Weekend Economists: The Severus Snape Edition, January 9-11, 2009

For those not in the Potterverse, this is the 49th anniversary of the birth of the snarkiest Potions Master and former Death Eater in Britain, who is NOT dead, no matter what the Author wrote, so stop saying that!

Severus Snape would, if he had the slightest interest in our Muggle economy, be the perfect commentator. One particular phrase of his stands out as particularly appropos: "I may vomit."

So, let's set queasiness aside and try to figure out this little Ponzi world of the former Masters of the Universe, or Death Eaters, as I've come to see them. Economic terrorists, or pirates, forsooth!

Please feel free to post anything you found especially enlightening, important, or humorous. WE thanks you in advance!

:kick:

As much as I admire enthusiasm and initiative, you could have let me post something besides the intro!

How was your week?

(They won't let me.)

I'm trying to be living proof for the now dethroned Have-mores that life can and does
continue for those without boatloads of money. In fact, it can be a quality existence.
If I can save one life... It'll be worth it.

I had just heated up some hot chocolate and was waiting for the opening (Hopefully) of
the widely anticipated DU Career and Jobs Forum Ozy has been championing over the last
week. I think it's a great idea, but, no move on the part of the DU Hierarchy yet.

You?

But the week is finally over. Thought my new computer was going to fail, but it was just a Firefox momentary blip, which seems to be over.

Yes, there is life after bankruptcy. The trouble is, some people would rather die. 3 very high-profile suicides are taking the last Depression's urban legend cliche and turning it into reality. Americans used to be made of sterner stuff. But seems that those who used to dish out the contempt and shame on perceived "failures" cannot take it themselves. I think we might be a better people, when the dust finally settles on this great economic collapse. Social Darwinism, more likely than any learning experience....

http://www.nytimes.com/2009/01/10/business/10rubin.html?_r=1&hp




Robert E. Rubin, the former Treasury secretary who is an influential director and senior adviser at Citigroup, will step down after coming under fire for his role in the bank’s current troubles, the bank confirmed Friday.

Since joining Citigroup in 1999 as an adviser to the bank’s senior executives, Mr. Rubin, 70, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent...

The announcement came as Citigroup was in talks to sell an interest in its Smith Barney brokerage and asset management unit to Morgan Stanley, according to two people with knowledge of the discussions. Although no deal has been reached, executives at the two banks have been in talks for some time.

A deal would put Morgan Stanley in control of the largest group of brokers in the country, topping Merrill Lynch, and possibly provide Morgan with a larger deposit base. Though both banks would retain stakes in the venture, Morgan Stanley would pay Citigroup an amount for its share and possibly come to control the entire venture over time.

While a final deal would bolster Morgan Stanley, the talks over the fate of Smith Barney appear to underscore the enormous problems that Citigroup continues to confront even after receiving $45 billion in government bailout funds.

Brokerage businesses provide steady revenues that analysts say can help Wall Street firms weather pullbacks in their other businesses.

Mr. Rubin had been backing away from his daily responsibilities since at least last summer when he started advising Mr. Obama, according to several Citigroup executives who have spoken to him recently. But this fall, he played a pivotal role in the bank’s negotiations with federal regulators orchestrating its multi-billion dollar bailout. The government has injected more than $45 billion into Citigroup and agreed to guarantee about $269 billion of illiquid mortgage-related assets.

As a board member and chairman of the bank’s executive committee, Mr. Rubin was awarded more than $126 million in cash and stock over eight years. He served as the bank’s elder statesman, meeting with important clients and building relationships with government and business leaders around the world, though his contract states that he is to have no daily operational responsibilities.

Vikram Pandit, the bank’s chairman, said in a statement Mr. Rubin had been “a trusted advisor” and would continue be “a sounding board and a resource for me and for the company.”

Mr. Rubin’s other role has been to serve as a sounding board and supporter for Citigroup’s senior leaders — including Vikram S. Pandit, its chief executive, and Mr. Pandit’s predecessor, Charles O. Prince III. But Mr. Rubin’s influence in urging the bank to ramp up risk-taking, while failing to properly supervise the big bets taken on mortgages and other complex investments, put him under fire.

Citigroup is likely to post its fifth consecutive quarterly loss when it reports results later this month, and it has already absorbed more than $65 billion in losses. Every one of its major businesses has suffered from the global financial meltdown. But the scale and scope of Citi’s losses, from its investment banking to its credit card and retail franchises, has been particularly pronounced.

Although Mr. Rubin had been contemplating the decision for several months, he may have hastened his departure to try to get ahead the public backlash facing the bank’s board, said two people at Citigroup with knowledge of the board’s thinking. Mr. Rubin is fiercely protective of his reputation and faced the possibility of a protracted struggle for reelection.

Mr. Rubin said he planned to deepen his involvement in public policy initiatives, charitable projects, and other personal hobbies such as fly-fishing.

In December, federal regulators approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank.

The complex plan calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. Under that plan, Citigroup agreed to certain executive compensation restrictions, which will be reviewed by regulators.

Once the nation’s largest and mightiest financial company, Citigroup lost 86 percent of its value in the stock market in the last year as the bank confronted a crisis of confidence.

With more than $2 trillion in assets and operations in more than 100 countries, Citigroup is so large and interconnected that its troubles could spill over into other institutions. Citigroup is widely viewed, both in Washington and on Wall Street, as too big to be allowed to fail.

http://news.bbc.co.uk/2/hi/americas/7819403.stm


An American surgeon is demanding that his estranged wife returns a kidney he donated to her or pays him $1.5m in compensation.

Dr Richard Batista has gone public with the demand saying he is fed up with how long it is taking for his divorce to be finalised.

See video at link. See Snape quote above.

:crazy:

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/08/AR2009010804109.html?hpid=topnews


By David Cho
Washington Post Staff Writer


Confronted with intense skepticism on Capitol Hill over the $700 billion financial rescue program, Treasury Secretary nominee Timothy F. Geithner and President-elect Barack Obama's economic team are urgently overhauling the embattled initiative and broadening its scope well beyond Wall Street, sources familiar with the discussions said.

Geithner has been working night and day on the eighth floor of the transition team office in downtown Washington with Lawrence H. Summers and other senior economic advisers to hash out a new approach that would expand the program's aid to municipalities, small businesses, homeowners and other consumers. With lawmakers stewing over how Bush administration officials spent the first $350 billion, Geithner has little chance of winning congressional approval for the second half without retooling the program, the sources added...Much of the work by Obama's team has focused on establishing principles that would clearly define the program's course and the conditions of government aid to financial firms.

With Geithner leading the discussions along with Summers, who will head the National Economic Council in the White House, the group is devising plans that would use rescue funds to help homeowners avoid foreclosure and unclog the credit markets that finance loans to consumers, small businesses and municipalities. The team is also planning to have the government take more stakes in financial firms, but companies receiving federal aid would have to submit to greater restrictions on executive compensation than were imposed by the Bush administration.

Geithner is also considering creating a new bureau within the Treasury to manage the Troubled Asset Relief Program, or TARP, in an attempt to improve the program's operations and oversight...Although the timing has not been settled, one source said details of this new approach may be laid out before Geithner's confirmation hearing, which is likely to be held late next week.

Some lawmakers are not waiting for the transition team to release its plans. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, was set to announce legislation today that would force the Treasury to meet conditions if it requested the second $350 billion of the rescue funds. Frank's terms include many of the proposals Geithner is considering as well as several others such as restricting executive bonuses and requiring firms that receive federal aid to explain how they are spending the money. Frank has scheduled a Jan. 13 hearing on the future of the rescue program.

Yesterday, Senate Democrats took their own action to help homeowners whose mortgages are larger than the value of their house, announcing a deal with Citigroup that would allow bankruptcy judges to set new repayment terms for mortgage holders.

Even if Geithner provided additional help for homeowners, he must overcome discontent among rank-and-file lawmakers about the program. Geithner faces a tremendous risk in asking for the money because if the request is turned down, it could wreak havoc in financial markets.

But he cannot wait long to ask for more funds. In December, the Bush administration made $4 billion of its $13.4 billion loan to General Motors contingent on whether Congress approves the second half of the TARP funds. GM needs the money to meet a massive debt obligation due in mid-February.

....
A date for Geithner's confirmation hearing has not been set. But two congressional sources said they expect it will take place Jan. 15...

Staff writers Binyamin Appelbaum and Neil Irwin contributed to this report.

http://www.nytimes.com/2009/01/09/business/09insure.html?ref=business



The federal investigation that prompted Gov. Bill Richardson of New Mexico to withdraw his nomination as commerce secretary offers a rare glimpse into a long-simmering investigation of possible bid-rigging, tax evasion and other wrongdoing throughout the municipal bond business.

