Five Disastrous Decisions That Got Us into This Economic Mess

Image via Wikipedia

By Joseph Stiglitz, Vanity Fair

We are at a dangerous moment. Behind the debates over future economic policy is a debate over history -- here are the major mistakes that got us here.
There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history -- a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it's crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road -- we had what engineers call a "system failure," when not a single decision but a cascade of decisions produce a tragic result. Let's look at five key moments.
No. 1: Firing the Chairman
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.
Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you'll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.
Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown -- as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation -- or "liar" -- loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn't have the tools, he could have gone to Congress and asked for them.
Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen -- for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk -- but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else -- or even of one's own position. Not surprisingly, the credit markets froze.
Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn't put it as memorably as Warren Buffett -- who saw derivatives as "financial weapons of mass destruction" -- but we took his point. And yet, for all the risk, the deregulators in charge of the financial system -- at the Fed, at the Securities and Exchange Commission, and elsewhere -- decided to do nothing, worried that any action might interfere with "innovation" in the financial system. But innovation, like "change," has no inherent value. It can be bad (the "liar" loans are a good example) as well as good.
No. 2: Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act -- the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn't its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest -- toward short-term self-interest, at any rate, rather than Tocqueville's "self interest rightly understood."
The most important consequence of the repeal of Glass-Steagall was indirect -- it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people's money -- people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.
There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can't, in any case, identify systemic risks -- the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.
As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation -- a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant -- and successful -- in their opposition. Nothing was done.
No. 3: Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease -- the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil -- money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America's household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.
The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly -- and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending -- not that American consumers needed any more encouragement.
No. 4: Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major scandals -- notably the collapse of WorldCom and Enron -- Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can't have faith in a company's numbers, then you can't have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are "incentive pay" in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.
The incentive structure of the rating agencies also proved perverse. Agencies such as Moody's and Standard & Poor's are paid by the very people they are supposed to grade. As a result, they've had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy -- that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.
No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008 -- that is, with the administration's response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America's banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.
The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn't address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding -- and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, "cash for trash," buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America's taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.
The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues -- they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely -- which they hadn't -- the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.
The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems -- the flawed incentive structures and the inadequate regulatory system.
Was there any single decision which, had it been reversed, would have changed the course of history? Every decision -- including decisions not to do something, as many of our bad economic decisions have been -- is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You'll hear some on the right point to certain actions by the government itself -- such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.'s had the same perverse incentive to indulge in gambling.
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, "I have found a flaw." Congressman Henry Waxman pushed him, responding, "In other words, you found that your view of the world, your ideology, was not right; it was not working." "Absolutely, precisely," Greenspan said. The embrace by America -- and much of the rest of the world -- of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
View this story online at: http://www.alternet.org/story/111709/

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Five Disastrous Decisions That Got Us into This Economic Mess

Image via Wikipedia

By Joseph Stiglitz, Vanity Fair

We are at a dangerous moment. Behind the debates over future economic policy is a debate over history -- here are the major mistakes that got us here.
There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history -- a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it's crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road -- we had what engineers call a "system failure," when not a single decision but a cascade of decisions produce a tragic result. Let's look at five key moments.
No. 1: Firing the Chairman
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.
Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you'll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.
Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown -- as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation -- or "liar" -- loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn't have the tools, he could have gone to Congress and asked for them.
Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen -- for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk -- but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else -- or even of one's own position. Not surprisingly, the credit markets froze.
Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn't put it as memorably as Warren Buffett -- who saw derivatives as "financial weapons of mass destruction" -- but we took his point. And yet, for all the risk, the deregulators in charge of the financial system -- at the Fed, at the Securities and Exchange Commission, and elsewhere -- decided to do nothing, worried that any action might interfere with "innovation" in the financial system. But innovation, like "change," has no inherent value. It can be bad (the "liar" loans are a good example) as well as good.
No. 2: Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act -- the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn't its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest -- toward short-term self-interest, at any rate, rather than Tocqueville's "self interest rightly understood."
The most important consequence of the repeal of Glass-Steagall was indirect -- it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people's money -- people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.
There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can't, in any case, identify systemic risks -- the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.
As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation -- a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant -- and successful -- in their opposition. Nothing was done.
No. 3: Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease -- the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil -- money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America's household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.
The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly -- and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending -- not that American consumers needed any more encouragement.
No. 4: Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major scandals -- notably the collapse of WorldCom and Enron -- Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can't have faith in a company's numbers, then you can't have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are "incentive pay" in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.
The incentive structure of the rating agencies also proved perverse. Agencies such as Moody's and Standard & Poor's are paid by the very people they are supposed to grade. As a result, they've had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy -- that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.
No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008 -- that is, with the administration's response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America's banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.
The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn't address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding -- and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, "cash for trash," buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America's taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.
The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues -- they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely -- which they hadn't -- the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.
The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems -- the flawed incentive structures and the inadequate regulatory system.
Was there any single decision which, had it been reversed, would have changed the course of history? Every decision -- including decisions not to do something, as many of our bad economic decisions have been -- is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You'll hear some on the right point to certain actions by the government itself -- such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.'s had the same perverse incentive to indulge in gambling.
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, "I have found a flaw." Congressman Henry Waxman pushed him, responding, "In other words, you found that your view of the world, your ideology, was not right; it was not working." "Absolutely, precisely," Greenspan said. The embrace by America -- and much of the rest of the world -- of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
View this story online at: http://www.alternet.org/story/111709/

Related articles by Zemanta

• The Regulatory Failure Behind the Bear Stearns Debacle
• high & low finance: Ill-Conceived Actions May Deepen Credit Crisis
• Greenspan: My Faith In Banks A "Mistake"
• Greenspan Concedes Error in Regulatory View
• Greenspan: Fed Isn't 'Magical Piggy Bank'

