by Robert Kiyosaki
Tuesday, November 14, 2006
Ken Lay, the disgraced former chairman of Enron, found a way to escape his legal problems: He died after being convicted of fraud and conspiracy charges. His onetime CEO and partner in crime, Jeffrey Skilling, wasn't so "lucky": He was sentenced to 24 years in prison last month.
I'm not gleeful about Lay's death or Skilling's sentencing, partly because I'm afraid true justice hasn't been carried out. Similarly, when Martha Stewart was convicted and went to prison in 2004, I was shocked. Not because I condone insider trading or attempting to cover up illicit activities, but because she was hardly the criminal the justice system should have been after.
Between 1995 and 2005, literally trillions of investor dollars were stolen from ordinary people with hopes for a secure retirement or a college education for their kids.
Wealth Instead of Jail Time
Many of the crooks responsible for such acts have never been caught and some remain in business. In the same vein, while the savings of average people across the country were being wiped out, the New York Stock Exchange "inadvertently" awarded CEO Dick Grasso a $187 million dollars in compensation.
While Martha was baking cookies in jail, Grasso was richly rewarded for presiding over one of the most corrupt eras of the stock exchange. Was the $187 million Grasso's sales commission for the $7 to $9 trillion the "little" investors lost?
Thank goodness Elliot Spitzer, the New York State attorney general, had the guts to take him to court and win. It looks like Grasso may have to pay back $100 million, but he won't do any time behind bars.
This raises all sorts of questions. Who are the guys who awarded Dick Grasso so much money in the first place? Is someone going after them? Do you still want to trust your money to these people? Does Martha doing time make you feel more confident? Is Jeff Skilling the last crook?
Out of Sight, Out of Mind
It is true that people, especially investors, tend to have short memories. As soon as a market heats up, greed takes over and caution is forgotten.
For instance, the real estate market hit bottom in 1992. Property prices were horrible, the savings and loan industry went bust, and dishonest bankers and real estate developers like Charles Keating were going to jail. Scandals were everywhere, and the federal government had to step in for a bailout.
But in less than 10 years, memories of that horrible disaster were erased, crooks and corruption were forgotten, and people were pouring their money back into real estate.
Today, such corporate giants such as Enron, Tyco, WorldCom, Arthur Andersen, and others are gone -- taking trillions of investor dollars with them. But with the Dow over 12,000 memories of these offenders (and of Martha in jail) have vanished just as surely, and investors are once again flocking to the stock market.
Where Are They Now?
At the height of the Enron mania, the company's market value was $65 billion. Once the dust cleared, the final value was $0. As you know, Ken Lay, Jeffrey Skilling, and CFO Andrew Fastow were all convicted of crimes -- but what happened to the rest of the predators?
What about Enron's board of directors who were supposed to supervise Lay, Skilling, and Fastow? What about the accountants and the analysts? What about all the pension and mutual fund managers who were buying the worthless Enron stock with their investors' money? Were they asleep as Enron executives were robbing and lying? Aren't they still out there investing other people's money?
And what about all the stockbrokers and financial planners who recommended the mutual funds that were buying the Enron, Tyco, and WorldCom stock for their investors? Are they still in business? Were they investigated? If medical doctors can be sued for malpractice, shouldn't financial professionals practice under the same safeguard?
And what about all the financial journalists on television and in print who failed to alert investors to Enron's shady practices? Only a few years ago they were cheering on the dotcom stocks, and today are cheering on the Dow reaching 12,000.
A Rogue's Gallery
Some of the people who made off with millions of investor money are still being celebrated rather than questioned. For example, former General Electric CEO Jack Welch is still considered a leadership guru.
Yet if you look at the facts, Welch took a lot of investor money and left GE in worst shape than ever. When he was exposed for an extra-martial affair, his retirement compensation also came to light. His work at GE netted him nearly $1 billion. His retirement benefits include use of company jets and a lavish New York apartment, and his stipend is $734,000 a month.
Now, if he'd left GE a stronger company, I wouldn't have much to criticize. But the hard facts are that the 2000 value of GE was $600 billion and by early 2005 it was down to $379 billion.
There's also Steve Case of AOL fame. When AOL acquired Time Warner, Time Warner's stock went to $90 a share before falling to a low of less than $10. Market value of the merger was $240 billion, but by 2005 it was less than $82 billion. Thanks to Case, I have a number of friends at Time Warner who are wondering what happened to their retirement.
The Takeaway
Most of the people who were responsible for one of the biggest market crashes in history are still in the system today, doing many of the same things today that they were doing then.
So, as the Dow continues its upward march past 12,000, remember that Martha Stewart is now out of jail -- but so are many of the other characters who actually did run off with the money and never served a day or jail time.
Your mind is still your most important asset, so be careful who you take your advice from and what you believe is true. Remember that all financial markets are filled with good but not necessarily innocent people looking after their own self-interests before they look after yours.
Thursday, November 16, 2006
Saturday, October 28, 2006
Alarm over radioactive legacy left by attack on Lebanon
Robert Fisk: Mystery of Israel's secret uranium bomb
Alarm over radioactive legacy left by attack on Lebanon
Published: 28 October 2006
Did Israel use a secret new uranium-based weapon in southern Lebanon this summer in the 34-day assault that cost more than 1,300 Lebanese lives, most of them civilians?
We know that the Israelis used American "bunker-buster" bombs on Hizbollah's Beirut headquarters. We know that they drenched southern Lebanon with cluster bombs in the last 72 hours of the war, leaving tens of thousands of bomblets which are still killing Lebanese civilians every week. And we now know - after it first categorically denied using such munitions - that the Israeli army also used phosphorous bombs, weapons which are supposed to be restricted under the third protocol of the Geneva Conventions, which neither Israel nor the United States have signed.
But scientific evidence gathered from at least two bomb craters in Khiam and At-Tiri, the scene of fierce fighting between Hizbollah guerrillas and Israeli troops last July and August, suggests that uranium-based munitions may now also be included in Israel's weapons inventory - and were used against targets in Lebanon. According to Dr Chris Busby, the British Scientific Secretary of the European Committee on Radiation Risk, two soil samples thrown up by Israeli heavy or guided bombs showed "elevated radiation signatures". Both have been forwarded for further examination to the Harwell laboratory in Oxfordshire for mass spectrometry - used by the Ministry of Defence - which has confirmed the concentration of uranium isotopes in the samples.
Dr Busby's initial report states that there are two possible reasons for the contamination. "The first is that the weapon was some novel small experimental nuclear fission device or other experimental weapon (eg, a thermobaric weapon) based on the high temperature of a uranium oxidation flash ... The second is that the weapon was a bunker-busting conventional uranium penetrator weapon employing enriched uranium rather than depleted uranium." A photograph of the explosion of the first bomb shows large clouds of black smoke that might result from burning uranium.
Enriched uranium is produced from natural uranium ore and is used as fuel for nuclear reactors. A waste productof the enrichment process is depleted uranium, it is an extremely hard metal used in anti-tank missiles for penetrating armour. Depleted uranium is less radioactive than natural uranium, which is less radioactive than enriched uranium.
Israel has a poor reputation for telling the truth about its use of weapons in Lebanon. In 1982, it denied using phosphorous munitions on civilian areas - until journalists discovered dying and dead civilians whose wounds caught fire when exposed to air.
I saw two dead babies who, when taken from a mortuary drawer in West Beirut during the Israeli siege of the city, suddenly burst back into flames. Israel officially denied using phosphorous again in Lebanon during the summer - except for "marking" targets - even after civilians were photographed in Lebanese hospitals with burn wounds consistent with phosphorous munitions.
Then on Sunday, Israel suddenly admitted that it had not been telling the truth. Jacob Edery, the Israeli minister in charge of government-parliament relations, confirmed that phosphorous shells were used in direct attacks against Hizbollah, adding that "according to international law, the use of phosphorous munitions is authorised and the (Israeli) army keeps to the rules of international norms".
Asked by The Independent if the Israeli army had been using uranium-based munitions in Lebanon this summer, Mark Regev, the Israeli Foreign Ministry spokesman, said: "Israel does not use any weaponry which is not authorised by international law or international conventions." This, however, begs more questions than it answers. Much international law does not cover modern uranium weapons because they were not invented when humanitarian rules such as the Geneva Conventions were drawn up and because Western governments still refuse to believe that their use can cause long-term damage to the health of thousands of civilians living in the area of the explosions.
American and British forces used hundreds of tons of depleted uranium (DU) shells in Iraq in 1991 - their hardened penetrator warheads manufactured from the waste products of the nuclear industry - and five years later, a plague of cancers emerged across the south of Iraq.
Initial US military assessments warned of grave consequences for public health if such weapons were used against armoured vehicles. But the US administration and the British government later went out of their way to belittle these claims. Yet the cancers continued to spread amid reports that civilians in Bosnia - where DU was also used by Nato aircraft - were suffering new forms of cancer. DU shells were again used in the 2003 Anglo-American invasion of Iraq but it is too early to register any health effects.
"When a uranium penetrator hits a hard target, the particles of the explosion are very long-lived in the environment," Dr Busby said yesterday. "They spread over long distances. They can be inhaled into the lungs. The military really seem to believe that this stuff is not as dangerous as it is." Yet why would Israel use such a weapon when its targets - in the case of Khiam, for example - were only two miles from the Israeli border? The dust ignited by DU munitions can be blown across international borders, just as the chlorine gas used in attacks by both sides in the First World War often blew back on its perpetrators.
Chris Bellamy, the professor of military science and doctrine at Cranfield University, who has reviewed the Busby report, said: "At worst it's some sort of experimental weapon with an enriched uranium component the purpose of which we don't yet know. At best - if you can say that - it shows a remarkably cavalier attitude to the use of nuclear waste products."
The soil sample from Khiam - site of a notorious torture prison when Israel occupied southern Lebanon between 1978 and 2000, and a frontline Hizbollah stronghold in the summer war - was a piece of impacted red earth from an explosion; the isotope ratio was 108, indicative of the presence of enriched uranium. "The health effects on local civilian populations following the use of large uranium penetrators and the large amounts of respirable uranium oxide particles in the atmosphere," the Busby report says, "are likely to be significant ... we recommend that the area is examined for further traces of these weapons with a view to clean up."
This summer's Lebanon war began after Hizbollah guerrillas crossed the Lebanese frontier into Israel, captured two Israeli soldiers and killed three others, prompting Israel to unleash a massive bombardment of Lebanon's villages, cities, bridges and civilian infrastructure. Human rights groups have said that Israel committed war crimes when it attacked civilians, but that Hizbollah was also guilty of such crimes because it fired missiles into Israel which were also filled with ball-bearings, turning their rockets into primitive one-time-only cluster bombs.
Many Lebanese, however, long ago concluded that the latest Lebanon war was a weapons testing ground for the Americans and Iranians, who respectively supply Israel and Hizbollah with munitions. Just as Israel used hitherto-unproven US missiles in its attacks, so the Iranians were able to test-fire a rocket which hit an Israeli corvette off the Lebanese coast, killing four Israeli sailors and almost sinking the vessel after it suffered a 15-hour on-board fire.
What the weapons manufacturers make of the latest scientific findings of potential uranium weapons use in southern Lebanon is not yet known. Nor is their effect on civilians.
Did Israel use a secret new uranium-based weapon in southern Lebanon this summer in the 34-day assault that cost more than 1,300 Lebanese lives, most of them civilians?
We know that the Israelis used American "bunker-buster" bombs on Hizbollah's Beirut headquarters. We know that they drenched southern Lebanon with cluster bombs in the last 72 hours of the war, leaving tens of thousands of bomblets which are still killing Lebanese civilians every week. And we now know - after it first categorically denied using such munitions - that the Israeli army also used phosphorous bombs, weapons which are supposed to be restricted under the third protocol of the Geneva Conventions, which neither Israel nor the United States have signed.
But scientific evidence gathered from at least two bomb craters in Khiam and At-Tiri, the scene of fierce fighting between Hizbollah guerrillas and Israeli troops last July and August, suggests that uranium-based munitions may now also be included in Israel's weapons inventory - and were used against targets in Lebanon. According to Dr Chris Busby, the British Scientific Secretary of the European Committee on Radiation Risk, two soil samples thrown up by Israeli heavy or guided bombs showed "elevated radiation signatures". Both have been forwarded for further examination to the Harwell laboratory in Oxfordshire for mass spectrometry - used by the Ministry of Defence - which has confirmed the concentration of uranium isotopes in the samples.
Dr Busby's initial report states that there are two possible reasons for the contamination. "The first is that the weapon was some novel small experimental nuclear fission device or other experimental weapon (eg, a thermobaric weapon) based on the high temperature of a uranium oxidation flash ... The second is that the weapon was a bunker-busting conventional uranium penetrator weapon employing enriched uranium rather than depleted uranium." A photograph of the explosion of the first bomb shows large clouds of black smoke that might result from burning uranium.
Enriched uranium is produced from natural uranium ore and is used as fuel for nuclear reactors. A waste productof the enrichment process is depleted uranium, it is an extremely hard metal used in anti-tank missiles for penetrating armour. Depleted uranium is less radioactive than natural uranium, which is less radioactive than enriched uranium.
Israel has a poor reputation for telling the truth about its use of weapons in Lebanon. In 1982, it denied using phosphorous munitions on civilian areas - until journalists discovered dying and dead civilians whose wounds caught fire when exposed to air.
I saw two dead babies who, when taken from a mortuary drawer in West Beirut during the Israeli siege of the city, suddenly burst back into flames. Israel officially denied using phosphorous again in Lebanon during the summer - except for "marking" targets - even after civilians were photographed in Lebanese hospitals with burn wounds consistent with phosphorous munitions.
Then on Sunday, Israel suddenly admitted that it had not been telling the truth. Jacob Edery, the Israeli minister in charge of government-parliament relations, confirmed that phosphorous shells were used in direct attacks against Hizbollah, adding that "according to international law, the use of phosphorous munitions is authorised and the (Israeli) army keeps to the rules of international norms".
Asked by The Independent if the Israeli army had been using uranium-based munitions in Lebanon this summer, Mark Regev, the Israeli Foreign Ministry spokesman, said: "Israel does not use any weaponry which is not authorised by international law or international conventions." This, however, begs more questions than it answers. Much international law does not cover modern uranium weapons because they were not invented when humanitarian rules such as the Geneva Conventions were drawn up and because Western governments still refuse to believe that their use can cause long-term damage to the health of thousands of civilians living in the area of the explosions.
American and British forces used hundreds of tons of depleted uranium (DU) shells in Iraq in 1991 - their hardened penetrator warheads manufactured from the waste products of the nuclear industry - and five years later, a plague of cancers emerged across the south of Iraq.
Initial US military assessments warned of grave consequences for public health if such weapons were used against armoured vehicles. But the US administration and the British government later went out of their way to belittle these claims. Yet the cancers continued to spread amid reports that civilians in Bosnia - where DU was also used by Nato aircraft - were suffering new forms of cancer. DU shells were again used in the 2003 Anglo-American invasion of Iraq but it is too early to register any health effects.
"When a uranium penetrator hits a hard target, the particles of the explosion are very long-lived in the environment," Dr Busby said yesterday. "They spread over long distances. They can be inhaled into the lungs. The military really seem to believe that this stuff is not as dangerous as it is." Yet why would Israel use such a weapon when its targets - in the case of Khiam, for example - were only two miles from the Israeli border? The dust ignited by DU munitions can be blown across international borders, just as the chlorine gas used in attacks by both sides in the First World War often blew back on its perpetrators.
Chris Bellamy, the professor of military science and doctrine at Cranfield University, who has reviewed the Busby report, said: "At worst it's some sort of experimental weapon with an enriched uranium component the purpose of which we don't yet know. At best - if you can say that - it shows a remarkably cavalier attitude to the use of nuclear waste products."
The soil sample from Khiam - site of a notorious torture prison when Israel occupied southern Lebanon between 1978 and 2000, and a frontline Hizbollah stronghold in the summer war - was a piece of impacted red earth from an explosion; the isotope ratio was 108, indicative of the presence of enriched uranium. "The health effects on local civilian populations following the use of large uranium penetrators and the large amounts of respirable uranium oxide particles in the atmosphere," the Busby report says, "are likely to be significant ... we recommend that the area is examined for further traces of these weapons with a view to clean up."
This summer's Lebanon war began after Hizbollah guerrillas crossed the Lebanese frontier into Israel, captured two Israeli soldiers and killed three others, prompting Israel to unleash a massive bombardment of Lebanon's villages, cities, bridges and civilian infrastructure. Human rights groups have said that Israel committed war crimes when it attacked civilians, but that Hizbollah was also guilty of such crimes because it fired missiles into Israel which were also filled with ball-bearings, turning their rockets into primitive one-time-only cluster bombs.
Many Lebanese, however, long ago concluded that the latest Lebanon war was a weapons testing ground for the Americans and Iranians, who respectively supply Israel and Hizbollah with munitions. Just as Israel used hitherto-unproven US missiles in its attacks, so the Iranians were able to test-fire a rocket which hit an Israeli corvette off the Lebanese coast, killing four Israeli sailors and almost sinking the vessel after it suffered a 15-hour on-board fire.
What the weapons manufacturers make of the latest scientific findings of potential uranium weapons use in southern Lebanon is not yet known. Nor is their effect on civilians.
Alarm over radioactive legacy left by attack on Lebanon
Published: 28 October 2006
Did Israel use a secret new uranium-based weapon in southern Lebanon this summer in the 34-day assault that cost more than 1,300 Lebanese lives, most of them civilians?
We know that the Israelis used American "bunker-buster" bombs on Hizbollah's Beirut headquarters. We know that they drenched southern Lebanon with cluster bombs in the last 72 hours of the war, leaving tens of thousands of bomblets which are still killing Lebanese civilians every week. And we now know - after it first categorically denied using such munitions - that the Israeli army also used phosphorous bombs, weapons which are supposed to be restricted under the third protocol of the Geneva Conventions, which neither Israel nor the United States have signed.
But scientific evidence gathered from at least two bomb craters in Khiam and At-Tiri, the scene of fierce fighting between Hizbollah guerrillas and Israeli troops last July and August, suggests that uranium-based munitions may now also be included in Israel's weapons inventory - and were used against targets in Lebanon. According to Dr Chris Busby, the British Scientific Secretary of the European Committee on Radiation Risk, two soil samples thrown up by Israeli heavy or guided bombs showed "elevated radiation signatures". Both have been forwarded for further examination to the Harwell laboratory in Oxfordshire for mass spectrometry - used by the Ministry of Defence - which has confirmed the concentration of uranium isotopes in the samples.
Dr Busby's initial report states that there are two possible reasons for the contamination. "The first is that the weapon was some novel small experimental nuclear fission device or other experimental weapon (eg, a thermobaric weapon) based on the high temperature of a uranium oxidation flash ... The second is that the weapon was a bunker-busting conventional uranium penetrator weapon employing enriched uranium rather than depleted uranium." A photograph of the explosion of the first bomb shows large clouds of black smoke that might result from burning uranium.
Enriched uranium is produced from natural uranium ore and is used as fuel for nuclear reactors. A waste productof the enrichment process is depleted uranium, it is an extremely hard metal used in anti-tank missiles for penetrating armour. Depleted uranium is less radioactive than natural uranium, which is less radioactive than enriched uranium.
