encourage more haphazard spending, which goes hand in hand with earmarks. So, don’t expect earmarks to disappear soon.

America’s Excessive Debt Disease

Will Obama’s proposed budget kill the patient?

By Alyssa A. Lappen
Right Side News | March 19, 2009

President Barack Obama wants Americans to see his $3.6 trillion 2010 federal budget as a long term bail out for the sick U.S. economy. Yet it focuses on key budgetary and economic issues only at the margins—through an ancillary hit list designed to overhaul health care, education and energy policies, and abate a purported global climate crisis that evidence totally debunks, according to over 31,000 scientists.
No, the economic turmoil originated in two decades of “irrational exuberance,” as former Federal Reserve Chairman Alan Greenspan correctly termed excessive market optimism in December 1996. Social spending can’t resolve the mess, no matter how hard Obama wishes.

“In just 50 days, Congress has voted to spend about $1.2 trillion” on the $787 billion so-called stimulus and $410 billion omnibus spending bills, noted Senate Minority Leader Mitch McConnell of Kentucky. “[T]hat’s about $24 billion a day, or … $1 billion an hour — most of it borrowed.” Those astronomical sums, moreover, followed a host of 2008 spending and relief programs that cost the government $2.3 trillion—including the February $168 billion Economic Stimulus Act and October Trouble Asset Relief Program to buy $700 billion in distressed securities. Since late September, U.S. debt has risen to nearly $11 trillion. In January, the Congressional Budget Office (CBO) projected that the U.S. deficit would rise to more than 8% of the gross domestic product (GDP) later this year.

The new budget, however, proposes to add more to the national debt “than all previous presidents—from George Washington to George W. Bush,” according to Stanford University economics professor Michael Boskin. Obama promised that 95% of Americans will see no tax increase. Yet his budget proposes to raise earnings taxes over the current payroll cap of $106,800, the top marginal rates to nearly 40% and capital gains and dividends taxes to 20%. That means, as Boskin notes, Obama is cutting average Americans’ work and savings incentives—most heavily impacting the middle class, not the super-rich.

Undoubtedly, Obama’s economic maneuvers will worsen matters, something reflected in Obama’s speedily declining popularity. Obama’s support already undercuts that of President George W. Bush at an equivalent moment in 2001, reports the Wall Street Journal. Roughly 83% of Americans worry that Obama’s financial measures will fail, and things will get worse. Two thirds wanted Obama to spend less. And most Americans expect to pay higher taxes, despite assurances to the contrary. Obama has lost much Independent, and virtually all Republican support, and has lower approval than any elected 20th century president at comparable points. Finally, while slightly more Americans have overall faith in Obama, 45% have no confidence in him, an increase since his January inauguration.

Americans especially disapprove of Obama’s costly proposal to generate at least $646 billion in “climate revenues” through 2019—from a “cap and trade” tax for every ton of carbon emitted. These expenses would be dispersed throughout the economy, falling on every consumer large and small. Within ten years they would make “climate revenues” the 6th largest federal revenue stream after individual and corporate income taxes, Social Security and Medicare payroll, and excise taxes. Of that, Obama proposes redistributing $15 billion annually to subsidize alternative fuel and $65 billion to subsidize workers who frequently pay no income taxes.

Worst of all, this proposed “climate tax” wealth redistribution mechanism results from a bogus global warming theory completely debunked scientifically. Human activity generates only 4% of atmospheric carbon, which totals only 2% of the vast global oceanic carbon sink, according to Resource and Environmental Geology Professor Tom Segalstad at University of Oslo. Moreover, atmospheric carbon emissions linger only five to six years—before the calcium-rich oceans absorb them, he says.