Greek-inspired demonstrations spreads across Europe

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Tri-City Herald

Unrest that has gripped Greece for the past six days showed troubling signs of spreading across Europe, as violence erupted in several cities.
Angry youths smashed shop windows, attacked banks and hurled bottles at police in small but violent protests Thursday in Spain and Denmark, while cars were set alight outside a consulate in France. Protesters gathered in front of the Greek Embassy in Rome on Wednesday and some turned violent, damaging police vehicles, overturning a car and setting a trash can on fire.
Authorities say the incidents have been isolated so far, but acknowledge concern that the Greek riots - which started over the police killing of a 15-year-old on Saturday - could be a trigger for anti-globalization groups and others outraged by economic turmoil and a lack of job opportunities.
"What's happening in Greece tends to prove that the extreme left exists, contrary to doubts of some over these past few weeks," French Interior Ministry spokesman Gerard Gachet told The Associated Press. "For the moment, we can't go farther with our conclusions and say that there's a danger of contagion of the Greek situation into France. All of that is being watched."
As Europe plunges into recession, unemployment is rising, particularly among the young. Even before the crisis, European youths complained about difficulty finding well paid jobs - even with a college degree - and many said they felt left out as the continent grew in prosperity.
At least some of the protests appear to have been organized over the Internet, showing how quickly a message can be spread, particularly among tech-savvy youth. One Web site that Greek protesters have been using to update each other claims there have been sympathy protests in nearly 20 countries.
"We're encouraging nonviolent action here and abroad," said Konstantinos Sakkas, a 23-year-old protester at the Athens Polytechnic, where many of the demonstrators are based. "What these are abroad are spontaneous expressions of solidarity with what's going on here."
In Denmark, protesters pelted riot police with bottles and paint in downtown Copenhagen at a rally late Wednesday. Some 63 people were detained and later released.
And in Spain, angry youths attacked banks, shops and a police station in separate demonstrations in Madrid and Barcelona late Wednesday that each drew about 200 people.
Some of the protesters chanted "police killers" and other slogans. Eleven people - including a Greek girl - were arrested at the two rallies, and two police officers were lightly injured.
The Barcelona daily La Vanguardia said the protests had been convened over the Internet.
Daniel Lostao, president of the state-financed Youth Council, an umbrella organization of Spanish youth groups, said young people in Spain face daunting challenges - soaring unemployment, low salaries and difficulty in leaving the family nest because of expensive housing.
Still, he said he doubted the protests in Spain would grow.
"We do not have the feeling that this is going to spread," Lostao said. "Let's hope I am not wrong."
In France, protesters set fire to two cars and a garbage can apparently stuffed with flammable material outside the Greek consulate in Bordeaux early Thursday and scrawled graffiti on the building threatening more unrest, Michel Corfias, the Greek consul, told The Associated Press.

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"It was a very, very intense fire," Corfias said, adding that it severely damaged the building's front door.
Graffiti sprayed on the consulate's garage door read "solidarity with the fires in Greece, the insurrection to come," he said, and the word "insurrection" was painted on the doors of neighboring houses.
Corfias said police suspect the attack is linked to events in Greece, and that it might have been carried out by youths unhappy with globalization and economic difficulties in France.
"The events in Greece are a pretext, in my opinion," he said. "The events in Greece are a trigger."
Elsewhere in Europe, more than 15 people occupied a Greek consulate in Berlin on Monday, hanging a banner out the window with the dead Greek teenager's name and the words, "Killed by the State." Youths clad in black appeared occasionally at a consulate balcony, exchanging chants with more than 50 protesters gathered on the street below.
About 100 people protested outside the Greek consulate in Frankfurt on Tuesday evening and minor violence was reported on the peripheries of the demonstration, including the breaking of a bank's window.

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Arrest of Lashkar Masterminds Confirmed

Informed Comment

Pakistan confirmed the arrest in Pakistani Kashmir of Zaki ur Rahman Lakhvi and Zarar Shah, leaders of the Lashkar-i Tayiba accused by the Indian government of having masterminded the attack on Mumbai.
Zarar Shah's arrest is particularly interesting, since he is thought to be a liason to a network of retired officers of the Inter-Services Intelligence who are alleged to have trained the Mumbai attackers.
This is a game of chicken. As the civilian Pakistani government gets closer to rogue cells in the ISI, it risks another coup or black ops aimed at destabilizing it.

Informed Comment

McClatchy has gained access to a confidential United Nations document on the Lashkar-e Tayiba, the Pakistan-based terrorist group suspected of being behind the attack on Mumbai. McClatchy writes:

' A U.N. document obtained by McClatchy said that LeT has sent operatives to attack U.S. troops in Iraq, established a branch in Saudi Arabia and been raising funds in Europe. The group may also have received money from al Qaida, suggesting that it has close ties with Osama bin Laden's terrorist network based along Pakistan's border with Afghanistan, the document said.'

The UN document expresses suspicions that al-Qaeda leaders such as Ayman al-Zawahiri are now working through non-Arab groups such as Lashkar-e Tayiba.
A UN Security Council Panel branded Jama'at ul Da'wa, led by Muhammad Hafiz Saeed a front organization for LeT on Thursday, naming 4 leaders as terrorist leaders and imposing sanctions on them. Those sanctioned include Muhammad Saeed himself (now under house arrest); Zaki-ur-Rehman Lakhvi, a paramilitary leader who is now in custody in Pakistan; finance chief Haji Muhammad Ashraf, and Saudi fund-raiser Mahmoud Mohammad Ahmed Bahariq.

Are We Courting a Populist Backlash?

