But, many people I met asked, "What does it mean for Democrats to take the issue 'seriously'?" The answer is simple: They must attack not only the headline-grabbing excesses of gifts, trips and meals, but also, more significantly, go after the core of the problem, which is the nexus of money and politics. Specifically, they must push to publicly finance all congressional elections.

I know, I know-I and other groups like Public Campaign have probably sounded like a broken record on this issue for a long time now. But that's only because the campaign financing system really is at the root of corruption. We have a system that is legalized bribery-legal campaign contributions go in, and legal legislative favors go out. But just because it is legal, doesn't mean it isn't unethical and isn't one of the major reasons why our government can no longer solve problems. It is. A government cannot solve problems if members of Congress making decisions are forced by virtue of their campaign finances to appease the Big Money interests that are often at the root of those problems.

So what are the prospects for congressional action on public financing with an election mandate at lawmakers' back? Here is a look at the proponents and opponents-and what will make the difference.

The Good Signs

Buried in a Sunday New York Times article we get our first glimpse of the major players pushing real reform:

"Spurred by the election results, several Democrats in addition to [Illinois Democratic senator] Mr. [Barack] Obama are pushing bigger changes. Senator Richard J. Durbin of Illinois, the No. 2 Democrat in the Senate, is preparing a proposal for some form of public financing or free broadcast time for congressional candidates to reduce their dependence on campaign donors. Common Cause says that 21 newly elected Democrats, more than half the class, and 69 incumbents have signed a pledge endorsing the idea."

Obama could be particularly pivotal. As I reported from my interview with him for The Nation earlier this year, the Illinois senator has shied away from pushing any proposal on any issue that fundamentally challenges the Washington power equation. However, the one issue that he appears willing to consider spending his political capital on is campaign finance reform. As an Illinois state legislator, he authored a bill to publicly finance his state's judicial elections. And recall his appearance on "Meet the Press" in January of 2006:

SEN. OBAMA: This is the part of the job I dislike the most, which is having to raise money. It is something that none of us are immune from because of the amount of money that has to be raised in order to get on television and run campaigns. It is a problem that I have to deal with, it's a problem that John McCain has to deal with, it's a problem that Russ Feingold has to deal with. It's something that all of us wrestle with. My belief in terms of moving forward on the ethics legislation is that we've got some low-hanging fruit that we should take care of right away...There are some easy things that we can do that hopefully will build momentum for some of the tougher stuff, which involves, how do we reduce the enormous amounts of money in politics generally? And those are going to be some tough questions, because they might involve, for example, asking the question, "Why don't we have free television time, for candidates, to reduce the amounts of costs?" My suspicion is that NBC, just like ABC and CBS, wouldn't necessarily be wild about those approaches, but that's the kind of conversation over the long term we're going to have to have. This is a starting point.

MR. RUSSERT: Would you consider public financing of campaigns?

SEN. OBAMA: I think that we should consider all approaches that would reduce the amounts of money that are required for campaigns.

Obama, of course, is not alone. Well-respected lawmakers have been pushing public financing for some time, including top Democrats who authored bills in the last Congress. Meanwhile, polls show the public has long supported the concept. As recently as 2000, the Washington Post reported that national polling on the issue showed "respondents did show enthusiasm for [public financing systems] that have already been endorsed by voters in Maine, Arizona, Vermont and Massachusetts." Even "when pollsters offered criticism of public financing, suggesting for instance that it would be 'welfare for politicians' and would encourage more fringe candidates to run, support for full public funding remained at 67 percent." The overwhelming popularity of the idea explains why at least some moderate Republican senators have indicated interest in supporting the concept.

The Bad Signs

In the same Sunday New York Times piece that offered hope for public financing, we also get a good look at the opposition:

"[Public financing] has never gained much traction in Congress, in part because lawmakers balk at the notion of helping challengers who want their jobs. 'You use taxpayer dollars to finance people who may not only be fringe candidates but-I was going to use the term 'nut'-may be mentally incompetent,' Ms. Feinstein said."

Sen. Feinstein's logic, of course, is a patently dishonest canard, though you've got to give her credit-her lie is an effective one in how it brings up thoughts of taxpayers having to fund the Charles Manson for Congress campaign. But let's get back to reality: Every serious public financing proposal-including the ones that have passed in states like Arizona and Maine-create thresholds to almost totally limit the possibility of "mentally incompetent" people from receiving taxpayer dollars to run a campaign. These thresholds often involve a candidate having to raise a certain number of small dollar contributions from a geographically diverse base in order to qualify for public dollars.

