The Weekend Economist

[Demeter]

Source: DU

A compendium of Posts to supplement the Stock Market Watch in these dynamic times

No link yet.

[Viva_La_Revolution]

1. Great idea! nt

[AnneD]

29. I second the motion.....

I have been wanting to have something on the weekend. There are articles etc that might help in the upcoming week. Perhaps you can make an announcement tomorrow on SWT Demeter, I'm sure that if you post it, they will come.....:rofl:

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33. They Are Coming Already

I would have preferred listing in the LBN--maybe the Editorials monitor isn't quite so...(insert least damaging adjective here)

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2. US inflation quickest in 17 years / BBC

US inflation accelerated at its fastest pace in 17 years in June, official figures have shown, driven higher by surging energy prices. Consumer prices were 5% higher than a year ago and rose 1.1% on a monthly basis, the Labor Department said... June's annual inflation increase was the highest since 1991 while the monthly jump is the sharpest since September 2005.

Federal Reserve boss Ben Bernanke has warned that the threat of rising inflation has intensified recently. Minutes from the Fed's latest meeting on interest rates indicated the next move in borrowing costs could be up. It faces the dilemma of having to stem the rise in inflation while not further choking an economy under serious strain...In his second day of congressional testimony on Wednesday, the Fed boss said inflation was too high and it was a key objective for the central bank to bring it down.

Many analysts now believe that the central bank may have to leave borrowing costs on hold, or even increase them, as it tries to steer a faltering economy through turbulent times. This increases concern that the Fed is not going to be able to lower interest rates if the economy remains weak...Energy prices were the main driver of price growth, and were 6.6% higher in June as the cost of petrol, natural gas and heating oil increased...Average weekly wages, after adjusting for inflation, fell by 0.9% in June - the biggest monthly decline in 24 years, the Department said.


Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7509729.stm

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25. U.S. `Misery Index' Climbs to 15-Year High on Prices (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aHXJY.fS72Ss

By Timothy R. Homan

July 16 (Bloomberg) -- Misery hasn't had this much company in more than 15 years.

The jump in consumer prices reported today by the Labor Department means the so-called Misery Index, the sum of the unemployment and inflation rates, is the highest since President Bill Clinton took office in January 1993. The measure, created by Arthur Okun, an economics adviser to President Lyndon Johnson, rose to 10.5 in June from 9.7 in the prior month.

Surging costs and falling payrolls will cause consumers to slow spending growth to the weakest pace since 1991 by the fourth quarter, according to a monthly survey of economists by Bloomberg News. The figures underscore Federal Reserve Chairman Ben S. Bernanke's comment to lawmakers yesterday that U.S. households are under ``tremendous pressure.''

The year-over-year inflation rate accelerated to 5 percent, the fastest since May 1991, the Labor Department said. A separate report July 3 showed a 5.5 percent unemployment rate for June.

Today's consumer price index data also showed wages fell 2.4 percent over the last 12 months, after adjusting for inflation.

``Both sides of stagflation are in greater evidence this week than they've ever been before,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York.

The June unemployment rate held at 5.5 percent after soaring the most in two decades in May from April's 5 percent.

The Misery Index peaked in June 1980, when the jobless rate reached 7.6 percent and consumer prices rose 14.4 percent.

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3. Financial Collapse Edges Closer By Martin Hutchinson

http://www.informationclearinghouse.info/article20295.htm

WARNING! CONSERVATIVE BIAS

16/07/08 "Asia Times" -- -- The financial crisis in the United States and worldwide entered a new phase this week, as Fannie Mae and Freddie Mac, the two huge US home-loan institutions, began what appears to be a "death spiral" similar to that which claimed Bear Stearns four months ago. Fannie and Freddie are unique institutions and will almost certainly be bailed out by the long-suffering taxpayer. However, for the first time, the specter has been raised of a general financial meltdown, such as the US managed to avoid in 1933 but Sweden succumbed to in 1991.

Sweden's financial meltdown of 1991 involved the government guaranteeing the obligations of the entire Swedish banking system, and recapitalizing the major banks, with the sole major exception of Svenska Handelsbanken. The total cost of the rescue to Swedish taxpayers was around US$10 billion, equivalent to about $1 trillion in the context of today's US economy. The causes of the crisis would be familiar to most Americans today: misuse of off-balance sheet securitization vehicles to invest excessively in real estate and mortgage lending.

It is thus not impossible for the entire US banking system to implode. It didn't happen in 1933 (though about a quarter of US banks failed) because US banks in the 1920s had been relatively conservative in their lending, with many banks requiring a 50% down payment for home mortgage loans, for example. Stock margin lending got way out of control in 1928-29, but relatively few banks were involved significantly in that.

The main problem in 1932-33 was quite simply liquidity; the Fed failed to supply adequate reserves to the banking system, so crises of confidence in individual banks led to panic withdrawals of deposits that caused the banks themselves to fail.

This time around, the problem is the opposite. Whereas the Fed had been appropriately cautious in the late 1920s, so only in the area of stock margin lending did the banking system get out of control, this time around the Fed has been hopelessly profligate in monetary creation for over a decade. The initial result of this profligacy, the tech bubble of 1999-2000, caused only modest problems in the banking system through telecom losses. The more recent profligacy and the housing bubble it caused have had much more serious consequences, mirroring those in Sweden leading up to 1991. The additional loosening since September has distorted the financial system further, producing a commodity price bubble that itself seems likely to have substantial further adverse consequences.

Fannie and Freddie are probably toast, and about time too. Federal Reserve Board chairman Ben Bernanke's statement on Friday that the two companies can discount paper with the Fed may prolong the inevitable, but also increases its likely huge cost to taxpayers.

There can be no economic justification for the government guaranteeing the great majority of the nation's home mortgages, and the spurious "government-sponsored enterprise" structure of Fannie and Freddie merely hid the likely consequences of their default. Their senior employees have been paid as if they were counterparts of Wall Street high-flyers for performing a function that was economically entirely unnecessary, and they have survived for more than 50 years simply through their ability to offer lucrative consulting contracts to ex-congressmen and other politically well-connected people.

It is thus necessary that any "rescue" for Fannie and Freddie be a euthanasia not a lifeline. They have extracted their rents from the market for too long and have encouraged the growth of a securitized mortgage market that has proved entirely unsound because of its perverse incentives. Simply providing them with $100 billion or so of extra capital at taxpayer expense, probably structured as some economically unjustified form of subordinated debt so that the shareholders are left undiluted and allowing them to continue operating, doesn't solve the problem; it exacerbates it.
The simplest from of euthanasia for Fannie and Freddie would be a takeover by the Office of Federal Housing Oversight (OFHEO), their regulator, on the grounds that they were no longer able to operate independently. In Freddie's case that could be carried out at any time, since the company has failed to follow through on a promise to OFHEO to raise $5.5 billion in new capital - which at Thursday's closing share price would dilute existing shareholders by 55%. In any case, further declines in their share prices and withdrawal of funding by the bond markets are likely to cause a sufficient crisis in the next few weeks to make such a takeover inevitable if a rescue is not organized (which it shouldn't be.)

Following a takeover, Fannie and Freddie would need to continue performing their current functions of guaranteeing home mortgages, as without such guarantees home mortgages are currently impossible to obtain. However, changes must be made to recognize the revised nature of the business.

Since the new guarantees would be direct government obligations (OFHEO being an arm of the government) rather than simply implied obligations, the fees for obtaining them should be jerked sharply upwards, perhaps to 1.5% per annum on the outstanding amount of the mortgage. That would allow mortgage finance to remain available at a cost that is still reasonable in current markets (Fannie Mae paper already pays a 0.75% premium over the government for its borrowings), but as markets recovered it would make Fannie/Freddie guaranteed mortgages highly uncompetitive against direct home loans, by far the healthiest way for housing to be financed.

Together with the salary reductions outlined below, it would also begin to reimburse the unfortunate taxpayer for the gigantic costs of this non-rescue operation.

Treasury Secretary Hank Paulson has called for "covered bonds" similar to the German pfandbriefe to be used to finance housing. Since pfandbriefe, bonds issued by German banks to finance housing, remain on German bank balance sheets and retain the bank guarantee, allowing the banks only to escape the funding risk of lending for 30 years at a fixed rate, they avoid the moral hazards of the securitization markets, and are thus an attractive alternative.

To encourage their use, and to reduce the capital cost to banks of holding mortgages on balance sheet, the Basel 1 bank regulations, currently being phased out, should be retained; they allowed mortgages to carry only a 4% capital charge as against 8% for regular loans. By this and other means, the private banking sector would be encouraged to make sound home loans directly, without the unnecessary Fannie/Freddie guarantees.

The objective would be over a five-10 year period for Fannie and Freddie to become insignificant participants in the mortgage market, after which they could be closed altogether. Meanwhile, costs in Fannie and Freddie could be cut drastically, particularly on the staffing side.

Since Fannie and Freddie staff would now be government employees, they should be paid on the GS (government) payscale, with the chief executive, as a GS-15, receiving appropriate remuneration between $115,317 and $149,000, according to his years of service. Even if the chief executive officer was able to argue himself onto the SES (senior executive service) pay scale - after all, he has excellent congressional contacts - he would be limited to about $205,000 in the Washington area.

Naturally, many Fannie/Freddie employees would be outraged at this cut in their living standards and would attempt to find alternative better-paid employment; I venture to suggest that few would succeed in doing so. That way, redundancy payments would be avoided while salary costs were slashed.

There would be a devastating effect on the Northern Virginia housing market, where many senior Fannie/Freddie employees have overextended themselves with giant home mortgages for vulgar McMansions, but that problem too is probably survivable. More important, the now-disgruntled employees would perform their job poorly, making applying for a Fannie/Freddie guarantee a bureaucratic and uncertain process, similar to negotiating with the Inland Revenue Service. That too should hasten the disappearance of the firms from the housing market.

Fannie and Freddie do not represent the entire US finance sector, far from it. Nevertheless their insolvency would further erode confidence in the rest of the sector, very likely leading to a cascade of death spirals among other institutions. After all, the best-run large non-global US bank, Wachovia, has itself got in trouble by its insanely foolish acquisition of the California mortgage lender Golden West Financial at the peak of the market in 2006, while Bank of America, the largest retail-oriented US bank, voluntarily took on more of the mess by its purchase of the diseased and probably criminal Countrywide Financial as recently as last January.

Citigroup is in deep trouble in a number of areas, particularly relating to its over-enthusiasm for the discredited technique of securitization, while JP Morgan Chase chief executive Jamie Dimon wrecked his credibility in May by announcing that the financial crisis was "mostly over" - presumably wishful thinking in the light of his huge holdings of dodgy Bear Stearns paper.

Only Goldman Sachs appears serenely above the fray, but don't forget that at May this year its "Level 3" assets were $78 billion, more than twice its capital. Level 3 assets, you may remember, are those for which there is no market, so can be valued only by the internal mathematical models of the institution concerned. Since this arcane highly illiquid paper is the most likely to suffer catastrophic erosion of "value" in a downturn, Goldman Sachs, like Jamie Dimon, must be keeping fingers crossed that somehow this nightmare must end soon.

It mustn't; from past experience of such follies it probably has at least another year to go. Thus a total collapse of the US financial system, while not inevitable, is a contingency which should now be planned for.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com .

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5. 'Massive potential' for global 'financial meltdown':Confidence falls in U.S. authorities' ability to

'Massive potential' for global 'financial meltdown':Confidence falls in U.S. authorities' ability to ease financial panic


http://www.informationclearinghouse.info/article20311.htm


Pedro Nicolaci da Costa
Reuters


Thursday, July 17, 2008


NEW YORK -- The nightmare scenario for U.S. economic authorities is here: Confidence in their ability to rescue the country from a housing-led financial panic is now at its lowest level since the crisis began.

This means losses for investors, already totalling nearly half a trillion dollars, could mount even further over the next few months, with implications for business investment and the overall health of the economy. "You see a massive potential for financial meltdown on a global scale," said T.J. Marta, fixed-income strategist at RBC Capital Markets.

Federal Reserve chairman Ben Bernanke and Treasury secretary Henry Paulson testified before Congress this week on the country's precarious financial state. They were met with unusually fierce questions from lawmakers on the feasibility of a plan to provide extra funding for mortgage finance giants Fannie Mae and Freddie Mac. "I will use every power in my arsenal to stop this," said Jim Bunning, Republican senator from Kentucky, berating the Treasury initiative in no uncertain terms.