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The LA Progressive

The government is doing a lousy job helping distressed homeowners. And according to John Dugan, the Comptroller of the Currency, the little that's been done has had surprisingly little effect. Nearly 36 percent of homeowners holding mortgages whose terms were adjusted to give them more leeway defaulted on payments within three months, and almost 53 percent were behind on payments by six months.
What's going on? It's hard to know for sure, because the homeowners who have qualified for help so far were supposed to have been fairly good credit risks to begin with. My guess is the worsening economy is making it harder for just about all homeowners to pay their mortgages, and those who were teetering on the edge months ago -- although perhaps good credit risks before that time -- are now way under water. Two of the biggest culprits: Layoffs and fewer working hours. With far less money coming in, more and more people have to choose between paying their mortgages and trying to keep up with larger and larger credit card debt. They're trying to manage both while paying the medical bills and the food bills and energy bills, and they can't make it.
It wouldn't surprise me if many of these Americans were starting to look at the size of the bailouts of Wall Street and the bailout of the Big Three -- at the executives, well-paid professional employees, upscale creditors and shareholders, and even well-paid blue-collar workers, who are the major beneficiaries of this federal largesse -- and conclude that a fundamental principle of fairness is being violated.
These Americans aren't revolutionaries. To the contrary, they're deeply conservative. They've worked hard, but their hard work hasn't paid off. Some have tried to save, only to see their savings disappear. They're worried about the future and about their kids' futures. They never expected anything like this.
This is the angry soil in which populist backlashes can take root.
Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.

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Why the U.S. Has a Quarter of the World's Prisoners

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AlterNet | Erikka Yancy

I can think of no greater hell on earth than spending day after day in a little box. What about non-violent offenders? The drug addicts, the bad check writers, the people that are filling up our jails and costing us money?
The number of prisoners in prisons for drugs equals the total number of prisoners in 1980! The good news: in the past 20 years spending for higher education has increased 21%. The bad news: in that same 20 years, spending for prisons increased 127%.
We're creating criminals, not citizens.

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Pakistan arrests suspected Mumbai mastermind

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TwinCities.com

Security forces overran a militant camp on the outskirts of Pakistani Kashmir's main city and seized an alleged mastermind of the attacks that shook India's financial capital last month, two officials said Monday.
The raid was the first known response to demands by India and the United States that Pakistan targets the alleged perpetrators of the Mumbai attacks, which have sharply raised tensions between South Asia's two nuclear-armed powers.
Backed by a helicopter, the troops grabbed Zaki-ur-Rehman Lakhvi among at least 12 people taken Sunday in the raid on the riverbank camp run by the banned group Laskhar-e-Taiba in Pakistani Kashmir, the officials said. There was a brief gunfight in the camp near Muzaffarabad before the militants were subdued, the officials said.
The officials -- one from the intelligence agencies and one from a government agency -- spoke on condition of anonymity because they were not authorized to speak to the media.
Indian officials say the sole Mumbai attacker captured alive has told them that Lakhvi recruited him for the mission and that Lakhvi and another militant, Yusuf Muzammil, planned the operation. The three-day seige of India's commercial capital left 171 people dead.
Analysts say Lashkar-e-Taiba was created with the help of Pakistan's intelligence agencies in the 1980s to act as a proxy fighting force in Indian Kashmir.
The United States says the group has links to al-Qaida.
In May, U.S. Department of the Treasury alleged that Lakhvi directed Laskhar-e-Taiba operations in Chechnya, Bosnia and Southeast Asia, In 2004, he allegedly sent operatives and funds to attack U.S. forces in Iraq, it said.
It was not immediately clear what Pakistan intended to do with Lakhvi.
Pakistan and India do not have an extradition treaty. Last week, President Asif Ali Zardari indicated anyone arrested in Pakistan in connection with the attacks would be tried in Pakistan.
Pakistan banned Lashkar-e-Taiba in 2002, but there have been few if any convictions of its members since then. Many suspect elements within the intelligence agencies keep some links with Lashkar and other militants in the country, either to use against India or in neighboring Afghanistan.
An Islamist charity called Jemaat-ud-Dawa sprang up after the ban, which U.S. officials say is a front for the group. It denies the accusation and has condemned the Mumbai attacks.
Pakistan and India have fought three wars over the last 60 years, two over Kashmir. In 2001, an attack by suspected Lashkar-e-Taiba militants on the parliament building in New Delhi brought the countries close to conflict.
The government convened a rare Cabinet-level meeting of the country's defense and intelligence chiefs, but made no official comment on the raid or Lakhvi's arrest.
That is not uncommon here, especially when the subject is sensitive.
"The committee reiterated Pakistan's resolve not to allow its soil to be used for any kind of terrorist activity anywhere in the region or the world," it said in a statement after the meeting ended.
The New York Times, citing unidentified American intelligence and counterterrorism officials, reported in a story published Monday that Lashkar has gained strength in recent years with the help of Pakistan's spy service, the Directorate for Inter-Services Intelligence.
The officials cited by the Times say the ISI has shared intelligence with and provided protection for the outlawed group, though there is no evidence to link the spy service to the Mumbai attacks.
Islamabad's young civilian government has denied any of its state agencies were involved in the Mumbai attacks, but said it was possible that the militants were Pakistanis. It has pledged to cooperate with India, noting it too is a victim of terrorism.
Pakistan has experienced a surge in militant violence since it sided with the United States after the Sept. 11 attacks. As part of the alliance, it allows NATO and America to truck supplies to their forces in Afghanistan through the country.

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New Al Qaeda Cell A Growing Threat To U.S., Officials Warn N. African-Based Militants Can Blend In Without Raising Suspicions In Europe, U.S.