Israel has a poor reputation for telling the truth about its use of weapons in Lebanon. In 1982, it denied using phosphorous munitions on civilian areas - until journalists discovered dying and dead civilians whose wounds caught fire when exposed to air.
I saw two dead babies who, when taken from a mortuary drawer in West Beirut during the Israeli siege of the city, suddenly burst back into flames. Israel officially denied using phosphorous again in Lebanon during the summer - except for "marking" targets - even after civilians were photographed in Lebanese hospitals with burn wounds consistent with phosphorous munitions.
Then on Sunday, Israel suddenly admitted that it had not been telling the truth. Jacob Edery, the Israeli minister in charge of government-parliament relations, confirmed that phosphorous shells were used in direct attacks against Hizbollah, adding that "according to international law, the use of phosphorous munitions is authorised and the (Israeli) army keeps to the rules of international norms".
Asked by The Independent if the Israeli army had been using uranium-based munitions in Lebanon this summer, Mark Regev, the Israeli Foreign Ministry spokesman, said: "Israel does not use any weaponry which is not authorised by international law or international conventions." This, however, begs more questions than it answers. Much international law does not cover modern uranium weapons because they were not invented when humanitarian rules such as the Geneva Conventions were drawn up and because Western governments still refuse to believe that their use can cause long-term damage to the health of thousands of civilians living in the area of the explosions.
American and British forces used hundreds of tons of depleted uranium (DU) shells in Iraq in 1991 - their hardened penetrator warheads manufactured from the waste products of the nuclear industry - and five years later, a plague of cancers emerged across the south of Iraq.
Initial US military assessments warned of grave consequences for public health if such weapons were used against armoured vehicles. But the US administration and the British government later went out of their way to belittle these claims. Yet the cancers continued to spread amid reports that civilians in Bosnia - where DU was also used by Nato aircraft - were suffering new forms of cancer. DU shells were again used in the 2003 Anglo-American invasion of Iraq but it is too early to register any health effects.
"When a uranium penetrator hits a hard target, the particles of the explosion are very long-lived in the environment," Dr Busby said yesterday. "They spread over long distances. They can be inhaled into the lungs. The military really seem to believe that this stuff is not as dangerous as it is." Yet why would Israel use such a weapon when its targets - in the case of Khiam, for example - were only two miles from the Israeli border? The dust ignited by DU munitions can be blown across international borders, just as the chlorine gas used in attacks by both sides in the First World War often blew back on its perpetrators.
Chris Bellamy, the professor of military science and doctrine at Cranfield University, who has reviewed the Busby report, said: "At worst it's some sort of experimental weapon with an enriched uranium component the purpose of which we don't yet know. At best - if you can say that - it shows a remarkably cavalier attitude to the use of nuclear waste products."
The soil sample from Khiam - site of a notorious torture prison when Israel occupied southern Lebanon between 1978 and 2000, and a frontline Hizbollah stronghold in the summer war - was a piece of impacted red earth from an explosion; the isotope ratio was 108, indicative of the presence of enriched uranium. "The health effects on local civilian populations following the use of large uranium penetrators and the large amounts of respirable uranium oxide particles in the atmosphere," the Busby report says, "are likely to be significant ... we recommend that the area is examined for further traces of these weapons with a view to clean up."
This summer's Lebanon war began after Hizbollah guerrillas crossed the Lebanese frontier into Israel, captured two Israeli soldiers and killed three others, prompting Israel to unleash a massive bombardment of Lebanon's villages, cities, bridges and civilian infrastructure. Human rights groups have said that Israel committed war crimes when it attacked civilians, but that Hizbollah was also guilty of such crimes because it fired missiles into Israel which were also filled with ball-bearings, turning their rockets into primitive one-time-only cluster bombs.
Many Lebanese, however, long ago concluded that the latest Lebanon war was a weapons testing ground for the Americans and Iranians, who respectively supply Israel and Hizbollah with munitions. Just as Israel used hitherto-unproven US missiles in its attacks, so the Iranians were able to test-fire a rocket which hit an Israeli corvette off the Lebanese coast, killing four Israeli sailors and almost sinking the vessel after it suffered a 15-hour on-board fire.
What the weapons manufacturers make of the latest scientific findings of potential uranium weapons use in southern Lebanon is not yet known. Nor is their effect on civilians.
Did Israel use a secret new uranium-based weapon in southern Lebanon this summer in the 34-day assault that cost more than 1,300 Lebanese lives, most of them civilians?
We know that the Israelis used American "bunker-buster" bombs on Hizbollah's Beirut headquarters. We know that they drenched southern Lebanon with cluster bombs in the last 72 hours of the war, leaving tens of thousands of bomblets which are still killing Lebanese civilians every week. And we now know - after it first categorically denied using such munitions - that the Israeli army also used phosphorous bombs, weapons which are supposed to be restricted under the third protocol of the Geneva Conventions, which neither Israel nor the United States have signed.
But scientific evidence gathered from at least two bomb craters in Khiam and At-Tiri, the scene of fierce fighting between Hizbollah guerrillas and Israeli troops last July and August, suggests that uranium-based munitions may now also be included in Israel's weapons inventory - and were used against targets in Lebanon. According to Dr Chris Busby, the British Scientific Secretary of the European Committee on Radiation Risk, two soil samples thrown up by Israeli heavy or guided bombs showed "elevated radiation signatures". Both have been forwarded for further examination to the Harwell laboratory in Oxfordshire for mass spectrometry - used by the Ministry of Defence - which has confirmed the concentration of uranium isotopes in the samples.
Dr Busby's initial report states that there are two possible reasons for the contamination. "The first is that the weapon was some novel small experimental nuclear fission device or other experimental weapon (eg, a thermobaric weapon) based on the high temperature of a uranium oxidation flash ... The second is that the weapon was a bunker-busting conventional uranium penetrator weapon employing enriched uranium rather than depleted uranium." A photograph of the explosion of the first bomb shows large clouds of black smoke that might result from burning uranium.
Enriched uranium is produced from natural uranium ore and is used as fuel for nuclear reactors. A waste productof the enrichment process is depleted uranium, it is an extremely hard metal used in anti-tank missiles for penetrating armour. Depleted uranium is less radioactive than natural uranium, which is less radioactive than enriched uranium.
Israel has a poor reputation for telling the truth about its use of weapons in Lebanon. In 1982, it denied using phosphorous munitions on civilian areas - until journalists discovered dying and dead civilians whose wounds caught fire when exposed to air.
I saw two dead babies who, when taken from a mortuary drawer in West Beirut during the Israeli siege of the city, suddenly burst back into flames. Israel officially denied using phosphorous again in Lebanon during the summer - except for "marking" targets - even after civilians were photographed in Lebanese hospitals with burn wounds consistent with phosphorous munitions.
Then on Sunday, Israel suddenly admitted that it had not been telling the truth. Jacob Edery, the Israeli minister in charge of government-parliament relations, confirmed that phosphorous shells were used in direct attacks against Hizbollah, adding that "according to international law, the use of phosphorous munitions is authorised and the (Israeli) army keeps to the rules of international norms".
Asked by The Independent if the Israeli army had been using uranium-based munitions in Lebanon this summer, Mark Regev, the Israeli Foreign Ministry spokesman, said: "Israel does not use any weaponry which is not authorised by international law or international conventions." This, however, begs more questions than it answers. Much international law does not cover modern uranium weapons because they were not invented when humanitarian rules such as the Geneva Conventions were drawn up and because Western governments still refuse to believe that their use can cause long-term damage to the health of thousands of civilians living in the area of the explosions.
American and British forces used hundreds of tons of depleted uranium (DU) shells in Iraq in 1991 - their hardened penetrator warheads manufactured from the waste products of the nuclear industry - and five years later, a plague of cancers emerged across the south of Iraq.
Initial US military assessments warned of grave consequences for public health if such weapons were used against armoured vehicles. But the US administration and the British government later went out of their way to belittle these claims. Yet the cancers continued to spread amid reports that civilians in Bosnia - where DU was also used by Nato aircraft - were suffering new forms of cancer. DU shells were again used in the 2003 Anglo-American invasion of Iraq but it is too early to register any health effects.
"When a uranium penetrator hits a hard target, the particles of the explosion are very long-lived in the environment," Dr Busby said yesterday. "They spread over long distances. They can be inhaled into the lungs. The military really seem to believe that this stuff is not as dangerous as it is." Yet why would Israel use such a weapon when its targets - in the case of Khiam, for example - were only two miles from the Israeli border? The dust ignited by DU munitions can be blown across international borders, just as the chlorine gas used in attacks by both sides in the First World War often blew back on its perpetrators.
Chris Bellamy, the professor of military science and doctrine at Cranfield University, who has reviewed the Busby report, said: "At worst it's some sort of experimental weapon with an enriched uranium component the purpose of which we don't yet know. At best - if you can say that - it shows a remarkably cavalier attitude to the use of nuclear waste products."
The soil sample from Khiam - site of a notorious torture prison when Israel occupied southern Lebanon between 1978 and 2000, and a frontline Hizbollah stronghold in the summer war - was a piece of impacted red earth from an explosion; the isotope ratio was 108, indicative of the presence of enriched uranium. "The health effects on local civilian populations following the use of large uranium penetrators and the large amounts of respirable uranium oxide particles in the atmosphere," the Busby report says, "are likely to be significant ... we recommend that the area is examined for further traces of these weapons with a view to clean up."
This summer's Lebanon war began after Hizbollah guerrillas crossed the Lebanese frontier into Israel, captured two Israeli soldiers and killed three others, prompting Israel to unleash a massive bombardment of Lebanon's villages, cities, bridges and civilian infrastructure. Human rights groups have said that Israel committed war crimes when it attacked civilians, but that Hizbollah was also guilty of such crimes because it fired missiles into Israel which were also filled with ball-bearings, turning their rockets into primitive one-time-only cluster bombs.
Many Lebanese, however, long ago concluded that the latest Lebanon war was a weapons testing ground for the Americans and Iranians, who respectively supply Israel and Hizbollah with munitions. Just as Israel used hitherto-unproven US missiles in its attacks, so the Iranians were able to test-fire a rocket which hit an Israeli corvette off the Lebanese coast, killing four Israeli sailors and almost sinking the vessel after it suffered a 15-hour on-board fire.
What the weapons manufacturers make of the latest scientific findings of potential uranium weapons use in southern Lebanon is not yet known. Nor is their effect on civilians.
Friday, October 27, 2006
Losers, A Mental State
The majority of people supports the war in Iraq, bold statement, as the war grows more controversial and some say extremely expensive. I assert this is just temporary and based in the American mentality of winning and repudiating the foreign mentality of losing.
Who wants to join a losing team.
Today, the Iraq invasion and its consequences has put a majority of people in a state of mind: the loser’s mind.
No one wants to be with the losing team.
That is pessimistic and we live in an optimistic all the time social state, if not forget about it and go shopping.
The perception of losing as occurring with “Operation Iraqi Freedom” is making most people uncomfortably to be near the losers, most folks are bailing out, no losing team for them.
The many all weather optimists, interested and ideologues alike, there is some light of hope, so far, is all make believe, but in the soul of all there is a sorrow for losing.
If the endeavor of Iraq would have the most minimal signal of been in a winning track, many will rapidly jump in the bandwagon and become sudden winners.
Although with the past three years of disastrous actions and diatribes full of lies, it seems that the optimists are starting in the four inning with a handicap of seventeen homeruns.
Do not despair, yet, it is possible with a few billions thrown in propaganda, which it will not the first time, the idea of winning in Iraq can be accomplished.
Psychoanalysts will tell you that those perpetual optimists will gain back the company of those who feel the Bush-Cheney junta has put them with a forever no end in sight losing team.
I am confident the invasion of Iraq has many more supporters than those out of the closet losers copying with denial.
For most people can be argued that sticking with the present state of political power, is also a sad losing proposition, but this is only temporary unmanaged perception.
Some say money is the culprit, the argument is, we are mortgaging the future of the next generation. Well, that was never a consideration when people cheered in the bars when we bomb the hell out of Iraq, or for that matter, no one protests the 50% of all taxes spent in the government war machine, so money is not the culprit.
Some say that too many American soldiers have already died, one is too many, but I hear only attacks and treason claims when the invasion was televised, so there is not much concern over lives and the consequences of invasions.
The number one reason why four years latter people are mad and discouraged is because the junta failed to make the Iraqis and American proud of the invasion.
It would have been a lesson to other dictators if the invasion of Iraq would have the ingredients of pride, altruism, and seriousness. Sadly, the invasion of Iraq is proven to be was about oil and class warfare from the corporatists to the rest of American citizens.
Thus, from the beginning was a losing proposition, many told us this war was about oil and personal revenge, they say it loudly, and they were label traitors losers etc. Today, those same one are saying : I told you so.” The next reality is that most people are recognizing that this is a class warfare, and it was the purpose from the get go.
Lou Dobbs has taking these arguments flag and making a serious and honest reporting in the subject of destroying American working class.
Most people get caught in the demagoguery of the new dukes- Senators, counts-Congressman and king, President. The fact of the matter is that Washington is the Versailles of Louis XIV and all the ideological filth that emanates from there is just that: filth of the powerful and their loud-mouths in the media.
As Lou Dobbs, Bill Moyers and other truth tellers will tell you, there is a very well-off group who understands the process and controls it very well. This group have created the laws to favor them, allowing them to pilfer the rest 95% of people’s money. This monarchy loves this war and its faith based arguments, for this cadre all looks really nice. I will say, all looks extremely rosy if you are near Halliburton or any other war profiteer, the monarchy is doing a great job.
Who wants to join a losing team.
Today, the Iraq invasion and its consequences has put a majority of people in a state of mind: the loser’s mind.
No one wants to be with the losing team.
That is pessimistic and we live in an optimistic all the time social state, if not forget about it and go shopping.
The perception of losing as occurring with “Operation Iraqi Freedom” is making most people uncomfortably to be near the losers, most folks are bailing out, no losing team for them.
The many all weather optimists, interested and ideologues alike, there is some light of hope, so far, is all make believe, but in the soul of all there is a sorrow for losing.
If the endeavor of Iraq would have the most minimal signal of been in a winning track, many will rapidly jump in the bandwagon and become sudden winners.
Although with the past three years of disastrous actions and diatribes full of lies, it seems that the optimists are starting in the four inning with a handicap of seventeen homeruns.
Do not despair, yet, it is possible with a few billions thrown in propaganda, which it will not the first time, the idea of winning in Iraq can be accomplished.
Psychoanalysts will tell you that those perpetual optimists will gain back the company of those who feel the Bush-Cheney junta has put them with a forever no end in sight losing team.
I am confident the invasion of Iraq has many more supporters than those out of the closet losers copying with denial.
For most people can be argued that sticking with the present state of political power, is also a sad losing proposition, but this is only temporary unmanaged perception.
Some say money is the culprit, the argument is, we are mortgaging the future of the next generation. Well, that was never a consideration when people cheered in the bars when we bomb the hell out of Iraq, or for that matter, no one protests the 50% of all taxes spent in the government war machine, so money is not the culprit.
Some say that too many American soldiers have already died, one is too many, but I hear only attacks and treason claims when the invasion was televised, so there is not much concern over lives and the consequences of invasions.
The number one reason why four years latter people are mad and discouraged is because the junta failed to make the Iraqis and American proud of the invasion.
It would have been a lesson to other dictators if the invasion of Iraq would have the ingredients of pride, altruism, and seriousness. Sadly, the invasion of Iraq is proven to be was about oil and class warfare from the corporatists to the rest of American citizens.
Thus, from the beginning was a losing proposition, many told us this war was about oil and personal revenge, they say it loudly, and they were label traitors losers etc. Today, those same one are saying : I told you so.” The next reality is that most people are recognizing that this is a class warfare, and it was the purpose from the get go.
Lou Dobbs has taking these arguments flag and making a serious and honest reporting in the subject of destroying American working class.
Most people get caught in the demagoguery of the new dukes- Senators, counts-Congressman and king, President. The fact of the matter is that Washington is the Versailles of Louis XIV and all the ideological filth that emanates from there is just that: filth of the powerful and their loud-mouths in the media.
As Lou Dobbs, Bill Moyers and other truth tellers will tell you, there is a very well-off group who understands the process and controls it very well. This group have created the laws to favor them, allowing them to pilfer the rest 95% of people’s money. This monarchy loves this war and its faith based arguments, for this cadre all looks really nice. I will say, all looks extremely rosy if you are near Halliburton or any other war profiteer, the monarchy is doing a great job.
Wednesday, September 13, 2006
A Shot in the Arm for 401(k) Investors
by Suze Orman
September 11, 2006
Last month, Congress passed and President Bush signed new legislation that affects your 401(k) and IRA savings.
The Pension Protection Act of 2006 also includes some changes on how traditional pensions -- known as defined benefit plans -- are run, but given that fewer and fewer firms offer those types of accounts, I'll focus on what most of you are relying on for retirement: your 401(k)s and IRAs.
There's a lot to commend in the new legislation, but that doesn't mean you should just sit back and settle for the new federal guidelines. Many of the changes simply create minimum "floors" for your retirement savings. To save enough to retire on comfortably, you need to aim for the ceiling, not the floors.
Automatic Isn't Automatically Perfect
Let me explain. A major provision of the legislation encourages employers to automatically enroll their employees in the company 401(k) plan rather than requiring employees to "opt in."
Furthermore, the law suggests setting the base contribution level at no less than 3 percent of an employee's salary, and to increase that contribution rate by 1 percentage point a year until it reaches 6 percent and no more than 10 percent.
I'm all for auto enrollment (amazingly, up to 30 percent of employees eligible for a plan don't participate), but I don't want employees to assume that a 3 percent contribution rate -- or 6 percent for that matter -- is enough.
The first rule of 401(k) investing is to always invest enough so that you'll get the maximum company matching contribution. If that requires you to invest more than 3 percent of your salary, do it. It's simply the best move you can make: Every penny your employer pours into your 401(k) account is akin to a bonus. You don't want to turn down bonus money, do you?
Contribute to the Max
It's no secret that my favorite type of retirement account is a Roth IRA. And I've said repeatedly that if you're eligible for a Roth but don't have enough money to invest in both a Roth and a 401(k), the best strategy is to sock away whatever amount you need to qualify for the maximum 401(k) employer match -- but not a dollar more -- and then concentrate on building up your Roth.
The maximum annual IRA contribution is $4,000 this year, or $5,000 for individuals at least 50 years old. (Quick review: individuals with incomes below $110,000 and married couples filing a joint tax return with income under $160,000 are eligible to fund a Roth.)
The maximum annual employee 401(k) contribution this year and in 2007 is $15,000 ($20,000 if you're at least 50 years old). The good news is that the new legislation makes those high contribution levels permanent; up until now they were scheduled to phase out after 2010 and revert to the lower limits put into place back in 2001.
So let me be clear: If you have the ability to max out your contributions to both your Roth IRA and 401(k), go for it. Don't assume that the 3 percent or so contribution rate your employer automatically signed you up for is all you need. You can and should invest more if you're able.