Nonetheless, Feinstein is not the lone Democratic obstacle to public financing. In a May 2006 Roll Call article, the spokesman for now-Majority Leader Steny Hoyer,D-Md., said that public financing "is not something he's looked at or focused on extensively." That's Washingtonese for "he will fight against it all the way." And really, should we be surprised? Hoyer is the same lawmaker who brags to reporters about heading up the Democrats' K Street Project. Incoming Speaker Nancy Pelosi, a longtime proponent of public financing, may balance Hoyer's position, but she too has recently gone out of her way to make clear that public financing was not something she would use her leadership position to push with the entire Democratic Caucus. "It's her personal opinion," her spokeswoman told Roll Call , "downplaying the significance of the leader's pronouncement" in support of public financing on national television in 2006.

Pelosi's wavering likely comes, in part, from K Street pressure. As highlighted by recent pieces in the New York Times and Wall Street Journal , a new army of Democratic-affiliated corporate lobbyists is salivating at the prospects of passing goodies through the new Congress. These mercenaries know the only way they can serve their clients is to transform massive corporate campaign contributions into legislative favors. A public financing system would effectively cut that scheme off at the knees, meaning K Street is probably already working hard to prevent any strong reforms that target the intersection of money and politics. These are not people who play nice -they play hardball. Remember, just a few months ago Big Business tried to unseat Portland, Oregon's mayor specifically because he championed public financing. The Washington version of that small-town West Coast drama would be even more severe.

What Will Make The Difference?

Because public financing so fundamentally threatens how business is done in Washington, it will only become reality if progressives hit the trifecta of massive grassroots/netroots pressure, support from the batch of new lawmakers who ran on an anti-corruption platform, and an infusion of star power from someone like Obama. And make no mistake about it: the latter two wild cards have no chance of happening without the grassroots component-a narrowly focused, carrot-and-stick campaign to embarrass, cajole and pressure Congress to act.

With so many issues and expectations for the new Congress, can a campaign like this be built? Absolutely. Well-organized groups like Public Campaign and Common Cause already have substantial political infrastructure to work with. Similarly, though the progressive netroots' has lacked a fully developed pan-issue ideology, it has consistently coalesced around the concept of taking political power from elites and redistributing it outside the Beltway. Public financing is, at its heart, the most nonideological way to do just that.

The question, in other words, is not "can" but "will"-will this campaign be built? Let's hope the answer is yes.

David Sirota is the author of Hostile Takeover: How Big Money and Corruption Conquered Our Government--and How We Take It Back (Crown, 2006).

The FSA said yesterday that an "appropriate" benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed. It stressed that this was not a forecast but a "severe but plausible scenario" and one that banks should examine when deciding how robust their balance sheets were.

In a speech to the British Bankers' Association yesterday, Clive Briault, the FSA's managing director for retail markets, remarked on banks' differing views over the size and impact of a house market downturn, hence the need for reference points.

He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.

In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls.

"We were struck by how mild the firm-wide stress events were at some of the firms we visited," wrote the FSA's director of major retail groups, David Strachan.

A few banks were "weak in all respects" in stress-testing.

House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.

Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made.

The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.

President George W. Bush, and most of the financial pages of the U.S. press, may still be touting the "wonderful economy" in the United States, but over recent days, warnings of a systemic crisis, and impending financial blowout, have been issued by leading representatives of major U.S. financial institutions. All are talking of the risk of out-of-control financial chaos, as a result of the massive, unpayable debt bubble created by Alan "Derivatives" Greenspan. There is not a hint of a solution to the onrushing crisis in any of these alarums, but, as Lyndon LaRouche noted in his Nov. 16 webcast, if they serve to wake people up to the danger ahead, they will be useful indeed.

Until now, with the exception of New York Federal Reserve head Timothy Geithner's, warnings about imminent implosion of the doomed financial bubble have come from European personalities, especially in London. Now, it appears that reality is about to strike home.

