Thursday, October 24, 2013

How Unregulated Banking Triggered the Crash of '08

Repo, Baby, Repo
“Repo has a flaw: It is vulnerable to panic, that is, ‘depositors’ may ‘withdraw’ their money at any time, forcing the system into massive deleveraging. We saw this over and over again with demand deposits in all of U.S. history prior to deposit insurance. This problem has not been addressed by the Dodd-Frank legislation. So, it could happen again.”

–Gary B. Gorton, Professor of Management and Finance, Yale School of Management (lifted from Repowatch)

Subprime mortgages did not cause the financial crisis, nor did the housing bubble or Lehman Brothers. The financial crisis originated in a corner of the shadow banking system called the repo market. That’s where the bank run occurred that froze the secondary market, sent prices on mortgage-backed assets plunging, and pushed the financial system into a death spiral. In the Great Crash of 2008, repo was ground zero, the epicenter of the global catastrophe. As analyst David Weidner noted in the Wall Street Journal, “The repo market wasn’t just a part of the meltdown. It was the meltdown.”
Regrettably, the Federal Reserve’s nontraditional monetary policies (ZIRP and QE) have succeeded in restoring the repo market to it’s precrisis level of activity, but without implementing any of the changes that would have made the system safer. Repo is as vulnerable and crisis-prone today as it was when the French bank PNB Paribas stopped redemptions in its off-balance sheet operations in 2007 kicking off the tumultuous bank run that would eventually implode the entire system and push the economy into the deepest slump since the Great Depression. By failing to rein in repo, the Fed has ensured that financial crises will be a regular feature in the future occurring every 15 or 20 years as was the case before banks were more strictly regulated and government backstops were put in place. Repo returns us to Wild West “anything goes” banking.

Why would the Fed be so reckless and pave the way for another disaster? We’ll get to that in a minute, but first, let’s give a brief explanation of repo and how the system works.

Repo is short for repurchase agreement. The repo market is where primary dealers sell securities with an agreement for the seller to buy back the securities at a later date. This sounds more complicated than it is. What’s really going on is the seller (primary dealers) are getting short-term loans from money market funds, securities firms, banks etc in order to maintain a position in securities in which they’re suppose to make markets. So, repo is like a loan that’s secured with collateral. (ie–the securities) It is a “funding mechanism”.

What touched off the Crash of 2008, was the discovery that the collateral that was being used for repo funding was “toxic”, that is, the securities were not Triple A after all, but subprime mortgage-backed gunk that would only fetch pennies on the dollar. So, when PNB Paribas stopped redemptions in its off-balance sheet operations on August 9, 2007, the rout began. Cash-heavy investors (like money markets) turned off the lending spigot, which reduced trillions of dollars of MBS to junk-status, precipitated massive fire sales of distressed assets that were dumped on the market pushing prices further and further down wiping out trillions in equity and reducing the financial system to a smoldering pile of rubble. That’s why the Fed stepped in, backstopped the system with explicit guarantees for both regulated and unregulated financial institutions and set about to reflate financial asset prices to their precrisis highs.

Newly appointed Fed chairman Janet Yellen summarized what happened in the panic in a speech she gave earlier this year. She said:
“The trigger for the acute phase of the financial crisis was the rapid unwinding of large amounts of short-term wholesale funding that had been made available to highly leveraged and/or maturity-transforming financial firms.”

In other words, the crisis began in repo. Unfortunately, Wall Street has fended off all attempts to fix the system, because repo is a particularly lucrative area of activity. And we are talking serious money here, too. Tri-party repo alone–which is a small subset of the larger repo market–represents “about $1.6 trillion in outstanding repos daily.” That means that the prospect of a big dealer dumping his portfolio of securities on the market at a moment’s notice igniting another panic, is never far away.

Why do banks borrow in the unregulated, shadow system instead of conducting their business in the light of day where regulators can check the quality of the underlying collateral, oversee the various transactions on public trading platforms, and make sure that capital requirements are maintained?

