2007: July August September October

Microsoft-loving (former) security czar calls for closed internet By Cade Metz in Santa Clara Published Tuesday 2nd October 2007 22:24 GMT Richard Clarke, the man who served President Bush as a special adviser for cyber security, has a five-point plan for saving the internet.

Speaking at a Santa Clara University conference dedicated to "trust online," Clarke called the net "a place of chaos in many ways, a place of crime in many ways," but laid out several means of righting the ship, including biometric IDs, government regulation, and an industry wide standard for secure software. He even embraces the idea of a closed internet - which seems to have sparked a death threat from net pioneer Vint Cerf.

"A lot of these ideas go against the grain. A lot of these ideas are ones people have already objected to - because of certain shibboleths, because of certain belief systems, because of certain idealogical differences," Clarke said. "But if we're going to create trust in cyberspace, we have to overcome some of those shibboleths, overcome some of those ideological differences, and look anew at these ideas."

According to Clarke - who was also a special assistant to the President for global affairs and national coordinator for security and counter-terrorism - about 35 per cent of all U.S. citizens would rather shoot themselves than carry a national ID card. But he thinks they're being silly. He believes biometric IDs are an essential means of fighting online crime.

"One thing you could do with a biometric ID card - if you wanted to - is prove your identity online," he said, as if taunting his critics.

Yes, he realizes that internet mavens value online anonymity. But he insists this has nothing to do with biometric internet IDs. "One of the ideological underpinnings of the internet is that we're anonymous," he said. "Well, guess what? We're not anonymous. Amazon and DoubleClick and all those other companies already know everything about what you're doing online." ID cards don't eliminate anonymity, he explained, because anonymity is already gone. Then he added that Bill Gates agrees with him.

Next, Clarke called for more government oversight of the net. According to his rough calculations, 75 per cent of all U.S. citizens are against government regulation of any kind. But he thinks they're being silly too. "You don't want government regulation? Then just let your kids eat all that lead off their toys."

In short, he believes the Federal Communications Commission (FCC) should force ISPs to crack down on cyber-crime. "[The FCC] could, for example, say to all the ISPs, 'You will do the following things to reduce fraud, bot nets, malicious activity, etc."

Isn't the government one of the problems where online privacy is concerned? It is, as Clarke pointed out. He also called for a nonpartisan organization dedicated to fighting abuses of government power. "What if we had a champion in the government who we trusted on privacy rights and civil liberties? What if we had a government advocate with real power to ensure that the government doesn't violate privacy rights."

That's three points from the five-point plan. Two more to go.


--------------------------------------------------------------------------------

Number four: A secure software standard. "We should look, as an industry, at improving the quality of secure code, so that we don't need to issue software patches, so there aren't trap doors - intentional or otherwise," he said. "This is not a revolutionary idea. We put this in place a long time ago for electrical appliances."

This is Clarke's least controversial notion, but you have to wonder how effective it can be. Removing all bugs from electrical equipment is one thing. Removing them from software code - some of the most complex stuff ever invented - is another.

In discussing secure software standards, Clarke slipped in another plug for Microsoft. "This is an idea Microsoft has already championed," he said. And then he said it again. Bill and gang sponsored the conference.

And, yes, Clarke's fifth and final idea is a less than open internet. "Another idea that's already been rejected that I think we should look at again is the idea of a closed internet," Clarke said. "Why should the part of the internet that's connected to the power grid be open? Why should that part of the internet that runs nuclear laboratories be open? Why shouldn't there be a closed internet? There are already relatively closed internets - and now we need to think seriously about expanding them."

Several years ago, when Clarke suggested the idea to Vint Cerf, the internet founding father had a fit. "[He] implied he was putting together a firing squad to take me out," Clarke said.

Comments (0) | 2007. 10. 06. 20:48:43

MSM Buries Story
161 Federal Tax Charges, 0 Convictions
Total National Media Blackout
10 -4 -7

IRS Suffers Staggering Defeat

Tax Questions Raised Regarding Gold and Silver Coins Used to Pay Wages

Around noon on Monday, September 17th, a Las Vegas federal jury returned its
verdict refusing to convict nine defendants of any of the 161 federal tax
crimes they had been charged with. The charges included income tax evasion,
willful failure to file and conspiracy to evade taxes.

The four-month trial centered around the family businesses of Robert Kahre
who paid numerous workers for their labor with circulating gold and silver
U.S. coins, and did not report the wages. The payments took place over
several years, allegedly totaling at least $114 million dollars.

On September 20, 2007, three days after the federal trial's dramatic
conclusion, the Las Vegas Review Journal, reportedly under a degree of
public pressure, ran its first (and last) story about the outcome of the
trial. To this day, with exception of the single article by the Review
Journal, no major media entity has published a news story regarding the
outcome of this important federal criminal tax case.

The censorship of this important news story is, unfortunately, not
unexpected given the continuing, worldwide onslaught against the U.S.
"dollar" -- specifically the Federal Reserve variety, and the ever growing
numbers of Federal Reserve Notes required to trade for an actual ounce of
silver, gold, oil, or for that matter, anything.

In short, this failed prosecution has coalesced and exposed truths our
Government desperately needs to hide from the People: the truth about our
money, the truth about our (privately-owned) central bank, and the truth
about the fraudulent nature of the operation and enforcement of the federal
income tax system.

