The Weekend Economists---Live! November 14-16, 2008

[Demeter]

Welcome back to another edition of WE, the place that tries (and doesn't fail completely, I hope) to make sense of the bustling American and world economies and leaders of same.

Maybe it should read Dead or Alive? After a week of riotous trading in fact and rumor, stock and bond and those crazy things that pretend to be stocks and bonds, we do not know whether we are coming or going, but the general suspicion is it's ugly out there, and not going to get better any time soon. So like good bears, we have been fattening up and nesting, preparing to hibernate through a long, cold, dark winter in the hope that Spring will come again.




So, let's clean house, or at least the inbox!

U.S. FUTURES &
MARKETS INDICATORS>
NASDAQ FUTURES-----------------------------S&P FUTURES

[Demeter]

1. O! Bama! The Whole World Turns its Weary Eyes to You…

http://www.dailyreckoning.com/Issues/2008/DR111408.html

You remember the 'plumbers?' That was the name given to a special government committee - known as the Plunge Protection Team. When the drains get clogged and the water starts backing up, this group is supposed to put on its waders and get to work.

And yet, now we have the water rising all over the world…and whole towns in California already submerged. Where are the plumbers?

Who knows? Maybe they had something to do with yesterday's rally. The Dow rose 552 points. The dollar went down hard - with the euro up to $1.28. And gold rallied $16 too - to $734.

The feds are doing all they can to bail out the economy. If they wanted, they could give the stock market a little boost from time to time. But probably not much more than that - and a great cost. And for all their bailing, the water is still rising…

Foreclosures are increasing at a 25% rate. GM is on the verge of bankruptcy; it's stopped talks with Chrysler. Joblessness is at a five-year high - and rising.

But there is good news too - prices dropped 65% at a wine auction… White truffles are down 84%.

This just in from colleague Ingrid Labuzan at MoneyWeek:

"In England, the housing slump is catching up to the U.S. Prices are officially down 14.6%. The average U.K. homeowner is losing money faster than he makes it. The housing bear market is reducing house prices by about 27,000 pounds per year - while the average bloke earns only 24,000. And every day, 121 houses are repossessed.

"The unemployment lines are getting longer too. There are expected to be 2 million people in Britain without jobs by the end of this year. Next year, the number is supposed to reach 3 million, above 10% of the workforce."

The OECD, meanwhile, says the floodwaters are rising all over the world. They expect the soggiest year in a long time…with negative growth in the developed world in 2009. Germany says it already faces the worst recession in 12 years.

For us, here at The Daily Reckoning, the crisis comes as no surprise. Heck, we saw it coming years ago. Of course, even we didn't think it would hit so hard…and so wide. We thought Japan, for example, would be spared. The poor Japanese are already black and blue from having been beaten up for the last 18 years; we figured they'd had enough. Instead, the Tokyo stock exchange got whacked again - taking stock prices down to levels last seen in 1986.

India, too, we thought would stay out of it. After all, Indians are pretty sober people. Almost party poopers. But the same stiff, moronic regulations that kept India from participating in the global credit expansion also meant that India's banks and consumers were less exposed to the global credit contraction. No party; no hangover. Still, that didn't stop investors from selling Indian stocks along with everything else.

We're surprised at how violently the downturn hit commodities too. Rightly or wrongly, investors are expecting a long, deep, deflationary correction.

"We are all Japan, now," says Albert Edwards at Societe Generale.

Of course, we know how it works: the correction must be equal and opposite to the shenanigans that preceded it. But which shenanigans? What, exactly, is this correction going to correct?

So far, the financial industry and the housing industry have had their fannies paddled. Just as you'd expect. They deserve it. Go ahead, Mr. Market, let 'em have it!

The U.S. auto industry too deserves a good spanking. It failed to hold down costs and continued making inefficient, gas-guzzling vehicles long after the market had turned away from them. It should be allowed to fail. Get it over with. Make room for new blood. There are a lot of automakers in the world; we don't need these dinosaurs.

America's retailers…and shopping malls…and fast-food joints… Well, the list of industries in need of a good whack is long and obvious.

But right now, it's the consumer who's bending over. In fact, from MarketWatch we get the news that "retail sales plunge a record 2.8% in October."

*** "Consumers stop shopping," is the stark headline at the Chicago Tribune. We know that that is just what he should do. He's got to pull himself together, get on the wagon, clean up his balance sheet.

But here come the feds - determined to stop him. They pull up to his house in a shiny convertible. "C'mon…it's happy hour all night long… No money? Don't worry, I'll lend you some…"

Here's the report from the New York Times:

"… with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.

"The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.

"Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases."

Paulson's new plan is simple enough. Borrow money from savers all over the world and give it to spenders in the United States of America. Put things back to 'normal' - or at least to what they were a few years ago. To a thinking man, of course, this plan is absurd. It merely encourages Americans to continue making the same mistake - spending money they don't have on things they don't need. Rather than cleaning up their balance sheets, they'd be making them worse.

But you couldn't put together a chess team with the few people who have their thinking caps on. This is a crisis; everybody says so. And in a crisis, you don't stop to think - you act! You act like a jackass, usually.

Paulson was the front man at Goldman up until 2006. You'll recall that that was when Wall Street's party was completely out of control…when financial shenanigans reached their crazy apogee. Now, the very same Henry Paulson is working his magic on the whole U.S. economy - good luck to us all!

But it really depends on how much correction Mr. Market has in mind. Is he correcting the excesses of the 2002-2007 period? That would take the Dow back to 7,000 or so…and cut housing down a few more percentage points.

But it would leave the fundamentals of the economy intact. Or is he correcting excesses of the entire bull market from 1982-2007? Or is he aiming to correct the whole, grotesque dollar-based post-'71 money system? That is, is he merely trying to correct the bubble or the pump? The speculative hyperbole of the last 5 years…or the source of so many bubbles…and so much economic distortion - the paper money system created by Richard Nixon in 1971?

We don't know. But judging by the way things are going…our guess is that he has bigger fish to fry than just the stock market…or the housing market. This looks like the big one to us - the "Greater Depression," as our old friend Doug Casey puts it.

Our guess is that he aims to take America down a peg or two. Its money. Its standard of living. Its power and its prestige. It won't be pleasant for many Americans…but in the end, they will be standing on more solid ground.
*** This from colleague Dan Denning in Australia:

"I ran across Dmitry Orlov's book, Reinventing Collapse, in which he compares present day America to Soviet Russia prior to its…collapse.

"Orlov outlines five stages of collapse, and where the U.S. along the way:

"Financial Collapse. Already in motion.

"Commercial Collapse. Just started.

"Political Collapse (a loss of faith in ideology). First part is over (the recent election in the US). Second part is going to be nasty.

"Social Collapse. Potentially the end state or stable equilibrium point for most of the world. Everyone against everyone with points awarded by the global marketplace.

"Cultural Collapse. Full meltdown. Global market breaks."

[Demeter]

2. The Fall of the U.S. Consumer

Is this the “ownership society” promoted by the Bush Administration? Now, people own less than ever!

There are said to be almost 8 million houses with negative equity in the United States.

Of course, people own a lot less in stocks than they did a few months ago too. Worldwide, stocks have shucked off about $28 trillion worth of value.

... And now, in the art market, “prices finally plunge,” reports the Daily Telegraph . An auction in New York of Impressionists and modern art was supposed to bring in $800 million. Instead, it barely fetched half that much – only $470 million by Friday night. Some lots didn’t sell at all. Only 60% of the artworks sold...at prices most about 30% below estimates...

...we announced a “Trade of the Decade” in 2000 – sell stocks, buy gold. The decade has a few more months to run, so we’ll stick with it. At the beginning of this decade you could get about 40 ounces of gold for a unit of the Dow stocks. Now, you barely get 12. If you’d done the trade and stuck with it, you’d be up about 200%...

Remember, a correction is equal and opposite to the deception that preceded it. Where was the deception of the boom years most concentrated? In two places – the United States and China. Americans believed they could live beyond their means forever. China believed it could get rich by selling more and more manufactured items – even though its major customer couldn’t pay...

“No one should underestimate Asia’s exposure to this crisis,” writes Richard Duncan in Far Eastern Economic Review . “At best, Asia is facing a severe recession. September 2008 may mark the end of the era of export-led growth, rather than merely the beginning of a more typical global recession. Asia’s export-led economic model is just as threatened as the Anglo-Saxon model of highly leveraged capitalism.”


http://www.dailyreckoning.com/Issues/2008/DR111208.html

[acmavm]

69. This is just one small part of this whole fiasco that boggles the mind:

<snip>

Paulson was the front man at Goldman up until 2006. You'll recall that that was when Wall Street's party was completely out of control…when financial shenanigans reached their crazy apogee. Now, the very same Henry Paulson is working his magic on the whole U.S. economy - good luck to us all!

<snip>

I will NEVER understood how this came to pass, that one of the crooks is put in charge of cleaning up the crime scene.

[Demeter]

3. HELL, MEET HANDBASKET, PART I by Doug Hornig

http://www.dailyreckoning.com/Issues/2008/DR111208.html#essay

Until recently, average Americans were only dimly aware that there were two types of banks – the commercial banks nearby and the major investment banks located in faraway New York. Understanding the bank where they conducted business, with people they knew, was enough. The big, impersonal Wall Street banks – which dealt in higher-risk investments with potentially higher rewards – were for companies and the very rich.

While ordinary citizens thought little about the distinctions among banks, the government did. Seventy-five years ago, as the Depression deepened, lawmakers were desperately trying to determine the causes of the crisis (read, looking for scapegoats). Some of the things they found were conflicts of interest and opportunities for fraud linked to the mixing of commercial and investment banking.

Congress decided to erect a “wall” between commercial and investment banking, and so passed the Banking Act of 1933, usually referred to as the Glass-Steagall Act. Glass-Steagall created the Federal Deposit Insurance Corporation (FDIC) to protect depositors in commercial banks, and it forbade commercial banks to underwrite securities or act as stockbrokers or dealers.

Glass-Steagall remained in force for six and a half decades, although various deregulatory measures and changes in exchange rules chipped away at it. Notably, in 1970 a rule excluding public companies from membership in the New York Stock Exchange was dropped. The last major private institution, Goldman Sachs, went public in 1999. This allowed investment banks to sell stock to any potential investor and greatly expand their capital base.

Over the last two decades of the 20th century, the financial industry lobbied vigorously for the repeal of Glass-Steagall and, in 1999, they got their way with the enactment of the Financial Services Modernization Act. The door was opened to consolidation in the banking industry.

With one stroke of a pen, commercial bankers could begin turning their loans into investment products. (Glass-Steagall had prevented them from selling debt-backed securities for which they were the underwriters.) And Wall Street investment banks were suddenly in the mortgage business. It would prove to be a marriage made somewhere significantly south of heaven.

We’re not fans of government regulation, but a deregulated marketplace carries with it certain imperatives. It functions as it should only in the absence of both criminal and boneheaded behavior. We can erect oversights meant to prevent the former and laws to punish it after the fact. But all the regulation in the world won’t do much about the latter, since both market traders and the regulation itself may be boneheaded.

The biggest factor here was the removal of Glass-Steagall prohibitions, but there were two other important tweakings.

The Commodities Futures Modernization Act of 2000 transformed the new mortgage-backed securities into a commodity, enabling them to be traded on futures exchanges with little oversight by any federal or state regulatory body.

Completing the trifecta, the Securities and Exchange Commission in 2004 waived its leverage rules. Previously, broker/dealer net-capital rules limited firms to a maximum debt-to-net-capital ratio of 12 to 1. But under the new regulations, five companies – Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, and Morgan Stanley – were granted an exemption, which they promptly used to lever up 20, 30, even 40 to 1.

Just as Congress was repealing Glass-Steagall, the tech stock bubble was inflating beyond sustainability. It would soon be pricked, ushering in a brief recession during which investors began the hunt for the next big thing....

MORE AT LINK

[Demeter]

4. Hale "Bonddad" Stewart / President-Elect Obama: How You Can Fix the Economy

http://www.huffingtonpost.com/hale-stewart/president-elect-obama-how_b_143501.html?view=screen

In my previous article I highlighted the general economic problems President-elect Obama faces. In short order these are the housing crisis, the financial crisis, the trade deficit, a recession, and a fiscal situation in ruins. This article will outline some of the possible policies -- as well as the pitfalls of the policy proscriptions. Simply put, his upcoming task is daunting.

Housing

Housing's basic problem is simple. Supply is at sky-high levels while demand is at low levels. As a result, prices are dropping as evidenced by the drop in the Case Shiller home price index. This has led to one third of recent homes sales leading to a loss for the seller (For a more complete explanation, see this story from my blog). The question becomes what can be done to deal with this situation?

The answer is there is little the government can do directly. Remember the central issue is massive oversupply of housing. Unless the government wants to actually start buying properties outright or demolishing houses through its eminent domain powers to lower supply there isn't much to be done directly.

However, there is an important indirect policy the government can undertake -- making it far easier to rework mortgages that are underwater (where the mortgage is worth more than the home price). I would suggest three different policy ideas. First, create some kind of tax incentive beyond the policies in the current tax code to encourage private compliance with these goals. For example -- a tax credit or some kind of bonus deduction would help to ease the losses faced by the financial sector when the financial institution directly owns the mortgage. Second, allow bankruptcy judges to rewrite mortgages. We're going to see a big increase in bankruptcy over the next year or so. Housing costs will play a fairly large part in that. Allowing judges the discretion to rework mortgage payments would ease some of the pain.

Finally, something has to be done to allow a rewriting of mortgages that have been securitized. Here's the basic problem. Before securitization the lender actually held the loan. For example, when the borrower went to the bank to get a 30 year loan the bank would own the loan for 30 years. This would make reworking the loan that much easier. Now the problem is much more complicated because the original lender no longer owns the loan. Instead, the lender sold the loan to an investment bank who packages the loan as part of a mortgage backed bond which in turn is sold to large institutional investors. Some type of mechanism needs to be created to help with this situation (if it's possible).

The General Economic Slump

When the recession started is debatable. I have argued it started in the 1Q of 2008. I have seen others argue it started in the 4Q of 2007. Irregardless of when it started there can be little doubt we are currently in a recession. That means overall growth is declining. Starting in the 4Q of 2007, the growth rate from the previous quarter was -.2%, .9%, 2.8% and -.3%. The 2.8% growth rate in the second quarter of 2008 was a statistical aberration. Real growth without the import price "inflator" was a decline of 1.3%.

So, the economy is clearly contracting now. This implies government stimulus would help to alleviate the slowdown. Former Labor Secretary Robert Reich explained the situation thusly:

Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.

I is investment. Absent consumer spending, businesses are not going to invest.

Exports won't help much because the rest of the world is sliding into deep recession, too. (And as foreigners -- as well as Americans -- put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)

That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won't work if there's inadequate demand.


Anyone who is familiar with the way the BEA reports GDP growth will be familiar with the above mentioned format.

So, we have the government spending to help minimize the effect of the slowdown. The question now becomes how much. Paul Krugman offered this analysis:

Right now, we're at 6.5% unemployment and a 3% output gap - but those numbers are heading higher fast. Goldman predicts 8.5% unemployment, meaning a 7% output gap. That sounds reasonable to me.

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it's too small. What's the multiplier? Better, we hope, than on the early-2008 package. But you'd be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.


Here's where the plan runs into a big problem. Bush is leaving Obama a fiscal disaster. Total US debt has increased from $5.8 trillion in 2001 to $10.6 trillion today. From a debt to GDP ratio the increase has been from roughly 57% to roughly 72%. These increases indicate that no one in Washington has been able to make any tough choices for the last 8 years. As a result the federal finances are now in terrible shape.

The central problem is interest rates on the debt. The price of a bond and the bond's interest rate are inversely related: as prices drop the interest rate on the bond increases. The Treasury is already issuing tons of debt to pay for the financial bail-out. As a result traders are expecting prices to decline and interest rates on government debt to increase:

"The No. 1 reason is supply,'' said Jason Brady, a survey participant and managing director at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees $4 billion in fixed income assets. "You have Fed and Treasury actions which are supporting credit markets and causing a huge amount of issuance.''

The U.S. is boosting debt sales to fund such programs as the Treasury's $700 billion bank bailout and the Federal Reserve's purchases of commercial paper to thaw credit markets. Federal Reserve Chairman Ben S. Bernanke has made unprecedented use of the central bank's powers as lender of last resort, unlike his predecessor, Alan Greenspan, who relied on interest- rate cuts to stabilize turbulent markets. President-elect Barack Obama called on Congress Nov. 7 to pass economic-stimulus legislation.