Nor will Treasury Secretary Thomas Geithner’s proposed new financial regulations—including new capital requirements for the largest 10 banks, increased Federal Reserve Board economic risk monitors, tightened bank regulatory oversight and stricter control over inter-bank money flow—outweigh the mass of negative budgetary factors. The U.S. stock and bond markets last week booed Obama with several consecutive days of decline. Even Federal Reserve Chairman Ben Bernanke is now on the defensive: In a CBS 60 Minutes interview aired Sunday March 15, Bernanke claimed the economy will recover, albeit not until the financial markets and banks stabilize. That gave small comfort to Americans who have lost roughly 50% of their wealth since November 2007.

Yet the vast majority of world leaders at the January World Economic Forum in Davos, Switzerland were stuck in what Harvard economics professor Niall Ferguson labels a “Great Repression,” that is, deeply anxious yet “fundamentally in denial about the nature and magnitude of the problem.” They reflexively reach for “dog-eared copies of John Maynard Keynes’ [1936] General Theory,” an economic theory prescribing heavy government spending to offset market instability in periods of high unemployment. And they almost universally prescribed issuing more debt to cure a global economic crisis caused by—an overabundance of easy credit and debt.

This fundamentally delusional mindset trusts that “a crisis of debt can be solved by creating more debt.” Yet, the West’s harsh repressed reality, Ferguson observes, is its current “crisis of excessive indebtedness”—-overly leveraged households, corporations and governments, alike. Average U.S. household debt is now 141% of disposable income (that is, income after taxes); in the U.K. it’s 177%. Some of the best known U.S. and European banks have overextended balance sheet debt to “forty, sixty or even a hundred times the size of their capital.” In short, they’re largely under water. Meanwhile, the U.S. federal budget deficit could easily hit 10% of GDP in 2009, Ferguson believes, and the CBO grossly underestimates the ultimate impact of that U.S. national debt explosion.

The only obvious solution, Ferguson correctly opines, is less debt, not more. Two methods ostensibly exist to reduce that debt—artificially inflating the U.S. dollar or renegotiating the debt. The first option is not currently feasible. While most economists eye inflationary pressure, deflation has already significantly eroded prices—and with them, opportunity to print enough money to escape a crisis this big. In the last quarter of 2008, deflation cut the consumer price index by a seasonally adjusted 12.7% per annum. The only remaining solution is restructuring. Bank shareholders must face their losses; bondholders must exchange debt for stock—at a negotiated discount—and governments must re-capitalize financial institutions after writing down their assets.

In the 19th century, Ferguson concludes, governments repeatedly exchanged higher-yielding bonds for lower-yielding securities. Bonds yielding 5% were swapped for 3% bonds, for example, without a whiff of default. Thus, homes could be refinanced, banks recapitalized and privatized, and the U.S. economy reset.

But time is wasting. Obama should quickly take Ferguson’s dark warning seriously to heart: “If we are still waiting for Keynes to save us when Davos roles around next year, it may well be too late.” Otherwise, his popularity is sure to plummet to unheard of lows.
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Alyssa A. Lappen, a freelance investigative journalist, is a former senior fellow of the American Center for Democracy, former senior editor of Institutional Investor, Working Woman and Corporate Finance and former associate editor of Forbes. Her work has also appeared in FrontPage Magazine, the Washington Examiner, Washington Times, Pajamas Media, American Thinker, Human Events, Right Side News, Midstream and Revue Politique. Her website is https://www.alyssaalappen.org/

Should the U.S. nationalize banks?

There may be a simpler solution to the credit crunch.

By Alyssa A. Lappen
Front Page Magazine | March 2, 2009

Well, it’s official.

Last Friday, the U.S. came within a hair of nationalizing a sick major bank. The government will receive up to 36% of Citigroup common shares—what financial markets would call control—for up to $25 billion in preferred stock bought in a failed October attempt to shore up the bank’s ailing capitalization.

For U.S. taxpayers, this could be a lose-lose proposition: As President Barack Obama’s newly named National Economic Council director Lawrence Summers observed last July, government sponsored enterprises (GSEs) tend to privatize profits and socialize losses. But the outcome will depend on Treasury Secretary Timothy Geithner’s next step, which he has not yet specified.