According to defense attorney Joel Hansen, who represented co-defendant Alex
Loglia, the primary "willfulness" defense was that the defendants believed
they had no legal obligation to withhold, pay income taxes or report
anything to the government because, in part, the nominal (i.e., face value)
of the gold and silver coins is so small as to fall beneath the reporting
thresholds set by the Internal Revenue Code.

The Defendants also argued that regardless of the valuation of the coins for
internal revenue purposes, there is no law that requires average American
workers to file or pay direct, un-apportioned taxes on the fruits of their
labor.

The Government argued that the payments in solid gold and silver U.S. coins
must be considered at their bullion (i.e., intrinsic full-market) value when
considering the worth of the wages for purposes of the internal revenue
code.

Attorney Hansen cited two Supreme Court cases bolstering Defendant's
monetary argument at the heart of the defendants "willfulness" defense.

The essence of the argument is that under the Constitution Congress is
obligated by law to mint and circulate such coins as demand requires, and
must establish the value of coins as they are used as legal tender, but the
coins' market value, arising as valuable personal "property," is a distinct,
separate attribute of such coins, and is of no legal consequence if the
coins are used as legal tender.

In other words, if a worker is paid with such coins, his taxable "income"
(if any) can only be the face value indicated upon the coin money paid --
i.e., $1.00 for a circulating silver dollar or $50 for a circulating gold
U.S. coin. Not surprisingly, the IRS has never issued any public guidance
regarding this significant issue. The first case, Ling Su Fan v. U.S., 218
US 302 (1910) establishes the legal distinction of a coin bearing the
"impress" of the sovereign:

"These limitations are due to the fact that public law gives to such coinage
a value which does not attach as a mere consequence of intrinsic value.
Their quality as a legal tender is an attribute of law aside from their
bullion value. They bear, therefore, the impress of sovereign power which
fixes value and authorizes their use in exchange."

The second case, Thompson v. Butler, 95 US 694 (1877), establishes that the
law makes no legal distinction between the values of coin and paper money
used as legal tender:

"A coin dollar is worth no more for the purposes of tender in payment of an
ordinary debt than a note dollar. The law has not made the note a standard
of value any more than coin. It is true that in the market, as an article of
merchandise, one is of greater value than the other; but as money, that is
to say, as a medium of exchange, the law knows no difference between them."

Defense attorney Hansen confirmed that members of the jury were able to
actually hold and inspect the gold and silver U.S. coins paid to the
workers.

After almost four months of testimony and three and a half days of
deliberation, the jury did not convict any of the defendants of any of the
161 crimes alleged. Although some defendants were acquitted of multiple
counts, and several were acquitted completely, others may have to stand for
a retrial if the Government brings charges a second time.

The Review Journal reported the jury foreman claimed DOJ prosecutors
admitted they were "shocked" by the outcome.

In March 2007, the primary defendant, Bob Kahre, filed a federal civil
rights lawsuit against the prosecutor and IRS agents who had conducted what
he alleges to be an unlawful search and seizure raid. In 2005, the Ninth
Circuit Court of Appeals refused to overturn a previous District Court
ruling holding that the federal prosecutor is not entitled to absolute
immunity for the unlawful raid. Read more.

Execute a Google News search to attempt to locate recent news stories about
the Kahre tax trial.

The media suppression of this story is similar to the widespread mainstream
media suppression of the July 11, 2007 acquittal of Louisiana attorney Tommy
Cryer who was also charged with multiple federal income tax crimes and
relied upon numerous Supreme Court precedents and U.S. tax laws to establish
his "willfulness" defense. Click here for a previous WTP update containing a
link to Cryer's 100-page Motion to Dismiss which details his legal
arguments.

Execute a Google News archive search to attempt to locate news stories about
Tommy Cryer's tax trial.

Comments (0) | 2007. 10. 06. 20:41:41

Finally, film evidence
has come to light proving that NASA has been airbrushing out anomalous
objects on the moons surface!

www.youtube.com/jp28b0.swf
During the Disclosure
Project press conference, former NASA employee, Donna Hare, revealed
how NASA managed to cover up and erase anomalies such as UFOs from
satellite photos. She was a female slide technician and received
numerous space awards including 1969 Apollo Achievement award from the
National Aeronautics and  Space Administration, 1973 Skylab award, a
medallion for success on the Skylab-Suez Test project. Other awards
for her skill as a technical Artist includes a 1994 recommendation by
Texas Governor Ann Richards to the Advisory Committee of Psychology
Associates.
 
Donna Hare (formerly (Tietze) has spent most of her professional life
involved in the Space Program as a technical illustrator. She drew
lunar maps, landing slides and  worked in the photo lab, Precision
Slide Lab. Her job was to reduce art work to one inch by one inch
drawings. She drew launch sites, landing sites and was employed as a
sub-contractor to NASA for over 15 years. She worked on flight manuals
for astronauts and has the wonderful ability to put words into images
but uniquely, learn to do everything backwards, including mathematical
computations, the writing of words, to put it simply, this woman has
seen just about all the different kinds of images one could see that
are used in Space Programs today.

Sergeant Karl Wolfe, is another witness who has come forward to reveal
that he also saw NASA photos being altered to erase anomalies on the
Moons surface which were filmed from the Lunar Orbiter. He was asked
to visit an area of Langley Air Force Base, where he viewed 35mm film
images being processed by NSA agents. He claims that he saw 35mm
strips of film which were spliced together to make 18 1/2" x 11"
mosaics of the lunar surface for release to the general public. An
officer told him that there was a Moon base on the dark side of the
Moon and that it was they're job to erase them out. The film above
includes interviews and photo examples where NASA have erased evidence
from the Moon photographs.
 