The government's vow to back the institutions largely failed to restore faith in a near-term recovery for battered financial markets. After a momentary jolt higher on Monday, U.S. stocks ended lower. The Dow Jones industrial average on Tuesday slipped below 11,000 for the first time in two years. U.S. shares did recover on Wednesday, but this was largely due to a rapid retreat in oil prices than any renewed confidence in credit markets or growth prospects.

"People's horizons are moving out to 2009 and they are still not seeing any end in sight and with credit losses increasing that's really not good news," said Steve Goldman, market strategist at Weeden & Co., in Greenwich, Conn. "The backstop with Freddie Mac and Fannie Mae doesn't deal with heart of the problem: foreclosures, supply."

U.S. Treasury bond prices rallied sharply on Tuesday despite a 9.2-per-cent year-on-year jump in producer level inflation, the biggest in almost 30 years...This counterintuitive reaction for government debt, whose fixed returns make them highly sensitive to inflation, indicates just how frantic investors have become. They would rather hold paper whose value might be eroded over time than face the prospect of immediate losses in risker assets like equity shares or asset-backed bonds.

...The scariest thing about it is that things seem to be getting worse rather than better. Gerard Cassidy, another RBC analyst, estimates that more than 300 U.S. banks could close their doors in the next three years, double what he had estimated back in February. Only a handful have failed so far.

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US faces global funding crisis, warns Merrill Lynch

http://www.informationclearinghouse.info/article20310.htm

The US Treasury is running out of time before foreign patience snaps, writes Ambrose Evans-Pritchard

Merrill Lynch has warned that the United States could face a foreign "financing crisis" within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world...The country depends on Asian, Russian and Middle Eastern investors to fund much of its $700bn (£350bn) current account deficit, leaving it far more vulnerable to a collapse of confidence than Japan in the early 1990s after the Nikkei bubble burst. Britain and other Anglo-Saxon deficit states could face a similar retreat by foreign investors.

"Japan was able to cut its interest rates to zero," said Alex Patelis, Merrill's head of international economics. "It would be very difficult for the US to do this. Foreigners will not be willing to supply the capital. Nobody knows where the limit lies."

Brian Bethune, chief financial economist at Global Insight, said the US Treasury had two or three days to put real money behind its rescue plan for Fannie and Freddie or face a dangerous crisis that could spiral out of control. "This is not the time for policy-makers to underestimate, once again, the systemic risks to the financial system and the huge damage this would impose on the economy. Bold, aggressive action is needed, and needed now," he said. Mr Bethune said the Treasury would have to inject up $20bn in fresh capital. This in turn might draw in a further $20bn in private money. Funds on this scale would be enough to see the two agencies through any scenario short of a meltdown in the US prime property market.

Fannie and Freddie - the world's two biggest financial institutions - make up almost half the $12 trillion US mortgage industry. But that understates their vital importance at this juncture. They are now serving as lender of last resort to the housing market, providing 80% of all new home loans.
Roughly $1.5 trillion of Fannie and Freddie AAA-rated debt - as well as other US "government-sponsored enterprises" - is now in foreign hands. The great unknown is whether foreign patience will snap as losses mount and the dollar slides.

Hiroshi Watanabe, Japan's chief regulator, rattled the markets yesterday when he urged Japanese banks and life insurance companies to treat US agency debt with caution. The two sets of institutions hold an estimated $56bn of these bonds. Mitsubishi UFJ holds $3bn. Nippon Life has $2.5bn...But the lion's share is held by the central banks of China, Russia and petro-powers. These countries could all too easily precipitate a run on the dollar in the current climate and bring the United States to its knees, should they decide that it is in their strategic interest to do so.

...Merrill Lynch said foreign governments had added $241bn of US agency debt over the past year alone as their foreign reserves exploded, accounting for a third of total financing for the US current account deficit. (They now own $985bn in all.) By most estimates, China holds around $400bn, Russia $150bn and Saudi Arabia and other Gulf states at least $200bn.

Russia's deputy finance minister, Dmitry Pankin, said the collapse in the share prices of Fannie and Freddie over the past week was irrelevant because their debt has been effectively guaranteed by the US government under the rescue package. "We don't see a reason to change anything because the rating of the debt of those agencies hasn't changed," he said. Foreign policy experts doubt that the picture is so simple. Russia is likely to use its $530bn reserves as an implicit bargaining chip in high-stakes diplomacy, perhaps to discourage the US from extending Nato membership to the Ukraine and Georgia...Vladimir Putin, now Russia's premier, has stated repeatedly that his country is engaged in a new Cold War with the United States. It is clear that Moscow would relish any chance to humiliate the United States, provided the costs of doing so were not too high for Russia itself.

China is regarded as a more reliable partner, with a greater desire for global stability. Treasury Secretary Hank Paulson has intimate relations with the Chinese elite, dating from his days at Goldman Sachs when he visited the country over 70 times. Brad Setser, from the US Council on Foreign Relations, said the Chinese have a stake in upholding Fannie and Freddie, not least to ensure that their loans are "honoured on time and in full"...

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11. Swan Song for Fannie: Eulogy For The "Ownership Society" By Mike Whitney

http://www.informationclearinghouse.info/article20305.htm


18/07/08 "ICH" -- - The Fed's emergency rescue plan for the financial markets is hopelessly flawed. It's a scattershot approach that doesn't address the real source of the problem; an unregulated, unsustainable structured finance system that emerged in full-force after 2000 and spawned a shadow banking system that creates trillions of dollars of credit without sufficient capital reserves. This is the heart of the problem and it needs to be debated openly. The present system doesn't work; it's as simple as that. It makes no sense to provide trillions of dollars of taxpayer money to shore up a system that is essentially dysfunctional. It's just throwing money down a rat-hole....The Federal Reserve and US Treasury want a blank check to prop up Fannie Mae and Freddie Mac, the two war-horses of the mortgage industry, that currently underwrite nearly 80 per cent of all new mortgages in the US. But by any objective standard both of these GSEs are already insolvent. Thus, the taxpayer is being asked to rescue a failed industry that has been used for private gain so that speculators will not have to suffer the losses. Even worse, Fannie and Freddie have written hundreds of billions of dollars worth of mortgages that have not yet defaulted, but will certainly default within the next two years. This is bound to batter the already faltering economy.

The bad paper held by Fannie and Freddie are mortgages that were made to unqualified applicants who are presently losing their homes in record numbers. Their loans were approved because there was no functioning regulatory body to oversee their issuance and because the mortgages were transformed into complex securities that were sold to credulous investors around the world. The ratings were fixed to meet the requirements of their employers, the investment banks, which marketed these exotic bonds to foreign banks, insurance companies and hedge funds. That puts Fannie and Freddie at the center of a system that needs radical surgery to eradicate the bad paper. If this doesn't happen in a timely fashion, then foreign investors will stop purchasing US debt and the dollar will crash. By creating a backstop for Fannie and Freddie, the Fed is linking US sovereign debt with mortgages and derivatives that are already known to be fraudulent. This is a big mistake. According to Merrill Lynch, the US is already facing a long-term "financing crisis" as the weakening US economy and sluggish consumer spending could signal an end to the $700 billion in foreign investment that covers America's current account deficit. By assuming the GSE's enormous debts, the Bush administration is just speeding this process along and inviting disaster...Fannie and Freddie have been insolvent for ages, but it hasn't stopped lawmakers from pushing the envelope and loading more debt on their balance sheets. Here's how Barron's summed it up more than six months ago:

"Fannie's balance sheet is larded with soft assets and understated liabilities that would leave the company ill-equipped to weather a serious financial crisis. And spiraling mortgage defaults and falling home prices could bring a tsunami of credit losses over the next two years that will severely test Fannie's solvency.

But, if the truth be known, a considerable portion of Fannie's losses also came from speculative forays into higher-yielding but riskier mortgage products like subprime, Alt-A (a category between subprime and prime in credit quality) and dicey mortgages requiring monthly payments of interest only or less. For example, Fannie's $314 billion of Alt-A -- often called liar loans because borrowers provide little documentation -- accounted for 31.4% of the company's credit losses while making up just 11.9% of its $2.5 trillion single-family-home credit book. Fannie was clearly looking for love -- and market share -- in some of the wrong places."

Rampant speculation, risky investments, and Enron-type accounting; hardly the stuff of solid portfolios. That's why the two mortgage giants are stumbling headlong towards oblivion despite the Treasury's panicky relief operation. By last Friday Fannie's stock had fallen 47 per cent while Freddie was down 50 per cent. The public may still be in the dark about what is going on, but investors have a pretty good grip on the situation; they can see the great birds are already circling overhead and its just a matter of time before they descend on their prey. Paulson's attempts to muddy the water have amounted to nothing. The fact remains that the two biggest mortgage-lenders in the world are busted and last week's stock sell-off was tantamount to a run on the country's largest bank. Paulson's statement was really nothing more than a eulogy for the mortgage industry; a few heartfelt words over the rigid corpse of a close friend.

When the housing market started to tumble and Wall Street's "securitization" model froze-up, Fannie had to take the lion's share of the mortgages to keep the real estate market hobbling along. In a two year period, between the housing peak in 2005 and 2007, Fannie went from roughly 40 per cent of the market to about 80 per cent. The Congress even enlarged the size of the mortgages they could underwrite from $417,000 to over $700,000. The prospect of bankruptcy never diminished congress's generosity.

Whatever happens to Fannie, the loss of investor confidence will send long term interest higher as investors demand bigger returns for the risk they're taking on GSE bonds. That'll put a straitjacket on home sales which are already flagging from soaring inventory and falling prices. Higher rates could bring the whole housing market to a standstill.

The Fed's cheap credit policy under Greenspan created an artificial demand for housing which ballooned into the biggest equity bubble in history. Low interest rates are a subsidy which naturally lead to speculation and asset-inflation. At a certain point, however, the endless debt-pyramiding reaches its apex and the whole mechanism switches into reverse. Now the economy has entered deleveraging-hell where everything is primal blackness and the gnashing of teeth, the flip-side of speculative rapture.

By some estimates, Freddie Mac has a negative net-worth of $17 billion. It's basically insolvent, although Paulson would like to see the charade go on a while longer. Investors purchased another $3 billion of the two GSEs last Monday, but the appetite for failing bonds is diminishing? What's certain is that the collapse of Fannie and Freddie would be a watershed event and a mortal blow to the US financial system. $5 trillion in shaky mortgage-debt can't be easily swept under the rug and ignored. Interest rates on everything would quickly rise; credit would become scarcer, economic growth would shrivel, unemployment would soar, and the dollar will plummet. As the two mortgage giants continue to get whipsawed by higher priced capital and waning investment, US government debt will likely to lose its much-vaunted triple A credit rating. On Friday, credit default swaps on government debt doubled, a sign that investors are losing confidence that the US will be able to manage its twin deficits or pay off its debts. It's the end of the road for Washington's free lunch throng and for a paper dollar that isn't backed by much of anything except music videos, fast food and smart-bombs...

PITFALLS FOR THE GSEs

The biggest problem facing Fannie and Freddie is that wary investors will not roll over the debt of the two companies which will precipitate a collapse. This is where it pays to have people who can be trusted in positions of power. Henry Paulson is the worst thing that ever happened to the US Treasury. Paulson is to finance capitalism what Rumsfeld is to military strategy. To say that Paulson is lacking in credibility is an understatement. Nothing he says can be taken at face-value. When Paulson says "the worst is behind us" or the "subprime crisis is contained" or the Bush administration "supports a strong dollar policy"; most people know it is a fabrication. Besides, Paulson is completely out of his depth in the present crisis. His appearances on TV, with the beads of sweat glistening on his forehead, and his foolish repetition of the same stale mantra is eroding confidence in the financial system and sending waves of panic rippling through Wall Street. Enough is enough. He needs to go.

If the administration was serious about changing direction they would dump Paulson and reinstate Paul Volcker. Whatever one thinks about Volcker, his presence would calm the markets and send a message that the adults were back in charge. But that won't happen. The Bush team still thinks they can finesse their way through the thicket of investor skepticism. That means that catastrophe is inevitable as more and more investors pick up their bets and head for the exits.

