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Ultrasecret NSA Has Conspicuous Role in New Federal Cybersecurity Center

Congress and civil libertarians have always been twitchy about involving the ultrasecretive National Security Agency—masters of electronic spying—more deeply in domestic security matters. Revelations that George W. Bush authorized the NSA (Motto: Never Say Anything) in the wake of 9/11 to expand warrantless electronic eavesdropping on Americans caused heartburn for both intelligence officials and private industry. Dragged into the controversy were phone companies and Internet service providers who took part in the program, although Congress later passed legislation that both tweaked and largely ratified Bush administration practices.  (Congress gave retroactive immunity from civil lawsuits to private firms that collaborated.)

If anything, the Obama administration, citing the threats of computer hacking and cyberterrorism, is now moving to involve the NSA more deeply in domestic security issues. The growing role of the NSA—a Defense Department agency with thousands of military personnel—in domestic matters was on semi-public display on Friday. Homeland Security Secretary Janet Napolitano visited a nondescript office complex in Arlington, Va., for the formal opening of a new high-tech command post called the National Cybersecurity and Communications Integration Center (NCCIC, pronounced "en-kick"). The facility is officially described as “a 24-hour, DHS-led coordinated watch and warning center that will improve national efforts to address threats and incidents affecting the nation’s critical information technology and cyber infrastructure.” The NSA’s official seal was displayed prominently on a big-screen graphic listing the center’s participants. The NSA’s director, Army Lt. Gen. Keith Alexander, was among the dignitaries standing at Napolitano’s side as she formally cut a ribbon inaugurating the facility, which, without its spooky graphics and tight security cordon, would look like a large newsroom or trading floor equipped with rows of computer workstations.

In keeping with the NSA’s character, Alexander wasn’t exactly bubbling with good cheer when Declassified asked him what his agency’s role would be in operating the cybersecurity command post. “We support DHS [Homeland Security] like everybody else,” is all the general would say. In introductory remarks, officials noted that Alexander has also been tapped by the Pentagon to head U.S. Cyber Command, a new military organization to be based alongside the NSA at Fort Meade, Md., that is intended to consolidate and improve cybersecurity and, presumably, cyberwarfare capabilities. Other officials were vague when asked for more details on the NSA’s role in  NCCIC, whose principal mission, according to Homeland Security officials, will be to monitor and assure the security and safety of civilian-government computer networks and to provide early warning to private businesses about cyber-attack threats.  As NEWSWEEK reported earlier this year, some cybersecurity experts have long argued that because the NSA traditionally has had the most formidable computer hardware and related brainpower of any agency in the government, it is essential that it become more deeply involved in protecting both domestic government computer networks and the privately run grids that now help run virtually every aspect of American daily life, including this blog.

Amy Kudwa, a Homeland Security Department spokeswoman, said that while NSA does provide "technical expertise" to DHS in connection with its cyber-security responsibilities, details of this assistance are classified. She said that although Alexander was present for the opening of the NCCIC, it was her information that the spy agency would not have representatives seated in the command center on a daily basis. She said that private sector companies eventually will be invited to assign personnel to work in the command center.

- Via Newsweek

Schwarzenegger Budget Director to Step Down as Deficits Loom

California Governor Arnold Schwarzenegger’s finance director plans to step down after four years of crafting budget proposals for a state that has been battered by the U.S. recession.


Mike Genest, Schwarzenegger’s longest-serving finance director, will leave whenever a replacement is found, said H.D. Palmer, a spokesman for the finance director. Genest, 62, told Schwarzenegger a month ago that he was considering leaving and expected to do so before the end of the year, Palmer said.

The departure comes as Schwarzenegger, a Republican who can’t seek re-election because of term limits, girds for his last political struggle over the state’s $85 billion budget. As tax revenue continues to slide, California is expected to have a deficit of at least $7 billion for the year that begins in July, according to Treasurer Bill Lockyer. Legislators eliminated $60 billion in budget deficits for 2009 and 2010.

“Mike Genest’s tenure has been one of the most challenging fiscal times in modern California history,” Palmer said. “He has served the governor, the public and the Legislature extremely well.”


Genest’s planned departure was reported by the Los Angeles Times.

- Via Bloomberg

California to withhold a bigger chunk of paychecks. Try 10% bigger!

Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners -- holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it's not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers' annual tax bills won't change.

Think of it as a forced, interest-free loan: You'll be repaid any extra withholding in April. Those who would receive a refund anyway will receive a larger one, and those who owe taxes will owe less.

But with rising gas costs, depressed home prices and double-digit unemployment, the state's added reach into residents' regular paycheck isn't sitting well with many.

"The state's suddenly slapping people upside the head," said Mack Reed, 50, of Silver Lake. "It's appalling how brash that is."

Brittney McKaig, 23, of Santa Ana said she expects the additional withholding to affect her holiday spending.

"Coming into the holidays, we're getting squeezed anyway," she said. "We're not getting Christmas bonuses and other perks we used to get. So it all falls back on spending. The $40 gift will become a $20 gift."

The extra withholding may seem like a small amount siphoned from each paycheck, but it adds up to a $1.7-billion fix for California's deficit-riddled books.

From a single taxpayer earning $51,000 a year with no dependents, the state will be grabbing an extra $17.59 each month, according to state tax officials. A married person earning $90,000 with two dependents would receive $24.87 less in monthly pay.