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CBS News

The new faces of terror are militants inside an emerging Al Qaeda cell, which U.S. officials warn presents a clear and growing threat to America.
Based in North Africa, the group calling itself "Al Qaeda in the Islamic Maghreb" specializes in kidnappings and suicide attacks, reports CBS News correspondent Bob Orr.
A car bombing last September of an Algerian military barracks killed 28 people. But, follow-up bombings of a United Nations building and a diplomatic office signaled that Al Qaeda in the Islamic Maghreb, or AQIM, has bigger plans.
"They have devoted an enormous amount of their energy and their resources to try to build this up as a base to try to carry out attacks, not just in North Africa, but ultimately into West Europe and someday against North America," says Bruce Riedel of the Brookings Institute.
Riedel, a former CIA official, says a propaganda video - just posted on a jihad website - shows a sophisticated attack capability.
But, the most lethal aspect of AQIM - and its real value for Osama bin Laden's terror network - goes beyond firepower.
Says Ambassador Dell Dailey, a U.S. Department of State Counterterrorism official: "Leaders of Al Qaeda and its affiliates are extremely interested in recruiting terrorists from and deploying terrorists to Europe, people familiar with our Western cultures that can travel freely."
And that's exactly who's being drawn to the AQIM training camps - people who can easily blend in without raising suspicions in Europe or the U.S.
"Some of those people are second, third generation and they now have French, Belgian or Spanish passports and a French, Belgian or Spanish passport is exactly what Al Qaeda is looking for because that's their mechanism to get into the United States," Riedel says.
U.S. officials have long worried about British radicals using U.K. passports to bring terror to America. But, now the North African branch of Al Qaeda presents a second pipeline - a doubled threat to the homeland.

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The Kashmir Connection - Are the Mumbai Terrorists Working With Al Qaeda?

NYTimes.com

All of the nightmares of the 21st century come together in Pakistan," in the words of the former C.I.A. officer Bruce Riedel. Among them is Lashkar-e-Taiba, the Army of the Pure, the group being blamed for the deadly attacks in Mumbai.
American intelligence on Lashkar falls into three categories. The biggest is the unknown. What little is known is bad enough. The what-ifs are worse: in particular, a possible strategic partnership between Lashkar and Al Qaeda's forces in Pakistan. Then there is the unknown.
If there were operational links between Lashkar and Al Qaeda in the multiple attacks that terrorized Mumbai for three days last week, American counterterrorism officials are still looking for the evidence. Beyond informed speculation, no proof in the public domain shows those two groups have a working alliance. But they have had some common goals and common ground.
Secretary of State Condoleezza Rice, visiting India, said she would not "jump to any conclusions," given the absence of proof. But she also said: "Whether there is a direct Al Qaeda hand or not, this is clearly the kind of terrorism in which Al Qaeda participates."
Still, there are clues half-buried in the recent past. Here is some of what is known:
First, American intelligence officials are all but certain that Lashkar led the attacks, which left 163 people -- including 18 members of India's security forces -- dead along with 9 suspected terrorists. "The same group that we believe is responsible for Mumbai had a similar attack in 2006 on a train and killed a similar number of people," the director of national intelligence, Mike McConnell, said last week in a speech at Harvard. "Go back to 2001 and it was an attack on the Parliament." The Mumbai commuter train bombings killed at least 186. A dozen died in the assault on Parliament, which led to talk of war.
Second, Pakistan's intelligence services have used Lashkar as a guerrilla force to fight India over their disputed border in Kashmir. That fight has raged since the British partitioned India and Pakistan in 1947. The rival nations went to war that year over Kashmir, and again in 1965 and 1971. Tens of thousands have been killed in political warfare since then.
Third, and most significantly, Lashkar's roots, like Al Qaeda's, lie in another war -- the battle between Soviet forces occupying Afghanistan and Islamic rebels who fought them in the 1980's. The rebels were backed by billions of dollars from the United States and Saudi Arabia. Their money and guns flowed through Pakistani intelligence.
In 1989, the Red Army left Afghanistan. The international Islamic holy warriors did not; many thousands of radicals from some 40 nations came to learn the lessons of jihad in Afghanistan, and Lashkar's first foot soldiers were among them.
Lashkar was founded in 1989, supported by Saudi money and protected by Pakistani spies, according to Hussain Haqqani, Pakistan's current ambassador to the United States, a former journalist who opposed Gen. Pervez Musharraf when the general was Pakistan's ruler. Pakistan's role as quartermaster and state sponsor of Afghan jihad forces created "a nexus between Pakistan's military and secret services, which was heightened by the state sponsorship of jihad against India," he has written.