Three federal agencies and a loose consortium of state attorneys general have for several years been gathering evidence of what appears to be collusion among the banks and other companies that have helped state and local governments take approximately $400 billion worth of municipal notes and bonds to market each year.

E-mail messages, taped phone conversations and other court documents suggest that companies did not engage in open competition for this lucrative business, but secretly divided it among themselves, imposing layers of excess cost on local governments, violating the federal rules for tax-exempt bonds and making questionable payments and campaign contributions to local officials who could steer them business. In some cases, they created exotic financial structures that blew up.

People with knowledge of the evidence say investigators are not just looking at a few bad apples, but also at the way an entire market has operated for years.

“It’s rare to sell a Senate seat, but it’s not rare to sell a bond deal,” said Charles Anderson, who retired as manager of tax-exempt bond field operations for the Internal Revenue Service in 2007. “Pay-to-play in the municipal bond market is epidemic.”

Michael D. Hausfeld, an antitrust lawyer in Washington, who is representing some of the cities, counties and states entangled in the federal dragnet, called it “one of the longest-running, most economically pervasive antitrust conspiracies ever to be uncovered in the U.S.” Many of these municipalities say they did nothing wrong and were duped by financial firms, which they are suing.

The possibility of a vast web of collusion would be sobering in any case, but the issue is of particular concern now, as Congress and the incoming Obama administration prepare a big fiscal stimulus package that may spawn infrastructure projects carried out and financed at the state and local level. States and cities issue bonds to raise money to pay for things like schools and road construction, and are supposed to follow strict rules on how the proceeds are handled for investors to receive a tax exemption on the interest.

Mr. Anderson estimated that as much as $4 billion a year was vanishing into the system, based on the volume of problems he saw before retirement.

Christopher Cox, the chairman of the Securities and Exchange Commission, has said oversight of the municipal bond markets is inadequate, and has urged Congress to take steps to protect both investors and taxpayers. Congress has not taken up the initiative.

The S.E.C. and the Justice Department declined to discuss the details or status of their investigations, including in New Mexico, where work on municipal bonds is part of a federal grand jury investigation. Officials at the I.R.S. said they were giving the matter high priority and had challenged the tax-exempt status of municipal bonds in a number of places but declined to describe individual cases.

Christopher Taylor, who retired in 2007 as executive director of the Municipal Securities Rulemaking Board, said the evidence amassed so far included tape-recorded phone calls, in which the independent specialists who are supposed to help local governments pick their bankers could be heard telling bankers: “We want you to bid on this deal, but you’re not going to get it — you’re going to get the next one. We want you to submit a sloppy bid.”

Unsuspecting governments then accepted the recommended bids, and paid too much, he said. Mr. Taylor also cited evidence of banks being paid in cities where they did no work at all, apparently to reward them for throwing the business to their rivals.

The business is lightly regulated, with rules governing the conduct of companies set by the municipal securities board. Municipal bond underwriters are prohibited from making campaign contributions to “buy” the business of bringing bonds to market. But no such rules govern the conduct of a type of professional who appeared in the industry about a decade ago — specialists who work with financial derivatives, like swaps and options.

In the last few years, the use of such derivatives in combination with municipal bonds has grown rapidly, market participants say. And so, it appears, has the interest of federal agents.

The federal inquiry appears to have started at the I.R.S., which was concerned that the rules for tax-exempt bonds were being trampled.

“We saw this coming and went to the Department of Justice and said, ‘Hey look! It looks as if there’s been price-fixing and bid-rigging on a major scale here,’ ” said Mr. Anderson, the retired I.R.S. manager.

The efforts have broadened into what investigators and lawyers described as a coordinated effort among the federal agencies broken down by jurisdiction.

The S.E.C. polices fraud in the municipal bond markets and is looking into whether municipal bonds are routinely certified for tax-exempt treatment, by people who perhaps know or should know they do not qualify.

The Justice Department’s criminal antitrust division has authority over bid-rigging, and that part of the investigation is being led by federal prosecutors in Manhattan. At the same time, various regional U.S. attorneys’ offices around the country are looking at whether campaign contributions and other gifts to state and local politicians were used improperly to “buy” bond-related business.

More than 30 financial services companies have been subpoenaed, including JPMorgan Chase, Merrill Lynch and the American International Group, which have recently received government assistance and in the case of A.I.G., an outright federal bailout. Several have disclosed in corporate filings that their employees have been called to testify before grand juries or have received “Wells notices” from the S.E.C. warning that an enforcement action is looming.

The disclosures follow raids by the F.B.I., in 2006, of the offices of three specialized firms that bring together local officials and the banks and other companies that seek business working on municipal bond sales.

One of the three, CDR Financial Products, of Beverly Hills, Calif., is at the heart of the federal investigation in New Mexico. Investigators there are looking at how CDR Financial came to be selected as the “swap adviser” for a $1.5 billion program — called Governor Richardson’s Investment Program, or GRIP — to raise money for road and rail construction in New Mexico.

CDR Financial and its founder, David Rubin, gave $100,000 to two of Governor Richardson’s political action committees in 2003 and 2004, and the company earned $1.5 million for advising GRIP in 2004. A Colorado political consultant, Michael Stratton, lobbied on behalf of CDR Financial, and was paid $269,000 by JPMorgan Chase during the same period, according to regulatory filings. JPMorgan was the lead underwriter on about $1.1 billion of bond sales for GRIP.

Mr. Stratton did not respond to messages requesting comment, and a JPMorgan spokesman said the bank would have no comment.

Allan Ripp, a spokesman for CDR Financial, said that Mr. Rubin had made the contributions because he supported Governor Richardson’s efforts to register people likely to vote Democratic in the presidential election. He said CDR Financial had competed fairly for the bond business and won its assignment on the merits.

Governor Richardson has said that he and his aides acted correctly at all times, and that he withdrew his nomination as commerce secretary only out of concern that the investigation might cause a long and distracting confirmation battle.

CDR Financial and the other two firms raided by the F.B.I. — Investment Management Advisory Group, known as Image, of Pottstown., Pa., and Sound Capital Management of Eden Prairie, Minn. — had attracted unfavorable attention even before the F.B.I. raids, in some cases because of campaign contributions.

In Philadelphia, Image and CDR Financial were described as “Company No. 1” and “Company No. 2” in the indictments of the former city treasurer, Corey Kemp, and other officials in 2004. CDR Financial had made political contributions and earned $415,000 for helping Philadelphia link a type of derivative called a “swaption” to its bonds. Image squired the city treasurer around by limo, and was in the running to participate in a school bond sale, but the deal fell apart when a local newspaper, The Daily News, questioned Image’s involvement.

Mr. Kemp is serving a 10-year prison sentence for accepting illegal payments in exchange for steering city bond business and other contracts to selected companies. Neither CDR Financial nor Image was formally accused of wrongdoing.

The use of derivatives in connection with municipal bonds has grown rapidly in the last five years. The packages are presented as money-savers to the municipalities, which may want to protect themselves against interest rate changes. But over the last year, as turmoil spread through the credit markets, some of the derivatives have blown up, leaving local governments stuck with unexpected costs.

That happened in Alabama, where Jefferson County linked an extraordinary number of derivatives, called interest-rate swaps, to its bonds, in some cases with the help of CDR Financial. Despite publicized concerns about whether improper payments to certain officials were behind the swaps, the county insisted the swaps were saving money. Last year, the derivatives failed, leaving the county with vast bills. Jefferson County is now at risk of declaring what would be the biggest governmental bankruptcy in United States history.

Even in places where the bonds and derivatives are performing as expected, irate government officials are finding they may have overpaid for various services and have inadvertently broken federal tax rules. Again and again, proceeds from tax-exempt bonds appear to have improperly generated investment income for banks and insurers.

Among the governments that have sued these financial firms are the cities of Chicago and Baltimore; Oakland and Fresno, Calif.; the state of Mississippi; and a number of counties, school districts and at least one water and sewer district. The lawsuits were consolidated in November, in Federal District Court for the Southern District of New York. Chicago has since abandoned that litigation.

SEE SNAPE QUOTE, ABOVE.

http://www.nytimes.com/2009/01/09/business/09norris.html?ref=business

“Dividends don’t lie.”

Chalk up the death of another Wall Street cliché.

In the late bull market, dividend payments provided one of the seemingly strongest arguments for the bulls. Maybe earnings numbers could be manipulated, but dividend payments required cash. If the company had the cash to hand out, you could be confident the earnings were real.

It was a lie.