Yet pumping new capital into sick banks hasn’t worked. Hundreds of billions in taxpayer funds barely dented the problem. At least Uncle Sam won’t commit ad infinitum to back Citi’s liabilities without control, dramatic policy changes and a total dividend moratorium. Common shareholders stand to see their 100% Citigroup stake tumble to 26%, but have little choice. The alternative could be total loss. Perhaps $27.5 billion in preferred and special stock may also be converted in the potential $52.5 billion deal if owners like Saudi Prince Alwaleed bin Talal, Singapore’s Government Investment Corp., Capital Research Global Investors and Capital World Investors and Abu Dhabi Investment Authority agree.

“This does something critical for the common good,” says Albert Romano, a former money center bank senior manager and trader, adding banks are but one industry affected by multiple converging crises. “We face widespread systemic risk. The overarching challenge goes beyond political views and philosophical differences.”

Even some die hard capitalists believe circumstances so grave that the U.S. must nationalize its banking system. Besides $1.2 trillion in subprime mortgages, New York University economics professors Matthew Richardson and Nouriel Roubini contend, $7 trillion in commercial real estate loans, consumer credit card debt, high-yield bonds and other loans could lose much of its value. The International Monetary Fund and Goldman Sachs predict bank loan write downs, now above $1 trillion, could exceed $2 trillion. Combined U.S. bank loan and portfolio losses could reach $3.6 trillion, with banks absorbing $1.8 trillion, the professors project. Banking industry capital, after U.S. government assistance, was only $1.4 trillion last fall—“about $400 billion in the hole.” Based largely on Sweden’s 1992 example, they argue, only nationalization, system-wide “receivership,” would stop “the death spiral,” resolve “toxic assets in an orderly fashion” and finally let lending resume.

Others disagree.

Sweden‘s emergency bank authority resembled the Federal Deposit Insurance Corporation, writes former Stockholm School of Economics professor Anders Aslund, a senior fellow at Peterson Institute for International Economics. “It is sheer waste to try to recapitalize a damaged bank,” as the U.S. did with Citibank and others. Like “a worm in an apple,” toxic debts left alone “will devour the whole apple.” Sweden categorized banks as obviously bankrupt, under-capitalized but salvageable, or private but in “rude health.” It reviled private-public partnerships like the “telling and repulsive” Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac). Only Sweden’s bankrupt Gota Bank was nationalized and merged into the government’s own bankrupt Nordbanken, which was reconstituted as Nordea, revitalized and privatized. Private banks created private bad banks, through which they discounted or sold non-performing loans.

Already under government control, Fannie Mae and Freddie Mac remain prone to privatize gains and socialize losses. Respectively founded in 1938 and 1970 to fill mortgage lending gaps, both benefit from U.S. government debt guarantees. In the early 1980s they “fed off the carcasses of the thrift industry,” enabling troubled savings and loans “to liquidate mortgage portfolios without recognizing losses.” Later, their easy lending policies fueled the current crisis: In 2003, they together held over half America’s outstanding mortgage debt. The Bush administration last year nationalized both bankrupt agencies. Yet they remain guarantors of the American dream—making home ownership universally available—a goal the Obama administration hasn’t relinquished.

Of most immediate concern is the banking industry’s terrible capitalization. Bank regulators require at least 6% of overall bank capitalization to be Tier 1—i.e. “intangible” preferred and special securities that ordinarily measure an institution’s health. For huge “money center” banks like Citi, U.S. economic cornerstones, regulators expect much higher Tier 1 capital ratios. But markets currently hate Tier 1 capital still more than bank common stock.

Thus the U.S. devised the new Citigroup rescue plan largely to sooth markets by creating up to $81 billion in tangible capital. Taxpayers lose out: The U.S. has collected only a quarter of $2.25 billion in annual dividends originally expected on $25 billion in preferred stock since October, although besides the control block, the U.S. would retain $27 billion in two other preferred “rescue” issues to convert into “separate trust preferred securities” paying 8% annually.