TIME IS RUNNING OUT

Whatever the administration decides to do; time is short and they have one chance to get it right. The Treasury needs to find a way to ring-fence the garbage bonds and pray that the investing public won't dump their holdings in a panic run on the market. Either way, it's a gamble and there's no guarantee of success. The Wall Street Journal outlined the doomsday scenario if Paulson's plan fails:

"Falling house prices and nonpaying homeowners cause the value of the trillions of dollars in outstanding debt held by these government-sponsored enterprises (Fannie and Freddie) to plunge. Many banks have balance sheets stuffed full of this paper. They face huge losses, which some can't survive. They and other investors, such as foreign central banks, then dump the GSE paper.

Fannie and Freddie would end up unable to lend, or at least to take up anything like their current 80% share of the U.S. mortgage market, further punishing the reeling housing market. This would add another twist to the spiral of falling prices, credit losses and failing lenders.

What should they do? First, devise a plan -- and fast. There is no time to dither." (Wall Street Journal)

If foreign banks and investors ditch their GSE debt; it will send shockwaves through the global economy. But if the Treasury provides unlimited funding for a sinking operation, it's likely to trigger a sell-off of the dollar. It's a lose-lose situation. For now, bond holders are sitting-tight even though the stock is tanking, but for how long? They've already been taken to the cleaners on hundreds of billions of dollars of mortgage-backed garbage; now there are rumors that the US government won't back agency debt. What kind of shabby shell-game is the US playing anyway?

New York Times:

“If people lose faith in Fannie and Freddie, then the whole system freezes up, and nobody can buy a house, and the entire housing market can crash,” said Paul Miller of the Friedman, Billings, Ramsey Group in Arlington, Va. “There’s a fine line between having faith and losing it, and sometimes it’s unclear when it has disappeared. But when investors cross that line, bad things happen very quickly.”

So far, banks have only written down $450 billion, which means that they are only 25 per cent of the way through the current credit storm. Defaults are liable to skyrocket as hundreds of undercapitalized banks turn to a grossly underfunded FDIC ($52 billion in reserves) to cover the losses of their depositors. The prospect of a humongous taxpayer bailout seems nearly unavoidable.

What's most disturbing is that nothing has been done to restore the markets to a functional model. The Fed's strategy is still to try to keep the relatively new "structured finance" model (with all it's bizarre-named debt instruments and derivatives) in place even though it failed its first stress-test and has demonstrated that it cannot withstand even moderate downward movement in the market. The current model is kaput; there needs to be a Plan B or the Fed is just wasting its time...

Bank credit is drying up because the capital is being destroyed (from foreclosures and downgraded assets) faster than anytime in history. We are just now feeling the first stiff breezes from a Force-5 deflationary hurricane set to touch down in 2009. Fannie and Freddie are teetering towards insolvency while the country is entering the most vicious downward cycle since the Great Depression. Higher interest rates, negative home equity, mounting credit card debt, auto loan debt, commercial real estate debt and tightening lending standards will only curtail consumer spending more putting greater pressure on the dollar....The Fed will have to be selective; not everything can be saved. Significant parts of the financial system will be reduced to ashes. It would be wiser to clear the brush away from as many of the solvent institutions as possible and prepare for the worst. Otherwise, the whole system is at risk of contagion. Hundreds of local and regional banks are expected to go under. (the average small bank has 67% of its assets in real estate) It can't be avoided. They are holding too much bad paper and no way to make up for the losses. They're following the same path as the 250 mortgage lenders that vaporised in the subprime meltdown. They couldn't be saved either.

The bigger investment banks are in trouble too. That's why the SEC has finally decided to act as a regulator and go after short-sellers: "The Securities and Exchange Commission announced an emergency action aimed at reducing short-selling aimed at Wall Street brokerage firms, Fannie Mae and Freddie Mac, and will immediately begin considering new rules to extend new requirements to the rest of the market."...The SEC never took an interest in naked shorting of stocks (or commodities speculators) while its fat-cat friends in the big brokerage houses were raking in billions. Now that many of these same institutions, including Fannie Mae and Freddie Mac, are in the crosshairs, SEC chief Christopher Cox is rushing to their rescue. It is utter duplicity, but it illustrates an important point; the system is cannibalizing itself just like Karl Marx predicted over 100 years ago. Unchecked greed is inevitably self-destructive...The troubles at Fannie and Freddie are symptomatic of more deeply rooted problems related to abusive lending and the unsustainable expansion of credit. We've now reached our debt limit and the bills must be repaid or written off. The Bush administration is hoping to reflate the bubble by (stealthily) recapitalizing the GSEs, but it won't be easy. As one blogger put it, we have reached "peak credit" and have nowhere to go except down.

Economist Michael Hudson summed it up like this:

"The reality is that Fannie, Freddie and the FHA gave a patina of confidence to irresponsible lending and outright fraud. This confidence game led them to guarantee some $5.3 trillion of mortgages, and to keep $1.6 trillion more on their own books to back the bonds they issued to institutional investors." It was a scam of Biblical proportions and now it is all starting to unravel. Bush's "ownership society" was a cheap parlor trick engineered by the Fed's low interest rates to trigger massive speculation and shift wealth from one class to another. Now, the housing bubble has crashed and the excruciating reality of insolvency is beginning to sink in....All one hears is a barrage of claims that the government must preserve the financial fictions of Fanny Mae and Freddie Mac in order to 'save the market.' The usual hypocrisy is being brought to bear claiming that all this is necessary to 'save the middle class,' even as what is being saved are its debts, not its assets...The “way of life” that is being saved is not that of home ownership, but debt peonage to support the concentration of wealth at the top of the economic pyramid.
Mortgages are the major debts of most American families. In this role, real estate debt has become the basis for the commercial banking system, and hence the basis for the wealthiest 10 percent of the population who hold the bottom 90 percent in debt. That is what Fannie Mae, Freddie Mac and “the market” are all about." (Michael Hudson; "Why the Bail Out of Fannie Mae and Freddie Mac is Bad Economic Policy", counterpunch.org)

The housing boom never had anything to do with Bush's Utopian-sounding "ownership society". It was always just a swindle to enrich the banking establishment and divert middle class wealth to ruling class elites.

[Demeter]

12. PAULSON'S POWER GRAB

http://www.informationclearinghouse.info/article20305.htm


What Paulson is really wants is for congress to allow the Fed to regulate the financial system without congressional oversight. Paulson's so-called blueprint for financial regulation is a blatant power-grab meant to expand the authority of the banking oligarchy giving them unlimited power over the markets. Journalist Barry Grey sums it up like this in his article on "US Bailout of Mortgage Giants: The politics of plutocracy":

"The plan outlined by Treasury Secretary Henry Paulson would give him virtually unlimited and unilateral authority to pump tens of billions of dollars of public funds into the mortgage finance companies. At the same time, the Federal Reserve Board announced that it would allow the companies to directly borrow Fed funds... The Democrats...now march in lockstep with the minority party to rush through laws demanded by Wall Street... The buying of legislators and their votes by corporate interests is carried out openly and shamelessly. Members of Frank’s House Financial Services Committee received over $18 million from financial services, insurance and real estate firms this year. Frank himself raised over $1.2 million, almost half of which came from finance and related industries...Senator Dodd’s top contributor in the 2003-2008 election cycle was Citigroup, followed by SAC Capital Partners. He raised $4.25 million from securities and investment firms.
Senator Schumer’s top contributor was likewise Citigroup. He raised $1.4 million from securities and investment firms, his most lucrative corporate sector."

The smell of political corruption is overpowering, and yet, the plan is moving forward regardless. Even if Paulson's plan worked in the short term, the damage would be enormous. It would place the country's regulatory powers and purse-strings in the hands of the same amoral banksters who created this mess to begin with. It is the fast-track to corporate feudalism on a nationwide scale.

[Demeter]

18. Fannie, Freddie spent $200M to buy influence / Lisa Lerer

http://news.yahoo.com/s/politico/20080716/pl_politico/11781;_ylt=Aqra8AQGuKZ7chQBIo7D5e2s0NUE

Wed Jul 16, 5:44 AM ET



If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions.

But the political tentacles of the mortgage giants extend far beyond their checkbooks.

The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home.

They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.

Fannie and Freddie’s aggressive political maneuvering has helped stave off increased regulation and preserve special benefits such as exemption from state and local income taxes and the ability to borrow at low rates...

At least 20 McCain fundraisers have lobbied on behalf of Fannie Mae and Freddie Mac, netting at least $12.3 million in fees over the past nine years.

Political insiders Arthur B. Culvahouse Jr., picked by McCain to vet his vice presidential nominees, and Jim Johnson, picked by Obama to perform the same function, once worked for the mortgage giants.

And for years, Rick Davis served as president of an advocacy group led by Fannie Mae and Freddie Mac that defended the two companies against increased regulation.

So far this election cycle, Freddie Mac’s political action committee and employees have contributed $555,567 to Senate and House candidates, and Fannie Mae’s PAC and employees have given more than $1.1 million, according to the Center for Responsive Politics.

In total, the two companies have spent $170 million on lobbying over the past decade, according to the Center, although they have scaled back in recent years. Last year, they paid $14.1 million in lobbying fees, a significant decrease from a high of more than $26 million in 2004. The connections of both campaigns to the well-entrenched mortgage companies highlight the difficulties the candidates face in selling voters on an outsider message.

McCain’s campaign denied that its political connections have affected his view on the issue.

“I have written every word that has to do with Fannie and Freddie in this campaign, and I don’t know who the people are that are linked to the companies,” said McCain’s economic adviser, Douglas Holtz-Eakin.

“Sen. McCain has favored GSE reform in the past and continues to favor GSE reform,” Holtz-Eakin said. “That’s unchanged.”

McCain has called the government’s weekend intervention in the struggling companies “correct,” saying he hoped that the action would “preserve the ability of Americans to obtain loans in order to buy a home and be able to afford mortgage payments they’re having to make.”



A spokesman for the Obama campaign declined to comment, noting only that former Fannie Mae CEO Jim Johnson stepped down from his campaign post in June. His resignation came in the wake of charges that he collected more then $7 million in home loans at special, below-average rates.

On Sunday, Obama shied away from commenting on the specific proposals, but cautioned regulators to give top priority to the interests of homeowners.

“That should be our No. 1 priority, not just shareholders, investors or CEOs of companies,” he said.

AND THE BEAT GOES ON--SEE ARTICLE AT LINK

[Demeter]

35. The next big wave is breaking By F William Engdahl

http://www.atimes.com/atimes/Global_Economy/JG17Dj03.html

The announcement by US Treasury secretary Henry Paulson, together with Federal Reserve chairman Ben Bernanke, that the US government will bail out the two largest guarantors of the country's housing mortgage debt - Fannie Mae and Freddie Mac - far from calming financial markets has confirmed what we have said repeatedly in this space: the financial tsunami that began in August 2007 in the relatively small "subprime" high-risk mortgage securitization market, far from being over, is only gathering momentum.

As with the tsunami that devastated Asia in wave after terrifying wave in December 2004, what we are witnessing now is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, and dumped on the market.

The scale of the latest wave to hit, the collapse of confidence in the two government-sponsored entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.

The Royal Bank of Scotland (RBS), one of the largest financial institutions in the European Union, has warned its clients that "a very nasty period is soon to be upon us - be prepared". RBS expects the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks and pension funds, could lose almost 23% by September as, in the bank's phrase, "all the chickens come home to roost" from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and then Fed chairman Alan Greenspan lowered US interest rates to levels not sustained since the 1930's Great Depression.

This will be seen in history as the disastrous Greenspan "Revolution in Finance" - an experiment in asset-backed securitization, a mad attempt to bundle risk into loans, "securitize" them in new bonds, insure them via specialized insurers called "monoline" insurers (which insured only financial risks in bonds), then rate them via Moody's and Standard & Poor's as AAA, or highest grade. All that was done so that pension funds and banks around the world would assume they were high-quality debt.

Fed in panic mode
While he is getting praise in the financial media for his "innovative" and quick reactions to the unraveling crisis, Fed chairman Bernanke in reality is in a panic mode. His room to act is increasingly bound by the soaring asset price inflation in food and oil, which is pushing consumer price inflation to new highs even by the doctored "core inflation" model of the Fed.