It is now becoming clear that the great news on the dividend front from 2004 through 2006 was not an indication of solid corporate performance; it was just another sign of lax lending standards. Lenders who willingly handed out money to homeowners with bad credit were even more generous to corporate borrowers.

Now the situation has reversed. The quarter just ended had the worst dividend news for American companies in half a century, and this quarter could be even worse. Many corporate boards review annual performance and decide what to do about the dividend during the first two months of each year, and it is not likely to be a happy time.

Until those meetings are completed, buying stocks for their high dividend yields may be risky.

“Investors need to be careful of overly generous yields,” said Howard Silverblatt of Standard & Poor’s, pointing to the possibility that more cuts will soon be announced.

In the final three months of 2008, S.& P. counted 288 announcements by public American companies of dividend reductions or eliminations, in contrast to 239 companies that either initiated or raised their payouts. It was the first time since 1958 that there were more negative announcements than positive ones.

In the boom years of 2004 through 2006, there were fewer than 100 negative announcements each year — the three best years in that regard since S.& P. started collecting data in 1955.

Companies appeared to be flush with cash during those days, but some of that was a mirage stemming from optimistic accounting, particularly at banks. In other cases, the cash was real but it did not stay in corporate treasuries very long. Wall Street was preaching the doctrine of shareholder value, and corporate America bought shares back at an unprecedented rate.

From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.& P. 500 — generally the largest companies in the country — reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares.

As a group, shareholders were paid about $200 billion more than their companies earned over that four-year period. Suffering investors who held onto their shares during the 2008 plunge may want to reflect on the fact that investors who were dumping shares got roughly twice as much of the money as the loyal holders did.

It was not only public companies that were able to pay dividends with cash that might have come from lenders rather than profits. Private equity firms were able to bolster their returns by having companies they owned borrow more money and use the cash to pay dividends. Now some of those same companies are struggling to find cash to finance operations.

The pain from the excessive payouts to shareholders from years past will be amplified by the fact that corporate loans have a lot in common with the exploding mortgages that came to dominate the home mortgage market before it collapsed.

Until the recent boom, the vast majority of home mortgages called for the homeowner to make monthly payments for up to 30 years, with the loan paid off by the time the payments stopped. With fixed-rate mortgages, the payment was constant, so a homeowner who kept his or her job could repay the loan even if the home’s value fell. Even with adjustable-rate mortgages, there would be no increased payment unless market interest rates rose.

The new mortgages ended that. Some were known as 3-27 or 2-28 mortgages, with a teaser interest rate for the first two or three years, and then a sharp increase in payment no matter what happened to market rates. Others were interest-only, or called for payments of even less than the interest being accrued. The common thread was that the borrower would have to refinance at some point. Now, of course, many cannot. Their homes are not worth what is owed, or their income is not adequate to support such a loan under the tighter prevailing standards.

In the business sector of the economy, similar loan terms were common. Many companies were financed by bank lines of credit that had to be renewed every few years. Even bond issues were only for 5 or 10 years. Most commercial real estate loans in recent years called for payments of just the interest, with the entire loan to be refinanced within 10 years.

To make things seem even better during the good years, lenders were willing to lend larger sums, assuming that rents would rise rapidly in commercial buildings, or that profits would do the same at companies. Where that did not happen — which is to say at most places — many loans will not be able to be rolled over when they mature. Unnecessary bankruptcies loom.

So did dividends lie? Perhaps they were simply misunderstood. Their real message from 2004 through 2006 was not that corporate America was doing so well. It was that lenders had embarked on an unsustainable credit expansion that was sure to end in tears.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris.

IS NOTHING SACRED? IS THERE NO HONOR AMONG THIEVES, AND NOTHING BUT THIEVES IN THE MARKETS?

FROM THE OFFICE OF SATAN
"Prince of Lies and proud of it"

Dear Hank:

You have outdone yourself once again, my loyal servant, with these fraudulent, deliciously deceptive proposals to reform the utterly corrupt financial system you exploited so profitably as head of Goldman Sachs.

My plans for the destruction of the United States of America have been going along rather swimmingly until we rushed things a bit with Bear Stearns--ah, the wondrous power of pure, unmitigated greed! It remains my favorite tool--and calls for reform were suddenly everywhere.

The rules which would have undone us were simple indeed, as you know all too well:

1. complete transparency of risk and leverage in all financial documents and financial instruments

2. the marking to market of all financial instruments and assets at the close of the trading day, as is currently done with commodities futures and stock options

3. the banning of "off balance sheet" accounting

4. the banning of offshore accounts and holding companies

5. the uniform enforcement of these regulations across all financial classes, assets, firms, brokers and banks


As you know, Hank, transparency, mark-to-market and strictly enforced regulations of all banks, broker-dealers and financial institutions would deal a death blow to my plans to destroy the U.S. via destruction of its financial system. Having sold your soul to me for the glory and riches you received at Goldman Sachs, you had to comply with my orders to destroy any such useful regulations with cunning "fixes" of your own.

Though I counted on your native feral survival instincts, I did not expect a plan of such evil genius. Imagine how foolish and naive humans must be to accept your "fix"! My mind boggles at the ease with which you have conned the gullible gallery of idiots in Congress and the mainstream media:

1. You diminish the powers of the Federal agencies and favor the "shadow government" Federal Reserve, which is not even a government agency but a private institution.

2. Instead of proposing transparency, you are adding another layer of secrecy in what the Fed can investigate and do to "fix" future problems.

3. Enable more "self-regulation" (hahahaha, I can't stop laughing at this one! You really are a comedian!)

I am still amused that the American populace hasn't noticed that you, Master of the Dark Arts at Goldman Sachs, have been duly appointed as the wolf assigned to guard the sheep. Now you have suggested opening the rusty wire fencing and lighting the opening so your brethren can more easily slip in and slaughter as many sheep as they wish--and the American sheep sit there mesmerized by my other crowning achievement, the TV, blithely accepted that the most voracious, cleverest wolf is now their "guardian." Never in my wildest imaginations did I hope for such gross stupidity, ignorance and naiveté.

Keep up the fine work--

Your Lord and Master,

Lucifer


http://www.oftwominds.com/blogmar08/paulson-devil.html

good morning!

http://gregmankiw.blogspot.com/2009/01/progressivity-of-tax-system.html

The CBO has released a new report on effective tax rates (total taxes divided by total income). Compared with previous reports, it includes more information about thin slices at the top of the income distribution. Here are the total effective federal tax rates for 2005, the most recent year available:

Lowest quintile: 4.3 percent
Second quintile: 9.9 percent
Middle quintile: 14.2 percent
Fourth quintile: 17.4 percent
Percentiles 81-90: 20.3 percent
Percentiles 91-95: 22.4 percent
Percentiles 96-99: 25.7 percent
Percentiles 99.0-99.5: 29.7 percent
Percentiles 99.5-99.9: 31.2 percent
Percentiles 99.9-99.99: 32.1 percent
Top 0.01 Percentile: 31.5 percent

N.B.: These figures include all federal taxes, not just income taxes.

There's probably some eye-openers there.

Hint: Not everyone has a tax shelter and it has been all the rage among the well-to-do
and connected lately.

in terms of state and local taxes -- state and local sales taxes, state gasoline taxes, state cigarette taxes, state income taxes, property taxes, etc.

Oh, the poor, poor rich folks. NOT!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!


Tansy Gold, who went rock hunting today

Our rocks are under 9 inches of the cold fluffy white stuff. The only way I'd find one today is by hitting it with the car, god forbid.

. .. . the people I was with didn't want to take my advice on the specific place to look. Even though I've been to that area 15, 20 times over the past 20 years, and they've never been, they insisted they knew better. So after they didn't follow my advice and therefore didn't find anything, they drove to a spot about 5 miles away and found. . . . more nothing.

But hey, it was a good day to get out in the Arizona sunshine, 68 degrees, cloudless sky. I can't complain.



Tansy Gold, headed to Sheep Crossing next Saturday and there she WILL get some REALLY GOOD rocks.

http://www.ft.com/cms/s/2/d4a84d58-d6c7-11dd-9bf7-000077b07658.html

Book Review by Niall Ferguson

Lords of Finance: The Bankers Who Broke the World
By Liaquat Ahamed
Penguin, 576 pages, $32.95
FT Bookshop price: £16

When the history of the current financial crisis comes to be written, the battle of the index entries will surely be won by central bankers not politicians. The name Bernanke will appear on many more pages than Bush, King more often than Brown, and Trichet will trump even Sarkozy. Most of the time, central banks strive to be dull places; the people who run them relish their obscurity. But when crisis strikes, the limelight shines.