Danger to the Dollar

Former Clinton Treasury Secretary Robert Rubin, now an executive at Citigroup, has been up-front for months in warning of the unsustainability of the Greenspan "wall of money" economy. In statements widely circulated on the Bloomberg financial wire Nov. 15, Rubin said the failure to stem the growing U.S. budget deficit may spook the central banks, hedge funds, and others who have been buying U.S. Treasury notes. "It seems almost inconceivable that this will continue indefinitely," Rubin said, in a videotaped message for a dinner hosted by the Concord Coalition. In a panel discussion at the event, former Federal Reserve chairman Paul Volcker concurred, saying that the U.S. borrowing requirements raise the risk of "crisis." "It's incredible people have gone on so long holding dollars. At some point, you will get a situation where people have had enough."

While the time frame Rubin cited for a dollar collapse-two and a half years-is highly understated, he has done his best to convey a sense of urgency about the crisis which the unsustainable borrowing, and speculation, promoted by the Bush Administration, has created.

On Nov. 16, a report by the Treasury Department confirmed the directionality Rubin has been pointing to. Foreign capital flows into the U.S. in September were at "only" $53 billion, starting to fall below the level of funding the monthly U.S. current account deficit. After eight to nine months of inflow in the $80-$100 billion range, it dropped in August to about $65 billion. Net purchase of U.S. Treasuries was also at just about $53 billion, with a net foreign sell-off of short-term T-Bills, and big inflow into long-term T-Notes and Bonds.

While the value of the U.S. dollar is already falling, the collapse in foreign capital inflow could turn it into a rout.

Those Ballooning Derivatives

On Nov. 10, none other than Administration insider, Comptroller of the Currency John C. Dugan, issued his own warning about the danger of a shock to the financial system. He spoke to the New York Bankers Association meeting in Phoenix, Arizona, specifically on the question of derivatives.

Although Dugan's statement was couched in all sorts of reassuring language about the ability of the large banks to "control" the situation, to anyone in the know, his message read more like a warning. Derivatives (i.e., gambling) dominate the world financial environment, whether individual banks are involved in them or not, Dugan emphasized, and if the large U.S. commercial banks-which represent 20% of the total global volume of derivatives-should stumble, that would affect the health of all banks in the United States (he could have also said, the world).

Why should all bankers be concerned about "risks" in the derivatives markets? Dugan asked rhetorically. "Because significant mismanagement of these risks could precipitate market disruptions that affect public confidence in financial institutions generally."

With one in six national banks using derivatives, he said, total credit exposure has now hit $199 billion. This, he stressed, is much less than the total notional value of outstanding derivatives, $119 trillion (an understated figure, according to EIR estimates), but vigilance is required. There must be "constructive cooperation between government and the industry," Dugan said, citing the President's Working Group on Financial Markets (known as the Plunge Protection Team, for its obvious work in pumping liquidity into failing stock markets), and cooperation between derivatives traders and supervisors as examples.

In moving to the question of risk, Dugan understates the case, but, in bankers' language, he succeeds in conveying the danger. I quote:

"As I've already noted, at $199 billion, the net current credit exposure numbers in the banking system are very large... [discussion of how derivatives traders demand additional collateral]. In sum, the very large amount of net current credit exposures arising from derivatives activities of large banks is not quite as worrisome as it may first appear....

"Nevertheless, derivatives credit exposure remains a real and quite significant risk. Fierce competition can have the effect of reducing the level of collateral protection that banks require. Unexpected market disruptions or other stress events can produce dramatic increases in credit exposures that can blow through the collateral required for more predictable market scenarios. Many derivatives counterparties are highly leveraged, producing less room for error in credit judgments. And the balance sheets of such counterparties are frequently opaque, making it impossible for bank dealers to assess risks embedded in 'away trade' that don't involve that bank. For all these reasons, we and other regulators will continue to closely monitor margin levels, stress testing, scenario analysis, and other tools that derivatives dealers need to use effectively to manage derivatives credit risk" (emphasis added).

Of course, monitoring will not stop a blowout, which could occur any day.

That Imploding Real Estate Bubble

Another U.S. financial overseer, director of the Office of Federal Housing Enteprise Oversight James Lockhart, weighed in with a warning on Nov. 9, involving the thoroughly alarming and dramatic statistics on the melting U.S. housing bubble. Also speaking to the New York Bankers Association conference, Lockhart called for bank-regulatory-like powers in order to address "significant" implications to financial markets and institutions of the potential "severe financial difficulties" at the "highly leveraged" Federal mortgage lending agencies known as Fannie Mae and Freddie Mac.

As of the end of 2005, these two government-sponsored enterprises together owned or guaranteed more than 40% of the residential mortgages in the United States, or about $4 trillion in debt, including mortgage-backed securities. Such rapid growth of portfolios held by Fannie/Freddie, he insisted, has increased "their own potential for causing systemic events."