Donna
Hare was interviewed on Washington D.C. Radio Station. The following is a partial
transcript of a radio talk show that occurred 5/6/95 on WOL-AM in Washington
D.C. which is simulcast on WOLB-AM in Baltimore Maryland. The show is broadcast
every Saturday night at 12:00am and is called "UFOs Saturday Night".


Elaine Douglass: This is Elaine Douglass, WOL News-Talk Network, our show
is UFOs Saturday Night and I'm here in the studio with Keith Morgan and our
topic is the Face On Mars. We have a new guest on the air with us, Donna Tietze...
Donna, you are also with three scientists who are on the air with us and that
would be Stan McDaniels from California, Errol Toron from the east coast and Dan
Drason whose in Colorado. The reason that I asked Donna to come on the show,
Donna is in Houston, Texas and kind enough to join us tonight to tell us some
very interesting things she observed while working at NASA. Donna is an educator
and she is working on her Masters in Education. In the past Donna, as I
understand that you held a position for 15 years with a contractor at the NASA
Johnson Space Center in Houston. You were a photo technician?

Donna Tietze: Correct!

E.D.: Donna welcome to UFOs Saturday Night. Tell me and tell everyone the
incident that you recall as they say in the law court, did there come a time
when you walked in a photo lab and someone told you something quite astounding?
What happened that day?

D.T.: Yes Elaine, that's true. During the Apollo mission I worked at NASA
throughout those Apollo missions and I did leave NASA at the time the space
shuttles began. I worked in building eight in the photo lab. I had a secret
clearance so I thought I could go anywhere in the building. And I did go into
one area that was a restricted area. In this area they developed pictures taken
from satellites and also all of the missions, the Apollo missions, flight
missions. I went in and I was talking to one of the photographers and developers
and he was putting together a mosaic which is a lot of photos, smaller photos
into a larger photo pattern. And while I was in there I was trying to learn new
methods and new things about the whole organization and I was looking at the
pictures and he directed my attention to one area, he said, Look at that. I
looked and there was a round oval shaped, well it was a very white circular
shape of a dot and I, it was black & white photography, so I asked him if that
was a spot on the emulsion and he said, "Well I can't tell you, but spots on
the emulsion do not leave round circles of shadows."

E.D.: So there was a shadow on the ground?

D.T.: Right, a round shadow! And I noticed that there were pine trees,
now I don't know where this area was or what, you, pretty close to the ground
what I saw but I didn't see outline of the continent. But I did notice that
there was shadow under this white dot and I also noticed that the trees were
casting the shadows in the same direction as this shadow of the circle of this
aerial phenomena because it was higher than the trees but not too much higher
than the trees but it was close to the ground and it was spherical but slightly
elongated, not very much but slightly. I then said, is it a UFO? And he said, "Well I can't tell you." And then I asked him, "What are you going to do
with this piece of information?" And he said, "Well we have to airbrush
these things out before we sell these photographs to the public." So I
realized at that point that there is a procedure setup to take care of this type
of information from the public.

E.D.: Isn't that remarkable gentlemen?

Stan McDaniels: Elaine, I was unable to really hear very much of that.

E.D.: Oh really?

S.
McD: I did catch air brush it out.

E.D.: Alright, Stan can you hear this station break coming up?

S.
McD: Uh, sure.

E.D.: So alright, we are going into that, we'll be back in just a couple
of minutes

BREAK

E.D.: Erol Toron, you are here?

E.T.: I'm still here

E.D.: Alright fine, Stan you said you could not hear the account that
Donna gave?

S.
McD: Not very well.

E.D.: Alright, Keith would you like to recapitulate what Donna said?

Keith Morgan: Stan, what she said was that she was in the photo lab at
NASA and that she was looking at some photos and one showed an elliptical, white
object that was casting a shadow on the ground above some trees and the
technician in there, she asked him if it was a UFO? He said "I can't tell
you." She said what are you going to do with this kind of information? He
said "Well that is the kind of stuff that we airbrush out."

S.
McD: Oh I see, thanks for that!

E.D.: So Donna that's approximately, essentially correct what you said,
right?

D.T.: Right!

E.D.: Yes well I, Stan I think that's quite startling, don't you?

S.
McD: Its speaks for itself.

E.D.: Yes it certainly does, Now Donna there is another matter that you
learned about when you were there at NASA. I believe this was through a third
party, a person that you were spending some time with who was a fellow NASA
employee?

D.T.: Right, in fact after we talked, I thought about another incident
with a guard that I would like to convey too that's very important. This man
that I had dated was in quarantine with the astronauts when they had come back
from the moon and I had talked to him about seeing this saucer (satellite
photos) and asked him if he had heard anything about that and he told me that
every astronaut, every moon trip had been followed by craft, by saucers, that
every one of them, every astronaut that went to the moon, now I don't know about
other sites but they all had seen it and all had been told to keep quite about
it and they were threatened with jail and their whole retirement, everything
taken away from them. They were also, this told me that if I ever told that he
said it, that he would deny it, that he would never admit that he told me all of
that.

E.D.: Did you hear that Stan?