The last great liquidity crisis to hit the global financial system happened 94 years ago, at the end of July 1914. It paralysed the wholesale money market, closed the world’s stock markets for months and necessitated unprecedented government intervention in the banking system. Rightly, this is where Liaquat Ahamed begins.

A semi-retired investment manager, Ahamed set out to tell the story of the four dominant central bankers of the inter-war period. He cannot have foreseen how timely his book would be. Unlike most works on the origins of the Great Depression, Lords of Finance is highly readable – enlivened by vivid biographical detail but soundly based on the literature. That it should appear now, as history threatens to repeat itself, compounds its appeal.

Ahamed’s four central characters are Émile Moreau, governor of the Banque de France; Montagu Norman, governor of the Bank of England; Hjalmar Schacht, president of the German Reichsbank; and Benjamin Strong, governor of the Federal Reserve Bank of New York. By 1926 they constituted “the most exclusive club in the world” but in 1914 they were largely unheard of.

Norman was a partner at the British affiliate of US merchant bank Brown Brothers. Neurotic and prone to bouts of mental collapse, he lived in a large, gloomy house off Holland Park, surrounded by furnishings of his own design, listening to Brahms and dabbling in spiritualism. With his long ginger beard, he looked more like a boulevardier than a banker.

At the other extreme was Schacht, a Hamburger who affected the stiff gait of a Prussian reserve officer, complete with bristling moustache, high celluloid collar and fierce glare. In 1914 he was rising through the ranks of Dresdner Bank.

Of the four, Benjamin Strong was the furthest advanced: president of the powerful Bankers Trust Company, an offshoot of the financial empire of JPMorgan. His troubles were purely personal: a first wife who committed suicide and the onset of the tuberculosis that ultimately killed him. Moreau, meanwhile, was a happy, healthy civil servant whose career had taken a wrong turning. Having served as chef de cabinet to the scandal-prone finance minister Maurice Rouvier, Moreau was sidelined at the Algerian central bank.

The war and its traumatic aftermath transformed all their careers. An architect of the Federal Reserve System, Strong accepted the governorship of the New York Fed in 1914. Norman joined the Bank of England in 1915 and became governor five years later.

Schacht had a less good war but re-launched his career in 1923, when hyperinflation had rendered the German currency worthless: having successfully introduced the new Rentenmark currency, he was appointed Reichsbank president before the year was out. Two and a half years later, political crisis propelled Moreau into the top job at the Banque de France.

The task facing these four men wasn’t small. After the first world war, victors and losers alike were saddled with immense foreign debts; all the European currencies had depreciated to varying degrees. The myriad new trade barriers made it ever harder for debtors to earn hard currency from exports.

Outwardly, as Ahamed shows, the central bankers seemed to co-operate. Their frequent peregrinations across the Channel and the Atlantic attracted febrile press speculation. (So over-attentive were the reporters that Norman even took to sailing under an assumed name, “Professor Clarence Skinner”.) Friendship flourished between them; “Dear Strong” and “Dear Norman” became “Dear Ben” and “Dear Monty”; Norman made a point of cultivating Schacht. The exception was Moreau, whom Norman couldn’t resist insulting and who declined when Strong invited them all to New York in 1927, a year before his untimely death.

Yet for all their communication, the four failed to reach an optimal resolution of the world’s financial problems. Strong encouraged Norman’s quasi-religious faith in the restoration of the gold standard, and helped finance the British return to the prewar dollar exchange rate. Yet Strong never allowed the gold standard to work as it was supposed to, systematically counteracting (“sterilising”) the effect of gold inflows on the American money supply. Meanwhile, Moreau intervened against the franc so the French currency was undervalued, ensuring export surpluses and the rapid growth of the Banque de France’s reserves. Schacht, on the other hand, obsessed about flows of hot money into Germany and the continuing burden of reparations on the German balance of payments.

The result was that what we would now call “global imbalances” were not reduced, even when economic conditions were relatively good. When Wall Street bubbled and then burst in 1928 and 1929, the Europeans wholly underestimated their own vulnerability. Norman saw the Wall Street crash as a boon for sterling, claiming the “credit” for having caused the New York sell-off by raising British interest rates the previous month.

By the summer of 1931, however, it was dawning even on Norman that the world economy was falling off a cliff. With massive bank failures on both sides of the Atlantic, it became clear that the Lords of Finance had bungled things. “Unless drastic measures are taken to save it,” he wrote to Moreau’s successor at the Banque de France, “the capitalist system throughout the civilised world will be wrecked within a year.” (With a characteristic flourish, he went on: “I should like this prediction to be filed for future reference.”)

Such apocalyptic fears were not new. As early as November 1918 Strong had warned Norman of a coming “period of economic barbarism which will menace our prosperity”. The irony was that their favoured prophylactics had, in combination, made the apocalypse more likely. By 1931 the capitalist system was on its knees, and democracy with it. Schacht was soon flirting with the rising star of the German right, Adolf Hitler; he later served as his economics minister.

As the world teeters on the brink of another great financial cliff, we can only hope that the modern-day Lords of Finance will co-operate to better effect. I suspect none has much time for bedtime reading these days. But should Messrs Bernanke, King and Trichet need a reminder of what can go wrong when central bankers achieve only the semblance, but not the reality, of co-operation, Lords of Finance is the book they should read.

As a matter of urgency, a Chinese translation should also be sent to Zhou Xiaochuan, governor of the People’s Bank of China.

Niall Ferguson is a contributing editor of the FT and author of ‘The Ascent of Money: A Financial History of the World’ (Allen Lane)

IT MIGHT BE FAIR TO SAY THESE CLOWNS BROUGHT US STALIN AND HITLER, WHO BROUGHT US ALL THE REST OF MODERN NIGHTMARES....

http://www.bloomberg.com/apps/news?pid=20601087&sid=abm7qDvy4P58&refer=home#

By Vivien Lou Chen

Jan. 4 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. central bank must have a “timely” plan for ending lending programs created since the start of the global financial crisis.

“Many of the interventions are novel, so no straightforward methods are available to quantify their effectiveness,” Yellen said in remarks prepared for a speech today in San Francisco. “The Fed must ensure that it has an exit strategy to wind down the facilities in a timely and effective way when they are no longer needed.”

Fed Chairman Ben S. Bernanke has created more than $2 trillion of emergency lending programs since December 2007, using the Fed’s balance sheet and money-creation authority to cushion the economy from the credit crunch. Yellen’s remarks come less than three weeks after Fed policy makers cut the federal funds rate, or the rate banks charge one another for overnight loans, to as low as zero for the first time. The central bank also shifted its focus to the amount and type of debt it buys...

http://clusterstock.alleyinsider.com/2009/1/does-gary-shilling-have-a-time-machine

Henry Blodget | Jan 4, 09 8:47 PM


After a year in which most forecasters felt (and deserved) only abject humiliation, it's worth celebrating those who got it right.

For example, Gary Shilling, whose 2008 recommendations (published last January) are

IN A TABLE AT THE LINK



(We'll publish Gary's 2009 recommendations tomorrow). TOMORROW FOLLOWS BELOW!


http://clusterstock.alleyinsider.com/2009/1/gary-shillings-2009-predictions-were-still-screwed

Gary Shilling's 2009 Predictions: We're Still Screwed

Henry Blodget | Jan 6, 09 3:58 PM

Last year, economist Gary Shilling humiliated the rest of the economic forecasting industry by going 13 for 13.

As promised, here are Gary's predictions for this year:

Every one of our 13 investment strategies for 2008 worked last year. Some of them have been fully exploited so we dropped them from this year's list. But others are only partially achieved in view of our dire outlook that the worst global financial crisis and deepest worldwide recession since the 1930s will continue throughout 2009.

So we've retained 10 of our 2008 strategies this year, some in modified form, and added two new ones.

1. Sell homebuilder stocks and bonds.

2. If you plan to sell your house, second home or investment houses anytime soon, do so yesterday.

3. Sell some housing-related stocks.

4. Sell some consumer discretionary spending companies.

5. Sell most commercial real estate.

6. Sell some commodities.

7. Sell emerging market equities.

8. Sell emerging market debt.

9. Buy the dollar.

10. Sell stocks in general. (S&P 500 to 600)

11. Sell consumer lenders’ equities.

12. Buy, carefully, high-grade bonds.

So much rich and filling info to post! Well, got to get some shut-eye so I can shovel tomorrow. Hasta la vista, y'all!

We'll see you tomorrow. :hi:

Had me doubled up.

