ECONOMY
The War Economy

Congress and the administration are embroiled in contentious talks over on the details of a $700 billion infusion into the financial system, intended to restore liquidity and maintain the flow of credit. But the talks stalled yesterday. "It was an implosion that spilled out from behind closed doors into public view in a way rarely seen in Washington," the New York Times observed. Tonight, Sens. Barack Obama (D-IL) and John McCain (R-AZ) are scheduled to debate foreign policy matters in Oxford, MS. While the subject matter seems disconnected from the situation in financial markets, prescient economists predicted this fall-out from the Iraq war long ago. In 2002, Gerd Hausler, director of international capital markets at the IMF, said that "a serious conflict with Iraq would not be a very healthy development" for the financial markets. Robert Shapiro, undersecretary of commerce in the Clinton administration stated, "If the [Iraq] conflict wears on or, worse, spreads, the economic consequences become very serious." The debt was $5.7 trillion when Bush took office; it will be $10.3 trillion by the time he leaves. While Congress hesitates to appropriate $700 billion for the financial crisis, the administration still is pouring $12 billion a month into Iraq, also raising the question of how the Iraq war funds could be spent better at home.

IRAQ RECESSION?: A significant reason for the current $9.6 trillion federal debt has been the Iraq war, which the U.S. largely financed through borrowing. This week, President Bush said that the crisis began after "a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business," which led to easy credit and to the housing bust. But the problem isn't simply one of excessive foreign investment because of businesses. "It's that the U.S. had to borrow money from foreign nations at an alarming rate, after it dug itself into debt paying for the Iraq War while cutting taxes," The Wonk Room observed. Thus, the United States had to turn to investment from abroad for financing. This, as well as lax regulation and oversight of Wall Street contributed to the credit troubles. Currently, 45 percent of Treasury securities are owned by foreign nations, with the most owned by China and Japan. Other nations owned less than 20 percent of these securities as recently as 1994. Bush left out of his assessment the fact that much of the foreign investment went to finance a war and his tax cuts.

PAYING FOR $700 BILLION: The rhetoric used in justifying giving a $700 billion blank check to the administration mimics the arguments used to justify the Iraq war. "Money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back," President Bush said on Tuesday. "The government could make 10 or 20 times what it pays on this, possibly," Sen. Norm Coleman (R-MN) said this week. Similarly, Iraq war architect Paul Wolfowitz remarked in 2002, "We are talking about a country that can really finance its own reconstruction and relatively soon." "[T]he negative effect will be quite small relative to the economic benefits," said White House economic adviser Lawrence Lindsey. As economist Paul Krugman wrote, "The premise of the Paulson plan -- though never stated bluntly -- is that these assets are hugely underpriced, so that Uncle Sam can buy them at prices that help the financial industry a lot, without big losses for taxpayers. Are you prepared to bet $700 billion on that premise?" "Both the $200 billion surge and the proposed $700 billion bailout are emblematic of a failed conservative ideology," writes the Center for American Progress's Matt Duss today.

ACHIEVING BIN LADEN'S GOAL: As Congress stalls on whether to appropriate $700 billion, exploding the deficit and handicapping the next administration, it's hard not to notice that this sum closely resembles the amount that the United States has spent thus far in Iraq. This is Osama bin Laden's very strategy: entangling the United States abroad and plunging the country into economic turmoil. In 2004, he remarked that his "bleed-until-bankruptcy" plan was seeing "evidence of the success." "And it all shows that the real loser is...you. It's the American people and their economy," he added. Lawmakers are cognizant of bin Laden's plan. The Iraq war "has weakened our national economy -- which is what bin Laden did to the Soviets in the 1980's and has expressly set out to do to us," said Sen. Russ Feingold (D-WI) this month. "I think Osama bin Laden is sitting back right now looking at this thing [and saying] in effect, 'We're kinda bankrupting this country," Sen. George Voinovich (R-OH) remarked in April. The United States will have spent at least $3 trillion regardless of who the next president is, according to Nobel Prize-winning economist Joseph Stiglitz.

Under the Radar

RADICAL RIGHT -- LOUISIANA LAWMAKER FAULTS MEDIA FOR FOCUSING ATTENTION ON HIS EUGENICS PROPOSAL: Louisiana State Rep. John LaBruzzo (R) recently stirred controversy by advocating a form of eugenics to decrease the number of poor. "I realized that all these people were in Louisiana's care and what a massive financial responsibility that is to the state," he said. "I said, 'I wonder if it might be a good idea to pay some of these people to get sterilized.'" His plan would also give tax incentives to the rich to encourage procreation. Appearing on CNN today, LaBruzzo defended his proposal by arguing that "the taxpayers of America are kind of getting fed up" with supporting welfare programs. When CNN's Kyra Phillips asked why he couldn't invest in education and poverty-reduction programs, LaBruzzo faulted the media for focusing too much attention on his eugenics program. "Obviously the media thought this was the one they could get some ratings out of," he said. He also blamed the "tremendous influx of illegal aliens" for "bringing down the economy even more." But LaBruzzo has explicitly ruled out more common sense solutions and appears to be dead serious about implementing the plan. He is "gathering statistics" now and planning to introduce legislation "if he finds that the number of people on welfare has increased" over the past decades.