S.McD: No

E.D.: Alright, ah, go ahead Keith, recapitulate. (Keith repeats
everything of that part that Donna Tietze stated, to McDaniel)

S.McD: Oh yes I see

E.D.: Yes and I believe that Donna you related to me, your friend came to
believe that the UFOs were instrumental in getting Apollo 13 that was, ah, our
disabled mission to the moon, was it 13?

D.T.: Right, well he said that it shouldn't have come back, I mean, there
was no, ah, they had help. And that was all he would say.

E.D.: All he would say?

D.T.: He said it was impossible for that craft to have gotten back home

E.D.: Donna you said that there was another matter that you wanted to
relate to us.

D.T.: Yes, something that I didn't talk to you about earlier. When I had
quite work, I had an office, I was doing illustration work at another office, in
another part of town. And a man that had been a guard at NASA during the time
came into my office and he had a large gash scar on his forehead and he told me
that he was a guard at NASA and that he was burning a lot of photographs of
UFOs. That was his job.

E.D.: Really (surprised)

D.T.: And he said he stopped to look at one too long and one of the
others, I gathered it was some type of military man, hit him in the head with a
gun butt and knocked him out.

E.D.: What? (shocked)

D.T.: Because he had looked at one of the photographs too long, he did
describe the photograph to me which I tend to believe was an accurate
photograph.

E.D: Oh, my god!

D.T.: He explained that it was a craft on the ground and it looked like,
it was like a regular saucer with like little bumps all over and he said it was
like it was burnt. He said cows in the field all had their tails stuck straight
up. At the time he said he didn't know when cattle were frightened, that their
tails would stick straight up. And he described this to me and since then, I did
describe it to someone that I thought might have looked at some of these photos,
possibly and they did look kind of frightened that I should know about that one.
(the next several minutes later the conversation is more about UFOs following
Apollo crafts to the moon)

E.D.: The second part of her account had to do with the stalking of our
space mission by UFOs of our space missions to the moon and so on. She even said
that they apparently helped in one case by bringing the Apollo 13 back, that was
the impression that she got and..

D.T.: Yes but they (aliens) also didn't want that craft to investigate
the part of the moon that they were going to, so they may have caused some of it
too, but it was supposed, we were told not to go but we ignored it. Now that's
what I've heard, that some of the stuff he was telling me.

E.D:. Did he say that, your direct contact?

D.T.: Yes!

E.D.: That the United States was told not to go to the moon?

D.T.: To that certain place on the back side of the moon.

E.D.: And did he know why we weren't supposed to go there?

D.T.: I guess they didn't want us to see something back there, I don't
know, I don't know that part. (interview winds down a few minutes later and the
show is out of time)

Comments (0) | 2007. 10. 03. 21:07:11

In an extraordinary exclusive interview, TheBigRetort speaks to a Pentagon whistelblower who claims a message from outer space is not benign.

Clarence Dacre, former staff officer at the Pentagon, claimed 'first contact’ with an extra-terrestrial civilisation has already happened – it took place thirty years ago.

Apparently it began when a strong, narrow band radio signal was inadvertently picked up by an early SETI researcher. He circled the discovery on the computer printout and wrote "Wow!" alongside.

The comment stuck ever since.

But the signal, said to have lasted for a total of 72 seconds, which bore all the expected hallmarks of potential extraterrestrial contact, remained a one-off, a 'possibility' never repeated.

Or so it seemed... because the human race may be about to go the way of the dinosaur.

Alerted to Mr Dacre’s claims by a correspondent in North Carolina, we were forced to make contact via a combination of email and phone number relays.

We encountered an astonishing conspiracy that started at a simple PO Box in Galveston, Texas - and leads right up to the Whitehouse.

"Forget global warming," we were warned, "Gone too are those petty disputes based on nationality and race - for there is only one 'race'." And although that race may be human if our source is to be believed this may soon change.

Intrigued... we decided to make contact with the mysterious Mr Dacre.

After repeated attempts however, when we finally spoke to the man at the other end of the phone... he seemed agitated - and far from thrilled.

"I have to be cautious. My pension... it could be revoked. They're watching and reading everything."

[In the three hour (taped) interview Dacre would not be drawn on who 'they' were, simply stating that it would soon become 'evident to all'.]

After we managed to gain his trust, Dacre opened up. He claimed that he had recently been dismissed from a specialist department within the US Air Force. He alleged that SETI (The Search for Extraterrestrial Intelligence) was initially funded through a shell company that was really a front for the National Security Agency (NSA), which moved to PR mode to downplay the Wow! signal's significance.

But that was thirty years ago, Jimmy Carter was President of the USA.

Dacre reminded us that President Carter had been a strong believer in UFOs and he was being secretly briefed by the NSA.

“The NSA simply distanced itself from the SETI programme,??? he told TheBigRetort.

Astonishingly however, Mr Dacre claims that another message also of ‘non-terrestrial and non-solar-system origin’ was recently received as early as 2004. "Only it’s not a message… it’s an instruction."

An instruction for what?

“ET is attacking us by stealth. Using our own computers against us.??? Dacre insists. He claims that the US government, in tandem with other 'friends', know that the interstellar computer virus arrived from a star system approximately twelve light years from our solar system. "A stone's throw on the galactic scale of failing suns!"

The question raised at the Whitehouse is now that 'they' (the aliens) have the system at their disposal, what are they going to do with it?"