Quarterly Borrowing

Last week the Treasury Department estimated that it will need to borrow $550 billion this quarter, more than triple an earlier forecast. New York-based Goldman Sachs Group Inc. said Oct. 29 the government's requirement this fiscal year that started Oct. 1 will almost double to $2 trillion.
The federal budget deficit may climb 58 percent to $687.5 billion for fiscal 2009 as U.S. debt swells and the slowing economy crimps tax receipts, according to a survey by the Securities Industry and
Financial Markets Association of its members released Oct. 31.

Expectations that yields on 10-year U.S. notes will rise increased to 54.08 in November after reaching a seven-month low of 48.91 in October, according to the Bloomberg survey. The measure is a diffusion index, meaning a reading above 50 indicates that participants expect bonds to weaken and yields to go up.


These are hardly alarming interest rates. 5.40% of interest on a 10-year debt is still very reasonable. However, it's important to remember that issuing all of this debt will have consequences. Some of which would be extremely unpleasant:

"The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system" and the bankruptcy of the government is not out of the realm of possibility, Hennecke said.

"In the United States there is already a funding crisis, and they will have to sell a lot more bonds next year to fund the bailout packages that have already been signed off," Hennecke told CNBC.


So, to help solve some of the basic problems of the economy the US will have to increase spending in a big way. For someone like myself who has been continually harping on the debt this is an extremely difficult policy call. I don't like deficit spending in any way at any time. It is an extremely dangerous precedent to set. However, there are times when it is required. And now is such a time. Simply put, without the cushion provided by a massive injection of government spending we are in serious trouble -- as in a contraction the likes of which we haven't seen since the early 1980s and probably before.

However, in doing so we are walking on extremely slippery policy ground. We have not come close to balancing the budget in over 8 years. As a result the debt/GDP has continually increased. Now -- at a time when it would be great to spend without having to worry about things like a dollar collapse, a loss of our AAA rating or a spike in interest rates -- such an action will in fact increase the possibility of that happening. Simply put there are no good choices right now. Do nothing and risk an extremely painful recession. Do something and place the soundness of the US government's finance sin jeopardy. It's not a pretty set of choices.

[Tansy_Gold]

11. Two points I want to make, and then I'm going rock hunting

First quote from the article: "He (Bernanke) knows that monetary policy won't work if there's inadequate demand."

A one-shot stimulus plan, like the rebates of last spring, only provided temporary increase in "demand." When much of the so-called stimulus went to pay off debts incurred by previous spending, there's no real stimulus at all. It's one meal to a starving man; you feed him once but he gets hungry again in a few hours. Of course, this applies to either an individual or a corporation.

Second quote: "I don't like deficit spending in any way at any time." Yet isn't this exactly the policy that Wall Street and indeed the puke-led governments have advocated? Isn't "deficit spending" just a synonym for "going into debt up to your eyeballs"? Isn't this what we've all done? well, other than those of us lucky and/or smart enough to avoid the debt trap?

But at the core, of course, is the issue of capitalism as built on the creation of unnecessary need beyond the normal ability to satisfy it. And no one is addressing that at all. Someone in the campaign whispered the dread word "marxist" and all potential discussion of alternate systems/philosophies was successfully quelled -- again.

Okay, that's it for this morning. I'm heading out to the desert to look for agates and sparkly things.

Tansy Gold

[Demeter]

5. Revenge of the Left across the world

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3366575/Revenge-of-the-Left-across-the-world.html

No matter that statist policies were responsible for this global crisis in the first place. It was Western governments that set interest rates too low for too long, encouraging us all to abuse credit.

It was Eastern governments that held down their currencies to pursue mercantilist trade advantage, thereby accumulating vast foreign reserves that had to be recycled. Hence the bond bubble. This is the deformed creature known as Bretton Woods II. Protectionist Democrats are right to complain that the game is rigged. Free trade? Laugh on.

But at this point I have given up hoping that we will draw the right conclusions from this crisis. The universal verdict is that capitalism has run amok.

In any case the damage caused as credit retrenchment squeezes real industry is likely to be so great that Barack Obama may have to pursue unthinkable policies, just as Franklin Roosevelt had to ditch campaign orthodoxies and go truly radical after his landslide victory in 1932. Indeed, Mr Obama – if he wins – may have to start by nationalizing the US car industry...

"It is certainly greatest crisis of capitalism since the 1930s. As Marx and Schumpeter foresaw, globalization not only destroys heritage, but is incredibly unstable. It operates through a series of crises.

"There'll be a much greater role for the state, one way or another. We've already got the state as lender of last resort, we might well return to idea of the state as employer of last resort, which is what it was under FDR. It'll be something which orients, and even directs the private economy," he said.

Dismiss this as the wishful thinking of an old Marxist if you want, but I suspect his views may be closer to the truth than the complacent assumptions so prevalent in the City.

To those who still think that business can go on as normal now that EU taxpayers have had to rescue the financial system, I can only say: what will happen to London if EU exchange controls are imposed, or if leverage is restricted by draconian laws – as demanded by the German, Dutch, and Nordic Left?

Does the UK still have a blocking minority under EU voting rules to stop a blitz of directives that could shut down half the activities of the City – or the 'Casino' as they say in Brussels? I doubt it.

Who thinks that the three key Commission posts – single market, competition, and trade – will still be held by free marketeers when the new team comes in next year?

In Germany, Oskar Lafontaine's Linke party now has 23pc support in Saarland on a Marxist pledge to nationalize banks and utilities. Needless to say, the Social Democrats (SPD) are shifting hard Left to protect their flank.

"The rule of the radical market ideology that began with Margaret Thatcher and Ronald Reagan has ended with a loud bang," said Frank-Walter Steinmeier, Germany's foreign minister and SPD candidate for chancellor next year.

"We need a comprehensive new start, so we can reestablish our society on fresh foundations. People create value, not locusts," he said.

France has its own Gaullist version on this, seizing on the crisis to launch the most far-reaching strategy of state intervention since the 1970s.

"Laissez-faire, c'est fini," said President Nicolas Sarkozy. "We will intervene massively whenever a strategic enterprise needs our money."

Such language can now be heard daily across Europe. It can only intensify as the fall-out from the EU's €1.8bn trillion (£1.4 trillion) bank rescue becomes clearer, and as Europe's elites discover that their own banks are the most leveraged in the world and have played their own Wagnerian part in Gotterdammerung.

European and UK banks are five times more exposed to emerging markets than US banks. They alone hold the collective time-bomb of $1.6 trillion (£990bn) in hard currency loans to Eastern Europe – now starting to detonate in Hungary, Ukraine, Romania, and even Russia.

At some point, Europe's political class will face the awful truth that their own credit bubbles are just as bad – and perhaps worse – than the excesses of US sub-prime property. As that occurs, the shock will move by degrees from revulsion to political rage.

Professor Hobsbawm, who spent his youth watching Hitler's rise in Berlin, has a warning for those who think this will help the Left in any recognizable form. "In the 1930s, the net political effect of the Depression was to enormously strengthen the Right," he said.

America was the great exception, as it may prove to be again. I for one will take the enlightened "socialism" of Barack Obama any day over the Hegelian broth nearing the boil in Europe.

[Tansy_Gold]

7. My thanks, too.

I don't usually get a chance to read more than a quick skim, but now that my nerves are getting back to something like normal after the (successful!) election, Week-end Edition is at the top of my priority list. There's NEVER a dud!



Tansy Gold, who sometimes IS a dud

:hi:

[Demeter]

13. Never a Dud, Tansy

Tired, discouraged, sick from a cold is not a dud. All of which I'm suffering this weekend, a typical November day: 40F, steady cold rain, powerful winds, and a cranky kid who wants me to go out in it...

It is a relief to have the election successfully behind us. It gives me a reason to get up in the morning.

[Tansy_Gold]

22. I feel almost -- almost -- guilty

Glorious here in the desert east of Phoenix. I'm setting out in about half an hour to go rock hunting with a couple of friends. Perfect weather -- not a cloud in our electric blue sky, just a slight breeze, 60s now and will probably hit 80 by afternoon.

We have some pretty crummy politics here, but I do love Arizona.





The transplanted native Chicagoan who is

Tansy Gold

[Hugin]

23. Looks like you're channeling the other Ben this weekend.

Y'know, that Franklin fellow... One of the first to state it's better to teach someone to fish for a lifetime than
to give them one fish to eat for today.

Maybe there was some other historical figure who said that? Probably.

[KoKo]

6. Thanks for doing this OTWeekend, Demeter.

For those of us addicted to Ozy's SMW, M-F...it's nice to have a "weekend edition" given the times we live in. Enjoyed your last two "weekenders," also.

:yourock:

[Demeter]

12. So Glad You Liked It!

[DemReadingDU]

8. Debt Rattle, November 14 2008: Look beyond your dreams

11/14/08 from ilargi at http://theautomaticearth.blogspot.com/


Ilargi: The problem with all plans to backstop mortgages is the same and eternal one that should have kept the government out of mortgages in the first place: it drives up prices. I know that in the US, the practice goes all the way back to the 1930's, and it may well have been well-intentioned, but it came with its own seed of failure built in from the start.

Today’s price levels are so high that any and all backstops are even far more perverted than they were 70 years ago, but the principle remains. The solution is not, and never can be, to allow or even seduce prospective buyers, through loans or giveaways or any other means, to purchase highly overvalued properties.

You see, that is good for the banks who write the mortgages; they receive far more in mortgage payments and interest. It is not good for the buyers, who get much deeper into debt than they would have if the government would stay away. You could have a system in housing that involves the government, but then you would have to throw banks out of that system altogether. If both are involved, homeowners automatically end up paying more.

I would be hugely in favor of kicking the banks out: they add nothing, they just take away. Now that Fannie and Freddie are back in government hands, and they buy 95% of all mortgages, the only role banks play is in pocketing fees, without any kind of responsibility. And that is of course never good. In my view, all basic human needs should be taken out of the marketplace, or at least food, water and shelter. I don’t mind leaving clothes in there, as long as you make sure everyone has enough.

But when it comes to food and water being bought and sold by large anonymous investors, there must inevitably come a time when a profit can be made through people's misery. Every community needs to have ownership of its basic needs. For housing, you could revert to George Bailey, but looking at the way the banking industry has grown into a gang of blood-thirsty sharks, I don't see the original savings and loan model as viable, not until the last guy to leave Wall Street turns off the lights.

Of course, there is the discrepancy between buyers on the one hand and owners that want to sell on the other. While buyers benefit from lower prices, owners obviously do not. Still, you don't have to choose sides to resolve this Gordian knot. All you really need to do is to know the cost of building a house, and to place a maximum profit margin on top of that. That is no different from what you must do to keep food affordable, or from the way water prices are still set in large parts of the world. If we allow our basic needs to be turned into investment and profit-making opportunities, we allow ourselves to be treated as such as well.

If there is more money to be made in selling sending our food and our water to other communities than our own, we will be either poorer, hungry, thirsty, or all of the above. Equally, if we allow people outside our communities to buy, sell, lend out and manipulate our homes for profit, we will end up either poorer or without shelter, and again most likely both.

It is not realistic to think that these principles will be adopted tomorrow morning. But in the meantime, plans like the one that Sheila Blair announced this morning, which facilitate the continuation of a system with highly overvalued real estate, can only fail, and will do so at the cost of the very people they claim to help. And once again, the only parties that benefit are the major banks and lenders. The losses reported this week by Fannie Mae and Freddie Mac, which are really just the tip of the iceberg, will all come back to haunt the same homebuyers (well, their grandchildren) who were supposed to be helped under Roosevelt’s New Deal, which gave birth to Fannie Mae.

These are unintended consequences that will cost US taxpayers trillions of dollars. Fannie and Freddie’s combined losses, just in the 3rd quarter, are $54 billion. At its 2005-06 peak, the total value of US residential real estate was estimated at some $23 trillion. According to Case/Shiller, it has since lost at least 22%, or $5 trillion. A large part of that loss sits in Fannie and Freddie’s portfolio’s, and the government is aggressively pushing them to buy more loans, close to $500 billion per year. The official line is that this will benefit the potential buyer and the consumer, customer, taxpayer, citizen. The reality is that such enormous mounds of losses are dumped on the heads of Americans, you won't be able to dig them out and find them back.

These consequences may never have been foreseen by Roosevelt and his people, though that is by no means sure. In the years since, however, both banks and governments have come to understand very well how much money can be made by pushing up real estate prices. All they had to do was promote the myth of the American dream of homeownership.

And that is perhaps the most amazing trick as well as the biggest crime: making people believe that something works to their advantage, while in reality it drives them into debt-riddled poverty. People have this remarkable talent to fool themselves, to see only what they wish to see, and it can be a gift from heaven. But that's not always a given.

At times it helps to look beyond your dreams. There are entire industries out there who use that talent of yours to see only what you wish, in order to sell you detergent, cars, houses, politicians and a whole lot of other things that you'd be better off without. Your dreams have a way of betraying you when you use them to escape. It's high time, and High Noon. Ask yourself why you dream what you dream.

click to read related articles and comments...
http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-14-2008-look.html

[Demeter]

14. Lots to Ponder in That Post--Thanks for Listing It!

Aside from turning the entire modern economy on its ear, I am hard-pressed to find a downside.

I'm of the opinion that the purpose of government is to see to the people, not the corporations, and in this country, to all people. The mechanism is the details; what worked in the 18th or 19th centuries faded in the 20th, and completely disappeared when Corporations went global....of course, if Globalism collapses, we will fall back into the practices of the early 20th century again...

[ozone_man]

47. Distinguishing between wants and needs is key.

Corporate consumerism has created these artificial wants that result in huge profits for them during the inflation of the bubble, and when the debt burden becomes extreme, the bubble pops, bankrupting consumers and the corporations that prey on them.

Personally, I think we need to take a hard look at the banking system, including the Federal Reserve and ask ourselves if this what we really want? Is the Fed even Constitutional? To have a private banking system responsible for money creation or debt creation as is the case with the Fed?

This is all tied in with the concept of growth of the economy and positive inflation, which inherently results in boom and bust capitalism. It's time for sustainable economics, not growth oriented, inflationary monetary policy to support this Ponzi scheme that we've been living under.

So, now we have a chance to change that. To re-examine whether the Fed is Constitutional and whether we can come up with a better monetary system, that is not corrupt. It's really much more than regulation of Wall Street that we need. We need fundamental changes in the monetary system.

And Greenspan belongs in jail. :)

[Demeter]

50. Agreed.

[Tansy_Gold]

62. If the monetary system is part and parcel of the economic system

we'd have to revamp both, wouldn't we?

The monetary system, it seems to me, both depends on and is necessary to the kind of consumer capitalism we currently enjoy (:sarcasm:), isn't it?

Wouldn't hurt my feelings to see 'em both disappear.


Tansy Gold

[ozone_man]

66. Yes, we need to revamp both.

Consumerism will be revamping itself to some extent as credit and dollars become scarce due to excessive debt. People will be cutting back to basics.

But in general, our society has to restructure to better address our needs over wants, the latter being marketed to us by aggressive advertising and a banking/monetary system that is inflationary and issues debt to consumers to feed the unsustainable consumption/debt spiral.

So we need a noninflationary monetary system and a society model for development that does not require growth to survive. Sustainable economics compatible with the environment.

I guess it's a tall order to expect some of these changes, but they could happen. And corporate welfare and military industrial complex are huge obstacles to changing the economic system. But at the root of this Ponzi scheme economy that we have is our monetary system, which issues debt to support our unsustainable economy model. Now, the rest of the world seems to be sucked into that same model, so perhaps a global solution is required. We can start by eliminating this shadow banking system and the monetary system that supports it.

The idea that you can have what you want now and pay for it later has to change. It's not sustainable and the banking system is designed around it to reap the profits from issuing debt. That's what Jefferson warned us of. He was right.

[Hugin]

9. Prag's Weekend Pondering (for those so inclined...)

This Weekend I'll be channeling Teddy Roosevelt in asking myself the question...

Is 'Too Big To Fail' too big to break-up?

Along with the mortgage madness, tax cuts for the hyper wealthy during war time, and questionable speculation
driven inflated energy prices I'm of the impression that the FTC's allowing the promiscuous and incestuous highly
leveraged mergers of all sorts (especially in the Financial Sector) is a root cause of the depressing state of our
mutual economy presently... Fortunately, it is a fixable problem.

But, will we hear of this remedy? I doubt it. In fact, I think the chorus of the Corporate Media
chanting "Too Big To Fail" is merely a distraction intended to keep the idea of reducing these Monolithic
Monopolies to fail-sized pieces from entering the collective mind. Funny how it's okay for Norquist to suggest
it's the way to deal with Government... But, silence on using slice and dice to control and regulate out-of-
control corruption on Wall Street. Maybe Grover was Projecting?