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After the attacks of September 2001, it was clearer that Al Qaeda had formed alliances with Lashkar: the first high-level Qaeda prisoner taken after 9/11, Abu Zubayda, was captured in a Lashkar safe house in Pakistan, as Mr. Riedel, now affiliated with the Brookings Institution, pointed out in an article posted online last Wednesday. Other Qaeda operatives who fled after American forces arrived in Afghanistan also holed up with Lashkar, he noted.
In December 2001, after the Lashkar attack on India's Parliament, President Bush added the group to the official United States list of international terrorist organizations. He asked General Musharraf to jail Lashkar's leaders and break up the group.
Some members were arrested. Others went to fight Americans alongside the Taliban in Afghanistan rather than continue their battles against India's Hindus in Kashmir, as the State Department and India's Defense Ministry have reported; by 2006, attacks by Lashkar and its allies in Kashmir were half what they were a few years before.
But on April 23, 2006, Osama bin Laden seemed to signal an open alliance with groups like Lashkar, and their goals. He issued a proclamation denouncing "a Crusader-Zionist-Hindu war against Muslims." He referred to the United States, Israel and India in the statement, as it was broadcast and translated by Al Jazeera. "A U.N. resolution passed more than half a century ago gave Muslim Kashmir the liberty of choosing independence from India," it said. "George Bush, the leader of the crusaders' campaign, announced a few days ago that he will order his converted agent Musharraf to shut down the Kashmir mujahedeen camps, thus affirming that it is a Zionist-Hindu war against Muslims."
Mr. bin Laden called for Islamic holy warriors to continue jihad against India over Kashmir. They did. Lashkar and other Kashmiri groups "continued regional attack planning" in 2007, and "continued to support attacks in Afghanistan," the State Department reported six months ago. The groups also continued to feature prominently in Al Qaeda's "transnational attack planning," the report said.
Then, in an August audio tape, Al Qaeda's second-in-command, Ayman al-Zawahiri, proclaimed that "the American, Zionist and Indian flags were raised high" over the bodies of dead Islamic fighters in Pakistan. Jarret Brachman, who was director of research at West Point's Center for Combating Terrorism from 2004 to 2008, points to that statement as potentially significant.
"He starts redirecting Pakistani jihadi attention to the evils of India and linking it more visibly to the U.S. and Israel," he said. "The Mumbai attacks should really come as no surprise to anybody who's been listening carefully to Al Qaeda's rhetoric. Even if Al Qaeda had nothing to do with it operationally, their peddling of this anti-Indian sentiment undoubtedly inspires more parochial groups, like Lashkar, to operationalize those ideas."
Intelligence work is about secrets and mysteries, as Defense Secretary Robert Gates, who used to run the C.I.A., often says. The Mumbai massacres remain something of a mystery. Of late, "Al Qaeda has seemed strategically schizophrenic," Mr. Brachman said. "How do they turn their hate list into a target list?" He said that no one knows if this attack was the start of something new.

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Are Mumbai attacks a chance for peace?

BBC NEWS

If Lashkar-e-Toiba is indeed responsible for the attacks - as Indian authorities claim and Pakistan denies - it will be the second time that the group has single-handedly put the two countries on a war footing. In 2002 each mobilised one million men for nearly a year after Lashkar attacked the Indian parliament.
The attacks have led to rising public anger in India against Pakistan and right wing Pakistani jingoism against India, in which some have even called on the moderate President Asif Ali Zardari to go to war.
When the Pakistan army finally stopped allowing Pakistan-based militant groups from infiltrating into Indian-administered Kashmir in 2004, groups like Lashkar, Jaish-e-Mohammed and Harkat-ul Mujheddin splintered and fragmented.
Besieged
Some militants went home, others got jobs or stayed in camps in the mountains.
However the youngest and most radicalised fighters joined up with al-Qaeda and the Pakistani and Afghan Taleban in the mountains of Pakistan's tribal areas on the border with Afghanistan.
They embraced the global jihad to fight US troops in Afghanistan and Iraq and later attacked the Pakistan government and army as the Pakistani Taleban developed their own political agenda to seize power.
The group that attacked Mumbai may well include some Pakistanis, but it is more likely to be an international terrorist force put together by al-Qaeda and the Pakistani Taleban, who are besieged by the Pakistan army on one side and a rain of missiles being launched by US forces in Afghanistan against their hideouts on the other.
Al-Qaeda is looking for some relief and a diversion.
What better way to do so than by provoking the two old enemies - India and Pakistan - with a terrorist attack that diverts attention away from the tribal areas?
Such a move would force Pakistani troops back to the Indian border while simultaneously pre-occupying US and Nato countries in hectic diplomacy to prevent the region exploding.
A diversion such as this would preserve extremist sanctuaries along the Pakistan-Afghanistan border and would provide militants with a much needed respite - especially considering that in the next few months President-elect Barak Obama is due to send an additional 20,000 US troops to Afghanistan, backed by more Nato troops.
Unfounded
This strategic diversion ploy for the sake of al-Qaeda and its surrogates is the principle motive behind the Mumbai terrorist attacks.
It worked well in 2002 when the Pakistan army moved away from the Afghan border to meet the Indian mobilisation, thereby allowing al-Qaeda and the Afghan Taleban to escape from Afghanistan and consolidate their positions in the tribal areas.
If the two countries now mobilise their forces against one another they will be walking straight into the trap laid for them by al-Qaeda.
Charges that the Pakistan government, army or its Inter-Services Intelligence (ISI) were behind the attack appear unfounded.
Pakistan can hardly contemplate a rise in tensions with India when it is beset by a monumental economic crisis, insurgencies in Balochistan and in North West Frontier Province, rising violence in Karachi and one-third of the country out of control of any constitutional authority.
Certainly Pakistan is not blameless. The army and its former military ruler President Pervez Musharraf must be faulted for refusing after 2004 to properly demobilise Kashmiri militant groups and being so reluctant to deal with the insurgency in the tribal areas. It was not until August when the army finally began a sustained offensive there.
And despite Musharraf's own peace overtures to India after 2004, the army itself has been slow to make the strategic shift from seeing India as the primary threat. It has taken time to understand that local extremists now pose a far greater danger.
As the militants working under the umbrella of al-Qaeda have targeted the army in the mountains and in its cantonments, the army has retaliated but it has been slow and late in doing so.
If India and Pakistan can understand that they are both victims of a strategic diversion by al-Qaeda and if international mediation can help deepen that understanding, then there is perhaps a greater opportunity for the two countries to address the conflicts that have bedevilled their relationship for 60 years - Kashmir and other lesser issues.
It will certainly be difficult for the two countries to walk away from the brink. India has a weak government whose counter-terrorism policies have been a failure and which faces an election in the next six months. The Indian public and media are demanding revenge - not co-operation with Islamabad.
Pakistan also has a weak government that is still trying to set parameters of co-operation with an army which dominates foreign and strategic policy and controls the ISI, the most powerful political entity in the country.
Pakistan's other problems could well overwhelm the government - a troops mobilisation is the last thing it needs.
To turn the possibility of war into the possibility of peace, the leadership of both countries need to show statesmanship, determination and authority even if they have to defy the public mood in their respective countries to do so.
Ahmed Rashid is the author of the recently published Descent into Chaos: How the war against Islamic extremism is being lost in Pakistan, Afghanistan and Central Asia.