If Bernanke continues to provide unlimited liquidity to prevent a banking system collapse, he risks destroying the US corporate and Treasury bond market and with it the dollar. If Bernanke acts to save the heart of the US capital market - its bond market - by raising interest rates, the Fed's only anti-inflation weapon, it will only trigger the next even more devastating round in tsunami shock waves.

The US government passed the law creating Fannie Mae in 1938 during the Great Depression as part of president Franklin D Roosevelt's New Deal. It was intended to be a private entity, although "government sponsored", that would enable Americans to finance buying of homes as part of the country's attempt at economic recovery. Freddie Mac was formed by Congress in 1970, to help revive the home-loan market. Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a US$2.25 billion credit line.

The problem with the privately owned government-sponsored entities, or GSEs, as they are technically known, is that Congress tried to fudge on whether they were subject to government guarantee in the event of a financial crisis such as the present one. Before now, that appeared a manageable problem. No more.

The United States economy is in the early phase of its worst housing-price collapse since the 1930s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, much as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were "too big to fail," that is, in a crisis the government - more accurately the US taxpayer - would be forced to step in and bail them out.

The two companies either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or $6 trillion - which is also about half the combined gross domestic product (GDP) of the entire 27 member states of the European Union in 2006, or almost three times Germany's GDP that year.

In addition to their home mortgage loans, Fannie Mae has $831 billion in outstanding corporate bonds and Freddie Mac $644 billion.

Freddie Mac owes $5.2 billion more than its assets today are worth, meaning under current US "fair value" accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may go negative next quarter. As home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.

...The Federal Reserve is rapidly becoming the world's largest financial garbage dump, as for months it has agreed to accept banks' asset-backed securities, including sub-prime real estate bonds, as collateral in return for US Treasury bond purchases. Now it agrees to add to that potentially $6 trillion in GSE real estate debt.

Yet the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses were made public. In 2003, William Poole, then president of the St Louis Federal Reserve, publicly called for the government to cut its implied guarantee of Freddie Mac and Fannie Mae, claiming then that the two lacked capital to weather a severe financial crisis. Poole, whose warnings were dismissed by then Fed chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout.

Meanwhile some investors are viewing the Paulson bailout not as a bid to rescue the US economy but a lifeline for his former Wall Street cronies as the country's big banks teeter towards a financial implosion. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from sovereign wealth funds in Saudi Arabia and elsewhere to remain in business.

In a statement in May, Citigroup's new chairman, Vikram Pandit, announced plans to reduce the bank's $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup "off balance sheet" liabilities, which include some of the highest risk deals in the US real estate and securitization era it so strongly backed.

The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result, with the value of liabilities exceeding the bank’s $90 billion market value. In December 2006, prior to the onset of this financial crisis, Citigroup had a market value of more than $270 billion.

F William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order, Pluto Press Ltd. Further articles can be found at his website, www.engdahl.oilgeopolitics.net.

[Demeter]

22. Status Report on the Collapse of the U.S. Economy By Richard C. Cook

http://www.informationclearinghouse.info/article20301.htm

17/07/08 " Global Research"

...What is really taking place, however, is that the producing economy of working men and women is being crushed by the overall debt burden on households, businesses, and governments that could reach $70 trillion by 2010. The financial system, including mortgage giants Fannie Mae and Freddie Mac, is bankrupt, as the debts it is based on cannot be repaid. This is because the producing economy of people who work for a living simply can no longer generate enough purchasing power for people either to pay their debts or allow them to purchase what is being sold in the marketplace. In turn it is the debt burden and the loss of societal purchasing power that are crashing the stock market. Thus the collapse of the financial economy has started to destroy the producing economy as well.

It’s a “perfect storm,” the result of a 200-year-old financial system where money is largely created by bank lending and where since 1980 our industry and jobs have been increasingly outsourced abroad to cheap labor markets. Thus domestic incomes have stagnated while the nation’s GDP has not been able to keep up with the exponential growth of debt.

While the mainstream media are blind, deaf, and dumb as to the causes, the victims within the middle and working classes are seeing their livelihoods ruined, jobs taken away, pensions eroded, homes foreclosed on, and are being saddled with ever-increasing debt and forced to work under more and more stress due to rising burdens of taxation, gas and food price inflation, and bureaucratic rules and regulations. The only places a more-or-less normal life may still be possible will be the wealthiest imperial centers like Washington, New York, Houston, Chicago, or San Francisco.

All that the current bailouts being engineered by the Federal Reserve are doing is to create more debt to shore up failing financial institutions. No new wealth is being created. It’s band-aids on band-aids....The problem politically is that control of the U.S. long ago was turned over to the bankers and the financiers of the Western world. It was called financial “deregulation,” accelerated under President Ronald Reagan, and has run amok since then. From a longer historical view, it’s the same phenomenon that first created and then ruined the British Empire , and it’s what created and is now ruining the American Empire today....The politicians have enabled these financial crimes. Above all it’s been the Bush family which has served as a political Trojan Horse for the financiers for three generations, with affairs having become much worse since George H.W. Bush invaded Iraq for the first time in 1991. The enablers have included a majority of the members of the U.S. Congress. (See the conclusion of Patrick Buchanan’s new book, Churchill, Hitler, and the Unnecessary War for an account of how the U.S. since the Bush I presidency has replicated the catastrophic errors of failed British imperialism.)

...What is taking place is not just the collapse of the U.S. , but more than likely the final crash of Western civilization, since we are the last of the world empires to go down the drain. World War I saw the end of the German, Austro-Hungarian, Russian, and Ottoman empires. World War II saw the disappearance of the French, British, Japanese, and Italian empires, along with Nazi Germany. The Soviet empire collapsed in 1991. The American is next. The danger is that we may lash out and start a nuclear World War III out of frustration and to appease the elitists of the world who see war and famine as their pathway to world control. Such a war would also mean a military takeover domestically to manage the pathetically weak nation that we are becoming.

The bankers and financiers do not care if nations and empires destroy themselves and each other, because they are internationalists. In fact, the more war and mass starvation there is the better off they feel. All they need is a base from which to operate. London has been their main base of operations since the Bank of England was founded in 1694, though they have a strong presence in other nations. They have been especially influential in northwest Europe , where elitism in the form of Freemasonry endeavored since the time of the French Revolution to destroy the authority of the Catholic Church.


It is theoretically possible that the US as a nation could still save itself through an internal revolution, while playing a much reduced role in the world. After all, England , France , and Italy still exist as shadows of their past greatness. But, realistically, all ordinary people can do today is try to survive, perhaps by working with friends and neighbors in planting food and living within the underground economy. At least people might not then have to starve to death, because hard as it is to believe that “it could happen here,” widespread famine in the U.S. seems a real possibility over the next several years. Nations take such risks when they allow capitalist agribusiness to destroy local agriculture.

On a national level, it is likely that as a response to the economic crisis some attempt will be made by desperate politicians to try to replicate the New Deal, but to do this effectively would require political control by a nationalistic reform party. Even then, additional reform measures such as control of credit as a public utility, a basic income guarantee, and a national dividend would be needed for real economic security to replace the current madness that could soon make the U.S. a relic of history.

-----------------------------------------------------------------------------------------------------

Richard C. Cook is a former U.S. federal government analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, NASA, and the U.S. Treasury Department. His articles on economics, politics, and space policy have appeared on numerous websites and in Eurasia Critic magazine. His book on monetary reform, entitled We Hold These Truths: The Hope of Monetary Reform, will be published soon by Tendril Press. He is also the author of Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age, called by one reviewer, “the most important spaceflight book of the last twenty years.” His website is at www.richardccook.com.

© Copyright Richard C. Cook, Global Research, 2008

[Demeter]

37. Near Insanity at the Federal Reserve / Dominick T. Armentano

http://www.independent.org/newsroom/article.asp?id=2257

East Bay Business Times, Houston Business Journal



The latest economic news isn’t pretty. Price inflation is raging everywhere, yet in most housing markets, sales are weak and prices are still in near free-fall. Crude oil and gasoline prices are at record levels and still climbing, despite my recent prediction that oil prices would fall (be patient, they will). Several hedge funds and investment banks have collapsed and bailout talk is everywhere. Finally, the stock market has fallen at least 20 percent from its previous high and a bear market in equities is now official. Welcome to recession 2008.

There is no shortage of explanations for our current difficulties. Some commentators say it’s all due to hedge fund “speculators” or the OPEC cartel or the spendthrift congress or Big Oil. Actually, the root cause of the inflationary recession is far more straightforward and far closer to home. The fundamental culprit is the U. S. Federal Reserve System and the near insane monetary policy it has had since 2001.

To understand how the Federal Reserve has wrecked the economy, let’s “follow the money.” When households save money in savings accounts or in CDs, that money normally finds its way through the banking system into business loans and real estate investments. In some general sense the banking system “collects” the nation’s savings and then invests that pool of savings in long-term projects (housing, capital goods) that promise a profit for the banks and interest income for savers. This process is entirely legitimate for a productive and growing economy.

The Federal Reserve, however, is no ordinary bank, no ordinary intermediary between savers and investors. The Fed does not have to “wait” for savers to save before it can “invest.” Indeed, the Federal Reserve has the legal right to CREATE money and credit by simply purchasing existing bonds or debt or making loans through its discount window.


Here’s how it normally works. Assume that a bank decides to sell some bonds out of its portfolio; assume also that the Federal Reserve decides to purchase those bonds in the open market. After the sale, the bank will eventually get a check from the Fed (or its broker) for those securities. That check from the Fed is NEW MONEY, legally created out of thin air; that money did not exist before the Federal Reserve wrote that check and bought those bonds. And that’s how the money supply increases. The bank, of course, couldn’t care less whether that check represents real savings or newly created credit. They will simply take the funds from the sale of the securities and invest them or loan them out locally.


Under close scrutiny, the problem becomes obvious. Between 2001 and 2005, the Fed inflated the money supply far beyond what households were willing to save out of current income. That easy money/low interest rate policy fueled a massive run-up in housing sales and prices. Eventually that excess credit spilled beyond the housing market into the rest of the economy (indeed, the rest of the world economy) and started to drive up prices for commodities (gold, oil) and eventually almost everything else. And when Greenspan’s Fed finally realized its policy error and raised interest rates, housing went into the tank and so did the financial institutions that had purchased mortgage-backed securities and collateralized debt obligations. The Fed has recently lowered rates but that has only made inflationary expectations worse.


The enduring lesson here is that debasing the currency by inflating the money supply is always counterproductive. The Fed should allow interest rates to rise according to market forces and permit the liquidation of remaining malinvestments. When crude oil prices start falling sharply, we will know that monetary policy finally makes sense.


--------------------------------------------------------------------------------
Dominick T. Armentano is professor emeritus in economics at the University of Hartford (Connecticut) and a research fellow at The Independent Institute in Oakland, Calif. He is author of Antitrust & Monopoly (Independent Institute, 1998).
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[Demeter]

38. Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

http://blogs.ft.com/maverecon/2008/07/time-for-comrade-paulson-the-pull-the-plug-on-the-fannie-and-freddie-charade/


Are Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? The answer is: obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms. Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail.

The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) are government-sponsored enterprises of the US federal government. They are shareholder-owned corporations authorized to make loans and loan guarantees. Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt’s New Deal. For the next 30 years, it held a virtual monopoly on the secondary mortgage market in the United States.

In 1968, to remove Fannie Mae from the federal budget and balance sheet - the financial demands of the Vietnam War made such financial window dressing politically necessary - Fannie Mae was converted into a private corporation and listed on the stock exchange. It also ceased to be the guarantor of government-issued mortgages. That responsibility was transferred to another GSE, the newly created Government National Mortgage Association (Ginnie Mae). Freddie Mac was created in 1970 to do effectively the same thing as Fannie Mae, that is to expand the secondary market for mortgages. The GSEs buy mortgages on the secondary market, pool them and sell them as mortgage-backed securities to investors on the open market. They institutionalised and popularlised securitisation, a development whose excesses ultimately brought us the subprime residential mortgage backed securities disaster (although the GSEs themselves did not issue or guarantee subprime mortgages).

The US has, starting with FDR, socialised much of its residential housing finance arrangements since the 1930s. Since the recent financial crisis began in August 2007, most of what remained private has also been socialised.