[Demeter]

15. Thre are a Lot of Monopolies That Never Should Have Been Permitted

Thank Reagan for that. I don't think there's been a successful obstruction of monopoly since Carter was trapped in the Rose Garden.

[Hugin]

24. I forgot to mention the roles of wage stagnation and job reductions as root causes.

I realized that in the interim between the time I posted and now...

But, I feel I've pretty well narrowed down the root causes other than Fraud, Greed, and Deceit which will have to
be determined by the Court of Public Opinion. (This Election was a start in that direction.)

I'm a little concerned about the lack of coverage and mention the Wars are recieving... Even with the Economic strife
and because of the problems we're facing, the focus should remain on our National commitments and how to resolve them ASAP.

[Demeter]

27. Bush Has Lost Interest in the War and Occupation Business

and Cheney must be on life support, he's so invisible.

So the world waits for Obama to move in.

I hope he has the good sense to just shut the whole thing down quickly--16 weeks, not 16 months, or less even. I don't want another helicopter off the roof departure like Saigon to stain our honor.

[DemReadingDU]

30. Cheney did come out from his undisclosed bunker

to show the VP residence to Joe and Jill Biden

:P

[Tansy_Gold]

58. I suspect -- tinfoil hat in place -- that some people may have considered it

and then discarded the idea for, shall we say, nefarious purposes. Maybe Grover was twisting their arms?

When the bailout of AIG was first proposed, or maybe even before that, wasn't there some discussion of selling off the unprofitable divisions and letting the profitable insurance business at its core continue to operate? What happened to that idea? And GM was trying to divest itself of it's mortgage arm, too, at one point, I think, maybe???

It would seem to this analyst, who always reminds her readers that she is not an expert and knows none of the intricacies of financial markets etc. but relies solely on common (?) sense and gut logic, that the breaking up of the auto maker conglomerates would put the really at-risk divisions (especially those tied to the FIRE industries) at highest risk. THEY might then actually fail, because they couldn't suck out the actual assets (production potential) from the manufacturing divisions.

Perhaps it's time for Michael Moore to do a sequel to "Roger and Me."


Tansy Gold

[Hugin]

59. I was thinking more of the Mega 'Too Big To Fail' Banks rather than GM.

Say... *cough*Citi*coff* for example.

GM is already set to fail as a means to shed it's Retirement/Employee Benefit commitments to save it's all important
mortgage arm.

Overseen by Cerberus, of course.

Edit: About the Fire Fighting Support Divisions of GM... Notice how easy it is when viewed in small pieces to see the
activities of Auto Manufacture which really do warrant a Govt. bailout vs. the cloudy Financial Arms?

[Tansy_Gold]

61. Well, now, see that's what's interesting.

I was using FIRE in terms of financial/insurance/real estate; you were using it in its literal terms, and BOTH were applicable.

But the other thing that's interesting is that the whole government bailout thing is socialism at its finest -- which some would call :sarcasm: and some wouldn't -- and no one is batting an eye. Well, yes, of course the upper-echelon pukes are screaming, but the folks on the street, including I presume many who where McCain/Palin/general GOP supporters/voters, are terrified of losing their jobs or whatever and are saying the government needs to step in. Well, folks, that's socialism. The alternative is, of course, the collapse of GM, the collapse of the ancillary industries, the collapse of the pensions.

How much of the financial problems with GM are, ahem, manufactured? I suspect a lot of them are. But what I don't like is the constant reference to the retirees' benefits, negotiated by the unions, as the CAUSE of the collapse.

I was always told that in a (normal) bankruptcy, the first claim on dissolution of assets came from the workers. Back wages owed trumped everything else. Obviously we know that is no longer true, but there at least used to be a sense that the workers contributed to the acquisition of those assets and that upon liquidation they had first dibs.

Likewise, the unions and the corporations negotiated on the basis -- even if it wasn't stated or completely comprehended on the conscious level -- that the workers were the ones who created the wealth and were entitled to their fair share. So both the unions and the companies negotiated, one assumes in good faith, that profits would continue even beyond the foreseeable future and that to ensure that a top-notch and loyal work force would always be available, the companies signed the contracts.

Now, it is true that times have changed. It is true that maybe, in today's economic climate, those benefits negotiated 20, 30 years ago seem excessive. But they weren't at the time. In order to secure the benefits they derived from labor, the Management /sic/ agreed to the contracts. Strikes or no strikes, threats or no threats, these were valid labor contracts.

But it wasn't labor that screwed up the economy. It wasn't labor that directed GM to diversify into sub-prime mortgages. It wasn't the retirees who told management to keep making and selling gas-guzzling SUVs. Labor, by definition, had no say in that. (Yes, we can blame the consumer, but wasn't the consumer informed by management via advertising???)

Now, Labor /sic/ in the form of retirees who are living relatively high on the hog compared to later generations of workers in the auto industry and elsewhere, could voluntarily renegotiate their contract "in the best interests of our fellow union members" to save jobs, save the industry, whatever. But frankly, I don't see that happening. And yes, you can color me bitter.

I went to work several years ago for one of the grocery chains that had negotiated a new contract that preserved the comfortable wages and benefits of current union members but relegated NEW hires to whatever minimum the company chose, which was in my case less than half what the hire-in wage had been pre-strike. The excuse the company had given, of course, was competition from non-union Wal-Mart going into the grocery business. But there were no concessions from the current union members for their incoming brothers and sisters, who would be paying the same union dues but getting far fewer benefits.

What was worse, however, was that many of the union members where I worked disparaged the new hires BECAUSE WE SETTLED FOR LOWER PAY. We were, they accused us, taking money away from them because we worked for less! As one said to me, "They won't let me work overtime because then they'd have to pay me $40/hour, but they can have five of you $7/hour people working instead. Well, of course they're going to put four of you on the schedule and save money, and it's your fault for working for that wage."

Real solidarity, huh? And sadly, she wasn't the only one, just in that store.

I have a couple of friends who are retired auto workers, and who constantly bitch that they are ENTITLED to their benefits, regardless how many new hires have to be laid off or do without or how many non-union, minimum wage, no benefits temporary workers are hired to take their place. They don't care, so long as they get their fat pension checks every month and their fully paid health care. They can't understand why they keep getting reports from their not-yet-retired friends about how lazy and shiftless and disloyal the "temps" are. They don't understand why there are problems on the assembly line or high absenteeism or shoddy work. "When we were workin' at Ford, that stuff didn't go on." Well, yeah, sure: You were makin' $30/hour and had good benefits and your wife didn't have to work and you took a nice vacation every year and had a new car every other year and had a secure future. These kids working the same job get bupkis, and you think they should have the same loyalty you did?

And yet even at that, I put the blame on management. Management and a political climate -- thank you, Ronnie Reagan -- that established "I got mine, now you go scratch" as a national motto.

Which is why we don't have the fire safety regulations in place in California and other locations that are far too vulnerable. It's always about profit, above everything else. And everything else can go scratch.

Tansy Gold

[Joe Chi Minh]

63. Major significance, imo, even in terms of the standard on here. The uninformed

right-winger in the UK blames the workers' "demands" for the destruction of our automotive industry, but it is accepted by those whose inclinations would be to deny it, but who know the facts, that it was a failure on the part of management.

As for the workers' wages not constituting the first priority, that is outrageous, isn't it. Just outrageous.

[Hugin]

65. It's made me very nervous to hear Management begin to throw around the word "Competitive".

Just look at what U.S. Workers are competing against... Slave Labor! :scared: When are people going to wake up?

Are 1%-ers going to (with a straight face) say, "Well, they've got slaves, so to compete... We need Slaves!"
That's exactly the sub-text of what's happening and I'm furious about it.

I think we shouldn't import any goods from any country which utilizes Slave Labor... Because, we can't Constitutionally
compete.

[burf]

10. Good morning all.

I have a question and so of course I ask the experts. It is: Wasn't there a chart (or charts) posted somewhere that showed the similarities in the Stock Market in 1929 and its current levels? I thought Marketwatch had something, but for the life of me, I can't find the darned thing. If anyone can help out it would be appreciated. Have a great weekend.

[Demeter]

16. Okay, We'll Look Around

[Demeter]

78. I found This One--It's the S&P

http://calculatedrisk.blogspot.com/2008/11/comparing-stock-market-crashes.html

This might be a good spot to monitor for that kind of information.

[Demeter]

17. Wal-Mart applies for bank status in Canada

http://www.straightgoods.ca/ViewConsForum8.cfm?REF=39

Public Interest Advocacy Centre calls for public inquiry.

Dateline: Tuesday, November 04, 2008

from PIAC

On September 13, 2008, Wal-Mart Canada Corp ("Wal-Mart") published a notice in the Canada Gazette, indicating their intention to make an application for letters patent to incorporate a bank for the purpose of carrying on the business of banking in Canada.

As per the notice, the bank would carry on business in Canada under the name Wal-Mart Canada Bank in the English form and La Banque Wal-Mart du Canada in the French form. Its head office will be located in Mississauga, Ontario. According to an article in the Hill Times dated October 13, 2008, Wal-Mart has been active in pursuing a Canadian banking license for about two years. It is expected that Wal-Mart's banking services in Canada would include loans, savings accounts, credit cards, mortgages and RRSPs, however Wal-Mart has said that it would be premature to speculate on what services will be offered.

Wal-Mart's history of violating civil rights and labour laws demonstrates a disturbing pattern of ignoring, or at worst, exploiting, vulnerable populations.



Before issuing letters patent to incorporate a bank, the Minister of Finance is required to take into account all matters that the Minister considers relevant to Wal-Mart's application as per s. 27 of the Bank Act. The section lists eight criteria for the issuance of letters patent of incorporation. In particular, PIAC would like to raise concerns with Wal-Mart's application regarding two of these criteria.

1) Wal-Mart's reputation


27. (d) the character and integrity of the applicant or applicants or, if the applicant or any of the applicants is a corporate body, its reputation for being operated in a manner that is consistent with the standards of good character and integrity;
Our first concern relates to the general character of Wal-Mart. There have been several examples of Wal-Mart disregarding legal accountability in the United States. While all large companies find themselves in legal battles, Wal-Mart's seem particularly egregious. Wal-Mart is the biggest company in the world. According to Fortune 500 rankings, Wal-Mart recorded nearly $13 billion US in profits in 2007. Yet its front-line employees earn less than $20,000 US per year and the company has been cited several times for union-busting tactics by government agencies and independent watchdogs.

Consider these three recent investigations and lawsuits:


In the largest class action lawsuit in United States history, Dukes v Wal-Mart Stores, Inc, 1.6 million current and female employees are suing Wal-Mart for gender discrimination on pay, promotions and job assignments. The "largely uncontested" statistics provided by the plaintiffs suggest that Wal-Mart engaged in systematic discrimination against its female employees. Wal-Mart faces a potential $10 billion judgment.

In December 2005, a jury awarded $172 million to 116,000 California Wal-Mart employees who were systematically and illegally denied lunch breaks while working for the company. One of the jurors commented that "Wal-Mart, in my opinion, had clear knowledge of what the law was requiring, full, timely, uninterrupted meal breaks, and from the top down to the store manager, it seemed that there was disregard for the laws that were passed in California. We wanted to send a very clear message that in California, even really big companies need to follow the law."

Wal-Mart paid $11 million in March 2005 to settle "Operation Rollback," a federal investigation that found hundreds of illegal immigrants hired to clean Wal-Mart stores. The penalty was the largest of its kind.
Wal-Mart has not escaped controversy in Canada. Wal-Mart is currently in the middle of a bitter legal dispute. In September 2004, the United Food and Commercial Workers Union won certification to represent employees of the Wal-Mart outlet in Jonquiere in the Sanguenay region. The union, one of the first in North America to organize Wal-Mart workers, filed an application under the Labour Code to refer the matter to arbitration.

On February 9, 2005, the Minister of Labour referred the dispute to arbitration and notified the parties of its decision. The same day, Wal-Mart announced that it was closing the store, putting approximately 190 employees out of work. The former employees complained to a Quebec Labour tribunal, arguing that Wal-Mart violated the provincial Labour Code by terminating their employment because of their union activities. The former employees also contended that Wal-Mart violated their freedom of association as guaranteed by the Quebec and Canadian charters of rights. The labour tribunal allowed the complaint, which was later dismissed by the Quebec Court of Appeal.

On August 7, 2008, the Supreme Court of Canada granted leave to Wal-Mart's former employees, Gaetan Plourde and Johanne Desbiens. The case is scheduled to be heard on January 21, 2009. In August 2008, workers at the Gatineau, Quebec Wal-Mart were awarded the first ever collective agreement with Wal-Mart. Two months later, on October 16, 2008, Wal-Mart announced that it was shutting down the Gatineau outlet. Wal-Mart stated that a union contract did not fit with its business model.

Wal-Mart's history of violating civil rights and labour laws demonstrates a disturbing pattern of ignoring, or at worst, exploiting, vulnerable populations. Banking is an industry that safeguards the financial resources of consumers, and thus, Wal-Mart's reputation should alarm the Office of the Superintendent of Financial Institutions.

2) The impact of any integration of the business and operations of Wal-Mart with those of the bank


27. (f) the impact of any integration of the businesses and operations of the applicant or applicants with those of the bank on the conduct of those businesses and operations;
Wal-Mart's proposal to incorporate as a bank raises important public policy questions about the separation of banking and commerce. Banks are meant to be "neutral arbiters of capital."

Former Chairman of the Federal Reserve of the United States Alan Greenspan warned that allowing corporations to own banks would create an unlevel competitive playing field among banking organizations. Greenspan noted that several concerns have historically motivated the United States Congress tradition of maintaining the separation of banking and commerce:


These include the concern that the affiliation of banks and commercial firms might create conflicts of interests that interfere with role of banks as independent financial intermediaries or allow the formation of economically dominant conglomerates... Another concern has been that a bank within a commercial organization might be called upon to support a commercial affiliate in financial distress, thus exposing the bank, federal safety net and taxpayer to the risks of the commercial affiliate.
As noted above, Wal-Mart is the number one company on the Fortune 500 list. Allowing Wal-Mart to own and operate a bank skews its role as a commercial company. Of particular concern is Wal-Mart's ability to neutrally award loans. Its position in the market as the largest commercial company puts it in a conflict of interest — the temptation for Wal-Mart to withhold loans from competitors and steer funds toward firms with which they do business is likely to be overwhelming. Furthermore, Gary Dymski, a professor of economics at the University of California Riverside, suggested that Wal-Mart may be inclined to lend to low-income consumers so that they could use their money in Wal-Mart stores, despite doubts about their ability to repay the loans. Wal-Mart's conflict of interest as a retailer that targets low-income consumers further demonstrates the troubling combination of commerce and banking.

The decision of whether, when, or how combinations of banking and commerce should be allowed is an important decision and one that should be made only after a full and informed debate. The public should be involved in this debate, as Wal-Mart's incorporation as a bank may greatly affect Canadian consumers. And while the experience of other retail entities that are concerned with banking may have some instructive value, the entry of Wal-Mart seems to present a concern involving vertical integration that dwarfs other current retail entrants.

Request for a public inquiry

Section 26(3) of the Bank Act permits the Superintendent to hold a public inquiry into any objections to a proposed incorporation of a bank if she is satisfied that it is necessary and in the public interest to do so. Accordingly, PIAC strongly encourages the Superintendent to hold a public inquiry into PIAC's objections to the proposed incorporation of Wal-Mart as a bank to discuss unresolved concerns with Wal-Mart's business record and the impact of their proposal for incorporation on the Canadian financial system.

Banks are clearly special institutions, tasked with ensuring that the payment system operates smoothly as well as holding a vast amount of consumer savings in the form of deposits. While governments submit banks to rigorous supervision and regulation primarily from a security standpoint, Canadian consumers also have high expectations of performance from their community's banks.

In September 1998, the Task Force on the Future of the Canadian Financial Services Sector published a report that examined the relationship between banks and communities. In its public opinion research, the task force found that 58 percent of Canadians agree that banks have greater public responsibilities than other businesses. The report goes on to advance two principal features of banks that give rise to high community expectations:


The first is simply their economic importance. Banks have traditionally been, and still are, fundamental to the economic and social well-being of communities. Moreover, they are very important repositories of people's money. Their role in facilitating transactions is crucial to businesses and individuals across the country, and they play a particularly important stewardship role with respect to the deposits and savings of virtually all Canadians. Canadians interact with their banks more often, and on a more regular and systematic basis, than with many other private businesses. And a particular characteristic of such interactions is the special role that banks play in granting credit. Unlike most other industries with which consumers deal on a regular basis, banks have tremendous influence over individuals' abilities to pursue their plans — whether starting a business, buying a car or purchasing a house. It is no wonder that the behavior or banks attracts attention.
Second, Canadians view banks as privileged institutions, operating with the sponsorship of governments in a protected and very concentrated environment. There is sometimes a debate about whether banks are public utilities or private businesses. We do not believe they are public utilities. They are not monopolies and are subject to competition in most if not all markets in which they operate. But they have never been, and are not, strictly private enterprises.