Tell, you what Tone, go to Gaza and settle the troubles you've contributed to there, and then come back and tell us again how you're going to provide, moral economic leadership that you and Gordon so signally failed to do when you were in office; but, instead, helped with your wingnut friends in the US to actually create. DESPITE Merkel's explicit warnings. And she was no voice in the wilderness - just one of many who could see its inevitability, but who were ignored by the Anglo-US axis; in the UK, you and Gord. Was there ever such a shameless bandwagon-jumper-onner?

At least, Sarkozy has a clear picture of how broken and discredited the wingnuts' economic paradigm is, isn't scared to say so, and to act upon it.

one wonders what the hell he was doing at this conference, since he has nothing to do now with the UK government, is not even a Member of Parliament, I think I'm right in saying, and clearly knows nothing about a). economics nor b). morality.

As for even beginning to try to do the sinecure job in Palestine he's being paid for by the "Quartet", you're joking, right?

1/9/09 Stoneleigh: Welcome to the Gingerbread Hotel

Bailouts are NEVER for the little guy no matter what spin their proponents use to sell them to the public (who will be paying for them through their taxes). The role of the little guy in a Ponzi scheme is to be the empty-bag holder. This is the tragedy of our times, and there's nothing anyone can do to prevent it, whether or not they might want to. The losses have already occurred, but as yet still lie out of sight in illiquid 'asset' accounts supposedly worth hundreds of trillions of dollars, but actually worth close to nothing.

A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, by encouraging them to buy far more than they could actually afford on margin (ie with borrowed money). That is a recipe for paying far over the odds for everything, while the financiers collect the excess - an excess collected preferentially from those near the bottom of the income scale, who were most likely to carry a perpetual credit balance at a predatory rate. This is how credit bubbles form - a combination of predators and all-too-willing prey that doesn't understand the nature of the trap. Hansel and Gretel and the witch's Gingerbread House comes to mind, minus the escape at the end.

Unfortunately, it was easy to entice people into debt slavery, as the offer of access to material goods is always hard to resist, particularly when it seems like everyone else is enjoying new-found wealth. It doesn't take long to convince people that they deserve to have a large home, multiple cars and all manner of consumer goods, or to convince them that they are somehow inadequate and that their children will suffer if they don't participate in the consumer culture. The relentless marketing barrage played on our insecurities, conveying a message that happiness and social status could, and should, be bought.

A situation where ordinary people are able to buy anything on margin is historically very rare, as credit is normally only extended to those who do not need it. The last several decades have been an aberration, largely due to an increasingly reckless attitude towards risk. For ordinary people, low interest rates led them to believe that huge debt burdens could be sustained so long as the budget could be stretched to cover the monthly payment. For those higher up the financial food chain, the process of securitization created the appearance that risk could be passed on ad infinitum, until it ceased to exist. Unfortunately, low interest rates are a trap, and securitization, instead of minimizing or eliminating risk, actually magnified it into a systemic threat.

In terms of mortgages, even those that seemed conservative in recent years were not. In the latter stages of a credit bubble, even a deposit of over 50% and a monthly payment that could be covered by one of two salaries is a recipe for deep trouble. We are looking at a collapse of property prices and a huge rise in unemployment, which will combine to cause an unprecedented amount of negative equity, defaults and foreclosure, and, thanks to leverage, the resulting loses will snowball, further undercutting the supposed value of financial assets. The 'conservative' mortgagees are mostly just as trapped as those who over-extended themselves further.

Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse.

The middle class has been comprehensively fleeced by the debt trap, and the consequences for social stability will be extremely unpleasant once the chickens come home to roost. Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout. Whether we've been gorging ourselves on the Gingerbread House or merely nibbling at it, we now find ourselves in a cage.


and from the comments section
kkallem509 said...

I can't help but question the legitimacy of the following statement by Stoneleigh:

"Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse."

If it gets that bad, mobility away from familiar surroundings and micro-cultures where one has some distinct advantages not to mention friends or family to lean on, to an unfamiliar environment for the sake of landing a better job would not only be an unwise idea, it might be logisitically impossible.

And if property taxes were to get so high that those with the good fortune or financial sense of being able to own their homes outright were unable to hold onto their property after basic neccessities, then to quote a friend of mine "we'd all be at the point of shanking each other in the streets."

The city of Spokane (WA) Valley near where I live was paying $70,000/day for snow removal over a two week span around christmas. I'm guessing they could trim quite a bit of fat before they would be forced to raise property taxes to a level that would oust a majority of property owners.

We wouldn't be communicating to each other via computer right now if we were anywhere close to that point.

Try growing a vegetable garden or raising a pig in your apartment complex. January 10, 2009 12:11 AM



and Stoneleigh responds
Stoneleigh said...

kkallem509 (with regard to renting),

If it gets that bad, mobility away from familiar surroundings and micro-cultures where one has some distinct advantages not to mention friends or family to lean on, to an unfamiliar environment for the sake of landing a better job would not only be an unwise idea, it might be logisitically impossible.

That will certainly be true for some. When you own free and clear the choices are harder and it will very much depend on your own individual circumstances. I wouldn't suggest that people automatically sell, even though selling would give them a great deal of liquidity (at a time when liquidity matters most), avoid a large loss on the property (my guess is 90% on average over perhaps 5-10 years), and give them mobility.

There are advantages and disadvantages to being settled where you are. If what you own is a homestead with self-sufficiency potential in an area where you have a good social network, then staying makes a great deal of sense. If it's a place where you might be very dependent on car travel, know relatively few people and have little potential to provide for the essentials of your own existence, then selling you probably be advisable.

We own a homestead free and clear and will not be selling, but then we have invested in a great deal of self-sufficiency here over the years since I saw this coming. We left the UK in 2000 because we felt it's prospects were awful. A 40 acre farm over here cost half what my house in town in England sold for, so I don't feel bad about what I will lose in value on this place. And here I can look after my family with much less need for money than I would have had over there.

And if property taxes were to get so high that those with the good fortune or financial sense of being able to own their homes outright were unable to hold onto their property after basic necessities, then to quote a friend of mine "we'd all be at the point of shanking each other in the streets."

Property taxes will go through the roof in real terms, against a backdrop of a collapsing money supply. Municipalities will be trying to squeeze blood from stones in a vain attempt to keep themselves going in their current form. In a liquidity crunch, money is VERY scarce. Being able to pay for necessities and property taxes is by no means a given in the future.

One of the attractive features about selling now is that you lock in today's property price in cash - cash that will then go ten times as far as you ever imagined it would in a few years (provided you don't manage to lose it in a bank run). You would then be able to afford a great property - perhaps large enough for yourself and your extended family - and still have money left over for taxes and necessities.

The city of Spokane (WA) Valley near where I live was paying $70,000/day for snow removal over a two week span around christmas. I'm guessing they could trim quite a bit of fat before they would be forced to raise property taxes to a level that would oust a majority of property owners.

They will cut back, and the services you receive will shrink to next to nothing over the next few years. That means you will have to do far more at your own expense, or by your own sweat, and you may be vulnerable to all manner of disruptions that you wouldn't experience now. You could be snowed in, you may not be able to travel to purchase supplies, your garbage may not be collected (assuming you were generating any at that point), the quality of your water supply could deteriorate significantly, you may lose power and/or heat. Think through what your dependencies are and who you are dependent on for them. Think about how secure your income really is and how much of a secure cash cushion you have. Think how you might provide necessities for yourself in the case of disruption, and then decide if you want to be tied to where you live now.

We wouldn't be communicating to each other via computer right now if we were anywhere close to that point.

Very true.

Try growing a vegetable garden or raising a pig in your apartment complex.

You can rent many other properties besides apartments, and in any case, renting would be a temporary phase if you look after the equity you extract at today's prices. If you already own a property with the potential for farming, that would be a good reason not to sell (depending on a full assessment of other relevant factors of course). January 10, 2009 9:09 AM


lots more...
and also check out the primers located in the upper right section
http://theautomaticearth.blogspot.com/2009/01/january-9-2009-dr-doomlittle.html


Edit: You can also read Stoneleigh's intro over at DailyKos
http://www.dailykos.com/story/2009/1/9/16546/13287/235/682182

1/10/09

Ilargi: The revolving doors between Washington and Wall Street are swinging like never before. Lawrence Summers and Robert Rubin are the finance powerhouses in the upcoming Obama administration. They were in the exact same place 10 years ago. This time, they bring along a protégé in Tim Geithner, who will be the fall guy if all goes wrong. And they know it will go wrong; they've seen it before. They're not dumb. They're just sick, not stupid. They know it will go wrong, because everything they've done so far has failed. Only, that's not what they see. They can't see it, because they are gambling addicts. And as you can find out in Gambling Anonymous meetings, the addicts are masters in distorting their own perception of reality. Rubin and Summers differ from most addicts in that they are in positions to control what is legal, which is quite close to what is real, and what is not.

