Weekend Economists--The Nostalgia Weekend November 21-23, 2008

[Demeter]

As the holidays approach, we reminisce about events and people long past who, through the dust and glow of history, look so much more lustrous now than they did then. We just didn't know how good we had it (well, those of us who have resisted, kicking and screaming, the gutting of America did know, we just couldn't get any leverage over the pirates). A lot of Americans bought the sizzle of false promises and too-good-to-be-true deals, and here we are!

So, let us gather about Nancy Pelosi's bare naked table, and recall the Past, project the Future, and bitch about the Present. Our emphasis is economics, political economics, but we are open to side trips and non sequitors....

If you haven't guessed by now, I am a daughter of the Motor City, and spent 29 years in exile before returning to my Native Land. I don't live in the city proper, but in the People's republic of Ann Arbor, as my dittohead uncle called it, since the city is a ghost of its former glory. So expect a lot of detail about the Big Three this weekend!

And in that vein, enjoy this special animation by Mark Fiore:



http://www.markfiore.com/owners_manual_0


<a href="http://comics.com/frank&ernest/2008-11-10/" title="Frank & Ernest"><img src="" border="0" alt="Frank & Ernest" /></a>



<a href="http://comics.com/frank&ernest/2008-11-19/" title="Frank & Ernest"><img src="" border="0" alt="Frank & Ernest" /></a>

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

[Demeter]

1. The Return of the $70 Per Hour Meme

http://www.portfolio.com/views/blogs/market-movers/2008/11/18/the-return-of-the-70-per-hour-meme


You might expect it from right-leaning commentators like Will Wilkinson. You wouldn't expect it from someone like Mark Perry, who lives in Flint, Michigan. And you certainly wouldn't expect to see it in the New York Times, from the likes of Andrew Ross Sorkin. But all of them are perpetuating the meme that the average GM worker costs more than $70 an hour, once you include health and pension costs.

It's not true.

The average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM's total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers.

Now that GM's healthcare obligations are being moved to a UAW-run trust, even that fictitious number is going to fall sharply. But anybody who uses it as a rhetorical device suggesting that US car companies are run inefficiently is being disingenuous. As of 2007, the UAW represented 180,681 members at Chrysler, Ford and General Motors; it also represented 419,621 retired members and 120,723 surviving spouses. If you take the costs associated with 721,025 individuals and then divide those costs by the hours worked by 180,681 individuals, you're going to end up with a very large hourly rate. But it won't mean anything, unless you're trying to be deceptive.

[burf]

26. But you forgot the

right wing credo: "Never let the facts get in the way of the talking points".

[DemReadingDU]

27. Ugh. The unions have done so many concessions

They are but a shell of their former selves.

It's not right that the banksters were given billions for whatever, but the autos have to have a plan for the bailout.

Something needs to be done with the auto industry, because it isn't just about making cars. It's also about suppliers, the businesses surrounding the factories, the millions of families impacted.

If the auto industry is dead, then the factories should be re-tooled for some other kind of manufacturing. Bring back the industries that were outsourced. It's all about people having jobs, providing for their families.

Else I see a major depression, an angry society, and bloodshed.

[Demeter]

2. Just give us the money

http://blogs.ft.com/maverecon/2008/11/just-give-us-the-money/

My wife and I are the proud owners of all the common stock in a small company, created originally as a vehicle for supplying consultancy services. Because we are both US citizens, the company is registered both in the US and in the UK. Over the years since its creation, an awareness has grown inside me, that what we really own is a bank: money goes out (quite a lot) and money comes in (not quite enough). All we lack to be a proper bank is leverage and a marble atrium.

To remedy this obvious deficiency, I have decided to submit a request to the US banking regulators (cc’d to Hank Paulson) to grant bank holding company status to our enterprise. If G-Mac can aspire to this status, which gives the qualifying institution access to all the Fed troughs and to what’t left of the TARP, then so can we.

Unlike G-Mac, which provides financing for crappy, environmentally unfriendly vehicles that no-one really wants, our would-be bank holding company is a model of family values at work. Sure, we don’t make loans. But show me a bank today that does. You may wish to point out that the two principals involved have no experience running a bank. You would be correct. But what really is worse, having no relevant experience or having an extensive track record of running multi-billion enterprises into the ground? Make a choice between a definite risk and the certainty of abject and costly failure.

If we cannot get bank holding company status for our company, we will fly our (separate) private jets to Washington DC to appeal for congressional support for our business as a quintessential heartland enterprise. The very fact that we are not systemically important makes us systemically important. The reason is that if we can get money from the US government, anyone can. And if anyone can, there is no longer any reason for fear, excessive caution and pessimism. Consumers will spend again. Banks will lend again. Companies will invest again. Just give us the money.

[Demeter]

3. David Fiderer / The Simple Arithmetic of Hank Paulson's Financial Disaster

http://www.huffingtonpost.com/david-fiderer/the-simple-arithmetic-of_b_145389.html



Financial markets just gave Hank Paulson a vote of no confidence. Unfortunately, it's the rest of us who will pay the price. As Paulson made clear this past week, he is stalling, subverting the express intent of Congress when it passed the bailout bill, by his refusal to take action on foreclosure relief for distressed homeowners. Paulson's inaction has triggered a chain reaction that goes something like this:

First: Treasury says it won't take steps to prevent home foreclosures, so that
Second: Prices of mortgage securities collapse, so that
Third: Bank equity gets wiped out, so that
Fourth: Banks, with shrunken equity capital, are forced to cut back on all types of credit, so that
Fifth: Financing for anything, especially residential mortgage loans, dries up, so that
Sixth: Market values of homes decline further, so that
Seventh: Mortgage securities decline further, and the downward spiral becomes self perpetuating.

This phenomenon is best illustrated by the numbers.

The free fall in mortgage securities.

The free fall in market prices for mortgage securities implies that the eventual recovery on distressed mortgage loans will be a lot worse than anyone expected on the eve of Obama's election. We see that from the Markit ABX Indices, which are something like a Dow Jones Average for subprime mortgage securities.

Market Price
ABX-HE-PENAAA 07-1, November 3: 55 November 20: 34.25
ABX-HE-PENAAA 06-2, November 3: 82 November 19: 58.32

When ABX-HE-PENAAA 06-2 traded at 82, or 82 cents on the dollar, the implied recovery rate on the entire mortgage pool is was something like 66%. When the same security trades at 58.32, the implied total recovery is about 47%. Here's why. The way these securities are structured, different classes of creditors, or different tranches, all hold ownership interests in the same pool of mortgages. But the tranches with the lower ratings - BBB, A, AA - take the first credit losses; they are supposed to get wiped out before the AAA bondholders lose anything. Typically, AAA bondholders represent about 75-80% of the entire mortgage pool. (Market Price@ 82 X approx. 80% of total pool = 66% total recovery). (ABX-HE-AA 06-2 currently sells at about 12; ABX-HE-A 06-2 sells under 6. At those prices, a buyer is betting that the eventual recovery will far exceed the market's expectations.)

Mortgage securities and bank stocks fall in tandem.

From the price graphs of the ABX benchmarks, accessible via hyperlink, you can see how the downward slopes closely match those for bank stocks since election day.

Market Price
ABX-HE-PENAAA 07-1, November 3: 55 November 20: 34.25
ABX-HE-PENAAA 06-2, November 3: 82 November 20: 58.32
Citicorp, November 3: 13.99 November 20: 4.71
Bank of America, November 3: 23.61 November 20: 11.20
JPMorgan Chase, November 3: 40.73 November 20: 17.35
S&P 500, November 3: 966 November 20: 752

Since November 3, Citicorp, Bank of America, and JPMorganChase have lost in excess of $240 billion in market value. Most of the other global banks, such as UBS, Barclays, BNP, have suffered similar declines.

The link between ABX indices and bank equity requires some further explanation.

Declines in mortgage securities wipe out bank capital and confidence in our global financial system.

About 18 months ago, banks lost control of their balance sheets. Losses on securities receive different accounting treatment than losses for loans. Comparatively speaking, loan losses are more predictable and more manageable. Before they report their quarterly results, banks review their problem loans and calculate the associated loss provisions. Banks don't expected to be whipsawed by market events on the last day of a fiscal quarter.

Things changed around July 2007, when AAA mortgage securities started trading at prices materially below par, or below100. Up until then, many banks had bulked up mortgage securities that were rated AAA at the time of issue. Why? Because they believed that AAA bonds could always traded at prices close to par, and consequently the bonds' value would have a very small impact on the earnings and equity capital. The mystique about AAA ratings dated back more than 80 years. From 1920 onward, the default experience on AAA rated bonds, even during the Great Depression, was nominal. Similarly, during the Great Depression national average home prices held their value far better than they have in the past two years.

Those assumptions, of a highly liquid trading market and gradual price declines, proved to be way off the mark. Beginning in the last half of 2007, the price declines of AAA bonds was steep, and the trading market suddenly became very illiquid. Under standard accounting rules, those securities must be marked to market every fiscal quarter, and the banks' equity capital shrank beyond anyone's worst expectations. Hundreds of billions of dollars have been lost. The losses in mortgage securities, and from financial institutions like Lehman that were undone by mortgage securities, dwarf everything else.

Before the end of each fiscal quarter, bank managements must also budget for losses associated with mortgage securities. But since they cannot control market prices at a future date, they compensate by adjusting what they can control, which is all discretionary extensions of credit. Banks cannot legally lend beyond a certain multiple of their capital.

This uncertainty about banks in general, and the ripple effect of reduced credit, creates a crisis in confidence throughout the financial system and the broader economy.

Why Treasury's intervention was needed to forestall a bigger glut of foreclosures.

Why did mortgage securities and bank stocks fall so much more sharply in the last few weeks? The market was expecting that Hank Paulson would act in a manner consistent with Congressional intent when it passed the bailout. As time passed, anxiety about treasury's inaction increased. Then on November 12, Paulson announced that he would do nothing soon to provide foreclosure relief to homeowners.

As we've seen above, stabilizing home prices is key to stabilizing the broader economy. And the key to stabilizing home prices is to limit the spate of foreclosures that would flood the market. If homeowners are able to remain in their homes and make partial payments on their mortgages, lenders may attain a better recovery than from a series of fire sale liquidations.

The problem is concentrated among private-label securitizations. Though they represent only 20 percent of all mortgages, they represent 60 percent of all defaults, according to The Financial Times. Unlike most mortgage securities that follow the standardized underwriting guidelines of Fannie Mae and Freddie Mac, private-label securities make it almost impossible for the lender to negotiate modifications with the homeowner. Congress passed the bailout package on the condition that a large chunk of the $700 billion to assume control of these assets so that the government could renegotiate terms with distressed homeowners.

Paulson ignored Congressional intent, and went off into an entirely different direction, allocating funds to bolster securitization of credit card receivables. Barney Frank, with great specificity, called him on his bad faith bait-and-switch tactics. But that exchange didn't get nearly as much coverage amid Paulson's platitudinous soundbites and talk about bailing out GM.

"The primary purpose of the bill was to protect our financial system from collapse," Paulson told the House Financial Services Committee. And the markets signaled what they think of Paulson's job performance.

Addendum
Here's a taste of how Barney Frank tried to cut through Hank Paulson's dissembling and evasiveness yesterday.

REP. FRANK: Let me just say there are pages -- it's four pages of specific authorization to buy up mortgages and write them down. Section 109(c), "upon any request arising under existing investment contracts, the secretary shall consent where appropriate in considering -- (inaudible) -- by the taxpayer to reasonable requests for loss mitigation measures."

In Section 110, homeowner assistance by agencies. "To the extent that the federal property manager holds on to controlled mortgages, they shall implement a plan that seeks to maximize assistance for homeowners."

The bill is replete with authorization to you, not simply to buy up mortgages, but in effect to do some spending -- because we are talking about writing them down.

So the argument that, frankly, of all the changes that have come with the program, this -- this wouldn't be a change. This was the program. And my colleague from California, who'll be -- you'll be hearing from shortly, made a big point of this on the floor.

So the argument that this is not part of the program simply doesn't wash. So -- would, do you agree, Mr. Secretary, that in fact the bill does authorize aggressive action, not simply to buy up mortgages, but in buying them up, take some action to reduce in some ways the amount owed so we diminish foreclosures?

SEC. PAULSON: Mr. Chairman, two things. First, I need to just say a word about AIG, because the primary purpose of the bill was to protect our system, protect our system from collapse.
AIG was a situation, a company, that would have failed, had the Fed not stepped in. Had we had the TARP at that time, this is right down the middle of the plate for what we would have used the TARP for.

As it turned out -- because it should have had preferred (and a ?) Fed facility, and as it turned out, we needed to come in again to stabilize that situation and maximize the chances that the government would get money back.

So I just wanted --

REP. FRANK: I'm not objecting to the AIG. I am just saying, though, that the standards of what we do -- and obviously foreclosure is also a serious problem for the economy.

SEC. PAULSON: I agree with you on the bill. There is no doubt that -- and so don't misunderstand what I say, that the --

We came to Congress with the intent to get at the capital program that banks were facing and the system was facing through purchasing large amounts of illiquid assets. And so the bill -- and it was to purchase those assets and then resell them.

And our whole discussion -- because that's what we were talking about, was how to use these and use this investment position to make a difference and mitigate foreclosures.

My only point is now that we haven't bought those assets, illiquid assets, that the -- that at least the intent is, I had seen it. At least all the discussions we had went to buying assets and reselling them. It didn't go to a direct subsidy. But

REP. FRANK: No, Mr. Secretary, I have to interrupt you. No, you are talking legitimately about your intent. But we had to get the votes for the bill.

SEC. PAULSON: Right.

REP. FRANK: Our intent was also relevant. And I read you sections of the bill which says, write it down, give them assistance. So the bill couldn't have been clearer that one of the purposes --
And, by the way, we're talking about, what, 24 billion (dollars) out of 700 billion (dollars)? You're talking about 4 percent of the total amount.

But the point is that clearly part of this was not just to stabilize, but to reduce the number of foreclosures, for good macro- economic reasons. And so again, the intent couldn't be clearer, from what I've read.

SEC. PAULSON: Let me then, Mr. Chairman, say what you've heard me say a number of times before, that going back many, many months, before it was as topical as it is now, we've been working very, very aggressively at the individual, helping the individual. As recently as last week --

REP. FRANK: Mr. Chairman, I'm sorry -- Mr. Secretary -- we don't have a lot of time, and I don't usually do this, but --

SEC. PAULSON: Okay, well, let me just --

REP. FRANK: What -- the question is the language in the TARP. We understand that there are other activities going on. I don't accept them as a substitute for using the authority that we very specifically and carefully wrote into the TARP and that was essential to it getting passed.

SEC. PAULSON: Well, what you've heard from me, and what you heard from me last night, and which I will say again, that I am going to keep working on this and looking for ways to use the taxpayer money as they expect me to here, with regard to foreclosure mitigation.

We have been, you know, as recently as last week, taking a step which I think will have --

REP. FRANK: No, I'm sorry, Mr. Secretary. Those are not substitutable. Because I will tell you this, and I apologize for taking the time, it is nobody's view that we have been as successful as we need to be for the stake of the economy in reducing foreclosures.

[D-Lee]

66. Yup, Paulson did ignore the mortgage solution mandate

Thanks for making that essential point so very well!

[Demeter]

4. The Community Bank closed, 20th failure of the year

http://www.marketwatch.com/news/story/community-bank-closed-20th-failure/story.aspx?guid={DC1245EA-2973-45EC-B090-99579F04D9B5}&siteid=yahoomy


SAN FRANCISCO (MarketWatch) -- Loganville, Ga.-based The Community Bank has been closed by regulators, the Federal Deposit Insurance Corp. said late Friday, marking the 20th bank failure so far this year amid the ongoing financial crisis.

All of The Community Bank's deposits have been transferred to Tappahannock, Va.-based Bank of Essex, the FDIC said, and all four of The Community Bank's branches will reopen Monday as Bank of Essex.
The Community Bank had total assets of $681 million and total deposits of $611.4 million as of Oct. 17, the FDIC said.

Bank of Essex purchased roughly $84.4 million of The Community Bank's assets and paid the FDIC a premium of $3.2 million for the right to assume the failed bank's deposits. The FDIC said it would retain the remaining assets "for later disposition."

The FDIC estimated that The Community Bank's failure will cost its Deposit Insurance Fund between $200 million and $240 million. The Community Bank is the third Georgia-based bank to be closed this year, the FDIC said

[Hugin]

5. Cute animation.

:)

I was wondering what ever happened to Mark Fiore.

Might look at a few more while I'm there.


Edit to add: Jeeze, it's been a LONG LONG eight years...

[Demeter]

6. Of All The Threads In All The Internet, He Has To Wander Into This One!

Hey Prag! See you found me!

[Hugin]

10. I heard there was free coffee and donuts here.

And I followed the cartoon crumbs.

Still not sure what day it is...

:hi:

[AnneD]

57. PRAG....

:donut: I just got back from the Greek Festival. There is a box of Greek pastries here too. Who loves ya baby?
I love the smell of Ouzo and garlic in the morning.

It was a good day. I sat down to eat my greek lunch and started talking to the folks next to me.. We had a great time and plan to get together for coffee soon. They live close to us now. I have a weird feeling that I may buy their house in a few years. Just one of those flashes I get now and again.

Every on at the the table was talking economics. And if everyone is talking cutbacks-even in an area that is doing well....Christmas will be setting all kinds of negative records this year.

[Hugin]

65. Hey AnneD!

Check out the new smiley!

:fistbump:

:woot:

[Demeter]

7. Goldman Recants Its $200 a Barrel, "Super Spike" Call for Oil

http://www.nakedcapitalism.com/2008/11/goldman-recants-its-200-barrel-super.html


Um, a bit late to come to that realization, don'tcha think? From Barron's (hat tip reader Michael):

That ‘’super spike” in oil prices that Goldman insisted would lift crude to $200 a barrel ….? ....It never really turned out to be that prescient: instead of the 50% jump in oil that Goldman anticipated back in May, when it made the call with crude trading at $132, the price of a barrel never got more than 11% higher. And has since, of course, lost fully two-thirds of that price in the intervening four months.

Now Goldman is left with the ignominy of summarily abandoning the investors who listen to its research calls... On Thursday, Goldman said it was ”closing” its recommendations for oil trades. Meaning that in a perilous time when the traders who pay attention to Goldman’s recommendations could use some guidance the most, Goldman has opted to give them the least. And some traders are furious about it, comparing the maneuver to then-strategist Abby Cohen’s decision to abandon her targets for equity indexes in the fall 2001, citing the uncertainties abounding in the market.

Goldman specifically talked about four trade recommendations it previously issued, and said clients shouldn’t put any stock in them any longer. One particular trade, a Nymex-WTI swap on the 2012 contract, issued in September, when crude already had declined to below $70, suggested that the contract would reflate to a range of $120 to $140. Obviously, that hasn’t happened.

The big losers, of course, would be anybody who continued to trade on Goldman’s recommendations. And the stocks of companies linked to those underlying commodities. Exploration and production names have had an awful go of it Thursday....But Goldman …? What did Goldman lose today? It’s worth noting that, for reasons unrelated to its oil trading call, Goldman shares dropped below their 1999 IPO price in Thursday’s trading.

[Demeter]

8. The Dollar Trap Part II: Mutually Assured Financial Destruction

http://jessescrossroadscafe.blogspot.com/2008/11/dollar-trap-us-treasury-and-dollar.html


The current structure of the remnants of the Bretton Woods agreement with the US dollar as the dominant reserve currency is not sustainable unless the rest of the world is willing to accept a form of neo-colonialism.

The developed nations are holding approximately 70% of their reserves in US dollars.

The rest of the world knows it must find an acceptable substitute for the dollar as the reserve currency.

The US does not wish to change the status quo for several reasons.

First, it provides an automatic funding mechanism for incredibly large budget deficits that would collapse without this mechanism.

Additionally, the US economy has become badly distorted, with an outsized financial sector as a percent of GDP created to manage its artificial reserve construct.

Change will be painful for all. Yet change must and will come, even as the US resists that change and uses a type of Mutually Assured Financial Destruction policy to maintain its hegemony.

No one wishes to make the 'first move' to the exit, since it will cause a severe depreciation of their dollar reserves, and possibly provoke clandestine and military action by the world's sole superpower.

And yet, the inching to the exits is underway, and the world holds its breath in case a shift occurs that will precipitously unravel 37 years of financial imbalance in a global economic earthquake.

The dollar will either be saved with a new formal structure, with more fiscal and political overtones to support an otherwise unstable monetary regime, or it will be decimated.

It would be naive to think that the US financial planners do not see this and are not using it to their advantage.

One can always count on a reversion to the mean. We just cannot know when it will happen, or how, or in what period of time.

When it comes it will come quickly like a lightning strike, with a terrific thunderclap heard around the world.




US Debt has grown to be about ten percent of World GDP (excluding the US) which is without historic precedent.



Approximately thirty percent of US debt is being held by non-US entities, in particular foreign central banks.



The Developed Countries are holding approximately 70% of their reserves in US Dollars. The Developing Nations have less exposure on a percentage basis.




Above Charts from "Is the US Too Big to Fail?" by the Reinharts at VoxEU


Total US Dollar Credit Market Debt Now Stands at 350% of GDP. This cannot be sustained. Certainly a certain portion of credit will be written off in defaults. But notice that the strategy of the US is not to make structural reforms but to try and restart the debt creation engine. This will require continued subsidies from foreign sources with waning appetites for US debt that can never be repaid.



Above chart courtesy of Ned Davis Research

[Demeter]

9. That's About All I Can Handle, Under the In"Flu"ence

see you in the morning!

[ozymandius]

11. Bank Failures #21 and #22: Downey Savings & Loan Association, Newport Beach and PFF Bank & Trust, Po

Bank Failures #21 and #22: Downey Savings & Loan Association, Newport Beach and PFF Bank & Trust, Pomona

From the FDIC: U.S. Bank Acquires All the Deposits of Two Southern California Institutions

U.S. Bank, National Association, Minneapolis, MN, acquired the banking operations, including all the deposits, of Downey Savings and Loan Association, F.A., Newport Beach, CA, and PFF Bank & Trust, Pomona, CA, in a transaction facilitated by the Federal Deposit Insurance Corporation.
...
As of September 30, 2008, Downey Savings had total assets of $12.8 billion and total deposits of $9.7 billion. PFF Bank had total assets of $3.7 billion and total deposits of $2.4 billion. Besides assuming all the deposits from the two California banks, U.S. Bank will purchase virtually all their assets. The FDIC will retain any remaining assets for later disposition.