In all social democracies governments grant bank charters and give banks their special powers and privileges. They also take responsibility for the health of banks both domestically and in dealings with governments of other countries in which their banks operate. Without this framework, banks would be very different from what they are today. It is questionable whether they would enjoy the same degree of public confidence, necessary to hold public deposits, as they now do.

Given Canadian views on the importance of banks to our communities, Wal-Mart's proposal to incorporate in Canada for the purpose of banking should be publicly scrutinized. A public inquiry would be the right path to take to afford such scrutiny, as a Wal-Mart bank may have a marked effect on Canadian banking and the communities that are served by Canadian banking. PIAC thus urges the Office of the Superintendent of Financial Institutions to hold a public inquiry into our objection, as public scrutiny of Wal-Mart's proposal is both necessary and in the public interest. A public inquiry would allow examination of the essential elements of Wal-Mart's proposal, including the risks associated with the proposed bank, potential conflicts of interest, management relationships, community and corporate responsibility, and the adequacy of capitalization.

The Public Interest Advocacy Centre ("PIAC") is an Ottawa-based non-profit organization that provides legal representation, research and advocacy on behalf of ordinary consumers of important public services.

ANY BETS AS TO WHEN WALMART APPLIES HERE?

[Demeter]

18. Fannie Says $100 Billion Pledge From Treasury May Not Be Enough

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.iQh4uHj3X8#



By Dawn Kopecki

Nov. 10 (Bloomberg) -- Fannie Mae may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt.

``This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,'' if there are further ``substantial'' losses or if the company is unable to sell unsecured debt, Washington-based Fannie said in a filing today with the U.S. Securities and Exchange Commission.

Fannie said it has a limited ability to issue debt maturing past one year, citing market conditions, the lack of an explicit federal guarantee and competition from government-insured bank bonds. Fannie, which along with Freddie Mac was seized by regulators on Sept. 6, slashed the value of its assets by at least $21.4 billion for the third quarter and increased credit loss reserves by 75 percent to $15.6 billion. Freddie is required to file its quarterly earnings by the end of the week.

``Treasury may end up putting far more than $100 billion into these entities, especially if the housing market continues to decline,'' said Rajiv Setia, a fixed-income analyst at Barclays Capital in New York. ``There's just no way, no way'' Fannie and Freddie will emerge from conservatorship within the next two to three years, he said.

Fannie, like McLean, Virginia-based Freddie, needs constant access to the debt markets to fund purchases for its $761 billion portfolio and pay off debt as it matures. The company has more than $138.6 billion in short-term debt maturing over the next two months, according the filing. The cost of using derivatives to manage the interest-rate risks has also increased, Fannie said.

Record Net Loss

Fannie's financing agreement with the Treasury also constrains its ability to issue debt, capping the total outstanding amount at 110 percent of the balance as of June 30. Fannie estimates that limit as $892 billion. As of Oct. 31, Fannie had $880 billion in total debt outstanding.

In its first report since being taken over, Fannie today said its third-quarter net loss widened to $29 billion, or $13 a share, the largest for any U.S. company this year.

Chief Executive Officer Herbert Allison, the former head of TIAA-CREF, reduced most of Fannie's deferred tax credits, increased default estimates and raised credit loss estimates. The decisions cut Fannie's net worth by 79 percent and shows the new management is taking a dimmer view of the company's financial future than the team under former CEO Daniel Mudd.

``The earnings were gruesome,'' said Howard Shapiro, an analyst at Fox-Pitt Kelton Inc. in New York. ``They're trying to clean house.''

The company's net loss in the same period last year was $1.4 billion, or $1.56 a share. The fair value of assets fell to negative $46.4 billion, according to the filing.

Government Money

Fannie, which traded at almost $50 a share a year ago, fell 2 cents to 72 cents today in New York Stock Exchange composite trading. Fannie's stock market value slumped from $39 billion at the beginning of the year to about $4 billion as of Nov. 7, including the government's 79 percent stake.

Fannie slashed its net worth, or the difference between assets and liabilities, to $9.4 billion on Sept. 30 from $44.1 billion at Dec. 31. The company said today it may fall to negative net worth by the end of next quarter, requiring it to seek government funding. Fannie said today that it hadn't tapped any federal aid through Nov. 7.

The Federal Housing Finance Agency placed Fannie and Freddie under its control Sept. 6 and forced out management after examiners found their capital to be too low and of poor quality. Treasury Secretary Henry Paulson pledged to invest as much as $100 billion in each company as needed to keep their net worth positive.

Housing Market

The companies will need that money ``sooner rather than later,'' according to Paul Miller, an analyst at Friedman, Billings, Ramsey in Arlington, Virginia.

Fannie and Freddie, which own or guarantee about 40 percent of the U.S. home loan market, must also cope with the possibility that the housing slump may extend into a fourth year. Banks are still turning away borrowers and foreclosures are worsening the glut of unsold homes.

Lower property values will keep eroding home equity, causing consumers to retrench further. The S&P/Case-Shiller home-price index of values in 20 U.S. cities dropped 16.6 percent in August from a year earlier, the fastest pace on record. The index has been lower every month since January 2007.

Fannie today maintained its housing market forecasts, reiterating that home prices nationally will decline 15 percent to 19 percent from their peak in 2006 before they stabilize.

Sugarcoating

Fannie was created in the 1930s under Franklin D. Roosevelt's ``New Deal'' plan to revive the U.S. economy. Freddie was started in 1970. The companies were designed to expand homeownership and provide market stability. They make money by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.

Fannie set aside $6.7 billion to cover delinquencies as home prices drop, up from $3.7 billion last quarter. The company also charged off $1.8 billion in securities losses it had previously categorized as temporary because executives had anticipated the assets would recover.

Credit-related expenses rose 74 percent to $9.2 billion from $5.3 billion last quarter, including the provisions for future losses.

``The new management team has no incentive to sugarcoat their earnings,'' Miller at Friedman, Billings said.

To contact the reporter on this story: Dawn Kopecki in Washington at [e-mail]

Last Updated: November 10, 2008 16:14 EST

[Demeter]

19. Paulson’s folly: Throwing good money after bad at AIG

http://blogs.reuters.com/great-debate/2008/11/10/paulson%e2%80%99s-folly-throwing-good-money-after-bad-at-aig/


– Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. The opinions expressed are his own. –

By Peter Morici

The Treasury is injecting another $27 billion into AIG and raising the taxpayers’ investment to $150 billion. Secretary Paulson appears more intent on helping his pals on Wall Street than protecting taxpayer interests.

AIG has solid businesses in industrial, commercial and life insurance, but like a lot of financial firms, was attracted to easy profits writing credit default swaps on mortgage backed bonds—so called collateralized debt obligations (CDOs).

AIG received fees to guarantee repayment of those mortgages, or the funds obtained through foreclosures when homeowners defaulted. Like most on Wall Street, AIG executives believed home prices would rise faster than household incomes forever, so these CDOs really bore little risk.

This credit default swap business was outside AIG’s highly-regulated, solid insurance businesses but was backed by the value of those businesses. Essentially, if the CDOs fell too much in value, AIG pledged the value of those businesses.

If an abnormal number of the mortgages failed, the held to maturity value of the CDOs would fall, and obligations would trigger for AIG to post collateral. When that happened in 2007, AIG deposited cash or other liquid assets with the investors holding the CDOs. With the housing market so depressed by the summer of 2007, AIG could not raise enough cash to meet all its obligations.

On September 16, the Federal Reserve provided $85 billion in loans to AIG in exchange for warrants—the right to buy common stock—equal to 79.9 percent of the company.

AIG was to pay 8.5 percent above Libor for the first $85 billion. AIG was to use the loans to honor obligations to holders of the credit default swaps, and AIG was to sell parts of its insurance businesses to repay the loans to the Federal Reserve. That loan proved inadequate, and the Fed advanced another $38 billion on October 9.

The $123 billion was not enough to finance AIG’s short-term credit default swap obligations, and it cannot sell enough pieces of its good insurance businesses to pay back the Federal Reserve in the current environment.

Now, the Federal Reserve and Treasury are agreeing to restructure $60 billion of the original loan, lowering the interest rate to 3 percent above Libor and invest about another $27 billion AIG.

The interest rates on the loans were lowered, in part, because large shareholders complained about heavy handed government action.

The monies will be used to set up two special funds. The first will seek to buy up some of the CDOs that have declined in value for about 50 cents on the dollar, permitting AIG to recoup its collateral paid in cash. This fund will not buy up the most troubled CDOs, whose values are even lower than 50 cents on the dollar.

The second fund will be used to solve liquidity problems at AIG’s securities lending business. It rents securities to short sellers in the stock markets.

This is all folly.

The government assumes greater risks without getting benefits for the taxpayer. Many firms who purchased the original credit default swaps from AIG have used the collateral posted by AIG on the less risky CDOs for other purposes and may not want to sell AIG their CDOs. Also, many of the swaps have been resold to firms that don’t hold the CDOs, as part of complex derivatives transactions.

The short selling business is a whole new headache, and it should make taxpayers ask, what else is lying around at AIG.

If the deal works out, AIG executives get to keep their jobs; but if the plan fails, the U.S. government may get stuck holding the bag on billions of dollars of false promises to pay from AIG. Its warrants may prove not worth very much as AIG’s obligations overwhelm the value of its businesses.

If AIG can’t make it on the money the taxpayers have already apparently squandered, then the Treasury should simply exercise its warrants, take control of AIG, and sell off AIG’s solid insurance businesses for what they are worth. The Treasury can buy back the CDOs for common shares in the company and reorganize the new AIG with more responsible management.

The executives at AIG certainly have not behaved well since the first bailout. They have enjoyed lavish golf retreats in California and luxurious hunting trips in Britain.

While Americans make monthly tax payment to Washington, AIG executives hunt quail on the English countryside.

Best Comment
November 11th, 2008
7:21 am ESTOne reason why these bailouts dont work is because the companies that are granted this privilege do not profit from it. They are given the money by the government, expect them to use that money to pay back debt to shareholders and CDO holders and within less than 3 years, return the loan to the government. If you do not see the problem yet, its just simply shifting the debt. Nothing has changed, the company still doesn't make money, of course it seems like a bad solution because it is one. What the government should do is extend the loan period, maybe 5 years, to give time to companies like AIG to earn back consumer trust to make profit so that the debt can really be cleared off instead of as stowing it aside for 2 years.

I LIKED THIS COMMENT BETTER, THOUGH!

These bailouts should be stopped. It’s like reviving a dead man time and time again. Your government is pledging money left and right without a hope of ever paying it back. It’s the drunkard let loose in the bottle store.
I bet a large portion of the obscenely large amounts are used on the stock exchange manipulating a stock market that must surely sink.
Leave it alone and get it over with, for the current system has been shown to be utterly corrupt, and will implode irrespective.

[Demeter]

20. Massachusetts judge stops foreclosures on H&R Block unit’s loans

By Jerry Kronenberg

A Massachusetts judge is blocking H&R Block from automatically foreclosing on up to 9,700 Bay State homeowners, ruling that the firm apparently wrote mortgages with “reckless disregard (for) the risk of foreclosure.”

“Any lender with even a modicum of business morality should recognize that it is immoral, unethical and unscrupulous to issue a home loan with reckless disregard (for) the risk of foreclosure,” Suffolk Superior Court Judge Ralph Gants wrote in a preliminary injunction against H&R Block.

Massachusetts Attorney General Martha Coakley has sued Block over Bay State subprime mortgages issued by the firm’s Option One subsidiary.

Coakley claims the high-risk loans violated state consumer-protection laws. She also alleges that Option One charged black and Latino borrowers inflated fees.

Block did not return calls seeking comment, but has denied the charges in court papers.

Nonetheless, Gants’ injunction orders Block not to foreclose on any Massachusetts subprime borrower without first giving Coakley’s office 30 to 45 days to review the person’s loan.

In cases where officials find questionable mortgage terms, Block must first try to negotiate a loan “workout,” then seek court approval to foreclose if talks fail.

Gants’ order expands on a landmark ruling he issued earlier this year in a lawsuit against subprime-mortgage giant Fremont General.

In that case, the judge declared whole classes of subprime loans “structurally unfair” - a violation of state consumer-protection laws.

Fremont appealed Gants’ decision to the state Supreme Judicial Court, which heard oral arguments last month but has yet to rule in the case.

Article URL: http://www.bostonherald.com/business/general/view.bg?articleid=1132040

[Joe Chi Minh]

25. What a wonderfully honest and just A.G.

[Demeter]

21. College Loan Slavery: Student Debt Is Getting Way Out of Hand

http://www.alternet.org/workplace/106445


By Nan Mooney, AlterNet


Raya Golden thought she was handling college in a responsible way. She didn't apply until she felt ready to dedicate herself to her studies. She spread her schooling across five years so she could work part-time throughout. She checked that her school, the Academy of Art University in San Francisco, had a high post-graduate employment rate. But there were two things she hadn't counted on. The first was the $75,000 in nonsubsidized federal student loans she'd have to take out for tuition and those living expenses her part-time jobs selling hotdogs and making lattes couldn't cover. The second was that she'd graduate into a workforce teetering on the edge of the biggest financial crisis since the Great Depression.

"All of a sudden the work just dried up," says Golden, who got her degree in traditional illustration. "I've sent out probably a hundred resumes from L.A. to Canada, but I haven't had a single response. Experienced people are getting laid off, so why would anyone take a chance on a college grad?"

Shortly after graduating this past January, Golden moved from San Francisco to Los Angeles hoping there would be more work available, only to find hiring freezes at most of the production studios and animation houses. She has looked into fields ranging from children's book publishing to T-shirt design, but no one is hiring. For now, she's doing her best to get by working part-time as a barista at Starbucks and sleeping on a friend's couch.

Golden has taken a three-month hardship deference on her student loans but is well aware that the longer she pushes off payments, the higher the interest will climb. She had hoped to consolidate her loans, which are now at $112,000, but every place she called either no longer handles consolidations or turned down Golden because she was not employed full-time. Since there's no way Golden could possibly make her $1,400-a-month payments on a part-time barista's salary, she brokered a temporarily reduced payment of $650.

"It doesn't even cover the interest," says Golden, "If I pay that for two years I'll wind up owing $150,000. But I can't see that I have any other choice."

As for her career future, Golden admits things look bleak.....


For years, young people have been banking on the message that acquiring job skills and an education will pave the way to financial security. Instead, for many, the quest for a college degree has only dumped them even deeper into the financial pit. For a country depending on coming generations to get us out of the economic mess we currently find ourselves in, such lack of faith in a brighter future truly is a petrifying prospect.



Nan Mooney is the author of "(Not) Keeping Up with Our Parents" (Beacon, 2008). Read more about the book and her work at Nan Mooney.com.

[Pale Blue Dot]

26. San Jose mayor seeks slice of bailout pie (2% of it, to be exact)

As cities around the United States start to scramble for a share of the $700 billion federal bailout package, San Jose Mayor Chuck Reed said Friday that he's working with leaders of other large California cities to make sure they're not left behind.

The stimulus package Congress passed last month wasn't designed to dole out money to governments, so it's far from clear whether San Jose will get a piece. But with $1.6 billion in unfunded retiree health care obligations, plus $500 million worth of local and regional road work to be done and $750 million in federal help sought to bring BART to the South Bay, Reed noted the city has a full slate of needs.

After meeting Friday with Gov. Arnold Schwarzenegger and the mayors of California's largest cities to discuss budget issues, Reed said California mayors plan to present their own bailout wish list through the governor soon, after Schwarzenegger finishes dealing with the state budget meltdown.

Reed created a minor furor Friday when he told an Associated Press reporter he would seek 2 percent of the bailout, or $14 billion, for San Jose — an eye-popping figure, given that the city's entire annual budget is $3.3 billion. Reed later told the Mercury News that his remark was "off the cuff," and based on the fact that the city contributes more than 2 percent of the nation's gross domestic product.

"It's just a number I can do in my head," he added.