ECONOMY -- SANDERS SCHOOLS KUDLOW: 'YOU'VE BECOME A SOCIALIST -- YOUR VERSION OF SOCIALISM IS TO BAIL OUT THE RICH': Appearing on CNBC's Kudlow and Company on Tuesday night, Sen. Bernie Sanders (I-VT) dismantled host Larry Kudlow's proclaimed support for unfettered free market enterprise. Sanders told Kudlow that after all the "ranting and raving" he had done "against government intervention and [extolling] the virtues of the free market," he must surely be against the bailout. "No, I'm in favor of the bailout," Kudlow said. "You've become a socialist overight!" Sanders responded, telling Kudlow, "Your version of socialism is to bail out the rich." Kudlow said that he's in favor of government intervention "every 20 or 30 or 50 years." "Larry, if I ask you that the government should intervene like every other industrialized country does and provide health care for all people, you'd say 'oh no,'' responded Sanders. Kudlow ended the segment by conceding Sanders' point. Sanders told the Progress Report earlier this week that the "fiscally responsible way" to pay for the bailout is "through a progressive tax." Sanders is proposing a "five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers," which he says he would "yield more than $300 billion in revenue."

ECONOMY -- JOBLESS CLAIMS AT SEVEN-YEAR HIGH, ECONOMIC GROWTH LESS THAN EXPECTED: According to data released yesterday by the Department of Labor, "initial filings for state jobless benefits increased by a seasonally adjusted 32,000 to 493,000 in the third week of September." This is highest level of initial claims in seven years. According to the Labor Department "about 50,000 of the new claims were due to the effects of Hurricanes Gustav and Ike." In all, "employers have cut more than 600,000 jobs since the beginning of the year." Also, the Commerce Department announced today that the U.S. economy grew at a rate of 2.8 percent in the second quarter, a lower rate than the original second quarter estimate of 3.3 percent. "Personal consumption, trade and business investment contributed less to gross domestic product than the prior estimate," the Commerce Department said. According to the Boston Globe, "the US economy is almost certainly in recession and facing a long period of weakness that could push unemployment to its highest level since the early 1990s."

Think Fast

Pakistan warned U.S. troops not to intrude on its territory, "after the two anti-terror allies traded fire along the volatile border with Afghanistan." The clash was "the first serious exchange with Pakistani forces acknowledged by the U.S." Pakistan's president said that only "flares" were fired at the U.S. troops.

"If money isn't loosened up, this sucker could go down," said President Bush at a White House meeting yesterday "as he watched the $700 billion bailout package fall apart before his eyes." In a statement outside the White House this morning, Bush attempted to project confidence in an eventual deal, saying, "There is no disagreement that something substantial must be done."

Yesterday, the federal government seized troubled lender Washington Mutual and then "brokered an emergency sale" of the bank to JPMorgan Chase for $1.9 billion. Washington Mutual's collapse represented the "largest bank failure in American history," and "JPMorgan Chase will absorb at least $31 billion in losses that would normally have fallen to the F.D.I.C."

Federal prosecutors attempted to paint Sen. Ted Stevens (R-AK) "as a savvy career politician who surreptitiously accepted valuable gifts." Stevens's attorney, "characterized the government's accusations as inaccurate" and argued that Stevens was innocently subjected to the "whims of a friend, who at times delivered unwanted gifts and even failed to bill Stevens for the renovation project."

Newsweek's Eleanor Clift writes in response to former Rep. Newt Gingrich's rejection of Henry Paulson's Wall Street bailout proposal: "Newt is back doing what he loves to do; challenging a sitting president of his own party, inciting insurrection among conservatives, and in his own words, 'having a ball.'"

"Israel gave serious thought this spring to launching a military strike on Iran's nuclear sites but was told by President George W. Bush that he would not support it and did not expect to revise that view for the rest of his presidency, senior European diplomatic sources have told the Guardian." Israeli Prime Minister Ehud Olmert floated the idea to Bush during his May visit to Israel.

Scientific figures released today shows the 'rise in global carbon dioxide emissions last year outpaced international researchers' most dire projections," with a 2.9 percent increase in carbon emissions in 2007. The rise "could translate into a global temperature rise of more than 11 degrees Fahrenheit by the end of the century, according to the panel's estimates."

And finally: Ohio farmer Duke Wheeler “would like to invite you to get lost inside the head" of Gov. Sarah Palin (R-AK). Wheeler has turned his 16-acre cornfield into a maze in Palin's likeness. He said it took "an artist from Idaho at least eight hours to mow down stalks for the maze." View a picture of the creation here.

Good News

Yesterday, the House passed legislation "requiring health-insurance providers nationwide to cover mental-health treatment on an equal basis with medical care."

State Watch

CALIFORNIA: California is the only state that offers no money to help National Guard members get an education.

COLORADO: "Days after discounting an economic forecast that predicted a $100 million shortfall in the current year's state budget, Gov. Bill Ritter on Thursday announced a partial hiring freeze and other steps to cut spending."

CIVIL RIGHTS: New television ad launches in Colorado and Nebraska that exposes Ward Connerly and his divisive campaign to outlaw equal opportunity programs.

Blog Watch

THINK PROGRESS: Think Progress will be liveblogging tonight's presidential debate.

WONK ROOM: Exclusive video of former Vice President Al Gore's remarks at the Clinton Global Initiative: "It is time for civil disobedience."

YGLESIAS: The people of Georgia want just as close a relationship with Russia as they do with the United States.

CONSCIENCE OF A LIBERAL: The breakdown in bailout talks is "the culmination of many past betrayals."

Daily Grill

"If money isn't loosened up, this sucker could go down."
-- President Bush, 9/25/08

VERSUS

"But our economy has very strong long-term fundamentals."
-- Treasury Secretary Henry Paulson, 7/20/08