The FDIC and U.S. Bank entered into a loss share transaction. U.S. Bank will assume the first $1.6 billion of losses on the asset pools covered under the loss share agreement, equal to the net asset position at close. The FDIC will then share in any further losses. Under the agreement, U.S. Bank will implement a loan modification program similar to the one the FDIC announced in August stemming from the failure of IndyMac Bank, F.S.B., Pasadena, CA.

The loss-sharing arrangement is expected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) for Downey Savings will be $1.4 billion and $700 million for PFF Bank. U.S. Bank's acquisition of all the deposits of the two institutions was the "least costly" option for the FDIC's DIF compared to alternatives.

These were the twenty first and twenty second banks to fail in the nation this year, and the fourth and fifth banks to close in California.

http://calculatedrisk.blogspot.com/2008/11/bank-failures-21-and-22-downey-savings.html

[Demeter]

12. In a weird world, yields on Tips point to deflation By John Dizard

http://www.ft.com/cms/s/0/37101d00-b511-11dd-b780-0000779fd18c.html



Would you believe that we shall actually have significant deflation in the US next year? And the year after that? And flat consumer prices for the year following? That's happened only once in a developed country since the 1930s - when Japan recorded a negative 1.6 per cent consumer price index for 2002.

Yet, if you believe the yields on US Treasury inflation protected bonds, or Tips, we shall have a 2.2 per cent fall in prices in 2009, a 2.5 per cent decline in 2010 and only flat prices in 2011. If that turns out to be true, the real interest rate burden on even the highest-rated borrowers will be extremely hard to bear.

As a practical matter, long before we had significant "negative prints" of consumer prices, the Federal Reserve would just flat out buy Treasury bonds and monetise away with "quantitative easing". Gold dealers would replace hedge fund managers at the art auctions, model agency parties and Congressional hearings.

What's really going on is another effect of the disappearance of dealer and arbitrageur capital. The dealers can't afford to make efficient markets, given their decapitalisation, downsizing, and outright disappearance. That means anomalies sit there for weeks and months, where they would have disappeared in minutes or seconds.

The arbs, well, they thought they had risk-free books with perfectly offsetting positions. These turned out to be long-term, illiquid investments that first bled out negative carry and then were sold off by merciless prime brokers....

MUCH MORE AT LINK--VERY ARCANE AND NEW AREA OF BONDS

[Demeter]

13. Volcker issues dire warning on slump

http://www.telegraph.co.uk/finance/economics/3474683/Volcker-issues-dire-warning-on-slump.html

Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence.

By Ambrose Evans-Pritchard
Last Updated: 10:39PM GMT 17 Nov 2008

"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.

"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."

His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.

Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said.

He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."

Mr Volcker is a towering figure in the US, praised for taming the great inflation of the late 1970s with unpopular monetary rigour. He is no friend of Alan Greenspan, who replaced him at the Fed and presided over credit excess that pushed private debt to 300pc of GDP.

"There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something," he said. "There are cycles in human nature and it is up to regulators to moderate these excesses. Alan was not a big regulator."

Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised risk.

[Demeter]

14. This Is Not A Normal Recession: Moving on to Plan B By Mike Whitney

http://www.informationclearinghouse.info/article21280.htm

The global economy is being sucked into a black hole and most Americans have no idea why. The whole problem can be narrowed down to two words; "structured finance".

Structured finance is a term that designates a sector of finance where risk is transferred via complex legal and corporate entities. It's not as confusing as it sounds. Take a mortgage-backed security (MBS), for example. The mortgage is issued by a bank (the loan originator) which then sells the mortgage to a brokerage where it is chopped up into tranches (pieces of the loan) and sold in a pool of mortgages to investors that are looking for a rate that is greater than Treasurys or similar investments. The process of transforming debt ("the mortgage") into a security is called securitization. At one time, the MBS was a reasonably safe investment because the housing market was stable and there were relatively few foreclosures. Thus, the chance of losing one's investment was quite small.

In the early years of the Bush administration, Wall Street took advantage of the gigantic flow of capital coming into the country ($700 billion per year via the current account deficit) by creating more and more MBSs and selling them to foreign banks, hedge funds and insurance companies. It was real gold rush. Because the banks were merely the mortgage originators, they didn't believe their own money was at risk, so they gradually lowered lending standards and issued millions of loans to unqualified applicants who had no job, no collateral and a bad credit history. Securitization was such a hit, that by 2005, nearly 80 percent of all mortgages were securitized and the traditional criteria for getting a mortgage was abandoned altogether. Subprimes, Alt-As and ARMs flourished, while the "30 year fixed" went the way of the Dodo. Lenders were no longer constrained by "creditworthiness"; anyone with a pulse and a pen could get approved. The mortgages were then shipped off to Wall Street where they were sold to credulous investors.

The disaggregation of risk--spreading the risk to many investors via securitization--was as much of a factor in the creation of "the largest equity bubble in history", as the banks lax lending standards or Greenspan's low interest rates. By spreading risk throughout the system, securitization keeps interest rates artificially low because the real risks are not properly priced. The low interest rates, in turn, stimulate speculation which results in equity bubbles. Eventually, credit expansion leads to crisis when borrowers can no longer make the interest payments on their loans and defaults spiral out of control. This forces massive deleveraging and the fire-sale of assets in illiquid markets. As assets lose value, prices fall and the economy enters a deflationary cycle.

There are many types of of structured instruments including asset-backed securities (ABS), mortgage-backed securities (MBS), collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) all of which provide a revenue stream from loans that were chopped into tranches and turned into securities. There are many problems with these complex securities, the biggest of which is that there is no way to unravel the individual pools of loans to isolate the bad paper. That's why subprime mortgages had such a destructive affect on the secondary market, because--even though subprimes only defaulted at a rate of roughly 5 percent--MBS sales slumped nearly 90 percent. Why? Former Secretary of the Treasury Paul O'Neill explained it like this: "It's like you have 8 bottles of water and just one of them has arsenic in it. It becomes impossible to sell any of the other bottles because no one knows which one contains the poison."

Exactly right. So why weren't these structured debt-instruments "stress tested" before the markets were reworked and the financial system became so dependent on them?

Greed. Because the real purpose of these exotic investments is not to provide true value to the buyer, but to maximize profits for the seller by increasing leverage. That is the real purpose of MBS, CDOs and all the other bizarre-sounding derivatives; higher profits with less capital. It's a scam. Here's how it works: A mortgage applicant buys a house for $400,000 and puts 10 percent down. His mortgage is sold to Wall Street, chopped into pieces, and stitched together in a pool of similar loans. Now the brokerage can use the debt as if it were an asset, borrowing at ratios of 20 or 30 to 1 to fatten the bottom line. When Fannie Mae and Freddie Mac were taken into conservatorship by the government, they were leveraged at an eye-popping 100 to 1. This shows that nearly an infinite amount of debt can be precariously balanced atop a paltry amount of capital. This explains why the $4 trillion aggregate value of the 5 big investment banks and the $1.7 trillion value of the hedge funds is now vanishing more quickly than it was created. Once the mighty gears of structured finance shift into reverse, deleveraging begins with a vengeance pulling trillions into a credit vacuum...

MUCH MORE AT LINK BEST EXPLANATION I'VE SEEN TO DATE!

[Demeter]

15. Bretton Woods, a failure timeline.

http://econospeak.blogspot.com/2008/11/bretton-woods-failure-timeline.html


Michael Moffit, in his 1983 book 'The World's Money - International Banking from Bretton Woods to the Brink of Insolvency'<1> has been very helpful this week. He presents an economic history that makes it clear as to why national economies started to come under pressure. This happened virtually as soon as their currencies were made fully convertible with each other under the obligations of the IMF's Article VIII. The Post-World-War-Two boom appeared to have much more to do with the stimulative boost of the Marshall Plan afterall.

1944 - Bretton Woods conference

1949 – Birth of Eurodollars

1945 – 1955. Europe’s capital markets remained largely closed to international capital flows. The US dollar was stable and other currencies were weak. Exchange controls in Europe were heavy. This combination discouraged speculation.

1950s – Growing concentration in international trade and investments leads to a small number of networks from which impressions and advice is received. This leads to a ‘common tilt’ in multinational corporations decisions and processes that courts instability in the global economy.

“Multinational enterprises in the ordinary course of operations dispose of vast quantities of money across international exchanges….Most of that flow is concentrated in forty or fifty multinational networks that draw their impressions and their advice regarding the relative stability of different currencies from common sources – half a dozen banks, and even smaller number of financial journals, and an incestuous round of lunches and conferences. Viewed in the abstract, the situation is set up for disaster; a common tilt in the group becomes a source of irresistible pressure on any currency.”<2>

1955 – European nations make their currencies convertible to the US dollar (defacto) in response to pressure from the US.


1958 – Currency convertibility of European currencies announced. “The system begins to sputter after 1958….”

Late 1950s – The Euromarket emerged. This new capital market entailed the free flow of U.S. dollar- denominated assets without supervision or control by any national government. It expanded substantially over the following three decades. The US and the UK rescinded capital controls on short-term capital flows. Other countries were compelled to rescind their own capital controls because they became too costly to sustain; especially in the light of the rapid growth of multinational corporations (MNCs). MNCs could simply avoid controls by borrowing and lending through foreign affiliates in the Euromarket. MNCs could also shift operations to other countries with looser restrictions so as to preserve their competitiveness. Countries that tried to retain tight controls faced capital outflows and a consequent loss of investment, employment and income.<3>

1960 – The US gold pledge weakened under pressure of the dollar overhang, leading promptly to speculation in the London gold market during the 1960 US presidential election. The volume of hot money circulating in the world’s money markets was increasing.

1960 – March. ‘Operation 40’ created by Allen Dulles (Director of the CIA under President Eisenhower) from the ‘group of 40’ of the US National Security Council. It was presided by vice-president Richard Nixon. The Cuban revolution had occurred the year before. This group was designed to respond to the threat of left wing governments in Latin America (in general) affecting US corporate holdings. Operation 40 not only was involved in sabotage operations but also, in fact, evolved into a team of assassins. Frank Sturgis, claimed: "this assassination group (Operation 40) would upon orders, naturally, assassinate either members of the military or the political parties of the foreign country that you were going to infiltrate, and if necessary some of your own members who were suspected of being foreign agents... We were concentrating strictly in Cuba at that particular time." <4>

1961 – On January 17th. Outgoing US President Eisenhower warned against the “acquisition of unwarranted influence by the military industrial complex.” Australia becomes viewed as a geopolitical asset by the US.

1964 – The exchange rate for sterling (one pound = $US2.80) became obsolete.

1967 – The British Pound was the first currency to succumb to international speculation.

1971 - Bretton Woods dismantled after the US dollar comes under heavy speculative attack.


FOOTNOTES AT LINK

[Demeter]

19. A NEW BRETTON WOODS VS. THE OLD BRETTON WOODS by Nathan Lewis

http://www.dailyreckoning.com/Issues/2008/DR112008.html#essay

In 1944, the world leaders that gathered in New Hampshire decided on a system based on gold. This was no innovation, as monetary systems for the past few centuries had also been based on gold. In the Bretton Woods system, the dollar was pegged to gold at $35/oz., and other currencies were pegged to the dollar. Currencies didn’t float in those days. Floating, manipulated currencies were considered an abomination. Exchange rates remained fixed. This stable, gold-linked system formed the foundation for a wonderful worldwide expansion of wealth in the 1950s and 1960s – even among the war’s losers, Germany and Japan.

Unfortunately, there was a flaw in this plan. Interest rate manipulation, as practiced by the Fed, was surging in popularity. It was hoped this currency tomfoolery would prevent another Great Depression, and every other little recession along the way. This “monetary policy” and currency manipulation was contrary to the simple, automatic currency board-like mechanisms by which gold standard systems should be operated. The result was that the fixed exchange rates and gold link came under constant pressure.

For a while, governments attempted to have it both ways. They imposed various capital controls to keep exchange rates fixed – while at the same time their central banks played games that caused exchange rates to diverge. The dollar/gold peg was not maintained by judicious supply adjustment, as a currency board would operate, but by heavy-handed intervention in the gold market in London.

Eventually, the conflict between manipulative central banks and the gold link became overwhelming. In January 1970, Richard Nixon installed his friend Arthur Burns as Chairman of the Federal Reserve. Burns immediately opened the monetary floodgates to help offset the recession of the time – following the day’s conventional wisdom. In August 1971, the conflict between Burns’ manipulation and the gold link became too great, and, rather than abandoning Burns’ currency games, it was decided to abandon the gold link instead. The dollar had become a floating currency. By 1973, all the major currencies floated.

An economic catastrophe ensued, the inflation of the 1970s. Even in the 1980s and 1990s, as currencies were stabilized somewhat, economies never regained the health they showed in the 1950s and 1960s. Emerging markets, in particular, were beset by regular currency disasters.

The environment of monetary chaos that we have lived in for the past thirty-seven years has finally produced a political willingness to fix the problem. Governments sense that, if they do not take action now, a worldwide crisis may ensue. Just as in 1944, governments want to return to the monetary stability upon which capitalism was founded. On November 15, governments will gather to talk about a “New Bretton Woods.” There is even some talk that gold will play a part. The creators of this New Bretton Woods, if they are able to agree on anything at all, would do well to recognize the successes and failures of the original Bretton Woods.

Bretton Woods was, overall, a great success. This was due to the link with gold, and the fixed exchange rates worldwide. Capitalism since the Industrial Revolution had been based on this monetary principle, and it worked again as it had in the past.

The reason that the Bretton Woods gold standard did not persist indefinitely was not government deficits, or insufficient gold bullion reserves, “current account imbalances” or any other such thing. The only reason that governments decided to abandon the gold link was that they preferred to play central bank games with their currencies. A New Bretton Woods must wholly and completely abandon such practices.

Without these guiding principles, this month’s discussions are likely to devolve into an unworkable hodgepodge of currency baskets, CPI targets, promises likely to be broken, and rhetorical vagaries. Certainly no usable system would emerge, although an unusable system might.

A New Bretton Woods, of gold-linked currencies worldwide, would be very easy to create. It could be done in a weekend, and wouldn’t cost a dime. It is merely a decision to manage currencies one way – a gold link – rather than another way. Unfortunately, I don’t think today’s generation of monetary bureaucrats in the U.S. and Europe have the talent, skills or understanding to accomplish this solution. They can’t even identify it.

I place my hopes on Russia, China and the Middle East. Their monetary bureaucrats don’t have the skills either, as far as I can tell, but they are willing to learn. As outsiders, they can see that the G7’s conventional wisdom isn’t working.

I wish the best for those governments willing to step up with a solution to the problems that have plagued the world since 1971. I just hope they get on with it before things get too out of hand.

Regards,

Nathan Lewis
for The Daily Reckoning

[Demeter]

20. The Bretton Woods sequel will flop By Gideon Rachman

http://www.ft.com/cms/s/0/0b3da1e6-af4b-11dd-a4bf-000077b07658.html

I blame it all on Dean Acheson. The long-dead American statesman was a big figure at the original Bretton Woods conference in 1944 and later helped invent Nato. Acheson gave his memoirs the modest title Present at the Creation and, in so doing, he inadvertently fed the grandiose fantasies of the leaders of the Group of 20 leading economies who will assemble in Washington next weekend. Perhaps they too can achieve near God-like status by reordering the institutions of the world?

Some of the leaders who are heading for Washington are surprisingly frank about the fun they are having. Nicolas Sarkozy, France’s dynamic president, has congratulated himself on his “luck” in having the chance to remake the global financial system. Gordon Brown, Britain’s prime minister, has visibly revelled in the idea that he is a global intellectual leader.

But like most sequels, Bretton Woods II is not going to be nearly as good as the original. The first conference gave birth to the World Bank and the International Monetary Fund. Its successor will be duller and less consequential.

The first reason for this is that the global financial crisis – bad as it is – is hardly the second world war. The war destroyed the established order and so the statesmen who drew up the postwar institutions had a blank piece of paper on which to doodle.

Second, there is not enough time. The original Bretton Woods conference benefited from two years of preparation, not two weeks.

Third – and rather important – the countries that are meeting in Washington this weekend disagree. The Europeans, who adore all forms of international governance, are pushing for new global regulators for the international financial system. The Americans and Chinese – more jealous of their national sovereignty – are more cautious.

Finally, unlike at the original Bretton Woods, the US has neither the power nor the inclination to impose a new set of arrangements on the rest of the world.

This last point is one that the Europeans, in particular, struggle to comprehend. Their general view is that there are two opposing ways to order the world. The first – associated with the dreaded President George W. Bush – was based on American power and “unilateralism”. The second – which they hope will be embraced by the sainted Barack Obama – is based on a chastened US working with others to build a multilateral world order. Part of the European excitement going into Bretton Woods II is based on the idea that the age of American primacy is over – and a new multilateral era is dawning.

But in 1944-45, multilateral institutions such as the IMF, World Bank and UN were born out of American strength, not American weakness. One of the reasons Bretton Woods worked was that the US was clearly the most powerful country at the table and so ultimately was able to impose its will on the others, including an often-dismayed Britain. At the time, one senior official at the Bank of England described the deal reached at Bretton Woods as “the greatest blow to Britain next to the war”, largely because it underlined the way in which financial power had moved from the UK to the US.

Next weekend’s meeting also acknowledges shifts in global power. Fans of the G20 like the idea that it is not the tired old G8, which they see as made up mainly of clapped-out European countries bound for the knacker’s yard of history. The G20 includes rising new powers such as China, India, Brazil and South Africa.

That is important. An international system that does not accommodate China, India and other new risers clearly cannot work in the long run. But bringing them into the system is no guarantee of success. The more voices around the table at Bretton Woods II – and the more equality there is between them – the harder it will be to reach agreement.

In fact, the emerging multilateral, multipolar world – long called for by those uncomfortable with American power – shows every sign of being highly dysfunctional.

The UN is increasingly deadlocked – beset by weak leadership and a blocked security council. In the past year the Doha round at the World Trade Organisation has failed. And if the negotiations at the WTO cannot be brought to fruition, what chance will there be of achieving the much more difficult task of negotiating a global climate-change agreement next year?

Earlier trade rounds were brought to a successful conclusion partly because they were stitched up between Europe, America and Japan. But in the most recent trade round, developing countries – in particular, India – were too powerful to be ignored. This is certainly an advance for global justice and equity. But it makes it much harder to reach a deal. The same problem is likely to plague next year’s climate change negotiations, in which China will play a central role.

Having lots of countries around the table is not in itself a deal killer. There were 44 nations at the original Bretton Woods. But what is needed is leadership. In 2008, as in 1944, the most plausible leader is the US. That makes it doubly unfortunate that the American president who will be acting as host in Washington is Mr Bush not Mr Obama.

Under President Bush, the US has found that it cannot lead the world through the exercise of raw power. President-elect Obama’s task will be to see whether the US can now lead by persuasion. Sadly, he will not be present at the re-creation this weekend.

NOT ONLY A FLOP, BUT A VERY PUBLIC EMBARRASSMENT FOR A VERY EMBARASSING "PRESIDENT"

[Hugin]

22. Yes, it's a very good primer on the details of this crisis.

Suggested reading!

[Demeter]

16. MARKET SNAPSHOT: Stocks look for respite in holiday-shortened week

http://www.marketwatch.com/news/story/us-stocks-look-respite-holiday-shortened/story.aspx?guid={FEBABF2E-8EF4-4209-9450-4F76D44220FD}&siteid=yahoomy

Obama's picks of Geithner, Clinton, Richardson seen reducing uncertainty

By Nick Godt, MarketWatch

-- U.S. stocks will start next week with investors looking for some respite after reports of key nominations to the administration of President-elect Barack Obama helped stem heavy selling that had slammed the market to 11 year lows.

In particular, the nomination of Tim Geithner, currently the head of the New York Federal Reserve, as the next treasury secretary, seemed to find immediate approval from Wall Street, judging by a market rally that saw the Dow industrials jump nearly 500 points Friday.

"That's good news," said Robert Pavlik, market strategist at Oaktree Asset Management. "Now we have a team that can come together and start coming up with a plan. The foundation has been laid to start addressing the situation."

The New York Times reported that Sen. Hillary Clinton has accepted Obama's nomination to be secretary of state. NBC news reported that besides Geithner, the president-elect has selected Bill Richardson, a former energy secretary under President Bill Clinton, as his nominee for commerce secretary. See full story.

An avalanche of reports on the economy next week, which will be shortened by the Thanksgiving holiday on Thursday, could also provide further evidence of the depth of the recession.
But "there's a possibility that we have a decent week because there won't be many people at their trading terminals," said Paul Nolte, director of investments at Hinsdale Associates.

[Demeter]

17. Brace yourself - this correction's gonna hurt…almost all of the gains made by investors in this cent

Brace yourself - this correction's gonna hurt…almost all of the gains made by investors in this century have been corrected

http://www.dailyreckoning.com/Issues/2008/DR112108.html


...On Monday, we put out the word that the Morgan Stanley index showed a worldwide loss of equity value of some $30 trillion. By Wednesday, we got an update: another $2 trillion had been lost. And yesterday, once again, the Dow went down hard – another 445 points were lost. This brings the index down to 7,552...another day like that and it will have wiped out all the gains of the last six years. The low for 2002 was 7,286. It looks like we’ll get there soon.

That will mean that Mr. Market will have corrected the entire 21st century rally. You’ll remember, we thought the bear market began in January 2000. Stocks fell. Then, in October 2002 began a uptrend that most people took for a new bull market. We figured it was just a bear market rally – a trap for unwary investors. But it lasted so long and took stock prices so high that even we had trouble sticking to our story.

Now we see we were right. Almost all the gains made by investors in this century have now been corrected.