According to Dacre, Pentagon officials believe that these ‘Botnets’ may start breaking encryption codes quite soon. (Ironically this could be done in a similar fashion to the Search for Extraterrestrial Intelligence project (SETI.) itself.)

"The first time in history that we have made ‘contact’ and now a supercomputer is under the control of an extraterrestrial source that we invited in,??? Dacre opined.

SETI declined to be drawn into the claim that the Wow! signal had been 'confirmed' over three decades ago, a star system plotted, and that a second later signal also arrived, quite recently. In fact it is this later signal that is the true cause of the ‘Storm Worm’ virus that is currently infecting home computers and being attributed to 'criminals'.

A SETI press officer responded, “We use a distributed network of computers to decipher many signals from outer space. We have to study all of the data, so we don’t yet know if this thing commenced with us. However, if this is confirmed, and I don’t say that it is confirmed, perhaps it’s a way of saying Hello, who knows.???

Dacre responded with a chortle, “The Botnet is closer to five million… and growing. Unlike SETI, the storm is working secretly in the background - so it doesn't take all resources, which is clever, very clever - and so the host - the computer - remains unaware of its presence. That’s hardly saying ‘Hello’ or of benign intent…. It's learning by stealth.???

We put it to Dacre that the Storm did not amount to a supercomputer, whatever the source of the attack.

He explained irritably, “It doesn’t take a supercomputer. All it takes is a wide range of computers – at home – and that’s what concerns the Pentagon.???

We asked why?

“Having resources like that….at their disposal…distributed around the planet from another planet… with a high presence… and in a lot of countries…Well???? He ended saying “Global warming… Increased surveillance. This is the perfect place, a planet that is being quickly terraformed and an uncaring apathetic species on it. One day we are going to go to bed and the next…???? He saw no need to finish the statement.

Recent reports claim that a “Storm Worm??? botnet virus has been estimated to have between one and five million computers under its control. – without the owner’s knowledge – and is currently creating a cluster in home computers. There has been some speculation as to its origins.

So could an ‘outside’ force currently be worming its way into millions of home PCs whilst their owners remains unaware be of its non-terrestrial origin?

We asked a contact based at IBM for her views on the virus. (To say she was nervous is an understatement.)

“This one’s hot…??? she stated. “It’s more powerful than Blue Gene, so anything and all things possible it is being considered. I don’t know myself what’s going on, I don’t have that type of clearance, but there are people here connected to the military who have disappeared. I heard that they are having high-level briefings at a secret location outside of Washington, that much I can say.??? (‘Blue Gene’ is a reference to IBM's Blue Gene/L supercomputer.)

Apparently due to its high number of distributed nodes, the Storm Worm’s cluster can scale faster and a lot larger than any supercomputer on earth.

Whatever its origins the cluster now has a combined computing power greater than the most powerful supercomputer in existence – which is alarming.

A NASA press officer initially scoffed at the Clarence Dacre Claims, as we labelled them. But later, after checking ‘with the big boys’, he turned rather officious indeed.

"This is not a quote,??? he instructed. “This is on background.??? (In other words for your ears only.) “Understood? Repeat background.??? He continued, “I am willing to confirm that there is debate – not 'at the highest levels’ as you claim - as to the validity of a million-strong cluster of computers (or more) being comparable to a supercomputer. However, I am assured that it takes more than a pile of CPUs and RAM to make a super computer. In fact one scientist here says that it’s like comparing an army of snipers with a nuclear weapon.??? (He laughed at this.)

“A supercomputer like Blue Gene has millions of dollars of R&D, tweaked I/O and an optimised operating system. In all, it's a system with substantial differences to a botnet. As for that connection with NASA and the NSA… well, frankly, it’s baloney," he said. He did not want to dignify Dacre’s claims of extra-terrestrial origin with a response. “Save to say, and don’t quote me, the man has a drink problem.???

But TheBigRetort had never mentioned a debate 'at the highest levels’ in any of our questions to NASA… it was aimed at NSA which refused to comment. Nor had we mentioned any connection between NASA and the NSA. And neither did tea-totalling Clarence Dacre have 'a drink problem'.

So, threat to world security, coverup, hoax? If so, to what ends?

After so many decades of looking up to the sky into the far reaches of outer space and asking Are We Alone, is that answer simply laying at our fingertips?

[Editor’s note. Whilst going to press we received email from the Pentagon press office. “There is no Lieutenant Paul(sic) Dacre employed at the Pentagon, or in any of are (sic) armed services,??? it read. “Neither is there a Lieutenant Dacre employed at Nontestcom.??? An extremely interesting response indeed… TheBigRetort had never mentioned Dacre’s rank - he had not informed us of it – nor a "Nontestcom???, which stands for Non-Terrestrial Communications. Unfortunately efforts to confirm the above with ‘Lieutenant’ Paul 'Clarence' Dacre have proved fruitless. His phone line has been terminated. Utility companies claim that no one with the name has ever resided at the address and the PO Box initially used for contact has ceased. Asked who settled the bill, the local shopkeeper controlling it said, “Nontestcom.???]

Comments (0) | 2007. 10. 03. 15:27:37

Robert Kuttner
The American Prospect
Wednesday October 03, 2007

Testimony of Robert Kuttner
Before the Committee on Financial Services
Rep. Barney Frank, Chairman
U.S. House of Representatives
Washington, D.C. on October 2, 2007


Mr. Chairman and members of the Committee:

Thank you for this opportunity. My name is Robert Kuttner. I am an economics and financial journalist, author of several books about the economy, co-editor of The American Prospect, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.
In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.
Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.

Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials -- excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.
The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.
There is good evidence -- and I will add to the record a paper on this subject by the Federal Reserve staff economists Dean Maki and Michael Palumbo -- that even much of the boom of the late 1990s was built substantially on asset bubbles. ["Disentangling the Wealth Effect: a Cohort Analysis of Household Savings in the 1990s"]
A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank -- e.g. Morgan or Chase -- as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks -- part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed's discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.
Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s -- lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction -- assuming perpetually rising asset prices -- so in a credit crisis they can act as net de-stabilizers.
A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn't work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.
The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business -- the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.
Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today's derivatives on which technical traders make their fortunes.
By contrast, in the traditional banking system a bank examiner could look at a bank's loan portfolio, see that loans were backed by collateral and verify that they were performing. If they were not, the bank was made to increase its reserves. Today's examiner is not able to value a lot of the paper held by banks, and must rely on the banks' own models, which clearly failed to predict what happened in the case of sub-prime. The largest banking conglomerates are subjected to consolidated regulation, but the jurisdiction is fragmented, and at best the regulatory agencies can only make educated guesses about whether balance sheets are strong enough to withstand pressures when novel and exotic instruments create market conditions that cannot be anticipated by models.
A last parallel is ideological -- the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government's main job is to protect property rights, and otherwise just get out of the way.
We all know the history. The regulatory reforms of the New Deal saved capitalism from its own self-cannibalizing instincts, and a reliable, transparent and regulated financial economy went on to anchor an unprecedented boom in the real economy. Financial markets were restored to their appropriate role as servants of the real economy, rather than masters. Financial regulation was pro-efficiency. I want to repeat that, because it is so utterly unfashionable, but it is well documented by economic history. Financial regulation was pro-efficiency. America's squeaky clean, transparent, reliable financial markets were the envy of the world. They undergirded the entrepreneurship and dynamism in the rest of the economy.
Beginning in the late 1970s, the beneficial effect of financial regulations has either been deliberately weakened by public policy, or has been overwhelmed by innovations not anticipated by the New Deal regulatory schema. New-Deal-era has become a term of abuse. Who needs New Deal protections in an Internet age?
Of course, there are some important differences between the economy of the 1920s, and the one that began in the deregulatory era that dates to the late 1970s. The economy did not crash in 1987 with the stock market, or in 2000-01. Among the reasons are the existence of federal breakwaters such as deposit insurance, and the stabilizing influence of public spending, now nearly one dollar in three counting federal, state, and local public outlay, which limits collapses of private demand.
But I will focus on just one difference -- the most important one. In the 1920s and early 1930s, the Federal Reserve had neither the tools, nor the experience, nor the self-confidence to act decisively in a credit crisis. But today, whenever the speculative excesses lead to a crash, the Fed races to the rescue. No, it doesn't bail our every single speculator (though it did a pretty good job in the two Mexican rescues) but it bails out the speculative system, so that the next round of excess can proceed. And somehow, this is scored as trusting free markets, overlooking the plain fact that the Fed is part of the U.S. government.
When big banks lost many tens of billions on third world loans in the 1980s, the Fed and the Treasury collaborated on workouts, and desisted from requiring that the loans be marked to market, lest several money center banks be declared insolvent. When Citibank was under water in 1990, the president of the Federal Reserve Bank of New York personally undertook a secret mission to Riyadh to persuade a Saudi prince to pump in billions in capital and to agree to be a passive investor.
In 1998, the Fed convened a meeting of the big banks and all but ordered a bailout of Long Term Capital Management, an uninsured and unregulated hedge fund whose collapse was nonetheless putting the broad capital markets at risk. And even though Chairman Greenspan had expressed worry two years (and several thousand points) earlier that "irrational exuberance" was creating a stock market bubble, big losses in currency speculation in East Asia and Russia led Greenspan to keep cutting rates, despite his foreboding that cheaper money would just pump up markets and invite still more speculation.
And finally in the dot-com crash of 2000-01, the speculative abuses and insider conflicts of interest that fueled the stock bubble were very reminiscent of 1929. But a general depression was not triggered by the market collapse, because the Fed again came to the rescue with very cheap money.
So when things are booming, the financial engineers can advise government not to spoil the party. But when things go bust, they can count on the Fed to rescue them with emergency infusions of cash and cheaper interest rates.
I just read Chairman Greenspan's fascinating memoir, which confirms this rescue role. His memoir also confirms Mr. Greenspan's strong support for free markets and his deep antipathy to regulation. But I don't see how you can have it both ways. If you are a complete believer in the proposition that free markets are self-regulating and self- correcting, then you logically should let markets live with the consequences. On the other hand, if you are going to rescue markets from their excesses, on the very reasonable ground that a crash threatens the entire system, then you have an obligation to act pre-emptively, prophylactically, to head off highly risky speculative behavior. Otherwise, the Fed just invites moral hazards and more rounds of wildly irresponsible actions.
While the Fed and the European Central Bank were flooding markets with liquidity to prevent a deeper crash in August and September, the Bank of England decided on a sterner course. It would not reward speculators. The result was an old fashioned run on a large bank, and the Bank of England changed its tune.