But he wasn't entirely kidding, either. Especially after the city manager reported Friday that, thanks to the sinking stock market, San Jose's pension funds are down $950 million since June 30, when they were valued at about $4.3 billion. Without a market turnaround in coming months, that would increase the city's costs to cover pension benefits.

http://www.mercurynews.com/breakingnews/ci_10989042

What's the stage right after terrified? :scared:

[Demeter]

28. Petrified, I Think

[DemReadingDU]

70. also Philadelphia, Atlanta and Phoenix seek bailout

U.S. Cities, Reeling From Deficits, Seek Bailout Cash (Update3)

By Adam L. Cataldo and William Selway

Nov. 14 (Bloomberg) -- Philadelphia, Atlanta and Phoenix are asking the U.S. Treasury Department for part of the $700 billion financial rescue package to help them finance construction projects and pay bills.

They seek $50 billion on behalf of cities nationally to spend on infrastructure and loans lasting as long as a year to aid cash flow. Philadelphia Mayor Michael Nutter, who is leading the effort, gave a copy of a letter detailing the request to Treasury Secretary Henry Paulson today, said Atlanta Mayor Shirley Franklin. Atlanta has laid off workers and frozen hiring and may cut essential services.

``We are going to start hitting bone,'' Franklin said in an interview today.

Paulson said on Nov. 12 such requests are beyond the scope of the bailout.

more...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYf6IDsyy874&refer=home

[DemReadingDU]

29. The Great Depression, Not So Far Away

11/16/08 Senior Citizens Describe The Crash, the Struggles, The Recovery -- and The Parallels to Today
By Donna St. George

Louise McKenzie was a 14-year-old Girl Scout when she helped prepare dinner for the president of the United States as a way to show the American public that nutritious meals could cost very little during the early years of the Great Depression.

In her Rosslyn home, a yellowed clipping from that April day in 1931 with President Herbert Hoover and his wife has been carefully preserved. She can still recount the meal: "split-pea soup, meatloaf, baked potatoes, tomato salad, bread pudding and tea, for just under 25 cents a person."

Now 91, McKenzie has heard echoes of her past in the economic turmoil of late, which many analysts have described as the worst since the "Black Tuesday" stock market crash of 1929. At the height of the Depression that spanned the 1930s, unemployment rates reached nearly 25 percent.

The common adage of the time, McKenzie recalled, was: "Use it up. Wear it out. Make it do. Do without." The ethic of conserving money -- and avoiding credit -- stuck with many in her generation for the rest of their lives. Some have never used a charge card or rarely allowed a balance due.

The life experiences of the Depression generation tell an increasingly relevant story about the toll of severe economic crisis and how people persevere in times of extreme hardship. Many who remember that era, or who have studied it, wonder how the current generation would withstand such dire circumstances.

more...
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/15/AR2008111501185_pf.html

[DemReadingDU]

31. 11 economies in decline

11/11/08
President Bush and other officials will meet Friday and Saturday to discuss the global financial crisis. Credit has stopped flowing, economies have slowed down, consumer prices have soared, unemployment is on the rise and stock markets are plummeting. Central banks have initiated programs costing trillions of dollars, but there is little sign that the crisis has abated. Here is a snapshot of 11 key economies and the challenges they face.


Country GDP growth Inflation Unemployment Stock market decline Gallon of gas Interest Rates

Brazil 5.23% 5.74% 7.70% -44.16% $5.83 13.75%
China 9.74% 6.43% 4%* -64.92% $3.48 6.66%
Germany 1.85% 2.94% 7.43% -41.12% $8.58 3.25%
Iceland 0.30% 12.12% 2.20% -45.81% $7.54 18.00%
India 7.93% 7.93% 7.80% -51.48% $4.95 7.50%
Japan 0.69% 1.57% 4.05% -42.45% $5.78 0.30%
Russia 7.00% 14.03% 5.90% -65.53% $3.93 11.00%
Saudi Arabia 5.85% 11.45% 13%† -50.50% $0.45 4.00%
South Africa 3.83% 11.78% 23.20% -30.64% $4.64 12.00%
United Kingdom 0.99% 3.78% 5.40% -34.20% $8.09 3.00%
United States 1.57% 4.22% 5.62% -33.10% $3.80 1.00%

Here's the link to see a better-looking chart!
http://money.cnn.com/news/specials/storysupplement/global_crisis/index.html

[Demeter]

35. China Faces Liquidity Crunch

IMAGINE! ALL THOSE DOLLARS, AND THEY STILL HAVE PROBLEMS! GIVEN THAT CHINA RUNS ITS OWN SCAMS ON THE REST OF US, I'M HAVING A HARD TIME WORKING UP ANY SYMPATHY.

http://www.nakedcapitalism.com/2008/11/china-faces-liquidity-crunch.html


Despite China's seeming economic might, it was only a few years ago that the hidden losses in among its banks were a frequent subject of discussion in the Western press. Indeed, in 2006, Ernst & Young hastily withdrew a detailed report that estimated that bad debt losses among Chinese banks were well above prevailing assumptions, and the volte face, clearly the result of official pressure, was viewed with considerable skepticism. But from then onward, discussion of the fragility of the Chinese financial system appeared to retreat to the background.

Those concerns may be coming to the fore again as the credit crunch hits China, and banks start to be saddled with real estate losses. The trigger is not residential mortgages (mortgages are not widely used and LTVs are much lower than in most Western countries) but loans to developers.

The article does not mention a second risk, highlighted by Brad Setser: China has experienced a huge influx of hot money seeking to benefit from the appreciation of the RMB. If these expectations fail to be met (CICC is forecasting that the RMB will fall slightly versus the dollar next year rather than continue to rise), some of this hot money will flee. Even for a country with China's massive FX reserves, a shift of that magnitude would be destabilizing.

From Stratfor (hat tip reader Marshall, subscription required)

The People’s Bank of China (PBoC) predicted Oct. 31 that in the coming two years housing prices would slide by 10 percent to 30 percent and that the market would not begin to recover until 2010. Even more important, the bank also publicly revealed its worries about a liquidity crunch among real estate companies and banks.

Thus far into the global financial crisis, China has appeared calm and in control, with all the assurance of a country sitting on $1.9 trillion worth of foreign currency reserves with which to provide liquidity should credit run short. The assumption has been that China is mostly insulated from the credit crunch and that the major threat to its economy is only in the form of the knock-on effects of the credit crisis on China’s crucial export sector...

Stratfor has seen anecdotes, from problems with trade credits to issues related to the real estate sector, suggesting that the image of China being insulated from the global crisis is in part a fabrication by the Chinese government...

The Oct. 31 announcement by the PBoC is the first official acknowledgment that China could be facing a domestic credit crunch. The bank’s predictions suggest not only that real estate prices are dropping drastically because of falling demand but also that the effect on real estate companies, especially in urban areas, is now amounting to tightened capital flows. Moreover, the PBoC warned that the situation poses “a relatively large risk” to the commercial banks that have made loans to the construction and development companies because these companies use property as collateral and their collateral is now losing value. Anywhere from 20 percent to 40 percent of the total loans granted by these commercial banks have been devoted to the real estate sector, according to the PBoC.

The prospect of China seeing urban real estate bubbles burst and developers and lenders fail is a cause of great concern among authorities. If the prospect comes true it could have dire consequences for the world’s fourth-largest economy.

China’s domestic economy depends on subsidized, below market rate credit to maintain rapid growth rates and employment. If a credit crunch strikes in China, it would be unusual and unintended, and the system might not be fully prepared to cope with it. The central government is likely to act quickly with its reserves to prevent emerging liquidity shortages from spreading, but as we have already seen in the West, credit crunches have a way of getting out of control.

[DemReadingDU]

40. Panicked China announces gargantuan stimulus package

11/11/08 John J. Xenakis

some snippets...
China announced a 4 trillion yuan stimulus package on Sunday.

This equals around $570 billion, and it's absolutely enormous, representing 18% of the country's annual GDP of $3.3 trillion.

By contrast, America's $700 billion bailout represents 5% of the country's $14 trillion GDP.


Here's China's announcement:

"China said on Sunday it will loosen credit conditions, cut taxes and embark on a massive infrastructure spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand.

A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake."


This is a desperate move, in response to an economy that's increasingly in serious trouble.

I'd like to explain why I believe that the Chinese bailout in particular cannot possible work as intended. This is a very general argument at a "system level," rather than focusing on specific details of the Chinese economy.

Suppose you have an old desktop computer, and you want to speed it up. So you buy a new, faster hard disk, and a new CPU that runs twice as fast, you plug them into the system board, and away you go. Unfortunately, the computer is barely faster at all. Why? Because you have to speed up the whole system -- the data buses, the memory, and so forth. It can almost be said that the system will be as fast as its slowest component. Even worse, a speed mismatch between different components may actually cause the system to run slower!

That's the problem with China's bailout. It targets certain "components" of China's economy, but it creates mismatches that will prevent the economy as a whole from benefiting. In fact, the mismatches may cause a great deal of waste, making the situation worse.

It's mind-boggling how long this process has gone on. Absolutely nothing has worked, but each failure has only brought on a bigger bailout and more failures. The dreaded massive failure -- a huge collapse of the entire financial system -- has been avoided so far, by targeting each bailout to a specific point of failure. But as in China, the bailouts have made the entire financial system diseased and distorted, guaranteeing that the massive failure will be worse than it would have been if all the bailouts hadn't been tried.

more...
http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e081111#e081111

[DemReadingDU]

32. Debt Rattle, November 15 2008: One Dollar One Vote

11/15/08 from ilargi at http://theautomaticearth.blogspot.com/

Ilargi: The G20 negotiations this weekend will produce nothing but empty resolutions and tons of embarrassing footage of twistedly smiling old men in surprisingly ill-fitting suits eating caviar and truffles. Their interests are way too diverse and divided.

Europe is subject to a virtually unlimited number of highly divergent and often contradictory forces. What is good for one goose is not for any two ganders. Further rate cuts seem an inevitable necessity in the eyes of most European policy makers, but they will leave certain EU members, even if they do not yet use the Euro, strongly vulnerable to "sovereign" attacks. We've seen huge rate hikes in Iceland and Hungary, and for countries like Greece, Turkey, Portugal, Latvia and Italy similar hikes may be the only path towards protecting their domestic markets.

The situation surrounding the G20 negotiations is very similar to what happens within OPEC. All sorts of agreements will be reached and made public, but they are increasingly meaningless and void, hollowed out by the sheer desperation that is developing on the respective home fronts. OPEC members all understand perfectly well that production cuts are probably the only way to stop the breakneck-speed fall in prices.

But for many, it is impossible to make that the top item on their agenda's. Budget deficits are rising as fast as prices fall, and they have only one way out: producing more, not less. They need all the income they can get their hands on, and are more than willing to risk disputes with other member states. The troubles on the Kuwait stock exchange this week should stand out as a bright red warning beacon to all.

Differences among the G20 participants are even an order of magnitude greater than those within OPEC. There are powerful players, like the EU and Russia, who seem willing to accept additional and stricter regulations in international banking and finance. There are parties like China, Brazil, India, and perhaps Japan, who primarily seek to come away from the meetings with increasing powers. And then there is the US, which doesn't feel like giving away one inch of the power and the freedom that the existing system provides it with.

Trying to hold on to what you got, trying to save the system as is, has been the sole US policy since the credit dams started bursting last year. In view of the fact that the policy has an exactly null and zero chance of succeeding, one might wonder why the country clings to it tooth and nail. A look at what the American political system has grown into could offer quite an insightful explanation.

Over the past 25 years, coinciding with Reagan’s push for less government and the continuation of that idea by subsequent administrations, a fourth branch of government has blossomed with a vengeance. Once again, as is the case with so much of what transpires in Washington, it is completely illegal and unconstitutional. By law, there are three branches of government, and three only: judiciary, legislative and executive. The added limb, the fourth branch, is formed by armies of corporate lobbyists. Since they operate mostly out of sight of the media and the public at large, their influence on policy making and -executing is hugely underestimated.

In exchange for the support of Congressmen and Senators for the corporations on whose pay-rolls they appear, the lobbyists offer the people’s representatives help in understanding difficult issues, and framing policy decisions based on the information they provide. When you see that the unwinding of Lehman Brothers, and all its interests, assets, liabilities and operations, which have tentacles deeply embedded inside financial institutions all over the planet, will take over ten years, you get a good picture of what it is decision makers and legislators are up against. The trimming down of government, exemplified by the outsourcing of many former Washington operations to private companies, often makes it impossible to get expert advice from neutral sources. There is no other help available.

These developments have made it inevitable that many of Washington’s official policies are being defined, and often even written, word for word, by parties that have very explicit interests in shaping policy in a way that benefits their employers. Yes, that is exactly what Mussolini and his crew had in mind when they defined corporate fascism, and it's somewhat odd that this aspect of 21st century American politics invites and receives so little attention. It may be obvious that the actors themselves would rather not be in the limelight, since they know full well what the legal status of their machinations is, but it's much less obvious why the media leave it all alone. Well, that is, if we forget for a second who owns those media.

Still, understanding how American policies are crafted, it becomes much easier to see why there is such an emphasis on rescuing corporations, especially financials, that everybody can see, and with their eyes closed, are beyond salvation, deeply bankrupt, and certain to fail eventually. And why it can all happen at the cost of ordinary citizens. The One Man One Vote principle may arguably have died long ago, the rise of the fourth branch of government has been the fatal stake through the heart of democracy. One Dollar One Vote rules today.

What will be decided in the G20 negotiations will to a very large extent carry the seal and stamp of the same corporate fourth branch of government: Wall Street banks will not accept laws and regulations that threaten their place in the sun. They will keep resisting, at home and abroad, until they no longer can. That fatal moment will come when they are forced, one way or the other, to reveal what lies in their vaults, and what losses they have incurred. It may not be so long anymore: the high-profile fight between JPMorgan and Freddie Mac may be a first indication that cracks are forming.

click to read related articles and comments...
http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-15-2008-one-dollar.html

[DemReadingDU]

67. Debt Rattle, November 16 2008: Everybody Now!

scary predictions...

Ilargi: Now the G20 meeting is finished, we see confirmed once more what I've said all along: the whole circus was an empty charade from the start, and nothing was achieved. Except perhaps for one notion that stands out: the vast majority of so-called leaders (isn't that a title you need work to deserve?) understand that it's everybody for himself.

The best illustration of this is provided by the fact that all participants agreed that a lot of studying and talking is left to do, before they meet again. Which is supposed to be in April 2009 (?!). That’s half a year away. Until then, the world will supposedly stand still. May I suggest you look back 6 months, to April of this year? Try some of the media headlines in those days. It'll give you a good indication of how much change can occur in such a relatively short period, and how useless therefore an agreement like this is.

Not that there ever was any doubt, that's all just window-dressing. Sure, there are parties, and very powerful ones, that will want to push through economic "reforms" that would lead to a drastic overthrow of current relations and systems, up to and including the introduction of new -global- currencies. But there are simply too many others at the tables who have had more than enough of the negative effects of their countries' exposure to globalized markets. And who want to have more control of their domestic economies, not less, as an increasingly global system would guarantee.

The forces who are pushing for what is still called (it's getting profoundly cynical by now) free trade and free markets, as noted, are very powerful. The elite triumvirat of Wall Street, the IMF and the World Bank are busy tightening the thumbscrews on their first victims, Pakistan, Ukraine, Hungary, Iceland, as we speak. There are, however, also strong voices who wish to keep the EU alive, and somewhere down the line that will lead to irreconcilable differences. Today’s political climate makes a take-over by the IMF crowd impossible. There are too many parts of the world where such attempts would lead to violent unrest, and that includes much of Europe. Which doesn't mean they won't try, mind you.

Besides, there is too much work to be done inside the US to focus more than fleeting Bilderberger glances on the rest of the world. They're too late. It's hardly relevant anymore whether the Treasury and Fed have so far spent and committed $2 trillion or $5 trillion on their litany of bail-out programs. Either amount pales in comparison to what is yet to come, at least in demands. It will take ten years to unwind Lehman, and there are certain to be huge additional costs to arise from that stinking heap. The Fed has silently engaged in sinking way more into AIG then we knew to date. A staggering additional amount will yet be dumped into the craters of Wall Street before this is over.

Still, the main story from now until Christmas -apart from a couple of million jobs lost- is that the rest of America will come knocking on any door available, demanding money. And most of those standing out in the cold will be told there is no money for them, because it has all been handed out to the banks. First come, first served. Of course, the banks will go down regardless, taking with them hundreds of billions in customer deposits for which there no longer will be FDIC guarantee funds available. At the same time, pension plans and 401k’s are being hollowed out at alarming rates, while the banks sitting still on taxpayer billions will raise mortgage and credit card rates, no matter that not doing that was -supposedly- the no.1 condition for access to the money in the first place.