A New Kind of 401(k)
The new law also gives "permanent" status to the Roth 401(k), which could be a huge win for you. Employers have been somewhat slow to offer these new types of 401(k)s, in large part because they were only temporary; without an act of Congress, Roth 401(k)s were scheduled to disappear in 2010.
The fact that Congress acted and made these 401(k)s permanent should encourage more employers to offer them to employees. If yours doesn't, start making a fuss.
The Roth 401(k) is a fantastic saving opportunity if you're young, and if you happen to think that your tax rate in retirement will be higher than it is today. That's likely for many of us given that rates today are near historical lows, even though our federal budget is under tremendous strain.
With the Roth 401(k) you don't get any tax break on your initial contributions, but just like a Roth IRA you'll never pay a penny of tax on the money you withdraw in retirement, assuming you meet some basic requirements. That can be a huge advantage over a traditional 401(k), where all your withdrawals are taxed at your income tax rate and you don't even get to take advantage of the typically lower capital gains rate.
Taking Stock
A recent survey of 401(k) plans by Vanguard found that among plans that offered company stock, about 70 percent of participants had more than 20 percent of their assets invested in their employer's stock.
That's way too much. No single stock should be more than 5 percent to 10 percent of your invested assets. This doesn't just protect you from Enron-like debacles, it's also basic diversification common sense: Your retirement shouldn't ride on a single investment.
The new legislation addresses the fact that many employers use company stock to make matching contributions to their employees. In a sense, these employers force their employees to own the stock. The new law provides some relief here, pushing employers to make it easier for employees to unload company stock they get as a match or profit sharing.
The change is good, but doesn't really help address the real problem -- the fact that participants aren't quick to take action. Study after study shows that inertia, not action, tends to run our 401(k) behavior. We tend to stick with what we have, rather than make changes that will help us.
So the pressure is still on you to protect yourself. If you have more than 10 percent of your money in one stock -- regardless of how much you love your company and are optimistic about its future -- you're putting your retirement in danger. You owe it to yourself to diversify.
A Boon for Beneficiaries
Congress just gave your heirs a very nice tax break. Under the old rules, any 401(k) beneficiary other than a spouse had limited options in how to take the payout; the reality was that most took it as a lump sum that triggered a big tax hit. (Remember, 100 percent of 401(k) withdrawals are taxed as ordinary income.)
With the new law, beginning in 2007 beneficiaries can instead move the 401(k) into a special IRA specifically designated for beneficiaries, and make annual withdrawals over many years based on their own life expectancy.
That means heirs will be able to leave more of the money invested in the tax-deferred account for longer. And that's a great way for your heirs to build their own sizeable retirement nest egg.
No Charity Tax
Finally, the new law also has a great break for IRA investors older then 70-1/2 who face making required minimum distributions (RMD) even though they don't need the income.
In 2006 and 2007, you'll now be allowed to donate up to $100,000 each year from your IRA to a public charity and not owe any tax on that money. That is, you won't first have to claim the money as a taxable RMD before you make the donation.
This can be a useful way to support a charity and meet your RMD requirements without boosting your adjusted gross income. The donation can't also be claimed as a deduction, so it makes the most sense for those of you who don't itemize.
September 11, 2006
Last month, Congress passed and President Bush signed new legislation that affects your 401(k) and IRA savings.
The Pension Protection Act of 2006 also includes some changes on how traditional pensions -- known as defined benefit plans -- are run, but given that fewer and fewer firms offer those types of accounts, I'll focus on what most of you are relying on for retirement: your 401(k)s and IRAs.
There's a lot to commend in the new legislation, but that doesn't mean you should just sit back and settle for the new federal guidelines. Many of the changes simply create minimum "floors" for your retirement savings. To save enough to retire on comfortably, you need to aim for the ceiling, not the floors.
Automatic Isn't Automatically Perfect
Let me explain. A major provision of the legislation encourages employers to automatically enroll their employees in the company 401(k) plan rather than requiring employees to "opt in."
Furthermore, the law suggests setting the base contribution level at no less than 3 percent of an employee's salary, and to increase that contribution rate by 1 percentage point a year until it reaches 6 percent and no more than 10 percent.
I'm all for auto enrollment (amazingly, up to 30 percent of employees eligible for a plan don't participate), but I don't want employees to assume that a 3 percent contribution rate -- or 6 percent for that matter -- is enough.
The first rule of 401(k) investing is to always invest enough so that you'll get the maximum company matching contribution. If that requires you to invest more than 3 percent of your salary, do it. It's simply the best move you can make: Every penny your employer pours into your 401(k) account is akin to a bonus. You don't want to turn down bonus money, do you?
Contribute to the Max
It's no secret that my favorite type of retirement account is a Roth IRA. And I've said repeatedly that if you're eligible for a Roth but don't have enough money to invest in both a Roth and a 401(k), the best strategy is to sock away whatever amount you need to qualify for the maximum 401(k) employer match -- but not a dollar more -- and then concentrate on building up your Roth.
The maximum annual IRA contribution is $4,000 this year, or $5,000 for individuals at least 50 years old. (Quick review: individuals with incomes below $110,000 and married couples filing a joint tax return with income under $160,000 are eligible to fund a Roth.)
The maximum annual employee 401(k) contribution this year and in 2007 is $15,000 ($20,000 if you're at least 50 years old). The good news is that the new legislation makes those high contribution levels permanent; up until now they were scheduled to phase out after 2010 and revert to the lower limits put into place back in 2001.
So let me be clear: If you have the ability to max out your contributions to both your Roth IRA and 401(k), go for it. Don't assume that the 3 percent or so contribution rate your employer automatically signed you up for is all you need. You can and should invest more if you're able.
A New Kind of 401(k)
The new law also gives "permanent" status to the Roth 401(k), which could be a huge win for you. Employers have been somewhat slow to offer these new types of 401(k)s, in large part because they were only temporary; without an act of Congress, Roth 401(k)s were scheduled to disappear in 2010.
The fact that Congress acted and made these 401(k)s permanent should encourage more employers to offer them to employees. If yours doesn't, start making a fuss.
The Roth 401(k) is a fantastic saving opportunity if you're young, and if you happen to think that your tax rate in retirement will be higher than it is today. That's likely for many of us given that rates today are near historical lows, even though our federal budget is under tremendous strain.
With the Roth 401(k) you don't get any tax break on your initial contributions, but just like a Roth IRA you'll never pay a penny of tax on the money you withdraw in retirement, assuming you meet some basic requirements. That can be a huge advantage over a traditional 401(k), where all your withdrawals are taxed at your income tax rate and you don't even get to take advantage of the typically lower capital gains rate.
Taking Stock
A recent survey of 401(k) plans by Vanguard found that among plans that offered company stock, about 70 percent of participants had more than 20 percent of their assets invested in their employer's stock.
That's way too much. No single stock should be more than 5 percent to 10 percent of your invested assets. This doesn't just protect you from Enron-like debacles, it's also basic diversification common sense: Your retirement shouldn't ride on a single investment.
The new legislation addresses the fact that many employers use company stock to make matching contributions to their employees. In a sense, these employers force their employees to own the stock. The new law provides some relief here, pushing employers to make it easier for employees to unload company stock they get as a match or profit sharing.
The change is good, but doesn't really help address the real problem -- the fact that participants aren't quick to take action. Study after study shows that inertia, not action, tends to run our 401(k) behavior. We tend to stick with what we have, rather than make changes that will help us.
So the pressure is still on you to protect yourself. If you have more than 10 percent of your money in one stock -- regardless of how much you love your company and are optimistic about its future -- you're putting your retirement in danger. You owe it to yourself to diversify.
A Boon for Beneficiaries
Congress just gave your heirs a very nice tax break. Under the old rules, any 401(k) beneficiary other than a spouse had limited options in how to take the payout; the reality was that most took it as a lump sum that triggered a big tax hit. (Remember, 100 percent of 401(k) withdrawals are taxed as ordinary income.)
With the new law, beginning in 2007 beneficiaries can instead move the 401(k) into a special IRA specifically designated for beneficiaries, and make annual withdrawals over many years based on their own life expectancy.
That means heirs will be able to leave more of the money invested in the tax-deferred account for longer. And that's a great way for your heirs to build their own sizeable retirement nest egg.
No Charity Tax
Finally, the new law also has a great break for IRA investors older then 70-1/2 who face making required minimum distributions (RMD) even though they don't need the income.
In 2006 and 2007, you'll now be allowed to donate up to $100,000 each year from your IRA to a public charity and not owe any tax on that money. That is, you won't first have to claim the money as a taxable RMD before you make the donation.
This can be a useful way to support a charity and meet your RMD requirements without boosting your adjusted gross income. The donation can't also be claimed as a deduction, so it makes the most sense for those of you who don't itemize.
Wednesday, August 30, 2006
The Soul of Money and Consciousness
There is not doubt, as we look into our own abilities, money becomes a unique measure of our capabilities. Our talents and material goods is the method of choice for exchanging the currency of abilities. But what about our internal measures of success? Pleasure of knowledge, fear from a bad trade or any other “gut feeling” we experience when we approach measurable points.
As in the prior consciousness post, the more we look into success, the more we look inward the person behind that success.
The same applies to money.
Now, the opposite seems to occur to crave for money, the more money is craved the less individuals look inward -into their conciousness- for money.
We say “money does not get you happiness” or “money is not everything” many more popular sayings about the limited capability of money. Still, we have not learn how to teach inward rewarding with outward results in a proficient manner.
In Maslow hierarchy of needs:
1. Physiological (biological needs)
2. Safety
3. Love/belonging
4. Status (esteem)
5. Actualization
**If you need to browse about Maslow, I'll suggest a quick browsing at:
http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs
If we look were we stand in our present society.
Some of us are stuck in a range from 3-4 and very few get into 5 in a real way. But it seems we have regress to #2 as a society. This is not a personal choice but the result of leaders choice, many are coy about challenging this regression.
The big step begins understanding how we pass from a linear left side of the brain thinking to a right side the brain thinking in a coordinated manner and obtain superior results.
This is what the book “A New Whole Mind” explores.
As we read present religious books and other motivational books.
We encounter the content travelling from the left side linear thinking to take-over actions in a non-linear way but forgetting to touch in how this is measured. These books usually fault at respecting and open some light into measuring equally both capacities of the brain, with its right and left side thinking.
Usually, the mantra is expressed in the common line “do what you love and you will be reward it.”
The intended meaning of reward is monetary, a total left brain approach, and the acting of love is no measurable nor can be taught in a clear way, what we need is a right brain treat of consciousness to be able to actually apply the content of those "self-help, God-help" books.
We are not taught to think in tangled non-connected manner, when in fact this is what we need in most of our human and non-human interactions. At the same time, we expect tangible measurements, if we are in love, usually it means we are somehow a little bit irrational. We do most things in search of these “irrational feelings” and demand tangible measurements.
We often for some unknown reason get a strong physical reaction to something or someone. It can come from influence of thinking or by the influence of our actions, but how do we is coming from a good place, where is this coming from?
If I feel great when I have a great stock trade or I feel awful when I have a bad one, does that means that stock trades –my actions- as a subject of many –trades- doing the same thing have a soul?
Thus, today’s tangled question: do stock trades have a soul?
As in the prior consciousness post, the more we look into success, the more we look inward the person behind that success.
The same applies to money.
Now, the opposite seems to occur to crave for money, the more money is craved the less individuals look inward -into their conciousness- for money.
We say “money does not get you happiness” or “money is not everything” many more popular sayings about the limited capability of money. Still, we have not learn how to teach inward rewarding with outward results in a proficient manner.
In Maslow hierarchy of needs:
1. Physiological (biological needs)
2. Safety
3. Love/belonging
4. Status (esteem)
5. Actualization
**If you need to browse about Maslow, I'll suggest a quick browsing at:
http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs
If we look were we stand in our present society.
Some of us are stuck in a range from 3-4 and very few get into 5 in a real way. But it seems we have regress to #2 as a society. This is not a personal choice but the result of leaders choice, many are coy about challenging this regression.
The big step begins understanding how we pass from a linear left side of the brain thinking to a right side the brain thinking in a coordinated manner and obtain superior results.
This is what the book “A New Whole Mind” explores.
As we read present religious books and other motivational books.
We encounter the content travelling from the left side linear thinking to take-over actions in a non-linear way but forgetting to touch in how this is measured. These books usually fault at respecting and open some light into measuring equally both capacities of the brain, with its right and left side thinking.
Usually, the mantra is expressed in the common line “do what you love and you will be reward it.”
The intended meaning of reward is monetary, a total left brain approach, and the acting of love is no measurable nor can be taught in a clear way, what we need is a right brain treat of consciousness to be able to actually apply the content of those "self-help, God-help" books.
We are not taught to think in tangled non-connected manner, when in fact this is what we need in most of our human and non-human interactions. At the same time, we expect tangible measurements, if we are in love, usually it means we are somehow a little bit irrational. We do most things in search of these “irrational feelings” and demand tangible measurements.
We often for some unknown reason get a strong physical reaction to something or someone. It can come from influence of thinking or by the influence of our actions, but how do we is coming from a good place, where is this coming from?
If I feel great when I have a great stock trade or I feel awful when I have a bad one, does that means that stock trades –my actions- as a subject of many –trades- doing the same thing have a soul?
Thus, today’s tangled question: do stock trades have a soul?
Monday, August 28, 2006
Consciousness The Last Great Frontier
If you are interested in the present, and want to know what is shaping the future, you must be interested in the research about CONSCIOUSNESS.
This incredible piece is by R. J. AUMANN a Nobel Price Winner of Economics.
Discussion Paper # 391 May 2005
×ª×•×™×œ× ×•×™×¦×¨×” רקחל זכרמ
CENTER FOR THE STUDY OF RATIONALITY
THE HEBREW UNIVERSITY OF JERUSALEM
URL: http://www.ratio.huji.ac.il/
Abstract
(Note: due to software translation of symbols you might find some duddles in the text. I will correct those as I work with the original text.)
Consciousness is the last great frontier of science. Here we discuss what
it is, how it difers fundamentally from other scientific phenomena, what
adaptive function it serves, and the difculties in trying to explain how it
works. The emphasis is on the adaptive function.
1. Introduction
Consciousness is the last great frontier of science. Sixty years ago, life was not
understood; it was a mystery. With the discovery of DNA, that mystery was
solved; today, we more or less understand, at least in principle, how life works.
But we do not at all understand how consciousness works.
We start by deÞning our terms; already there, there are dificulties. By con-
sciousness, we mean, in the Þrst instance, the ability to experience. To see, hear,
smell, feel, taste, desire, enjoy, sufer, like, dislike, love, hate, fear, become excited by an idea, be saddened by a loss. We do not mean to sense. A machine can
"sensor" also senses. Machines read; record sounds; detect odors, touches, and
favors; win at chess. They can even be programmed to exhibit a frownie, or
emit downbeat sounds when something isn't right. But presumably they do
not experience.
What, exactly, does "experience" mean? Ah, that is where the dificulty lies.
The word cannot be deÞned in technical terms that do not refer to the concept
itself. Experience cannot be defined in terms that a machine can understand.
If you yourself are not conscious have never experienced something then you
will not understand what the term means; just as little as congenitally deaf people
∗Center for the Study of Rationality, and Departments of Mathematics and Economics, The
Hebrew University of Jerusalem, 91904 Jerusalem, Israel
understand what music means. To be sure, they can understand about the vibra-
tions of taut strings, about air waves, about the workings of musical instruments,
and even about musical notation and rhythm; but they can never understand what
music is. For that, one must hear it. Similarly, someone who is not conscious
cannot understand experience.
Ernst Mayr, in The Growth of Biological Thought,1 distinguishes between two
fundamental questions in biology: “how” and “why”. “How” refers to mechanism,
“why” to function. The question “how do we digest food?” is answered by
describing the process, involving saliva, chewing, swallowing, processing in the
stomach and intestines, absorption into the bloodstream, and so on; and, disposing
of wastes. The question “why do we digest food?” is answered by saying that
food must be digested in order to provide vital ingredients for the functioning of
the body, particularly energy.
To these questions, we add a third, which logically comes before the other
two: “what”. This refers to the descriptive aspect of biology, and of science
in general. The answer to the question “what is digestion?” is that it is the
process whereby food is transformed to a state that the body can use. “What”
questions also include observational, descriptive, and classifying matters, and also
methodological or conceptual matters, like “what is a species?”
The remainder of this essay is divided into three sections: “What”, “Why”,
and “How”. In the Þrst, we discuss what consciousness is, and how it differs
radically from other scientiÞc phenomena. In the second, we discuss a possible
function of consciousness, from the evolutionary viewpoint; and the third discusses
the mechanism. Unfortunately, the “How” section is particularly short: We really
have nothing to say about this, other than to describe the difficulties.
2. What
We have deÞned consciousness as the ability to experience. This puts the phe-
nomenon into a completely different category from other scientiÞc phenomena, in
several ways.
(i) Unlike almost every–indeed every–other scientiÞc phenomenon, conscious-
ness is completely subjective. No veriÞable outside characteristics of consciousness
are known. No matter how complex an organism’s behavior is, a computer could
conceivably be programmed to mimic that behavior. An individual can observe
1Cambridge, Massachusetts: Belknap Press, 1982.
2
consciousness only in himself.
SpeciÞcally, I can observe consciousness in myself only; I cannot be certain
that anybody else really is conscious. To be sure, since other people appear
roughly similar to me, and act similarly, I may surmise that they, too, are con-
scious; but I’m not certain. Each individual can be certain of consciousness only
in himself, where he directly observes it.
(ii) Whereas the phenomenon of consciousness is highly subjective, it is, para-
doxically, the only phenomenon of which the observer is absolutely certain. All
other phenomena and observations could conceivably be attributed to hallucina-
tions, dreams, and/or mental illness. But also hallucinations, dreams, and the
ravings of a madman are experiences; in each case, the observer is sure that he
is experiencing–is “conscious”–and he is right (we include dreams under the
heading of consciousness).
(iii) Sometimes, people express perplexity as to the nature of the problem.
They do not see anything mysterious about consciousness, and do not understand
in what way it is different from other neurological functions like, say, the regulation
of breathing. Asked whether a computer could in principle be conscious, they
answer, “why not?”
We are dumbfounded by this reaction, and can only conjecture that these
people are themselves not conscious. To me, it is evident that no combination
of silicon chips and wires could conceivably “experience” in the sense that I do.
Consciousness involves something beyond the merely physical and mechanical.
(iv) It seems only slightly less evident that no combination of off-the-shelf
chemicals could experience in the sense that I do. But here, we are entering a
gray area. By all indications, the day is not far off when it will be possible to
synthesize a human being.2 Will such a golem be conscious?
Each of the possible answers–“yes” and “no”–is problematic. “Yes” is prob-
lematic because a combination of chemicals is in principle no different from a
combination of silicon chips and wires, which we intuitively feel cannot experi-
ence. But “no” is also problematic, because there is no reason to believe that a
golem that is identical, molecule for molecule, with a live human being would not
in all respects–including consciousness–be like that human being.
