Monday, August 12, 2013 - The End of Mandatory Draconian Punishment

The End of Mandatory Draconian Punishment

by Sinclair Noe

DOW – 5 = 15,419
SPX – 1 = 1689
NAS + 9 = 3669
10 YR YLD + .02 = 2.60%
OIL+ .19 = 106.16
GOLD + 22.60 = 1338.30
SILV + .87 = 21.53

This week's economic calendar includes retails sales reports tomorrow, plus a look at inflation on the wholesale level tomorrow, and inflation at the retail level on Wednesday; also reports from the Philly Fed, plus a look at industrial production, housing starts, and consumer sentiment. The over-riding question is whether the economy is seriously showing strength or if we are just grinding along. Most of the expectations for this week's data suggest more of the same old, same old. It's doubtful we will see anything that could sway the Federal Reserve to change policy, and that means the stock and bond markets may have gotten ahead of themselves in pricing in an improving economy.

The Treasury Department reported this morning that the US government spent $98 billion more than it took in last month, with the deficit driven by spending on healthcare programs, pensions for the elderly and the military. So far in the current fiscal year, which began in October, the federal government has run $607 billion into the red, a narrowing from the $974 billion deficit chalked up in the same 10 months of fiscal year 2012.

A major change today from the Justice Department; Attorney General Eric Holder is calling for sweeping and systemic changes to the American judicial system. Holder made the announcement today during a speech to the American Bar Association, outlining a reform plan he calls “Smart on Crime”.

Holder says the Justice Department would direct federal prosecutors to charge defendants in certain low-level drug cases in such a way that they would not be eligible for mandatory sentences now on the books. Prosecutors would do this by omitting from official charging documents the amount of drugs involved in a case. By doing so, prosecutors would ensure that nonviolent defendants without significant criminal history would not get long sentences.

The Smart on Crime reforms also include allowing for the early release of non-violent elderly federal defendants who had served significant portions of their sentences, thereby helping to reduce the overall federal prison population. Holder also called for greater use of incarceration alternatives and renewed focus on prevention, pointing out reforms in typically conservative states that have steered funding towards treatment and supervision, rather than funneling more money into prisons.

Holder said: “The bottom line is that, while the aggressive enforcement of federal criminal statutes remains necessary, we cannot simply prosecute or incarcerate our way to becoming a safer nation. To be effective, federal efforts must also focus on prevention and reentry. We must never stop being tough on crime. But we must also be smart and efficient when battling crime and the conditions and the individual choices that breed it."

He also noted that sentences are often racially disproportionate, referencing a February report indicating that, in recent years, black male offenders have received sentences nearly 20 percent longer than white offenders convicted of similar crimes.

Since Richard Nixon declared the "war on drugs" in 1971, US prison numbers have soared to account for 25% of all the world's prisoners even though it has only 5% of the world's population. Drug-related offenses drive the vast majority of the increased prison population.

Some of the proposals unveiled by Holder, such as giving federal judges the leeway to depart from mandatory minimum sentences for some drug offenses, require congressional approval,and getting any consensus in Washington DC is tough, even though this should be an issue that attracts bi-partisan support.

Forty years of a failed war on drugs has destroyed communities and families all across our land. Hard earned tax-payer dollars have been wasted on ineffective policies that have resulted in over-incarceration, pushing state and federal budgets to the brink of bankruptcy.

The attorney general said 17 states have directed money away from prison construction and toward programs and services such as treatment and supervision that are designed to reduce the problem of repeat offenders.

In Kentucky, legislation has reserved prison beds for the most serious offenders and refocused resources on community supervision. The state, Holder said, is projected to reduce its prison population by more than 3,000 over the next 10 years, saving more than $400m.

Holder also cited investments in drug treatment in Texas for non-violent offenders and changes to parole policies which he said brought about a reduction in the prison population of more than 5,000 inmates last year. He said similar efforts helped Arkansas reduce its prison population by more than 1,400. He also pointed to Georgia, North Carolina, Ohio, Pennsylvania and Hawaii as states that have improved public safety while preserving limited resources.