Dan Denning sends us over this chart:



Goldilocks and the 4 Bears

But what next? Will Mr. Market stop there? It doesn’t look like it. We’ve never seen him so angry...and never seen him so determined to do damage. It looks to us as though he wants to correct a lot more than just the bear market rally...

....maybe he’s going to correct the entire bull market run that began in 1982. If so, you can expect the Dow to sink down to about 3,000 (adjusting the ’82 level to inflation).

...maybe he’s going to spank the baby boomers. They didn’t save. They were reckless and spendthrift. They’ve lived such charmed lives; they were born just after the last Great Calamity – the period of 1914-1945. But now it looks like they are in for a correction...correcting their foolish habits and silly ideas. In other words, it looks like the boomers are going to sweat – for the first time in their lives.

...maybe he’s going to correct the entire post-’71 funny money system, taking the dollar down a peg so it’s no longer the world’s only reserve currency.

...or maybe he’s going to correct something even bigger. A “correction” is an episode – inevitable, but rare – in which mistakes are identified and put right. But there’s another way of looking at it...it’s a period when things regress to the mean...when they go back to normal...when they return to where they ‘ought’ to be.

Well, it’s not ‘normal’ for the price of oil, for example, to shoot up from barely $30 to nearly $150 in the space of a couple years. Now, we’re seeing the oil price come down to more normal levels. Yesterday, oil dropped below $50. This morning, in Asian trading, it is below $49. It is regressing to the mean. It might even “overshoot” to get there.

It may not be ‘normal’ either for a man in Detroit to earn $35 an hour while a man in Shanghai earns only $1.50. Both men’s work should be worth about the same thing. And for most of human history, there was probably little difference. In the 18th century, for example, economists believe that a fellow had about the same standard of living, whether he lived in Delhi, Detroit or Dongguan. Then began an anomaly. Detroit took off. Thereafter, people in Europe...or of European descent...earned far more than the ‘wogs.’

Naturally, the Europeans developed a certain sense of superiority.

“What separates civilized men from barbarians?” the French have been known to jest. “The Mediterranean!”

*** Now, it’s the Europeans and Americans who are on the wrong side of the Mediterranean. They have a big disadvantage: their costs are too high. Just look at Detroit. Its labor is too expensive. It has too many legacy costs. It operates with too much overhead...too many lawyers and bureaucrats...too much staff...too many expenses and impediments that its competitors in China don’t have.

And so now, the Chinese are proposing to buy GM! Can you believe it? What was good for GM was supposed to be good for America – at least, it was in GM’s heyday. But now they’re talking about selling the whole U.S. auto industry to communists. Here at The Daily Reckoning we’re having a serious case of irony overload... We read the headline news...and we just don’t know what to make of it.

But yesterday evening...walking along the quai...we had a thought. What if Mr. Market intends to correct the entire European advantage? What if he intends to correct the entire Industrial Revolution...bringing the developed world’s GDP/person more into line with those in China and India? Maybe he intends to unhinge the sky again? Maybe we will see all five stages of collapse – financial, economic, political, social and cultural...and maybe some hurricanes and a major epidemic too!

But we’re not going to worry about it. That is all in the future...perhaps the distant future. Let’s get back to what is happening right now.

The feds are now in full inflation mode. They’re cranking out as much cash as they can. But as much as they create new money – Mr. Market destroys it faster.

And what will happen today? Who knows...? But yesterday probably took another $1 trillion out of the financial world’s stuffing...

A Reuters report tells us that it will take a lot more than Paulson has left to fix what it wrong with Wall Street. Financial institutions need between $1 trillion and $1.2 trillion to repair their balance sheets, says an analyst.

Remember, it’s a “balance sheet recession,” not a standard business cycle recession. Companies, governments, consumers, investors – we’re all desperate for cash to rebuild our balance sheets. We need to pay down debt and build up savings.

And given the size of the holes we have to fill, you can expect some big loads of sand, rocks and gravel coming from the world’s central banks. In fact, one report we got this week tells us that the size of the campaign – in dollar terms – is already over $4 trillion...or more than the cost of WWII.

[Demeter]

18. LAND OF THE RISING SUN… HAS OFFICIALLY SUNK by Bill Bonner

SAME LINK AS ABOVE

As if the poor Japanese investor hadn't had misery enough! He's been beaten up for the last 18 years. He was whacked when Japan, Inc. went bust in 1990. He was smacked when stocks fell 70%- 90% during the '90s. He was racked with pain when property collapsed to as little as one-tenth its late '80s value. He was starved for yield when the Japanese Central Bank dropped its policy rate to zero and kept it there for six years. He was tortured over an entire decade as his government wasted $1 trillion trying to force him to spend and invest. And he was hung by his thumbs in four separate recessions. You'd think Mr. Market would have the grace not to kick him when he was down.

When the sun rose on 2008, the typical Japanese was still in a fetal position, with his head down and his wallet closed up tightly. But along came the sell-off of 2008 - and he got the boot again. The Nikkei fell another 50%. The Japanese investor who bought stocks in 1982 when he was 35 years old is now 61…and his stocks are not worth a penny more! And this week he got the news that the Japanese economy is once again in recession. Today, we feel his pain - not so much because we sympathize with the Nipponese themselves, but because now we are Japanese too.

The G20 nations met in Washington last weekend, hoping to get a little preview of the future. They thought they might do a little editing before the film was released to the public. But while the Japanese example was available for all to see, no wanted to look. And so, the meeting came to an end and the heads of state left town with a clear conscience; while they had done no good, at least they had done no harm.

Even seasoned hacks seem to have no idea what is going on. "Barron's" has been putting out a financial weekly since 1921. You'd think in all that time they'd get a little idea of how things worked. Nope. The best advice they could give to President-Elect Obama was the same program that didn't work in Japan: protect the dinosaurs…and spend more public money. Curiously, the paper wants to bail out Ford and GM but let "Chrysler go under." (What does Barron's have against Chrysler? Maybe the publisher owns one of its cars….)

Since neither pundits, ministers plenipotentiary nor Wall Street pros pre-penitentiary have yet explained the crisis, it falls to us to do so. We will pass over what went wrong; everyone now knows. But we offer an important nuance: this is not a typical business cycle recession. The idealized business cycle downturn came about after an economy "overheated." Labor rates rose and the cost of living went up. This consumer price inflation forced the central bank to raise rates, causing the economy to "cool off" again.

Today's recession in America and Britain is a credit cycle recession; it is different. For proof, we offer exhibit A: a corporate bond from International Paper Company with a yield of nearly 10%. Compare that to the yield on U.S. Treasury paper - barely one tenth of one percent on 91-day T-bills. Even the 10-year Treasury notes pay less than the official rate of consumer price inflation. The "spreads" between corporate bonds and U.S. government bonds are wider than at any time since America's Great Depression. Why?

Investors all over the planet are taking a beating. Mr. Market has taken a cudgel to stocks, property, consumer spending and the economy - just as he did in Japan during the "Lost Decade." People are afraid to lend and afraid to borrow; they worry that the money will be knocked senseless before it finds its way home.

This time, the economy did not overheat…nor did labor rates go up. And when the bubble popped, the pin was not higher lending rates. This bust was caused by too much credit, not by too little. It is what economist Richard Koo calls a "balance sheet recession" a la Japan in the '90s. That is, it is a time when businesses, investors and householders realize that if they don't cut back they could go broke.

And unlike the more typical recession, this is a slump the feds can't control and can't cure. They can offer easier credit; but more debt is just what both lenders and borrowers are most afraid of. The feds can offer more props, more handouts, and more public spending too, just like Japan. But all they are doing is retarding the correction. Mistakes of the bubble era need to be fixed. Balance sheets need to be brought back into balance. There's no way around it. Japan proved it.

Just a few months ago, investors reached for the highest yields they could get. Now, they fold their arms, clutching to their breasts the lowest-yielding paper on the planet. Once they believed in capitalism and its bonds. Now, they want nothing that does not have the seal of the US government on it. A few months ago, they saw no danger. Now, they see nothing else.

[burf]

25. Wow, whatta coincidence...

This looks like the chart I asked for last week. Does this mean that there are some notables who read and post on the Weekend and SMW? Hmmmmmmm.... BTW, thanks again for the response to last weeks request.

[DemReadingDU]

28. more charts

The 100 year Dow chart

http://bigpicture.typepad.com/comments/2006/06/read_it_here_fi.html






Dow Only Adjusted for Inflation: 1924 - 2008

http://itulip.com/realdow.htm






Real Dow

http://homepage.mac.com/ttsmyf/




More charts, Dow 1928 - 1932
http://www.creditwritedowns.com/2008/06/chart-of-day-dow-1928-1932.html



edit: another graph



Dow December 31 1974 - October 31, 2008
Click the link to read significant levels on the Dow

http://www.the-privateer.com/chart/dow-long.html


My opinion is that the Dow needs to fall to the point where it started to ramp up in the 70's, appx 1000.

[Demeter]

29. My God! Then We Might As Well Go Back on the Gold Standard, Then

There has to be some stability somewhere in the economy--and I don't mean stagnant wages while prices rise...

[DemReadingDU]

42. I think getting off the Gold Standard, was the beginning of credit bubble

But the credit bubble really started growing when Reagan began deregulation of everything. Greed and profits shot up to the moon. Now we are all seeing the effects of the credit bubble bursting. I think it is going to be a very long time before there is any real stability in the economy. From what I've read about bubbles, however long it takes to ramp up the bubble, it takes as many years for the bubble to completely burst. We're looking at 25 years? But I believe by reading the SMW and weekend threads, we're all the more knowledgeable and better able to weather the storm. There definitely needs to be some kind of standard, maybe gold, to keep thing the bubble from inflating again.

[DemReadingDU]

49. A return to the Bretton Woods international gold standard is inevitable

11/16/08 A return to the Bretton Woods international gold standard is inevitable by Eric Janszen

Thirty-seven years ago the world’s economies started on the circular track back to Bretton Woods. We will sooner or later be back where we started, with international transactions guided by a fixed gold price.

Note: An international gold standard does not require a return to national gold standards by participating nations. In an international gold standard gold is only relevant for international transactions between nations. Fiat currencies, such as the dollar, euro, and yen, remain in use for domestic transactions within countries.

As economies and commerce grew more complex, fractional reserve banking based on gold reserves, the true risk-free reserve asset, evolved. The 30,000 tons of gold that central banks still hoard in their vaults 37 years after the end of the gold standard is an artifact of that ancient evolution. In our usual habit of asking the most obvious question, when we did our analysis in 2001 we pondered: Why do central banks own 30,000 tones of gold when the stuff has had no monetary purpose for decades? Why not sell it over that time and hold "risk-free" government bonds instead that earn interest? How many hundreds of billions of dollars in interest income have central banks lost by not holding “risk free” government bonds instead of gold all this time? How can central banks justify this apparent fiduciary delinquency and waste?

The answer is obvious once you have asked the question. A central bank without gold reserves today is like a stunt pilot without a parachute. The stunt since 1971 is maintaining stable international currency values in a system of fiat money and floating exchange rates, difficult but possible when the global economy and money supply are expanding but impossible when debt, the hangover from a 27 year long credit bubble, is deflating worldwide.

more...
http://www.itulip.com/forums/showthread.php?p=61139#post61139

[phrigndumass]

21. Off to the greatest with ya :)

(even though this thread would have ended up there anyway)

Good morning, Demeter! :hi:

[Demeter]

23. Thank You, Kind Sir!

By the way, any final analysis of the recent election in the works? Has everything finally been resolved, Presidentially? I know the Senate race drags on. How Fabulous was it that Stevens was rejected! Alaska isn't totally crazy, it seems.

[phrigndumass]

55. The longer I wait to post, the more Obama gains, lol

The results thread showed Obama winning by 6.5% but he has extended his win to 6.9% since then! (btw, I projected +7.0)

I'll do a couple threads with final data once all the states are done counting.

Can't believe Stevens received a standing O in the Senate chambers. Could Cheney receive one, too? :puke:

:hi:

[Demeter]

58. Politics--The Art of the Possible

Says it all, I think. Now why impeachment isn't possible, escapes me.

[Tansy_Gold]

24. Hey! What're you doing HERE????

Aren't you supposed to be crunching election projection numbers or something????!!!!???


Oh, wait. . . . . .





Tansy Gold, still not quite adjusted to the idea that we don't have to wonder and worry about what's going to happen


:hi:

[Demeter]

30. Poor P-Man Now Has TWO Women on His Back!

You want to be the good cop, or the bad one, Tansy?

[phrigndumass]

56. (pssst ... Hi!)

:hi: :hug:

[Demeter]

31. Not Everything Can Be Too Big to Fail By PETER J. WALLISON

I CAN'T BELIEVE I'M POSTING SOMETHING FROM WSJ AND WRITTEN BY AMERICAN ENTERPRISE INSTUTE FELLOW!

http://online.wsj.com/article/SB122731217473649399.html

There's a lot of loose talk about 'systemic' risk.

There is a really bad idea circulating in the nation's capital. Of course, that's not surprising -- but when it's endorsed by the Treasury secretary, we'd better pay attention.

This week, Henry Paulson said in an interview with the Washington Post that he wants the Federal Reserve to be able to regulate and ultimately take over any failing financial institution that it considers crucial -- including hedge funds. This echoes a notion that has been endorsed by executives of some industry associations, that to prevent a recurrence of today's financial crisis it will be necessary to impose tough new regulations on financial institutions deemed "systemically significant."

If this approach were to be adopted in the panicked Washington of today, it would substantially change our financial system and guarantee -- rather than prevent -- future crises.

For starters, because the definition of a systemically significant institution is highly dependent on context, it's impossible to identify one in advance. Consider Drexel Burnham Lambert. When it failed in 1990 it was one of the largest securities firms in the United States, not much smaller in relation to the market at the time than Lehman Brothers was when it collapsed earlier this year. Yet Drexel's collapse, which happened when the market was functioning normally, did not put the financial system or the economy at risk.

On the other hand, when Germany's Herstatt Bank failed to meet its international payment obligations in the mid-1970s, that event caused a serious globalized payment-system crisis -- even though Herstatt itself would not have been on anyone's list of major financial institutions at the time.
And then there's Northern Rock in London. When it collapsed recently, the British government was forced to bail it out even though it was not considered significant before its depositors started to run. In fact, in today's fragile markets, almost any financial institution is systemically significant -- if what we mean by the term is that its collapse will stimulate fear about the stability of others.

In short, predicting the true sources of systemic risk in advance of their actual failure is probably impossible. But even if it could be done, should we want to?

The answer is no. An institution designated as systemically significant, or "crucial," would be marked as too big to fail. After all, that's what such a designation means -- that the institution's failure must be avoided because of its potential impact on the economy or financial system. But once we designate a financial institution as too big to fail, and regulate it as such, a lot of unpleasant things follow.

First, we will have created "moral hazard" and impaired market discipline. The markets will understand that a loan to a systemically significant institution will carry less risk than a loan to an institution that does not have this status. Accordingly, systemically significant institutions will have an easier time raising funds than others, will pay lower rates and grow larger than others, and it will be able to take more risks because of the absence of market discipline.

This in a nutshell is the story of Fannie Mae and Freddie Mac. The two companies were implicitly backed by the U.S. government, which in practical terms meant that they would not be allowed to fail. As a result, they were able to borrow as much as they wanted and take risks with those funds that they couldn't have taken unless the markets believed -- correctly as it turned out -- that Uncle Sam would stand behind them.

Second, systemically significant institutions would suddenly have an unfair competitive edge that would warp the market. Why? Because their lower funding costs would make them more profitable than others, and enable them -- as it enabled Fannie and Freddie -- to drive competitors from any markets they enter.

The effect of designating certain companies as systemically significant would cause a consolidation of the industries in which they are located, with the systemically significant companies gobbling up those that couldn't survive, and others seeking mergers simply to claim designation as systemically significant or too big to fail.

Finally, the support voiced in Washington for the idea of regulating systemically significant financial institutions is based on the fundamental misperception that regulation can prevent them from taking the huge risks their protected status would permit. This New Deal notion should be discarded.

Exhibit A is the banking system, now mired in the worst financial crisis since the Great Depression -- even though it has always been the most heavily regulated. Exhibit B is the S&L debacle less than 20 years ago. Thousands of S&Ls and more than 1,500 commercial banks collapsed in another memorable regulatory failure.

It is completely inexplicable -- after the blindingly obvious failure of bank regulation -- that Washington (and European Union) policy makers would now want to spread regulation beyond banking and into other financial institutions, including hedge funds, brokerage houses and others that the government designates as systemically significant. This would give the government the opportunity to pick winners in each financial industry -- ultimately creating Fannies and Freddies everywhere. Among bad ideas, this one stands out.

Mr. Wallison is a senior fellow at the American Enterprise Institute.

[Demeter]

32. Embarrassed GM axes two private jets

http://www.guardian.co.uk/business/2008/nov/21/automotive-useconomy



Show of contrition from aid-needing carmaker fails to stave off lashing from investors
Elana Schor in Washington and Phillip Inman guardian.co.uk,



General Motors, the embattled US carmaker, buffeted by criticism for sending its chief executive on a private jet to plead for government aid, vowed today to stop leasing two of its five company planes.

GM is "very sensitive" to "the symbolic issue of people showing up in Washington in corporate jets", spokesman Tom Wilkinson said, promising more cuts to come at the company.

But the show of contrition has come too late to spare GM and its fellow Detroit giants, Ford and Chrysler, from a lashing as investors weigh up the pile of debts pulling the carmakers to the brink of insolvency.

GM and Ford fell in early trading before inching toward parity after Thursday's stock selloff. Yet their market values have been ravaged this year: GM shares have fallen below $3 (£2), down 88% for the year, while Ford has plunged $1.33, down by 80%.

The United Auto Workers union is reported to be considering a symbolic sacrifice, nine days after arguing labour costs were not hurting Detroit. The UAW could agree to cut its "jobs bank", which assured payments to laid-off employees for 48 weeks – and sometimes for years at a time.

That programme is as symbolic as the GM jets for many in Congress who are annoyed by the industry's unwillingness to admit mistakes. A year ago the union agreed to cut its healthcare benefits.

Asked about the chief executives of GM, Ford and Chrysler, senior Republican senator Richard Shelby told MSNBC: "I'll tell you what: they seem to be three of the most arrogant, non-repentant people I've ever seen to be running three losing companies."

Ford, in fact, turned a $100m profit in the first quarter of this year before the global credit meltdown halted its progress. It cut pension commitments and began to move to fuel-efficient hybrid models.

All three motor manufacturers are now racing to produce long-term recovery plans by December 2 in a bid to win a Congressional rescue. They have been warned that their initial request for $25bn in low-interest loans is now a ceiling and the ultimate bail-out may be much lower.

President-elect Barack Obama appears to be putting Detroit on notice that his arrival in January could mean a more radical shift. Bloomberg news reported today that Obama's advisors have contacted legal experts to discuss an auto bankruptcy, a prospect dismissed as "pure fantasy" this week by the GM chief, Rick Wagoner.

Two factors are behind the US motor industry's difficulties: shrinking sales for the gas-guzzling trucks and SUVs that long dominated their lines and a growing bill for healthcare and pensions for retirees.

Ford's US SUV sales fell by 53.9% last month, more than twice the level of dwindling car sales in the struggling economic climate. GM posted sales figures not seen since the oil shock of the 1970s, with its truck sales sinking by 51% and cars by 34%.

The Chevrolet Volt, GM's highly touted electric model, is being rushed out by 2010 in an attempt to reverse that slide, but the company admitted it would have to sell Volts at an initial loss.

The amount the carmakers spend on making cars is dwarfed, however, by their commitments to ex-employees in pensions and healthcare costs. GM has 96,000 staff in its US pension scheme and 479,000 retirees and spouses who are receiving benefits.

Between 1993 and 2007, GM spent $103bn "to fund legacy pensions and retiree health care" – an average of about $7bn a year. During those 15 years, GM paid only $13bn in shareholder dividends. Critics of the company say the pension payments also stifled investment and delayed newer greener cars.

GM's gathering storm clouds were brightened a bit today by Opel, which assured the Frankfurter Rundschau newspaper that its parent company did not owe any money to its German unit. Company chief Hans Demant said Opel could survive into next year even if Congress did not rescue GM.

[Demeter]

33. GM BANKRUPTCY CONSIDERED

http://online.wsj.com/article/SB122731593872949815.html

DETROIT -- Members of General Motors Corp.'s board of directors are willing to consider "all options" for the ailing auto maker, including an eventual filing for bankruptcy protection, a stance that puts them in rare disagreement with Chairman and Chief Executive Rick Wagoner, people familiar with the matter said.

As part of his push to win a federal bailout for the company, Mr. Wagoner told Congress this week that GM management believes bankruptcy protection is not a viable option for the company. Instead, GM is focusing on persuading lawmakers to provide financial help, Mr. Wagoner said.

[Demeter]

51. Goldman, GE, GM Invite Us to Play a Rigged Game: Jonathan Weil

http://www.bloomberg.com/news/commentary/columnists.html

Commentary by Jonathan Weil


Nov. 20 (Bloomberg) -- The fleecing knows no end.

Take a look at GM's 8.375 percent bond due in July 2033, and feast your eyes on the new world of American capitalism. Yesterday's price, at about 15 cents on the dollar, tells you the market believes GM will last long enough to make a little less than two years' worth of interest payments.

Were it not for the chance of a government bailout, in lieu of an imminent Chapter 11 bankruptcy filing, the bonds would trade for much less. And there lies the truth about what America's capital markets have become: a rigged game.

You can see it all over. Nobody who knows anything about General Electric Co. actually believes it's a AAA credit. And yet the raters at Moody's Investors Service and Standard & Poor's continue to give GE their highest mark. Meanwhile, the company just landed government insurance for as much as $139 billion of debt for its lending arm, GE Capital Corp., which also is rated AAA. If GE were really that strong, it wouldn't need the help.

At American International Group Inc., the $150 billion ward of the Treasury Department, management had the audacity to claim in the company's latest quarterly report that it ``believes it will have adequate liquidity to finance and operate AIG's businesses.'' In other words, AIG's executives are counting on a blank check from the government, should the money run out again.