States like California had already raised alarms over their financial situation, and now major cities are doing the same. Next are counties, towns, you name it. There is no way the federal government can rescue all of them, not even if they would not have given a penny to the banks. But they have. Unless we get either real careful or real angry, we might see a situation where all levels of government can only procure some cash by borrowing at exorbitant rates, like 15%-20%, from Wall Street banks, who borrow it from the Fed and Treasury at 2%. And if you have to borrow your own money back at a loss of 10% or over, believe me, you won't last long.

Meanwhile, 6000 smaller US banks now count on the fact that they will get funds from Fed/Treasury programs. And that’s just banks. Every single insurer, monoline, carmaker, airline, mortgage lender, big box store chain, media giant and a million other industries will be singing carols for cash. Most of them are not operating in ways that stand any chance in the new economy that will start next year, but trillions of dollars more will be thrown at those with the best lobbyists anyway.

As for a social safety net in America, you got to be kidding. You’d be much better off in Sweden. Or Germany, France, Holland.

click for related articles and comments...
http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-16-2008-everybody.html

[DU GrovelBot]

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34. Hello GrovelBot !

Welcome to our weekend editorial postings!

[Demeter]

36. The Gray Lady turns pasty white: Is the financial demise of The Times at hand?

http://www.scholarsandrogues.com/2008/11/11/the-gray-lady-turns-pasty-white-is-the-financial-demise-of-the-times-at-hand/

...The Times has fallen on hard times (forgive me). The faltering business model that has strapped financial straitjackets onto other newspapers (witness the Christian Science Monitor ending its print edition) may have finally knee-capped the nation’s best newspaper. It has significant debt coming due, and insignificant cash on hand.

Reports Henry Blodget of the Silicon Valley Insider:

he company must deliver $400 million to lenders in May of 2009, six months from now. The company has only $46 million of cash on hand, and its operations will likely begin consuming this meager balance this quarter or next. The company has been shut out of the commercial paper market, but has a $366 million short-term credit line remaining that it entered into several years ago, when the industry was strong. It has not yet drawn this cash down, and given the current environment and the trends at the company, we would not take for granted that it will be able to do so.

Consider numbers we can all understand: In 2002, The Times’ stock price hit nearly $53. On Monday, the last line of a Forbes.com story relayed this telling stat: “Shares in the Times company fell 59 cents, or 6.3 percent, to $8.73 in mid-afternoon trading …”

The Times‘ suddenly accelerated descent into fiscal disarray has probably irritated Mexican billionaire Carlos Slim Helú. Just two months ago, Mr. Slim bought a 6.4 percent stake of the New York Times Co. at about $14 a share, an investment then worth about $127 million. If he’s still in, he’s lost nearly half his investment.

Recall, please, Mr. Sulzberger’s comment just 21 months ago at the World Economic Forum at Davos, Switzerland, when asked about the future of the print edition of The Times:

I really don’t know whether we’ll be printing The Times in five years, and you know what? I don’t care either.

Bet he cares now. At the time, he said The Times was focused on becoming an Internet news leader, saying it had doubled its online readership to 1.5 million a day to go along with its 1.1 million subscribers for the print edition. But the problem is simple: It may have consistently high readership online, but that’s not translating into sufficient online advertising revenue to meet the expectations of institutional investors concerned primarily with short-term gain.

Here’s the short-term financial picture for the Times company as constructed by Mr. Blodget based on recent NYTCo. filings with the Securities and Exchange Commission:

What NYTCo. has:
• $46 million of cash
• $366 million owed to it by advertisers
Total: $412 million

What NYTCo. owes:
• $398 million of short-term debt (due in May)
• $161 million of accounts payable (newsprint, travel, etc.)
• $100 million of payroll (salaries)
• $159 million of other expenses
• $50 million owed on long-term debt and rent
Total: $865 million

Bottom line, short term: NYTCo. owes $453 million more than it has.

Other harpies have been snipping at The Times‘ heels. Recall, please, that in January a pair of hedge funds demanded changes at the company:

The trouble, according to Firebrand Partners and Harbinger Capital, is that the New York Times company has moved far too slowly to replace the revenue that is being lost as readership figures come under pressure and advertisers shift their spending from newspapers to the internet.

Firebrand’s founder, Scott Galloway, wants the Times company to diversify. In a January letter to Mr. Sulzberger, Mr. Galloway wrote: “We believe a renewed focus on the core assets and the redeployment of capital to expedite the acquisition of digital assets affords the greatest shareholder appreciation and creates the appropriate platform to compete in today’s media landscape.”

Well, good luck with appreciating shareholder value with that acquisition of digital assets. (About.com is highly profitable, so why’s the Times company shopping it around?) Too little, too late. The Times, like virtually every major newspaper company in America, refused to accept the Internet as an effective colleague and instead regarded it only as an ineffective, sure-to-fail upstart. Such arrogance is proving costly.

The news worsens. Nielsen reports that advertising spending for the first half of 2008 declined by 1.4 percent compared with the same period in 2007. Its news on Internet advertising is mixed:

Although overall Internet ad spending, when including paid search and online video advertising, was up by 11% during the first half of this year, image-based Internet advertising declined by 6% during the first half of 2008, compared to the same period in 2007. …

The decrease in image-based Internet advertising was driven by a 27% drop in online ad spending by financial services companies, which decreased their spending from $1.5 billion in the first half of 2007 to $1.1 billion during the first two quarters of this year.

AFP reports that:

The Interactive Advertising Bureau and PricewaterhouseCoopers said Internet advertising revenues rose 15.2 percent in the first six months of 2008 over the first half of 2007. Online advertising revenue was up 12.8 percent in the second quarter over the same period of 2007 but declined 0.3 percent from the first quarter of the year, from 5.8 billion dollars to 5.7 billion dollars, the IAB-PwC survey said.

And that’s the problem for the Times company and every other newspaper company that has placed its business-model bet on sure-to-be-profitable Internet advertising. Despite double-digit growth in online advertising revenue in recent years, that growth isn’t paying off fast enough.

“Total advertising revenue for the newspaper industry is expected to decline 11.5% to $40.1 billion this year,” reports Jennifer Saba of industry trade journal Editor & Publisher. Print ad revenues, though declining, still provide the bulk of the industry’s income. Internet ad revenues, though increasing, will not produce sufficient revenue soon enough to stave off drastic, perhaps catastrophic, changes in the newspaper industry.

In February, reported The Times‘ Richard Pérez-Peña, “The Times has 1,332 newsroom employees, the largest number in its history; no other American newspaper has more than about 900.” When The Times said in February it would cut 100 jobs, its stock immediately rose 86 cents to $18.84. Now it’s under 10 bucks.

The Times, in fiscally happier times (forgive me again), bet big on expansion in New England to maximize revenue. In 1993, shortly after Tim Berners-Lee released the World Wide Web for full public use, the Times company bought The Boston Globe for $1.1 billion. In 1999, it bought the Worcester, Mass., Telegram & Gazette for $295 million. Both deals were roundly criticized as too pricey for value received. Both deals have proven to be financial drains on the Times company. (The Times did not significantly embrace the Internet for several years and made poor decisions. Remember the ill-fated, pay-for-premium-content TimesSelect?)

Early this week, Forbes reported that the company “increased its estimates for how much The Boston Globe and other New England newspapers it owns have declined in value because of reductions in advertising revenue.” That drop in value — $166 million — occurred in just the third quarter. The Times company said the fourth quarter will bring further devaluation of the properties.

Prediction I: The Times will initially follow the industry’s formula: Cut expenses drastically (read: jobs). Seek to at least maintain current share price. Prediction II: The strategy will fail. Prediction III: The Times will sell assets. Prediction IV: That, too, will fail, because the company has insufficient assets relative to its debt and declining ad revenue. In September, E&P reported that the Times company ad revenue had declined 14.1 percent compared to the same period a year ago. Total revenue dropped 8.8 percent for the month.

Could the Times company raise enough cash to take itself private? Hmmm. Perhaps that’s why About.com may be on sale.

All this in a tanking economy. The Times and other newspaper companies shouldn’t bet on traditional big-bucks advertisers — Detroit, real estate, and want-ad classifieds — to come to the rescue. They’ve got problems of their own.

According to Mr. Blodget, the long-term view for the Times company is equally bleak:

What NYT has:
• $1.355 billion of buildings, real-estate, printing presses, trucks, technology
• $146 million of investments in joint ventures (Red Sox, etc.)
Total: $1.501 billion

What NYT owes:
• $673 million of long-term debt
• $7 million of long-term rent
• $284 million of pension benefits
• $214 million of retiree healthcare and other benefits
• $290 million of other liabilities
Total: $1.468 billion

Bottom line, long term: Balance sheet carrying values can provide a very misleading picture of long-term asset values, especially for things like land and buildings, which may have appreciated (or depreciated) significantly. As a result, there may be significant embedded value in these assets. But assuming the NYT’s land, buildings, and joint-ventures are carried at something approaching market value, NYTCo has only about $33 million more than it owes.

The Gray Lady badly needs a Green Mistress, but in an American economy this distressed, that’s unlikely to occur. (Oh, Rupert? You interested in a really good deal?)

So what will the Times company do? Sell assets? In this economy, who will buy? Cut jobs? Assuredly, but at what credibility cost to the journalistic product it sells? End its print editions, and not just that of The Times, but of other papers it owns as well? Newsprint and subscriber delivery are costly. Aside from staff cuts, that seems the most likely — and quickest — route to cut costs substantially.

Any change in the Times company’s business model will influence the readership habits and information needs and wants of millions of people. The Times has been the opinion leader of the fabled Eastern Liberal Elite™ for a century and its front page has influenced daily the contents of hundreds of newspapers nationwide.

Perhaps the changes won’t immediately be so drastic, preserving the print edition. Says Mr. Blodget: The Times company’s realistic options have been reduced to:

• Major cost cuts (including dividend)
• Large asset sales
• Sale of equity at fire sale price.

Like most newspaper companies, the Times company has proven to be short-sighted in its adaptation to the Internet, its recognition of changing demographics and readership needs and desires, and its dog-on-a-short-leash relationship with institutional investors.

We should hope The Times survives with the quality of its journalism intact (wrong-on-WMDs Judith Miller, plagiarist Jayson Blair et al. incidents notwithstanding). With nearly 100 Pulitzer Prizes to show to the tourists, it’s still the best journalism gig in town.

As the new year approaches, The Times will surely and frequently editorially instruct president-elect Barack Obama on the appropriate means to reinvigorate the American economy.

In the midst of its own partially self-induced financial decline, The Times‘ advice ought to be taken cum grano salis.

[Demeter]

37. Dave Lindorff: 'Too Big To Fail' has an Easy Answer: Anti-Trust or Public Control

http://www.buzzflash.com/articles/lindorff/168

The one thing we are not hearing from Congress or from incoming president Barack Obama in the current economic crisis facing the country are the words "anti-trust" and "public ownership."

From the moment the crisis first struck, with the near collapse of AIG, the mantra has been that companies such as AIG, Morgan Stanley, Merrill Lynch, Citibank, etc. -- and more recently General Motors Corp. and Ford -- are "too big to fail." That is, it is argued that these companies are so huge that if they were to collapse into the rubble they deserve to be, it would damage the nation irreparably.

The question is, if that is genuinely the case, why were they allowed to be that big in the first place, and why aren't we rethinking that policy?

It's not as though they got that way through organic growth by being successful at what they did. Hardly. GM was the quintessential result of a merger of smaller automakers. Ford grew too, by acquiring the competition, most recently Volvo. Most, if not all of those acquisitions were first vetted and approved by the Federal Trade Commission and found to be acceptable as a matter of economics and public policy.

In the banking industry, which is regulated, the picture is even worse, with the government first opening the door to the creation of national banking companies, and then routinely approving the gobbling up of one after another regional or even national bank by another. At some point we reached the point where the giants in the industry -- Citibank, JP Morgan Chase, Bank of America, Wells Fargo, etc. -- were able to say when they ran into trouble that allowing them to fail would have dire consequences for the national economy. This kind of extortion should never have been allowed to happen.

First of all, the argument for national banks never made sense for ordinary people, and wasn't necessary for large customers either. Large corporate fundings have always been done by bank consortia, and this could have been accomplished with the nation's banking industry fragmented into small state-chartered institutions. Meanwhile, small businesses and individuals always lose when a bank is national in scale. It is much more costly to handle the banking business of small enterprises and individual families than it is to handle the business of huge corporate clients, with the result that the major banks have made it costlier and costlier for small customers to do business with them.

The answer is clear. Bigness is fundamentally bad when it comes to capitalism. There is a point where any company in any industry becomes too big for it to be socially acceptable. Big companies attempt to behave in a monopolistic fashion by destroying or buying up the competition, both nationally or, as in the case of a retailer such as WalMart or a bank such as Citibank, locally, using their huge financial power to locally underprice the competition and drive them out of business (after which they are free to gouge the local customer base). They also ride roughshod over local political interests, demanding tax breaks, zoning waivers, etc. This being the case, the government should simply not allow corporations to achieve such scale and market dominance.

Companies, whether banks, car makers, or media companies, should never be allowed to grow to a point that they become "too big to fail." If that can be said about any company, whether because of the assets it holds, or because of the number of people it employs, it is time to break it up.

Think of GM. If GM were ripped up into six or seven competing companies, it is certain that at least one of those smaller entities would be producing electric cars by next year. The Saturn plant already made one, the Impact, that was wildly popular (see the excellent documentary "Who Killed the Electric Car"), and if left to its own devices to sink or swim, could probably be cranking those out in volume for the 2010 model year.

Some companies would certainly fail. But that's what is supposed to happen in a capitalist system.

This piece is not meant to be a paen to capitalism. But having said that, if you're going to have capitalism, which is the ruling ideology here in the U.S. of A, you have to let it function as intended. As soon as the government comes in and starts encouraging the establishment of monopolies or quasi-monopolies, and preventing the failure of poorly managed enterprises or dying industries, as it is doing in the case of the banking and automotive sectors, it is no longer true capitalism.

That could work, too. Many democratic countries, including Japan, Sweden, France, and Germany, have the concept of shared governance of corporations, in which large corporate entities are partially owned and run by government, and of planned economies, in which certain sectors are deliberately protected and promoted by government policy. The U.S. has moved in that direction with the investment by the government in nine of the country's largest banks, and in discussions to provide $25-50 billion in financial assistance to the major U.S. auto companies. But in the U.S. case, the government is studiously avoiding demanding a role in running those companies. It is by design only a "passive" investor.

This is the triumph of ideology over rationality and the public interest. I recently interviewed a number of investment strategists in the course of working on an article for an investment magazine. They all had the same advice for worried investors: invest in shares of the "magic nine" banks that are recipients of tens of billions of dollars in bailout money from the federal government. As they all point out, the government's stake in these banks means that they will not be allowed to fail, and moreover, they are in a unique position to use their flush capital reserves to acquire, at fire sale prices, the assets of smaller banks that are being left to sink or swim in the current credit crisis and recession. That is not a free market. It's a government program to reduce the competition in the banking sector and hand all the business over to a favored few giant banks.

Now that would be okay if the government, in return for its investment, were taking a management role in those favored banks. But it is not. Congress, the Bush Administration, and, so far at least, the incoming administration of Barack Obama, have not been demanding a management stake in any of the companies that are getting bailout funding. If the government takes ownership positions at all, it is taking non-voting shares in those companies, solely in the hope of someday getting some of the invested money back by selling those shares.

This is not just a rip-off of the taxpayer. It is a craven program to enrich big investors in the bailed-out enterprises, while putting control of the nation's economic destiny increasingly into a smaller number of hands of people whose interests are not even aligned with the national intereest (these are, after all, all transnational corporations only nominally headquartered in the U.S.).

There is, of course, another reason that companies should never be allowed to become "too big to fail." That is political clout. The U.S. political system is already largely an owned-and-operated subsidiary of corporate America. When companies become as large as AIG or GM or Bank of America, they also gain a disproportionate influence over the political apparatus that is an order of magnitude larger than their share of the national GDP. It's not just that they have limitless money to donate to political campaigns. They also, by their size, are able to dispense political favors in virtually every Congressional district, much as the Pentagon has been doing for the past half century, and also to threaten national havoc if they don't get their way.