It’s because the banks want to deploy all their capital, leverage up to their eyeballs and play fast-and-loose with the rules. Here’s what the New York Fed has to say on the topic:
“One clear motivation for intermediation outside of the traditional banking system is for private actors to evade regulation and taxes. The academic literature documents that motivation explains part of the growth and collapse of shadow banking over the past decade…
Regulation typically forces private actors to do something which they would otherwise not do: pay taxes to the official sector, disclose additional information to investors, or hold more capital against financial exposures. Financial activity which has been re-structured to avoid taxes, disclosure, and/or capital requirements, is referred to as arbitrage activity.” (“Shadow Bank Monitoring“, Federal Reserve Bank of New York Staff Reports, September, 2013)

In other words, the banks are conducting their operations in the shadows because it’s cheaper. That’s what this is all about. Here’s more from the same report:
“While the fundamental reason for commercial bank runs is the sequential servicing constraint, for shadow banks the effective constraint is the presence of fire sale externalities. In a run, shadow banking entities have to sell assets at a discount, which depresses market pricing. This provides incentives to withdraw funding—before other shadow banking depositors arrive.”

Okay, so when there’s a run on the local bank, the bank may have to offload some of its illiquid assets (real estate, commercial property, etc) to meet the increased demand of depositors who want their money, but they can also rely on government backing. (deposit insurance). But with shadow banking–like repo– it’s a bit different; the problem is fire sales. For example, when repo lenders–like the big money markets–demanded more collateral from the banks in exchange for short-term funding; the banks were forced to dump more of their assets en masse pushing prices lower, eroding their equity and leaving many of the banks deep in the red. This is how the panic wiped out Wall Street and cleared the way for the $700 TARP bailout. It all started in repo.

The point is, had the system been adequately regulated with the appropriate safeguards in place, there would have been no fire sales, no panic, and no crisis. Regulators would have made sure that the underlying collateral was legit, that is, they would have made sure that the subprime borrowers were creditworthy and able to repay their loans. They would have made sure that repo borrowers (the banks) had sufficient capital to meet redemptions if problems arose. And regulators would have limited excessive leveraging of the securitized assets.

Regulation works. It provides safety, stability, and security as opposed to panic, bankruptcy and severe recession which is the scenario that Wall Street’s profiteers seem to prefer. Now check this out from the NY Fed:
“While leveraged lending collapsed in 2008 from a peak of $680 billion in 2007, it has rebounded very quickly, and is now at record levels of volume, projected to be larger than $1 trillion in 2013…” (NY Fed)

How’s that for progress, eh? So, Bernanke’s reflation efforts have effectively restored the same shabby, poorly designed system to its former glory putting all of us at risk again. Here’s more:
“One area of concern, however, is the significant increase in the fraction of covenant lite loans, which have increased dramatically from 0 percent in 2010 to 60 percent in 2013. This deterioration in loan underwriting has come hand-in-hand with an increased presence of retail investors in the leveraged loan market, through both CLOs and prime funds, as relatively sophisticated investors, like banks and hedge funds, are exiting the asset class.” (New York Fed)

Great. So now we are seeing the same problems that emerged in 2004 and 2005 with subprime mortgages, that is, there’s so much liquidity in the system–thanks to the Fed’s zero rates and QE– that investors are dabbling in all-types of risky garbage that you wouldn’t normally touch with a 10 foot dungpole. Check this out from Testosterone Pit:
“Shadow banking loans are estimated to have reached $15 trillion in the US. And among them is a particularly hot category: lending to highly leveraged companies with junk credit ratings. … the NY Fed found that these loans are increasingly issued in a loosey-goosey manner, with low underwriting standards. And issuance has soared...
Layered into these crappy and risky loans are the crappiest and riskiest of all loans, namely “covenant-lite” loans. Their covenants are so watered down and so full of holes that investors have few if any protections in case of default. If the Fed ever allows reality to set, and these companies stumble under their load of debt or can’t refinance it at ridiculously low rates, investors can kiss their money goodbye.” …
these desperate small investors…have unknowingly made a quantum leap in risk – allowing the smart money, which hears the hot air hissing from the credit bubble, to bail out. This must be one of the proudest moments in Chairman Bernanke’s glorious tenure.” (“Fed: Hedge Funds, Banks Sell Crappiest Debt To Small Investors (Before Credit Bubble Blows Up) ” Testosterone Pit)

Nice, eh? So the big boys are planning to vamoose before the whole house of cards comes tumbling down. Meanwhile, Mom and Pop are about to get reamed for the umpteenth time when the Fed “tapers” and these covenant lite IEDs blow up in their face taking another sizable chunk out of their retirement savings. Way to go, Bernanke. Here’s more from the NY Fed report:
“Shadow credit transformation increased from only 5 percent of total credit transformation in 1945 to a peak amount of 60 percent in 2008 before declining to 55 percent in 2011.”