Unfortunately, markets disapprove. Citigroup shares fell 39% Friday, and further in after hours trading. Other banks were also pummeled. “The dose of intervention and its intended objectives will ultimately determine the validity of this temporary model,” says Romano. But as to whether political animus or President Obama’s social agenda will prevent an orderly resolution of the mess, the jury remains out.

Disgraced Merrill Lynch managing director Henry Blodget calls Geithner a “weird reverse Robin Hood,” shoveling money from regular guys “into banks that vaporize it.” The U.S. should force Citi to write down its assets and convert the company’s debt to common stock. Blodget understands balance sheet toxic assets have to go.

Unfortunately, “mark-to-market” accounting rules, intended to forestall managers from doctoring true asset values to disadvantage shareholders, are self-defeating in the current market. Panic has virtually eliminated normal markets, slashing bank balance sheet values for some of the most troubled assets to far less than the “near expected rate” cash flows that they currently produce.

Thus the obvious, best and simplest solution, also possibly closest to Sweden’s successful model, might be removing “bad” assets from bank balance sheets at “net realizable value,” argues American Enterprise Institute senior fellow Peter J. Wallison. Translation: paying a normal market price, if there were a normal market to realistically assess. Normal prices generally approximate current cash flows “discounted by expected credit losses over time.” Bank balance sheet losses are temporary “liquidity losses,” not indicative of whether banks are sufficiently financed to continue “until liquidity returns to the asset-backed market.” Banks aren’t insolvent, and “nationalization would be a huge mistake.” The U.S. could and should simply buy assets at independently-verified net realizable values, thus significantly improving bank industry capitalization—and U.S. economic health. Ultimately, taxpayers would lose little, since the government could sell the “toxic” assets for their true value, like Sweden’s private banks eventually did.

In any case, delaying puts the U.S. at risk of tumbling into something akin to Japan’s 1990s, decade-long banking crisis, Swedish economist Aslund warns. The Obama administration must “act fast” to identify, write off, and remove bad debts from normal banks—especially since assets at those banks equal at least $1 trillion, or 7 percent of America’s gross domestic product (GDP).

Leahy’s “Truth Commission”

Vermont Senator Patrick Leahy tries to fuel the partisan mud-slinging machine

by Alyssa A. Lappen
Front Page Magazine | Feb. 16, 2009

Two of Congress’s most radical members believe George W. Bush’s America was the equal of apartheid South Africa.

Last week, Vermont Senator Patrick Leahy proposed that Congress establish a “truth commission” to investigate alleged Bush misdeeds. In the House, Judiciary committee chairman John Conyers seconded Leahy’s request.

The concept of the “truth commission” originated in post-apartheid South Africa, when the Mandela government launched an investigation into crimes against humanity. Punishments were waived on the grounds that the nation needed to know the truth about the white minority regime’s suppression of black Africans. Presumably, Leahy assumes President Bush engaged in equally egregious behavior during the War on Terror. Leahy, like his Michigan colleague Carl Levin, hopes to distort any circumstantial evidence he uncovers about how Bush-44 successfully kept this nation free from a second terrorist attack for seven years into proof of the greatest violation of civil rights since Lincoln suspended habeas corpus.

If the investigation exposes the ongoing, covert measures Bush has taken to keep America safe, Leahy will only smile as they are revealed. He has a long history of exposing the most vital secrets of our nation. At least one operative was murdered after Leahy publicly leaked a 1985 intercept that had enabled the capture of the Achille Lauro terrorists. After Leahy leaked a 1986 covert operation to topple Libyan dictator Moammar Gaddhafi, it was necessarily canceled. But for that, in other words, 270 victims of Libya’s Pan Am 103 bombing over Lockerbie Scotland might still be alive.