Banks now face great risk through their overwhelming exposure to mortgage debt, which has since 2000 grown so explosively that it dominates bank and brokerage assets-and which is now falling more and more sharply, as plunging rates of new home starts reported again on Nov. 17, clearly showed. Lockhart said. "In particular, banks with large amounts of this debt could experience losses and liquidity problems, "resulting in a reduction in bank lending or even bank failures." More than 60% of banks held Fannie/Freddie debt, and mortgage-backed securities, and in combination these are worth over 50% (!) of those banks' Tier 1 capital, as of the end of 2005. Many mortgage lenders also "would have difficulties maintaining their business models," Lockhart said blandly.

In fact, none of these impending crises-in the banks, derivatives markets, and housing market-can be prevented, or dealt with, without junking the current bankrupt system, dumping masses of unpayable speculative debt, and putting the financial system back on a sound basis. If these warnings result in alerting policy-makers to study that solution, which has been put forward by Lyndon LaRouche, they will have served a good purpose.

Though technically an independent, Sanders will caucus with the Democrats in the Senate, as he has in the House since he was first elected as Vermont's single representative in 1990. The Dems' one-vote margin should give him considerable leverage: Nobody seriously thinks he would routinely vote with the GOP, as fellow independent Joe Lieberman might well do on some issues, but Sanders is also not a party-line man and in the past has joined Republicans on votes against NAFTA, trade with China, and other issues.

When I stopped by his office last week - still his old digs in the Rayburn House Office Building - Sanders, in his standard sport coat and slacks, first excused himself to make a quick phone call: "Hello," he said, "this is Senator-elect Bernie Sanders. Would Senator Kennedy have a little time this afternoon?" He was still getting adjusted, he confessed, to being part of what he calls the "House of Lords." He demurred on my questions about Robert Gates, Bush's nominee for secretary of defense ("I don't know anything about him") and the Murtha-Hoyer leadership fight among his former colleagues in the House. Instead, he insisted on talking about wealth.

Mother Jones: What's your first-100-days agenda?

Bernie Sanders: The first thing I want to do is to force reality onto the floor of the Senate so that we can end this stupid discussion about how great the American economy is. The economy is not great. The economy is a disaster for the middle class.

Second, I want to focus on an issue that is almost never talked about on the floor - that is the power of big money. What are the moral implications? What do these people do when they have tremendous amounts of money? They use that money to perpetuate their own wealth and their own power. Every day, Congress works on behalf of big-money interests.

Third, I want to take a look at some of the good things that are being done around the rest of the world that are almost never discussed in the United States. How often is it discussed that the American people work the longest hours of any industrialized country in the world? The two-week paid vacation is almost a thing of the past; meanwhile in Europe you get four to six weeks vacation, and maternity leave with pay. We don't know about these things. I want to take a look around the world and see what workers are receiving, and compare that to the United States - from an educational point of view.

MJ: How would you force these discussions? Through committee hearings?

BS: Yes - I was very fortunate in that [Senate Majority Leader] Harry Reid gave me the committees I wanted. I am on Kennedy's Health, Education, Labor, and Pensions Committee. I am going to be on the environmental committee, with Barbara Boxer, which is what I wanted. Also the veterans committee, the budget committee, and the energy committee; Harry gave me what I wanted.

MJ: You talk about big money. But nobody has seriously looked at this since Wright Patman, the old Texas populist and antitrust crusader who chaired the House Banking Committee for, what, 40 years?

BS: That's right. Patman produced a book on concentration of bank ownership. We can do things like that-take a hard look at who owns America.

MJ: You'd do it through Kennedy's committee?

BS: Yes. We would demand studies, raise questions, get the word out.

MJ: Do you think that Americans are getting nostalgic for a sort of FDR Democratic Party?

BS: No. I think that what this election was about was a rejection of the disastrous policies of Bush, Cheney, and the Republican leadership. It was the war in Iraq. It was incompetence. It was Katrina. It was bad public policy, but it certainly was not an embracing of an alternative philosophy, because in fairness the Democrats are all over the place, and what I have said to the Democratic leadership and will say publicly every chance I get, if the Democrats - having this opportunity no one thought they would have - if they do not move boldly and decisively and make a difference in the lives of ordinary Americans, they're going to be in a lot of trouble.