So the point is not that the Fed should let the whole economy collapse in order to teach speculators a lesson. The point is that the Fed needs to remember its other role -- as regulator.
One of the odd things about the press commentary about what the Fed should do is that it has been entirely along one dimension: a Hobson's choice: -- either loosen money and invite more risky behavior, or refuse to enable asset bubbles and risk a more serious credit crunch -- as if these were the only options and monetary policy were the only policy lever. But the other lever, one that has fallen into disrepair and disrepute, is preventive regulation.
Mr. Chairman, you have had a series of hearings on the sub-prime collapse, which has now been revealed as a textbook case of regulatory failure. About half of these loans were originated by non-federally regulated mortgage companies. However even those sub-prime loans should have had their underwriting standards policed by the Federal Reserve or its designee under the authority of the 1994 Home Equity and Ownership Protection Act. And by the same token, the SEC should have more closely monitored the so called counterparties -- the investment and commercial banks -- that were supplying the credit. However, the Fed and the SEC essentially concluded that since the paper was being sold off to investors who presumably were cognizant of the risks, they did not need to pay attention to the deplorable underwriting standards.
In the 1994 legislation, Congress not only gave the Fed the authority, but directed the Fed to clamp down on dangerous and predatory lending practices, including on otherwise unregulated entities such as sub-prime mortgage originators. However, for 13 years the Fed stonewalled and declined to use the authority that Congress gave it to police sub-prime lending. Even as recently as last spring, when you could not pick up a newspaper's financial pages without reading about the worsening sub-prime disaster, the Fed did not act -- until this Committee made an issue of it.
Financial markets have responded to the 50 basis-point rate-cut, by bidding up stock prices, as if this crisis were over. Indeed, the financial pages have reported that as the softness in housing markets is expected to worsen, traders on Wall Street have inferred that the Fed will need to cut rates again, which has to be good for stock prices.
Mr. Chairman, we are living on borrowed time. And the vulnerability goes far beyond the spillover effects of the sub-prime debacle.
We need to step back and consider the purpose of regulation. Financial regulation is too often understood as merely protecting consumers and investors. The New Deal model is actually a relatively indirect one, since it relies more on mandated disclosures, and less on prohibited practices. The enormous loopholes in financial regulation -- the hedge fund loophole, the private equity loophole, are justified on the premise that consenting adults of substantial means do not need the help of the nanny state, thank you very much. But of course investor protection is only one purpose of regulation. The other purpose is to protect the system from moral hazard and catastrophic risk of financial collapse. It is this latter function that has been seriously compromised.
HOEPA was understood mainly as consumer protection legislation, but it was also systemic risk legislation.
Sarbanes-Oxley has been attacked in some quarters as harmful to the efficiency of financial markets. One good thing about the sub-prime calamity is that we haven't heard a lot of that argument lately. Yet there is still a general bias in the administration and the financial community against regulation.
Mr. Chairman, I commend you and this committee for looking beyond the immediate problem of the sub-prime collapse. I would urge every member of the committee to spend some time reading the Pecora hearings, and you will be startled by the sense of déjà vu.
I'd like to close with an observation and a recommendation.
My perception as a financial journalist is that regulation is so out of fashion these days that it narrows the legislative imagination, since politics necessarily is the art of the possible and your immediate task is to find remedies that actually stand a chance of enactment. There is a vicious circle -- a self-fulfilling prophecy -- in which remedies that currently are legislatively unthinkable are not given serious thought. Mr. Chairman, you are performing an immense public service by broadening the scope of inquiry beyond the immediate crisis and immediate legislation.
Three decades ago, a group of economists inspired by the work of the late Milton Friedman created a shadow Federal Open Market Committee, to develop and recommend contrarian policies in the spirit of Professor Friedman's recommendation that monetary policy essentially be put on automatic pilot. The committee had great intellectual and political influence, and its very existence helped people think through dissenting ideas. In the same way, the national security agencies often create Team B exercises to challenge the dominant thinking on a defense issue.
In the coming months, I hope the committee hears from a wide circle of experts -- academics, former state and federal regulators, financial historians, people who spent time on Wall Street -- who are willing to look beyond today's intellectual premises and legislative limitations, and have ideas about what needs to be re-regulated. Here are some of the questions that require further exploration:
First, which kinds innovations of financial engineering actually enhance economic efficiency, and which ones mainly enrich middlemen, strip assets, appropriate wealth, and increase systemic risk? It no longer works to assert that all innovations, by definition, are good for markets or markets wouldn't invent them. We just tested that proposition in the sub-prime crisis, and it failed. But which forms of credit derivatives, for example, truly make markets more liquid and better able to withstand shocks, and which add to the system's vulnerability. We can't just settle that question by the all purpose assumption that market forces invariably enhance efficiency. We have to get down to cases.
The story of the economic growth in the 1990s and in this decade is mainly a story of technology, increased productivity growth, macro-economic stimulation, and occasionally of asset bubbles. There is little evidence that the growth rates of the past decade and a half -- better than the 1970s and ‘80s, worse than the 40's, 50's and ‘60s -- required or benefited from new techniques of financial engineering.
I once did some calculations on what benefits securitization of mortgage credit had actually had. By the time you net out the fee income taken out by all of the middlemen -- the mortgage broker, the mortgage banker, the investment banker, the bond-rating agency -- it's not clear that the borrower benefits at all. What does increase, however, are the fees and the systemic risks. More research on this question would be useful. What would be the result of the secondary mortgage market were far more tightly subjected to standards? It is telling that the mortgages that best survived the meltdown were those that met the underwriting criteria of the GSE's.