Pakistani organization accused of links to Mumbai attacks holds open house

csmonitor.com

Jamaat-ud-Dawa, which the US says is a front for Lashkar-e-Taiba militants, invited reporters to tour its compound near Lahore, Pakistan.

This article is a nice summary of the issue.

Zimbabwe cholera 'an emergency'

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BBC NEWS

Authorities in Zimbabwe have declared a cholera outbreak that has killed more than 550 people to be a national emergency, state media reports.
Health Minister David Parirenyatwa said hospitals were in urgent need of medicine, food and equipment and were suffering a critical staff shortage.
Zimbabwe is appealing for international help urgently to tackle the outbreak, which they had said was under control.
Meanwhile 16 soldiers have been held over disorder in Harare, say reports.
The Zimbabwean police told the state-owned Herald newspaper that 10 of the soldiers were detained over a looting spree on Monday which broke out after the central bank said it did not have the money to pay defence force members queuing for wages.
The other six were part of a group that reportedly looted shops and battled riot police last week.
Zimbabwe's defence minister has blamed the disturbances on an unruly minority in the army, and promised to punish the culprits.
Zimbabwe's deputy health minister told the BBC's World Today programme that patients would die without urgent medical aid.
Dr Edwin Muguti said the country's health sector was having "tremendous difficulties".
Health Minister Mr Parirenyatwa, meanwhile, told the Herald:
"Our central hospitals are literally not functioning."
The BBC's Peter Biles reports from neighbouring South Africa that as recently as last week, Zimbabwean officials had said there was no need to view cholera as an emergency.
The UN says at least 565 people have died from the cholera outbreak, which began in August, though correspondents say the real death toll could be much higher.
At least 12,545 cases of cholera have been recorded over the same period.
The outbreak comes as Zimbabwe is crippled by economic meltdown and political stalemate.
President Robert Mugabe's Zanu-PF party and the opposition Movement for Democratic Change have been rowing over a power-sharing deal following disputed polls this year.
Zimbabwe's prime minister-designate and opposition leader Morgan Tsvangirai is expected to meet Kenyan Prime Minister Raila Odinga in Nairobi on Thursday.
Mr Tsvangirai has been on a whirlwind tour of several African countries for talks on the Zimbabwe crisis.
Water shortage
On Wednesday, the European Commission said it would provide more than $12m (£8m) for drugs and clean water in Zimbabwe.
Most of Zimbabwe's capital has been without water since Sunday. State media said the water was cut because of a lack of purification tablets.
The health minister said there had been a drop in cholera cases in all provinces except Harare.
The World Health Organisation has said it is keen to help after Mr Parirenyatwa appealed for medical supplies and funds to pay hospital staff.
On Wednesday, riot police in the Zimbabwean capital, Harare, broke up a protest march by doctors and nurses angered at the worsening outbreak.
The authorities also prevented trade union members staging a protest over the country's banking meltdown.
The government has blamed its crisis on Western sanctions it says are aimed at trying to bring down Mr Mugabe.
But the sanctions imposed after allegations of electoral fraud and political violence are aimed at the president and his close associates and consist of travel bans and a freeze on their foreign assets.
Cases of cholera have been reported either side of Zimbabwe's borders with South Africa, Botswana and Mozambique.

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EU official warns of 'slave-like' labor market

You can bet, slave labor is happening all over the west including in the US.
Tri-City Herald

Europe has a hidden labor market in which migrants and even children are working in "slave-like" situations, a European Union official said Tuesday.
Morten Kjaerum, director of the European Union Agency for Fundamental Rights, warned that the current global economic crisis could push more people into this underground economy and expose them to severe exploitation.
Kjaerum said there is a growing illicit market in Europe "where migrant workers and children are working in what you could say (are) slave-like situations."
Kjaerum, in an interview with The Associated Press, said the problem persists throughout Europe and involves both undocumented foreign nationals and EU citizens.
"The whole issue of ... the "slave-like" labor market is something we have to address again more forcefully," he said.
While the market's magnitude was "very difficult" to assess, such low-end jobs can be found in the sex and farming industries, among others, Kjaerum said. Sometimes, domestic workers also fall into this category.
Reports suggesting the existence of an underground economy within the EU are not uncommon. In late 2006, for example, Polish police said they had arrested the alleged ringleader of a human trafficking network that had shipped hundreds of Poles to what authorities described as virtual slave labor in Italian fruit plantations since 2000.
Sometimes, Kjaerum said, workers in the illicit market even face death.
"We have seen cases in member states where, most likely, these people were shot, killed afterwards just to get rid of them - so it is a real issue," Kjaerum said. He declined to provide more details.
The Vienna-based agency is slated to release a report on child trafficking early next year. According to Kjaerum, very preliminary findings show that the problem is "very much an issue" to which EU nations and institutions need to pay more attention.
Each year, "hundreds, if not thousands" of children come to Europe and simply disappear within days or weeks, he said.
"Some of them we never hear about, others present themselves at the borders as asylum seekers or in other ways and are being transferred to asylum camps or other care centers and then simply disappear."
Kjaerum said it was "most likely" that many of the children either disappear into the sex market, become domestic workers or laborers in industries such as farming.
The European Union Agency for Fundamental Rights was established last year and is meant to advise the EU and its member states as they implement EU laws to ensure that fundamental human rights are observed.

Pakistan: The hottest place in the world

The truth about Pakistan's Inter Services Intelligence may never be known for sure. Some attribute Inter Services Intelligence with funding the Al Qaeda attack on the World Trade Center. Here is a great video about that angle and the Bush Administration cover-up of 9/11.