If you had considered betting against Fannie Mae and Freddie Mac this summer -- that is, when the Securities and Exchange Commission wasn't banning short sales of their stocks -- the biggest risk wasn't that they would surprise investors by turning in a good quarter. It was that Treasury Secretary Hank Paulson or Federal Reserve Chairman Ben Bernanke would show up before Congress to talk up their stocks and squeeze the shorts.

Paulson's Sting

Your worry is the same if you're thinking of shorting Morgan Stanley, Goldman Sachs Group Inc. or Citigroup Inc. All Paulson might have to do to separate you from your money is call a press conference. And if you bought toxic mortgage bonds, just before Paulson canceled Treasury's purchases of troubled mortgage-related assets, you've felt his sting already.

When the government let Lehman Brothers Holdings Inc. die, there at least was the sense, for a day or so, that somebody very large wasn't too big to fail. Today we understand better: The government is picking winners and losers. Instead of just a couple giant government-sponsored enterprises, now we have dozens.

With so many beggars in Zegna suits lobbying for handouts, it's easy to see why lots of Americans are aghast at what our country has become.

Many of the companies receiving bailout treasure will get washed out to sea in the end. When we look back on the money showered upon them, whether to fund banker bonuses or preserve Michigan's share of the Electoral College, we will wish we had saved it, if for no other reason than to preserve the Treasury's own AAA-credit rating.

Market Understanding

Think back to the price of that GM bond. It doesn't imply that a government bailout would be enough to let the automaker continue as a going concern until its bonds mature. What the market understands is that GM will collapse long before then, no matter how much taxpayer money it gets now.

In Congress, lawmakers may be fancying a $25 billion bailout for the auto industry. Yet even if they earmarked all that money just for GM, which has $59 billion more liabilities than assets, it wouldn't make the company solvent.

Advance Knowledge

So, for the time being, the clearest path to making money in the public markets is to know in advance what the government plans to do next with which companies, and when -- and then trade on it. Let there be no doubt: Plenty of people with access to such inside information are enriching themselves this way now. My guess is none of them is named Mark Cuban, and that the Securities and Exchange Commission will never sue any of them.

It's long been cliche to say the securities markets are a giant casino. This notion hasn't been explored enough. Aside from the free drinks, the only reason a rational person would play a slot machine in Las Vegas, aware that the house controls the outcome, is because of the mindless entertainment it promises. For ordinary folks with money to burn, this might be the last, best reason to invest in the U.S. capital markets, too.

[Demeter]

34. CONTRAST TO AMERICA'S SWEETHEART (DEAL) More A.I.G. By Floyd Norris

http://norris.blogs.nytimes.com/2008/11/10/more-aig/


The most interesting part of the American International Group bailout today is the securities lending part, which I will get to later. It is happening because A.I.G. gambled with collateral that it was expected to put in safe investments. Having lost the gamble, it turns to Uncle Sam.

Before we get to that, I need to correct something from my previous post on A.I.G. In it, I wrote:

It appears that the government may end up with a lot of dubious paper, since it has limited A.I.G.’s risk in purchasing some dubious collateralized debt obligations that the company insured. A.I.G. seems to think the owners of those C.D.O.’s will sell them at a discount, but when asked why they would do that — given the insurance — there was no real answer. This plan could flop in the market.

I’ve now gone through documents, and talked to people briefed on the bailout, and I think I understand it better. The first sentence is accurate. But the rest of the paragraph is misleading or wrong. The inability of company executives to answer the question is appalling. This deal will appeal to everyone in the market. It is only the government that is at risk.

Here is how the C.D.O. deal will work. A.I.G., in many cases, has already had to put up in cash the decline in market value of the C.D.O.’s. Say that is 50 percent of the original value. The new special purpose vehicle will buy the C.D.O. for the remaining 50 percent. The holder gets par — keeping the cash he already got from A.I.G., and the rest from the new vehicle.

This is supposed to cost $35 billion to buy $70 billion of paper. The new vehicle will get $30 billion from the government and $5 billion from A.I.G. If all goes well, A.I.G. will earn three percentage points over Libor on that $5 billion, with the possibility of additional profits. The government will get just one percentage point over Libor on its investment, although it will be repaid first, if all goes well. If somehow there are profits, the government gets two-thirds, and A.I.G. the rest.

If there are losses, A.I.G. will take the first $5 billion, and the government the rest.

For A.I.G., this limits the possible losses from the venture.

These are C.D.O.’s, by the way, that are called multi-sector because they were made up of securities from various mortgage backed securities — subprime, Alt-A, home equity lines of credit and commercial.

A.I.G. guaranteed they would pay off. This makes good on the guarantee, courtesy of the taxpayers.

Now for the securities lending business.

A.I.G.’s insurance companies, like many other institutional investors, lend out the corporate bonds and stocks they own. The borrowers of the securities, who need them to deliver on short sales, or for other purposes, put up collateral of a little over the value of the securities.

Normal institutional investors put that money to work in short-term money markets. There they earn perhaps 30 basis points over the interest rate they are paying to the borrower who put up the collateral. If the money market does not blow up, it provides a low but safe profit.

That was not good enough for A.I.G. It took the money and used it to buy residential mortgage-backed securities (R.M.B.S.). They paid much higher interest rates, so A.I.G. could report higher earnings.

Now, however, the R.M.B.S. have plunged in value, and are hard to sell at any price. As the normal securities are returned, the borrowers want their cash back, and A.I.G. does not have it.

The process will be similar, A.I.G. will put up cash to cover the decline so far in market value and the new special purpose vehicle — financed with $1 billion from A.I.G. and $22.5 billion from the government, will then buy the securities at that market price. Again, all will make money if the market price is low enough. They will lose if it is not low enough to cope with future defaults.

Much will depend on whether the market values are fair or not. A.I.G. will calculate them, under government oversight.

[Demeter]

35. WHY AIG? Goldman big winner in government's revised bailout of AIG

IT HELPS TO HAVE BOYFRIENDS IN HIGH PLACES

http://www.nakedcapitalism.com/2008/11/goldman-big-winner-in-governments.html

Note that the headline above was on a Wall Street Journal story about the new taxpayer-raping improved version of the AIG bailout. The current headline is anodyne: "New AIG Rescue Is Bank Blessing."

Just as one wonders why the government backed down on a deal that was appropriately punitive to AIG (at worst, it was an orderly liquidation, which would be an acceptable outcome, and if management could sell enough businesses at good prices, they might be left with a rump of a company to operate). And now, the Wall Street Journal backs down from a headline that accurately and pointedly describes who does best out of these inexplicably sweetened terms. Both roads appear to lead to Goldman.

As we said in an earlier post on this sorry affair, AIG claimed the interest payments were too high. The only way under the circumstances that they could be "too high" was if the company was having to borrow to fund them. If that was the case, the remedy was simple: require only part to be paid in cash on a current basis, and add the rest to principal. Similarly, AIG said they might not be able to sell subsidiaries in two years (the term of the original loan) to off the debt. Two years is a long way away. I would have waited at least a year and few months before doing anything and then might have extended the loan by a year if I was persuaded AIG really had made bona fide efforts to sell and had not held out for unrealistic prices.

Similarly, Felix Salmon wondered why any changes to the terms were made now, and why this matter was not left to the next Administration. This is all looking, as reader Marshall noted, like the Clinton pardons, except with more dollar signs attached.

But even with the toned-down headline, it looks as if the AIG treatment is, again. all about special dealing on behalf of Goldman. Recall that Goldman CEO Lloyd Blankfein was the only Wall Street executive invited in to work with Paulson on the terms of the original rescue. These guys are completely shameless, and for good reason. There are no repercussions from this sort of cronyism, not even recrimination in the media.

From the Wall Street Journal:

Banks in the U.S. and abroad are among the biggest winners in the federal government's revamped $150 billion bailout of American International Group Inc.

Many banks that previously bought protection from the insurer on securities backed by now-troubled mortgage assets stand to recoup the bulk of their investments under a plan by AIG and the Federal Reserve Bank of New York to buy around $70 billion of those securities via a new company. These securities are collateralized debt obligations backed by subprime-mortgage bonds, commercial-mortgage loans and other assets.

Banks in the U.S., Europe and Canada bought credit-default swaps on these securities from AIG, which in turn promised to compensate them if the securities defaulted. Defaults haven't been a major problem, but the market values of these CDOs fell sharply over the past year or so.

That enabled the banks to pry roughly $35 billion in collateral from AIG as a result of those declines and downgrades in AIG's own credit ratings. The banks that have sought and received collateral from AIG include Goldman Sachs Group Inc., Merrill Lynch & Co., UBS AG, Deutsche Bank AG and others.

Yves here. Note the clearly slanted choice of words, "pry collateral". Huh? These were contractual terms agreed upon by AIG, and other CDS protection writers (ex ones like Ambac who wrote them as insurance contracts rather than swaps) and (not having seen the documents) appear to be standard. A ton of hedge funds and other protection writers also had to cough up a ton of collateral when the credit instruments they guaranteed, such as similarly dodgy CDOs and deteriorating bond issues by Lehman and its ilk, went south. AIG was not treated unfairly nor is it deserving of sympathy, as the turn of phrase implies.

Back to the article:

Throughout its AIG rescue efforts during the past two months, the government has had the banks in its sights; it made its initial bailout of AIG in part to avoid potential bank losses that might have threatened the broader financial system.

Under the plan announced Monday, the banks will get to keep the collateral they received from AIG, much of which came when the government made funds available to AIG in September. The banks also will sell the CDOs to the new facility at market prices averaging 50 cents on the dollar. The banks that participate will be compensated for the securities' full, or par, value in exchange for allowing AIG to unwind the credit-default swaps it wrote.

"It's like a home run for some of the banks," says Carlos Mendez, a senior managing director at ICP Capital, a fixed-income investment firm in New York. "They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back."...

And why do they deserve a back-door subsidy? These were bad investments, but the banks are being rewarded (as always) for lousy business decisions. The previous capital infusions by the TARP carried a well below market fixed dividend payment on the preferred, But we are past that now, the Treasury is now finding creative ways to hand out taxpayer money with no strings attached, and no upside for the taxpayer (yes, technically the CDO vehicle might show a profit, and if it does, the taxpayer SPLITS it with AIG. But if you believe you will see anything from this chicanery, I have a bridge in Brooklyn I'd like to sell you).

Back to the article:

A person familiar with the government's rescue plan says it wasn't specifically designed to benefit individual banks at the expense of U.S. taxpayers and AIG, which will end up bearing the risk of the CDOs. However, officials wanted to give banks sufficient incentives to sell the securities so that AIG could cancel the swaps.

The contract cancellations will free the insurer from additional collateral calls on those swaps, which also have been responsible for billions of dollars in write-downs that AIG has logged in recent quarters. The plan is analogous to an insurer buying a house it provided fire insurance on, negating the need for an insurance policy on the home....


Yves again. This is utter rubbish. CDS can be cancelled without going through this nonsense. It is called "commuting" the contract. You negotiate and pay a price. See here for an example. And the house illustration serves to demonstrate how roundabout and inefficient this mechanism is.

Back to the article:

In an interview this week, AIG Chief Executive Edward Liddy said the revised rescue plan "ring-fenced" key problems, including the swaps. It also helps keep these problems from affecting AIG's other businesses, while giving the company more breathing room to sell assets to pay back a large loan from the Fed that is central to the bailout....

Yves again. This is artful, to put it politely. This deal only applies to $75 billion in insured value of so-called multi-sector COOs. Lest we forget, AIG also entered into CDS to enable European banks to evade statutory minimum capital requirements. I have not independently verified the figure, but have been told those agreements cover $300 billion of risk, and the Journal later also mentions that AIG has insured over $300 billion of assets excluding these CDOs. There are more shoes still to drop.

[Demeter]

36. Bust-outs and the Paulson Mob

http://skepticaltexascpa.blogspot.com/2008/11/bust-outs-and-paulson-mob.html

Yves Smith has a 9 November 2008 post at her Naked Capitalism that closely parallels my thinking about AIG'S bailout, i.e., it's a bankruptcy fraud. Here's a link:

http://www.nakedcapitalism.com/2008/11/aig-looting-continues.html.

I describe a bustout at my 30 July 2008 post,

http://skepticaltexascpa.blogspot.com/2008/07/london-banker-on-covered-bonds_30.html.


Bankruptcy fraud is a federal crime, 18 USC 152. Sometimes prosecuted, if small and the "perps" are not politically well connected. "The Beaux Art Dresses Inc., was a domestic corporation organized in December, 1920. ... In August, 1922, the corporation entered into an agreement with a discount company by the terms of which it assigned its accounts receivable to that company for advances of money. ... Within seven weeks before the failure, it purchased merchandise amounting to $47,000 a large part of which purchases were made in the three weeks before the failure. ... At bankruptcy it had liabilities of $67,435.25 and assets of $1,064.14", Beaux Art Dresses v. US, 9 F2d 531, 532 (2nd Cir., 1925). "A decrease of value--more than one-half in two months, after the purchase of new merchandise--under the circumstances disclosed in this record are not to be believed", 534. Ah, for "old time bustouts", when the "mob" did them for profit. They were modest, typically involving $2-$10 million in creditor losses in 2008 $ and easily understood as they used companies which dealt in tangible objects which "disappeared" in the middle of the night. The proof: circumstantial, unexplained asset losses. I estimate $67,000 1922$ is about $2.5 million today, peanuts, 3.7% of Lloyd Blankfein's 2007 bonus, not worth looking at.


Bust outs usually require cooked books to induce the "mullets" to extend credit to the company to be bankrupted and can be charged under 18 USC 1341 and 1343, mail and wire fraud. Insurance companies make ideal bust out candidates because they take in premiums today for a promise to pay claims in the future. Were AIG's books cooked? Was AIG insolvent before Uncle Sam extended it $123 ($150?) billion and if so, who knew? Would anyone have the nerve to conclude AIG was insolvent before its CDS counterparties got more collateral to support their CDSs? What would be the effects? How many billions could it cost Goldman Sachs?


"Appellant, individually and trading as Rand Manufacturing Company, was engaged in business in Philadelphia. On August 22, 1928, an involuntary petition in bankruptcy was filed against Rand, and he was adjudicated a bankrupt on September 12, 1928. To sustain the indictment, Joseph Karp was called as a witness, who testified that he was a certified public accountant living in Brooklyn, N.Y., and that he had considerable experience in examining books of account of garment manufacturers: that he had carefully examined the books of appellant for the purpose of ascertaining the amount of purchases of merchandise, its value and the amount and value of sales of merchandise and finished products, in order to determine if the bankrupt had concealed or disposed of any portion of the merchandise so purchased", Rand v US, 45 F2d 947, 947 (3rd Cir., 1930). "Deducting this amount from the total purchases of 70,574 yards leaves a balance of 22,744 yards of material unaccounted for. ... The witness Karp also testified to a state of facts showing the value of purchases, amount expended for labor, and total sales, which indicated that appellant should have had on hand at the time of bankruptcy, in cash and/or materials, a value amounting to $22,832.94, unaccounted for to the receiver", 948. "Large quantities of merchandise of appellant disappeared, He accounts for the disappearance by claiming a robbery, but the circumstances surrounding the alleged robbery are, to say the least, suspicious. It was proper to submit all of these facts to the jury to determine whether his statement as to the robbery was true or false, whether it led to the conclusion of guilt or innocence as to the charge of concealment", 949, my emphasis. To the jury! Got it yet, Mike Garcia, formerly SDNY US Attorney. Apparently Mary Jo White in her nine years as SDNY US Attorney never did.


What's apparently happening at AIG? First, keep AIG alive to try to "end run" the lookback periods. Next, create massive confusion to conceal what's happening. Which is? AIG's insurance subsidiaries were looted of tens of billions to support AIG's CDSs with the connivance of New York's insurance commissioner, the Fed and the Treasury. The relative positions of insurance policy holders and unsecured creditors were changed during insolvency. If AIG went bankrupt, the bankruptcy judge might let the unsecured creditors "retroject", Hassan v Middlesex, 333 F2d 838 (1st Cir., 1964) AIG's financial condition. If properly done, the scheme could collapse. That's how it looks from here. This secured-unsecured creditor issue sometimes arises in LBOs which later go bust. Neat huh? Bring back "old time" bust-out frauds, they were a relative "public service"; I mean what's a few millions between friends? Or even a few tens of millions?

More on this topic (What's this?)
AIG: The Looting Continues (Banana Republic Watch) (naked capitalism, 11/9/08)
"Goldman big winner in government's revised bailout of AIG" (naked capitalism, 11/11/08)
AIG Executives Caught... Again (Fund my Mutual Fund, 11/11/08)
Read more on American International Group, Treasury at Wikinvest
Posted by Independent Accountant at 4:16 PM

[Demeter]

37. "Recession? Why Worry?"

http://economistsview.typepad.com/economistsview/2008/11/recession-why-w.html


In an oldie, John Kenneth Galbraith explains why, for many, there is no rush to enact stabilization policy when the economy turns downward:

Recession? Why Worry?, by John Kenneth Galbraith, Commentary, NY Times: Reputable economic attitudes hold that the economic norm is high, if not quite full, employment and a reliable rate of expansion in economic output. Recessions are an aberrant departure from that norm. Correction must come. ...

One must, however, challenge all accepted attitudes on the next point. It is that recession is uniformly adverse in its effect and thus by everyone deplored. A great many people and an even higher proportion of those who have political voice and vote, though perhaps not a majority, find a recession quite comfortable, and certainly more so than the measures that do anything effective about it. This, however, no one dreams of saying.

Economists and all approved economic doctrine have made high employment and economic growth a sacred good. With this no one can openly disagree.

There are the many who live in recession with a wholly secure livelihood and with a lessened fear of price increases, of inflation. They are in no real danger of loss or diminution of income. Present here are the more secure parts of the modern corporate bureaucracy. ...

Similarly secure are many in the professions, professors, needless to say, some public servants, lawyers, doctors and media stars. Also very important is the modern large rentier class. And many who live on Social Security or pensions.

For all these, recessions mean stable or even falling prices and no serious reduction of income. ...

Also, in an economy where services are increasingly important, a recession means a more willing and pliant labor supply, an underclass more available for the unpleasant toil that makes life for the rest of us more agreeable. And for employers.

A recession in modern times is also for many far more attractive than remedial action against it.

The possible positive lines of action against recession are three: taxes can be reduced to enhance the flow of consumer and investment spending, or so it is hoped; interest rates can be lowered to enhance investment spending and consumer purchases of houses, automobiles, refrigerators and electronics, or so it is also hoped; the Government can undertake direct, forthright job creation. This is the holy trinity. Prayer and repetitive prediction of recovery apart, there are no other lines of action.

Tax reduction has its proponents, notably among those who pay the taxes. Unfortunately, its relation to recovery is theoretical. There is the difficult question as to whether the revenues released will be spent or invested; they may be held as cash or unused bank balances. And tax reduction would increase the deficit, concern with which has now reached near paranoiac proportions. Again, better the recession.

Next, there is monetary policy: the reduction of interest rates by the Federal Reserve. This is believed to have a peculiar magic. It calls for no big bureaucratic effort, carries no threat of taxes -- and a special intelligence is taken to characterize those who are associated occupationally with money.

But monetary policy works against recession by reducing interest rates and therewith rentier income. This is by no means welcomed by those who enjoy such income. They are not without political influence. Any talk of an easier monetary policy automatically brings grave and urgent warnings of the danger of inflation. This, too, is a threat to those on stable incomes.

Additionally, there is the sad fact that in a recession monetary policy doesn't work. The elasticity of the response to reduced interest rates is then very low. People and firms spend and invest, or fail to do so, pretty much as before.

Finally, there is direct Government expenditure and employment. For those resting comfortably in recession, this is the worst of all. It could raise prices, risk inflation. Much worse, it promises higher taxes at some time yet to come. ...

We pride ourselves in being plain-spoken, free from cant and certainly from any pathological self-delusion. Given a fact, we face it. Let us now face the fact that for many a recession is a tolerable, even pleasant thing. And let us say so. This will not be popular. There could be indignant denial. That is often the response to unwelcome truth.

[Demeter]

38. Citigroup May Get Government Rescue, Investors Say (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3ArjWNoRSKw&refer=home

By Christine Harper and Bradley Keoun

Nov. 21 (Bloomberg) -- Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said.

Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“There is no question that Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating agencies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was “on the right track” five days before the firm went bankrupt.

“The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients today. “In situations where the government has stepped in, the equity holders have not fared well.”

Pandit’s Conference Call

Citigroup CEO Vikram Pandit told employees today that he doesn’t plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 cents, or 20 percent, to $3.77 at 4:08 p.m. in New York, giving the company a market value of about $21 billion. The stock pared its loss after the close of official trading, fetching $4.07 as of 4:35 p.m.

Pandit and Chief Financial Officer Gary Crittenden, speaking on a worldwide conference call this morning, also said they don’t expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it wasn’t open to the public.

The call came as Citigroup’s board, led by Chairman Win Bischoff and independent director Richard Parsons, prepared to meet today at the bank’s headquarters in New York, said a person familiar with the company’s plans who declined to be identified because the deliberations are private. Bischoff, interviewed at a conference in Portugal today, declined to comment on any potential changes to the board.

No. 5 By Value

Once the biggest U.S. bank, with a market value of $274 billion at the end of 2006, Citigroup has now slipped to No. 5 behind Minneapolis-based U.S. Bancorp. A plan by 51-year-old Pandit this week to cut costs by shedding 52,000 jobs and an endorsement by billionaire Saudi investor Prince Alwaleed bin Talal didn’t assuage shareholders’ concern that bad loans and securities writedowns may extend a year-long run of net losses totaling $20 billion.

“To be consistent with the last few government interventions, I don’t think Citigroup’s going to be allowed to fail,” said William Fitzpatrick, an analyst at Optique Capital Management Inc. in Milwaukee, which oversees about $1 billion and doesn’t own Citigroup shares. “This company’s too intertwined with the rest of the financial system to allow any further deterioration.”

Citigroup spokesman Michael Hanretta declined to comment. On the call today with employees, Pandit said the company’s capital and liquidity are strong.

TARP Funds

Including a $25 billion capital injection from the U.S. Treasury under the $700 billion Troubled Asset Relief Program, the company has at least $50 billion of capital above the amount required by regulators to qualify as “well capitalized.” Capital is the cushion banks must keep to absorb losses and protect depositors.