So now the shadow players are generating more than half of all the nation’s credit via their dodgy, unregulated operations. Why? So a handful of ravenous banks can make bigger profits.

According to the Financial Stability Board (FSB) “credit intermediation that takes place in an environment where prudential regulatory standards and supervisory oversight are either not applied or are applied to a materially lesser or different degree than is the case for regular banks engaged in similar activities.” (FSB, 2011).

Read that over again. What they’re saying is that it’s a completely ridiculous, insane system. We’ve given the banks this outrageous privilege of creating private money out of thin air, (credit) and they spit in our face. They won’t even follow a few simple rules that would make the process safer for everyone. Keep in mind, that Dodd Frank does nothing to remedy the problems in repo.

One last thing (from the NY Fed):
“Intermediaries create liquidity in the shadow banking system by levering up the collateral value of their assets. However, the liquidity creation comes at the cost of financial fragility as fluctuations in uncertainty cause a flight to quality from shadow liabilities to safe assets. The collapse of shadow banking liquidity has real effects via the pricing of credit and generates prolonged slumps after adverse shocks.”

Repeat: “liquidity creation comes at the cost of financial fragility as fluctuations in uncertainty cause a flight to quality from shadow liabilities to safe assets.”

Can you believe it? The Fed doesn’t even try to deny what’s going on. They admit that letting the banks ratchet up their leverage increases “financial fragility ” which could precipitate another crash. (“flight to quality from shadow liabilities to safe assets.”) In other words, the Fed KNOWS the system is nuts, just like they know that it’s only a matter of time before the whole bloody thing blows up again and the economy goes off the cliff. Still, they’re not going to lift a finger to change the system.


You know why.

Because a few fatcats at the top like the way things are now, that’s why.

If that doesn’t make your blood boil, I don’t know what will.

Wednesday, October 23, 2013

BIG CITY GANG BANG Productions - The Next Great Depression

As Ye Sow, So Shall Ye Reap

Paul Craig Roberts

The year 2014 could be shaping up as the year that the chickens come home to roost.

Americans, even well-informed ones, don’t know all of the mistakes made by neoconized and corrupted Washington in the past two decades. However, enough is known to see that the US has lost economic and political power, and that the loss is irreversible.

The economic cost of this lost will be born by what remains of the middle class and the increasingly poverty-stricken lower class. The one percent will have offshore gold holdings and large sums of money in foreign currencies and other foreign assets to see them through.

In the political arena, the collapse of the Soviet Union presented Washington with the grand opportunity to reallocate the Pentagon budget to other uses. Part of the reduction could have been returned to taxpayers for their own use. Another part could have been used to improve worn out infrastructure. And another part could have been used to repair and improve the social safety net, thus insuring domestic tranquility. A final, but perhaps most important part, could have been used to begin repaying the Treasury IOUs in the Social Security Trust Fund from which Washington has borrowed and spent $2 trillion, leaving non-marketable IOUs in the place of the Social Security payroll tax revenues that Washington raided in order to fund its wars and current operations.

Instead, influenced by neoconservative warmongers who advocated America using its “sole superpower” status to establish hegemony over the world, Washington let hubris and arrogance run away with it. The consequence was that Washington destroyed its soft power with lies and war crimes, only to find that its military power was insufficient to support its occupation of Iraq, its conquest of Afghanistan, and its financial imperialism.

Now seen universally as a lawless warmonger and a nuisance, Washington’s soft power has been squandered. With its influence on the wane, Washington has become more of a bully. In response, the rest of the world is isolating Washington.

The prime minister of India, Manmohan Singh, recently declared China and Russia to be India’s “most important partners” with whom India shares “common strategic interests.” Prime Minister Singh said: “ India and Russia have always had a convergence of views on global and regional issues, and we value Russia’s perspective on international developments of mutual interest.”

India joined China in expressing concerns about the Federal Reserve’s practice of printing money in order to cover Washington’s vast red ink. The BRICS (Brazil, Russia, India, China, South Africa) are taking steps to create their own method of settling trade accounts in order to protect themselves from the looming dollar implosion,

China has forcefully called for a “de-Americanized world.” After watching the “superpower” offshore a large part of its GDP to China and then add to the diminished tax base the burden of $6 trillion in wars that brought no booty and served no US interest, China has concluded that American power is spent. The London Telegraph thinks “it is only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources.”