2In an email message dated March 22, 2005, the U.S. National Academy of Sciences an-
nounced that “The U.S. National Academy of Sciences and other members of the InterAcademy
Panel, a worldwide organization of science academies, have stated that a worldwide ban on hu-
man reproductive cloning–a technique that attempts to produce a child–is justiÞed.” If it is
being banned, it is presumably within reach; and then, no bans can prevent it from happening.
3
(v) Are animals conscious? On the face of it, there is no reason to suppose
that they cannot be. But as stated above (in (i)), it is not even clear that all
humans–other than me–are conscious. By analogy with me, I can surmise that
other human beings are conscious; but the analogy is less compelling in the case
of animals. The further one gets from human beings on the evolutionary scale, the
less compelling the analogy. So the short answer is, “possibly; we don’t know.”
(vi) Consciousness may have levels. For example, dreaming is certainly an
expression of consciousness, but perhaps at a lower level than waking conscious-
ness. Newborn children, and the mentally impaired, may be conscious at a lower
level. In the opposite direction, people taking certain drugs sometimes report a
“heightened state of consciousness.”
Here again, we are at a loss, because we cannot really imagine what it is like to
be, say, a newborn child. We personally have never taken drugs, so cannot make
a judgment in the opposite direction either. We are stuck in our own conceptual
prison: Consciousness is about subjective experience, so it is difficult to imagine
levels of consciousness other than our own.
Though it may have various levels, its existence at any level already poses the
conceptual problems discussed here.
(vii) Conscious experience appears to be associated with certain physiological-
neurological processes in the brain, like the simultaneous Þring of many neurons
in a well-deÞned group of neurons.3 This, however, does not explain how con-
sciousness works–just as little as noticing that human reproduction is associated
with sexual intercourse explains how reproduction works.
(viii) Up to now we have discussed only the “input” component of conscious-
ness: experience. There are also two other vital components. One is the “process-
ing” component: thought, including intention. The other is the “output” compo-
nent: volition–consciously choosing to do something, and doing it. True, a person
could be conscious, but have no power to take any action–as when asleep, or as
a result of a totally debilitating stroke. But under most normal circumstances,
thought and volition are intimately associated with consciousness. Indeed, as
we shall presently see, it is the combination of all three elements–experience,
thought, and volition–that enables consciousness to perform its function.
3Communicated by Prof. Rafael Malach of the Weizmann Institute of Science, Rehovot.
Based on this observation, Professor Malach makes the fascinating suggestion that a group of
individuals acting in concert may also be conscious.
4
3. Why
We next address the issue of “why”: What is the function of consciousness, from,
say, the evolutionary viewpoint?
The answer we propose is based on the two related notions of decentralizing
and decoupling–roughly speaking, splitting a difficult or complex task into several
easier or less complex tasks, often with the aid of an auxiliary “driving force.”
Here are some examples:
(i) Tearing a Manhattan telephone book in two–perhaps the grand-
daddy of all decoupling processes. Taken as is, it is very difficult. But if one Þrst
separates the book into a number of thinner parts, then one can easily tear each of
these parts in two, thus accomplishing the task. Here the difficult task is tearing
the whole book; the easier tasks are tearing each of the thinner parts; and the
decoupler is separating the entire book into the thinner parts.
(ii) Operating an economy. An economy can be centrally planned, as in a
Kibbutz (Israel cooperative village). A central planner decides how much of each
good will be allocated to each individual, how much–and where–each individual
will work, and so on. In theory, the entire economy of a whole country could be
planned in this way. That is the conception behind socialist economies, like that
of the former Soviet Union.
Centrally planning an entire economy is enormously complex and difficult. To
start with, the informational requirements–Þnding out what each person wants
to consume and what he is capable of producing–seem utterly beyond reach.
But even if that could somehow be achieved, the problemof getting the people to
do what you want them to do, and the sheer complexity of the task, makes the
efficient central planning of an entire economy practically unachievable. Indeed,
socialist economies like that of the Soviet Union achieve levels of efficiency that
are far below those of advanced “free” economies.
What enables free economies to work more efficiently is that they are, by and
large, decentralized. Within limits, each person seeks to acquire the goods and
services that he wants, and to work at the tasks that he wants and that he is
able to perform. There is no problem in getting the people to do what you want
them to do, as each individual makes his own choices. And, the complexity of the
task is greatly reduced, as the task of operating the economy is transferred from
a central planner to individuals, each planning only the segment of the economy
that interests him–usually, his own consumption and production. Instead of one
planner (or planning agencies) planning many billions of transactions, we have
5
several million planners planning thousands of transactions each. The total size
of the task is perhaps roughly the same, but the task is decoupled into millions of
individual tasks–and so is much more easily accomplished.
The driving force that makes the whole process work is individual motivation.
Each individual is motivated to seek for himself the best “deal” that he can get–
the goods and the work that he likes most–and it is this that operates the entire
economy. That is Adam Smith’s “invisible hand.”
(iii) Money and prices. Primitive decentralized markets work by barter:
Two or more people get together and exchange goods or services, to the mutual
beneÞt of all parties to the transaction; the process may be repeated as often
as desired. One may hope that the Þnal outcome is optimal, in the sense that
no traders could have done better by trading with each other.4 In practice, in
reasonably large markets–or even in fairly small ones–identifying the bartering
groups, and deciding on the barters to be implemented, is so complex, involved,
and fraught with uncertainty that barter is unlikely to achieve an outcome that
is anywhere close to optimal.
Enter the institutions of money and prices. Rather than bartering, each trader
sells his goods at market prices; with the proceeds he buys the goods he desires,
again at market prices. Then if the prices are “right,” the market “clears”: the
demand for each good exactly matches the supply. Moreover, the resulting reallo-
cation of goods is optimal (in the above sense); and in large markets, all optimal
outcomes are achievable in this way.
Thus, the unsophisticated but highly complex, involved, and uncertain bar-
tering process is replaced by the price mechanism, which, though a lot more so-
phisticated than barter, is far easier to execute: it requires only that each trader
buys what he likes,5 given his budget.6 Here the complex task is achieving opti-
mality; the simpler tasks are for each trader to decide what he wants, given his
budget; and the decoupler is the price mechanism. And again, the driving force is
individual motivation. Each individual is motivated to “maximize over his budget
set”–sell and buy, at the given market prices, so as to be left with those goods
and services that he most prefers.
4More precisely, no group of traders could have improved the welfare of all its members by
trading within the group only. In economic theory, such outcomes are called core outcomes.
5Unlike barter, where each trader needs some knowledge about the preferences of the traders
with whom he trades, and also about at least some of the others, so that he will know with
whom to trade.
6The proceeds from the sale, at market prices, of the goods that he brought to the market.
6
An interesting aspect of this decoupling is that historically, it has emerged by
itself in every reasonably advanced society, without being imposed by any plan-
ning entity. Not only has the price mechanism emerged by itself, but the market
prices themselves also usually emerge by themselves–determined by supply and
demand–without being imposed by planning entities. And when planning enti-
ties do enter the process of price determination, as in the former Soviet Union or
with rent control in various cities, they often wreak havoc, causing shortages and
other distortions.
Whereas this example is related to the previous one (Example ii), they are
not the same. In the previous example, the point was decentralizing the economy,
letting each individual see to himself. In the current example, the point is the
formation of a price system. Logically, the examples are independent; a centrally
planned economy can have a price system, and a decentralized economy can work
on barter.
(iv) Chess. The ideal way to play chess is to plan the entire course of play
from the beginning, taking into account anything the other player might do. In
practice, this is beyond the power of any man or machine. Instead, the players
“evaluate” the situation at each move, using numerical indices for the various
pieces; e.g., 8 for the queen, 5 for a rook, 3 for a bishop or knight, 1 for a pawn.
They also take account of the general characteristics of the position: develop-
ment of the pieces, castling, passed pawns, and so on. Using such criteria, each
player “looks ahead” for a few moves, trying to maximize his valuation of the
position at the end of that period, and taking into account that the other player
is doing likewise. Weaker players often do not look ahead more than a move or
two, and even that only partially. Stronger players may look as much as Þve or
six moves ahead, and sometimes even more; but they, too, do not examine all
possibilities–all “branches of the tree”–in the process. Human players do not
use a precise numerical valuation, but take a generalized view. Chess-playing com-
puter programs7 basically do use a precise numerical valuation function; though
even there, the “depth” of the look-ahead varies, with some branches of the tree
being examined more thoroughly than others.
Here the complex task is planning the whole game beforehand; and the simpler,
decoupled tasks are playing move by move, with a more or less modest look-
ahead. The overall, macroscopic driving force is, of course, the desire to win; but
7Like IBM’s “Deep Blue,” which several years ago defeated World Chess Champion Gary
Kasparov in a tournament (though there have been allegations that “Deep Blue” cheated by
enlisting human aid during the course of play).
7
“microscopically”–at each separate move–the driving force is to maximize the
valuation several moves ahead.
In Examples (ii) and (iii) above, the decoupling is achieved by spreading the
task over many individuals, each with his own motivation. In contrast, in this
case the decoupling is achieved by spreading the task over time. There is a single
overall motivation–winning–which is expressed at each move by looking ahead
a few moves and maximizing valuation.
(v) Solomon’s judgment. Rather than rendering his judgment (1 Kings 3,
16-28), King Solomon could have entered into a complex factual investigation of
the women’s claims. He “decoupled” the process by motivating them unwittingly
to reveal the truth themselves. Here the complex task is determining which woman
is the live baby’s mother; the simpler tasks are for the women to express their
preferences given the judgment; and the driving force is the women’s motherly
love.
(vi) Fair division. This may be achieved by cumbersome methods of direct
measurement. Alternatively, the process may be decoupled by the method of “one
cuts, the other chooses,” which motivates the parties themselves to divide fairly.
(vii) Evolution. Suppose a Creator had wanted to create the living world
as we know it. He could have designed each individual organism separately, to-
gether with the appropriate interactive adaptations. This would have been enor-
mously complex. Alternatively, He could have decoupled the process by means
of evolution–survival of the Þttest–which runs by itself, automatically, with no
need for “hands on” direction. Here the complex task is creating the world; the
decoupled alternative tasks are for each organism–or even each gene–to adapt
to its surroundings; and the driving force is survival of the Þttest.
These examples should give the reader some idea of what we mean by decou-
pling. What we now suggest is that consciousness serves as a decoupler that allows
human beings to perform tasks that otherwise would be unachievable because of
their complexity. Let us illustrate.
(a) Food. The body needs food for energy and other vital purposes. The
process of supplying food may be divided into two parts: (1) before it enters the
mouth, and (2) afterwards. Part 1 consists of triggering the individual to seek
food, and acquiring, preparing, and eating it. Part 2 consists of digesting it, i.e.,
transforming it into a state that the body can use (see Section 1, above).
Both parts are extremely complex, but Part 1 is by far the more so. We must
choose the food to buy, shop for it, store it, clean it, cook it, and serve it. We must
8
also choose and buy closets and a refrigerator to store it; sinks to wash it; stoves,
ovens, gas tops, microwaves, pots, pans, cake forms, pie dishes, utensils, mixers,
vegetable peelers and so on to prepare it; plates, bowls, platters, and utensils, to
serve it. We must earn money to buy the food and all the auxiliary items we have
mentioned, and those we have not mentioned. Earning money usually involves
various skills–not the least of them social–which must be acquired.
There is another fundamental difference between the two parts. Part 2 is
“hard-wired”: It works “automatically,” by mechanical, chemical, and electrical
means, with no conscious, voluntary component. Part 1 is precisely the opposite:
all conscious, all volitional. To start with, when the body runs short of the
required nutrients, it must be prompted to eat. Once this is done, the food must
be acquired, prepared, and eaten. Conceivably, parts of the process could be hard-
wired: A gauge could tell the brain when the stomach is empty; the eye and brain
could identify food, then send signals to the hand automatically to take it and
put it in the mouth. But it seems unlikely that acquiring the food and preparing
it, and earning the necessary money, could all be hard-wired.
How, then, does the process work? What drives it?
The answer is simple, even obvious: hunger. And, the other side of the same
coin: enjoyment of food.
Hunger does not mean an empty stomach. An empty stomach by itself will
not prompt us to eat. We need the pain or discomfort of hunger, and/or the
pleasure of food, to make us eat. Pain and pleasure depend on consciousness. If
you are not conscious, you cannot experience pain or pleasure. So consciousness
is an important component of the mechanism that supplies us with nutrients.
Moreover, it decouples the nutritive process into the two parts we have described:
until the food reaches the mouth, and afterwards.
Indeed, it does much, much more: The entire process of acquiring, preparing,
and serving food is decoupled into many small steps. Each step is conscious,
with a well-deÞned goal; it is motivated. Going to market, picking the items to
buy, standing in line at the check-out counter, bringing the items to your car,
unloading, putting in the refrigerator, all the myriad tasks involved in cooking,
all the myriad tasks involved in earning the money with which to buy the food,
all the myriad tasks involved in all stages of the process–all together, and each
one separately–are driven by hunger, through the medium of consciousness; they
are motivated.
More precisely, the experiences of hunger and food enjoyment are the overall,
macroscopic driving forces, like the desire to win in chess (Example iv above). The
9
thought process, which is the second component of consciousness (see Section
2, Item viii), translates this into many small tasks–making money, baking a
cake, and so on–each with its own driving force, like valuation-maximizing in
chess. And then volition–the third component of consciousness–comes into play,
enabling the individual actually to carry out these individual tasks.
It is important to note that while “hard-wired” processes like digestion may be
highly complex, they are fairly repetitive. Digestion works on the same materials,
in the same way, every day; there are few, if any, surprises. The processes of food
acquisition and preparation are much less repetitive; they require a good deal
of instantaneous adaptation to various different environments, environments that
may be unfamiliar. Consciousness is particularly important for motivating and
carrying out these non-repetitive tasks.
Finally, we remark that themechanisms provided by nature to facilitate eating–
hunger and the enjoyment of food–may sometimes “misÞre.” It is well known
that severely undernourished people whose hunger leads them to overeat may
well die as a consequence; there are documented cases of people who survived
the concentration camps during the Holocaust, only tragically to die in this way.
Even better known is that the enjoyment of food may cause people to overeat or
to eat foods that are not nutritious. While not immediately fatal like with the
concentration camps, this may nevertheless be detrimental to health; or at least,
serve no useful adaptive purpose.
(b) Sex. Biologists identify two basic drives in living organisms: nourishment
and reproduction.8 What we have said about food applies, mutatis mutandis, also
to sex. It is hunger and the enjoyment of food–not the need for nourishment!–
that makes people eat. Similarly, it is not the desire for offspring that makes
them have sex; it is the sex drive–the enjoyment of sex. Enjoyment is a function
of consciousness. You cannot enjoy if you are not conscious. Many people do
consciously want offspring, but that is not why they have sex.9
As with nourishment, the process of reproduction has several distinct parts:
(1) before the semen enters the woman’s body; (2) conception and pregnancy;
8It is interesting that in several places, the Talmudic literature identiÞes these two basic
drives. In the biblical verse relating how Joseph’s master, Potiphar, “left everything in Joseph’s
hands, except for the bread that he (Potiphar) eats” (Genesis 39, 6), the Midrash takes the
“bread” to mean Potiphar’s wife. And when Jethro’s daughters tell him that “an Egyptian man
saved us,” and Jethro says, “where is he? Call him and let him eat bread” (Exodus 2, 19-20),
the Midrash takes the “bread” to mean the daughters themselves.
9Thus, homosexuals will usually not have relations with persons of the opposite sex. When
they want offspring, they prefer adopting, or artiÞcial insemination.
10
and (3) childhood, when the offspring cannot fend for itself. The Þrst two parts
are decoupled by the sex drive. The second part, though highly complex, is hard-
wired; once sex has taken place, there is no conscious intervention until birth.
After birth, parental love takes over; like hunger and the sex drive, this depends
on consciousness. As with food, the Þrst and third parts of the process–which
are not hard-wired–split up into a myriad of distinct small steps, starting with
dating and earning the required money; each is conscious, each has a well-deÞned
goal, each is motivated.
Like with food, the hard-wired part of the process is fairly repetitive, the other
parts not.
Unlike food, sex is programmed to be proßigate. In a single season, a single
ßowering tree produces many hundreds of thousands of blossoms, and billions
of grains of pollen. It is doubtful if even one of these comes to fruition. In
each ejaculation there are hundreds of millions of sperms, at most one of which
is used. Many sexual episodes lead nowhere, many relationships lead nowhere,
many dates lead nowhere. The sex drive leads to many activities that have no
chance of producing offspring: sex with birth control, sex after the reproductive
age, homosexuality, masturbation, oral sex, bestiality, pornography, and so on.
Love and sex play dominant roles in advertising, literature, Þlm, music, painting,
photography, dance, almost all cultural activity. In the case of food, we used the
term “misÞre” to describe situations in which food does not provide nourishment.
In the case of sex, the corresponding situations are so ubiquitous that they must
be considered a part of the process.
(c) Pain. It has long been recognized that pain calls attention to something in
the body having gone wrong, so that it can be attended to. Again, pain depends
on consciousness; if you are not conscious, you cannot experience pain. Machines
cannot suffer.
As before, we have here a decoupling process. Pain motivates the individual to
seek medical or surgical treatment. Unlike with food and sex, though, the effect of
treatment is not entirely automatic; repeated intervention may be required. Pain
decouples the treatment process into many distinct small steps, motivating the
individual at each step to do what is required in order to alleviate his condition.
It, too, may “misÞre,” as when a medical or surgical treatment causes more pain
than what the patient can suffer.
To summarize: Consciousness enables the decoupling of highly complex,
non-repetitive tasks into many simpler tasks, mainly through the element of mo-
tivation.
11
4. How
This is the shortest of our sections: We have little to contribute on this score,
other than to say that the neurological phenomena that have been observed to be
associated with consciousness do not explain how it works; the “how” remains a
deep mystery.
One last remark is worth making. “How” questions are usually answered
by analogy with something else, with which we are familiar. For example, the
workings of the circulatory system are explained by analogy with plumbing. But
consciousness is unique; there is nothing else in the world that is even remotely
like it. Since there is nothing like it, what analogy can we use to explain it? And
if not by analogy, how else can it be “explained?”
12
This incredible piece is by R. J. AUMANN a Nobel Price Winner of Economics.
Discussion Paper # 391 May 2005
×ª×•×™×œ× ×•×™×¦×¨×” רקחל זכרמ
CENTER FOR THE STUDY OF RATIONALITY
THE HEBREW UNIVERSITY OF JERUSALEM
URL: http://www.ratio.huji.ac.il/
Abstract
(Note: due to software translation of symbols you might find some duddles in the text. I will correct those as I work with the original text.)
Consciousness is the last great frontier of science. Here we discuss what
it is, how it difers fundamentally from other scientific phenomena, what
adaptive function it serves, and the difculties in trying to explain how it
works. The emphasis is on the adaptive function.
1. Introduction
Consciousness is the last great frontier of science. Sixty years ago, life was not
understood; it was a mystery. With the discovery of DNA, that mystery was
solved; today, we more or less understand, at least in principle, how life works.
But we do not at all understand how consciousness works.