Deutsche Bank AG analyst Mike Mayo wrote in a report today that the bank’s $25 billion of reserves, when combined with other resources, “should be enough to cover estimated cumulative losses of $50 billion on loans.’” Mayo rates the stock “hold” and has a $9 price target.

“With Citi being as big as they are, the government will make a special case and step in and find another reason to dispose of more TARP funds,” said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati, which manages about $2.9 billion and doesn’t own Citigroup stock or debt.

Deposits Are Safe

Pandit was appointed last December to succeed Charles O. “Chuck” Prince, who was ousted as mortgage-bond writedowns saddled the bank with a record fourth-quarter loss of almost $10 billion. Prince was the handpicked successor of former Chairman and CEO Sanford “Sandy” Weill, who built the company through a series of acquisitions over 17 years before stepping down in 2003.

Bischoff, 67, was Citigroup’s top executive in Europe until he was named chairman when Pandit became CEO.

Bank employees have been telling customers their deposits are safe, and so far corporate clients haven’t moved their money elsewhere, said three people familiar with the matter who declined to be identified because they weren’t authorized to speak publicly about the accounts.

Crittenden, 50, has told colleagues it would be unwise to make hasty decisions to dispose of good businesses to satisfy investor demands for a show of action, one person familiar with the matter said.

[DemReadingDU]

63. Martin Weiss: Citigroup Failure Imminent

11/23/08 Martin Weiss: Citigroup Failure Imminent
Citigroup, the nation’s second largest banking conglomerate, is on the brink of failure.

Its stock price collapse is the canary in the coal mine, wiping out over nine-tenths of the company’s market cap since its 2007 peak, decimating two-thirds of its value just last week alone.

At the same time, the collapse in its market cap is also the bank’s nail in the coffin, making it virtually impossible for it to raise the capital it desperately needs to save itself.

If it fails, it will be, by far, the largest banking disaster in history, involving $2 trillion in assets. That makes it approximately six times larger than Washington Mutual and three times bigger than Wachovia.

Moreover, the prospect of a failure by Citigroup poses far greater challenges to regulators than a typical large bank. Due to its massive derivatives holdings — side bets on interest rates, currencies, and the probability of defaults by other large corporations — it could be extremely difficult to save Citigroup without serious disruptions, raising serious questions about the global banking system and the world economy.

At mid-year, June 30, 2008, the Office of the Comptroller of the Currency (OCC) reported that Citi’s primary banking unit, Citibank NA, held $37.1 trillion in total notional value derivatives, including $3.6 trillion in credit default swaps, which, in recent months, have proven to be the most dangerous category.

In contrast, Wachovia bank, bought out by JP Morgan Chase in a deal brokered by the regulators, had only $4.4 trillion in derivatives, among which $404 billion were in credit default swaps, or only one-ninth the size of Citigroup’s.

Thus, whereas it was possible for the authorities to arrange buy-outs for banks like Wachovia and Washington Mutual, there is no buyer big enough in the United States to absorb Citigroup. Nor is it likely that an international consortium of banks would want to squander the precious capital they have left on a sinking titanic the size of Citigroup.

What will happen next? No one can say with certainty. However, it’s likely that:

1. The Treasury Secretary, the Fed Chairman, as well as FDIC and Citigroup officials are currently holding tense and intense discussions in a desperate attempt to somehow stem the megabank’s demise.

2. They will soon announce a massive federal bailout that could make the $150 billion AIG rescue seem small by comparison.

3. And, ultimately, these kinds of bailout efforts will fail.

more...
http://www.moneyandmarkets.com/citigroup-failure-imminent-6-28244

[Demeter]

39. Unemployment by industry: Recession or Depression? - Eric Janszen

http://www.itulip.com/forums/showthread.php?p=59666#post59666

More than you'll ever want to know about unemployment trends and the possibility of Depression in the US, with lots of beautifully executed, very ugly graphs. It's too much to post here, so click on the link!

This one's for burf!

[burf]

41. Thank you

It is truly mind boggling how much information is out there. But not nearly as bad as I witnessed yesterday. I did a really dumb thing and watched CNBC the last hour of the trading yesterday. I couldn't stop watching as I felt I was in the twilight zone or something similar. The announcement of a (maybe) treasury secretary and the world was saved! A guy who from what little I know seems to be joined at the hip with Paulson and others who have engineered this fiasco called a bailout.

My guess it is the perfect cover for BushCo to exit stage left. The markets are now confident and gleeful that Obama is selecting a economic team. This will continue to rally the market. Then the Christmas shopping will be spun to make it look acceptable. The terminology of "It not as bad as expected" will be thrown around continually. Then, Obama gets into the final stretch and all are hopeful the end ot the crisis is near. Bush slips out the door and Obama is left holding the bag. All the while the numbers such as unemployment, foreclosures, etc continue to show how lousy things are.

It just keeps reminding me of the famous Monty Python Dead Parrot skit.

http://www.youtube.com/watch?v=4vuW6tQ0218

[DemReadingDU]

43. That's a good skit

I wonder if Obama will tell us the truth and be able to get the people to sacrifice and find solutions to help the economy. I worry that Geithner is of the same mold as Paulson.

[Demeter]

44. You Are Entirely Welcome

Just don't let it drain your life of all joy. Eat, sleep, go to a movie occasionally, do good deeds.
And don't vote for the GOOP!

[DemReadingDU]

48. great link, thanks

[Demeter]

40. I'm Never Going to Catch Up

The way things keep happening, I'll never get through all those emails. Maybe it will slow down over Christmas? I think the world needs a break, frankly.

What do you readers think? Keep posting, or is this enough for the weekend?

[DemReadingDU]

46. Thank you for the thread

Don't feel you have to post everything. Usually others post throughout the weekend too. Take a break, have some fun!

:hi:

[Demeter]

50. I Have the Flu--There's No Way to Have Fun!

And it's only 30F and I'm dog-sitting my grandpuppy.

[DemReadingDU]

52. I guess posting here, is your break!

The influenza is nasty, I had it about 5 years ago, stuck in bed for 4 days with fever alternating with chills, headache, and every muscle feeling it had been run over by a Mack truck.
Take care, drink lots of water!

30 degrees in SW Ohio too. Brrr

[Demeter]

45. How Did Iceland Go Bankrupt? Posted by John Emerson

http://trollblog.wordpress.com/2008/11/15/how-did-iceland-go-bankrupt/


The small and hitherto very prosperous nation of Iceland seems likely to go bankrupt. At the moment they don’t have even enough foreign exchange to import food (which they can’t grow themselves), and because Icelandic banks have defaulted on British depositors, Britain has rather ludicrously declared Iceland to be a terrorist nation. The future is uncertain, but it seems sure that every Icelander will see a big decline in their standard of living, and that includes many who never really profited from the recent boom.

That’s just introductory. Up until a year ago, the Icelandic miracle was one of the big success stories of globalization and financial deregulation. The rest of this post will just be links and citations, most of them obsolete and highly embarrassing....

[Demeter]

47. US help for investors to buy ailing banks

http://www.ft.com/cms/s/0/4c68bf50-b82b-11dd-ac6d-0000779fd18c.html

By Joanna Chung and Saskia Scholtes in New York


US federal banking regulators have created a national charter system to allow private equity groups and other investors to buy troubled or failed institutions. The move comes as regulators brace for a growing number of bank collapses following 20 failures so far this year.

The Federal Deposit Insurance Corporation, which insures customer deposits, brokers the sale of failed banks to other banks or savings and loan institutions.

Under a “shelf charter” system, the Office of the Comptroller of the Currency would grant conditional preliminary approval of a national bank charter to non-bank investors, thereby expanding the pool of potential qualified buyers available.

The 18-month conditional charter would remain inactive or “on the shelf” until an investor group is in a position to acquire a troubled bank. It would allow the group access to the FDIC’s list of failed or troubled banks and let it bid for them. A final charter approval can be granted once a bid is accepted.

Julie Williams, OCC’s chief counsel, said: “The big picture here is that we have taken a look at the situation and decided that this new charter system will enable transactions that get new capital into the banking industry.”

“But not just anybody can come in and get a charter ... We are looking for management that has the capacity and experience to manage a bank safely and soundly, has the ability to inject a substantial amount of capital into the troubled institution and will be subject to significant regulatory oversight.”

The OCC said on Friday that it had granted the first such preliminary approval to a management and investor group led by a 30-year banking veteran, Gerald Ford.

The group, backed by investors including three private equity funds, has about $1.38bn in capital to invest in troubled institutions, according to a letter from the OCC. The banking regulator is considering other applications for preliminary approvals.

Separately, the FDIC on Friday strengthened its guarantee programme for bank-issued debt to address concerns the scheme would fall short of restoring confidence in bank lending markets unless further safeguards were in place.

The revised terms of the programmes, finalised on Friday, will allow financial institutions to tap debt investors for funds backed by the “full faith and credit” of the US government.

The FDIC will insure that if a bank defaults, investors will receive timely payment of interest and principal on senior unsecured debt issued by the bank.

The FDIC also replaced a flat 75 basis point fee on each debt issue with a tiered pricing system that would charge different fees for the insurance depending on the maturity of the bond issued.

Banks had argued that the original system was prohibitively expensive for short-term debt in particular and could undermine the market for overnight interbank loans. Loans with maturities of less than 30 days are now excluded.

JPMorgan filed a shelf registration on Friday with the Securities and Exchange Commission that cleared the way for the bank to issue debt under the FDIC’s programme at any time, while Goldman Sachs said it intended to issue FDIC-backed debt early next week.

[DemReadingDU]

53. Debt Rattle, November 22 2008: Ordinary People

11/22/08 from Ilargi at http://theautomaticearth.blogspot.com/

Ilargi: Most financial and economic news, both historically and in these days, is focused on large corporations, governments and central banks. This may be logical, after all that's where the biggest numbers are, but it's also a major mistake, certainly in times of crisis.

We need to start looking much closer at what's going on beyond the big numbers. Because if we do, we can find out what is happening to all the millions of people whose purchases and tax revenues combine to make multi-trillion dollar economies possible. With that idea in mind, what we see in the real world should be a wake up call, a realization that we can indeed predict what will be the future of large banks, insurers and carmakers.

Most North Americans and Europeans don’t just have little money left, their effective net worth is negative, they have more debts than assets. This is the result of easy credit, used for anything from home and car purchases to all the gadgets and trinkets charged to their credit cards. The whole system has been based on a promise to pay back later, to spend now what will be earned at a later date.

But now the easy credit is gone, and it drags an entire way of life, and even entire economies, down with it. People can no longer get loans to buy houses or vehicles. And that should make us pause and ask why our governments are so eager to bail out the large banks and other corporations. The notion that certain enterprises are essential, too big to fail etc. needs to have a question attached to it: can these companies return to profit, will they be able to persuade consumers to come back and purchase their goods and services?

The answer is as brief as it is clear: no. The easy credit is gone, perhaps not forever, but for a very long time. There comes a point where the promise to pay in the future loses its credibility. That's the essence of what we're looking at. Banks don't believe other banks’ promises, and they don't believe their customers will be able to pay them back either. A classic example of a grinding halt.

Since all our economic dealings in the past 25 years have been increasingly funded by credit, by spending -ever more- before earning -more or less the same-, the disappearing act of credit will grind to a big and devastating halt the entire chain we have based our societies on. Governments at all levels borrow money -against interest- based on expected future tax revenues. Stores and factories use credit to accumulate inventory that is supposed to be sold at a profit, which is to be used to pay the loan plus the interest. These loans to governments and companies are vanishing as rapidly as those the man in the street has used to buy his shelter and vehicles.

And no amount of federal bail-out can restore the easy credit that has provided the loans. This is not hard to understand. The US Treasury and Fed rely on the very same principle that has led to the credit halt in the first place. And in this case, the principle is put on steroids: a huge increase in spending now what is expected to be earned later. By now it's obvious that the debt involved cannot possibly be paid back with earnings of the present population; it bas become necessary to rely on future generations’ earnings. But no bank, even in good times, would let you use the earning power of your grandchildren as collateral for a loan, and it's no different if a government tries it.

70% of the US GDP is determined by consumer spending. It would thus seem glaringly obvious that in order for the economy to be revived on anything resembling sound principles, the purchasing power of ordinary people needs to be restored. Still, this is not even attempted. The money that the ordinary people will have to earn in the future is today handed out to the corporations that are inevitably doomed to failure if they can no longer do business with ordinary people. And the more the companies receive from the government, the higher the likelihood that they will fail, because the money they get is the money the man is the street would need to buy the companies' goods and services.

Unless governments change their tactics and their views, and very soon, their legitimacy and credibility will be questioned ever more, and ever louder. None of the bail-outs have had any positive effect on the economy, because they can't; they ignore the most important party in the economy.

The man in the street is too big to fail, not the corporations.


click to read related articles and comments
http://theautomaticearth.blogspot.com/2008/11/debt-rattle-november-22-2008.html

[Tansy_Gold]

59. Was the consumer to blame?

ISO (InSignificant Other) was watching DL Hughly on CNN last night and Barney Frank was interviewed regarding the Detroit bail-out. After watching Michael Moore's comments earlier on a rerun of Larry King, I had enough to digest, so I skipped most of Barney, but ISO remarked later that Frank had put at least some of the blame on consumers who continued to demand gas guzzling SUVs, big trucks, etc., in the vein of "If no one had bought them, Detroit wouldn't have continued to make them."

Now, personally, I think there may be SOME truth to this, because I know people who have said with no apology that they want a big truck or car and they don't care how much gas it guzzles or how much it costs. Virtually all of these people vote GOP and embrace the general GOP platform -- anti-abortion, pro-guns, pro-xtian church, pro-military, pro-war, racist. Some of these people are in the uppr income levels and can more or less thumb their noses at a lot of the economic misery that is pouring down on the rest of us, but many more of them are working class people who just don't get it. ISO has asked me many times why this is, why do people follow a set of beliefs that rationally are in their own worst interest and I keep telling him that there is NO rational explanation because people like that don't operate on the same "rational" basis as the rest of us.

There is also SOME truth to Frank's comment but in terms of negative proof. Consumers did make their choices known in that over the past 35 years -- since 1973's oil crisis -- they have sitched more and more to Asian and European auto makers. Remember that even back in the 60s, the fuel-efficient and low-cost Volkswagen was popular. We saw the occasional Mercedes, the sporty British Triumphs and X-KEs and MGBs, and other exotics. Detroit produced its own compacts: Corvair, Falcon, Comet. And they came out with the "mid-size" models, like GM's Chevy II (Nova), Chevelle (Malibu), Pontiac Tempest/LeMans, and so on. So it's not like they couldn't do it or didn't do it in terms of addressing the potential for a market for smaller, more fuel-efficient vehicles.

But gas was cheap and plentiful and we had a lot of our own. And we had this interstate highway project that needed justification. We had a love affair with the open road that had to be indulged. And we had stockholders' investments that had to be returned on.

With all of those pressures, how much real influence could the consumer have? Remember that this is a consumer who is bombarded with advertising day after day after day. Tv, radio, billboards, magazines, newspapers. Movies - just think "Bullitt" and "Thelma and Louise" for two examples -- promoted either blatantly or subtly the libidinous appeal of the automobile. The mainstream media and the government have long downplayed the risks of "peak oil," which gives those consumers who have little to no criticial thinking skills all the ammunition they need to defend their choices. Only those who have sufficient expertise and access to alternative information will be able to make an "informed" choice as to which car to buy.

Another pressure, of course, comes in the form of "buy American." When covering "the great Arizona mine strike of 1983," writer Barbara Kingsolver was driving "a dirt tan Nissan pick-up" and found herself immediately at odds with the Steelworkers. As she writes in the Foreward to the 1996 edition of "Holding the Line": ". . . 'buy American' is no platitude, but food on the plate." And yes, many of the same people who gobble up cheap plastic crap at Wal-Mart will also buy a big fat Dodge Ram pick-up or a Chevy Silverado or a Ford F-250. They're "buying American." And can we fault that motive? Maybe others, yes, but aren't they acting out of some kind of loyalty and is that a bad thing?

Just as we've put the blame on the mortgage brokers and predatory lenders and greedy developers who suckered in a lot of unqualified home buyers, don't we have to let at least some of the car-buying consumers off the hook for their "he chose poorly" support of the worst of the Big 3's products? Most new-car buyers have, if market share is any indication, moved away from Detroit to Asia and Europe. Many used-car buyers have bought what's available and affordable, and if U.S. autos have higher depreciation rates, then they're going to be more affordable (and maybe more plentiful) than used Asian and European makes. They may not be buying what they'd really LIKE to buy, but rather what they CAN buy, and it's not fair to blame them for Detroit's actions.

I would suggest to Congressman Frank -- with apologies for NOT watching all the interview and hearing ALL his comments -- and to everyone else ready to blame the consumer for GM's woes that this is just another attempt by a big corporation to avoid taking responsibility for its own actions. And since a corporation isn't a sentient being, those actions are directed by human beings like executives and managers and boards of directors. They're the ones who made the decisions. They could have continued to make S-10s and Rangers. They could have made their engines fuel efficient and durable. They could have been innovative and technologically advanced -- and looked at a world market that wasn't interesed in Escalades and Excursions and Durangos. Toyota and Subaru and Hyundai did it. And consumers made the shift.


Tansy Gold

[DemReadingDU]

60. Most has to do with automakers, bigger profits on those bigger SUVs

Sure the automakers could have made smaller fuel efficient vehicles, but the bigger the vehicle, the bigger the profit. But of course, average Joe/Jane can't afford this. So what did the automakers do...get a longer loan maybe 5 years or 6 years, or lease that big truck or SUV.

A lot has to do with advertising which has everything to do with egos. And in this gotta have it now society, that's what people did...bought big vehicle, now.

Apparently, the automakers, like the mortgage brokers, figured the good times and large profits were going to last forever. They should have seen this bubble bursting, and been prepared for it by promoting those S-10s and smaller fuel efficient vehicles.

I'm really torn with the bailouts. On one hand, the banks are given billions to do whatever they want. But the autos need a plan. Well, then the plan should include smaller fuel efficient vehicles, and keep the unions. My feeling is that big business is looking at ways to get rid of unions during this crisis.

And change those commercials to promote smaller fuel efficient vehicles that they can afford. If you can't make car payments on a 3-year loan, then get a cheaper vehicle!

[Tansy_Gold]

61. Yes. There is always, even from Barney Frank, this message that

the consumer has to be prudent and educated and wise and sensible, but EVERYONE ELSE is bombarding the consumer with the buy-it-now (thank you, eBay!) and buy it bigger and be sexier and more attractive and even holier and more American if you buy, buy, buy. None of the corporations are urging prudence, caution, savings.

So the consumer is caught in a double bind, a catch-44, and then told it's his/her responsibility to bail out the people who put him/her there.

http://www.npr.org/templates/story/story.php?storyId=97303393

Here's a plan. Here's a company that already has a car. No retooling.

Let's give them the bailout money. Let's let them hire the union auto workers.


Why not?

[DemReadingDU]

62. I want one!

Well, I did, till I read the article, and it costs $100,000. But I'd be willing to use bailout money to research and develop ways to get this vehicle cost-affordable for the masses.
Now to listen to that 45-minute audio.

[Hugin]

64. Now, I don't want to rain on your parade...

But, isn't advocating a start-up Company that has a CEO... CFO... CIO... Advisory Board and no workers kind of like
trying to build a house and starting with the roof? Those guys strike me as wanting success the easy way.

They've been lobbying for tax-cuts and handouts for years now.

and then there's this:

"With a carbon-fiber skin made in France, an aluminum frame made by Lotus in England and batteries made in Asia, the Tesla Roadster was born."

On the technical side...

These so-called "commodity batteries" are not exactly environmentally friendly to produce or dispose of (why they're
made in Asia) and they have, as any laptop or cell-phone owner can attest, a short service life necessitating frequent costly replacement.

I'm going to hold out for Direct Hydrogen or Fuel Cells.

But, energy storage is the bane of the transportation appliance and it always has been.

[Tansy_Gold]

67. No problem, Prag. You're not rainin' on my parade at all.

All I was saying, though, is that there are alternatives to handing $25bn of the taxpayers' cash to GM and Ford and Dan Quayle. Maybe Tesla isn't the answer, but maybe something else is. And if we can't give it to them, why not spend some of it on hydrogen fuel cell research and development.

I didn't get a chance to hear the whole program Friday afternoon and didn't even have time this morning to listen to all of it before I posted it, so I'm sure it's not a perfect solution. We need to bring back mass transit. We need to do more telecommuting. We need to modify the whole consumer culture. None of it's going to be easy or cheap, but if the alternative is self-destruction, we need to do SOMETHING.

And it's been my contention all along that when the government operates in crisis mode, it tends to do things way too big and way too fast. Nothing is thought out any more. Panic sets in and we (they) get into this "it's better to do the wrong thing than nothing at all." And sometimes it might be better to do nothing, while deciding what's the BEST thing to do.



Tansy Gold

[Pale Blue Dot]

54. Closures & Layoffs (Nov. 16-22): Layoffs Hit Sun, AMD and Other Tech Firms

In this week's issue:
We give you the latest announcements of major U.S. corporation closures and layoffs including Advanced Micro Devices, Alcoa, Amylin Pharmaceuticals, Brunswick Corp., Comsys IT Partners, Imation, Intersil, Metaldyne, MGP Ingredients, Sun Microsystems, Weyerhaeuser and additional closings in Texas, Wisconsin and Washington.
Closures & Layoffs

Advanced Micro Devices Inc. based in Sunnyvale, CA, is cutting 500 workers, or 3% of its global staff. The cuts are AMD's second big round of layoffs this year. AMD had already laid off 1,600 workers, replaced its chief executive and announced plans to spin off its factories. The job cuts will affect all AMD departments worldwide except for the company's manufacturing operations, which have roughly 3,000 employees and are being spun off into a separate company.

Alcoa will curtail an additional 350,000 metric tons per year of aluminum production beginning immediately. The cuts affect work in its Rockdale, TX, and Ferndale, WA, operations. The reductions will be phased-in beginning immediately.