Don't expect much in the way of scrutiny of this bailout process from the corporate media, by the way, which has been engaged in the same process of national consolidation for the past few decades. But clearly, the public needs to wake up and start demanding that if our money is going to be used to bail out these corrupt and horrifically managed enterprises, we the people need to have a controlling interest in running them, so that they are run in our interest. Better yet, we should be demanding that these bumbling colossuses be broken up into little pieces, and then left to sink or swim on their own like the rest of us.

DAVE LINDORFF is a Philadelphia-based journalist and columnist. His latest book is "The Case for Impeachment" (St. Martin's Press, 2006). His work is available at www.thiscantbehappening.net.

[DemReadingDU]

38. Systemic Risk, Contagion and Trade Finance

11/14/08 Systemic Risk, Contagion and Trade Finance - Back to the Bad Old Days by London Banker

snippet from middle of article

The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.

Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer's issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.

The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.

Adding to the difficulties, letters of credit are so short term that they become an easy target for scaling back credit as liquidity tightens around bank operations globally. Longer term “assets” – like mortgage-back securities, CDOs and CDSs – can’t be easily renegotiated, and banks are loathe to default to one another on them because of cross-default provisions. Short term credit like trade finance can be cut with the flick of an executive wrist.

Further adding to the difficulties, many bulk cargoes are financed in dollars. Non-US banks have been progressively starved of dollar credit because US banks hoarded it as the funding crisis intensified. Recent currency swaps between central banks should be seen in this light, noting the allocation of Federal Reserve dollar liquidity to key trading partners Brazil, Mexico, South Korea and Singapore in particular.

Fixing this problem shouldn't be left to the Fed. They aren't going to make it a priority. Indeed, their determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it. Furthermore, the Fed may be highly selective in its allocation of dollar liquidity abroad, prejudicing the economic prospects of a large part of the world that is either indifferent or hostile to the continuation of American dollar hegemony.

If cargo trade stops, a whole lot of supply chain disruption starts. If the ore doesn’t go to the refinery, there is no plate steel. If the plate steel doesn’t get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers don’t buy. If the consumers don’t buy, there is no Christmas.

more...
http://londonbanker.blogspot.com/2008/11/systemic-risk-contagion-and-trade.html

[Demeter]

39. Bonuses for Wall Street Should Go to Zero, U.S. Taxpayers Say By Christine Harper

http://www.bloomberg.com/apps/news?pid=20601087&sid=apRDGKM7Sbi8&refer=home



Nov. 11 (Bloomberg) -- U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don't want executives' bonuses reduced. They want them eliminated.

Compensation at Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and the six other banks that received the first $125 billion of the federal funds is under scrutiny by lawmakers, including Rep. Henry Waxman, a California Democrat, and New York Attorney General Andrew Cuomo, also a Democrat. President-elect Barack Obama cited the program at his first news conference on Nov. 7, saying it will be reviewed to make sure it's ``not unduly rewarding the management of financial firms receiving government assistance.''

While year-end rewards are likely to decline with a drop in revenue this year, industry veterans say that eliminating them risks driving away the firms' most productive workers...The companies, which set aside revenue throughout the year to pay bonuses, haven't commented on plans for year-end awards, typically decided this month or next. A study released last week said the firms are likely to cut bonuses for top executives by as much as 70 percent.

``Even really sober people are saying this is the worst financial crisis since the Depression, and they're saying bonuses are just going to be reduced?'' said Patrick Amo, a 53-year-old retired merchant marine in Seattle. ``Oh my God, you read that and your jaw drops.''

Wall Street firms' pay has traditionally been tied closely to performance of the companies, which is why employees receive most of their compensation at the end of the year after final results are known. Depending on seniority and performance, bonuses for traders, bankers and executives can be a multiple of their salaries, which range from about $80,000 to $600,000.

Blankfein's $67.9 Million

The nine banks that Waxman pressed to detail their bonus plans asked for more time to respond, according to his spokeswoman, Karen Lightfoot. She said they've been granted an additional two weeks. The original deadline was yesterday.

Goldman, the largest and most profitable U.S. securities firm in the world last year, paid Chief Executive Officer Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. That was justified, he told shareholders at the company's annual meeting in April, because of Goldman's superior financial results.

``We're very much a performance-related firm,'' he said. ``If those results don't come in, I assure you at Goldman Sachs you won't see that compensation.''

Goldman's profit is down 47 percent so far this year and five analysts expect the company to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67 percent this year and Goldman received $10 billion from the U.S. government in the bailout last month. Michael DuVally, a spokesman for Goldman Sachs in New York, declined to comment on the company's plans for bonuses this year.

`Appalling'

``The executives in companies that get bailout money should have their base salaries reduced by 10 percent for 2009 and they should pay back a substantial portion of their 2007 bonuses to the government for the financial devastation they oversaw, fostered and, in some cases, directly caused,'' said S. Woods Bennett, a 57-year-old lawyer in Baltimore. ``Their sense of entitlement is appalling.''

In addition to Goldman, Morgan Stanley and Citigroup, the companies that received the first round of money from the U.S. government's Troubled Asset Relief Program were Merrill Lynch & Co., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., State Street Corp. and Bank of New York Mellon Corp.

Some needed the money more than others. Citigroup and Merrill haven't been profitable since early last year. Earnings at each of the other firms, except Boston-based State Street, have been dropping.
....
A renegotiated government rescue for American International Group Inc., which was once the world's largest insurance company, includes a freeze on the bonus pool for 70 top executives and imposes limits on severance benefits, the Treasury said in a statement yesterday. AIG's bailout is separate from the $125 billion being invested in nine banks.

Economy Contracts

The bailout is only part of the reason that people object to Wall Street bonuses this year. The financial industry worldwide has taken more than $690 billion in writedowns and credit losses this year and cut more than 150,000 jobs, according to data compiled by Bloomberg.

A decline in lending has caused the wider economy to contract: the U.S. gross domestic product shrank at a 0.3 percent annual pace in the third quarter, consumer spending fell at its fastest pace since 1980 and unemployment jumped to 6.5 percent, the highest since 1994.

``This is the real economy these vultures have wrecked once again,'' said Leo Gerard, president of the Pittsburgh-based United Steelworkers, which represents 1.2 million active and retired members. ``Workers are taking it on the chin through no fault of their own.''

MUCH MORE INDIGNATION AT LINK

[Joe Chi Minh]

64. If they must bet, they should play the horses, and not the "bubbles".

Nassim Taleb points out that "banks make money from two sources. They take interest on our current accounts and charge us for services. This is easy, safe money. But they also take risks, big risks, with the whole panoply of loans, mortgages, derivatives and any other weird scam they can dream up. “Banks have never made a penny out of this, not a penny. They do well for a while and then lose it all in a big crash.”

TIMESONLINE at: http://business.timesonline.co.uk/tol/business/economics/article4022091.ece?token=null&offset=36&page=4

Nuff said?

[Demeter]

41. Saudi Arabia Spends $3.5 Billion to Buy Gold in the Past Two Weeks

http://jessescrossroadscafe.blogspot.com/2008/11/saudi-arabia-spends-35-billion-to-buy.html


Gulf News
Gold demand rises in Saudi Arabia
By Mariam Al Hakeem, Correspondent
November 12, 2008, 23:42

Riyadh: There has been an unprecedented demand for gold in the Saudi market recently, with over 13 billion Saudi riyals (equivalent to US $3,466,667,946) (Dh12.75 billion) being spent on the yellow metal during the last two weeks.

Demand is expected to rise still higher as more investors turn to gold as a safe haven in the midst of the global financial crisis, according to market sources.

Sami Al Mohna, an expert on the gold market, said the trend had resulted in a substantial rise in the gold reserves of Saudi investors...

[Demeter]

42. Lehman's bankruptcy '10 times more complicated than Enron'

http://www.independent.co.uk/news/business/news/lehmans-bankruptcy-10-times-more-complicated-than-enron-1019875.html

Accountants tell creditors it will take years to unravel

By Mathieu Robbins

The administration of the London-based arm of Lehman Brothers will be "at least 10 times" more complicated than the European side of the Enron bankruptcy in 2001, according to the team of accountants at PricewaterhouseCoopers which has worked on both transactions.

The administrators, led by Tony Lomas, said yesterday at a press conference on the Lehman situation that there are more than $1 trillion of positions to unwind as part of the administration process, which is likely to take several years and go through court proceedings with some parties as they try to decide what is owed to whom, where the assets are, and secure those funds or securities for the creditors. Only about $5bn of asset realisations have been made so far after more than two months. "We have got a long way to go," said Mr Lomas.

Part of the complication is due to UK bankruptcy law, as opposed to its US equivalent. While the US arm of Lehman was able to continue to trade for several days while under bankruptcy protection, the European arm, based in London, had all its trades frozen, leaving a big web of in-limbo assets and payments.

The complexity of the trades and inter-relationships between different Lehman businesses also makes the unwinding more difficult. About $1bn is held up in the company's German business, for example.

[Demeter]

49. Lehman to put $8m of art on block

http://www.guardian.co.uk/business/2008/nov/12/lehman-art-sale/print

Christie's in New York also selling $20m collection of former Lehman boss Richard Fuld and his wife
Kathy


The bankrupt investment bank Lehman Brothers wants to sell at least $8m (£5.2m) worth of the art collection that once decorated its offices. The news comes as $20m of postwar art, put up for sale by the former Lehman boss Richard Fuld and his wife Kathy, goes on the block tonight at Christie's in New York.

The sale of drawings from the Fulds' collection, including three Willem de Koonings, was announced a few days after Lehman declared bankruptcy in September. The Fulds still own a sizable art collection and five homes, including a $21m Manhattan apartment. Kathy Fuld is a well-known modern art collector and a trustee of New York's Museum of Modern Art.

The Fulds' sale also includes five Barnett Newmans, four Arshile Gorkys and four Agnes Martins. De Kooning's kinetic orange-haired 1951 Woman in graphite, charcoal, pastel and oil on paper is expected to fetch as much as $4m. His drawing Two Women could raise up to $3m. The pieces will be auctioned in Christie's evening sale at the Rockefeller Plaza.

Meanwhile, Lehman filed court papers on Monday seeking authority to pay fees to art handlers who provided warehousing and framing services before its bankruptcy. It said it needs to pay the fees so it can access the artwork and show it to potential buyers.

About $8m worth of art is being stored in warehouses in New York and Paris, Lehman said. Other pieces of artwork are still located in the company's offices, the court documents showed.

Following its bankruptcy, Lehman's core US brokerage business and its New York headquarters were sold to Barclays. Lehman has sold other assets in the past few weeks. It gained court approval last week to sell a corporate plane for $24.9m and has filed papers to sell 50 acres of undeveloped land in Hamilton Township, New Jersey, for $6.25m.

In the agreement between Barclays and Lehman from September 22, Barclays was given the right to keep the art at Lehman's headquarters at 745 Seventh Avenue in place for a year. During that time, Barclays will have the opportunity to buy the art. If the British bank doesn't want it, it must return it to Lehman, which can then put it up for auction.

Bain Capital, which agreed to buy Lehman's money manager, Neuberger Berman, for $2.15bn, got a similar deal. It gets to keep the artwork located at 605 Third Avenue for a year.

[Tansy_Gold]

72. Okay, let's see what's goin' on here.

Bain Capital is Mitt Romney, isn't it?


And who gets to keep the proceeds from the sale of the Fulds' personal art collection, which no doubt was acquired using the ill-gotten mazillion$$ Fuld took from Lehman's?

WHY SHOULD HE HAVE ALL THE MONEY AND THE TAXPAYERS BAIL OUT THE COMPANY HE DESTROYED?



Tansy Gold

[Demeter]

73. I Didn't Know That

I try to avoid Romney Like the Plague.

[Tansy_Gold]

74. Here's the info

http://en.wikipedia.org/wiki/Mitt_Romney

[Demeter]

75. By The Way, It Stopped Raining Today

The ground is white with snow.

[Tansy_Gold]

76. Oh, Demeter, I'm so sorry!

Really, I am. I'm a transplanted midwesterner so I know snow. And I don't like it!




Taken yesterday at Willow Springs, in the Goldfields just north of Superstition Mountain. 75 degrees with a breeze.



Tansy Gold

[Demeter]

77. Don't Cry For Me, Argentina

I spent 29 years of my adult life trying to get back to my native land. It's just that it's been such an awful year that snow so early makes it unlikely that I'll get anything done in the gardens at all.....still, things are definitely looking up (in all ways except the onslaught of winter 30 days too soon...)

Enjoy Arizona. Wherever your heart is, it is home!

[Pale Blue Dot]

43. The Hartford Takes Step Toward Treasury-Fund Eligibility (to become S&L holding company)

The Hartford, weighed down by investment losses and other business pressures, announced dramatic steps Friday to shoot for a financial boost from the U.S. Treasury.

The Hartford Financial Services Group applied to become a savings and loan holding company and signed a deal to buy a Florida bank in hopes of qualifying for an estimated $1.1 billion to $3.4 billion from the Treasury's Capital Purchase Program.

In addition, Lincoln National Corp., which has a smaller Hartford presence, also plans to buy a savings and loan company, a federal official told Bloomberg News Friday. Lincoln previously said it would consider seeking to participate in the Treasury program, but wouldn't comment Friday.The Hartford, which got $2.5 billion last month in a deal with German insurer Allianz, has said it is well capitalized — financially strong — in the current depressed market conditions. But The Hartford is seeking Treasury money as an extra capital cushion it would need if financial markets and the economy wither more. And the money comes on favorable terms that are hard for companies to pass up.

The Hartford's move to participate in the Treasury's $250 billion program can also be read as a further step to restore investor confidence in the 198-year-old company. It seemed to work Friday, as The Hartford's stock jumped 21 percent after the announcement, closing up $2.19 at $12.65 a share.

http://www.courant.com/business/hc-thehtfd1115.artnov15,0,3808081.story

[Demeter]

45. Everybody Wants to Be a Bank

Like Willie Sutton said: "That's where the money is!"

The AP reports: 4 insurers ask government to let them acquire thrifts so they can receive bailout funds

In addition to Hartford Financial, the AP reports that Genworth Financial Inc., Lincoln National Corp. and Aegon NV have all asked the Office of Thrift Supervision for permission to buy thrifts - and access the TARP.

http://biz.yahoo.com/ap/081114/treasury_bailout_insurers.html

[Demeter]

48. LoS to Become Bank Holding Company by Mr Juggles

(PARODY)

http://longorshortcapital.com/los-to-become-bank-holding-company.htm

LongorShortCapital(THIS WEBSITE) has received approval to become a bank holding company as of November 13th 2008. LoS, through absolutely no fault of management, has been hit by The Perfect Storm of Perfect Storms. This storm impaired our capital and destroyed our ability to continue paying lucrative dividends to subscriberholders. These dividends are the lifeblood for our investors/readers, many of whom derive the majority of a minority of their income from LoS dividends. Transforming the company from a purely fictional producer of financial satire into a bank holding company will allow LoS to access the TARP, the Fed discount window, and the slush fund to pay US auto workers*. The company plans to immediately draw down the full amount of money available and prudently pay it out immediately to our subscriberholders after first contributing heavily to the executive pension fund and rewarding management performance with large bonuses.

*for voting Democrat (Thank You!)

[Demeter]

44. ... Is Citigroup going under? Is Sheila Bair's erratic behaviour really her trying to save Citi?

http://brontecapital.blogspot.com/2008/11/citigroup-whachovia-sheila-bair-and.htl


Readers will know that I think pretty lowly of the head of the FDIC. Maybe I am wrong.
I have been puzzling this weekend – trying to work out what is going on using the assumption that all is part of a grand and competently executed strategy. And the result was unsettling. The best hypothesis I came to is that Citigroup is going down and that Sheila Bair is trying to save it.

Sheila Bair – as readers will remember – forced Wachovia to sell itself in three days whilst other parties had not had anything like enough time to complete due diligence. She – unilaterally and incorrectly – told the world that this deal could not be done without government assistance. She unilaterally decided to issue a guarantee that on a pool of $312 billion of Wachovia assets Citigroup could not lose more than $42 billion. She made that decision even though Wells Fargo was telling her that all they required was more time to do due diligence.

Given that Wells Fargo was willing to acquire Wachovia at no-cost to taxpayers that looks like a very bad decision indeed. But this is the post assuming that Sheila Bair is smarter than all of us.
And so we need to understand the significance of that guarantee. The significance is as follows: Once Citi owns $312 billion in assets on which they can only lose $42 billion the remaining pool must be worth $270 billion. That $270 billion is guaranteed by the US Government – as the FDIC is a full faith and credit organisation. Citigroup can put that $270 billion (plus the $42 billion in non-guaranteed assets) in a pool and repo it – and as Treasuries yield very little they will wind up paying well under a percent of interest. The Sheila Bair decision was equivalent to a cash injection into Citigroup of 270 billion because the repo-market will turn government guaranteed loans into cash.