Together, Fannie Mae and Freddie Mac own or back about half of all outstanding home loans. Evidently impressed by the argument that farmers in the US don’t have their snouts deep enough in the public trough, the federal government in 1988 created the Federal Agricultural Mortgage Corporation (Farmer Mac), following the Fannie & Freddie model, as a a stockholder-owned, publicly-traded company to promote a secondary market in agricultural loans. In addition, the Federal Home Association, a branch of the federal Department of Housing and Urban Development, provides subsidised mortgage insurance. Currently the FHA has 4.8 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio. In addition, the 12 Federal Home Loan Banks (created in 1932) provide low-cost funding to private American financial institutions for home mortgage loans, small business , rural, agricultural and economic development lending. While they are owned by their (private institutional) members, they are exempt from state and local income taxes. They also don’t seem to go broke a lot. An agricultural version of the FHLB, the Farm Credit System, consisting of four Farm Credit Banks, one Agricultural Credit Bank and a number of other institutions rounds off the universe of federally subsidised public housing finance provision in the US.

Formally, neither Fannie nor Freddie are backed or funded by the U.S. government, nor do the securities it issues benefit from any statutory government guarantee or protection. However, the companies’ charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default. Irrespective of these legal niceties, de facto, everybody knows that, although the shareholders of these GSEs are (probably) not underwritten by the Federal Government, the Federal Government would bail out the rest of the creditors to both institutions before you could say the words “serious threat to residential mortgage finance”. The creditors to Fannie and Freddie are therefore not unduly worried, even as the shares of the two companies have tanked. Between May 1 and July 9, credit-default swaps tied to the senior debt of Fannie Mae and Freddie Mac climbed 35 basis points to 70 basis. That’s ludicrously low, if there is no implicit guarantee of federal financial support for these entities.

During good times, Freddie Mac and Fannie Mae have been able to collect massive rents by being able to borrow at spreads over Federal borrowing rates that were much lower than was warranted by the quality of their portfolios. The implicit guarantee of the Federal Government, an implicit contingent liability of the tax payers, made this possible. These rents were partly appropriated by the orginal investors in Fannie and Freddie stock, and partly by the management and employees of the two GSEs.

Now that the seven fat years have come and gone and the seven lean years have arrived, the Federal Government is likely to be called upon to bail out Fannie and Freddie. The deterioration in the quality of their balance sheet and the increase in the scale of their balance sheets - both the result of political pressure to ‘do something’ about the US housing crisis and the implosion and disappearance of the private home loan market - probably would have pushed both GSEs into insolvency by now had they been honest private corporations. These parrots are no more.

On July 11, 2008, the New York Times reported that US government officials were considering a plan for the US government to take over Fannie Mae and/or Freddie Mac if their financial situations were to worsen due to the US housing crisis. These government officials were also reported by the New York Times as stating that the government had also considered calling for an explicit federal government guarantee of $5 trillion on debt owned or guaranteed by the two companies through legislation. You can see why the creditors to these GSEs don’t seem to be too worried.

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification. The creation of the Delaware SPV that houses $30 billion worth of the most toxic waste from the Bear Stearns balance sheet (with only $1 billion of JP Morgan money standing between the tax payer and the likely losses on the $29 billion committed by the Fed to fund the SPV on a non-recourse basis) is the clearest example of quasi-fiscal obfuscation I have come across in an advanced industrial country. The decision by the Fed to ‘invite’ the primary dealers and their clearers to collude in the (over) pricing of illiquid collateral offered by the primary dealers to the Fed at the newly created TSLF and PDCF (by the Fed accepting the pricing/valuation by the clearers of the illiquid collateral) is another example of the abuse of the Fed as a vehicle for channeling taxpayer-financed subsidies to the primary dealers. This form of socialism for the rich is therefore well-established.

The chair of the Senate Banking Committee, Chris Dodd, has said the Fed and the Treasury were considering opening the Fed’s discount window to Fannie and Freddie. I am afraid he may be right. After all, an injection of the liquidity by the Fed is so much more politically expedient than an explicit fiscal subsidy, even though their economic effect is identical. This would not be a liquidity enhancement operation by the Fed, which would be a legitimate operation for the central bank to engage in. It would be a quasi-fiscal recapitalisation of two insolvent institutions, which is not part of the mandate of the Fed.

The financial assistance offered to US homeowners through the spagetti of federal financial inducements (ranging from the tax deductability of nominal interest payments to the subsidisation of mortgage financing provided by the FHA and the GSEs) is not primarily socialism for the rich. It is socialism for the electorally sensitive, rather like the agricultural welfare state that exists in the US.

So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie Mae. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

[Demeter]

4. Ecuador and Venezuela in oil pact

http://english.aljazeera.net/news/americas/2008/07/20087161250585971.html


Rafael Correa, the Ecuadorian president, and Hugo Chavez, his Venezuelan counterpart, have entered into an agreement to build the biggest oil refinery on South America's Pacific coast.

The refinery plan announced on Tuesday will go up in El Aromo, 250km from Quito, the Ecuadorian capital, and should be ready by 2013.

"Instead of having refineries in the United States, we decided to keep them here in our geopolitical context," Chavez said.

Chavez hopes to wean Venezuelan crude away from the US, where Venezuela currently runs seven refineries.

Correa said that the joint $6.6 billion project by state-run oil firms from both countries will save Ecuador $3 billion in oil imports a year.

Venezuela and Ecuador are the only Latin American members of the Organisation of the Petroleum Exporting Countries.



Chavez said he plans to build other refineries in Brazil and Nicaragua.

"Everything ended up in the United States; that's what the empire and colonialism are all about," Chavez said.

Chavez said his goal was to provide "energy security for all the people in the (South American) continent."

He also proposed building a joint steel plant in Ecuador and help it improve its telephone service.

Correa said Chavez's plans were not motivated by "interest" or a desire to interfere in his neighbours' affairs, but by a feeling of solidarity and his belief in the "Latin American Union".

[Demeter]

6. N.H. will accept free oil from Chavez after all By NORMA LOVE Associated Press Writer

http://hosted.ap.org/dynamic/stories/C/CHAVEZS_OIL_NEW_HAMPSHIRE?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2008-07-18-15-47-44

CONCORD, N.H. (AP) -- Two years ago, New Hampshire refused to accept heating oil from Venezuelan President Hugo Chavez, the pro-Castro U.S. critic who once called President Bush "the devil." But with fuel prices rising, well, free oil is free oil.

With the state's blessing, New Hampshire residents will be receiving some of the fuel this winter.

New Hampshire becomes the last state in the Northeast to embrace the offer...

The oil giveaway will be managed by Citizens Energy, a nonprofit organization set up by former Massachusetts Rep. Joseph Kennedy to help the poor stay warm. But the state energy office plans to help Citizens publicize the aid and sign up fuel-oil dealers.

...Back in 2006, when Chavez began offering free oil to Americans from Venezuela's government-controlled Citgo, New Hampshire's energy office contacted the Venezuelan Embassy about working out a deal. But the idea galled some New Hampshire Republicans, including Sen. John Sununu, who called it a "disgrace" and an attempt at grandstanding by Chavez, and Democratic Gov. John Lynch squelched the effort...Chavez's supporters defend the heating oil program as another example of a generous deed by a president leading a socialist revolution for the poor. Some Chavez critics have charged that he is trying to embarrass the Bush administration and curry favor with the American public.

But a lot has changed over the past two years. Back then, heating oil sold for about $2.50 per gallon in the Northeast. Last month, the average price was $4.61, with predictions of $5 per gallon oil by winter. "The average tank is 250 to 275 gallons," Citizens spokeswoman Ashley Durmer said. "Filling it once is over $1,500. That is unfathomable that anyone can pay that price. If you have to fill the tank four times, it's going to be a devastating winter for a lot of people."

On Thursday, Sununu again criticized Chavez but said he has no problem with people or businesses accepting help from an independent nonprofit such as Citizens...Sununu and other lawmakers around the Northeast are pressing for big increases in federal home heating aid. More than 6 million New England households rely on oil heat.

Bob Garside, president of the Oil Heat Council of New Hampshire, a trade group, predicted many of the state's 200 dealers will refuse to participate in the heating-oil giveaway. "In the past, it's been nothing but a ploy for Chavez," Garside said.

Bill Fuller, general manager of Fred Fuller Oil Co., disagreed. He began delivering fuel for Citizens last winter, when hundreds of New Hampshire residents who applied on their own, without state involvement, got 100 gallons free. Fuller said he plans to do it again.

"It's actually a pretty good program," he said. "We get a voucher. We fax it in and get money right away."


NOTE TO READERS: NEW HAMPSHIRE IS ALWAYS CUTTING OFF ITS NOSE TO SPITE ITS FACE!

[Demeter]

19. Venezuela hands out energy efficient light bulbs in 11 US cities

--------------------------------------------------------------------------------
http://www.newspress.com/Top/Article/article.jsp?Section=WORLD&ID=565334541007717435


July 17, 2008 10:47 AM
CARACAS, Venezuela (AP) - Venezuela's CITGO Petroleum Corp. is handing out energy efficient light bulbs across the U.S., despite political tensions between the two nations.

Houston-based CITGO is teaming with nonprofit Citizen's Energy Corp. of Boston to hold workshops on energy conservation.

They plan to distribute nearly 500,000 small fluorescent bulbs in 11 cities.

The program kicks off in Houston Thursday, two days after it began in Washington.

The companies joined in 2005 to bring Venezuelan heating oil to low-income U.S. households. Critics alleged that President Hugo Chavez was attempting to spread his leftist ideals.

Chavez often threatens to cut off oil shipments to the U.S. But Venezuela remains its fifth biggest supplier.

[Demeter]

15. Russia's energy drive leaves US reeling By M K Bhadrakumar

http://www.informationclearinghouse.info/article20313.htm

Global Research, July 18, 2008
Asian Times



What emerges is that if anything, Medvedev is pursuing Russia's energy diplomacy more robustly than Putin. Soon after taking over in the Kremlin in May, Medvedev ordered the expeditious completion of the first stage of the Eastern Siberia Pacific Oil Pipeline (ESPO) by end-2009. The ESPO has a vital role in Moscow's efforts to balance its oil export strategy between Europe and Asia-Pacific. Moscow hopes to target Asia-Pacific as the export destination for one-third of its oil exports by 2020, as compared to 3% currently.

In early July, Medvedev undertook a diplomatic tour of the Caspian region, covering Azerbaijan, Turkmenistan and Kazakhstan. In Azerbaijan's capital Baku, he made a stunning offer that Russia was prepared to buy Azerbaijan's entire gas output at market prices. In Ashgabat, he shored up Turkmenistan's commitment to the modernization of the Central Asia-Center Pipeline and the construction of a new littoral Caspian pipeline.

Medvedev succeeded in prevailing over competing European and US rivals in the struggle for Turkmen gas. He further ensured that oil and gas from Turkmenistan and Kazakhstan will not bypass Russia. But what has truly incensed the Bush administration are Gazprom's dramatic inroads into Africa.

Russian giant Gazprom, the largest extractor of natural gas in the world, has announced plans to build a pipeline across the Mediterranean to pump Libyan gas to Europe. This is the final lap of a Kremlin strategy that involves Gazprom handling the entire output of Libya's gas, oil and liquefied natural gas (LNG) designated for export to Europe and the US.

Look at Gazprom's terse announcement in Moscow on July 9, "The Libyan side positively evaluated Gazprom's proposal to buy all future volumes of gas, oil and liquefied natural gas assigned for export at competitive prices." Now, Washington gingerly allowed the re-entry into the "international community" by Muammar Gaddafi, Brotherly Leader and Guide of the Revolution in Libya, on the basis of clear understanding. Western statesmen from British Prime Minister Gordon Brown to French President Nikolas Sarkozy and former Italian premier Romano Prodi queued up to climb the window of business opportunity opened by the Bush administration. And then Putin visits Tripoli in April, less than a month before he left office, and the two erstwhile colonels decided to jointly handle all of Libya's energy resources.

And Gazprom seeks to buy exploration licenses in Nigeria and proposes to build a pipeline from there to Algeria, and with Algeria, Gazprom is developing a proposal on "joint" marketing of gas in Europe. US officials have gone ballistic. "The monopolistic Gazprom is behaving like a monopolist does. It tries to gain control of the market as much as possible and to stifle competition. And that's clearly what is going on," thundered Matthew Bryza, US deputy assistant secretary of state for Eurasian affairs. "The Kremlin wants Gazprom to be a dominant force in global energy, and the dominant force in global gas. Tying up gas resources in Central Asia and Africa is part of that," he added. The plan is for Gazprom to dominate "in every corner of the planet", he alleged.