Amylin Pharmaceuticals Inc. based at 9360 Towne Centre Drive in San Diego, CA, will reduce its San Diego workforce by approximately 25%, or 340 employees. The company's Ohio facility is unaffected by the restructuring. After the workforce reduction, Amylin's employee base will be 1,800 worldwide, with approximately 900 employees in San Diego.

Brunswick Corp. will transfer production of Trophy offshore fishing boats made at its plant in Cumberland, MD, to another Brunswick facility in Ashland City, TN, by the end of 2008, eliminating approximately 115 production and support positions.

http://www.costar.com/News/Article.aspx?id=DA28A0DA9B01B3431969B6C13A7E7A01&ref=1&src=rss

Much more at the link.

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68. Wealth, Income, and Power (Lots More Graphs)

http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

This document presents details on the wealth and income distributions in the United States, and explains how we use these two distributions as power indicators.

Some of the information might be a surprise to many people. The most amazing numbers come last, showing the change in the ratio of the average CEO's paycheck to that of the average factory worker over the past 40 years.

First, though, two definitions. Generally speaking, "wealth" is the value of everything a person or family owns, minus any debts. However, for purposes of studying the wealth distribution, economists define wealth in terms of marketable assets, such as real estate, stocks, and bonds, leaving aside consumer durables like cars and household items because they are not as readily converted into cash and are more valuable to their owners for use purposes than they are for resale (Wolff, 2004, p. 4, for a full discussion of these issues). Once the value of all marketable assets is determined, then all debts, such as home mortgages and credit card debts, are subtracted, which yields a person's net worth. In addition, economists use the concept of financial wealth, which is defined as net worth minus net equity in owner-occupied housing. As Wolff (2004, p. 5) explains, "Financial wealth is a more 'liquid' concept than marketable wealth, since one's home is difficult to convert into cash in the short term. It thus reflects the resources that may be immediately available for consumption or various forms of investments."

We also need to distinguish wealth from income. Income is what people earn from wages, dividends, interest, and any rents or royalties that are paid to them on properties they own. In theory, those who own a great deal of wealth may or may not have high incomes, depending on the returns they receive from their wealth, but in reality those at the very top of the wealth distribution usually have the most income.

The Wealth Distribution
In the United States, wealth is highly concentrated in a relatively few hands. As of 2001, the top 1% of households (the upper class) owned 33.4% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 51%, which means that just 20% of the people owned a remarkable 84%, leaving only 16% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth, the top 1% of households had an even greater share: 39.7%. Table 1 and Figure 1 present further details drawn from the careful work of economist Edward N. Wolff at New York University (2004).


SEE GRAPHS AT LINK!

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72. Wish the author could update this article

Those graphs go back to 2001. It would be interesting the concentration of wealth in 2007 before Bear Stearns collapsed.

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69. Foreclosures up 25 percent: RealtyTrac

http://www.reuters.com/article/email/idUSTRE4AC10H20081113


NEW YORK (Reuters) - Foreclosure activity in October rose 25 percent from a year earlier, although filings in California fell by double-digit percentage points for the second consecutive month due to a state law slowing the foreclosure process, according to a monthly report by RealtyTrac.

Foreclosure filings -- default notices, auction sales notices and bank repossessions -- rose by 5 percent from September to 279,561 in October, according to Irvine, California-based research firm RealtyTrac.

That means one in every 452 U.S. housing units received a foreclosure filing in October, the firm said in its report released on Thursday.

The California law, which requires lenders to contact homeowners and explore options to avoid foreclosure before initiating the process, took effect in early September and drove the state's foreclosure activity rates down, at a pace of 31.6 percent from August to September and 18 percent from September to October.

But in September, the California law helped drive the national foreclosure rate down, something that did not happen in October.

"Foreclosure activity in other places rose significantly enough to offset the drop in California," said RealtyTrac Senior Vice President Rick Sharga.....

HELP FROM FANNIE, FREDDIE ON THE WAY?

The markets that once lead the housing boom topped the foreclosure list in September.

Nevada posted the nation's highest foreclosure rate for the 22nd consecutive month in October, with one in every 74 housing units, or 14,483, receiving a foreclosure filing during the month -- more than six times the national average.

Arizona registered the second-highest state foreclosure rate. Filings were reported on 17,507 Arizona properties, an increase of 35 percent from the previous month and 176 percent from October 2007.

In Florida, one of every 157 units received a filing during October, the nation's third-highest state rate. A total of 54,324 Florida properties received a foreclosure filing during the month, an increase of 13 percent from the previous month and nearly 80 percent from last year.

However, the government unveiled a plan on Tuesday which, unlike California's law, could permanently reduce the number of foreclosures, Sharga said.

Homeowners facing foreclosure who are spending more than 38 percent of their income on mortgage payments could have monthly payments reduced by Fannie Mae and Freddie Mac, the two largest U.S. mortgage finance companies.

"The good news is that there are programs and facilities in place that could actually have a material effect of stemming the tide of foreclosures, but as always the devil is in the details," Sharga said, adding that he does not expect to see that effect until late in the first quarter of 2009.

RealtyTrac counts foreclosures by compiling the total number of properties with at least one foreclosure filing reported during the month. If more than one foreclosure document is filed against a property, RealtyTrac counts only the most recent filing.




© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.

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70. The Six Unknowns That Are Roiling the Stock Market by Ben Steverman

http://finance.yahoo.com/banking-budgeting/article/106163/The-Six-Unknowns-That-Are-Roiling-the-Stock-Market

After weeks of mad volatility, even long-time market observers are baffled by what's ahead for stocks. The general future is too uncertain.

The stock market's behavior is downright strange lately. Professionals with decades of market experience scratch their heads as the market falls to its lowest point of the year, then surges almost 7% in an afternoon—all for no apparent reason.

What's hanging over the stock market these days is uncertainty. In an environment where few know what's next, investors are skittish, corporate executives are cautious, and government officials are trying anything and everything to stabilize the situation.

BusinessWeek asked stock market experts to identify the biggest unknowns facing investors. These factors will be crucial to clearing up a foggy outlook. Unfortunately, it could take months—if not years—to resolve them.

1. Will the market lows hold?

On Nov. 13, the broad S&P 500 index and the tech-heavy Nasdaq composite dipped to their lowest points of the year. The Dow Jones industrial average got close, sliding below the key level of 8000. Then, however, buyers flooded the market and all three indices jumped more than 6%, mostly in the last 50 minutes of trading.

Randy Frederick, Charles Schwab's (SCHW) director of trading and derivatives, points out that this has happened roughly four times in the past two months: The market keeps returning to its lows, then rebounding. "It's actually an encouraging sign," he says. "The danger is if we dip below that."

Traders who rely on technical analysis—that is, watching the stock market's past patterns to predict future moves—could be unnerved by a significant drop below these levels. "That's when things will get spooky," he says.

2. What will President Obama do?

The victory of Barack Obama on Nov. 4 settled one unknown. Investors know who will be President on Jan. 20, 2009—they're just not sure what he's going to do.

"You have a new administration coming in, and nobody knows what the new rules are going to be," says James Reed, portfolio manager of the UMB Scout Fund (UMBSX). Hanging in the balance are efforts to stimulate the economy and end the credit crunch, taxes, health care policy, and new regulations for the financial industry.

"It will be interesting to see in the president's first 100 days how much of the changes he advocated can be implemented," says Richard Sparks of Schaeffer's Investment Research.

3. How bad will the layoffs be?

In October the U.S. unemployment rate rose from 6.1% to 6.5% and the consensus is that it will continue to climb. But how far and how fast?

Many companies have announced job cuts in the past month and the beginning of 2009 may be a crucial period. Firms are putting together budgets for next year, Reed says, and he's expecting "whopping layoffs in the first quarter."

The unemployment rate is "the key data point that everyone is watching," says Steve Neimeth, portfolio manager at AIG SunAmerica Asset Management. If the rate moves above 8%, consumers could slash their spending, and the economic recovery some hope to see in 2009 could be delayed, he says.

4. How happy will the holidays be?

Stressed out by the economic headlines, stock market losses, falling home values, and a precarious job market, consumers seem in no mood to spend during this holiday season. Nearly every retailer has lowered sales expectations.

"Expectations have been set very low," says Frederick. Holiday spending that beats the gloomy estimatescould boost retail stocks and the market as a whole.

However, sales figures could still disappoint. "The consumer is in retrench mode," says Ralph Shive, portfolio manager at 1st Source Funds. Falling energy prices have been likened to a 'tax cut.' But, Shive says, compared to the many factors stacked against the U.S. consumer, the "gas 'tax cut' won't be enough."

5. When will the hedge funds stop selling?

Market professionals speculate incessantly on the state of the hedge fund industry. But few have solid information as to what is going on.

Hedge funds invest billions of dollars in the market and often borrow to magnify that exposure. Reportedly, funds are being forced to sell assets because of their poor investment performance, the difficulty of obtaining credit, and most of all, because their investors are withdrawing money.

Funds don't want to disclose that they're being forced to sell assets, but many observers assume that hedge fund troubles are partly to blame for the market's big decline in past months. "None of this is out in public," Reed says. "It's all between the hedge funds and their customers."

Though hedge fund investors can pull their money out each month, the end of the year may cause even more investors to reduce fund exposure, Frederick warns.

6. What's the next turn in the credit crisis?

Every market expert has a different opinion on what the U.S. Treasury, the Federal Reserve, and regulators and central bankers around the world should be doing to resolve the global financial crisis. The biggest unknown may be whether—and when—they are ultimately successful.

"Credit drives the economy, and we are in a credit crunch of unknown degree," Shive says.

Some easing of credit-market conditions has cheered investors recently, Neimeth says. But, he adds, more could be done.

Many companies aren't able to obtain short-term financing because of problems in the commercial paper market. Neimeth says the government should protect investments in money market funds, a move that would add liquidity to the commercial paper market.

With so many unknowns continuing to make investors very uneasy, wild daily index swings are likely to keep our heads spinninG.

FLUFFER-NUTTER SANDWICHES FOR THE MASSES

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71. US's Road to Recovery Runs Through Beijing

http://www.atimes.com/atimes/China/JK15Ad01.html


By Francesco Sisci and David P Goldman

the United States' road to recovery, as well as Barack Obama's path to presidential greatness, run through China.

In the rush to prop up America's financial institutions, foreign economic policy seems remote from Washington's agenda. America wants to revive the mortgage market and consumer spending. The effort is doomed to failure. For a quarter of a century the American consumer has been the locomotive of the world economy, and now the locomotive has derailed and taken the rest of the world economy with it.

Recovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.

No recovery is possible unless American households can save, and they cannot save in an economic contraction when incomes spiral downwards. To save, Americans must sell goods and services to someone else, and a glance at the globe makes clear who that must be: nearly half the world's population, and most of the world's capacity for economic growth, is concentrated in China and the Pacific Littoral.

China's economic problem is the inverse of America's: China has achieved fast rates of growth at the expense of huge disparities between the prosperous coast and the backward interior, as well as excessive dependence on foreign markets. China's policy response to the economic crisis is far more radical than Washington's. Rather than attempting to patch up the situation and restore the status quo ante, China plans to spend nearly a fifth of its gross domestic product on an internal stimulus focused on infrastructure in its interior. Severe execution risk attends the Chinese proposal, and markets remain to be convinced.

China can reduce the execution risk of its great economic shift towards home consumption, and America can solve its savings problem, through a grand partnership. This partnership need not be exclusive to America and China, but it must be founded on America and China, two of the world's largest economies. India and the other Asian economies should be encouraged to join this partnership. A great deal has been written about prospective conflict between China and the United States, but very little explanation is offered as to what issues might arise between China and the United States. China and America have far more to gain from cooperation than from conflict.

America's objection to Chinese foreign policy center on China's pursuit of commercial interest with countries (Iran, Sudan) whose behavior America considers unacceptable. America stands to gain an ally in questions of rogue-state behavior, terrorism, nuclear proliferation and other matters of national interest, in return for helping China achieve its legitimate goals.

The goals of the partnership should be to:


Support China's internal development by re-orienting export flows towards China and other emerging economies from the United States and other industrial countries.

Transfer technologies and other expertise to the emerging economies.

Make the emerging economies partners in the recovery of American asset prices.

Fear and risk-aversion rather than trust and optimism conditioned the two-way capital flow between emerging markets and the United States during the past 10 years. After the 1997 Asia financial crisis, and the 1998 Russian bankruptcy, investors in emerging markets lent their savings to the American government or its quasi-governmental agencies to diversify their portfolios into safe assets, while Westerners invested in local emerging market currencies for higher returns.

As one of the authors reported recently at this site (See Who will finance America’s deficit? David P Goldman, Asia Times Online, November 13, 2008), global financing of the US government deficit drew on leverage in emerging markets. De-leveraging of the world financial system sharply curtails the availability of overseas financing for the Treasury deficit.

America's economy model is broken. The tape cannot be run in reverse: America can't rescue an economy based on rising consumer debt and zero savings. America must become a technology exporter. Throwing more money into consumer stimulus, bailouts for the automobile sector, and so forth will fail miserably. America should recognize that the deformation of its economy is the inverse of the deformation of the Chinese economy (as well as other emerging economies), and that their common problem has a common cure.

The trouble in the world economy has been that a rich Chinese won't lend money to a poor Chinese, unless the poor Chinese first moves to America. China bought American mortgages, including poor-quality assets dressed up as high-quality assets, because China does not have the financial, legal and administrative capacity as well as the trust to write sufficient mortgage business at home. China's efforts to spend a fifth of its GDP on infrastructure face enormous problems of governance. In the United States, voters most approve most public spending at the local level, and the federal system provides checks and balances against abuse of public funds. Emerging economies must rely on the probity of a small number of officials with enormous power, a far less effective check against corruption.

China can use America's help in shifting its economy towards the internal market. Ironically, American officials have been trying to persuade China to import the American financial model for years, and the collapse of the American model has made the prospect less attractive. But it is a very good moment for China to bring in American banks, and start up a consumer lending market. The failures of the American consumer market do not wipe out a century of banking experience in evaluating and securitizing consumer loans. To help import the American model, China should be given the opportunity to purchase major American institutions in return. Citicorp, for example, could be bought today for about $50 billion or Capital One for $13 billion.

America remains the most technologically advanced economy in the world. China needs American high technology. In many instances, America restricts the sale of technology to China due to security concerns.

The United States should offer China a general reduction in restrictions on imports of American technology and acquisition of American companies, in return for a treaty linking Chinese and American security interests. The treaty would include:

A system of royalties for technology transfers and guarantees against pirating.

Freedom for Chinese companies to acquire American companies, including financial institutions.

Agreement on a common stance towards rogue states, nuclear arms proliferation, terrorism and other issues of mutual concern, covering such issues as Pakistan, Sudan, Iran and other areas of past diplomatic conflict.

An agreement on strategic arms deployment in Asia.

A roadmap for China's democratization.

Environmental and energy-efficiency goals.

Stabilization of China’s yuan against the dollar to support free capital flows between the US and China.

There are close to 2 billion people in China and the countries in its immediate periphery, and a further 1.1 billion people in India. Half the world's population lives in emerging Asia, and its productivity could triple in a generation. Out of the present crisis, the world might enjoy one of the longest and fastest economic booms in history - or it might remain in an economic mire for a decade. The incoming American administration might be remembered as one of the worst, or one of the best, in American history.

David P Goldman was global head of fixed-income research for Banc of America Securities and global head of credit strategy at Credit Suisse.

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73. Why Washington Cannot Prevent Depression by Martin D. Weiss, Ph.D.

http://www.moneyandmarkets.com/why-washington-cannot-prevent-depression-27968

Fear of depression is sweeping the nation...The Wall Street Journal, USA Today, and hundreds of other newspapers around the world are all asking essentially the same question: Are we sinking into a depression? How bad will it be?

The answer, they say with unanimity, lies with Washington. That’s why General Motors has suddenly switched PR tactics, now admitting it will run out of the cash it needs to stay in business. It wants a Washington handout. That’s why dozens of major cities and states are saying the same thing. They want their share of the federal money too. In this Washington-worship environment, you may even see Wall Street brokers drop their traditional embellishment of the news and begin stressing the negative — all for the sake of pressing the case for “bigger and better” federal bailouts.

The dire reality: Washington is not God. It cannot save the world. It cannot prevent the next depression.

Hard to believe? Here’s the proof:

Proof #1 The Debt Crisis, the Primary Catalyst of the Economy’s Decline, Is Far Too Big for the U.S. Government to Control

The facts:

1. Based on the Federal Reserve’s Flow of Funds report, there are now $52 trillion in interest-bearing debts in the U.S.

2. Based on estimates provided by the U.S. Government Accountability Office and other sources, it’s safe to assume that there are also at least $60 trillion in contingency debts and obligations now starting to kick in — for Social Security, Medicare and other pensions.

3. Separately, the Bank of International Settlements reports that the total value of debts and bets placed worldwide (derivatives) is $596 trillion, or more than a half quadrillion!

In contrast, even after the most reckless outpouring of government bailouts in recent months, the total rescue money announced in the U.S. so far is $2.7 trillion — a huge, unwieldy amount, but still minuscule in comparison to the massive debt build-up.


The numbers are not directly comparable, but just to get a sense of the magnitude of the problem, compare the size of the debts and bets outstanding (the first three bars in the chart) with the size of the $2.7 trillion in bailout commitments thus far (barely visible in the chart).



Still, most people insist,

“If only Washington can avoid the mistakes it made in the 1930s … if only Washington can preemptively nip this crisis in the bud … if only Washington can be our lender and spender of last resort … Great Depression II will never come to pass.”

What they don’t see is the fact that the debt build-up in the U.S. today is far greater than it was on the eve of Great Depression I. Indeed, in the chart below, Claus Vogt, the editor of Sicheres Geld (the German edition of our Safe Money Report) shows how …

Prior to the 1930s, the total debt in the U.S. was between 150% and 160% of GDP. Now it’s close to 350% of GDP.



Moreover, he reminds us that this chart does not even include derivatives, which barely existed in the 1930s but which are now sinking banks deeply into the red.

Clearly the government bailouts are too little, too late to end this crisis. At the same time …

Proof #2 The Cost of the Bailouts Is Too Much, Too Soon for Those Who Must Finance It

With the economy already falling, Washington cannot — and will not — fund the bailouts with higher taxes. Nor will it do it by making major cuts in government expenditures. Instead, at this phase of the crisis, the government will try to finance its folly largely by borrowing the money.

And now it has started: Just last week, the U.S. Treasury department announced that it is borrowing $550 billion dollars in the fourth quarter, more than the entire deficit of fiscal year 2008.

Also last week, Goldman Sachs estimated that the upcoming borrowing needs of the U.S. Treasury will be a shocking $2 trillion — to finance the bailouts, to finance the existing deficit and to refund debts coming due. That’s four times the size of the entire deficit.

This means you can expect an avalanche of new Treasury bond supplies, crowding out private borrowers and putting severe upward pressure on interest rates. And, needless to say, higher interest rates cannot end the debt crisis; they can only make it worse.

Proof #3You Can Bring a Horse to Water But You Cannot Make It Drink.

My father told me this story about President Herbert Hoover shortly after the Crash of ‘29 …

Hoover was worried about the sinking U.S. economy. So he called the leaders of major U.S. corporations down to Washington — auto executives from Detroit, steel executives from Pittsburgh, banking executives from New York.

And he said:

“Gentlemen, when you go back home to your factories and your offices, here’s what I want you to do. I want you to keep all your workers. Don’t lay any off! I want you to keep your factories going. Don’t shut any down! I want you to invest more, spend more, even borrow more if you have to. Just don’t do any cutting. So we can keep this economy going.”

Instead, the executives went back to their factories and offices and said to their associates:

“If the president himself had to call us down to Washington to lecture us on how to run our business, then this economy must be in even worse shape than we thought it was.”

They promptly proceeded to do precisely the opposite of what Hoover had asked: They laid off workers by the thousands. They shut down factories. They slashed spending to the bone.

And today, we’re beginning to see precisely the same phenomenon:

Washington is prodding consumers to borrow more, spend more, and save less. But consumers are doing precisely the opposite, as we just saw from the October collapse in retail sales.

Washington is prodding bankers to dish out more mortgage money, give people continuing access to credit cards, even lend money to sinking businesses. But the bankers are also doing precisely the opposite, as we just saw in a recent Fed’s survey of bank loan officers.

Why the reluctance to borrow and lend? Because most borrowers and lenders are finally beginning to recognize what really went wrong in the United States: Too much debt, not enough savings. They also recognize what they have to do about it: Try to cut back.

In response, Washington bureaucrats are rushing out, waving their arms frantically in the air, and shouting: “No! Don’t do that! We want you to lend and borrow more — so we can keep this economy going.”

But their pleas fall on deaf ears: No matter what the government says, it is the natural survival instinct of billions of people and businesses around the world that will determine the outcome: Depression and deflation.

Proof #4 Powerful Vicious Cycles of Debts and Deflation

You ask: We’ve had these debts for many years, haven’t we? So why are they suddenly such a huge disaster now?

The answer: Yes, debt alone is usually tolerable. It can persist and pile up for years. And as long as borrowers have the income — or as long as they can borrow from Peter to pay Paul — they can continue making payments, and life goes on. Deflation alone is also not so bad. It can help make homes more affordable, a college education more achievable, a tank of gas easier to fill. It’s when debts and deflation come together that a depression is inevitable. That’s what happened in the 1930s; and, in a somewhat different way, that’s what’s happening today.

We are witnessing powerful vicious cycles in which deflation brings down debts and debts help accelerate the deflation.

For example …

In the U.S. housing market, widespread mortgage delinquencies and foreclosures precipitate massive selling of real estate; massive real estate selling causes severe price declines; and the price declines, in turn, cause more delinquencies and foreclosures.

On Wall Street, corporate bankruptcies — and the fear of more to come — precipitate the liquidation of common stocks, corporate bonds and virtually every kind of asset; the selling drives markets lower; and falling markets, in turn, cause more corporate bankruptcies.

Consumers, small and medium-sized businesses, city and state governments, hospitals and schools, even entire countries are caught up in a similar downward spiral; slashing their spending, laying off workers, dumping assets, losing revenues, and slashing their spending still more.
In every sector of the economy and every corner of the globe, debt defaults are causing deflation; and deflation is causing debt defaults. No government can stop this powerful vicious cycle. It has to play itself out.