The Obama regime attempted to attack Syria based on the sort of lies that the Bush regime used to invade Iraq, only to be slapped down by the British Parliament and Russian government. This rebuke was followed by the childishness of the government shutdown and threat of default. Consequently, the Washington morons have lost their monopoly on economic and political leadership. A few days ago the British government announced a historic agreement that permits British investors direct access to China’s markets and allows Chinese banks to expand their operations in Great Britain.

In Australia, the US dollar will no longer be used as the currency in which to settle the Australian trade accounts with China. Instead of dollars, trade will be settled in the Chinese currency.

Washington served as cheerleader, as did most economists and libertarians, while US corporations, greedy for short-term profits and executive bonuses, offshored US industry and manufacturing, calling it free trade. The obvious and predicted result is that China’s demand for resources needed to fuel its industrial and manufacturing power now dominates markets. This means that the US dollar is being displaced as world currency. The only market that America dominates is the market for financial fraud.

When industrial, manufacturing, and tradeable professional service jobs are offshored, they take US GDP and tax base with them. The foreign country gets the benefit of the relocated economic activity. Due to the revenues lost from jobs offshoring, there is a large gap between federal revenues and federal expenditures. As Washington’s irresponsible behavior has raised so many doubts about the dollar’s value and the government’s commitment to stand behind its massive debt, foreign countries with trade surpluses with the US are less and less willing to recycle those surpluses into the purchase of US Treasury debt.

Today the two largest holders of US Treasury debt are not investors or even foreign central banks. The two largest holders are the Federal Reserve and the Social Security Trust Fund.

As for those $6 trillion wars, that’s to pay for national defense to protect us from women, children, and village elders in far away countries devoid of air forces and navies, and to provide those recycled taxpayer monies from the military/security complex that find their way into political contributions.

The Wall Street gangsters sighed for relief over the last minute debt ceiling agreement. This shows how short-term Wall Street’s outlook is. All the October agreement did was to push off the crisis to January and February. The “debt ceiling agreement” did not produce a new debt ceiling that would last beyond February, and it did not resolve the large difference between federal revenues and expenditures. In other words, the can was again kicked down the road. A repeat of the October fiasco won’t play well.

Obamacare is causing the premiums on private insurance polices to rise substantially, almost doubling in some situations unless people move to the uncertain exchanges, and Obamacare’s raid on Medicare payroll tax revenues has resulted in a cut in Medicare payments to health care providers. The result is a further reduction in consumer discretionary income and a further drop in the economy.

This in turn means a larger federal budget deficit and the need for the Federal Reserve to purchase more debt.

Another reason the Federal Reserve is faced with increasing, not tapering, quantitative easing (money printing) is the decline in foreign purchases of US Treasury bills, notes, and bonds. As the instruments pay interest that is less than the rate of inflation, holding Treasury debt makes no sense when the dollar’s value and the potential of default are open questions.

According to reports, not only are foreign governments, such as China, ceasing to buy US Treasury debt, China has started to sell off its holdings, substituting gold in the place of US Treasury debt.

This means that the bonds must be purchased by the Fed or interest rates will rise as the increased supply of bonds on the market drives down bond prices. The only way the Fed can purchase a larger supply of bonds is by printing more money, that is, by more quantitative easing.

With the world moving away from using the dollar to settle international accounts, as the Fed prints more dollars the rate at which foreign holders of dollar assets sell off their holdings will rise.

To get out of dollars requires that the dollar proceeds from selling Treasuries, US stocks and US real estate be sold in the currency markets. The selling of dollars drives down the exchange value of the US dollar and results in rising US inflation. The Fed can print money with which to purchase Treasury debt, but it cannot print foreign currencies with which to purchase dollars.

The decline in the dollar’s exchange value and the domestic inflation that results will force the Fed to stop printing. What then covers the gap between revenues and expenditures? The likely answer is private pensions and any other asset that Washington can get its hands on.

Initially, private pensions will be taxed at a rate to recover the tax-free accumulation in the pensions. The second year a national emergency will be used to confiscate some share of pensions. Those relying on the pensions will find themselves with less income. Consumer spending will decline. The economy will worsen. The deficit will widen.