The November 12, 1999 repeal of the Glass-Steagall Act (officially named the Banking Act of 1933), enforced through the signing into law of the Gramm-Leach-Bliley Act by Slick Billy Clinton, gave them access to depositors’ money, and thus made it legal to use people's savings for "investments". 9 years later, those savings were all gone. Today they have an even larger pool of dough: the money of all Americans, and all of their children. This is what you're looking at when you see Henry Paulson, Barney Frank, Ben Bernanke or Barack Obama talk about bail-outs and rescue plans. It's all about providing the world's most megalomaniac gamblers with cash for their addictions. There's nothing else, that’s all there is.

The banking industry had tried to get rid of Glass-Steagall for a decade, but, aside from minor changes in 1980 and 1982, it wouldn't be until Rubin and Summers were at the helm, as Treasury Secretary and Deputy Secretary, that they succeeded in pushing through the repeal. After setting up the procedure, Rubin left the government on July 1, 1999, and joined the newly formed Citigroup, leaving Summers as Treasury Secretary to execute the plan and have President Clinton sign the Gramm-Leach-Bliley Act into law.

Citigroup was put together in 1998 by combining Citibank and insurance slash finance company Travelers. The only way this combination made sense was for the Glass-Steagall Act to be gone, since the Act barred banks merging with insurers. Citi would have had to shed many valuable assets within the next 2-5 years to remain within the law. But then-CEO Sandy Weill stated at the time: "that over that time the legislation will change...we have had enough discussions to believe this will not be a problem“. In other words, the fix was in. The fact that Rubin joined the company months before Clinton signed Gramm-Leach-Bliley only serves to confirm that.

Because of these preparations, Citi was off to a flying start in the new "free world", as was Goldman Sachs, Rubin's longtime (1966-1992) employer before he joined the Clinton administration. At Goldman, one of Rubin's pupils was Henry Paulson, who would become Treasury Secretary under Bush 43. Larry Summers doesn't have a Goldman or Citi background. He, like Princeton’s Ben Bernanke, represents another piece of the power pie, having served for a long time at Harvard university and the World Bank. In that same vein, Rubin is presently co-chair for the Council on Foreign Relations.

Of course the Fed chairman during all this time was Alan Greenspan. In 2000, the trio of Rubin, Summers and Greenspan successfully argued for the deregulation of the derivatives trade. This enabled Citi and Goldman Sachs, as well as other major Wall Street players, to increase their bets and gambles manyfold. And let me repeat: it took just 9 years for them to burn through all customer deposits. And then some.

The real consequences of their actions will not be truly felt for a while to come, since they now put all their economic and political weight, again successfully, behind the persistent attempts to avoid putting fair value, mark-to-market prices on the respective banks’ gambling losses, also known as derivatives. The reason is clear: applying fair accounting value would not only expose the gentlemen as frauds and criminals, it would also immediately bankrupt most, if not all, of the most powerful Wall Street institutions.

Because of the revolving doors, and the political power these provide them with, the bankers that have incurred the hundreds of trillions of dollars worth of gambling losses, now have drilled into a new source of funds to quench their insatiable lust for more betting: taxpayers’ money. We should realize that the $1 or $2 trillion they have plundered so far from what belongs to the public, is by no means enough to cover the losses of the past. It's therefore inevitable to conclude that the new-found money will be used for more double or nothing wagers.

The fact that Rubin now leaves Citigroup, which will free time to take the reins of Obama’s finance squad, should be a clear sign for everyone that the gamblers are getting increasingly serious about coming for the public trough. It's also a sign that they are equally serious about keeping the toxic derivative papers in the vaults, and about keeping the vaults locked, until they have disappeared into the night.

Savings and deposits at Citigroup are long gone. Without public funds, Citi itself would be long gone. To understand what's going on, look at the behavior of anyone addicted to gambling, or heroin for that matter. That's where you can find the clues. If you see these people as financiers who sometimes make unfortunate honest mistakes, you’re way off. They are junkies in urgent need of treatment, and they're not getting it. And until they are stopped, they will bankrupt thousands of more Americans every single day, like any junk does to his or her mother, if given the chance.

Robert Rubin and Larry Summers are junkies, they are addicted to gambling on a level you never thought possible. Get them treatment or show them the door, but whatever you do, don't give them your money. You'll never see it back. Ask any mom with an addicted child. Look, there is no law that prevents them from taking your money and spending it at the casino. They are the law. Obama guarantees it.


horn·swog·gle
To bamboozle; deceive.

ab·squat·u·late
a. To depart in a hurry; abscond. "Your horse has absquatulated!"
b. To die.


lots more...
http://theautomaticearth.blogspot.com/2009/01/january-10-2009-hornswoggled.html

edit: some articles to read at the link, comments section at end

Thanks for the post, though. We need to know.

with our money.

:mad:

and political, of the likes of Paulson, Bernanke, Ruben et al, are, and indeed always have been responsible for most of the major catastrophes that have afflicted mankind, or large parts of it. Yet, they are also the very people who ceaselessly maunder and whine about welfare paymnents, financial and medical, for the unemployed and otherwise disadvantaged poorer folk.

No doubt some will have interpreted it as anti-intellectual, but I have reiterated again and again the simple truth that if a person's very high worldly intelligence functions on the basis of false assumptions, that person will be an enormously greater and more punishing liability, financial and in any number of other ways, by several orders of magnitude than literally millions of poorer folk living on benefits. It seems that in this conjoint crisis of the economy and the very governance of the nation, most notably, both in the US and the UK, we can see it personified in the major players in a particularly vivid and painful manner.

Truly, God is not mocked. In their worship of Mammon, devastating the lives of so much of mankind, including their fellow citizens, the house they have built for their nation was on foundations of sand... and the wind blew, etc., while currently they have stowed away their own swag for a very prosperous personal future. I wonder if they will be allowed by the public to enjoy those ill-gotten gains, or whether it will be clawed back by government via appropriate windfall taxes, income-tax rates, etc.

Adam Smith was clearly against the very concept of flat taxes, believing that people should pay in proportion to their income, but, curiously, M. Friedman and his "Chicago Boy" androids appear to have said nothing about that; just another of those very inconvenient truths articulated by Smith.

I've just watched a few questions put to Friedman by an interviewer about possible doubts he may entertain as to the sovereign merit of greed. Bizarrely, MF retorted, do you thnk the Russians are not motivated by Greed? Or the Chinese? For some reason, I don't believe the interviewer point out to him that that was not the issue. It was a shameless "strawman". The issue is whether greed is good or needs to be harnessed and controlled - which both regimes did to a far greater extent of course than has occurred in the West - at least since the sixties.

of false assumptions, that person will be an enormously greater and more punishing liability, financial and in any number of other ways, by several orders of magnitude than literally millions of poorer folk living on benefits."

Well, it's worse than that, really, because they must have known what they were doing.

1/11/09
Stoneleigh: People often ask us which currency they should hold and whether or not we think the US dollar is about to plummet, so I thought it would be a good topic for a primer. Basically, the value of a currency can be looked at in two ways - relative to other currencies internationally and relative to goods and services domestically. It is the former that people are generally concerned about, but it should be the latter. Deflation is already outpacing the ability of central bankers and governments to 'print money' (monetize debt), and in a deflation, cash is king, relative to goods and services.

You need liquidity, and you need it in a form that will be accepted in your locality, whatever that currency is worth relative to others. As a fully liquid cash equivalent, you could also consider short term bonds (30-90 days) issued by your own government, as long as your government isn't Zimbabwe or anywhere comparable. Our horizons will contract drastically as we move towards a far more local world - a world where trading one currency for another might not be possible at all for most people. For most people, the time to think internationally is over. Credit expansion effectively shrank the world and turned it into a global village, but the world is about to get much larger again.

In the past, most people were born and lived and died all within about a five mile radius, and that is the world we are returning to. What good would a foreign currency be under those circumstances? If you are caught with foreign currency you can't legally trade, you would lose either all or most of its value (depending on the availability of a black market, but that has its own risks). Also, in a world that will be increasingly jingoistic and xenophobic, with the unfolding of an inevitable blame game, holding foreign currency could also be construed as unpatriotic, and that could be dangerous.

If you have liquidity, then you will be able to purchase necessities, and also the hard assets you will eventually need. Deflation will force down the prices of almost everything, hence preserving your purchasing power now will give you options in the future that very few will have. All fiat currencies are eventually inflated away, and in this case that will happen once the credit bubble has finished deflating and the international debt financing model is well and truly broken. I would expect that to be quite some time, as deflation and depression are self-reinforcing, and during that downward spiral it will be impossible to inflate.