Next, you ask: Why can’t the U.S. government simply create more inflation? Why can’t it do what the government of Germany did after World War I? Or what the government of Zimbabwe is doing right now? In other words, why can’t it just print all the money it needs to buy up all the debts?

That takes me to the fifth and final reason the government cannot end the debt crisis, cannot stop the vicious cycle of debt default and deflation, cannot prevent a depression.

Proof #5 The Ultimate Power of Markets

Let’s say I am Uncle Sam; I represent the U.S. government. And let’s say you represent the investors of the world, especially investors in U.S. government bonds. I issue the bonds to borrow money. You buy the bonds to loan me money, to finance the U.S. government. Now let me ask one fundamental question: Who is really in control of this situation? You or me?

The answer is obvious: I do not control you. I cannot tell you what to buy or how much. You are the one in control of that decision. You have great power — power that the creditors of Germany did not have after World War I and the creditors of Zimbabwe do not have today. You have the power of the market — a market for the government securities you own.

In fact, in order to run my government, I cannot even dream of raising the money I need without you or without that market. I need you. I need you to hold the U.S. bonds you’ve already bought. Plus, I need you to buy more new bonds to finance all my new spending and deficits. You are my lender, my creditor, my benefactor. I must keep you happy. I cannot afford to do anything that will make you angry.

In fact, by allowing the evolution of this vast market for government securities, I have effectively transferred the ultimate power to make final, critical decisions from me — the government — to you, the investors in government securities. And The power of the market is stronger than any politician or government bureaucrat. It is more powerful than any law. It is even more powerful than the gold standard.

In order to raise money for the government, I must retain your confidence, your trust. To do that, I cannot run the printing presses or destroy your money. Instead, I have to let the deflation and depression run its course.

Bottom line: It’s preposterous to believe that Washington can save every failing individual, company, country and government on this planet.

It’s naive to believe that government gimmicks or trick — manipulating the currency, writing new laws, changing the banking structure — will be a match for billions of consumers in revolt, millions of investors desperate to sell and thousands of banks pulling in their horns.

The government cannot repeal the law of gravity or stop investors from dumping their assets.

It cannot turn back the clock or reverse decades of financial sins.

It cannot win the battle against depression.

It cannot stop the Dow or S&P from losing half their value from current levels, if not more.

It cannot stop the collapse in real estate, commodities, and corporate bonds.

So act promptly now to liquidate or hedge your holdings, build cash and make sure the cash is safe.

[Demeter]

74. The G-20 Washout By Mike Whitney

http://www.informationclearinghouse.info/article21252.htm


November 17, 2008 "Information Clearinghouse" -- As expected, the G-20 Economic Summit in Washington turned out to be a total bust. None of the problems which have pushed the global economy to the brink of disaster were resolved and none of the main players who gamed the system with their toxic securities were held accountable. Instead, the visiting dignitaries gorged themselves on stuffed quail and roast rack of lamb before settling on a toothless "Statement on Financial Markets" which accomplished absolutely nothing. The one noteworthy clause in the entire document is a two paragraph indictment of the United States as the perpetrator of the financial crisis. At least they got that right.

From the text:

"Root Causes of the Current Crisis: During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption."

Bingo. The contagion started on Wall Street and that's where the responsibility lies. It was the result of the Fed's reckless low interest rates and lack of government oversight. This allowed market participants to create massive amounts of leverage via speculative bets on under-capitalized debt-instruments. The resulting collapse in value of all asset-classes across the spectrum has created a gigantic multi-trillion dollar capital hole in the global financial system which has precipitated violent swings in the stock markets, tightening credit, currency dislocations, soaring unemployment and deflation. Almost all of todays economic woes can be traced back to legislation that was promoted by key members of the Clinton and Bush administrations. (Many of who will now serve in the Obama White House) The G 20s statement puts the blame squarely where it belongs; on the Federal Reserve and Wall Street.

But this is old news. There's no point in rehashing the past unless there's a real interest in bringing the guilty parties to justice or unless the gathered leaders are serious about establishing the rules for a new economic regime. But they're not, which is why the confab was just another political gab-fest devoid of any serious reforms.

It was interesting, though, to hear Bush, in a rare, unscripted moment, acknowledge that the extreme steps taken by the Fed and US Treasury--since Bear Stearns defaulted 17 months ago--were intended to avoid what he called "a depression greater than the Great Depression." That's quite an admission for Bush, as well as a vindication of the left-wing web sites which have been making the same prediction for more than 2 years. And although Bush rejected any personal responsibility for the policies which led to the crisis, it's clear that he has some rudimentary grasp of its gravity. That's a start. As he opined to the press, "This sucker could go down".

Despite the outcry for meaningful reform, the summit only reinforces the status quo; the same old American-led financial system. In fact, there appears to be growing consensus that the IMF should spearhead the programs that provide liquidity to the developing countries that are getting pounded by the downturn. This is a major setback. It restores the IMF--which is the "iron fist" of the US Treasury-- to its former glory so it can once again use its extortionist loans to thrust faltering nations into structural adjustment, privatization and slave wages. The meetings are breathing new life into the failed neoliberal policies that should be done away with once and for all.

The G 20 statement invokes the same "pro growth", free market mumbo jumbo that permeates all far-right documents. Pro growth is code for low interest credit which allows market speculators to benefit from the steady flow of cheap capital while workers are stuck trying to make ends meet on stagnant wages and a falling dollar. It's a way of making sure that the playing field is always tilted in favor of Wall Street. Pro growth does not mean strengthening productive activity or manufacturing goods that consumers want to buy. It means expanding credit through derivatives contracts and other leveraged investments to maximize profits on borrowed money. The long-term objective is to put the financial sector above the productive sectors of the real economy. It is a blueprint for maintaining dollar hegemony and Wall Street's continued dominance over global finance.

The G 20 statement also rejects protectionism which defends the interests of labor and crucial national industries. Again, this just illustrates the blatant pro-Wall Street bias of the meetings where none of the leaders represented the interests of labor or unions. To hell with the working man.

The group called for more government stimulus to minimize the effects of the frozen credit markets, unemployment and deflation. They also demanded greater "transparency and accountability", although it will probably amount to nothing. Wall Street is not about to give up the Golden Goose; its off balance sheets operations, its Level 3 "marked to fantasy" assets, its "dark pool" trading, and its opaque, convoluted accounting methods. These are the alchemists best friends which allow investment gurus with little talent and even less scruples to weave exotic debt-instruments into pure gold. Expect plenty of lip-service from Paulson and his brood about transparency, while revealing next to nothing about their shady activities.

Of course, there was the usual high-minded gibberish about "fostering innovation", preserving market "dynamism" and striving for "poverty reduction". Some of the leaders even called for the creation of "supervisory colleges'' for bank regulators and limits on executive pay to "avoid excessive risk-taking." (Oh, please) It's a wonder that the developing nations, many of whom have been the victims of the IMF's heavy-handed policies, would allow this type capitalist claptrap to be inserted into the final copy. It's like something out of Milton Friedman's memoirs. No one in the penthouse suites in downtown Manhattan will be taking a cut in pay anytime soon nor do they lose any sleep over "poverty reduction". These guys are riverboat gamblers whose life-work is picking the pockets of unwitting investors.

What's really needed instead of all this diversionary nonsense is strict compliance to a basic set of rules . The rules for financial institutions have been articulated by many market analysts including Karl Denninger (Market Ticker) in his "Genesis Plan":

1-- Force all off-balance sheet "assets" back onto the balance sheet, and force the valuation models and identification of individual assets out of Level 3 and into 10Qs and 10Ks. Enact this requirement beginning with the 3Q 2008 reporting period which begins next month. (ed.--All assets must be accounted for on the banks balance sheet)

2. Force all Over the Counter (OTC) derivatives onto a regulated exchange similar to that used by listed options in the equity markets. This permanently defuses the derivatives time bomb. Give market participants 90 days to get this done; any that are not listed in 90 days are declared void; let the participants sue each other if they can't prove capital adequacy. (ed--This creates a public exchange so that regulators know whether derivatives contracts are sufficiently capitalized)

3. Force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit. Every firm that has failed had double or more the leverage of that former 12:1 limit. Enact this with a six month time limit and require 1/6th of the excess taken down monthly. (ed--The 5 largest investment banks claimed an aggregate asset-value of $4 trillion before Bear Stearns defaulted. Many, if not most, of those worthless assets are now on the Fed's balance sheet underwritten by the US taxpayer. Too much leverage, simply means that the taxpayer pays the difference when the bank fails)

That's the bulk of it right there. Follow the rules or go to jail. Period.

Of course, Glass Steagall will need to be reenacted--to separate commercial from investment banks--and the ratings agencies will have to be freed from any conflicts of interest. They cannot be paid by the same financial institutions that commission them to provide ratings; that's a non-starter. The main thing is to restore confidence in the markets through transparency. Right now, the Obama camp is amassing the same collection of Wall Street sharpies who pushed to repeal Glass Steagall and allow derivatives to be traded off of a public exchange. They believe they can keep the same financial regime in place with just slight face-lift using Obama's credibility to conceal their activities. That's why it is critical for the nations with the largest capital reserves to establish an independent model for providing relief for developing countries that are hurting from the financial crisis. Otherwise, the IMF (US Treasury) will entangle them in their web of debt.

In his latest article "The Great Depression of the 21st Century: Collapse of the Real Economy" author and economist Michel Chossudovsky sheds some light on the agenda of the banking giants led by their standard-bearer at Treasury, Henry Paulson:

"Once they have consolidated their position in the banking industry, the financial giants including JP Morgan Chase, Bank of America, et al will use their windfall money gains and bailout money provided under TARP, to further extend their control over the real economy. The target of these acquisitions are the numerous highly productive industrial and services sector companies, which are on the verge of bankruptcy and/or whose stock values have collapsed. As a result of these developments, which are directly related to the financial meltdown, the entire ownership structure of real economy assets is in turmoil.

In a bitter twist, the new owners of industry are the institutional speculators and financial manipulators. They are becoming the new captains of industry, displacing not only the preexisting structures of ownership but also instating their cronies in the seats of corporate management".

Chossudovsky sums it up perfectly. The financial crisis is being used by Wall Street big-wigs to restructure the economy and create a permanent class of working poor.

The world doesn't need a new Breton Woods or a new world order; it needs a competing vision of global finance. One that will put an end to dollar tyranny, superpower politics and "beggar thy neighbor" economic policies. A system that strengthens national sovereignty, cooperation, and international law. That's what the G 20 should have been talking about, instead of wasting their time trying to prop up a system that's rotten to the core.

[Demeter]

75. The G-20 Economic Summit Won’t Change the "Financial Crime Scene" By Richard C. Cook

http://www.informationclearinghouse.info/article21250.htm


Remarks by Richard C. Cook
George Mason University, Fairfax, Virginia - November 15, 2008



November 17, 2008 "Global Research" -- -The G20 is meeting today in Washington , D.C. , to discuss the world financial crisis, its causes, and what can be done about it. But this won’t help the people of the U.S. who have been victimized by their own financial system.

The stated objectives are to find ways to stabilize and reduce speculation in the financial markets and make financial transactions more transparent, more efficient, and more international in scope. But this is also a revolt by the nations of the world against over-reliance on the U.S. dollar as the world’s reserve currency. What we are likely to see over time is a multi-currency regime that includes the Euro and one or more Asian currencies as well.

But the conference will not address the real causes of why the world is heading into a global recession or why the U.S. economy in particular is in such dire straits. Nor will the meeting result in redress of the staggering level of bankers’ criminality abetted by the U.S. government in the creation of the financial bubbles whose collapse is underway.

The real problem is that the world is locked into a debt-based financial system run by the world’s banks, where the only way currency can be entered into circulation is through lending. It’s been massive amounts of completely irresponsible lending which have leveraged the bubbles against much smaller amounts of tangible value.

The GDP of the entire world is $55 trillion. This is dwarfed by speculative lending in the derivatives markets of ten times that amount--$525-$550 trillion. No nation has clean hands in this travesty. The governments of the world and the central banks have allowed it to come into being.

Within the U.S. , reliance on money-creation through bank lending has been the problem since the creation of the Federal Reserve System in 1913. At that point the U.S. monetary system was privatized. The case has been the same with all the other nations which have private banking systems that control their central banks. The granddaddy is the Bank of England which dates from 1694.

The creation of the Federal Reserve System marked the start of a century of world war. This is hardly a coincidence. Indeed, the central banking system encourages wars and lives off them, because it is war and the threat of war that is most profitable to a system where the more money governments borrow the more profits the banks make.

All this started with World War I, which was largely financed by the British, French, German, and the U.S. banks. Events have continued in that vein through today, where the nations of the world are armed to the teeth and global finance capitalism tries to increase its control everywhere to the detriment of workers, national economies, and the environment.

To try to fix the crisis through bailing out the system, we are now seeing in the U.S. and Europe levels of government borrowing that have not been experienced since World War II. The purpose is to recapitalize a financial system that has destroyed itself through its own greed and folly. But all this does is defer the bill to future generations who have to pay the enormous compounded interest charges this borrowing entails. Interest on the national debt in the 2009 federal budget is over $500 billion. Every man, woman, and child in the nation is a victim of this crime.

The situation is so bad that many people believe the U.S. may even be in danger of defaulting on its gigantic national debt sometime in 2009.

Meanwhile, the failed financial system is dragging down the world’s producing economy with it, and the bailouts won’t change that situation. Combined with the financial crash has been a collapse in consumer “demand.” In other words, consumers, who are maxed out on their credit, no longer can borrow enough to keep the wheels of the economy turning.

But the reason they must borrow for consumption is that earnings are not sufficient for people to buy what they need to live. This is why in the U.S. there has been an outcry, including with the Obama campaign, for new government job-creation programs. Every day there is another proposal by progressives for new government spending, which, of course, will have to be financed by even more government debt.

So when are we going to learn how to introduce purchasing power without debt? How did we ever come to believe that the only way to create money is through a bank inventing it out of thin air? In the past few weeks we have had a number of Nobel-prize winning economists chip in with their suggestions of what to do, but none have addressed the obvious question of what the alternatives may be to bankers’ debt-based currency.

If we look at history, we see other ways governments have used their powers to create money. Indeed, until the Federal Reserve Act of 1913, the U.S. was a kind of laboratory of alternative methods of money-creation.

If we go back to colonial days, the American colonies used a variety of means to introduce currency into circulation. In Virginia , plantation owners received tobacco certificates when they deposited their product at public warehouses. The certificates then circulated as currency.

In Pennsylvania the goVernment ran a land bank which paid cash to land-owners for liens on property. The interest paid for the costs of government without any taxation of citizens.

In Massachusetts, Pennsylvania, and elsewhere, governments spent paper money directly into circulation. The money received value by then being accepted by those governments, after it circulated within the economy, in payment of taxes.

Other forms of currency were Spanish dollars, Indian wampum, and IOUs. There was also a flourishing barter trade.

The system worked. By 1764, the American colonies formed one of the most prosperous trading regions on the planet. When asked why, Benjamin Franklin said it was because of colonial scrip—i.e., their paper money. When the British Parliament outlawed it through the Currency Act of 1764, an economic depression followed. It was the underlying cause of the Revolutionary War.

During that war, the Continental Congress issued the famous Continental Currency. What likely caused that money to inflate was extensive British counterfeiting, not being used to excess by our national government.

Once the nation became independent, a U.S. mint was founded so individuals could bring in gold or silver and have it stamped into coinage free of charge. New discoveries as with the California and Yukon gold rushes or better methods of extraction from ores resulted in economic booms. From then until coinage lost its value after the Federal Reserve System was established, precious metals were a major part of the U.S. monetary system that included not only coinage but also gold and silver certificates.

In 1791 and again in 1816 Congress passed legislation for the First and Second Banks of the United States . These banks were dupicates of the Bank of England whose purposes were to fasten on the U.S. the same type of debt-based monetary system that was the driving force for the British Empire . Presidents Thomas Jefferson, James Madison, Andrew Jackson, and Martin van Buren were among those who saw these banks as a Trojan Horse for financier tyranny. The split between pro- and anti-bank forces was the origin of the two-party system within the United States .

When Jefferson became president in 1800 he refused to borrow from the bank and balanced the federal budget for eight consecutive years by cutting military expenditures. Andrew Jackson took similar action in 1833 when he withdrew federal funds from the bank and paid off the entire national debt. It was recognized back then that fiscal responsibility was an effective means for keeping the government out of the control of the bankers and their political friends.

When the Civil War broke out in 1861, President Abraham Lincoln refused to borrow from the banks. Instead he financed the war through income and excise taxes, sale of war bonds directly to citizens, and issuance of the famous Greenbacks. This came about in 1862 when Congress authorized the government to spend $450 million in paper Greenbacks directly into circulation. Congress also introduced tangible value into the economy by what was then the very wise policy of transferring huge amounts of public land to the railroads and to citizens under the Homestead Act.

During the late 19th century, ordinary citizens were not so stunningly ignorant of the politics of money as they are today. People recognized the Greenbacks for having saved the union. A Greenback Party was formed that elected representatives to Congress and ran candidates for president.

Greenbacks remained in circulation, and as late as 1900 still made up a third of the nation’s monetary supply, along with coinage, gold and silver certificates, and national bank notes. Also, many other business entities, including the “company stores” owned by mining companies, issued their own paper scrip that was part of the circulating currency. For example, in a pamphlet on monetary reform written by American poet Ezra Pound in the 1930s was an illustration of paper money his grandfather issued from his lumberyard in Michigan in the late 1800s backed by board-feet of lumber payable on demand! Of course barter trade continued and still exists today among industrial firms.

But the bankers were on the move. In 1863 and 1864 Congress passed the National Banking Acts which drove the extensive system of state-chartered banks, including some owned by state governments, out of existence. By the early 1900s, the power of the bankers had coalesced under the New York banking trust led by the J.P. Morgan and Rockefeller financial interests.

The bakers struck in 1913 just before the Christmas recess when many Congressmen had already left Washington for the holidays. The Federal Reserve Act had actually been written by bankers from Europe who were allied with the Rothschild interests. Congressman Charles Lindbergh, Sr., father of the aviator, called the Act “the legislative crime of the ages.” Later President Woodrow Wilson, who signed the Act, said he had “unwittingly ruined my nation.”

But the deed was done. The Federal Reserve System created the first major financial bubble through World War I spending, followed by a depression, then created and burst the stock market bubble whose collapse started the Great Depression in 1929. President Franklin D. Roosevelt took over credit creation through low-cost government lending in the 1930s but had to use World War II to achieve full employment because by then the government was totally locked into the Keynesian tax-and-borrow credo of public finance.

The bankers began their comeback in the 1950s and consolidated their power in the 1970s under the heading of “monetarism,” which is the philosophy of trying to control the economy through raising and lowering of interest rates. This travesty—which is really institutionalized usury—is as familiar to us today as the water a fish swims in. We don’t even notice it. Yet it’s this system that has ruined the world. Ever since the 1970s, every period of economic growth in the U.S. has been a bank-created bubble followed by a crash and a recession.

We had the inflation of the 1970s created by the government-induced oil prices shocks, followed by the Paul Volcker crash of 1979-83 when the Federal Reserve raised interest rates above twenty percent and caused the biggest downturn since the Great Depression.

During the later Reagan years we had the merger-acquisition bubble followed by the recession that brought Bill Clinton to office in 1992. Then we had the dot.com bubble of the mid- to late-1990s that ended with the crash of 2000-2001.

Next, instead, of rebuilding an economy that had been devastated by export of our best manufacturing jobs to China and other cheap-labor countries, the Federal Reserve under chairman Alan Greenspan, with assistance from the George W. Bush administration, created the biggest bubble economy in history, with the housing, commercial real estate, equity, hedge fund, derivatives, and commodities bubbles all blowing up at the same time and leaving us with the mess we are in today.

What has happened during the Bush administration has been the greatest crime against the public interest in U.S. history. Its effects are only starting to be evident.

Of course in the face of so many disasters, the credit markets have imploded, and governments don’t know what to do except recapitalize and restructure them but without taking action to address the deep systemic problems with the producing economy. And while the Europeans may have blown the whistle on U.S. excesses through the G20 meeting, this country still faces disaster.

Yes, Wall Street is killing Main Street , and no one has come up with an answer except suggestions for the bailouts and some New Deal-type programs in an environment that is much worse even than in the 1930s. For one thing, most of what we consume today is produced abroad. For another, family farming has been ruined. In a pinch, our nation could no longer even feed itself.

But the amazing thing is how easy it would be to salvage the situation if the government took the simple step of treating credit as what it really is—a public utility like clean air, water, or electricity, not the private property of the banking system. In fact the banking system and the politicians they own have stolen and abused this fundamental piece of the social commons.

Banks have no legal right to work against the public interest. Every single bank that has ever existed has operated under a public charter. The Constitution gives Congress—i.e., the people’s representative government—authority to regulate interstate commerce. It also gives Congress the right and responsibility to control the monetary system.

So why doesn’t Congress do it? Why does Congress sit passively and stare when Federal Reserve chairmen such as Alan Greenspan or Ben Bernanke sit before them and mumble nonsense about markets and interest rates and inflation and the rest of a made-up system whose main result is to funnel the wealth of the economy upwards into the hands of the financial elite?

In my writings I have advocated several measures Congress could take immediately to remedy the catastrophe we are facing:

Congress could authorize direct expenditure of government funds for legitimate public expenses, as was done with the Civil War-era Greenbacks. Contrary to bankers’ propaganda, the Greenbacks were not inflationary then and would not be inflationary now, because they would be backed by tangible economic production of goods and services. What has been inflationary has been the debt-based currency which, since it was introduced in 1913, has caused the dollar to lose 95 percent of its value. Greenback-type spending is contained in the proposed American Monetary Act, developed by the American Monetary Institute.

Congress could authorize a national infrastructure bank that would be self-capitalized and would lend money into existence to state and local governments at zero percent interest. Legislation for such a bank has been introduced by Congressman Dennis Kucinich.