California will probably continue to collect the tax at a higher rate for many years -- or find an additional $1.7 billion to slice from a future budget, an unlikely occurrence. All workers who have state taxes withheld will see their paychecks shrink.

"Many families are sitting at their kitchen table wondering how they're going to make ends meet," said state Sen. Tony Strickland (R-Thousand Oaks). "At the same time, the state of California is taking a no-interest loan."

The provision is one of numerous maneuvers state lawmakers and Gov. Arnold Schwarzenegger approved in the summer to paper over the state's deficit. Many of the changes, including the extra withholding, were little noticed outside of Sacramento.

Savvy taxpayers can get around the state's maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state's Franchise Tax Board.

"People can get out of this," she said, noting that most people would have to change their allowances through their employers. California's budget leaders are banking on the hope that most won't.

The increase is coming at a bad time for store owners, many of whom depend on the holiday shopping season to keep their businesses alive.

"I don't think there's any question it's going to impact consumers' spending," said Bill Dombrowski, president of the California Retailers Assn. "Any time you reduce people's disposable income, there's going to be a negative effect on the retail sector."

But Stephen Levy, director of the Center for Continuing Study of the California Economy, wasn't so sure.

"It's having a relatively small impact on people's income," Levy said, pointing out that many families will receive only $12 to $40 less each month.

Yet Erika Wendt, 28, of San Diego said she already lived on a tight budget: She rides her bike to work, for instance, to save on gasoline and parking costs.

"I am frustrated as this directly impacts my weekly budget -- what groceries I buy, how much I drive and can spend on gas," she said. "Now money will just be tighter, and I'm not sure where else I can cut back."

The extra withholding comes in addition to tax hikes the state enacted this year.

In February, state income tax rates were bumped up 0.25 of a percentage point for every tax bracket. The dependent credit was slashed by two-thirds. The state sales tax rate rose 1 percentage point. The vehicle license fee nearly doubled to 1.15% of a car's value.

Lawmakers and the governor also approved deep cuts to schools, social services and prisons to fend off one of the steepest revenue losses in California history.

Temporary budget bandages, such as the increase in withholding, were included at several points this year to avoid higher taxes and deeper cuts, said H.D. Palmer, a spokesman for the state Department of Finance.

Sacramento, meanwhile, is awash in red ink again. The state controller recently said revenue in the budget year already had fallen more than $1 billion short of assumptions. Outsize deficits are projected for years to come.

Such temporary measures as the withholding tax increase don't really fix the budget gap, "they just more or less hid it," said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. "I call it a fraud."

- Via LA TIMES

Delaware beats Switzerland as most secretive financial center

Move over Switzerland. The tiny state of Delaware beats the Alpine country in a contest for the most secretive financial jurisdiction, a tax justice rights group said on Saturday.


The United States, led by the eastern seaboard state, took in $2.6 trillion in deposits from non-resident corporations and individuals in 2007, according to a survey of financial jurisdictions analyzed by the Tax Justice Network.

The survey of laws, practices and size of inflows in 60 jurisdictions found Delaware coming in first, followed by Luxembourg and then Switzerland. The Cayman Islands and the United Kingdom round out the top five.

"While the U.S. has been jumping up and down and saying 'Aha, bad, wicked Swiss banks,' the U.S. is doing exactly the same things as far as non-resident bank account holders," said Sarah Lewis, executive director of the group, based in the U.K.

Switzerland has been the poster child for financial secrecy over the past year. The United State sued Swiss global banking giant UBS AG, which paid a $780 million fine to settle a lawsuit against it by the government. As part of the deal, UBS admitted it actively helped Americans evade U.S. taxes.

The ranking is based on a composite of total offshore activity and measures such as whether a jurisdiction obtains beneficial ownership information about companies and the degree of cooperation in turning over requested financial information.

Delaware is attractive because it does not tax profits realized outside the state and does not require companies to be physically present, according to the Tax Justice Network.

UBS and Credit Suisse have about 200 entities in the state, according to the group.

There are nearly 700,000 active entities registered in Delaware -- and about half of those publicly traded in the United States, according to the group.

Total U.S. deposits of non-residents rose from about $1 trillion in 2001 to $2.6 trillion in 2007, according to the study.

In Luxembourg, non-resident deposits rose to $500 billion from $101 billion over the same period. In Switzerland, such deposits rose to $1.45 trillion from $103 billion during the period.

Larry Hamermesh, a business law professor at Widener University in Delaware, said the state gets an unfair rap.

For example, he said tax justice groups criticize the state for not obtaining companies' beneficial ownership information when they incorporate in the state.

But no other U.S. state actually requires such information, Hamermesh said.

"Delaware is no more secret than any other U.S. state," he said, noting that Delaware's attraction to business is its flexible laws and expert courts.

- Via Reuters

It is Japan we should be worrying about, not America

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.

 

The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).

Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.

 

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".

The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

Mr Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in "nominal" terms than a year ago – and nominal is what matters for debt.

Tokyo's price index fell 2.4pc in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher's 1933 paper, Debt Deflation Causes of Great Depressions.

The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry.

"This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."
Tokyo has let the yen appreciate violently – 90 to the dollar, 13 to the Chinese yuan – giving another twist to the deflation knife. Top exporters are below break-even cost, says RBS. The government could stop this, as it did in a wave of manic dollar purchases from 2003-2004. It could print money à l'outrance to stave off deflation. Yet it sits frozen, like a rabbit in the headlamps.

Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

- Via Telegraph UK