MJ: Are you a Democrat, an independent, or a socialist?

BS: You can call me anything you want. I won with the label "Independent" next to my name. If you ask me, "Are you an independent democratic socialist?" - yes, I am. But then we have to talk about what that means.

The sycophancy isn't surprising. Friedman was blessed with it from the start. For example, the supposedly liberal PBS starred him in a ten part series, "Free to Choose" in 1980 just in time to help Reagan win the presidency. To this day, even NPR babbles about the "free market" when you all you have to do is count the number of lobbyists in Washington to understand that such an economy doesn't exist.

Further, one of the best kept secrets of economics is that there are lots of systems that work provided, that is, you don't care who they work for. Feudalism, for example, was great if you were a lord, not so efficient a marketplace is you were merely a serf. And each system works differently depending on the culture in which it operates, which is why communism in the Soviet Union, China and Italy meant such different things. In the end, the real test of an economy is not its math but its social, financial and moral effect on its culture and those who live there.

This is why the commentaries on Friedman were so consistently wrong. They treated economics as though it was a cold science when, in a mind as distorted as Friedman's, it was really just a sort of creationism myth applied to money.

If you read far enough down the stories, you would find, grudgingly, a single quote from a critic. The Washington Post cited Galbraith biographer Richard Parker who said that Friendman's "passionate calls for financial and securities market deregulation played no small role in ushering in the half-trillion dollar S&L fiasco of the 1980s and the deeply corrupt Wall Street stock market boom of the 1990s. His tax-reduction-at-all-costs policies helped lead to the nation's yawning budget deficits." And the Wall Street Journal admitted deep in its account, "Critics said he inspired policies that put millions of people out of work in pursuit of low inflation and demonized almost everything the government did, no matter how beneficial or democratically chosen. 'Milton Friedman didn't make a distinction between the big government of the People's Republic of China and the big government of the United States, said James Galbraith, professor of government at the University of Texas."

But for the most part both public figures and the media bought Friedman's mythology, never stopping to look critically at the effect it had on America. Here are a just few things that have happened since America's elite swallowed the Friedman myth:

- Real income down
- Real manufacturing wages down
- Top one percent's share of wealth up
- Income gap between rich and poor up
- Family indebtedness up
- Bottom forty percent's share of wealth down
- CEO pay as a percent of average workers' pay up
- Workers covered by pensions down
- Workers covered by health plans down
- Age at which one can receive Social Security down
- Personal bankruptcies up
- Housing foreclosures up
- Median rent up

But the worst damage of Friedman economics is not fiscal but what it has done to the social and moral principles that made America what it was before the greedsters of neo-capitalism began taking it apart. The underlying principle of laissez faire economics is that power is intrinsically good and decency intrinsically irrelevant.

No society can long function on such a lie. It is essentially that of the Mafia with the exception being that you don't have to always ignore the law to get what you want; often, with the help of your lobbyists and purchased politicians, you can just change it to fit your needs.

The moral vacuum was clear from the start. Ronald Reagan said things like "We were told four years ago that 17 million people went to bed hungry every night. Well, that was probably true. They were all on a diet." And: "Unemployment insurance is a pre-paid vacation for freeloaders."
As for Margaret Thatcher, whose platform of public selfishness was used as a model for the Reagan campaign, she thought there wasn't even anything one could call a community: "There is no such thing as society. There are individual men and women, and there are families." Thatcher wrapped herself in economic slogans that justified greed not only to accomplish economic ends but also to deal with gays and abortions and everything else she didn't like. In her paradigm, the free market and Victorian tyranny formed a civil union. By the time Reagan, Bush, and Clinton were through with the concept, they had created a gaping corporate exemption from common morality and decency. The market not only offered adequate justification for any act, it had replaced God as the highest source of law.

We have paid a terrible price for this corruption of our culture by the new robber barons egged on by Friedman and his ilk. We so accept their foul standards that we don't even discuss or debate them. We have become prisoners of their lie.