Asia Times Online

Based on the complicated set of facts in front of us, it seems logical for now to conclude that the Mumbai operations were the product of meticulous planning and action taken almost exclusively by non-locals to prevent the risk of information leaking to Indian police if locals had been taken into confidence. The most logical source of such people would be the Islamic terrorist continuum operating under the auspices of al-Qaeda and loosely aligned with renegade elements of the Pakistani government itself, namely the Inter-Services Intelligence or ISI; the notorious state-within-state.
Much as everyone discusses the carnage in Mumbai, I cannot escape the feeling that execution was hurried along; the use of even a slightly larger force with more deadly weapons could well have created a multiplication of damage and casualties in Mumbai. That suggests that the operation was executed prematurely: precisely what one should expect if planners had somehow suspected being exposed and their carefully planned actions aborted entirely. It is for this reason that I suspect the Pakistani government's actions against the ISI as the primary trigger for this terrorist attack.
[..]
Pakistan is a country possessing nuclear weapons and hosting over 150 million people skewed towards the young. Its share of young, unemployed and restless people with a penchant for religious extremism since the early 1980s has steadily risen to the point where calling the country the leading breeding center for terrorism globally wouldn't be too far-fetched. All of these factors have led to the undermining of civilian government, while the country's elite slide into accommodation with religious fanatics from al-Qaeda and the Taliban.
[..]
One of the key changes ushered in by President Asif Ali Zardari was the broadening of ties with India, leaving out for now the thorny issue of Kashmir but focusing instead on improving trade and infrastructure while making a common cause against Islamic terrorists. This made sense not only because Zardari owed his ascent to the assassination of his wife, former premier Benazir Bhutto, but also because sidelining the army by achieving peace with India would help to secure his own future.
Proceeding in that vein, and acting finally on a key recommendation by the US government that had been made as early as 2006, earlier last week it emerged that the "political" wing of the ISI had been disbanded. Now of course, much of the ISI isn't supposed to exist in the first place, therefore one uses ground contacts to determine just how serious such changes actually are; in this case it appears that the government's action was seen as a stinging slap on the face of the ISI by effectively rendering the organization captive to the policies and actions of the government in power rather than being determined by its own senior cadre of advisors and agents as had been done previously.
In effect, disbanding the political wing of the ISI was seen as a move for the Pakistani government to take direct charge of ISI activities, and stop being hostage to the machinations of the ISI itself. In the past, the political wing of the ISI was thought to be responsible for the removal of Benazir Bhutto, the trial by fire of Nawaz Sharif, the removal of president General Pervez Musharraf and most recently the assassination of Benazir Bhutto herself. It was for this reason that the ISI took great pains to ensure that her death was blamed on an accident (head hitting the door handle) rather than an assassin's bullets because the difference is the one between martyrdom and destiny.
[..]
It is unlikely that the governments of the US, UK, Israel and India will take the involvement of agents within the Pakistani government in the Mumbai bombings lightly. However, that anger is beside the point because it is not clear to me that the Pakistani government can actually survive any course of action against these embedded agents.
With its credibility badly damaged in the eyes of the world, the government will have to rush towards a compromise position with the very people it sought to dislodge, namely forces friendly to Islamic terrorism within the agencies of the government including the army and the ISI. In return for promises of going easy, the government would get nominal visibility in future plans.
Then-president Musharraf came to a similar arrangement in the months following 9/11 and US actions against Afghanistan. In return for face-saving bans on terrorist outfits that gathered funds and hired Pakistanis for their operations, he allowed the outfits to expand their soft programs, including Islamic education, pushing back women's rights and broadening the run of the Taliban in border areas with Afghanistan. This worked for a reasonable period of time until finally the US government lost patience with the foot-dragging on operations against al-Qaeda/Taliban fighters nesting within Pakistan. That in turn caused the Americans to act against Musharraf, and bring in Bhutto, albeit with unimaginable consequences for the latter.
In all this, there was also a history lesson that was completely missed, namely the events of 1999 when then prime minister of Pakistan, Nawaz Sharif, proposed peace; this led his then head of the army Musharraf and a handful of top officers to plot the onset of a war with India by using irregular units of the Pakistani army in the guise of Islamic militants that attacked a forward Indian army unit in Kashmir; the resulting battle led not only to a threat of a nuclear strike by Pakistan but also eventually to the replacement of Sharif by Musharraf, after Sharif was forced to settle for peace by the US and other countries for the illegal actions of the army.
What is different this time around is that instead of the army being at loggerheads with the government, a small group within the ISI appears to have achieved the ability to destabilize both the government and the Pakistani army. For security experts, this was an obvious conclusion to reach when Musharraf was pushed out of power, and when Zardari started his peacemaking routine with India. My discomfort stems from the fact that no one in power across the US and India saw it coming.
To any dispassionate observer, it is easy to conclude that Pakistan is now a failed state on the lines of Somalia and Afghanistan where the government writ runs only in limited areas while everywhere else in the country is dominated by warlords. The only national institution in Pakistan is its army, although the push against Musharraf and the actions of the Taliban against specific army units point to cracks within that could well result in final breakdown of its command structure. It goes without saying that only the al-Qaeda/Taliban combine stand to take advantage of such a breakdown of the army command structure, using the opportunity to seize control of nuclear weapons.
Now, just to state the obvious from my perspective, there isn't anything particularly bad about people belonging to a particular religion or ethnic group securing nuclear weapons capability. The problem with al-Qaeda and the Taliban taking control of these weapons of mass destruction though are that the groups put the survival of their own people second to the achievement of longer-term principles. This casual disregard for the lives of their own people - well witnessed in Afghanistan, Iraq and other theaters of
al-Qaeda/Taliban operations - is what makes the idea of them seizing nuclear weapons so much more of a strategic nightmare.
As for India ...