Bryza's outburst is understandable. The good work he did lies now in ruins. Washington was relieved to see the back of Putin's presidency, but it now transpires that Gazprom may have only stepped up the pace of overtures under Medvedev's astute guidance. Besides, with its new assets in Africa, Gazprom will soon be knocking for access to the US market through supplies of LNG. The European and international companies which have been traditionally present in the African market will be compelled to play a role alongside Gazprom.

Washington hit back by ensuring that Russian companies are left out in the cold from the 30 contracts for lucrative oil deals that Baghdad is awarding. It is a big blow for Russia. In February, Moscow had written off US$12 billion or 93% of Iraq's debt to Russia in a move that was widely seen as aimed to help Russian oil company LUKoil regain the Saddam Hussein-era rights to develop Iraq's giant West Qurna-2 oil field. But under US pressure, the Iraqi government is now awarding West Qurna-2 to the US's Chevron.

The Kremlin didn't show any anger, but coincidence or not, Gazprom chief executive Alexei Miller suddenly arrived in Tehran on Monday and discussed with Iranian President Mahmud Ahmadinejad the setting up of an organization of gas-producing countries. No doubt, with the Russian foothold in Libya (which has estimated natural gas reserves of 1.47 trillion cubic meters), in coordination with Algeria (which currently supplies over 10% of Europe's gas supplies), Qatar (with proven natural gas reserves of 25.8 trillion cubic meters) and Iran (which has the world's second-largest reserves after Russia), the time for a "Gas OPEC" is approaching.

The Iranian leader also suggested to Miller a market-sharing arrangement so that Russia and Iran could "collectively meet the demands of Europe, India and China in the gas sector". During the visit, an agreement was signed on the development of Iran's oil and gas fields by Russian companies; on Russian participation in the transfer of Iran's Caspian Sea crude oil to the Oman Sea; cooperation in the development of Iran's fabulous North Azadegan oil field; and, possible participation of Gazprom in the planned Iran-Pakistan-India gas pipeline project. Evidently, Moscow took a deliberate decision to press ahead with Iran in energy cooperation in the full glare of world publicity in complete disregard of US displeasure. Tehran loved it.

To quote a US expert, "Russia's strategic interest in Iran implicitly underscores the futility of hopes that Moscow would cooperate with Washington in imposing meaningful sanctions on Iran. While Western European companies are moving out of Iran or suspending agreements for fear of US sanctions (which penalize investments of more than $20 million a year in Iran's oil and gas sector), Gazprom is enlarging the already existing foothold."

Conceivably, the danger of losing out on the last energy frontier to Russia (and China) could be a factor in Washington's policy shift on Iran talks. Washington calls the u-turn "a strong signal to the Iranian government that the United States is committed to diplomacy". But according to The New York Times, Rice has decided to "test Iran's willingness to consider an international package of incentives meant to coax Iran into making concessions on its nuclear program". What we do not know is how close the Bush administration may be for involvement in Iran's energy sector, which is an element in the so-called "international package of incentives". (Halliburton, which Vice President Dick Cheney headed, was a very active player in Iran.)

By now it must be obvious to the Bush administration that the youthful-looking, post-communist lawyer-president who took over from Putin has lost no time drilling a hole through the entire US strategy to weaken Gazprom's grip over the supply of gas to Europe. The sense of fury is imaginable. But then Washington has only itself to blame. Medvedev's career as an energy czar is an open book like Cheney's - or Rice's. From 2000, he headed Gazprom. Now he controls Gazprom from the Kremlin.

Few took note that when he formally bid farewell to the Gazprom board of directors at a ceremony in Moscow on May 27, Medvedev took immense personal pride in pointing out that during his eight-year stewardship, Gazprom's capitalization skyrocketed by a factor of 46, and one fifth of Russia's budget is today derived from Gazprom's activities. He concluded, "I want to say in my turn that we will have the chance to see each other and discuss things in working meetings. So, nothing is coming to an end. It's only the beginning."

...The geopolitics of energy security are a highly sensitive subject for the Bush administration, whose profound links with Big Oil are legion. It is a tremendous loss of face for the Bush-Cheney-Rice combine that Moscow is outwitting the US on the energy front.



Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign Service. His assignments included the Soviet Union, South Korea, Sri Lanka, Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.

[Trajan]

7. Though I love the idea

Does this post conform to LBN rules ? .... It isn't a specific news story ....

[Demeter]

8. It Is Modelled After the Stock Market Watch

Which is a long-standing feature of LBN.

[Trajan]

9. Well .... We all love SMW, that's for sure ....

Good Luck ....

[libnnc]

10. this is very cool

I miss the market threads on the weekends

thanks

[Demeter]

13. And I'm Working So Many Hours Now, I Can't Post During the Week...

[ozymandius]

14. The dire circumstances upon us should be examined seven days per week.

The weekend is for deal brokering to keep the ship of financial state afloat. Every rescue plan of import lately has been leveraged on a Sunday. Great idea for this thread Demeter.

Dynamic times indeed as illustrated here by UpInArms thread in LBN:

Oil hedges turn toxic for weak balance sheets

NEW YORK (Reuters) - Companies with weak balance sheets are discovering that hedges against oil price moves can be almost as punishing as this summer's leap in crude costs.

Physical oil trader SemGroup LP told its lenders this week it may file for bankruptcy after margin calls on hedges designed to protect its 500,000 barrels per day business from a fall in oil prices gobbled up its cash reserves.

.....

Companies facing the biggest threat right now could be those that took short positions on crude, experts said. Independent oil and gas producers, companies like SemGroup that buy and trade oil, and refiners head the list of potential victims and the credit crunch at U.S. banks is making the situation worse.

"With these explosive moves in the commodities a lot of hedgers are exceeding their credit lines and when they go to their banks they can't get any more credit," said Phil Flynn of Alaron Trading in Chicago.

http://www.reuters.com/article/reutersEdge/idUSN1844188720080718?sp=true

[Demeter]

16. Praise from Ozymandius Is Praise, Indeed!

Thanks! I am still trying to empty my mailbox....

[Demeter]

17. ANYBODY MAY POST IN THIS THREAD!

Just in case anyone feels inhibited....

[havocmom]

23. Gonna move it to the proper forum for such discussion. It's Economy Forum stuff not LBN

And yes, anybody CAN post to it.

Thank you for starting this discussion. Looks interesting.

hm

[Mojorabbit]

27. It seems this should be in LBN

as is stock market watch every weekday esp since things are moving so fast and a larger amt of the board would see it.
The news is not good. I am hoping they can prevent a meltdown.

[AnneD]

34. I am ok with it being in the Economics spot.....

do we need to recommend it to keep it up there for folks to see. I go to both SWT and Economics. If it is announced in the SWT next week, I am sure the regulars will come over. I think we could cover the news dumps on Saturday and the brokered deals on Sunday. There is enough for a Sat and Sun Thread.

[Demeter]

20. Pakistani Investors Riot as Stocks Plunge By VOA News

http://www.voanews.com/english/2008-07-17-voa28.cfm?rss=asia



Hundreds of Pakistani investors rioted at the Karachi Stock Exchange Thursday demanding a halt in trading after share prices fell for the 15th straight session.

The exchange's security chief Mohammed Aslam said investors began smashing windows after the administration declined to suspend trading.

Similar protests also broke out in Lahore, where investors burned tires and blocked roads.

The Karachi Stock Exchange index has fallen 14 percent since Monday. Angry investors blamed the government for the recent volatility, after regulators relaxed curbs on daily stock price movements.

Persistent concerns about economic and political instability have also contributed to a decline in Pakistani stocks.

[Demeter]

47. And Commentary From DailyReckoning.Com

http://www.dailyreckoning.com/Issues/2008/DR071808.html http://www.dailyreckoning.com/Issues/2008/DR071808.html

The neophytes take these things seriously. In Pakistan, for example, investors rioted yesterday – breaking out the windows of the Karachi stock exchange and stoning officials.

What set off this popular uprising was the 15th day of declining prices – bringing the total loss for Pakistani investors to 35%. That doesn’t seem like much of a loss to us. Major market declines can take 80% or 90% off investors’ stock market holdings. But the Pakistanis are fairly new to the city and to the ways of modern markets. They don’t seem to realize that prices go up and down. Nor, do they seem to understand that markets are supposed to be beyond the reach of public officials.

“We demand that all stock prices be frozen at current levels,” said a representative of the Small Investors Association, perhaps speaking for small investors all over the world. He was not, of course, speaking for short investors – who couldn’t be happier. All over the planet, stocks have lost ground. The least of the losers, so far, is the United States...where the S&P is only off about 15% from its high. In Europe, losses are in the 20-25% range. And in China and Vietnam, investors have lost about half their money.

“You will start hearing of suicides...” continued the spokesman for the little guys, and still not quite getting the point...and then, the scales seem to fall from his eyes:

“Regulators always favor big brokers and investors.”

Of course they do. What did they think? How many small investors take the regulators to lunch? How many diminutive capitalists offer them jobs...and slip them envelopes? How many of the little guys hire lobbyists and big law firms to hobnob, pander and prevaricate?

C’mon, get with the program.

[Demeter]

21. Report shows costs threaten progress in poor nations

http://africa.reuters.com/country/LS/news/usnL17852821.html

GENEVA (Reuters) - Record growth in the world's poorest countries has failed to prevent an increase in their total numbers of poor people, the U.N. Conference on Trade and Development (UNCTAD) said on Thursday. Recent rising food costs threaten to undercut what modest progress has been achieved, while three quarters of people living in least developed countries (LDCs) still survive on less than $2 (1 pound) a day, it said in a report.

Income under $2 a day does not allow most people to meet basic needs for food, water, shelter, health or education, the Least Developed Countries Report 2008 noted.

The 49 LDCs experienced record growth of 7.9 percent in 2005, followed by 7.5 percent in 2006 and a projected 6.7 percent in 2007, the report said. But the high growth rates, driven in many cases by record exports boosted by high energy and minerals prices, may not be sustainable, it said. "The recent growth surge is generally not associated with a structural transition in which the share of manufactures in total output is growing (except for most Asian LDCs)," it said. "In fact, as compared with 10 years earlier, half of the LDCs have experienced deindustrialisation, reflected in a declining share of manufacturing in GDP."

DEPRIVATION

This record growth should have provided the opportunity for substantial improvements in living conditions but rapid population increases and other factors mean some 581 million out of a total 2005 LDC population of 767 million continue to live in material deprivation, it said.

Growth was uneven, with GDP declining in 2006 in Equatorial Guinea and East Timor, and growing by less than 3 percent in Chad, Somalia, Haiti, Eritrea, Nepal, Lesotho, Comoros, Tuvalu and Kiribati.
Growth had some impact on absolute poverty, defined as those living on less than $1 a day, which fell to 36 percent of the LDC population in 2005 -- a still high 277 million people -- from 44 percent in 1994, it said.

Sharp rises in food prices in 2007 and early 2008 have led the prices of staples such as maize, wheat and rice to double in some countries over the past year and a half, a severe blow to poor people spending a large share of their income on food.

"The bigger food import bills will widen further the already high trade deficits of the LDCs. This will affect all food-importing LDCs, and the balance-of-payment impact will be accentuated as countries also have to deal with rising energy prices," it said.

Besides those mentioned above, the other LDCs are Angola, Benin, Burkina Faso, Burundi, Central African Republic, Democratic Republic of Congo, Djibouti, Ethiopia, Gambia, Guinea-Bissau, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Sao Tome, Senegal, Sierra Leone, Sudan, Togo, Uganda, Tanzania, Zambia, Afghanistan, Bangladesh, Bhutan, Cambodia, Laos, Maldives, Myanmar, Nepal, Yemen, Samoa, Solomon Islands and Vanuatu.

(Reporting by Jonathan Lynn; Editing by Charles Dick)

[Mojorabbit]

24. Trouble at Fannie and Freddie Stirs Concern Abroad

Trouble at Fannie and Freddie Stirs Concern Abroad

By HEATHER TIMMONS
Published: July 21, 2008

For more than a decade, Fannie Mae and Freddie Mac, the housing giants that make the American mortgage market run, have attracted overseas investors with a simple pitch: the securities they issue are just as good as the United States government’s, and they usually pay better.