You can see where this is going, and there seems to be no way out. Policymakers, economists, and corporation executives are in denial about the adverse effects of offshoring, which they still, despite all the evidence, maintain is good for the economy. So nothing will be done about offshoring. Republicans will blame the budget deficit on welfare and entitlements, and if those are cut consumer spending will decline further, widening the budget deficit. Inflation will rise as incomes fall, and social cohesion will break down.

Now you know why Homeland Security purchased 1.6 billion rounds of ammunition, enough ammunition to fight the Iraq war for 12 years, has its own para-military force and 2,700 tanks. If you think the “terrorist threat” in America warrants a domestic armed force of this size, you are out of your mind. This force has been assembled to deal with starving and homeless people in the streets of America.

September employment report: According to the Bureau of Labor Statistics (BLS), September brought 148,000 new jobs, enough to keep up with population growth but not reduce the unemployment rate. Moreover, John Williams ( says that one-third of these jobs, or 50,000 per month on average, are phantom jobs produced by the birth-death model that during difficult economic times overestimates the number of new jobs from business startups and underestimates job losses from business failures.

The BLS reports that 22,000 of September’s jobs were new hires by state governments, which seems odd in view of the ongoing state budgetary difficulties.

In the private sector, wholesale and retail trade produced 36,900 new jobs, which seems odd in light of the absence of growth in real median family income and real retail sales.

Transportation and warehousing produced 23,400 new jobs, concentrated in transit and ground passenger transportation. This also seems odd unless the price of gasoline and pinched budgets are forcing people onto public transportation.

Professional and business services accounted for 32,000 jobs of which 63% are temporary help jobs.

So here you have the job picture that the presstitutes, hyping “the jobs gain,” don’t tell you. The scary part of the September job report is that the usual standby, the category of waitresses and bartenders, which has accounted for a large part of every reported jobs gain since I began reporting the monthly statistics, shows job loss. Seven thousand one hundred waitresses and bartenders lost their jobs in September. If this figure is not a fluke, it is bad news. It signals that fewer Americans can afford to eat and drink out.

The unemployment rate that is reported is the rate that does not count as unemployed discouraged workers who are unable to find jobs and cease to look. This favored rate, the darling of the regime in power, the presstitutes, and Wall Street, also is not adjusted for the category of “involuntary part-time workers,” those whose hours have been cut back or because they are unable to find a full-time job. Obamacare, as is widely reported, is causing employers to shift their work forces from full time to part time in order to avoid costs associated with Obamacare. The BLS places the number of involuntary part-time workers at 7,900,000.

The announced 7.2% unemployment rate is a meaningless number. The rate can decline for no other reason than people unable to find jobs drop out of the work force. You are not counted in the work force if you are discouraged about finding a job and no longer look for a job.

The phenomena of discouraged workers shows up in the measure of the labor force participation rate, which has declined in the 21st century. The opportunities for American labor are so restricted that a rising percentage of the working age population have given up looking for jobs.

Yet, the Obama regime, the Wall Street gangsters, and the pressitute media tell us how much better the economic situation is becoming as more small businesses close, as memberships decline in golf clubs, as more university graduates return home to live with their parents, who are drawing down their savings to live, as Fed Chairman Bernanke has made it impossible for them to live on interest payments on their savings.

According to the US census bureau, real median household income in 2012 was $51,017, down 9% from $56,080 in 1999, 13 years ago. In contrast, annual compensation in 2012 for US CEOs broke all records. Two CEOs were paid more than $1 billion, and the worst paid among the top ten took home $100 million. When the presstitutes speak of economic recovery, they mean recovery for the one percent.

America is in the toilet, and the rest of the world knows it. But the neocons who rule in Washington and their Israeli ally are determined that Washington start yet more wars to create lebensraum for Israel.

Early in the 21st century the liberal Democrat Senator from New York, Chuck Schumer, and I coauthored an article in the New York Times about the adverse effects on the US economy of jobs offshoring. The article caused a sensation. The Brookings Institution in Washington quickly convened a conference which was covered by C-SPAN. C-SPAN rebroadcast the conference several times. During the conference I said that if jobs offshoring continued, the US would be a third world economy in 20 years.

Wall Street quickly shut up Senator Schumer, but I am sticking by my forecast. Indeed, I think we are already there.