Until now, with the exception of New York Federal Reserve head Timothy Geithner's, warnings about imminent implosion of the doomed financial bubble have come from European personalities, especially in London. Now, it appears that reality is about to strike home.
Danger to the Dollar

Former Clinton Treasury Secretary Robert Rubin, now an executive at Citigroup, has been up-front for months in warning of the unsustainability of the Greenspan "wall of money" economy. In statements widely circulated on the Bloomberg financial wire Nov. 15, Rubin said the failure to stem the growing U.S. budget deficit may spook the central banks, hedge funds, and others who have been buying U.S. Treasury notes. "It seems almost inconceivable that this will continue indefinitely," Rubin said, in a videotaped message for a dinner hosted by the Concord Coalition. In a panel discussion at the event, former Federal Reserve chairman Paul Volcker concurred, saying that the U.S. borrowing requirements raise the risk of "crisis." "It's incredible people have gone on so long holding dollars. At some point, you will get a situation where people have had enough."

While the time frame Rubin cited for a dollar collapse-two and a half years-is highly understated, he has done his best to convey a sense of urgency about the crisis which the unsustainable borrowing, and speculation, promoted by the Bush Administration, has created.

On Nov. 16, a report by the Treasury Department confirmed the directionality Rubin has been pointing to. Foreign capital flows into the U.S. in September were at "only" $53 billion, starting to fall below the level of funding the monthly U.S. current account deficit. After eight to nine months of inflow in the $80-$100 billion range, it dropped in August to about $65 billion. Net purchase of U.S. Treasuries was also at just about $53 billion, with a net foreign sell-off of short-term T-Bills, and big inflow into long-term T-Notes and Bonds.

While the value of the U.S. dollar is already falling, the collapse in foreign capital inflow could turn it into a rout.

Those Ballooning Derivatives

On Nov. 10, none other than Administration insider, Comptroller of the Currency John C. Dugan, issued his own warning about the danger of a shock to the financial system. He spoke to the New York Bankers Association meeting in Phoenix, Arizona, specifically on the question of derivatives.

Although Dugan's statement was couched in all sorts of reassuring language about the ability of the large banks to "control" the situation, to anyone in the know, his message read more like a warning. Derivatives (i.e., gambling) dominate the world financial environment, whether individual banks are involved in them or not, Dugan emphasized, and if the large U.S. commercial banks-which represent 20% of the total global volume of derivatives-should stumble, that would affect the health of all banks in the United States (he could have also said, the world).

Why should all bankers be concerned about "risks" in the derivatives markets? Dugan asked rhetorically. "Because significant mismanagement of these risks could precipitate market disruptions that affect public confidence in financial institutions generally."

With one in six national banks using derivatives, he said, total credit exposure has now hit $199 billion. This, he stressed, is much less than the total notional value of outstanding derivatives, $119 trillion (an understated figure, according to EIR estimates), but vigilance is required. There must be "constructive cooperation between government and the industry," Dugan said, citing the President's Working Group on Financial Markets (known as the Plunge Protection Team, for its obvious work in pumping liquidity into failing stock markets), and cooperation between derivatives traders and supervisors as examples.

In moving to the question of risk, Dugan understates the case, but, in bankers' language, he succeeds in conveying the danger. I quote:

"As I've already noted, at $199 billion, the net current credit exposure numbers in the banking system are very large... [discussion of how derivatives traders demand additional collateral]. In sum, the very large amount of net current credit exposures arising from derivatives activities of large banks is not quite as worrisome as it may first appear....

"Nevertheless, derivatives credit exposure remains a real and quite significant risk. Fierce competition can have the effect of reducing the level of collateral protection that banks require. Unexpected market disruptions or other stress events can produce dramatic increases in credit exposures that can blow through the collateral required for more predictable market scenarios. Many derivatives counterparties are highly leveraged, producing less room for error in credit judgments. And the balance sheets of such counterparties are frequently opaque, making it impossible for bank dealers to assess risks embedded in 'away trade' that don't involve that bank. For all these reasons, we and other regulators will continue to closely monitor margin levels, stress testing, scenario analysis, and other tools that derivatives dealers need to use effectively to manage derivatives credit risk" (emphasis added).

Of course, monitoring will not stop a blowout, which could occur any day.

That Imploding Real Estate Bubble

Another U.S. financial overseer, director of the Office of Federal Housing Enteprise Oversight James Lockhart, weighed in with a warning on Nov. 9, involving the thoroughly alarming and dramatic statistics on the melting U.S. housing bubble. Also speaking to the New York Bankers Association conference, Lockhart called for bank-regulatory-like powers in order to address "significant" implications to financial markets and institutions of the potential "severe financial difficulties" at the "highly leveraged" Federal mortgage lending agencies known as Fannie Mae and Freddie Mac.