Congress could authorize dividend payments to citizens as advocated by the Social Credit movement founded by Major C.H. Douglas of Great Britain decades ago as a means of monetizing the net appreciation of the producing economy. Dividends exceeding $1,000 a month could be issued from a national dividend account without recourse to taxation or borrowing. Such a concept is related to the Alaska Permanent Fund which paid over $3,200 to each state resident in 2008 and to the concept of a basic income guarantee advocated by proponents of the negative income tax in years past.
Congress could utilize dividend payments once they were spent, possibly in the form of vouchers for necessities of life like food and housing, to capitalize a new network of community savings banks that would provide low-cost credit to home purchasers, students, small business people, and local farms.

I worked in the U.S. Treasury Department for 21 years and learned first-hand the history and operations of public finance in the U.S. I have seen the disastrous results of the debt-based financial system and how it has driven our nation, government, and people into bankruptcy. I have also seen how these simple measures of monetary reform would be easy to implement and would begin to turn the situation around within weeks or months.

All it takes is political will and a determination to challenge the death-grip the financial elite has had on our economy for a century.

We can be quite certain that these vital issues will not be addressed by the summit of the G20 meeting in Washington today. If anything, these meetings are likely to render the grip of private finance on the peoples of the world even tighter than before.

But sooner or later change must come. For the immediate future people could fight back by doing everything possible to get out of debt, convert their cash reserves to tangible holdings, and start their own local currency and barter systems. But for real change, a monetary revolution is required.


Richard C. Cook is a former U.S. federal government analyst and an advocate for economic democracy and sustainability. His new book, We Hold These Truths: The Hope of Monetary Reform, can now be ordered for $19.95 from www.tendrilpress.com.

[Demeter]

76. Lehman Administrators' Task Will Dwarf Enron, Creditors Told

http://www.guardian.co.uk/business/2008/nov/15/lehman-brothers-us-economy

• European arm has more than $500bn of debt
• Collapsed bank's creditors expect less than 10%

By Simon Bowers

November 15, 2008 "The Guardian" -- --- Administrators grappling with the European arm of the failed investment bank Lehman Brothers have told creditors their task is "10 times as big and as complicated" as the unwinding of Enron.

Speaking after the first creditors' meeting, a team from PricewaterhouseCoopers said they had identified more than $1tn (£670bn) in assets and liabilities that need to be accounted for.

At the meeting, held behind closed doors in a conference hall at the O2 dome in London, the lead administrator, Tony Lomas, told hundreds of representatives and lawyers that he had recovered about $5bn out of a potential $550bn of obligations owing to creditors. A further $22.3bn of client assets had been identified, all of which will be returned to their owners.

He drew a comparison with the US energy-trading group Enron, which collapsed in 2001, noting that some of his colleagues are still working on unresolved elements of that administration.

Lomas said the administration was already behind schedule because of delays in receiving confirmation from third parties believed to be holding assets of Lehman Brothers International (Europe).

"The balance sheet position will be north of $1tn and we've got a long way to go before knowing what the position is for creditors," Lomas said after the meeting. "The prospect is that some creditors will lose money. How much? We can't determine that for a significant time."

PWC has already identified more than 400 trade creditors to Lehman's European business, including Reuters, HSBC, Hewlett-Packard, BT, the London Stock Exchange and Lufthansa. Even PWC itself is listed among those owed money by the collapsed firm, as are the Bank of England and the Financial Services Authority.

The parent company Lehman Brothers Holdings, once America's fourth-largest bank, was forced to file for bankruptcy protection in the US in September after investors lost confidence in the business and the quality of assets on its balance sheet. It had been one of the most active players in sub-prime home lending.

The settlement of Lehman credit insurance contracts linked to the bank's bonds suggested debt holders could expect to recover less than nine cents in the dollar.

About 1,500 Lehman staff in Europe lost their jobs or resigned as the bank went bust. A further 2,500, mainly at the group's Canary Wharf offices, became employees of the Japanese bank Nomura, which bought the European and Middle Eastern equities and investment banking operations out of administration.

[Demeter]

77. Wall Street's Bailout is a Trillion-Dollar Crime Scene Why Aren't the Dems Doing Something About It?

Wall Street's Bailout is a Trillion-Dollar Crime Scene
Why Aren't the Dems Doing Something About It?
By Naomi Klein

http://www.informationclearinghouse.info/article21226.htm

November 14, 2008 "The Nation" - -- The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal.

In a moment of high panic in late September, the U.S. Treasury unilaterally pushed through a radical change in how bank mergers are taxed -- a change long sought by the industry. Despite the fact that this move will deprive the government of as much as $140 billion in tax revenue, lawmakers found out only after the fact. According to the Washington Post, more than a dozen tax attorneys agree that "Treasury had no authority to issue the notice."

Of equally dubious legality are the equity deals Treasury has negotiated with many of the country's banks. According to Congressman Barney Frank, one of the architects of the legislation that enables the deals, "Any use of these funds for any purpose other than lending -- for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. -- is a violation of the act." Yet this is exactly how the funds are being used.

Then there is the nearly $2 trillion the Federal Reserve has handed out in emergency loans. Incredibly, the Fed will not reveal which corporations have received these loans or what it has accepted as collateral. Bloomberg News believes that this secrecy violates the law and has filed a federal suit demanding full disclosure.

Despite all of this potential lawlessness, the Democrats are either openly defending the administration or refusing to intervene. "There is only one president at a time," we hear from Barack Obama. That's true. But every sweetheart deal the lame-duck Bush administration makes threatens to hobble Obama's ability to make good on his promise of change. To cite just one example, that $140 billion in missing tax revenue is almost the same sum as Obama's renewable energy program. Obama owes it to the people who elected him to call this what it is: an attempt to undermine the electoral process by stealth.

Yes, there is only one president at a time, but that president needed the support of powerful Democrats, including Obama, to get the bailout passed. Now that it is clear that the Bush administration is violating the terms to which both parties agreed, the Democrats have not just the right but a grave responsibility to intervene forcefully.

I suspect that the real reason the Democrats are so far failing to act has less to do with presidential protocol than with fear: fear that the stock market, which has the temperament of an overindulged 2-year-old, will throw one of its world-shaking tantrums. Disclosing the truth about who is receiving federal loans, we are told, could cause the cranky market to bet against those banks. Question the legality of equity deals and the same thing will happen. Challenge the $140 billion tax giveaway and mergers could fall through. "None of us wants to be blamed for ruining these mergers and creating a new Great Depression," explained one unnamed Congressional aide.

More than that, the Democrats, including Obama, appear to believe that the need to soothe the market should govern all key economic decisions in the transition period. Which is why, just days after a euphoric victory for "change," the mantra abruptly shifted to "smooth transition" and "continuity."

Take Obama's pick for chief of staff. Despite the Republican braying about his partisanship, Rahm Emanuel, the House Democrat who received the most donations from the financial sector, sends an unmistakably reassuring message to Wall Street. When asked on This Week With George Stephanopoulos whether Obama would be moving quickly to increase taxes on the wealthy, as promised, Emanuel pointedly did not answer the question.

This same market-coddling logic should, we are told, guide Obama's selection of treasury secretary. Fox News's Stuart Varney explained that Larry Summers, who held the post under Clinton, and former Fed chair Paul Volcker would both "give great confidence to the market." We learned from MSNBC's Joe Scarborough that Summers is the man "the Street would like the most."

Let's be clear about why. "The Street" would cheer a Summers appointment for exactly the same reason the rest of us should fear it: because traders will assume that Summers, champion of financial deregulation under Clinton, will offer a transition from Henry Paulson so smooth we will barely know it happened. Someone like FDIC chair Sheila Bair, on the other hand, would spark fear on the Street -- for all the right reasons.

One thing we know for certain is that the market will react violently to any signal that there is a new sheriff in town who will impose serious regulation, invest in people and cut off the free money for corporations. In short, the markets can be relied on to vote in precisely the opposite way that Americans have just voted. (A recent USA Today/Gallup poll found that 60 percent of Americans strongly favor "stricter regulations on financial institutions," while just 21 percent support aid to financial companies.)

There is no way to reconcile the public's vote for change with the market's foot-stomping for more of the same. Any and all moves to change course will be met with short-term market shocks. The good news is that once it is clear that the new rules will be applied across the board and with fairness, the market will stabilize and adjust. Furthermore, the timing for this turbulence has never been better. Over the past three months, we've been shocked so frequently that market stability would come as more of a surprise. That gives Obama a window to disregard the calls for a seamless transition and do the hard stuff first. Few will be able to blame him for a crisis that clearly predates him, or fault him for honoring the clearly expressed wishes of the electorate. The longer he waits, however, the more memories fade.

When transferring power from a functional, trustworthy regime, everyone favors a smooth transition. When exiting an era marked by criminality and bankrupt ideology, a little rockiness at the start would be a very good sign.

[Demeter]

78. British banks battered in wake of Paulson's U-turn on US bail-out

http://thescotsman.scotsman.com/business/British-banks-battered-in-wake.4694079.jp

By Martin Flanagan
City Editor

SHARES in Royal Bank of Scotland, Barclays and other banks were hit yesterday in the wake of the US government's abandonment of the cornerstone of its $700 billion (£467bn) rescue effort for the financial system.

The new banking sector volatility came after Treasury secretary Hank Paulson revealed on Wednesday that the US administration had decided that using billions of dollars to buy up so-called toxic assets related to subprime was now "not the most effectADVERTISEMENTive way to use the bail-out package".

..........

One UK banking executive said: "Many investors are looking at any excuse to 'sell the UK and go away', and Paulson's move gave more excuse.

"It came on top of the market digesting the grim news on recession from the Bank of England and also what the International Monetary Fund had to say about the UK's gloomy prospects. Bank stocks were bound to be affected by that."

One analyst added: "You've got to remember that Paulson's asset bail-out idea back in late September was initially very welcome to the UK banks. But it was overtaken by events in the shape of Gordon Brown's recapitalisation of the UK banks. Share prices in the sector are still looking for any negative news and Paulson's U-turn obliged."

...However, Alex Potter at Collins Stewart, said although the volte-face by the US administration might be negative for UK banks "at the margins" initially, it was now widely accepted that the $700bn "was never nearly big enough".

[Demeter]

79. Paulson the Bungler By Mike Whitney

http://www.informationclearinghouse.info/article21212.htm


November 13, 2008 "Information Clearinghouse" -- Henry Paulson's time at Treasury has been one pratfall after another. Even so, on Tuesday he managed to out-due himself. Paulson held a "surprise" press conference where he announced that the $700 billion Troubled Asset Relief Program (TARP) wouldn't be used to buy troubled assets after all. Instead, the money will used to bail out insurance giant AIG, provide extra capital for the banks to hoard, and now (this is new part) give money to "nonbank financial institutions, like insurers and specialty-finance companies" so they can lend to credit-worthy consumers. (Isn't that why we gave money to the banks?)

Paulson's announcement was like tossing a hand-grenade in a San-i-can; it blew the stock market to Kingdom come. Just minutes after the opening bell on the New York Stock Exchange (NYSE) stocks plummeted to new lows ending the session in a 400 point death-spiral. Wall Street doesn't like uncertainty and Paulson's sudden about-face sent jittery investors running for cover. The message to investors is clear, the government doesn't have the foggiest idea of what it's doing and is just grasping at straws.

But Paulson's no fool; he knew exactly what the reaction would be on Wall Street. He simply decided that blowing up the equities market was worth the price of reviving "securitization"--the transformation of loans into securities. You see, securitization is Wall Street's Golden Goose. It's the foundation block upon which structured finance and all its complex credit-enhancing derivatives rests. Keep in mind, that all these exotic, financially-engineered products--the CDOs, MBS, and CDS--were all created with one goal in mind; to maximize leverage with minimum capital so that profits can be skimmed off the top. That's how Paulson managed to walk away from Goldman Sachs with hundreds of millions of dollars in his pockets. It's a racket.

There's a myth that credit is contracting because the banks won't lend. But, in truth, total bank credit expanded by $575 billion over the past 10 weeks. The real problem is that the securitzation market remains frozen.

So now Paulson wants to breathe new life into securitization by providing liquidity for nonbank financial institutions who get their money from the wholesale market. Of course, no one really knows how this will work since these operations are completely unregulated by the federal government. No worries; the charade will persist behind the dodgy claim that "it's needed to get credit to the consumer". Baloney. What the consumer needs job security and a pay-raise, not more debt. This is just more Paulson flim-flam.

It was clear that the Treasury Secretary was concocting a new swindle a couple weeks ago when Fed chief Bernanke defended "securitzation in a speech where he said:



"The ability of financial intermediaries to sell the mortgages they originate into the broader capital market by means of the securitization process serves two important purposes: First, it provides originators much wider sources of funding than they could obtain through conventional sources, such as retail deposits; second, it substantially reduces the originator's exposure to interest rate, credit, prepayment, and other risks associated with holding mortgages to maturity, thereby reducing the overall costs of providing mortgage credit."

Nonsense. What it really does is create the optimal environment for speculative leveraging, debt-pyramiding and massive profit-taking. But, that's beside the point. The real issue is that securitization is dead already because Paulson and his ilk poisoned the well by adding subprime garbage and Alt As to the mix. Now investors are steering clear of any securities that bundle debt. It's a confidence issue.



According to the Wall Street Journal:

"Banks and other finance companies making loans for autos, credit cards and college tuition are having virtually no success in selling those loans to other investors, a potent sign of just how tight credit markets remain.

The market for selling such loans — by packaging, or securitizing, them into bonds — had just one $500 million deal for all of October, according to Barclays Capital. That compares with $50.7 billion worth of deals made one year earlier, according to market-research firm Dealogic. The overall market for so-called asset-backed securitization is estimated at $2.5 trillion. (Bond Woes Choke off some Credit to Consumers, Wall Street Journal, Robin Sidel)

$500 million is just 1 percent of $50 billion! Securitization will be dead for a decade or so; it was destroyed by lax lending standards and easy credit. Paulson and his fellows will have to find a new way to fleece gulible investors.

The TARP is most expensive boondoggle in history. No one even knows what the banks are doing with the money. There's neither accountability nor transparency. As a result, investor confidence has deteriorated and stocks have continued to fall. No one trusts Paulson to do the right thing anymore; it's that simple.

The Treasury's new Financial Stability Oversight Board has met four times, but they still can't say how the banks are using the money. It's a joke. Congress has been missing in action, too. They promised to create their own oversight board, but five weeks have passed and still nothing has happened. Apparently, the idea throwing $700 billion down rathole isn't enough to prod Ms. Pelosi and her congressional cohorts into action. All that really matters to them is getting reelected and nuzzling ever-closer to the public trough.

The TARP fiasco is not taking place in a vacuum either; the country is at the beginning of the deepest consumer-led recession in the last half century. Retail spending and automobile sales have been following the same grim flightpath as housing, while unemployment is at a 7 year high soaring to nearly 4 million. Household debt is at record levels of $14 trillion. The job market is steadily weakening while the consumer is more vulnerable than ever. Meanwhile, Paulson has dragged his feet on rewriting mortgages to slow foreclosures, stalled on providing another stimulus package, and diverted all the money from the $700 billion bailout to his friends in the financial industry. Not one dime has gone to a working man or woman. Paulson continues to play games while Rome burns even though, according to his colleague, former G-Sax chairman John Whitehead, the current downturn will be worse than the Great Depression.

According to Reuters:

"The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead ...

"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system. ... I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. ... I just want to get people thinking about this, and to realize this is a road to disaster. I've always been a positive person and optimistic, but I don't see a solution here."


There is no solution. The first thing to realize is that it is not a matter of "fixing" the economy. The economy is fixing itself by purging the unsustainable debt from the system. That's how markets work. Greenspan's low interest rates created a subsidy for debt which--along with the alphabet soup of leveraged derivatives--buoyed the economy along on the biggest wave of speculative financing the world has ever seen. The distortions that were caused by the unprecedented credit expansion stimulated artificial demand that created the appearance of growth and prosperity but, in truth, was nothing more than an equity bubble. Now the bubble has popped and the financial system is returning to the mean. That means that credit will probably contract by 30 to 40 percent putting us on the path to another Great Depression. Unless the government takes preventative action to get money into the hands of consumers and restore confidence, the nation will face (what David Brooks called) "grueling scarcity" and widespread panic. That's probably why all the voting machines and exit polls finally matched up with the election results in the 2008 presidential balloting for the first time in 8 years; because the ruling elites know that they need a popular executive to put in front of the cameras when they try to calm the crowds and keep the country from disintegrating into anarchy. It also explains the nervous smiles on the faces of the money-lenders and graybeards assembled on the stage behind Obama at his first press conference. The American establishment is placing all its hopes for economic survival on the narrow shoulders of their newest posterboy, Barak Hussein Obama.

There's more pain to come, but the suffering can be mitigated by sound decision-making and Keynesian policies. That means public work programs, bankruptcy reform, and extensions on unemployment. Nobel prize winner Paul Krugman recommends a stimulus package of $600 billion. That's a good start, but it will take much more than that. And foreign investors will have to be confident in our choices or the sale of Treasurys will slip and the US will face a funding crisis. The Fed's lending facilities have already loaned $2 trillion while the Treasury's bailout is $700 billion. By the end of 2010, fiscal deficits will be nearly $2 tillion and the total cost to the US taxpayer will be at least $5 trillion. That means rising interest rates, flagging growth and hard times ahead.

The present financial crisis is a self-inflicted wound. It started at the Federal Reserve with their cynical neoliberal monetary policies. Any solution, that does not involve the dismantling of the Fed, is unacceptable.

[Demeter]

80. October budget deficit hits record of $237.2B

http://news.yahoo.com/s/ap/20081114/ap_on_bi_go_ec_fi/budget_deficit

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics Writer
Fri Nov 14, 6:33 am ET

WASHINGTON – The federal government began the new budget year with a record deficit of $237.2 billion, reflecting the billions of dollars the government has started to pay out to rescue the financial system.

The Treasury Department said Thursday that the deficit for the first month in the new budget year was the highest monthly imbalance on record. It was far bigger than analysts expected, over four times larger than the October 2007 deficit of $56.8 billion, and more than half the total for all of last year.

The big surge reflected the government spending $115 billion to buy stock in the nation's largest banks. Those were the first payments made from the $700 billion government rescue program passed by Congress to deal with the most severe financial crisis to hit the country since the 1930s.

The October deficit began a period in which economists are forecasting the red ink for the entire year could well hit $1 trillion, reflecting what many expect to be a severe recession, which will depress tax revenue, and the heavy costs of the financial system bailout...The $237.2 billion deficit for October included total government spending of $402 billion, a record in terms of outlays.

The spending figure included $115 billion paid to some of the country's largest banks to buy stock, the beginning of a program in which the government will spend $250 billion before the end of the year to take ownership shares in hundreds and potentially thousands of banks. The goal is to bolster banks' balance sheets so that they will resume more normal lending and keep the country from falling into a prolonged recession.

The deficit also was boosted by the government's move to purchase $21.5 billion in mortgage-backed securities, an effort the Bush administration announced when it took control of mortgage giants Fannie Mae and Freddie Mac in September because of rising losses in that market.

Government receipts in October totaled $164.8 billion, down 7.5 percent from October 2007, reflecting the impact on revenues from the slumping economy.

For the 2008 budget year, which ended on Sept. 30, the deficit totaled a record $454.8 billion, reflecting the impact of the weak economy on revenues and a $168 billion stimulus program which sent stimulus payments to millions of Americans during the spring and early summer.

The Bush administration in July estimated that the deficit for the current budget year could hit $482 billion, but that projection was made before the administration got Congress to pass a $700 billion rescue program on Oct. 3.

[Demeter]

81. Leading Economist Warns of Food Riots

http://www.informationclearinghouse.info/article21231.htm


Letters of Credit and The Disruption of International Trade: Systemic Risk, Contagion and Trade Finance

By The London Banker and RGE Monitor

November 15, 2008 -- "Global Research" -- November 15, 2008 -- Back in the old days (pre-1980s), the term systemic risk did not refer to contagion of illiquidity within the financial sector alone. Back then, when the real economy was much more important than low margin, unglamorous banking, it was understood that the really scary systemic risk was the risk of contagion of illiquidity from the financial sector to the real economy of trade in real goods and real services.

If you think of it, every single non-cash commercial transaction requires the intermediation of banks on behalf of – at the very least – the buyer and the seller. If you lengthen the supply chain to producers, exporters and importers and allow for agents along the way, the chain of banks involved becomes quite long and complex.

When central bankers back in the old days argued that banks were “special” – and therefore demanded higher capital, strict limits on leverage, tight constraints on business activity, and superior integrity of management – it was because they appreciated the harm that a bank failure would have in undermining the supply chain for business in the real economy for real people causing real joblessness and real hunger if any bank along the chain should be unable to perform.

As the “specialness” of banks eroded with the decline of the real economy (and the migration globally of many of those real jobs making real goods and providing real added-value services to real people), the nature of systemic risk was adjusted to become self-referencing to the financial elite. Central bankers of the current generation only understand systemic risk as referring to contagion of illiquidity among financial institutions.

They and we all are about to learn the lessons of the past anew.

We are now starting to see the contagion effects of the current liquidity crisis feed through to the real economy. We are about to go back to the bad old days. Whether the zombie banks are kept on life support by the central banks and taxpayers of the world is highly relevant to whether the zombie bank executives pay themselves outsize bonuses and their zombie shareholders outsize dividends with taxpayer money. It appears sadly irrelevant to whether the banks perform their function of intermediating credit and commercial transactions in the real economy along the supply chain. The bailout cash and executive and shareholder priorities do not seem to reach so far.

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.

Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.

Everyone along the supply chain should worry about their children going hungry.

When that happens, everyone in governments should worry about the riots.

Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall. Without dedicated focus on the issue of trade finance and liquidity from those in the emerging world most interested in sustaining the growth of recent years, little progress can be expected. Trade finance is rapidly communicating the stress on bank liquidity to the real economy. It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York. It could collapse the employment, the well being and the political stability of most of the world’s population.

The World Trade Organisation hosted a meeting on trade credit in Washington Wednesday to highlight the rapid and accelerating deterioration in trade finance as an urgent priority for public policy.

I look at the precipitous collapse of the Baltic Dry Index and I wish them Godspeed.