Seeing the events of the Thanksgiving massacre unfold in Mumbai, I was reminded of an awful joke from Israeli television during the first Gulf War in 1990, after Saddam Hussein launched daily Scud missile attacks on the Jewish state. Told that the wild targeting and the inbuilt inaccuracy of the Scud missiles meant that the chances of anyone actually dying from such an attack were broadly the same as winning the national lottery, one comic deadpanned, "Yes, but you didn't tell me there were so many draws every day."
That sick joke must have gone through the minds of more than one person in Mumbai over the past few days as the latest attacks add to the recent history of terrorism against people in the city that started with the serial bombings of 1993 that killed more than a thousand people. More recently, there have been sporadic attacks using bombs in taxis and trains that have killed over 500 people.
A security expert on television made the point that the terrorists had chosen soft targets such as hotels and hospitals, but this comment only caused me to laugh mirthlessly. For it appears to me that the Indian government long ago beat the terrorists to that job, by making not just Mumbai but other big Indian cities also soft targets for terrorism.
In the months after 9/11 in the US, as well as the terrorist attacks on Madrid it became clear that the ultimate objective of al-Qaeda and its related groups was to destabilize multi-ethnic democracies everywhere. Being the only one of its kind in Asia, it would have been foolhardy for India not to see itself as a target even before taking into account specific issues such as the simmering Kashmir insurgency, its relative proximity to the US and lastly the large Muslim population that lives in its secular rather than theocratic framework that directly challenges the orthodox ideology of al-Qaeda.
Yet and almost alone among all such democracies, the Indian government refused to change its homeland security apparatus in the months following the terrorist attacks on the Indian parliament in 2001, as well as deeper provocations such as the attacks on Mumbai in later months.
There is no national body coordinating counter-terrorist intelligence across state lines; this would be tragic in a monolingual country like the United States but completely unfathomable in a multi-ethnic multilingual country like India. There is no apparent infrastructure to enable responses to crisis situations that aren't conventional military attacks such as the Kargil war mentioned previously in this article.
Much has been made of the commercial importance of Mumbai, a fact that even economists like me only understand when looking at the domicile of India's largest companies and its richest people. An overwhelming majority of India's richest 100 people live and work in Mumbai, a journalist friend recently pointed out that over a quarter of the country's revenue from taxing salaries arose from companies domiciled in this one city.
In any other emerging market leave alone democracy, Mumbai would automatically have been accorded protected status with governments bending over backwards to improve infrastructure and ensure security. None of these things have happened though, due to the curious and illogical domination of the Indian political spectrum by communists. As I wrote in another article for Asia Times Online (India's real terrorists May 17, 2008), the role of communists in pushing back efforts to modernize and protect Mumbai cannot be overstated.
Israel's Defense Minister Ehud Barak made the point on Friday that India's special forces unit that dealt with the siege at the top hotels in Mumbai did not appear to be well prepared, nor could they be considered sufficiently well trained for such complex operations. This is a matter not just of concern for Indians, but also an invitation to question the absence of coordination with security experts from Israel and the United States. Interestingly, while India is one of the largest buyers of defense equipment from Israel, it has thus far failed to secure much training in anti-terrorism from Israeli and American experts.
The reason isn't hard to find - efforts to enlarge such cooperation with Israel and the United States inevitably run into opposition from a motley crew of communists across the country. While their opposition to the US on ideological grounds is well known (as shown by the recent blocking of the nuclear deal with the US even though the positive effects of securing safe power stations running on nuclear fuel is obvious to any industrialist), it is interesting to note that protests against "Zionism" are usually led by the same communists. The arguments were first aired by the USSR at the height of the Cold War, and India's communists are the only ones in the world to still subscribe to that world view.
Driven as much by envy of the industrious people of the city as by its relative prosperity and ability to attract the best talent from around the country, communists have steadily pushed against infrastructure improvements. Much of the security ills of the famously diverse city arise from the under-investment on infrastructure and inability to corral the criminal groups that operate openly in the city.
On the heels of this attack, India has once again made some cosmetic changes by replacing its most senior politician in charge of security with Finance Minister Palaniappan Chidambaram. Given that I have not been impressed with the country's ability to manage its finances over the past five years, it is unlikely that the government will do much to improve.
There are only two courses of action open to the Indian government; firstly to launch a strike against Pakistan-based training camps for Islamic terrorists such as those belonging to the banned Laskhar-e-Taiba and the Jaish Mohammad; this course of action risks opening up a full scale war with Pakistan. The second course of action would for the government to do precisely nothing but to passively sit around awaiting another terrorist attack on the country's citizens.
While I fear the first course of action, I am well inclined to believe that it is the second course of action that will most likely emerge. In terms of protecting the well-being of its citizens as I have noted previously on many occasions, India is not China.
Spengler comments:
As Chan Akya observes, Pakistan's military age population is far greater than those of other Muslim military powers in the region. With about 20 million men of military age, Pakistan today has as much manpower as Turkey and Iran combined, and by 2035 it will have half again as many.

Half the country is illiterate and three-quarters of it subsists on less than $2 a day, according to the World Bank. That is to say that Pakistan's young men are more abundant as well as cheaper than in any other country in the region. Very poor and ignorant young men, especially if their only education has been in Salafi madrassas (seminaries), are very easy to enlist in military adventures.
The West presently is unable to cope with a failed state like Somalia, with less than a tenth as many military-age men as Pakistan, but which nonetheless constitutes a threat to world shipping and a likely source of funding for terrorism. How can the West cope with the humiliation of Pakistan's pro-American president and the inability of its duly-constituted government to suppress Islamist elements in its army and intelligence services? For the moment, Washington will do its best to prop up its creature, President Asif Ali Zardari, but to no avail. The alternatives will require the West to add several zeros to whatever the prevailing ceiling might be for acceptable collateral damage.