As of the end of 2005, these two government-sponsored enterprises together owned or guaranteed more than 40% of the residential mortgages in the United States, or about $4 trillion in debt, including mortgage-backed securities. Such rapid growth of portfolios held by Fannie/Freddie, he insisted, has increased "their own potential for causing systemic events."

Banks now face great risk through their overwhelming exposure to mortgage debt, which has since 2000 grown so explosively that it dominates bank and brokerage assets-and which is now falling more and more sharply, as plunging rates of new home starts reported again on Nov. 17, clearly showed. Lockhart said. "In particular, banks with large amounts of this debt could experience losses and liquidity problems, "resulting in a reduction in bank lending or even bank failures." More than 60% of banks held Fannie/Freddie debt, and mortgage-backed securities, and in combination these are worth over 50% (!) of those banks' Tier 1 capital, as of the end of 2005. Many mortgage lenders also "would have difficulties maintaining their business models," Lockhart said blandly.

In fact, none of these impending crises-in the banks, derivatives markets, and housing market-can be prevented, or dealt with, without junking the current bankrupt system, dumping masses of unpayable speculative debt, and putting the financial system back on a sound basis. If these warnings result in alerting policy-makers to study that solution, which has been put forward by Lyndon LaRouche, they will have served a good purpose.

This article appears in the November 24, 2006 issue of Executive Intelligence Review.

The biggest tax scam on earth has a very innocent sounding name. It is called "transfer prices." That almost sounds boring. It is, however, anything but boring. Abuse of transfer prices is a key tool multinational corporations use to fool the U.S. and other jurisdictions to think that they have virtually no profit; hence, they shouldn't pay any taxes.

Corporations involved in this scam are "model corporate citizens," or so they would like us to believe. The truth is that they rob us all blind. The money we lose can be estimated in the tens of billions, or possibly hundreds of billions of dollars every year. We all end up paying higher taxes because rich corporations make sure they don't.

But don't take my word for this.

A few weeks ago U.K.-based GlaxoSmithKline (GSK), one of the largest pharmaceutical companies in the world, together with the Internal Revenue Service (IRS) announced that GSK will pay $3.4 billion to the IRS to settle a transfer pricing dispute dating back 17 years. The IRS alleges that GSK improperly shifted profits from their U.S. to the U.K. entity.

And U.K. pharmaceutical companies are not alone with these kinds of problems. Merck, one of the largest U.S. drug companies, also this month disclosed that they face four separate tax disputes in the U.S. and Canada with potential liabilities of $5.6 billion. Out of that amount, Merck disclosed that the Canada Revenue Agency issued the company a notice for $1.8 billion in back taxes and interest "related to certain inter-company pricing matters." And according to the IRS, one of the schemes Merck used to cheat American tax payers was by setting up a subsidiary in tax-friendly Bermuda. Merck then quietly transferred patents for several blockbuster drugs to the new subsidiary and then paid the subsidiary for use of the patents. The arrangement in effect allowed some of the profits to disappear into Merck's own "Bermuda triangle."

I have described many more ways the global drug industry cheats and defrauds our government in my recent book, "The Whistleblower, Confessions of a Healthcare Hitman." In this article, however, I'm going to focus on how they, and other rich multinationals, use the tax system to defraud us.

So what's going on here, how have multinational drug companies been able to gouge us for years selling expensive drugs and then avoid paying tax on their astronomical profits?

The answer is simple. For companies in certain businesses, such as pharmaceuticals, it is very easy to simply "invent" the price a company charges their U.S. business for buying the company's product which they manufacture in another country. And if they charge enough, poof; all the profit vanishes from the US, or Canada, or any other regular jurisdiction and end up in a corporate tax-haven. And that means American and Canadian tax payers don't get their fair share.

Many multinational corporations essentially have two sets of bookkeeping. One set, with artificially inflated transfer prices is what they use to prepare local tax returns, and show auditors in high-tax jurisdictions, and another set of books, in which management can see the true profit and lost statement, based on real cost of goods, are used for the executives to determine the actual performance of their various operations.

Of course, not every multinational industry can do this as easily as the drug industry. It would be difficult to motivate $6,000 toilet seats. But the drug industry, where real cost of goods to manufacture drugs is usually around 5% of selling price, has a lot of room to artificially increase that cost of goods to 50% or 75% of selling price. This money is then accumulated in corporate tax-havens where the drugs are manufactured, such as Puerto Rico and Ireland. Puerto Rico has for many years attracted lots of pharmaceutical plants and Ireland is the new destination for such facilities, not because of the skilled labor or the beautiful scenery or the great beer-but because of the low taxes. Ireland has, in fact, one of the world's lowest corporate tax rates with a maximum rate of 12.5 percent.