Tuesday, October 22, 2013

The Triumph of the Right

Conservative Republicans have lost their fight over the shutdown and debt ceiling, and they probably won’t get major spending cuts in upcoming negotiations over the budget.

But they’re winning the big one: How the nation understands our biggest domestic problem.

They say the biggest problem is the size of government and the budget deficit.

In fact our biggest problem is the decline of the middle class and increasing ranks of the poor, while almost all the economic gains go to the top.

The Labor Department reported Tuesday that only 148,000 jobs were created in September — way down from the average of 207,000 new jobs a month in the first quarter of the year.

Many Americans have stopped looking for work. The official unemployment rate of 7.2 percent reflects only those who are still looking. If the same percentage of Americans were in the workforce today as when Barack Obama took office, today’s unemployment rate would be 10.8 percent.

Meanwhile, 95 percent of the economic gains since the recovery began in 2009 have gone to the top 1 percent. The real median household income continues to drop, and the number of Americans in poverty continues to rise.
So what’s Washington doing about this? Nothing. Instead, it’s back to debating how to cut the federal budget deficit.

The deficit shouldn’t even be an issue because it’s now almost down to the same share of the economy as it’s averaged over the last thirty years.

The triumph of right-wing Republicanism extends further. Failure to reach a budget agreement will restart the so-called “sequester” — automatic, across-the-board spending cuts that were passed in 2011 as a result of Congress’s last failure to agree on a budget.
These automatic cuts get tighter and tighter, year by year — squeezing almost everything the federal government does except for Social Security and Medicare. While about half the cuts come out of the defense budget, much of the rest come out of programs designed to help Americans in need: extended unemployment benefits; supplemental nutrition for women, infants and children; educational funding for schools in poor communities; Head Start; special education for students with learning disabilities; child-care subsidies for working families; heating assistance for poor families. The list goes on.

The biggest debate in Washington over the next few months will be whether to whack the federal budget deficit by cutting future entitlement spending and closing some tax loopholes, or go back to the sequester. Some choice.

The real triumph of the right has come in shaping the national conversation around the size of government and the budget deficit – thereby diverting attention from what’s really going on: the increasing concentration of the nation’s income and wealth at the very top, while most Americans fall further and further behind.

Continuing cuts in the budget deficit – through the sequester or a deficit agreement — will only worsen this by reducing total demand for goods and services and by eliminating programs that hard-pressed Americans depend on.

The President and Democrats should re-frame the national conversation around widening inequality. They could start by demanding an increase in the minimum wage and a larger Earned Income Tax Credit. (The President doesn’t’ even have to wait for Congress to act. He can raise the minimum wage for government contractors through an executive order.)

Framing the central issue around jobs and inequality would make clear why it’s necessary to raise taxes on the wealthy and close tax loopholes (such as “carried interest,” which enables hedge-fund and private-equity managers to treat their taxable income as capital gains).

It would explain why we need to invest more in education – including early-childhood as well as affordable higher education.

This framework would even make the Affordable Care Act more understandable – as a means for helping working families whose jobs are paying less or disappearing altogether, and therefore in constant danger of losing health insurance.

The central issue of our time is the reality of widening inequality of income and wealth. Everything else — the government shutdown, the fight over the debt ceiling, the continuing negotiations over the budget deficit — is a dangerous distraction. The Right’s success in generating this distraction is its greatest, and most insidious, triumph.

Tea Party Logic (This Modern World)

Lobbyists Will Win and We Will Lose If TPP Trade Deal Goes Through

Civil Liberties  
October 18, 2013 |

Something very important happened last week.

For the first time, Presidents and Prime Ministers of several countries met with industry lobbyists to discuss the Trans-Pacific Partnership (TPP) on the sidelines of the annual Asia-Pacific Economic Cooperation (APEC) summit in Bali, Indonesia. Although U.S. President Obama suddenly announced he would not [3] be joining these discussions, industry lobbyists are hoping to push through [4]  TPP talks to finalize the agreement.

What exactly is the TPP? It’s been called one of the most significant international trade agreements since the creation of the World Trade Organization [5]- but you’d be forgiven for not knowing about it. Discussions about this monumental agreement have been so secret that the little we know about the text is from leaked documents [6]- documents that show we have grave reason to be concerned.