Second, what techniques and strategies of regulation are appropriate to damp down the systemic risks produced by the financial innovation? As I observed, when you strip it all down, at the heart of the recent financial crises are three basic abuses: lack of transparency; excessive leverage; and conflicts of interest. Those in turn suggest remedies: greater disclosure either to regulators or to the public. Requirement of increased reserves in direct proportion to how opaque and difficult to value are the assets held by banks. Some restoration of the walls against conflicts of interest once provided by Glass Steagall. Tax policies to discourage dangerously high leverage ratios, in whatever form.
Maybe we should just close the loophole in the 1940 Act and require of hedge funds and private equity firms the same kinds of disclosures required of others who sell shares to the public, which in effect is what hedge funds and private equity increasingly do. The industry will say that this kind of disclosure impinges on trade secrets. To the extent that this concern is valid, the disclosure of positions and strategies can be to the SEC. This is what is required of large hedge funds by the Financial Services Authority in the UK, not a nation noted for hostility to hedge funds. Indeed, Warren Buffet's Berkshire Hathaway, which might have chosen to operate as private equity, makes the same disclosures as any other publicly listed firm. It doesn't seem to hurt Buffett at all.
To the extent that some private equity firms and strategies strip assets, while others add capital and improve management, maybe we need a windfall profits tax on short term extraction of assets and on excess transaction fees. If private equity has a constructive role to play -- and I think it can -- we need public policies to reward good practices and discourage bad ones. Industry codes, of the sort being organized by the administration and the industry itself, are far too weak.
Why not have tighter regulation both of derivatives that are publicly traded and those that are currently regulated -- rather weakly -- by the CFTC: more disclosure, limits on leverage and on positions. And why not make OTC and special purpose derivatives that are not ordinarily traded (and that are black holes in terms of asset valuation), also subject to the CFTC?
A third big question to be addressed is the relationship of financial engineering to problems of corporate governance. Ever since the classic insight of A.A. Berle and Gardiner Means in 1933, it has been conventional to point out that corporate management is not adequately responsible to shareholders, and by extension to society, because of the separation of ownership from effective control. The problem, if anything, is more serious today than when Berle and Means wrote in 1933, because of the increased access of insiders to financial engineering. We have seen the fruits of that access in management buyouts, at the expense of both other shareholders, workers, and other stakeholders. This is pure conflict of interest.
Since the first leveraged buyout boom, advocates of hostile takeovers have proposed a radically libertarian solution to the Berle-Means problem. Let a market for corporate control hold managers accountable by buying, selling, and recombining entire companies via LBOs that tax deductible money collateralized by the target's own assets. It is astonishing that this is even legal, let alone rewarded by tax preferences, even more so when managers with a fiduciary responsibility to shareholders are on both sides of the bargain.
The first boom in hostile takeovers crashed and burned. The second boom ended with the stock market collapse of 2000-01. The latest one is rife with conflicts of interest, it depends heavily on the perception that stock prices are going to continue to rise at multiples that far outstrip the rate of economic growth, and on the borrowed money to finance these deals that puts banks increasingly at risk.
So we need a careful examination of better ways of holding managers accountable -- through more power for shareholders and other stakeholders such as employees, proxy rules not tilted to incumbent management, and rules that reward mutual funds for serving as the agents of shareholders, and not just of the profit maximization of the fund sponsor. John Bogle, a pioneer in the modern mutual fund industry, has written eloquently on this.
Interestingly, the intellectual fathers of the leveraged buyout movement as a supposed source of better corporate governance, have lately been having serious second thoughts.
Michael Jensen, one of the original theorists of efficient market theory and the so called market for corporate control and an advocate of compensation incentives for corporate CEOs has now written a book calling for greater control of CEOs and less cronyism on corporate boards. That cronyism, however, is in part a reflection of Jensen's earlier conception of the ideal corporation.
I don't have all the answers on regulatory remedies, but people smarter than I need to systematically ask these questions, even if they are beyond the pale legislatively for now. And there are scholars of financial markets, former state and federal regulators, economic historians, and even people who did time on Wall Street, who all have the same concerns that I do as well as more technical expertise, and who I am sure would be happy to find company and to serve.
One last parallel: I am chilled, as I'm sure you are, every time I hear a high public official or a Wall Street eminence utter the reassuring words, "The economic fundamentals are sound." Those same words were used by President Hoover and the captains of finance, in the deepening chill of the winter of 1929-1930. They didn't restore confidence, or revive the asset bubbles.
The fact is that the economic fundamentals are sound -- if you look at the real economy of factories and farms, and internet entrepreneurs, and retailing innovation and scientific research laboratories. It is the financial economy that is dangerously unsound. And as every student of economic history knows, depressions, ever since the South Sea bubble, originate in excesses in the financial economy, and go on to ruin the real economy.
It remains to be seen whether we have dodged the bullet for now. If markets do calm down, and lower interest bail out excesses once again, then we have bought precious time. The worst thing of all would be to conclude that markets self corrected once again, and let the bubble economy continue to fester. Congress has a window in which restore prudential regulation, and we should use that window before the next crisis turns out to be a mortal one.

Comments (0) | 2007. 10. 03. 14:34:45