The marketing plan worked. About one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-governmental agencies, some $1.5 trillion worth, were held by foreign investors at the end of March. One out of 10 American mortgages is, in effect, in the hands of institutions and governments outside the United States.

Now that the two companies are at risk, how their rescue is handled will ultimately test the world’s faith in American markets. It could also influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say.

“No less than the international perception of the credit quality of the U.S. government is at stake,” said Richard Hofmann, an analyst with CreditSights, an independent research house with offices in London and New York.

Also at stake is Americans’ future ability to gain access to credit. If foreign companies and governments abandon United States investments, home, auto and credit card loans will be much more difficult to come by.
more at link
http://www.nytimes.com/2008/07/21/business/21bank.html?_r=1&hp&oref=slogin

[populistdriven]

26. Economic tremors in the West reach China

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3402977

[Mojorabbit]

28. Sovereign wealth funds likely to turn to Asia

NEW YORK: The trouble at Fannie Mae and Freddie Mac, the U.S. mortgage finance companies, may discourage sovereign wealth funds from buying dollar-denominated assets, but the euro is not likely to be the main beneficiary.

Instead, these government-run investment entities, which control more than $3 trillion in assets, are likely to turn to investments in Asia, a move that will probably push the dollar lower against Asian currencies, including the yen.

"This is not a euro-dollar story - it's going to be a developed-world-versus-developing-world story," said Stephen Jen, who head of global foreign-exchange strategy at Morgan Stanley.

The authorities in Kuwait said last week that its sovereign wealth fund would not buy future Fannie or Freddie debt, opting instead to raise investments in stocks, bonds, and real estate in China, India and Japan.

The Chinese Academy of Social Sciences also said the problems at Fannie and Freddie added urgency to China's goal of diversifying its $1.8 trillion in currency reserves.

At the end of 2007, the China Investment Corporation, China's sovereign wealth fund, oversaw an estimated $200 billion in assets, while the Kuwait Investment Authority has as much as $250 billion in investments, according to estimates by JPMorgan.

The U.S. Treasury and Federal Reserve have acted to shore up the balance sheets of Fannie Mae and Freddie Mac, which own or guarantee $5 trillion in debt, close to half the value of all U.S. mortgages. So far, the plan has helped to build investor confidence, and recent Federal Reserve data showed that central banks were still adding to their agency holdings in the week to July 16.
more at link
http://www.iht.com/articles/2008/07/20/business/deal21.php

[Demeter]

32. Unless Asia Has Tightened Up on Their Fraud and Corruption, Good Luck With That!

In the US we at least have a history and tradition of trying to do things above-board, and some of the legal structures still exist.

If the election isn't stolen, and Obama doesn't sell out, we could see the US recover to much better, more solid and honest heights.

[ozone_man]

30. The dual of Ozymandius stock thread.

Brilliant idea! The economy doesn't stop for the weekend.

I could see how it might be considered LBN though, in the same way that the SM thread is.

[Demeter]

31. How to Get the Economy from its Vicious to a Virtuous Cycle -- But Radical Righties Won't Let it Hap

Paul Abrams


http://www.huffingtonpost.com/paul-abrams/how-to-get-the-economy-fr_b_113067.html

Policies founded upon lies rarely work.

The economy has deteriorated, and will continue to spiral downward, but the reasons for the vicious cycle have been ignored, and thus the cures not even discussed. That represents a victory for the radical rightwing ideologues and a major defeat for the people of the United States.

The major reason for the downward spiral is the upward spiral in the US deficits and debt. Remember, our dear leader inherited a projected surplus of $5 Trillion, and succeeded in transforming that into a debt of an additional $4 Trillion, the most spectacular case of fiscal mismanagement in world history.

The boy wanted to outdo dad, and, boy, did he!

Even admitted economic illiterates like Bush and McCain would understand that when you accomplish such a feat, the value of your currency is likely to go down. And, it has. Yesterday, our dear leader told us that he was not an economist but an optimist. Golly-gee.

When the currency falls in value, the price of imports increases. We import most of our oil. Hence, the price of oil and gas increase.

The premium paid for gas at the pump ($1.50-$2 of the price) is a "tax" that goes to the oil companies instead of your government where all would share in its benefits.

So, the way to get gas prices down, and thus the tax on consumers that goes to the oil companies reduced, is to have a stronger currency.

How can that be accomplished? Well, interest rates could be raised. Yes, but that also increases the payments on the debt and thus annual deficits, further damages the housing market and, without dealing with the deficits, injects little confidence that the US was becoming serious again about prudent management.

Some of the radical righties propose increasing interest rates. Perhaps the dollar would creep up, but very slightly, and the impact on the housing market would be negative, thereby decreasing the wealth of the majority of Americans. Of course, the radical righties do not really care about the wealth of the majority of Americans whose home is their major asset.

But, we know what works.... because we did it in the early '90s. We were coming out of the Savings & Loan Crisis, the economy was doing poorly, George H.W. Bush kept proclaiming we were not in recession. But HW acted, and did so against his "read-my-lips" pledge, earning him the undying enmity of the radical righties, but taking the major first step that righted the economy.

He raised revenues by raising taxes. Bill Clinton then upped the ante again, and, in the midst of an economic downturn, the myths of the radical righties exploded -- the economy actually reversed itself and grew despite the slightly increased tax rates.

Here's how. The major problem at the time was that the deficits were reflected by high interest rates. That kept investment low, and the interest on the debt high, becoming a major component of government spending that accomplished nothing. By restraining spending via pay-as-you-go (aka, "pay-go"), and taking in more revenues through higher taxes on the wealthy, interest rates came down, and the economy took off.

Today, the major problem the deficits cause is a low dollar. Restrain spending, and increase revenues by increasing taxes on the wealthy and restoring the estate tax to 2000 levels and closing loopholes and imposing the surtax to pay for the Iraq and Afghanistan wars--and, voila!, the dollar will strengthen substantially.

A strong dollar will then reduce dramatically the price of oil, and gas, and reduce the "taxes" we are all paying to the oil companies. It will enable interest rates to stay down, thereby allowing the housing market first to stabilize and then rebound over time.

Why can we not do this? Because the radical righties cannot abide the notion that raising marginal tax rates slightly on the rich can indeed work. They will tell you that cutting taxes raises revenues, but even Bush Treasury Secretary Paulson said in his confirmation hearings that tax cuts "do not pay for themselves". The true irony is that the wealthy were actually much better off, i.e., they were wealthier, when their slight increased tax rates got the deficits down, and thus their wealth up.

We still would have a lot of problems: the crisis in the financial institutions, the dependence on foreign oil, global warming, failed foreign policies, etc.

But, the vicious cycle we now face could be turned into a virtuous one.

[flashl]

36. Commercial bankruptcies soar, reflecting widening economic woes

Tony Pugh | McClatchy Newspapers
last updated: July 19, 2008 05:01:14 PM

WASHINGTON — Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

States that saw the biggest increase in filings were Delaware, Montana, Oregon, Maryland and Connecticut, suggesting that the economic gloom is spreading beyond large population centers.

It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008.

McClatchy Washington Bureau

[Demeter]

40. No Jobs and No Decent Wages=No Customers

Even Hery Ford, who nobody could call a leftist, socialist, or anything other than a skinflint, rapacious capitalist Yankee, knew that.

He made sure his workers were paid enough to have some money left over to buy Fords. That's known as descretionary income, Paulie, Ben, Dick and Georgie: something above starvation levels.

[AnneD]

39. Speculators gone wild----summer vaca edition.

His gamble went way wrong


EL CENTRO, CALIF. — From his office in a strip mall in the Southern California desert, energy trader Bill Rapp bet heavily that Hurricane Katrina would cause natural gas prices to go up and up and up.

He got it wrong — spectacularly wrong.

The gamble has led to tens of millions of dollars in losses at the utility he worked for, the Imperial Irrigation District, and resulted in higher electric bills for its 140,000 customers in this region of triple-digit temperatures and double-digit unemployment. As for Rapp, he lost his job and went from potential hero to goat.

"We're having to pay for someone's bad decisions, for someone's mistakes," said Donna Freeman, 60, who pays $300 a month to cool her small home.


More....

www.chron.com/disp/story.mpl/business/5896444.html

An interesting cautionary tale.......

[Demeter]

41. They Are Really Slow To Learn in California

It's either the eternal sunshine or the drugs or the lack of animal proteins and iron in the diet...

or maybe it's Reagan's gutting the schools.

[AnneD]

42. Author questions Harvard's mission (School of Business)

Philip Delves Broughton, an English newspaperman who graduated from Harvard Business School in 2006, chronicled it in his new book, Ahead of the Curve: Two Years at Harvard Business School.

While lauding the smarts of his fellow students, he wonders what kinds of businesspeople Harvard is producing. Almost half his class accepted jobs in the financial services sector.

"If your day is spent fiddling with money on a screen, how real does your work become? How real is the fact that thousands are losing their homes?"

He also criticized what he saw as the school's mission of "educating future leaders of the world," saying it should stick to churning out capable business managers. The mission has encouraged hubristic behavior among its graduates, he said. "Business has become big headed. There's no reason ... for every businessperson to think they should be running everything in the world."

more....

www.chron.com/disp/story.mpl/business/5896506.html

The fact that Bush is an alumni and has totally f@#*#d over this economy doesn't speak to well of their output. Wonder if Senior could get a refund on the tuition-cause we sure as hell didn't get our money's worth.

[Demeter]

43. You Think Bush Paid Tuition?

:rofl:

[AnneD]

44. Absolutely.....

He didn't have a decent academic record. I am being nice to call it tuition. In other circles it would be called a bribe.:spray:

[Demeter]

45. The Mogambo Guru Speaks...and Speaks...And Speaks

Nuggets from as many as I can stand to process columns by

Richard Daughty, general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

[Demeter]

46. A WORLD WITHOUT INFLATION by The Mogambo Guru

http://www.dailyreckoning.com/Writers/Mogambo/DREssays/MG070708.html


...Anyway, so I go back home, and finish reading the article, where Mr. Steingart goes on, “Adjusted for inflation, prices are in fact rising by only 2.3 percent.” Hahaha! I can’t help myself! Prices are rising “only” 2.3% above the rate of inflation, after you take out inflation! Hahahaha! Unbelievable! He doesn’t say what the 2.3% is, if it isn’t inflation, which is kind of funny.

And since we are being funny, I forget where I got this, but “ Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF’s board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.” Hahahaha!

The reason given is that “Under its bylaws, the IMF is charged with the supervision of the international monetary system.” To illustrate the fairness of its request, the article notes, “Roughly two-thirds of IMF members – but never the United States – have already endured this painful procedure.”

Painful? Americans? Americans putting up with painful? Hahahaha! Don’t make me laugh!

Apparently, we are so screwed up economically that the IMF, an organization of Leftists, socialists, Keynesian-befuddled, fiat-money yahoos and (seemingly) various mental defectives, thinks it is necessary to find out what is wrong with us! Hahaha!

As if Bush, Cheney, the Treasury, the Congress, or the Fed would allow anyone, especially foreigners, to go snooping around and finding evidence of their staggering mismanagement, their unfathomable stupidities, and their unbelievable frauds and corruptions! Hahaha! Too, too much!

Hell, nobody has ever been allowed to look at, much less audit, America’s gold (held by the Federal Reserve) since the ’50s, or the Fed’s books, ever!

But I am supposed to think that, “As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests – worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar.” Hahaha!

First we get the outrage of Treasury Secretary Paulson wanting the Federal Reserve to be given huge, new, awesomely sweeping powers to intrude anywhere it wants, and actually manipulate private financial firms (and your money), and now this? Hahaha!

We’re freaking doomed! Ugh.

[Tandalayo_Scheisskopf]

48. Globex Commodities, 07Jul08

At 8:57PM EDT, Oil is up .81, Gasoline is up .0202 and Heating Oil is up .0371 for August delivery. NG is up .115.

Grains and Soybeans are all down.

Gold is down .30.

[Demeter]

49. SCORCHED EARTH ECONOMY by David Galland

http://www.dailyreckoning.com/Issues/2008/DR071008.html

... in Doug Casey’s August 2005 article, the dramatically titled “Profiting from the End of Western Civilization”... he looked ahead and saw the inflation that the government’s loose money policies made inevitable. A quote...