In Puerto Rico, over a quarter of the country's gross domestic product already comes from pharmaceutical manufacturing. That shouldn't be surprising. According to the U.S. Federal Tax Reform Act of 1976, manufacturers are permitted to repatriate profits from Puerto Rico to the U.S. free of U.S. federal taxes. And by the way, the Puerto Rico withholding tax is only 10%.

Of course, no company should have to pay more tax than they are legally obligated to, and they are entitled to locate to any low-tax jurisdiction. The problem starts when they use fraudulent transfer pricing and other tricks to artificially shift their income from the U.S. to a tax-haven. According to current OECD guidelines transfer prices should be based upon the arm's length principle - that means the transfer price should be the same as if the two companies involved were indeed two independents, not part of the same corporate structure. Reality is that standard operating procedure for multinationals is to consistently violate this rule. And why shouldn't they? After all, it takes 17 years for them to pay up, per the GSK example above, even when they get caught.

Another industry which successfully exploits overseas tax strategies to cheat us all is the hi-tech industry. In fact, Microsoft Corp. recently shaved at least $500 million from its annual tax bill using a similar strategy to the one the drug industry has used for so many years. Microsoft has set up a subsidiary in Ireland, called Round Island One Ltd. This company pays more than $300 million in taxes to this small island country with only 4 million inhabitants, and most of this comes from licensing fees for copyrighted software, originally developed in the U.S. Interesting thing is, at the same time, Round Island paid a total of just under $17 million in taxes to about 20 other countries, with more than 300 million people. The result of this was that Microsoft's world-wide tax rate plunged to 26 percent in 2004, from 33 percent the year before. Almost half of the drop was due to "foreign earnings taxed at lower rates," according to a Microsoft financial filing. And this is how Microsoft has radically reduced its corporate taxes in much of Europe and been able to shield billions of dollars from U.S. taxation.

But remember, this is only one example. Most of the other tech companies are doing the same thing. Google recently also set up an Irish operation that the firm credited in a SEC filing with reducing its tax rate.

Here's how this is done in the software industry and any other industry with valuable intellectual property. A company takes a great, patented, American product and then develops a new generation. Then, of course, the old product disappears. Some, or all, of the cost and development work for the new product takes place in Ireland, or at least, so the company claims. The ownership of the new generation product and all income from licensing can then legally be shared between the U.S. parent company and the offshore corporation or transferred outright to the tax-haven. The deal, to pass IRS scrutiny, has to be made using the "arms-length principle." Reality is that the IRS has no way of controlling all these transactions.

Unfortunately those of us working and paying tax in the U.S. can't relocate our jobs and our income to Ireland or another tax haven. So we have to make up the income shortfall. In the U.S. we have a highly educated society with a very qualified workforce, partly supported by our tax payers. This helps us generate breakthrough products. But once a company has a successful product, they have every incentive to move the second generation of a successful product overseas, to Ireland and a few other corporate tax havens.

There is only one problem for U.S. companies with this strategy, and that is that if they repatriate this money to the U.S. they have to pay full corporate taxes. In fact, according to BusinessWeek, U.S. multinational corporations have built up profits of as much as $750 billion overseas, much of it in tax havens such as the Ireland, Bahamas, and Singapore to avoid the stiff 35% levy they'd face if they repatriated the funds back into the U.S.

But of course, Congress, which is basically paid for by our multinational corporations, generously provided for a one-time provision in the corporate tax code, so that they could repatriate profits earned before 2003, and held in foreign subsidiaries, at an effective 5.25% tax rate.

And so the game goes on.

In the end, multinational corporations live in a global world which allows them to pretty much send their money to corporate tax havens at will, and then repatriate this money almost tax free, with the help of the U.S. Congress.

The people left holding the bag are you and me. If you want to know learn more about the corruption in the drug industry, read my new book, "The Whistleblower, Confessions of a Healthcare Hitman."

Peter Rost, M.D., is a former Vice President of Pfizer. He became well known in 2004 when he emerged as the first drug company executive to speak out in favor of reimportation of drugs. He is the author of "The Whistleblower, Confessions of a Healthcare Hitman" See: http://the-whistleblower-by-peter-rost.blogspot.com/