We start by deÞning our terms; already there, there are dificulties. By con-
sciousness, we mean, in the Þrst instance, the ability to experience. To see, hear,
smell, feel, taste, desire, enjoy, sufer, like, dislike, love, hate, fear, become excited by an idea, be saddened by a loss. We do not mean to sense. A machine can
"sensor" also senses. Machines read; record sounds; detect odors, touches, and
favors; win at chess. They can even be programmed to exhibit a frownie, or
emit downbeat sounds when something isn't right. But presumably they do
not experience.
What, exactly, does "experience" mean? Ah, that is where the dificulty lies.
The word cannot be deÞned in technical terms that do not refer to the concept
itself. Experience cannot be defined in terms that a machine can understand.
If you yourself are not conscious have never experienced something then you
will not understand what the term means; just as little as congenitally deaf people
∗Center for the Study of Rationality, and Departments of Mathematics and Economics, The
Hebrew University of Jerusalem, 91904 Jerusalem, Israel
understand what music means. To be sure, they can understand about the vibra-
tions of taut strings, about air waves, about the workings of musical instruments,
and even about musical notation and rhythm; but they can never understand what
music is. For that, one must hear it. Similarly, someone who is not conscious
cannot understand experience.
Ernst Mayr, in The Growth of Biological Thought,1 distinguishes between two
fundamental questions in biology: “how” and “why”. “How” refers to mechanism,
“why” to function. The question “how do we digest food?” is answered by
describing the process, involving saliva, chewing, swallowing, processing in the
stomach and intestines, absorption into the bloodstream, and so on; and, disposing
of wastes. The question “why do we digest food?” is answered by saying that
food must be digested in order to provide vital ingredients for the functioning of
the body, particularly energy.
To these questions, we add a third, which logically comes before the other
two: “what”. This refers to the descriptive aspect of biology, and of science
in general. The answer to the question “what is digestion?” is that it is the
process whereby food is transformed to a state that the body can use. “What”
questions also include observational, descriptive, and classifying matters, and also
methodological or conceptual matters, like “what is a species?”
The remainder of this essay is divided into three sections: “What”, “Why”,
and “How”. In the Þrst, we discuss what consciousness is, and how it differs
radically from other scientiÞc phenomena. In the second, we discuss a possible
function of consciousness, from the evolutionary viewpoint; and the third discusses
the mechanism. Unfortunately, the “How” section is particularly short: We really
have nothing to say about this, other than to describe the difficulties.
2. What
We have deÞned consciousness as the ability to experience. This puts the phe-
nomenon into a completely different category from other scientiÞc phenomena, in
several ways.
(i) Unlike almost every–indeed every–other scientiÞc phenomenon, conscious-
ness is completely subjective. No veriÞable outside characteristics of consciousness
are known. No matter how complex an organism’s behavior is, a computer could
conceivably be programmed to mimic that behavior. An individual can observe
1Cambridge, Massachusetts: Belknap Press, 1982.
2
consciousness only in himself.
SpeciÞcally, I can observe consciousness in myself only; I cannot be certain
that anybody else really is conscious. To be sure, since other people appear
roughly similar to me, and act similarly, I may surmise that they, too, are con-
scious; but I’m not certain. Each individual can be certain of consciousness only
in himself, where he directly observes it.
(ii) Whereas the phenomenon of consciousness is highly subjective, it is, para-
doxically, the only phenomenon of which the observer is absolutely certain. All
other phenomena and observations could conceivably be attributed to hallucina-
tions, dreams, and/or mental illness. But also hallucinations, dreams, and the
ravings of a madman are experiences; in each case, the observer is sure that he
is experiencing–is “conscious”–and he is right (we include dreams under the
heading of consciousness).
(iii) Sometimes, people express perplexity as to the nature of the problem.
They do not see anything mysterious about consciousness, and do not understand
in what way it is different from other neurological functions like, say, the regulation
of breathing. Asked whether a computer could in principle be conscious, they
answer, “why not?”
We are dumbfounded by this reaction, and can only conjecture that these
people are themselves not conscious. To me, it is evident that no combination
of silicon chips and wires could conceivably “experience” in the sense that I do.
Consciousness involves something beyond the merely physical and mechanical.
(iv) It seems only slightly less evident that no combination of off-the-shelf
chemicals could experience in the sense that I do. But here, we are entering a
gray area. By all indications, the day is not far off when it will be possible to
synthesize a human being.2 Will such a golem be conscious?
Each of the possible answers–“yes” and “no”–is problematic. “Yes” is prob-
lematic because a combination of chemicals is in principle no different from a
combination of silicon chips and wires, which we intuitively feel cannot experi-
ence. But “no” is also problematic, because there is no reason to believe that a
golem that is identical, molecule for molecule, with a live human being would not
in all respects–including consciousness–be like that human being.
2In an email message dated March 22, 2005, the U.S. National Academy of Sciences an-
nounced that “The U.S. National Academy of Sciences and other members of the InterAcademy
Panel, a worldwide organization of science academies, have stated that a worldwide ban on hu-
man reproductive cloning–a technique that attempts to produce a child–is justiÞed.” If it is
being banned, it is presumably within reach; and then, no bans can prevent it from happening.
3
(v) Are animals conscious? On the face of it, there is no reason to suppose
that they cannot be. But as stated above (in (i)), it is not even clear that all
humans–other than me–are conscious. By analogy with me, I can surmise that
other human beings are conscious; but the analogy is less compelling in the case
of animals. The further one gets from human beings on the evolutionary scale, the
less compelling the analogy. So the short answer is, “possibly; we don’t know.”
(vi) Consciousness may have levels. For example, dreaming is certainly an
expression of consciousness, but perhaps at a lower level than waking conscious-
ness. Newborn children, and the mentally impaired, may be conscious at a lower
level. In the opposite direction, people taking certain drugs sometimes report a
“heightened state of consciousness.”
Here again, we are at a loss, because we cannot really imagine what it is like to
be, say, a newborn child. We personally have never taken drugs, so cannot make
a judgment in the opposite direction either. We are stuck in our own conceptual
prison: Consciousness is about subjective experience, so it is difficult to imagine
levels of consciousness other than our own.
Though it may have various levels, its existence at any level already poses the
conceptual problems discussed here.
(vii) Conscious experience appears to be associated with certain physiological-
neurological processes in the brain, like the simultaneous Þring of many neurons
in a well-deÞned group of neurons.3 This, however, does not explain how con-
sciousness works–just as little as noticing that human reproduction is associated
with sexual intercourse explains how reproduction works.
(viii) Up to now we have discussed only the “input” component of conscious-
ness: experience. There are also two other vital components. One is the “process-
ing” component: thought, including intention. The other is the “output” compo-
nent: volition–consciously choosing to do something, and doing it. True, a person
could be conscious, but have no power to take any action–as when asleep, or as
a result of a totally debilitating stroke. But under most normal circumstances,
thought and volition are intimately associated with consciousness. Indeed, as
we shall presently see, it is the combination of all three elements–experience,
thought, and volition–that enables consciousness to perform its function.
3Communicated by Prof. Rafael Malach of the Weizmann Institute of Science, Rehovot.
Based on this observation, Professor Malach makes the fascinating suggestion that a group of
individuals acting in concert may also be conscious.
4
3. Why
We next address the issue of “why”: What is the function of consciousness, from,
say, the evolutionary viewpoint?
The answer we propose is based on the two related notions of decentralizing
and decoupling–roughly speaking, splitting a difficult or complex task into several
easier or less complex tasks, often with the aid of an auxiliary “driving force.”
Here are some examples:
(i) Tearing a Manhattan telephone book in two–perhaps the grand-
daddy of all decoupling processes. Taken as is, it is very difficult. But if one Þrst
separates the book into a number of thinner parts, then one can easily tear each of
these parts in two, thus accomplishing the task. Here the difficult task is tearing
the whole book; the easier tasks are tearing each of the thinner parts; and the
decoupler is separating the entire book into the thinner parts.
(ii) Operating an economy. An economy can be centrally planned, as in a
Kibbutz (Israel cooperative village). A central planner decides how much of each
good will be allocated to each individual, how much–and where–each individual
will work, and so on. In theory, the entire economy of a whole country could be
planned in this way. That is the conception behind socialist economies, like that
of the former Soviet Union.
Centrally planning an entire economy is enormously complex and difficult. To
start with, the informational requirements–Þnding out what each person wants
to consume and what he is capable of producing–seem utterly beyond reach.
But even if that could somehow be achieved, the problemof getting the people to
do what you want them to do, and the sheer complexity of the task, makes the
efficient central planning of an entire economy practically unachievable. Indeed,
socialist economies like that of the Soviet Union achieve levels of efficiency that
are far below those of advanced “free” economies.
What enables free economies to work more efficiently is that they are, by and
large, decentralized. Within limits, each person seeks to acquire the goods and
services that he wants, and to work at the tasks that he wants and that he is
able to perform. There is no problem in getting the people to do what you want
them to do, as each individual makes his own choices. And, the complexity of the
task is greatly reduced, as the task of operating the economy is transferred from
a central planner to individuals, each planning only the segment of the economy
that interests him–usually, his own consumption and production. Instead of one
planner (or planning agencies) planning many billions of transactions, we have
5
several million planners planning thousands of transactions each. The total size
of the task is perhaps roughly the same, but the task is decoupled into millions of
individual tasks–and so is much more easily accomplished.
The driving force that makes the whole process work is individual motivation.
Each individual is motivated to seek for himself the best “deal” that he can get–
the goods and the work that he likes most–and it is this that operates the entire
economy. That is Adam Smith’s “invisible hand.”
(iii) Money and prices. Primitive decentralized markets work by barter:
Two or more people get together and exchange goods or services, to the mutual
beneÞt of all parties to the transaction; the process may be repeated as often
as desired. One may hope that the Þnal outcome is optimal, in the sense that
no traders could have done better by trading with each other.4 In practice, in
reasonably large markets–or even in fairly small ones–identifying the bartering
groups, and deciding on the barters to be implemented, is so complex, involved,
and fraught with uncertainty that barter is unlikely to achieve an outcome that
is anywhere close to optimal.
Enter the institutions of money and prices. Rather than bartering, each trader
sells his goods at market prices; with the proceeds he buys the goods he desires,
again at market prices. Then if the prices are “right,” the market “clears”: the
demand for each good exactly matches the supply. Moreover, the resulting reallo-
cation of goods is optimal (in the above sense); and in large markets, all optimal
outcomes are achievable in this way.
Thus, the unsophisticated but highly complex, involved, and uncertain bar-
tering process is replaced by the price mechanism, which, though a lot more so-
phisticated than barter, is far easier to execute: it requires only that each trader
buys what he likes,5 given his budget.6 Here the complex task is achieving opti-
mality; the simpler tasks are for each trader to decide what he wants, given his
budget; and the decoupler is the price mechanism. And again, the driving force is
individual motivation. Each individual is motivated to “maximize over his budget
set”–sell and buy, at the given market prices, so as to be left with those goods
and services that he most prefers.
4More precisely, no group of traders could have improved the welfare of all its members by
trading within the group only. In economic theory, such outcomes are called core outcomes.
5Unlike barter, where each trader needs some knowledge about the preferences of the traders
with whom he trades, and also about at least some of the others, so that he will know with
whom to trade.
6The proceeds from the sale, at market prices, of the goods that he brought to the market.
6
An interesting aspect of this decoupling is that historically, it has emerged by
itself in every reasonably advanced society, without being imposed by any plan-
ning entity. Not only has the price mechanism emerged by itself, but the market
prices themselves also usually emerge by themselves–determined by supply and
demand–without being imposed by planning entities. And when planning enti-
ties do enter the process of price determination, as in the former Soviet Union or
with rent control in various cities, they often wreak havoc, causing shortages and
other distortions.
Whereas this example is related to the previous one (Example ii), they are
not the same. In the previous example, the point was decentralizing the economy,
letting each individual see to himself. In the current example, the point is the
formation of a price system. Logically, the examples are independent; a centrally
planned economy can have a price system, and a decentralized economy can work
on barter.
(iv) Chess. The ideal way to play chess is to plan the entire course of play
from the beginning, taking into account anything the other player might do. In
practice, this is beyond the power of any man or machine. Instead, the players
“evaluate” the situation at each move, using numerical indices for the various
pieces; e.g., 8 for the queen, 5 for a rook, 3 for a bishop or knight, 1 for a pawn.
They also take account of the general characteristics of the position: develop-
ment of the pieces, castling, passed pawns, and so on. Using such criteria, each
player “looks ahead” for a few moves, trying to maximize his valuation of the
position at the end of that period, and taking into account that the other player
is doing likewise. Weaker players often do not look ahead more than a move or
two, and even that only partially. Stronger players may look as much as Þve or
six moves ahead, and sometimes even more; but they, too, do not examine all
possibilities–all “branches of the tree”–in the process. Human players do not
use a precise numerical valuation, but take a generalized view. Chess-playing com-
puter programs7 basically do use a precise numerical valuation function; though
even there, the “depth” of the look-ahead varies, with some branches of the tree
being examined more thoroughly than others.
Here the complex task is planning the whole game beforehand; and the simpler,
decoupled tasks are playing move by move, with a more or less modest look-
ahead. The overall, macroscopic driving force is, of course, the desire to win; but
7Like IBM’s “Deep Blue,” which several years ago defeated World Chess Champion Gary
Kasparov in a tournament (though there have been allegations that “Deep Blue” cheated by
enlisting human aid during the course of play).
7
“microscopically”–at each separate move–the driving force is to maximize the
valuation several moves ahead.
In Examples (ii) and (iii) above, the decoupling is achieved by spreading the
task over many individuals, each with his own motivation. In contrast, in this
case the decoupling is achieved by spreading the task over time. There is a single
overall motivation–winning–which is expressed at each move by looking ahead
a few moves and maximizing valuation.
(v) Solomon’s judgment. Rather than rendering his judgment (1 Kings 3,
16-28), King Solomon could have entered into a complex factual investigation of
the women’s claims. He “decoupled” the process by motivating them unwittingly
to reveal the truth themselves. Here the complex task is determining which woman
is the live baby’s mother; the simpler tasks are for the women to express their
preferences given the judgment; and the driving force is the women’s motherly
love.
(vi) Fair division. This may be achieved by cumbersome methods of direct
measurement. Alternatively, the process may be decoupled by the method of “one
cuts, the other chooses,” which motivates the parties themselves to divide fairly.
(vii) Evolution. Suppose a Creator had wanted to create the living world
as we know it. He could have designed each individual organism separately, to-
gether with the appropriate interactive adaptations. This would have been enor-
mously complex. Alternatively, He could have decoupled the process by means
of evolution–survival of the Þttest–which runs by itself, automatically, with no
need for “hands on” direction. Here the complex task is creating the world; the
decoupled alternative tasks are for each organism–or even each gene–to adapt
to its surroundings; and the driving force is survival of the Þttest.
These examples should give the reader some idea of what we mean by decou-
pling. What we now suggest is that consciousness serves as a decoupler that allows
human beings to perform tasks that otherwise would be unachievable because of
their complexity. Let us illustrate.
(a) Food. The body needs food for energy and other vital purposes. The
process of supplying food may be divided into two parts: (1) before it enters the
mouth, and (2) afterwards. Part 1 consists of triggering the individual to seek
food, and acquiring, preparing, and eating it. Part 2 consists of digesting it, i.e.,
transforming it into a state that the body can use (see Section 1, above).
Both parts are extremely complex, but Part 1 is by far the more so. We must
choose the food to buy, shop for it, store it, clean it, cook it, and serve it. We must
8
also choose and buy closets and a refrigerator to store it; sinks to wash it; stoves,
ovens, gas tops, microwaves, pots, pans, cake forms, pie dishes, utensils, mixers,
vegetable peelers and so on to prepare it; plates, bowls, platters, and utensils, to
serve it. We must earn money to buy the food and all the auxiliary items we have
mentioned, and those we have not mentioned. Earning money usually involves
various skills–not the least of them social–which must be acquired.
There is another fundamental difference between the two parts. Part 2 is
“hard-wired”: It works “automatically,” by mechanical, chemical, and electrical
means, with no conscious, voluntary component. Part 1 is precisely the opposite:
all conscious, all volitional. To start with, when the body runs short of the
required nutrients, it must be prompted to eat. Once this is done, the food must
be acquired, prepared, and eaten. Conceivably, parts of the process could be hard-
wired: A gauge could tell the brain when the stomach is empty; the eye and brain
could identify food, then send signals to the hand automatically to take it and
put it in the mouth. But it seems unlikely that acquiring the food and preparing
it, and earning the necessary money, could all be hard-wired.
How, then, does the process work? What drives it?
The answer is simple, even obvious: hunger. And, the other side of the same
coin: enjoyment of food.
Hunger does not mean an empty stomach. An empty stomach by itself will
not prompt us to eat. We need the pain or discomfort of hunger, and/or the
pleasure of food, to make us eat. Pain and pleasure depend on consciousness. If
you are not conscious, you cannot experience pain or pleasure. So consciousness
is an important component of the mechanism that supplies us with nutrients.
Moreover, it decouples the nutritive process into the two parts we have described:
until the food reaches the mouth, and afterwards.
Indeed, it does much, much more: The entire process of acquiring, preparing,
and serving food is decoupled into many small steps. Each step is conscious,
with a well-deÞned goal; it is motivated. Going to market, picking the items to
buy, standing in line at the check-out counter, bringing the items to your car,
unloading, putting in the refrigerator, all the myriad tasks involved in cooking,
all the myriad tasks involved in earning the money with which to buy the food,
all the myriad tasks involved in all stages of the process–all together, and each
one separately–are driven by hunger, through the medium of consciousness; they
are motivated.
More precisely, the experiences of hunger and food enjoyment are the overall,
macroscopic driving forces, like the desire to win in chess (Example iv above). The
9
thought process, which is the second component of consciousness (see Section
2, Item viii), translates this into many small tasks–making money, baking a
cake, and so on–each with its own driving force, like valuation-maximizing in
chess. And then volition–the third component of consciousness–comes into play,
enabling the individual actually to carry out these individual tasks.
It is important to note that while “hard-wired” processes like digestion may be
highly complex, they are fairly repetitive. Digestion works on the same materials,
in the same way, every day; there are few, if any, surprises. The processes of food
acquisition and preparation are much less repetitive; they require a good deal
of instantaneous adaptation to various different environments, environments that
may be unfamiliar. Consciousness is particularly important for motivating and
carrying out these non-repetitive tasks.
Finally, we remark that themechanisms provided by nature to facilitate eating–
hunger and the enjoyment of food–may sometimes “misÞre.” It is well known
that severely undernourished people whose hunger leads them to overeat may
well die as a consequence; there are documented cases of people who survived
the concentration camps during the Holocaust, only tragically to die in this way.
Even better known is that the enjoyment of food may cause people to overeat or
to eat foods that are not nutritious. While not immediately fatal like with the
concentration camps, this may nevertheless be detrimental to health; or at least,
serve no useful adaptive purpose.