“Of particular importance is that the U.S. dollar has been used as a gold substitute for decades by other countries. This has been very convenient for the U.S. – we can create almost infinite numbers of greenbacks and give them to people in other countries in exchange for real wealth. Idiotically, central banks abroad have been holding those dollars as backing for their own currencies.

“The amounts involved have grown so immense, and the eventual grim fate of the dollar has grown so obvious, that foreign central bankers are now looking at each other, trying to figure out who will head for the exits first. Many are ‘diversifying’ from dollars into other currencies – which are themselves backed mainly by other paper money, mostly dollars. At some point there’s going to be a panic out of U.S. dollars that’s going to dwarf any financial event in history.”

And in that same article he also predicted the current collapse in the housing bubble that the loose money had made possible. Another quote...

“What’s going on now in the residential real estate market is much like the tech bubble, but potentially much, much more serious than what went on in stocks a few years ago.”

Jumping ahead 3 years, to today, the unhappy scenario Doug then foresaw is now unfolding. Right on schedule the economy and markets are heading inexorably toward what might be termed the Scorched Earth Phase.

Even a casual glance at the devastation now being wrought on the very building blocks of the economy confirms the appropriateness of that term.

For instance, consider the U.S. financial firms, the single largest component sector of the S&P 500. So far, the losses to those firms are approaching half a trillion dollars. And the odds are high that there’s much more to come. With the exception of Bear Sterns, the big name financials have been able to cobble together the billions of dollars in additional capital needed to shore up their balance sheets...but they are quickly running out of rope. That becomes apparent when you consider that many of their major revenue centers are now either severely wounded or in the morgue. Last quarter alone Morgan Stanley saw its investment banking fees fall by half and toxic paper sales (ah err, I mean “fixed income”) sales and trading revenue collapse by over 85%. And this at a time when these same firms are being forced by regulators to repatriate their off-balance sheet assets...to wit, the aforementioned toxic paper.

Sovereign Wealth Funds (SWF) to the rescue? Not anymore. Those that initially rushed in were seriously burned and many are now on record as staying on the sidelines. But any that might wish to take a second roll of the dice, will only do so if they get much better terms, which is dilutive to existing shareholders.

Meanwhile, the housing meltdown persists and will continue for at least another year or two. Unless, of course, the government gets serious about “doing something”...in which case the downturn could last 5 or 10 years.

Why do I say that? What the market needs most of all right now is for house prices to fall, as quickly as possible, to a market-clearing price. The problem, of course, is that thanks to the self-serving exuberance shown by many appraisers during the real estate bubble-mania, at this point nobody actually knows where the bottom is. Another 10%? 20%? 30%?

There really is only one way to find out...let the brush fire burn, as painful as that will be. But as I don’t need to tell you, “doing nothing” is not a concept that politicians in an election year are very comfortable with. And so, like trained seals leaping after vote-fish, the politicians will jump though any number of hoops to keep people in their homes even though many can’t afford the carrying costs, let alone the mortgages. That only prolongs the pain and increases the government deficits that are at the core of the current crisis.

So, we have a tumbling collapse in the largest component of the stock market, coinciding with a tumbling collapse in the largest component of people’s net worth, their homes.

And we aren’t even warming up yet.

For a more complete accounting, you also have to add into the mix the intractable problems unfolding in energy patch, including the near-certainty that Mexico, the 3rd largest source of imported oil for the U.S., will stop exporting said oil within 4 to 6 years...max.

Rather than rushing ahead with emergency initiatives to open up new energy sources, the U.S. Congress just passed emergency legislation to prevent so much as exploring for uranium anywhere near that big hole in the ground, the Grand Canyon. It is this perfect world mentality that assures that the cost of what energy is available, will only get more, not less, expensive. Of course, as energy is required in the production of, well...everything, so the cost of everything will go up.

And that includes, food...which, as I don’t need to tell you, has been on a tear of late.

Sure, opportunistic new plantings will help, over time, to moderate the higher food prices...but not overnight. Meanwhile, the cost of filling the old tractor and shipping food to market will keep going up.

So, to the list of serious problems for the economy, we have to add persistent high energy and food prices.

But even those fall short of the KING KONG of the set piece...the collapsing fiat monetary system that helped create the recent series of bubbles in the first place.

In a fiat monetary system the only tangible barriers to money creation are provided by a loss in stakeholder confidence. While the average American is, sad to say, almost completely ignorant of what a fiat monetary system is, let alone the consequences of same, the same cannot be said of the foreign holders of an unprecedented $6 to $7 trillion dollars.

To be a touch more specific, by unprecedented I mean as in “never happened before”. While, under other circumstances this fact might evoke a raised eyebrow or a concerned comment over cocktails...going into the jaws of a vicious economic/dollar crisis those foreign dollar holdings become akin to playing toss with a lit stick of dynamite. He who holds the dollars when the fuse meets the powder is in for a very, very bad day.

As a result, the foreign holders are watching the moves of the Fed very closely. Trying to avoid that scrutiny the Fed, like a curbside Three Card Monty dealer, has come up with some clever sleights of hand, including lending directly to investment banks and swapping Treasury bills for toxic paper. But that has accomplished little more than buying some time; it does nothing to resolve the “rock and a hard place” dilemma.

Which remains as thus: if the Fed raises rates to prevent a sell off in dollars, they’ll crush the highly indebted and already struggling populace and, in so doing, unleash a serious economic crisis. But if the Fed keeps rates where they are, or even lowers them, they’ll trigger a dollar sell-off and unleash a serious economic crisis.

Either way, the story ends the same: a serious economic crisis.

At this point, our bet remains that the Feds will go to default mode which means cranking up the printing presses into the red zone, letting the dollar move ever closer to its intrinsic value: zero. That they’ll follow this route is suggested by two inputs. First, a depreciating dollar means a reduction in the trillions of dollars in obligations now owed by the U.S. government. And, secondly, foreign holders don’t vote.

So, we are calibrating our investments toward a serious economic slowdown, but with high inflation. Some people would call that Stagflation. But given the severity of both sides of that formula, the situation may be better described in terms of Scorched Earth. Or, because people seem to find concepts ending in “flation” handy, Stag-flagration.

Businesses and personal net worth will be devastated at the same time that costs run out of control.

How to Play It?

Our strongest recommendation is to position your portfolio in anticipation of higher inflation and, in time, a turnaround in interest rates. The latter is because interest rates, which are still near a 50-year low, can only go up as the inflation rises to the point of banner headlines (at which point, the government is hoping, the economic downturn will have moderated).

In fact, we think the move towards higher interest rates is a trend that will surprise many, but, once it gets going in earnest (and corporate bond yields are already on the rise) last for at least the next several years.

In terms of other investments, it’s worth noting that in the last major bull market for tangibles, back in the 1970s, oil was the best performing investment, followed by gold, U.S. coins, silver and stamps.

Today the range of investment vehicles you can use to make the trend your friend is greatly expanded a wide variety of specialized ETFs (though an added layer of analysis is required to sort the strong, well structured, high volume variety from the thinly traded variety of suspect parentage). And while they continue to require patience, the highest quality junior Canadian gold exploration stocks remain one of the most prospective investments you can make. A number of these companies are now sitting on proven big discoveries, but thanks to the stop-start markets, are significantly undervalued. They won’t stay that way long.

Whatever you do, don’t be complacent at this point. If we are right, then the economic crisis will soon head into its next and most dangerous stage. Certainly, we should feel the heat, and maybe worse, by the end of the year. Therefore, at the very least, you’ll want to take measures now to protect yourself. For our own portfolios, we believe that the best defense is a good offense, and so are positioning ourselves in the sectors that will profit, and profit big, as the stag-flagration sweeps across the global economy.

Then it’s just a matter of sitting tight and being right.

[Demeter]

50. Visitors from the Planet Thrift

http://www.dailyreckoning.com/Issues/2008/DR071608.html

Question: If a bubble pops on Wall Street and all the traders are in the Hamptons, does it make a sound?

The most common question I have gotten on a weekly basis for the last 18 months is “When will the bubble pop?”

My answer is pretty standard: “There is no bubble!”

I am not usually invited back to those cocktail parties, as it scares the guests. The truth is we are not in a bubble. We are in an upward correction propelled by years of denial, stupidity, underinvestment and neglect. The blame falls squarely on several parties.

Wall Street is guilty for not embracing the commodity markets earlier. Wall Street should have allowed commodity prices to reflect the true nature of pent-up demand by making those markets available to its clients. Instead, Wall Street discounted commodities as some form of gambling.

The commodities exchanges and traders are also to blame for not making their markets more transparent, and for also projecting an image of secrecy and mystery.

And both Byron and I could tell you stories about the underinvestment in basic production over the past couple of decades. Really, what were people thinking? That prices were low, and would stay low forever? Did it ever occur to anyone that all those babies born in the 1970s and 1980s might some day grow up and want food, energy and manufactured goods?

No, this is not a bubble. It’s a coming of age, a big, hard reality check that has been decades in the making. I have seen more activity by Wall Street in the resource markets in the last three years than in the previous 17. And I do not expect that it will ever go back to the way it was. I also don’t expect to see 42nd Street filled with porno and hookers again, either.

Change is often hard to accept. $140 oil, $1,000 gold, $8 corn... this is all the new reality. None of these new price trends are a figment of some rogue speculator’s imagination or the products of evil activity. This is a wake-up call that our growing world is hungry for the limited resources it still has.

The most important thing to remember is that markets, even parabolic bull markets, always correct. Those corrections can be painful if one is overextended or married to one side of the market – in this case, the bull market.

So ride the wave of change, of course. Be flexible, buy on the corrections, sell for profits on the overdone rallies and vice versa. Go short when clear tops have been made (although I grant it can be hard to determine the exact top).

There is no trail of breadcrumbs to follow on Wall Street, but that’s why you have Byron and me to help guide you. As long as grains don’t go up too much more, we should be able to supply you with a good trail to follow for many years to come, whether commodities are in rally mode or consolidation.

Best wishes for profitable investing,

Kevin Kerr

[Demeter]

51. Productivity Increases As Workers Are Fired

http://www.nakedcapitalism.com/2008/05/productivity-increases-as-workers-are.html


What's good for GM is not longer what's good for America. The supposedly good news that productivity is up, reducing inflationary pressures, is due to the fact that businesses cut their workforces and had those who remained do more...This has been a long standing practice in large corporations; a lot of staffers are doing what would have been a job and a half or even two jobs eight years ago. And because workplace insecurity is high, no one dares push back. Note that wage gains are lagging inflation.

Japan has had the same pattern since the end of its bubble years: a grinding down of employees due to stagnant pay, widespread use of temporary and part-time workers, and increased demands for output. In Japan's case, it has helped fuel a robust export sector and a stagnant domestic economy. Is this what America's future holds?

From Bloomberg:


U.S productivity unexpectedly accelerated in the first quarter, helping combat inflation, as job cuts meant the remaining employees did more work.

Productivity, a measure of worker efficiency, rose at a 2.2 percent annual rate after a 1.8 percent gain the prior quarter, the Labor Department said today in Washington. A separate report showed pending sales of existing homes fell for the fourth time in five months, signaling no end in sight to the housing recession.

Federal Reserve policy makers anticipate that the economic slowdown and weakening job market will contain consumer prices, and today's figures may bolster their case. Companies trimmed staff hours by the most in five years last quarter as they tried to cope with the housing-led economic downturn, the data showed.

``Productivity is solid and labor costs are slowing and this will take the pressure off inflation and the Federal Reserve,'' said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. ``Unit labor costs have essentially come to a grinding halt and that should support corporate profits and allow businesses to hold the line on prices.''.....

Hours worked dropped at a 1.8 percent pace, the most since the first quarter of 2003, today's report showed.

U.S. employers cut payrolls in each of the last four months, bringing the total number of jobs lost this year to 260,000.

[Hugin]

52. Yay! Great idea Demeter!

I have no contributions at the moment. But, there's been oodles in the past I'd have liked to post.

:)

[Demeter]

53. I Feel a Bit Faint, After Posting So Much Bad News

But the mailbox is slightly less bulgy now...

Have a good day!

[DemReadingDU]

54. Thanks!

Great place on the weekends to read economic news