During the deflationary phase you will need liquidity, but once it is over you will need to switch to hard assets. I would suggest waiting for very substantial price falls in order to hang on to as much of your wealth as you can, but not to wait for the bottom. The risks of spending a lot of money when no one else has any will grow with time, and you will need time to climb the learning curve associated with any self-sufficiency assets you buy. My guess is that deflation could last for a number of years, and that the best time to shift to hard assets (from a purely financial point of view) should be at least a couple of years away. Others with more resources may make the shift sooner, knowing that they will lose money, but having the luxury of being able to do so in order to buy time to learn new skills.

As for the value of your currency relative to others, that is less important for ordinary people, but may be important for those who are lucky enough to have far more wealth to begin with. Deflation is currently pushing up the value of the US dollar on a flight to safety (temporary pullbacks notwithstanding), and we are on the verge of an unwinding of the yen carry trade, which should also increase the value of the yen substantially. I would expect the euro to fall (temporary rallies notwithstanding) as the internal pressures build in Europe, and currencies that were on the opposite side of the yen carry trade should also fall as the yen rises.

Commodity currencies should do poorly as commodity demand falls and global trade is greatly scaled back, but could recover if we see a supply collapse and commodity prices rise again. This would probably depend on the commodity in question. Beyond a certain point, however, I am expecting currency relationships to become very volatile, if not chaotic. We are likely to see a series of beggar-thy-neighbour competitive devaluations as countries attempt to secure an advantage for themselves, if only temporarily. Where many currencies are falling, relative value depends on which one falls the fastest, or where a perceived safe haven may lie this week. My guess is that we will move into this kind of environment within the next two years, and quite possibly sooner rather than later.

As bets on relative currency values form a large part of the derivatives market (along with interest rate bets), sudden bursts of volatility are likely to generate large losses that could further destabilize an already precarious situation. Betting on specific currency swings under such circumstances would amount to very aggressive gambling and is generally a recipe for losing your shirt. At some point we are likely to see a relatively sudden dislocation in the bond market as we see international borrowing become more difficult, with continuous bailouts making the bond market nervous. Essentially, bailouts will be overtaken by events. That would involve bond prices falling substantially and interest rates soaring - quite possibly into the double digits.

People frequently worry that this will be inflationary, but it would actually precipitate an enormous amount of deflationary credit destruction. Interest rates on all debts would rise with bond rates to crippling levels, leading to a huge wave of defaults. This would amount to hitting the 'emergency stop' button on the economy, and is one reason we point out that holding debt can easily be financially fatal during deflation. In addition to a default tsunami, we would see governments cut back services drastically in order to reduce terribly expensive borrowing. This means being on your own in a pay-as-you-go world, which is why we emphasize the need for you to hold cash in hand. For many people, the only way to achieve no debt and cash in hand is to sell property and rent. For others, pooling resources may achieve the same thing.

Whatever the fate of the dollar relative to other currencies during a bond market crisis, its value relative to available goods and services domestically should still be increasing. Of course some goods may not be available at this point if they are sourced from abroad and trade has collapsed. There may therefore be some goods that would be worth purchasing at today's prices, in order to secure items that could be very useful while all it takes is the internet and a credit card.

When we eventually do see inflation, it will not come from the initial havoc in the bond market, but from the aftermath of its destruction. Once deleveraging is over and countries must function in financial isolation, there will be nothing to prevent them from printing actual cash, as opposed to desperately trying to expand credit in a double-or-nothing gamble as they are currently doing. Down that road lies a currency hyperinflation on a Zimbabwean scale, but we are nowhere near that point now. You must survive deflation in order to have to worry about hyperinflation.

more...
http://theautomaticearth.blogspot.com/2009/01/january-11-2009-special-relativity-of.html

...the US dollar's privileged "reserve" status has been a principal factor in America's continued prosperity. The dollar's unassailable position has enabled successive American governments to disguise the vast depletion of America's wealth and to successfully increase US Treasury debt
to where the published debt now accounts for some 100% of GDP. The total of US government debt, including IOUs and unfunded programs, now stands at a staggering $50 trillion, or five times GDP! If the dollar were just another currency, this never would have been possible.

In today's crisis however, the dollar is likely making its last star turn as the leading man in the global financial drama. Other stronger, less-burdened currencies are waiting in the wings for the old gent to take his final bows.

The dollar's demise is being catalyzed by the neglect of the Federal government. Instead of enacting policies that would restructure the US economy and restore productive, non-inflationary wealth creation, Congress is simply financing the old crumbling edifice.

Faced with the growing realization that America is not doing the work necessary to right its economic ship, it will not be long before America's primary creditors begin to seriously question the nation's ability to service, let alone repay, its debts.

There is now the prospect (inconceivable until recently), that America could lose its prestigious triple-A credit rating. In today's risk-adverse market, this could cost the Treasury 1% in interest on long bonds. Each additional percentage point of interest would cost America some $10 billion a year on each trillion dollars of new debt, or some $300 billion over the life of a 30-year bond.

http://www.atimes.com/atimes/Global_Economy/KA09Dj02.html

how cutthroat is that

From Paul Krugman's blog:



There’s been some talk abut risks of deflation, but there’s one alarming comparison I haven’t seen made. The figure above shows that the CBO is currently projecting an output shortfall from the current slump comparable to the slump of the early 1980s. Actually, it’s very close: if you compare the CBO’s projections of unemployment from 2008 through 2012 with its estimate of the natural rate, we’re looking at cumulative excess unemployment of 13.9 point-years; that compares with 13.7 point years from 1980 through 1986. (If the natural rate — the unemployment rate that keeps inflation unchanged — is 5 percent, and the actual unemployment rate averages 7 percent over a year, that’s 2 point-years of excess unemployment.)

Now here’s the thing: the slump of the early 1980s produced the Great Disinflation, which brought the core inflation rate down from about 10 to about 4.

This time, however, we entered the slump with a core inflation rate of about 2.5 percent. If we experienced a disinflation comparable to that of the 1980s, that would mean ending up with deflation at a rate of -3.5 percent.

And bear in mind that neither the CBO nor the Obama team really explains where recovery comes from; it’s just assumed.

So tell me why we aren’t looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend. Tell me why this risk wouldn’t remain high, though lower, even with the Obama plan, which as far as I can tell is expected to reduce cumulative excess unemployment by about a third.

http://krugman.blogs.nytimes.com/2009/01/10/risks-of-deflation-wonkish-but-important/

CHINA'S central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.

The People's Bank of China will expand financial cooperation with overseas economies and "properly deal with the global financial crisis," the central bank said.

"We'll actively join international efforts to tackle the global financial crisis while safeguarding national interests," the central bank said.

It pledged to implement a pilot program that the State Council announced last month.

China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China's two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.

Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.

Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.

The dollar's exchange rate has become more volatile since the global financial crisis began.

The central bank said it will make the exchange rate of the yuan more flexible and keep it "basically stable on a reasonable, balanced level."

There has been speculation that the yuan's appreciation will slow down, which would help Chinese exports maintain price advantages in overseas markets.

http://www.shanghaidaily.com/sp/article/2009/200901/20090107/article_387229.htm

not to mention the "firm hand on the tiller", provides room for some hope (depending on the quality of implementation).

If I weren't in the prairie, I'd say we are having a Nor'easter. It's a blizzard, a white-out, and the snow, which just blew about for hours, is suddenly piling up like GWB's Trillion Dollar Legacy.

Because of Depression-era economizing, the plows weren't out earlier, and they can't possibly keep up. We will be snowed in tomorrow. It's a good day to do laundry and other homely tasks.

Thanks to all for the posts--I will now get down and do my bit.

icy roads are nasty too

A year from now we may look back on this column and thank heaven that not all of its grim predictions came true. But don’t bet your kid’s lunch money against Nouriel Roubini. A professor of economics at New York University’s Stern School of Business and chairman of the consultancy RGE Monitor, Roubini in 2006 predicted the housing bust and an ensuing recession, among other on-the-money calls. And he says the worst is still ahead. Amar Bhidé, a professor of business at Columbia University, is a former McKinsey executive, a staff member for the commission that investigated the stock market crash of 1987, and author of the new book The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. He, too, expects a trying year ahead. But beyond the black cloud hanging over America, he sees a country chastened and an economy strengthened by the ordeal.

…more…

http://www.businessweek.com/print/magazine/content/09_03/b4116017130825.htm

Page 1 of 1
January/February 2009

“Because the United States is such a huge part of the global economy, there’s real reason to worry that an American financial virus could mark the beginning of a global economic contagion.” – Nouriel Roubini, March 2008

Last year’s worst-case scenarios came true. The global financial pandemic that I and others had warned about is now upon us. But we are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst.