(b) Sex. Biologists identify two basic drives in living organisms: nourishment
and reproduction.8 What we have said about food applies, mutatis mutandis, also
to sex. It is hunger and the enjoyment of food–not the need for nourishment!–
that makes people eat. Similarly, it is not the desire for offspring that makes
them have sex; it is the sex drive–the enjoyment of sex. Enjoyment is a function
of consciousness. You cannot enjoy if you are not conscious. Many people do
consciously want offspring, but that is not why they have sex.9
As with nourishment, the process of reproduction has several distinct parts:
(1) before the semen enters the woman’s body; (2) conception and pregnancy;
8It is interesting that in several places, the Talmudic literature identiÞes these two basic
drives. In the biblical verse relating how Joseph’s master, Potiphar, “left everything in Joseph’s
hands, except for the bread that he (Potiphar) eats” (Genesis 39, 6), the Midrash takes the
“bread” to mean Potiphar’s wife. And when Jethro’s daughters tell him that “an Egyptian man
saved us,” and Jethro says, “where is he? Call him and let him eat bread” (Exodus 2, 19-20),
the Midrash takes the “bread” to mean the daughters themselves.
9Thus, homosexuals will usually not have relations with persons of the opposite sex. When
they want offspring, they prefer adopting, or artiÞcial insemination.
10
and (3) childhood, when the offspring cannot fend for itself. The Þrst two parts
are decoupled by the sex drive. The second part, though highly complex, is hard-
wired; once sex has taken place, there is no conscious intervention until birth.
After birth, parental love takes over; like hunger and the sex drive, this depends
on consciousness. As with food, the Þrst and third parts of the process–which
are not hard-wired–split up into a myriad of distinct small steps, starting with
dating and earning the required money; each is conscious, each has a well-deÞned
goal, each is motivated.
Like with food, the hard-wired part of the process is fairly repetitive, the other
parts not.
Unlike food, sex is programmed to be proßigate. In a single season, a single
ßowering tree produces many hundreds of thousands of blossoms, and billions
of grains of pollen. It is doubtful if even one of these comes to fruition. In
each ejaculation there are hundreds of millions of sperms, at most one of which
is used. Many sexual episodes lead nowhere, many relationships lead nowhere,
many dates lead nowhere. The sex drive leads to many activities that have no
chance of producing offspring: sex with birth control, sex after the reproductive
age, homosexuality, masturbation, oral sex, bestiality, pornography, and so on.
Love and sex play dominant roles in advertising, literature, Þlm, music, painting,
photography, dance, almost all cultural activity. In the case of food, we used the
term “misÞre” to describe situations in which food does not provide nourishment.
In the case of sex, the corresponding situations are so ubiquitous that they must
be considered a part of the process.
(c) Pain. It has long been recognized that pain calls attention to something in
the body having gone wrong, so that it can be attended to. Again, pain depends
on consciousness; if you are not conscious, you cannot experience pain. Machines
cannot suffer.
As before, we have here a decoupling process. Pain motivates the individual to
seek medical or surgical treatment. Unlike with food and sex, though, the effect of
treatment is not entirely automatic; repeated intervention may be required. Pain
decouples the treatment process into many distinct small steps, motivating the
individual at each step to do what is required in order to alleviate his condition.
It, too, may “misÞre,” as when a medical or surgical treatment causes more pain
than what the patient can suffer.
To summarize: Consciousness enables the decoupling of highly complex,
non-repetitive tasks into many simpler tasks, mainly through the element of mo-
tivation.
11
4. How
This is the shortest of our sections: We have little to contribute on this score,
other than to say that the neurological phenomena that have been observed to be
associated with consciousness do not explain how it works; the “how” remains a
deep mystery.
One last remark is worth making. “How” questions are usually answered
by analogy with something else, with which we are familiar. For example, the
workings of the circulatory system are explained by analogy with plumbing. But
consciousness is unique; there is nothing else in the world that is even remotely
like it. Since there is nothing like it, what analogy can we use to explain it? And
if not by analogy, how else can it be “explained?”
12
Sunday, August 27, 2006
Suspicious Trading
Whispers of Mergers Set Off Suspicious Trading
By GRETCHEN MORGENSON
The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic problem.
It is against the law to trade on inside information about an imminent merger, of course.
But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.
The study, conducted for The New York Times by Measuredmarkets Inc., an analytical research firm in Toronto, scrutinized mergers with a value of $1 billion or more that were announced in the 12-month period that ended in early July. The firm analyzed the price, the total number of shares traded and the number of individual trades in each stock during the weeks leading up to the announcement and looked for large deviations from trading patterns going back as far as four years.
Although any number of factors can lead to spikes in trading, deviations of the kind observed by Measuredmarkets are among the data used by regulators to spot insider trading. Of the 90 big mergers in the period, shares of 37 target companies exhibited abnormal trading in the days and weeks before the deals were disclosed.
Christopher K. Thomas, a former analyst and stockbroker who founded Measuredmarkets in 1997, said that his company’s analysis led to the conclusion that the aberrant activities most likely involved insider trading. Measuredmarkets provides examples of unusual trading to institutions, individuals and a regulatory organization in Canada.
It is always possible that a company’s stock moves because of developments in a particular industry or business sector, or because a prominent newsletter, columnist or blogger has written something that could prompt investors to take action. But in the companies that were analyzed, no such influences seemed to be at work. The companies were not the subject of widely dispersed merger commentary during the periods of abnormal trading, nor did they make any announcements that would seem to explain the moves.
The analysis by The New York Times found that, in a handful of the mergers, significant progress toward a deal was being made on the days unusual trading occurred. For example, the day that four bidders were putting together buyout offers for Amegy Bancorp, a Houston bank company, trading in its stock quadrupled.
Attempts to quantify the amount of potential insider activity in deals have come up short in the past, in part because the regulators with access to detailed information do not release it. The Securities and Exchange Commission does not disclose, for example, the percentage of referrals it receives from exchanges that wind up as cases.
The S.E.C. would not comment on the study but said that it had looked at Measuredmarkets’ system and concluded that surveillance techniques of self-regulatory organizations like the New York Stock Exchange were more sophisticated.
Securities regulators, traders and academics agree that merger waves lead to more illicit trading on nonpublic information. In Britain, regulators have made insider trading a primary focus and have shifted their scrutiny to brokerage firms and institutional investors, rather than individuals, involved in mergers.
Like Measuredmarkets, the Financial Services Authority in British has found a pattern of stock trading ahead of mergers. In 2004, 29 percent of companies involved in mergers experienced abnormal trading before public announcements, according to a March 2006 study of large British companies subject to takeovers. In 2001, the comparable figure was 21 percent.
The British study compared the stocks’ price movements with previous returns, adjusted for overall market moves. The comparison period was 240 trading days, ending 10 days before the merger announcement.
In this country, the S.E.C. has focused more on individuals than on institutions in its investigations. And even though merger activity has rocketed in recent years, the number of its cases involving insider trading has held in a range of 40 to 59 annually since 2000, the S.E.C. said.
Some economists and academics assert that insider trading is essentially a victimless crime and therefore not worth deploying regulatory armies to battle. But there are losers, including small investors who miss out on gains, when such trading moves markets.
Moreover, many investors are troubled by what they now see as rampant insider trading, saying it fosters the perception that insiders can profit in the markets at the expense of outsiders.
“Martha Stewart got hurt very badly for something that happens every single day on Wall Street,” said Herbert A. Denton, president of Providence Capital, a money manager and an adviser to minority shareholders. “It’s a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the S.E.C. should get very, very serious and prosecute a lot of people or forget about it.”
Although Ms. Stewart was investigated for insider trading, she was found guilty of other related charges.
The S.E.C.’s handling of one insider-trading investigation is the subject of scrutiny by Congress after the firing last September of Gary J. Aguirre, a former staff attorney at the agency. Mr. Aguirre contends that his investigation into possible insider trading by Pequot Capital Management, a prominent hedge fund, was thwarted for political reasons by his superiors. He was fired after complaining, even though he had just received a merit pay increase.
Mergers and acquisitions present particularly rich opportunities for profiting on insider information, a violation of the securities laws written to keep all investors on a level playing field. That is why all those involved in corporate unions, from law firms to investment banks to those in between like printers, are supposed to keep quiet during the process.
Officials from the nation’s top securities regulators met on Aug. 18 to discuss emerging trends in insider trading, said Joseph J. Cella, chief of the office of market surveillance at the S.E.C. “We are certainly cognizant of the uptick in merger-and-acquisition activity,” he said.
The companies identified by Measuredmarkets represented many industries and received bids not only from corporate rivals, but also from private investor groups and management-led buyout teams. They included Amegy Bancorp, the subject of a $1.7 billion takeover announced last September by Zions Bancorp, the large Utah bank; CarrAmerica Realty, a real estate investment trust acquired for $5.6 billion by the private investment company Blackstone Group after a March announcement; Dex Media, a directory publisher whose $9.5 billion purchase by the R. H. Donnelley Corporation was disclosed in October; the IDX Systems Corporation, a health care systems company whose $1.2 billion acquisition by General Electric was announced in September; and Texas Regional Bancshares, which the Argentinian bank BBVA said it would acquire in June for nearly $2.2 billion.
In each of the five cases, the abnormal trading occurred during periods of significant behind-the-scenes progress in the mergers, as outlined by the companies themselves in regulatory filings long after the deals were struck.
In the Amegy bank deal, the volume of shares traded more than quadrupled on a day when four of the bank’s bidders were analyzing its financial records and preparing offers. Volume jumped in CarrAmerica’s shares on Feb. 17, the day the real estate investment trust struck a confidentiality agreement with a potential bidder and Goldman Sachs began providing the bidder with an analysis of CarrAmerica’s books.
Trading in Dex Media increased sharply last Sept. 14, the day that management, legal teams and financial advisers representing the company and Donnelley met. And the price and the number of shares traded in IDX jumped on Sept. 7, when its chief executive and a G.E. executive talked and G.E. agreed to increase its bid by 5 percent.
Officials at the companies said that they were unaware of unusual trading in advance of the deals and declined to speculate on reasons for the action.
Measuredmarkets has no way to identify who might have been behind the anomalous trading. But a few of the deals that it flagged are already under scrutiny by regulators.
In June, for example, the S.E.C. froze $1 million in trading gains of South American investors who profited on the June 12 buyout announcement of the Maverick Tube Corporation, an oil equipment maker, by Tenaris SA, a steel company with headquarters in Luxembourg. Anadarko Petroleum’s June bid for the Kerr-McGee Corporation, a smaller rival, is also being investigated, according to a July 13 report in The Houston Chronicle; the transaction closed in August. The S.E.C., following its usual practice, declined to comment on the report.
The takeover crowd includes corporations, management-led buyout teams as well as private equity firms, which represent wealthy private investors. Companies’ directors are reaching out to many potential bidders these days to ensure shareholders get the best price. In the process, they are expanding the number of people with knowledge of the deals.
Still, it is undeniable that brokerage firms, with their varied businesses all under one roof, remain particularly well-positioned to capitalize on inside information. Not only do these firms advise buyers and sellers in mergers, giving them immense access, they also have proprietary trading desks that invest the firm’s money in stocks and other securities, money management units that invest for clients and trading desks that profit mightily by executing trades for hedge funds.
Brokerage firms contend that barriers within their operations keep deal information from seeping out. But regulators at the Financial Services Authority in Britain are challenging these assertions.
In a July 7 speech, Hector Sants, managing director of wholesale and institutional markets at the F.S.A., described why his focus was shifting to institutions. “Our spotlight will shine in particular on relationships between investment banks and their clients,” he said, “because we believe the risk of market abuse is highest where a client can be made an insider on a forthcoming deal.”
The fast and furious pace of deals this year is increasing the opportunities for mischief. In each of the last three months, according to Thomson Financial, the value of announced mergers has exceeded $100 billion — the longest stretch of such volume since 2000.
Although the number of deals in the first seven months of this year slipped to 685 from 763 in the same period in 2005, the dollar amount of transactions rose 31 percent in that time, Thomson Financial said.
Regulators on the front lines also seem to be spotting more irregularities. Officials in the market surveillance unit of New York Stock Exchange Regulation Inc. have made more referrals to the S.E.C. this year than they did in the comparable period last year. As of last month, those regulators had referred 76 cases for possible investigation, up from 60 a year earlier. In 2005, the surveillance unit referred 111 cases, 63 percent more than the previous year.
The number of insider-trading cases filed by the S.E.C., though, has been relatively static. Walter G. Ricciardi, deputy director of enforcement at the S.E.C., said that 9 percent of the cases filed by the commission since Feb. 1 have been based on insider trading, which can encompass merger or any other news that would affect a company’s market price. On a percentage basis, the cases have ranged from 7 percent to 12 percent of the agency’s total since 2000.
“The yield is less probably than in comparable areas,” Mr. Ricciardi explained of insider-trading inquiries. “A lot of times the trading may look like something crazy, but you’ve got to have evidence.”
Recent cases have centered on some relatively small players. In late December, for example, the S.E.C. sued Gary D. Herwitz, an accountant, and Tracey A. Stanyer, an executive vice president at Sirius Satellite Radio, for trading ahead of news in late 2004 that Sirius was going to award a $500 million contract to Howard Stern, a radio show host.
Each settled with the S.E.C., without admitting or denying wrongdoing. Mr. Herwitz paid $52,000. Mr. Stanyer paid $35,000 and was barred from serving as officer or director of a public company. Mr. Herwitz pleaded guilty to insider trading in federal court in Brooklyn and was sentenced to two years’ probation and a $20,000 fine earlier this year.
In May, the S.E.C. sued Jason Smith, a letter carrier in New Jersey, contending he leaked grand jury information to a 14-person ring that included low-level employees of Merrill Lynch and Goldman Sachs, a worker for a printing company and a retired seamstress in Croatia. Regulators say that scheme generated $6.7 million in profits.
What about cases involving larger or more sophisticated investors? “We certainly see institutional-type accounts that have come into the market with extraordinarily good timing on a repeat basis; we have investigated those,” said Mr. Cella of the S.E.C. “But to get the evidence to prove a violation of the statute under which we allege insider trading is difficult.”
And that is true whether the case involves individuals or institutions.
The British securities regulator, for its part, has cited the possibility of hedge funds profiting on insider information as a foremost concern. David Cliffe, a press officer at the F.S.A., said that hedge funds must be keenly watched because they have extensive and close relationships with investment banks that are in a position to provide nonpublic information in exchange for lucrative trading commissions.
Spotting abnormal trading is far simpler than bringing a successful insider-trading prosecution, as Mr. Cella of the S.E.C. noted. Still, the trading anomalies identified by Measuredmarkets are intriguing.
Consider Koch Industries’ bid for Georgia-Pacific on Nov. 13. Senior officials of the companies first met to discuss a merger on Oct. 5. Koch Industries proposed to limit its purchase to certain Georgia-Pacific assets after the company, which makes forest products, had spun off other businesses to the public. Subsequent company filings noted that Danny W. Huff, Georgia-Pacific’s chief financial officer, told Koch officials on Oct. 7 that such a deal would “probably not” be acceptable to his company’s board.
Merger talks continued through October and into November. Both sides conducted corporate analyses — known as due diligence — from Nov. 8-11. Koch Industries’ board voted to approve a bid on Nov. 10.
That day, volume in Georgia-Pacific shares jumped 37 percent above its 2005 average and the number of trades in the stock rose significantly as well, Measuredmarkets found. On Friday, Nov. 11, volume increased yet 66 percent more from the previous day’s high level. Georgia-Pacific shares rose 5.5 percent over the period. The company made no announcements either day, and the overall market rose 1.3 percent over the two days.
On Sunday, Nov. 13, Koch Industries announced that it would pay $21 billion for Georgia-Pacific, or $48 a share, a 39 percent premium to the closing price the previous Friday. Anyone who bought Georgia-Pacific shares on either Nov. 10 or Nov. 11 stood to gain 40 percent in just a few days.
A spokeswoman for Koch Industries did not return phone calls seeking comment.
Another case in point is the surprise merger, announced May 7, between the Wachovia Corporation, a bank holding company based in North Carolina, and Golden West Financial, a West Coast savings and loan. This time the unusual trading showed up both in the stock of Golden West Financial and in its call options.
Traders buy call options, giving them the right to purchase shares of the underlying company at a set price within a specified period, when they expect the stock to rise. Options provide the potential for a sharp profit because each option represents 100 shares.
On May 3, the number of Golden West’s call options that changed hands was triple the daily average. Subsequent filings show that was the day Wachovia’s board met to review a possible acquisition of Golden West and the day after Golden West’s board met to weigh the bid.
Officials at Wachovia and Golden West said they did not know why the volume rose.
The probability of detection appears small, based on the number of cases brought in the United States, and the penalty for insider trading is often a negotiated settlement that may not involve much more than giving up the gains.
An example is the S.E.C.’s conclusion of a case in 2004 with an employee of Fleet Boston. The employee, the S.E.C. said, made $473,000 by trading on knowledge of the bank’s buyout by Bank of America. The commission exacted $525,000 in a settlement, which included his profits, prejudgment interest of $1,576.67 and a civil penalty of $51,842.36.
The penalty portion of such settlements, Mr. Ricciardi said, typically equals the illegal profits. The Insider Trading Sanctions Act of 1984 allows for a penalty of up to three times those profits.
The S.E.C. dispenses a reward, up to 10 percent of the penalties, Mr. Ricciardi said, to tipsters whose information leads to a successful case.
When stocks gyrate because nonpublic information about deals has leaked out, many people are harmed. The most affected are those who sell shares in the company before it is taken over at a significant premium. An investor who sold Georgia-Pacific shares on Nov. 9, just before the unusual trading, missed a 46 percent gain. Those who sold the Andrx Corporation, just before unusual trading began last February missed, a 36 percent gain.
Others also lose. The company that makes the acquisition, for example, may wind up paying more. Investment advisers typically include a company’s target share price and total market capitalization in the analysis of what an acquirer should be willing to pay. If a stock rises in the days or weeks during negotiations, the purchase price could be driven higher. A rising price could even scuttle a merger if the deal becomes too costly to the prospective buyer.
Jenny Anderson contributed reporting for this article, and Donna Anderson contributed research.
By GRETCHEN MORGENSON
The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic problem.
It is against the law to trade on inside information about an imminent merger, of course.
But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.
The study, conducted for The New York Times by Measuredmarkets Inc., an analytical research firm in Toronto, scrutinized mergers with a value of $1 billion or more that were announced in the 12-month period that ended in early July. The firm analyzed the price, the total number of shares traded and the number of individual trades in each stock during the weeks leading up to the announcement and looked for large deviations from trading patterns going back as far as four years.
Although any number of factors can lead to spikes in trading, deviations of the kind observed by Measuredmarkets are among the data used by regulators to spot insider trading. Of the 90 big mergers in the period, shares of 37 target companies exhibited abnormal trading in the days and weeks before the deals were disclosed.
Christopher K. Thomas, a former analyst and stockbroker who founded Measuredmarkets in 1997, said that his company’s analysis led to the conclusion that the aberrant activities most likely involved insider trading. Measuredmarkets provides examples of unusual trading to institutions, individuals and a regulatory organization in Canada.
It is always possible that a company’s stock moves because of developments in a particular industry or business sector, or because a prominent newsletter, columnist or blogger has written something that could prompt investors to take action. But in the companies that were analyzed, no such influences seemed to be at work. The companies were not the subject of widely dispersed merger commentary during the periods of abnormal trading, nor did they make any announcements that would seem to explain the moves.