One of its most troubling chapters includes an extreme Internet censorship plan that could break your digital future. Here are the top five ways the TPP censors the Internet and why it should concern you:

5.The TPP could criminalize small-scale copyright infringement

The next time you want to share a song or a recipe online, you’d have to ask yourself: Am I a criminal? Interested in writing some fan fiction based on your favourite detective series and sharing it online? Ask yourself that very same question. That’s how TPP provisions could characterize you based on what we know about its Intellectual Property chapter.

According to the leaked drafts, unauthorized small-scale downloading or sharing of copyrighted material could result [7] in severe fines and criminal penalties. Law enforcement could even seize your computer and send you to jail for minor copyright infringement.

4. The TPP could prohibit blind and deaf users from breaking digital locks to access their content

Under the TPP, attempts to circumvent digital locks in order to use your paid-for and legally-acquired media may become illegal. If you are blind, this means you could be criminalized [8] for circumventing digital locks on your purchased e-books and other digital materials in order to convert text to braille, audio, or other accessible formats. If you are a librarian, it may become very difficult to share [9] excerpts of content with students for education purposes, lend out material to the public, or even gain full access to purchased content; and as a consumer of digital media, attempts to [10] make backup copies of that DVD you purchased or transfer your legally-purchased e-book on a different device would become unlawful.

3. The TPP could lead to excessive copyright terms

Copyright, which was originally intended to promote the creation of new works by giving authors certain exclusive rights for a limited time, may be threatened [11] by excessive terms and a rigid system that could stifle creativity and innovation under the TPP.

Under the TPP, excessive copyright terms [10] could be created beyond internationally-agreed upon periods; it could also lengthen terms for corporate-owned works. Despite the strong and growing body of evidence demonstrating the importance of a rich commons [12] in creating new works, such a rigid copyright regime would stifle creativity and innovation. It would also restrict [13] the limitations and exceptions that member countries could enact, ensuring that countries enact compliant laws in order to avoid trade sanctions.

2.The TPP may regulate temporary copies at the cost of innovation and freedom

Temporary copies, or the small copies that your computer needs to make in order to move data around, are being targeted by TPP lobbyists who are attempting to redefine the very meaning of the word “copy”. The very notion of regulating temporary copies is ludicrous given how basic [14] the creation of temporary copies of files and programs is to computer functioning and the Internet. As the Electronic Frontier Foundation notes [14]:

This proposal may seem absurd to you. It should. Given how crucial the storage of “temporary copies” of digital files is to the functioning of our devices, the inclusion of unfettered provisions to regulate it is purely backward, especially given the supporters’ failure to justify a legitimate purpose for imposing a burden without a balance.

If lobbyists have their way, anyone viewing content on any device could potentially be committing copyright infringement. Companies like Wikipedia and Connexions would face serious difficulty [14] in hosting and storing user-generated content. Ultimately, this provision could make it more expensive for you to access licensed content, make you more vulnerable to liability, require you to purchase licenses from copyright-holders for transactions, and hinder your ability to use and create online content.

1. The TPP could kick you off the Internet

The TPP will place the burden [15] of monitoring copyright infringement on your Internet Service Provider (ISP), potentially resulting in the blocking of entire websites. Your ISP would have to institute what’s called a “three-strike rule [15]” – a rule that would kick you and your whole family off the internet after three infringement accusations by copyright holders.

It would also force websites to police user-contributed material.. Not only would this mean added financial burden [16], which could lead to the stifling of technology startups, it would also result in websites having to actively monitor for banned links – forcing the creation of a stringent Internet censorship regime. If ISPs are incentivized to remove content because of the resource-heavy nature of investigating copyright infringement complaints, such immediate takedown could censor time-sensitive news, including information to facilitate social organization, protest, and community-building.

It would also break your right to privacy [17] by forcing your ISP to share your private sensitive information with law enforcement in order to investigate your alleged copyright crimes.

Here’s the bottom line: The TPP is a secretive and extreme agreement that could break our digital future. It could change how we behave online, threaten our freedom of expression by promoting an extreme Internet censorship plan, and invade our privacy. The TPP will stifle creativity and innovation, hinder our ability to access information and organize, and criminalize our Internet use. The TPP is an affront to global Internet freedom.

Over 100,000 people have said no [18] to the TPP’s extreme Internet censorship plan and several thousand have put forward their vision of a fair digital future [19]. Join them and make your voice heard – the time is now [20].