Five years after Wall Street's malfeasance nearly caused a global financial metldown, and after four years of hearing Jamie Dimon whine about how regulations would hurt his bonus, and long after tens of billions of dollars have been lost to bankster fraud, we're about to see the first arrests of Wall Street bank employees. What's more, the suspects work at JPMorgan Chase, a bank which, ironically enough, politicians and pundits insisted was the "good bank" after the financial crisis hit in 2008. This in connection with the London Whale case.

Despite the overwhelming evidence of criminal behavior in a large number of cases, this will have been the first time since the financial crisis that a banker's been arrested on criminal charges, assuming the arrests take place as planned, of course.

Let's be clear: These arrests are a good thing. Justice demands that anyone, no matter who they are, be made to answer for their deeds. What's more, bankers at "too big to fail" institutions have the power to shatter, and even bring down, the global economy. The lack of arrests up to this point means there's been no deterrent effect, no reason for them not to keep committing fraud. And when you compare and contrast the banksters antics, compared to the kid who smokes a joint and goes to jail under mandatory sentencing laws, well it makes a mockery of justice. But even if arrests are made, it is expected to be junior level traders, it won't be Bruno Iksil, the trader known as the London Whale; he's worked out some sort of deal and he's cooperating with investigators. It won't be the Whale's boss, or anybody higher up the corporate food chain. It'll be low-level guys.

There is good reason to look up the corporate chain. Senior management was either complicit or asleep at the switch. The bank's own risk management rules and guidelines were violated 330 times. JPMorgan Chase stonewalled their regulator and as losses grew, Chase provided less and less information to the OCC. Dimon ordered the bank to omit critical data from its standard reports to the OCC.

Now sometimes the Department of Justice arrests low-level workers in an attempt to get them to provide information against upper level management; they use them to build a case. Sometimes, the low-level guys are nothing more than sacrificial lambs. We'll see.

News out of Mexico today that could have a big impact on the energy sector. Mexican President Enrique Peña Nieto proposing to end a ban on foreign firms taking part in the state-run oil industry. Now, this is not a new idea, and in the past it has not been well received.

The proposal would allow state-oil agency Petróleos Mexicanos, or Pemex, to partner with foreign firms and share profits, a practice prohibited by the Mexico constitution. It would also allow more private participation in electricity generation in an attempt to drive down prices that the government says are 25% higher than in the United States.

Peña Nieto says the oil and electricity industries would remain under government control and that private companies could not claim petroleum reserves as their own even as opponents railed against changes they say run contrary to the national interest and risk handing over the country's greatest treasure to foreigners. Pemex has not been employing new technologies, and the thinking is that bringing in foreign firms might modernize practices. Oil output has dropped from nearly 3.4 million barrels per day in 2004 to 2.5 million barrels per day in 2012. The flip side is the fear that foreign firms will do more than modernize, they will claim Mexican reserves as their own, or employ environmentally harmful drilling techniques.

Meanwhile, north of the border, Texas has been employing modern techniques for quite some time; the result is a boom in exploration and production; the oil is flowing, but the water supply is running dry. Three years of drought, decades of overuse, coupled with the oil industry's demands on water for fracking are drying up reservoirs and underground aquifers. The Texas Commission on Environmental Quality says 30 communities could run out of water by the end of the year. And while most of those communities are small rural towns, there are nearly 15 million people living under some form of water rationing, barred from freely watering their lawns or refilling their swimming pools or in the case of the small town of Barnhart Texas, they've just run out of water; turn the faucet and nothing happens.

Fracking is a powerful drain on water supplies. In adjacent Crockett county, fracking accounts for up to 25% of water use. Fracking isn't the only reason for water shortages. Big cities soak up plenty of water, agriculture takes its share, climate change and the drought have added to the problem, but fracking seems to be the straw that might break the camel's back. Last week, heavy rains hit much of Texas, but it wasn't enough to recharge the aquifers.