The analysis by The New York Times found that, in a handful of the mergers, significant progress toward a deal was being made on the days unusual trading occurred. For example, the day that four bidders were putting together buyout offers for Amegy Bancorp, a Houston bank company, trading in its stock quadrupled.
Attempts to quantify the amount of potential insider activity in deals have come up short in the past, in part because the regulators with access to detailed information do not release it. The Securities and Exchange Commission does not disclose, for example, the percentage of referrals it receives from exchanges that wind up as cases.
The S.E.C. would not comment on the study but said that it had looked at Measuredmarkets’ system and concluded that surveillance techniques of self-regulatory organizations like the New York Stock Exchange were more sophisticated.
Securities regulators, traders and academics agree that merger waves lead to more illicit trading on nonpublic information. In Britain, regulators have made insider trading a primary focus and have shifted their scrutiny to brokerage firms and institutional investors, rather than individuals, involved in mergers.
Like Measuredmarkets, the Financial Services Authority in British has found a pattern of stock trading ahead of mergers. In 2004, 29 percent of companies involved in mergers experienced abnormal trading before public announcements, according to a March 2006 study of large British companies subject to takeovers. In 2001, the comparable figure was 21 percent.
The British study compared the stocks’ price movements with previous returns, adjusted for overall market moves. The comparison period was 240 trading days, ending 10 days before the merger announcement.
In this country, the S.E.C. has focused more on individuals than on institutions in its investigations. And even though merger activity has rocketed in recent years, the number of its cases involving insider trading has held in a range of 40 to 59 annually since 2000, the S.E.C. said.
Some economists and academics assert that insider trading is essentially a victimless crime and therefore not worth deploying regulatory armies to battle. But there are losers, including small investors who miss out on gains, when such trading moves markets.
Moreover, many investors are troubled by what they now see as rampant insider trading, saying it fosters the perception that insiders can profit in the markets at the expense of outsiders.
“Martha Stewart got hurt very badly for something that happens every single day on Wall Street,” said Herbert A. Denton, president of Providence Capital, a money manager and an adviser to minority shareholders. “It’s a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the S.E.C. should get very, very serious and prosecute a lot of people or forget about it.”
Although Ms. Stewart was investigated for insider trading, she was found guilty of other related charges.
The S.E.C.’s handling of one insider-trading investigation is the subject of scrutiny by Congress after the firing last September of Gary J. Aguirre, a former staff attorney at the agency. Mr. Aguirre contends that his investigation into possible insider trading by Pequot Capital Management, a prominent hedge fund, was thwarted for political reasons by his superiors. He was fired after complaining, even though he had just received a merit pay increase.
Mergers and acquisitions present particularly rich opportunities for profiting on insider information, a violation of the securities laws written to keep all investors on a level playing field. That is why all those involved in corporate unions, from law firms to investment banks to those in between like printers, are supposed to keep quiet during the process.
Officials from the nation’s top securities regulators met on Aug. 18 to discuss emerging trends in insider trading, said Joseph J. Cella, chief of the office of market surveillance at the S.E.C. “We are certainly cognizant of the uptick in merger-and-acquisition activity,” he said.
The companies identified by Measuredmarkets represented many industries and received bids not only from corporate rivals, but also from private investor groups and management-led buyout teams. They included Amegy Bancorp, the subject of a $1.7 billion takeover announced last September by Zions Bancorp, the large Utah bank; CarrAmerica Realty, a real estate investment trust acquired for $5.6 billion by the private investment company Blackstone Group after a March announcement; Dex Media, a directory publisher whose $9.5 billion purchase by the R. H. Donnelley Corporation was disclosed in October; the IDX Systems Corporation, a health care systems company whose $1.2 billion acquisition by General Electric was announced in September; and Texas Regional Bancshares, which the Argentinian bank BBVA said it would acquire in June for nearly $2.2 billion.
In each of the five cases, the abnormal trading occurred during periods of significant behind-the-scenes progress in the mergers, as outlined by the companies themselves in regulatory filings long after the deals were struck.
In the Amegy bank deal, the volume of shares traded more than quadrupled on a day when four of the bank’s bidders were analyzing its financial records and preparing offers. Volume jumped in CarrAmerica’s shares on Feb. 17, the day the real estate investment trust struck a confidentiality agreement with a potential bidder and Goldman Sachs began providing the bidder with an analysis of CarrAmerica’s books.
Trading in Dex Media increased sharply last Sept. 14, the day that management, legal teams and financial advisers representing the company and Donnelley met. And the price and the number of shares traded in IDX jumped on Sept. 7, when its chief executive and a G.E. executive talked and G.E. agreed to increase its bid by 5 percent.
Officials at the companies said that they were unaware of unusual trading in advance of the deals and declined to speculate on reasons for the action.
Measuredmarkets has no way to identify who might have been behind the anomalous trading. But a few of the deals that it flagged are already under scrutiny by regulators.
In June, for example, the S.E.C. froze $1 million in trading gains of South American investors who profited on the June 12 buyout announcement of the Maverick Tube Corporation, an oil equipment maker, by Tenaris SA, a steel company with headquarters in Luxembourg. Anadarko Petroleum’s June bid for the Kerr-McGee Corporation, a smaller rival, is also being investigated, according to a July 13 report in The Houston Chronicle; the transaction closed in August. The S.E.C., following its usual practice, declined to comment on the report.
The takeover crowd includes corporations, management-led buyout teams as well as private equity firms, which represent wealthy private investors. Companies’ directors are reaching out to many potential bidders these days to ensure shareholders get the best price. In the process, they are expanding the number of people with knowledge of the deals.
Still, it is undeniable that brokerage firms, with their varied businesses all under one roof, remain particularly well-positioned to capitalize on inside information. Not only do these firms advise buyers and sellers in mergers, giving them immense access, they also have proprietary trading desks that invest the firm’s money in stocks and other securities, money management units that invest for clients and trading desks that profit mightily by executing trades for hedge funds.
Brokerage firms contend that barriers within their operations keep deal information from seeping out. But regulators at the Financial Services Authority in Britain are challenging these assertions.
In a July 7 speech, Hector Sants, managing director of wholesale and institutional markets at the F.S.A., described why his focus was shifting to institutions. “Our spotlight will shine in particular on relationships between investment banks and their clients,” he said, “because we believe the risk of market abuse is highest where a client can be made an insider on a forthcoming deal.”
The fast and furious pace of deals this year is increasing the opportunities for mischief. In each of the last three months, according to Thomson Financial, the value of announced mergers has exceeded $100 billion — the longest stretch of such volume since 2000.
Although the number of deals in the first seven months of this year slipped to 685 from 763 in the same period in 2005, the dollar amount of transactions rose 31 percent in that time, Thomson Financial said.
Regulators on the front lines also seem to be spotting more irregularities. Officials in the market surveillance unit of New York Stock Exchange Regulation Inc. have made more referrals to the S.E.C. this year than they did in the comparable period last year. As of last month, those regulators had referred 76 cases for possible investigation, up from 60 a year earlier. In 2005, the surveillance unit referred 111 cases, 63 percent more than the previous year.
The number of insider-trading cases filed by the S.E.C., though, has been relatively static. Walter G. Ricciardi, deputy director of enforcement at the S.E.C., said that 9 percent of the cases filed by the commission since Feb. 1 have been based on insider trading, which can encompass merger or any other news that would affect a company’s market price. On a percentage basis, the cases have ranged from 7 percent to 12 percent of the agency’s total since 2000.
“The yield is less probably than in comparable areas,” Mr. Ricciardi explained of insider-trading inquiries. “A lot of times the trading may look like something crazy, but you’ve got to have evidence.”
Recent cases have centered on some relatively small players. In late December, for example, the S.E.C. sued Gary D. Herwitz, an accountant, and Tracey A. Stanyer, an executive vice president at Sirius Satellite Radio, for trading ahead of news in late 2004 that Sirius was going to award a $500 million contract to Howard Stern, a radio show host.
Each settled with the S.E.C., without admitting or denying wrongdoing. Mr. Herwitz paid $52,000. Mr. Stanyer paid $35,000 and was barred from serving as officer or director of a public company. Mr. Herwitz pleaded guilty to insider trading in federal court in Brooklyn and was sentenced to two years’ probation and a $20,000 fine earlier this year.
In May, the S.E.C. sued Jason Smith, a letter carrier in New Jersey, contending he leaked grand jury information to a 14-person ring that included low-level employees of Merrill Lynch and Goldman Sachs, a worker for a printing company and a retired seamstress in Croatia. Regulators say that scheme generated $6.7 million in profits.
What about cases involving larger or more sophisticated investors? “We certainly see institutional-type accounts that have come into the market with extraordinarily good timing on a repeat basis; we have investigated those,” said Mr. Cella of the S.E.C. “But to get the evidence to prove a violation of the statute under which we allege insider trading is difficult.”
And that is true whether the case involves individuals or institutions.
The British securities regulator, for its part, has cited the possibility of hedge funds profiting on insider information as a foremost concern. David Cliffe, a press officer at the F.S.A., said that hedge funds must be keenly watched because they have extensive and close relationships with investment banks that are in a position to provide nonpublic information in exchange for lucrative trading commissions.
Spotting abnormal trading is far simpler than bringing a successful insider-trading prosecution, as Mr. Cella of the S.E.C. noted. Still, the trading anomalies identified by Measuredmarkets are intriguing.
Consider Koch Industries’ bid for Georgia-Pacific on Nov. 13. Senior officials of the companies first met to discuss a merger on Oct. 5. Koch Industries proposed to limit its purchase to certain Georgia-Pacific assets after the company, which makes forest products, had spun off other businesses to the public. Subsequent company filings noted that Danny W. Huff, Georgia-Pacific’s chief financial officer, told Koch officials on Oct. 7 that such a deal would “probably not” be acceptable to his company’s board.
Merger talks continued through October and into November. Both sides conducted corporate analyses — known as due diligence — from Nov. 8-11. Koch Industries’ board voted to approve a bid on Nov. 10.
That day, volume in Georgia-Pacific shares jumped 37 percent above its 2005 average and the number of trades in the stock rose significantly as well, Measuredmarkets found. On Friday, Nov. 11, volume increased yet 66 percent more from the previous day’s high level. Georgia-Pacific shares rose 5.5 percent over the period. The company made no announcements either day, and the overall market rose 1.3 percent over the two days.
On Sunday, Nov. 13, Koch Industries announced that it would pay $21 billion for Georgia-Pacific, or $48 a share, a 39 percent premium to the closing price the previous Friday. Anyone who bought Georgia-Pacific shares on either Nov. 10 or Nov. 11 stood to gain 40 percent in just a few days.
A spokeswoman for Koch Industries did not return phone calls seeking comment.
Another case in point is the surprise merger, announced May 7, between the Wachovia Corporation, a bank holding company based in North Carolina, and Golden West Financial, a West Coast savings and loan. This time the unusual trading showed up both in the stock of Golden West Financial and in its call options.
Traders buy call options, giving them the right to purchase shares of the underlying company at a set price within a specified period, when they expect the stock to rise. Options provide the potential for a sharp profit because each option represents 100 shares.
On May 3, the number of Golden West’s call options that changed hands was triple the daily average. Subsequent filings show that was the day Wachovia’s board met to review a possible acquisition of Golden West and the day after Golden West’s board met to weigh the bid.
Officials at Wachovia and Golden West said they did not know why the volume rose.
The probability of detection appears small, based on the number of cases brought in the United States, and the penalty for insider trading is often a negotiated settlement that may not involve much more than giving up the gains.
An example is the S.E.C.’s conclusion of a case in 2004 with an employee of Fleet Boston. The employee, the S.E.C. said, made $473,000 by trading on knowledge of the bank’s buyout by Bank of America. The commission exacted $525,000 in a settlement, which included his profits, prejudgment interest of $1,576.67 and a civil penalty of $51,842.36.
The penalty portion of such settlements, Mr. Ricciardi said, typically equals the illegal profits. The Insider Trading Sanctions Act of 1984 allows for a penalty of up to three times those profits.
The S.E.C. dispenses a reward, up to 10 percent of the penalties, Mr. Ricciardi said, to tipsters whose information leads to a successful case.
When stocks gyrate because nonpublic information about deals has leaked out, many people are harmed. The most affected are those who sell shares in the company before it is taken over at a significant premium. An investor who sold Georgia-Pacific shares on Nov. 9, just before the unusual trading, missed a 46 percent gain. Those who sold the Andrx Corporation, just before unusual trading began last February missed, a 36 percent gain.
Others also lose. The company that makes the acquisition, for example, may wind up paying more. Investment advisers typically include a company’s target share price and total market capitalization in the analysis of what an acquirer should be willing to pay. If a stock rises in the days or weeks during negotiations, the purchase price could be driven higher. A rising price could even scuttle a merger if the deal becomes too costly to the prospective buyer.
Jenny Anderson contributed reporting for this article, and Donna Anderson contributed research.
Monday, August 21, 2006
Why the Rich Get Richer
by Robert Kiyosaki
How to Profit From a Cooling Real Estate Market
All over the U.S. there are stories of a rise in real estate foreclosures. Many people who took those exotic mortgages -- borrowing 125% of home value or choosing adjustable-rate mortgages -- are struggling to make their payments, and some aren't making it.
Also, a glut of new property supply, especially condominiums, is coming on line. A friend of mine, a very seasoned real estate investor, says in San Diego County, once one of the hottest real estate markets in the country, thousands of new condominiums are getting ready to come to market -- just as the market softens. He estimates that over 12,000 new units are coming on line, and the market, at the best of times, can only absorb about 1,000 condominiums a year. If he's correct, that means 12 years of supply will be ready for market in the next year.
As interest rates rise and the number of eager new buyers begins to diminish, adding supply to an already bad real estate market for sellers may mean a very good market for buyers and for property investors.
Hungry Alligators
The people who are in the most trouble are flippers -- people who aim to buy low and sell high within a short space of time. Many were buying condominiums off the plans, which means the projects were yet to be built, in the hopes that when the homes were completed, they would sell for a tidy profit. The trouble is many of these flippers, lured into the market by stories of people making a huge killing earlier with a similar strategy, are now the ones to be slaughtered. Now, they either lose their deposit or have to cough up the money for the purchase in the hopes there's a greater fool than they were somewhere out there real estate.
If you recall, the same thing happened around the year 2000 as amateurs jumped into the stock market, buying up tech stocks or any IPO with a dot-com after the company name.
In the coming months, I predict we'll see an increase in people dumping real estate they can't afford. They'll be forced to sell because they'll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators -- if you can't afford to feed the property every month, it eats you.
I know of one so-called real estate investor (and I prefer to call people like him speculators rather than investors) who has three homes he thought he could flip for a profit -- but he priced them too high. Now, $7,500 comes out of his pocket every month to feed the negative-cash-flow alligators. The problem is, he and his wife don't earn that much a month. Their three alligators are literally eating them out of house and home, consuming the profits they made from other flips -- and their savings.
To add more pain to the misery, they still have to pay the capital-gain taxes they made from their previous successful flips. They're toast. The alligators are eating them alive. They can't afford to feed them, and they can't afford to sell them because the prices they paid for these alligators are more than they're worth today. And this is only one story -- out of who knows how many. Over the next couple of years, keep your eyes open for some great bargains.
It's Time for the Pros
Some people say we're now entering a bad real estate market. I disagree. I think we're entering a great market. A bad one is when amateur investors become real estate experts and they bid up prices. They make housing expensive for homeowners, often adding little to no value to the property. They simply muddy the waters and make a valuable investment, a home, expensive.
Now, I must admit, I sometimes do buy to flip, so I can't be too critical. Yet it's the amateurs who come late to the party -- and who eventually donate their money back to the professionals. What I'm saying is: Now is the time to turn pro. Now is not the time to be an amateur. It's the amateurs who jump in when the market is hot. It's the professional who comes in when it's cooling down. Get the message?
When the red-hot bull market of real estate was beginning to overheat, you didn't have time to make considered decisions. Sellers were receiving multiple, over-asking-price offers. In a bull market, you had to be quick, have money, and be a little foolish. Now that the market is cooling down, sellers are a little bit more humble. You have more time and can do your due diligence carefully. You can negotiate better terms and make a better deal, especially if the seller has his leg inside an alligator's jaws.
Bad News That's Good
But don't be in too much of a hurry. I think we still have some bad news yet to come -- and I believe it may come from the bond market. I suspect that many of our foreign investors who have been buying our debt may be becoming more cautious about investing in American assets, especially U.S. bonds. Many foreign bankers may be having doubts about the U.S. government paying the interest on our debt. In other words, many investors will be moving increasingly out of their cash into tangible assets such as gold, silver, and other metals. Again, this is only a suspicion. We should know more by September of this year.
If investors stop buying U.S. government debt, who knows what might happen? The U.S. may need to raise interest rates even higher, which will drive home values down even further. So be patient, keep looking at real estate, but keep your hand on your wallet (unless of course you find a seller with a really mean alligator eating him alive).
A year ago, I sent out a warning to investors, especially flippers, to cash out quickly. I received a lot of irate e-mails from people who thought I was turning on them. They thought I was spreading bad news. Little did they know that by forecasting a real estate downturn, I was spreading good news -- good news for real investors and bad news for amateur alligator wrestlers.
Recent ColumnsGo
Forth and Multiply -- Your MoneyTuesday, August 22, 2006Lazy People Don't Get RichTuesday, August 8, 2006Bet on Gold, Not on Funny MoneyTuesday, July 25, 2006Why the Rich Get Richer ArchivesDiscuss this column on our message boards
More From Robert Kiyosaki
Thinking of Quitting Your Job?
Want to start a business but afraid of failing? Robert Kiyosaki shares his successes and failures to illustrate 10 key lessons for entrepreneurs.
Robert Kiyosaki, author of the best-seller Rich Dad Poor Dad, quit his job at age 31 -- and he's never looked back.
Before you do something stupid, read this book. www.richdad.com
How to Profit From a Cooling Real Estate Market
All over the U.S. there are stories of a rise in real estate foreclosures. Many people who took those exotic mortgages -- borrowing 125% of home value or choosing adjustable-rate mortgages -- are struggling to make their payments, and some aren't making it.
Also, a glut of new property supply, especially condominiums, is coming on line. A friend of mine, a very seasoned real estate investor, says in San Diego County, once one of the hottest real estate markets in the country, thousands of new condominiums are getting ready to come to market -- just as the market softens. He estimates that over 12,000 new units are coming on line, and the market, at the best of times, can only absorb about 1,000 condominiums a year. If he's correct, that means 12 years of supply will be ready for market in the next year.
As interest rates rise and the number of eager new buyers begins to diminish, adding supply to an already bad real estate market for sellers may mean a very good market for buyers and for property investors.
Hungry Alligators
The people who are in the most trouble are flippers -- people who aim to buy low and sell high within a short space of time. Many were buying condominiums off the plans, which means the projects were yet to be built, in the hopes that when the homes were completed, they would sell for a tidy profit. The trouble is many of these flippers, lured into the market by stories of people making a huge killing earlier with a similar strategy, are now the ones to be slaughtered. Now, they either lose their deposit or have to cough up the money for the purchase in the hopes there's a greater fool than they were somewhere out there real estate.