Finally in January 1987, Leahy was forced to resign as vice-chair of the Senate’s Select Committee on Intelligence after leaking classified information on the Iran-Contra affair. Not surprisingly, after 9/11, the FBI investigated national security leaks from Congress, specifically House and Senate Select Intelligence committee leaks.

In the 14 years after resigning from the intelligence committee in disgrace, the Vermont Senator also thwarted key speech and public education. In July 1999, then Defense Secretary William Cohen in a Washington Post op-ed predicted a major terrorist attack on U.S. soil. He and Secretary of State Madeleine Albright were so convinced Osama bin Laden would hit the U.S. that they canceled a planned visit to Albania that month. Yet in 2000, for fear of an unspecified threat against “civil liberties,” Leahy successfully opposed publication of a 2000 National Commission on Terrorism report in intelligence legislation—another measure that could have saved lives.

Had terrorists ended up in the U.S. courts, many benches would be empty thanks to Leahy. Through January 2001, he chaired the Senate Judiciary Committee. He grew petulant, however, when New Hampshire Sen. Judd Gregg replaced Leahy—and Bush appointed John Ashcroft as Attorney General over his intense objections. (Mind, many early Ashcroft opponents ended up heralding him as a hero for defending the U.S. Constitution far better than they’d expected.) In June 2001 Leahy returned as Senate Judiciary chair for 18 months. He then worked overtime to halt and block Bush judicial nominations. As ranking committee member from January 2003 through December 2006, he likewise plotted to thwart every Bush judicial nominee, an allegation he tried to turn against Republicans who attempted to expose him. In January 2007, upon resuming the Judiciary chairmanship, Leahy reinforced his stalwart political blockade, which he maintained throughout the 110th Congress. Political shenanigans over judicial nominees grew so pronounced that even the Washington Post objected to what it called intentional “justice delayed.”

The scales of justice are highly imbalanced in Leahy’s world. Pat defended Illinois Senator Richard Durbin when he compared U.S. troops in Guantanamo Bay to Nazis on the Senate floor. Leahy quickly appeared on Vermont’s Charlie & Ernie talk radio show. Although the Wall Street Journal directly quoted the U.S. Congressional Record, Leahy whined WSJ reporters “are notorious for taking quotes totally out of context, even making them up.”

Now, Leahy wants to convince the public that his “Truth Commission” is merely a good faith attempt to “get to the bottom of things.”

Were he interested in investigations that may have some political impact, he could turn his attention to potential conflicts of interest in the Obama administration. Although Obama signed an executive order barring lobbyists from serving in his administration, he also signed 17 lobbyist waivers including Attorney General Eric Holder (until 2004, a registered lobbyist for clients like bankrupt Global Crossing), White House intergovernmental affairs director Cecilia Munoz (through 2008, an anti-immigration enforcement advocate for National Council of La Raza) and Deputy Defense secretary nominee William Lynn (until 2008, a Raytheon defense contractor executive and registered lobbyist).

Leahy could investigate campaign donations Obama received from disgraced former Federal National Mortgage Association (Fannie Mae) chairman Franklin D. Raines and his supporters, which total more than $100,000. Obama gave his blessings and state and federal legislative help to several developers who subsequently received more than $700 million in subsidies and loans for their projects. The developers, including Obama’s Chicago law partner Allison Davis, Syrian developer Antoin “Tony” Rezko (now incarcerated on 16 political corruption charges) and Chicago slumlord Cecil Butler, among others, all profited greatly from loans to unqualified borrowers—largely at U.S. taxpayer expense. These may have only the appearance of impropriety — but had they occurred in the Bush administration, Leahy would have long since started mining the “truth.”

Leahy’s blatant partisan witch-hunt is the most recent sign that Bush Derangement Syndrome remains alive and well. Whatever the left’s talk of “hope and change,” of abandoning the “politics of fear,” its bomb-throwers simply wish to continue fighting yesterday’s battles, because their hatred will not allow them to, err, Move On.