That cash injection is almost 40 percent of the size of the whole bailout package and it was given to Citigroup by Sheila Bair without congressional oversight. We got all stroppy at giving Paulson that sort of unilateral powers – but – hey – we are prepared to forget that Sheila Bair already has them.

Anyway – Citigroup buying Wachovia reliquefies Citigroup. Big time. Citigroup almost certainly knows this. Sheila Bair – if she is smart – knows this. That is why it is so important for Citigroup to complete the deal.

Now Wells Fargo have come to destroy the party. They are prepared to buy Wachovia without any government guarantee. The FDIC should be cheering as this removes all cost to the taxpayer – but Sheila Bair stands behind the decision to sell Wachovia to Citigroup.

Citigroup isn't looking to sue Wachovia for a break-up fee. They are looking to enforce specific performance on Wachovia. They are not interested in a $20 billion break-up fee – that does not save them. That is just too small. They are interested – critically interested – in the net $270 billion in guaranteed assets because that is the equivalent of $270 billion in cash – enough to save Citigroup from destruction.

Specific performance is very hard to enforce as numerous blogs have pointed out – here and here for example. But in this case it is necessary.

Sheila Bair is smarter than I thought and she knows it too. So I withdraw my demand that Sheila Bair resign – on the basis that it is probable that Sheila Bair knows more than me and she deemed it necessary to inject $270 billion in cash into Citigroup to stop their imminent failure.

Of course if this thesis is wrong Sheila should just save me the trouble of issuing a correction and resign forthwith.



John Hempton

[Demeter]

46. Let’s Have Another Cup of Coffee By MICHAEL KINSLEY

http://www.nytimes.com/2008/11/14/opinion/14kinsley.html?_r=2&oref=slogin&oref=slogin

STROLLING through the Pentagon City Costco last week, I could feel my consumer confidence draining away. Even the bargains at Linens ’n Things around the corner, which is going out of business, didn’t tempt me....I’m not the only one. “Consumer confidence” is plummeting nationwide. Those famous attitude surveys from the University of Michigan say so and actual consumption statistics confirm it. October retail sales were down double digits from a year ago. Most of this drop represents people who suddenly are poorer, or feel that way. But there also is some concern that the great American shopping spree may be over. We have all the stuff we need.

What do they want from us, anyway? Without consumers to lead the charge, an economic recovery will be hard to achieve. And yet everyone agrees that we need to start saving more. So should I buy that coffee maker to stimulate the economy? Or should I save the money in order to “grow” the economy and provide for my own old age? I can’t do both.

This is the dilemma that 30 years of Reaganomics (the real Reaganomics — keeping the economy overstimulated with huge deficits and irresponsible consumer borrowing — not the fantasy Reaganomics of government run like a family and tax cuts that pay for themselves) has left us with. So what do we do? The nearest thing to an actual plan seems to be something like this: stimulate first, to avert various short-term disasters, and then — at some signal from the Treasury Department — turn around and start saving like mad, to avert various long-term disasters. In other words, we need to get back our consumer confidence, and then lose it again.

The first part is fun. We just keep doing what we’ve been doing, only more and faster. The deficit may soar to $1 trillion a year while the government hands out cash to whoever shows up at the teller’s window. Each of us can do our own bit as well. Show your consumer confidence. One last shopping spree. Buy that coffee maker whether you want one or not.

Part II will not be fun. Return the coffee maker (if the store is still in business), and deposit the money in your 401(k). Start drinking instant.

Michael Kinsley is a columnist for Time magazine.

[Demeter]

51. Abandon all hope once you enter deflation

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3448664/Abandon-all-hope-once-you-enter-deflation.html

The price of white truffles has fallen 84pc. Fines wines have dropped 65pc. Lobsters are off 52pc. Deflation has reached the City. It has engulfed housing and now threatens to spread through the broader economy, lodging like a virus in the British and global monetary systems.

By Ambrose Evans-Pritchard


Deflation is sometimes likened to Dante's Inferno. "Abandon all hope" once you step into that Hellfire.

We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year. This is a drastic reversal of the oil and food spike that played such havoc with monetary policy over the summer. "The world changed in September," said the Governor.

The Bank's fan charts point to zero inflation at current interest rates of 3pc, but the startling new feature is that price falls could gather pace. This is a clear signal that the Monetary Policy Committee will cut rates again in December – perhaps by a full point to the historic low of 2pc, last seen in the Great Depression.

Mr King let slip yesterday that there is "obviously" a risk of deflation, although he remains sure it can be averted by a pre-emptive monetary blitz. Let us hope he is right.

The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same. This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in John Steinbeck's Grapes of Wrath.

We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s. Our sensitivity to debt deflation is therefore greater...Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop.

It also redistributes wealth – the wrong way. Savings appreciate, which is nice for the "rentiers" with capital. The effect is a large transfer of income from working people with mortgages to bondholders. (These may be pension funds, of course).

[Demeter]

52. T.A.R.P. R.I.P.: Illiquency Watch

http://www.creditslips.org/creditslips/2008/11/tarp-rip-illiqu.html

posted by Anna Gelpern

TARP's third incarnation as a consumer lending catalyst goes straight to my pet crisis peeve. I am endlessly flummoxed at the authorities' insistence on throwing liquidity at a solvency problem -- with TARP I, AIG, and now, the consumers.

I have ranted elsewhere about the perils of drawing a sharp line between illiquidity and insolvency in a financial and macroeconomic crisis. While the bankruptcy world has moved beyond the distinction in important ways, it still dominates the crisis policy response.


With the liquidity-solvency prism as their guide, policy makers invariably define the crisis as one of pure illiquidity/temporary confidence shock long past the point of credulity; the alternative is admitting failure with few tools to fix it. We have ready medicine for illiquidity: the Lender of Last Resort lends freely for a short term, preferably at high interest rates and against good collateral, to tie us over until the panic subsides. This describes old and new Fed lending, for which we have standing authority, as well as key features of all three AIG packages, and TARP to date: unlike the RTC, which took over failed S&L, TARP is either a money tap or a vehicle for parking "temporarily illiquid" assets in a government parking lot.

In contrast, the medicine for systemic insolvency is large-scale debt reduction and restructuring, which may require legislation and is fraught with political risk, since it entails unpopular decisions about loss distribution. Where the liquidity-solvency judgment is wrong of fudged (and it always is), debt relief is delayed, while losses are masked and maldistributed. Unsustainable debt compounds, and with it, the fiscal cost of the ultimate fix. Revisiting Japan's experience in the 1990s makes for uncomfortable reading. I am becoming increasingly convinced that doing away with the liquidity-solvency prism and requiring restructuring sooner, in conjunction with liquidity support, makes good policy sense.

[Demeter]

53. Paulson is handing out free money like candy to a baby

http://www.creditwritedowns.com/2008/11/paulson-is-handing-out-free-money-like.html

Hank Paulson knows he has two months left until he leaves Washington. Therefore, he must feel he needs to pass out as much free cash to his friends in banking and finance before he leaves town. Or, at least so it seems.

The latest story I saw on this turn of events concerns Citigroup and its bid to take over my local bank, Chevy Chase Bank. This bank, whose headquarters is literally half a mile from my house is a profitable institution with $14 billion in assets. How can Citigroup, which has over $60 billion in writedowns, is losing money hand over fist, and received a massive cash injection from the federal government just weeks ago take over a smaller, more profitable institution? Doesn't this create a moral hazard? I heard Peter Morici, a well-known International Business Professor at the University of Maryland, on the radio this morning asking the same questions.

The US banking system is certainly in need of recapitalization. But I must confess this looks a lot like crony capitalism. Let me do a brief recap of how we got here and add in some of the ways US Government money and the $700 billion TARP (Troubled Asset Relief Program) have been used to date.



Originally, the TARP was passed under the guise of buying up dodgy assets from banks in order to set a floor on those assets' price. The premise was this would allow financial institutions to better price these illiquid securities, bringing back some liquidity to the market through better pricing and a willing trading partner in the US Government. Stephen Roach of Morgan Stanley had praise for putting some funds to work in this way. However, most commentators and many Americans, including yours truly, felt that this was an ill-conceived freebie for the financial services industry. See my post, "The $700 billion Paulson Plan is dead on arrival." As a result, this bill initially was rejected by the US House of Representatives.

However, after adding in some stimulus and other giveaways, the bill eventually passed. See my posts, "US Senate passes Economic Patriot Act 74-25" and "Congress passes the bailout bill." Hank Paulson has since said that he never intended to spend the funds in that way. So, why did the Bush Administration sell the program as such? See my News round-up for comments from various economists on Paulson and his recent claims. Instead of buying toxic assets, the Treasury has focused its efforts on recapitalizing the US banking system.

In my opinion, Hank Paulson is not being straight with us. It was only after the British went ahead and proposed their own recapitalization program that Treasury started singing this tune. See my Oct. 7th post, "Recapitalising Britain" and my Oct 8th post "The Swedish roots of the UK bailout plan." But, in the UK, the plan is much more stringent. The UK government is NOT forcing firms to take on equity capital. Barclays has tried to raise outside capital from Middle Eastern investors -- albeit in a way that leaves its shareholders uneasy. Moreover, the UK plan eliminates dividends for those banks taking on the government monies. Paulson has no string attached whatsoever.

So, in the case of Citigroup, we have a company whose CEO pocketed $150 million in compensation before being fired. The company then proceeds to write down $60 billion in credit. But then it gets billions of dollars in equity capital from the government with no strings attached. That allows this company to takeover a better run smaller institution like Chevy Chase Bank and still pay a dividend to shareholders. Meanwhile, they have not done nearly enough in loan modification or increased lending to justify giving them a free ride. Regional banks are already on record as saying this would happen and it has. See my post, "Quote of the day: Nationalized banking predators," for a quote from a regional bank CEO predicting this. This is the height of moral hazard.
However, there is a lot more to this story. Look at who is in line for free money from the U.S. Government:

Banks have gone to the Federal Reserve with dodgy assets and received trillions of dollars in loans at low rates (Fed Funds is 1% now) in return. However, the Federal Reserve refuses to reveal what assets it is taking on. Bloomberg News has sued to find out. See my post, "Bloomberg News sues the Fed under Freedom of Information Act."

Money center banks received $125 billion in equity capital under TARP.
Regional and local banks received another $125 billion dollars in equity capital.
AIG has received $40 billion in equity capital and a line of credit of $150 billion. See my post, "Doubling down at AIG."

Morgan Stanly and Goldman Sachs became bank holding companies in order to secure low cost funding.
American Express became a bank holding company for the same reason GMAC and GE Capital want to be bank holding companies for the same reason. Last time I checked. GMAC was a auto finance company and GE Capital was a private equity shop. They are not banks.

GE Capital has received a blanket guarantee for $139 billion in debt from the FDIC which regulates and makes money available for depositary institutions. GE Capital is not a depositary institution.
All of this is well documented as you can see from the number of posts even I have written on the subject. This whole charade is a bit of a head scratcher because it confirms the notion that financial interests are clearly winning out over consumer interests. How many people do you know getting mortgage loan modifications or debt relief? Not may I suspect. Wall Street is still getting a lot more dosh than Main Street. And it's all happen right under our noses in plain view for all to see.

Hank Paulson is going back to the Democratic Congress to get his hands on the $350 billion he has yet to spend in order to dole out the cash to consumer finance companies -- read American Express, GE Capital and GMAC before Obama gets into office. Should he get his money?

As Yves Smith told me, it sounds a lot like the Clinton pardons from 2000 -- a nice parting gift for friends.

[Demeter]

54. Should GE be a AAA company?

http://www.creditwritedowns.com/2008/11/should-ge-be-aaa-company.html

The latest news in bailouts involves GE Capital. Apparently, the company has gone begging to the FDIC for a bailout. In fact, the FDIC has offered to back $139 billion in GE Capital debt. I have serious reservations about this move by Sheila Bair. In fact, I am outraged.

First, as I understand it, the FDIC has much less than $139 billion in capital on hand. And they have hundreds of banks to watch that are busy going broke. So, how is it possible that they can guarantee GE Capital's debt? The answer is they cannot. American taxpayers are what is behind this move just as they were with Fannie and Freddie - not that we will get stuck with the bill as GE is not going under, but the FDIC certainly can't pay. (UPDATE: a reader who writes the blog "Skeptical CPA" is not so sanguine about GE and passed on a post he wrote doubting GE Capital's funding model.)

Second, how is GE a AAA company? As I understood it, AAA means bullet-proof, high quality, or excellent. If a company needs the support of the government, it is not possible to be considered AAA. Do you see Berkshire Hathaway going cap in hand to the government for a bailout? As a matter of fact, Berkshire assisted GE Capital by buying preferred shares at a steep price, which allowed the company to raise billions in capital. The difference is striking.

Third, GE Capital isn't even a bank. The FDIC only deals with depositary institutions. Are you kidding me? The US Government is obviously willing to do anything to bail out financial institutions at this point. Forget rules and reulations. Just give them the money.

G.E.'s AAA rating is a sham.



General Electric said Wednesday that the federal government had agreed to insure as much as $139 billion in debt for its lending subsidiary, GE Capital. This is the second time in a month that G.E. has turned to a federal program aimed at helping companies during the global credit crisis.

GE Capital is not a bank, but granting it access to a new program from the Federal Deposit Insurance Corporation may reassure investors and help the lender compete with banks that already have government-protected debt, a G.E. spokesman, Russell Wilkerson, told Bloomberg News.

“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Mr. Wilkerson said.

The F.D.I.C. program covers about $139 billion of G.E.’s debt, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.

[Hugin]

57. One other thing about GE Captial...

They've taken over JCPenneys financial operations... (Read: JCPenneys Credit Cards)

Didn't hear much about it, but, I saw a flyer to that effect a couple of weeks ago.

http://www.gemoney.com/en/personal/about_us.html

[Demeter]

55. While I've Still Over 40 Emails to Sort Through, It Will Have To Wait for Sunday

Sorry I couldn't find any good news (other than the election results).

Try to have pleasant dreams anyway!


Smile though your heart is aching
Smile even though its breaking
When there are clouds in the sky, you'll get by
If you smile through your fear and sorrow
Smile and maybe tomorrow
You'll see the sun come shining through for you

Light up your face with gladness
Hide every trace of sadness
Although a tear may be ever so near
That's the time you must keep on trying
Smile, what's the use of crying
You'll find that life is still worthwhile
If you just smile

Light up your face with gladness
Hide every trace of sadness
Although a tear may be ever so near
That's the time you must keep on trying
Smile, what's the use of crying
You'll find that life is still worthwhile
If you just smile

That's the time you must keep on trying
Smile, whats the use of crying
Youll find that life is still worthwhile
If you just smile

[Karenina]

56. Thanks, Demeter!

:hi::loveya::hi:

[DemReadingDU]

68. Thanks for this weekend thread

Lots of good reading here again!
:hi:

[Pale Blue Dot]

60. Closures & Layoffs (Nov. 9-15): DHL Cutting 9,500 U.S. Jobs

In this week's issue:

* DHL cutting 9,500 U.S. jobs.

* Motor home, RV dales running out of gas.

* Fidelity Investments layoffs not 'mutually' exclusive.

* Plus, a whole new round of major U.S. corporation closures and layoffs were announced in: Alabama, Connecticut, Florida, Georgia, Indiana, New Jersey, Ohio, Pennsylvania, Utah and Virginia.

http://www.costar.com/News/Article.aspx?id=598F4D59D231A94A53AD9235145C833E

[DemReadingDU]

71. Stimulate Car Buyers, Not Car Makers

11/15/08 Stimulate Car Buyers, Not Car Makers
Government rebates would do less harm than a bailout.
.
.
Since a big fiscal-stimulus package for fighting the recession -- some combination of tax cuts, extended unemployment compensation, infrastructure grants and assistance to states -- is coming soon, why not stimulate consumers to buy cars? Why not offer eye-popping rebates -- say, $3,000 -- for a limited time to buyers of cars and light trucks? It would probably make sense to phase out rebates for the most expensive cars, and as a treaty obligation, it wouldn't do to discriminate against foreign makes.
.
.
If, say, 12 million nonluxury vehicles were sold in the next year -- similar to 2007 -- the rebates would total $36 billion. Of that sum, about one-half would go for cars built by the Big Three. Better yet, more than 80% could be expected to go for vehicles actually manufactured in North America, even if the auto maker is from overseas.

more...
http://online.wsj.com/article/SB122670687859029699.html?mod=googlenews_wsj