If you recall, the same thing happened around the year 2000 as amateurs jumped into the stock market, buying up tech stocks or any IPO with a dot-com after the company name.
In the coming months, I predict we'll see an increase in people dumping real estate they can't afford. They'll be forced to sell because they'll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators -- if you can't afford to feed the property every month, it eats you.
I know of one so-called real estate investor (and I prefer to call people like him speculators rather than investors) who has three homes he thought he could flip for a profit -- but he priced them too high. Now, $7,500 comes out of his pocket every month to feed the negative-cash-flow alligators. The problem is, he and his wife don't earn that much a month. Their three alligators are literally eating them out of house and home, consuming the profits they made from other flips -- and their savings.
To add more pain to the misery, they still have to pay the capital-gain taxes they made from their previous successful flips. They're toast. The alligators are eating them alive. They can't afford to feed them, and they can't afford to sell them because the prices they paid for these alligators are more than they're worth today. And this is only one story -- out of who knows how many. Over the next couple of years, keep your eyes open for some great bargains.
It's Time for the Pros
Some people say we're now entering a bad real estate market. I disagree. I think we're entering a great market. A bad one is when amateur investors become real estate experts and they bid up prices. They make housing expensive for homeowners, often adding little to no value to the property. They simply muddy the waters and make a valuable investment, a home, expensive.
Now, I must admit, I sometimes do buy to flip, so I can't be too critical. Yet it's the amateurs who come late to the party -- and who eventually donate their money back to the professionals. What I'm saying is: Now is the time to turn pro. Now is not the time to be an amateur. It's the amateurs who jump in when the market is hot. It's the professional who comes in when it's cooling down. Get the message?
When the red-hot bull market of real estate was beginning to overheat, you didn't have time to make considered decisions. Sellers were receiving multiple, over-asking-price offers. In a bull market, you had to be quick, have money, and be a little foolish. Now that the market is cooling down, sellers are a little bit more humble. You have more time and can do your due diligence carefully. You can negotiate better terms and make a better deal, especially if the seller has his leg inside an alligator's jaws.
Bad News That's Good
But don't be in too much of a hurry. I think we still have some bad news yet to come -- and I believe it may come from the bond market. I suspect that many of our foreign investors who have been buying our debt may be becoming more cautious about investing in American assets, especially U.S. bonds. Many foreign bankers may be having doubts about the U.S. government paying the interest on our debt. In other words, many investors will be moving increasingly out of their cash into tangible assets such as gold, silver, and other metals. Again, this is only a suspicion. We should know more by September of this year.
If investors stop buying U.S. government debt, who knows what might happen? The U.S. may need to raise interest rates even higher, which will drive home values down even further. So be patient, keep looking at real estate, but keep your hand on your wallet (unless of course you find a seller with a really mean alligator eating him alive).
A year ago, I sent out a warning to investors, especially flippers, to cash out quickly. I received a lot of irate e-mails from people who thought I was turning on them. They thought I was spreading bad news. Little did they know that by forecasting a real estate downturn, I was spreading good news -- good news for real investors and bad news for amateur alligator wrestlers.
Recent ColumnsGo
Forth and Multiply -- Your MoneyTuesday, August 22, 2006Lazy People Don't Get RichTuesday, August 8, 2006Bet on Gold, Not on Funny MoneyTuesday, July 25, 2006Why the Rich Get Richer ArchivesDiscuss this column on our message boards
More From Robert Kiyosaki
Thinking of Quitting Your Job?
Want to start a business but afraid of failing? Robert Kiyosaki shares his successes and failures to illustrate 10 key lessons for entrepreneurs.
Robert Kiyosaki, author of the best-seller Rich Dad Poor Dad, quit his job at age 31 -- and he's never looked back.
Before you do something stupid, read this book. www.richdad.com
Saturday, August 12, 2006
Latin America Sustaining The US Debt
BY R G PAGES—staff writer—
INSTEAD of serving to protect the population the current economic model of the Latin America and the Caribbean is forcing them to emigrate.
For experts meeting at the 7th International Conference on Globalization and the Problems of Development in Havana, the region’s principal export line is that of persons and large-scale emigration to the developed nations.
With the neoliberal reforms of the 1990s exports grew in Latin America, but not on the basis of the development of national industries.
The current model has seen a reduction in employment, increased emigration and a lack of growth overall in its Gross Domestic Product (GDP).
This is a notable paradox because a growth in exports should signify a higher GDP and, with a few exceptions, this is not occurring. Mexican expert Arturo Huerta reasoned that the internal Latin America markets are still being restricted. Governments are adopting policies of cutting back on inflation and public spending and not extending the infrastructure of works to the benefit of the population
Demand and wages are being contracted in defense of external interests, noted Huerta, a professor at the Autonomous University of Mexico.
He analyzed what happens with nations dependent on the export of their mining products. Gold has been rising in price since 2001, associated with insecurity on the US stock market, of the dollar and the behavior of the economy.
Thus gold is presently extremely profitable, because foreign investors in gold mines do not pay taxes on profits or aggregate value and thus the governments of countries with reserves of this important natural resource receive no contribution to their GDP.
As gold extraction requires high technology. Investment in the sector does not increase employment. By not paying taxes, foreign investments give nothing to the country owning that natural resource. Thus gold exports increase but the GDP does not.
Remittances entering the countries of the region have grown and now represent the second largest entry of capital in global form. However, one cannot say that these remittances have a positive impact, because it should be the function of national economies to improve the populations’ living standards.
PERVERSE TRANSFER
Jaime Stay, a professor at Mexico’s Puebla University, believes that there is a very close relationship between the flight of capital, external debt and the functioning of the US economy.
The US economy acts like a black hole by attracting large volumes of capital from the rest of the world. Capital enters the Latin American region in the form of loans or bank credits and simultaneously produces the flight of that capital toward the developed nations, essentially the United States.
The exit of capital can assume many forms. One of them is related to the corruption involved in a large part Latin American governmental dealings. There are daily examples of how corruption has come down to setting up bank accounts elsewhere, such as in tax havens.
Capital flight is accompanied by another phenomenon, which is not strictly the flight of capital abroad, but appears in the so-called net transfer of resources. It is a serious problem, because the net income from capital is less than the net payment that has to be made for that income at a previous point.
Jaime Stay exposed the fact that the exit of profits without interest payments reaches a higher total than that of capital income.
This phenomenon, which was apparent in Latin America during the external debt crisis of the 1980s, has reappeared with absolute totals larger than those of that decade. The exit of profits has grown steadily year after year up until 2004.
“We have a net transfer of capital from the underdeveloped countries, which cannot confront the gravest problems impeding their development, to nations of advanced capital – starting with the US economy,” Stay affirmed.
It is a perverse transfer. The less developed countries are constantly contributing to the developed ones, in an unjust relationship that might well date back to colonial times. It is ethically unjustifiable when we are supposedly living in a world in which opportunities for everyone should be extended.
SNOWBALLING
Claudio Katz, a professor at Buenos Aires University, noted that the monetary, credit and social policy of every country in the region is subordinated to what the International Monetary Fund imposes on them in order to meet their external debts.
He described how in the Argentine case, the way in which the external debt is being discussed at the moment is going to bring problems, although the government is conducting itself with more dignity and a taking up a more confrontational position with the IMF.
Katz believes that the Argentine government initiated negotiations on its debt erroneously, by acknowledging that it exists, when it is known that it is a fraudulent debt and very much in question.
The Buenos Aires professor warned against reassuming the system of repaying the external debt in the form of bonds, given that, in the long term, this generates a fiscal surplus for decades in order to be able to price new bonds emitted. Having a fiscal surplus, he added, means reducing social spending on education and housing.
“Apparently we are easing a problem without foreseeing that huge snowball that is indebtedness,” Katz explained.
Brazilian professor Theolonio dos Santos, from the Fluminense University of Rio de Janeiro, similarly analyzed the problem of the flight of capital from Latin America to the developed countries, again essentially to the United States.
He gave this example: a Latin American country is given a $100-million loan at an interest rate of 45%. That means that for every $100 given, $45 has to be returned in interest. The government of that country needs to increase its bank reserves to make itself attractive to the World Bank and the International Monetary Fund.
Then what happens? The $100 million it was given in credit – with the 45% interest – is placed in a US bank where it is only taxed at an annual interest rate of 5%. In the course of time, the Latin America nation is ruined because all the capital that enters has to be directed to paying debts and commissions.
Although it seems irrational, that is what has occurred with the Latin American economies. In Brazil, Theolonio noted, $46 billion entered the country in the form of high-interest loans. Afterwards, that money was deposited as a reserve in the United States at only 4-5% interest.
If a Brazilian housewife asks to borrow money and has to pay 48% interest on it, and then deposits that money in another account (equal to the reserve in US banks) at only 5% interest, she will be ruined. If you own a property be prepared to lose it because all the money will go on paying interest and commissions.
GOVERNMENTS’ HANDS TIED
The inability of governments to manage their own resources is one of the consequences of the model imposed on Latin America.
The independence of state central banks and the thinking that there must be huge resources in those central banks so as to maintain that reserve is placing nations in very difficult positions.
Professor Dos Santos stated that the Central Bank of Brazil has raised the interest rate that the state has to pay it and with that policy is spectacularly increasing the public debt. In order to pay those high rates of interest, governments have to spend less. It is an absurd situation that translates into an absence of public works.
It is argued that bank interest rates have to be high to prevent growing demand and avoid inflation, which are viewed as the main enemy.
In the name of preventing inflation, they are compromising public resources. Brazil is the most serious case in the region, the professor noted. “My country is paying $750 billion just on servicing its internal debt, not to mention its external debt, another payment whose interest rate is taken from the world market.
The distribution of profits in Brazil remains within the financial system to the detriment of the business sector and traders who have to pay extortionate interest.
For Arturo Huerta: “We do not have a monetary policy or a fiscal policy. We have recourse to privatizations and the politicians are incapable of saying that we have to break with these models.”
Katz stressed that the most incredible aspect of privatization is that 10 years of the process have gone by and there is no study of what has already happened.
“With privatizations they wanted to send us this message: the state is ridding itself of deficient public enterprises and has money that can be invested in education and health. However, what has in fact happened is that we have a colossal public debt and are unable to invest in social programs. Argentina, a country that has traditionally had a 6% unemployment rate, now has one of 16-20%. Privatizations have led to 44% of its population falling into poverty and 35% of its children suffering from malnutrition.
Katz confirmed that the flight of capital from Argentina almost equals that of its external debt.
With privatizations the peoples have begun to realize that they have no benefits, as is the case in Bolivia with water and gas.
Huerta observed that Mexican sold off its banking system and went into crisis. In order to rescue it, the country had to spend out more than $100 billion, the cost of which is being paid by the people. A government that loses its central bank and its strategic economic sectors has no future whatsoever. Sovereign control of the national economy has to be respected.
A country that is unable to generate its own currency cannot have economic sovereignty. Latin American money is controlled by international finance capital, which wants the currency of the country in which it invests to be stable, thus forcing the imposition of high bank interest rates on the state in question.
The region has to recover control of its monetary policy in order to subsequently adopt a fiscal policy that is an incentive to economic growth, Huerta noted.
Unfortunately, no political party in the region is proposing the rescue of monetary control in its program.
Oscar Ugarteche, professor at the Catholic Pontificate University of Peru, stated that while the Latin American countries have high international reserves in US banks, his nation is registering an immense budgetary deficit in the order of 5% of its GDP.
However, now the Bolivarian Alternative for the Americas, a redefined economic model that promotes integration on the basis of a genuine policy of regional development.
INSTEAD of serving to protect the population the current economic model of the Latin America and the Caribbean is forcing them to emigrate.
For experts meeting at the 7th International Conference on Globalization and the Problems of Development in Havana, the region’s principal export line is that of persons and large-scale emigration to the developed nations.
With the neoliberal reforms of the 1990s exports grew in Latin America, but not on the basis of the development of national industries.
The current model has seen a reduction in employment, increased emigration and a lack of growth overall in its Gross Domestic Product (GDP).
This is a notable paradox because a growth in exports should signify a higher GDP and, with a few exceptions, this is not occurring. Mexican expert Arturo Huerta reasoned that the internal Latin America markets are still being restricted. Governments are adopting policies of cutting back on inflation and public spending and not extending the infrastructure of works to the benefit of the population
Demand and wages are being contracted in defense of external interests, noted Huerta, a professor at the Autonomous University of Mexico.
He analyzed what happens with nations dependent on the export of their mining products. Gold has been rising in price since 2001, associated with insecurity on the US stock market, of the dollar and the behavior of the economy.
Thus gold is presently extremely profitable, because foreign investors in gold mines do not pay taxes on profits or aggregate value and thus the governments of countries with reserves of this important natural resource receive no contribution to their GDP.
As gold extraction requires high technology. Investment in the sector does not increase employment. By not paying taxes, foreign investments give nothing to the country owning that natural resource. Thus gold exports increase but the GDP does not.
Remittances entering the countries of the region have grown and now represent the second largest entry of capital in global form. However, one cannot say that these remittances have a positive impact, because it should be the function of national economies to improve the populations’ living standards.
PERVERSE TRANSFER
Jaime Stay, a professor at Mexico’s Puebla University, believes that there is a very close relationship between the flight of capital, external debt and the functioning of the US economy.
The US economy acts like a black hole by attracting large volumes of capital from the rest of the world. Capital enters the Latin American region in the form of loans or bank credits and simultaneously produces the flight of that capital toward the developed nations, essentially the United States.
The exit of capital can assume many forms. One of them is related to the corruption involved in a large part Latin American governmental dealings. There are daily examples of how corruption has come down to setting up bank accounts elsewhere, such as in tax havens.
Capital flight is accompanied by another phenomenon, which is not strictly the flight of capital abroad, but appears in the so-called net transfer of resources. It is a serious problem, because the net income from capital is less than the net payment that has to be made for that income at a previous point.
Jaime Stay exposed the fact that the exit of profits without interest payments reaches a higher total than that of capital income.
This phenomenon, which was apparent in Latin America during the external debt crisis of the 1980s, has reappeared with absolute totals larger than those of that decade. The exit of profits has grown steadily year after year up until 2004.
“We have a net transfer of capital from the underdeveloped countries, which cannot confront the gravest problems impeding their development, to nations of advanced capital – starting with the US economy,” Stay affirmed.
It is a perverse transfer. The less developed countries are constantly contributing to the developed ones, in an unjust relationship that might well date back to colonial times. It is ethically unjustifiable when we are supposedly living in a world in which opportunities for everyone should be extended.
SNOWBALLING
Claudio Katz, a professor at Buenos Aires University, noted that the monetary, credit and social policy of every country in the region is subordinated to what the International Monetary Fund imposes on them in order to meet their external debts.
He described how in the Argentine case, the way in which the external debt is being discussed at the moment is going to bring problems, although the government is conducting itself with more dignity and a taking up a more confrontational position with the IMF.
Katz believes that the Argentine government initiated negotiations on its debt erroneously, by acknowledging that it exists, when it is known that it is a fraudulent debt and very much in question.
The Buenos Aires professor warned against reassuming the system of repaying the external debt in the form of bonds, given that, in the long term, this generates a fiscal surplus for decades in order to be able to price new bonds emitted. Having a fiscal surplus, he added, means reducing social spending on education and housing.
“Apparently we are easing a problem without foreseeing that huge snowball that is indebtedness,” Katz explained.
Brazilian professor Theolonio dos Santos, from the Fluminense University of Rio de Janeiro, similarly analyzed the problem of the flight of capital from Latin America to the developed countries, again essentially to the United States.
He gave this example: a Latin American country is given a $100-million loan at an interest rate of 45%. That means that for every $100 given, $45 has to be returned in interest. The government of that country needs to increase its bank reserves to make itself attractive to the World Bank and the International Monetary Fund.
Then what happens? The $100 million it was given in credit – with the 45% interest – is placed in a US bank where it is only taxed at an annual interest rate of 5%. In the course of time, the Latin America nation is ruined because all the capital that enters has to be directed to paying debts and commissions.
Although it seems irrational, that is what has occurred with the Latin American economies. In Brazil, Theolonio noted, $46 billion entered the country in the form of high-interest loans. Afterwards, that money was deposited as a reserve in the United States at only 4-5% interest.
If a Brazilian housewife asks to borrow money and has to pay 48% interest on it, and then deposits that money in another account (equal to the reserve in US banks) at only 5% interest, she will be ruined. If you own a property be prepared to lose it because all the money will go on paying interest and commissions.
GOVERNMENTS’ HANDS TIED
The inability of governments to manage their own resources is one of the consequences of the model imposed on Latin America.
The independence of state central banks and the thinking that there must be huge resources in those central banks so as to maintain that reserve is placing nations in very difficult positions.
Professor Dos Santos stated that the Central Bank of Brazil has raised the interest rate that the state has to pay it and with that policy is spectacularly increasing the public debt. In order to pay those high rates of interest, governments have to spend less. It is an absurd situation that translates into an absence of public works.
It is argued that bank interest rates have to be high to prevent growing demand and avoid inflation, which are viewed as the main enemy.
In the name of preventing inflation, they are compromising public resources. Brazil is the most serious case in the region, the professor noted. “My country is paying $750 billion just on servicing its internal debt, not to mention its external debt, another payment whose interest rate is taken from the world market.
The distribution of profits in Brazil remains within the financial system to the detriment of the business sector and traders who have to pay extortionate interest.
For Arturo Huerta: “We do not have a monetary policy or a fiscal policy. We have recourse to privatizations and the politicians are incapable of saying that we have to break with these models.”
Katz stressed that the most incredible aspect of privatization is that 10 years of the process have gone by and there is no study of what has already happened.
“With privatizations they wanted to send us this message: the state is ridding itself of deficient public enterprises and has money that can be invested in education and health. However, what has in fact happened is that we have a colossal public debt and are unable to invest in social programs. Argentina, a country that has traditionally had a 6% unemployment rate, now has one of 16-20%. Privatizations have led to 44% of its population falling into poverty and 35% of its children suffering from malnutrition.
Katz confirmed that the flight of capital from Argentina almost equals that of its external debt.
With privatizations the peoples have begun to realize that they have no benefits, as is the case in Bolivia with water and gas.
Huerta observed that Mexican sold off its banking system and went into crisis. In order to rescue it, the country had to spend out more than $100 billion, the cost of which is being paid by the people. A government that loses its central bank and its strategic economic sectors has no future whatsoever. Sovereign control of the national economy has to be respected.
A country that is unable to generate its own currency cannot have economic sovereignty. Latin American money is controlled by international finance capital, which wants the currency of the country in which it invests to be stable, thus forcing the imposition of high bank interest rates on the state in question.
The region has to recover control of its monetary policy in order to subsequently adopt a fiscal policy that is an incentive to economic growth, Huerta noted.
Unfortunately, no political party in the region is proposing the rescue of monetary control in its program.
Oscar Ugarteche, professor at the Catholic Pontificate University of Peru, stated that while the Latin American countries have high international reserves in US banks, his nation is registering an immense budgetary deficit in the order of 5% of its GDP.
However, now the Bolivarian Alternative for the Americas, a redefined economic model that promotes integration on the basis of a genuine policy of regional development.
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