The prevailing conventional wisdom holds that prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that these assets have fallen sharply from their peaks of late 2007, they will likely fall further still. In the next few months, the macroeconomic news in the United States and around the world will be much worse than most expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that the economic contraction will be mild and short.

Severe vulnerabilities remain in financial markets: a credit crunch that will get worse before it gets any better; deleveraging that continues as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus leading to cascading falls in asset prices, margin calls, and further deleveraging; other financial institutions going bust; a few emerging-market economies entering a full-blown financial crisis, and some at risk of defaulting on their sovereign debt.

Certainly, the United States will experience its worst recession in decades. The formerly mainstream notion that the U.S. contraction would be short and shallow—a V-shaped recession with a quick recovery like the ones in 1990–91 and 2001—is out the window. Instead, the U.S. contraction will be U-shaped: long, deep, and lasting about 24 months. It could end up being even longer, an L-shaped, multiyear stagnation, like the one Japan suffered in the 1990s.

As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan, and the other advanced economies, it will be severe. Nor will emerging-market economies—linked to the developed world by trade in goods, finance, and currency—escape real pain.

What constitutes a “recession” will depend on the country in question. For China, a hard landing would mean annual growth falls from 12 to 6 percent. China must grow by 10 percent or more each year to bring 12 to 15 million poor rural farmers into the modern world. For other emerging markets, such as Brazil or South Korea, growth below 3 percent would represent a hard landing. The most vulnerable countries, such as Ecuador, Hungary, Latvia, Pakistan, or Ukraine may experience an outright financial crisis and will require massive external financing to avoid a meltdown.
Click Here!

For the wealthiest countries, a debilitating combination of economic stagnation and deflation might happen as markets for goods go slack because aggregate demand falls. Given how sharply production capacity has risen due to overinvestment in China and other emerging markets, this drop in demand would likely lead to lower inflation. Meanwhile, job losses would mount and unemployment rates would rise, putting downward pressure on wages. Weakening commodity markets—where prices have already fallen sharply since their summer peak and will fall further in a global recession—would lead to still lower inflation. Indeed, by early 2009, inflation in the advanced economies could fall toward the 1 percent level, too close to deflation for comfort.

This scenario is dangerous for many reasons. A number of central banks will be close enough to setting interest rates of zero that their economies fall into a triple whammy: a liquidity trap, a deflation trap, and debt deflation. In a liquidity trap, the banks lose their ability to stimulate the economy because they cannot set nominal interest rates below zero. In a deflation trap, falling prices mean that real interest rates are relatively high, choking off consumption and investment. This leads to a vicious circle wherein incomes and jobs are falling, with demand dropping still further. Finally, in debt deflation, the real value of nominal debts rises as prices fall—bad news for countries such as the United States and Japan that have high ratios of debt to GDP.

As orthodox monetary tools become ineffective, policymakers will turn to unorthodox approaches. We’ll see traditional fiscal policy, in the form of tax cuts and spending increases, but also worldwide bailouts of lenders, investors, and financial institutions, as well as borrowers. Central banks will inject massive amounts of cash into financial systems to unclog the liquidity crunch. More radical actions, such as outright purchases of corporate and government bonds or subsidization of mortgage rates, might also be necessary to get credit markets functioning properly again.

This crisis is not merely the result of the U.S. housing bubble’s bursting or the collapse of the United States’ subprime mortgage sector. The credit excesses that created this disaster were global. There were many bubbles, and they extended beyond housing in many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans. There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic, and destructive financial instruments. And there were still more bubbles for local government borrowing, leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and credit-default swaps—a dangerous unregulated market wherein up to $60 trillion of nominal protection was sold against an outstanding stock of corporate bonds of just $6 trillion.

Taken together, these amounted to the biggest asset and credit bubble in human history; as it goes bust, the overall credit losses could reach as high as $2 trillion. Unless governments move with more alacrity to recapitalize banks and other financial institutions, the credit crunch will become even more severe. Losses will mount faster than companies can replenish their balance sheets.

Thanks to the radical actions of the G-7 and others, the risk of a total systemic financial meltdown has been reduced. But unfortunately, the worst is not behind us. This will be a painful year. Only very aggressive, coordinated, and effective action by policymakers will ensure that 2010 will not be even worse than 2009 is likely to be.

/. http://www.foreignpolicy.com/story/cms.php?story_id=4591

http://www.motherjones.com/news/feature/2009/01/fiscal-therapy.html

for years now, whenever I've been invited to lecture students on how our tax system works, I have asked a simple question: What is the purpose of the United States of America? The most common answer, be it at prestigious universities, elite prep schools, rural community colleges, or crowded urban high schools, is this: To make people rich.

This should come as no great surprise. For anyone born after, say, 1970, the world has been shaped by Ronald Reagan's remaking of government's relationship with private interests—a vision of lower taxes, less regulation, and maximum economic leeway for those at the top. In this view, the pursuit of wealth is the warp and weft of America; everything else will follow.

By contrast, the preamble to the Constitution tells us the nation's reason for being in 52 words that can be reduced to six principles: society, justice, peace, security, commonwealth, and freedom. Individual riches don't make the list. They are a product of American society, not its guiding purpose. Progress, then, must begin with a return to the best of the values that created this Second American Republic—one born, it's worth remembering, from the failure of the Articles of Confederation, whose principles (weak government, unfettered capitalism) found their resurrection in the economic policies of the past three decades.

Even judged by its own yardstick, the trickle-down approach has failed to deliver: Rather than getting richer, we have been slowly impoverishing ourselves. While incomes at the very top have soared to levels beyond imagining even a generation ago, the average inflation-adjusted income of the bottom 90 percent of earners was lower in 2006 than it was back in 1973. And since 2000, the median income of all Americans has actually slipped, proof that tax cuts for the rich do not create general prosperity. Today, more and more of us do not have enough money to live on without going into debt. For each dollar of equity people gained in their homes from 1980 to 2006, they borrowed two—and while a portion of that is accounted for by poor decision making, much has to do with the sheer impossibility of making ends meet.

Debt payments—individual and governmental—now consume so much income that they are suffocating economic growth. Interest on the federal government's debt this year will eat up the equivalent of all the income taxes we pay from January until at least sometime in May. (Already, the financial system bailout has added more than $3 trillion to the national debt—see "$3.4 Trillion & Counting"—for an extra $170 billion in annual interest payments.) This keeps us from making productive use of our tax dollars—launching universal health care, rebuilding our crumbling infrastructure, or funding the research we need to transform our energy system. We've been sold on tax cuts as the best way to spur growth, but what we really got was weak job growth, a sinking economy, and a slew of tax deferrals that cause increasing revenue shortfalls and force the government to borrow even more—with all of us paying the interest....

MUCH MORE AT LINK

David Cay Johnston is the author of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill).

Is TARP working?
Jan. 9: Lame duck watch: New details are coming out about bailout money given to General Motors. Is the TARP bailout money working? Rachel Maddow is joined by Pulitzer Prize winning reporter David Cay Johnston.
http://video.msn.com/video.aspx?mkt=en-US&brand=msnbc&vid=6f80455a-fed1-45bd-bc8e-a8b0100c99f6

Pretty grim stuff she's got there.

“Black Barts not black swans”

“Wall Street perpetrated a massive fraud on the American taxpayer.”

“Value-destroying financial meth labs.”

Janet Tavakoli, author of Dear Mr Buffett, is pretty straightforward. This crisis was created by Wall Street and it’s perpetrators should be shunned — not rewarded with government-sponsored bailouts. For some very strong opinions to mull over the weekend, watch the interview:

http://www.clipsyndicate.com/publish/video/801852

http://clusterstock.alleyinsider.com/2009/1/economists-who-blew-it-agree-prosperity-is-just-around-corner

Henry Blodget | Jan 3, 09 9:01 AM

Now that we're mired in the worst economic crisis since the Depression, forecasters who didn't see it coming are consoling themselves by saying, "no one saw it coming." This is hogwash. Many people saw it coming: Gary Shilling, Nouriel Roubini, Jeremy Grantham, Dean Baker, Peter Schiff, Robert Shiller, et al. They just don't happen to work for major investment banks.

It is true that the folks who work for major investment banks didn't see it coming. Historians will eventually determine whether this is because the major investment banks uniformly employ boneheads, or, more likely, because, when you work for an investment bank, it is easier to conclude that now is always a good time to buy stocks.

In any event... the New York Times reports that economists who work for major investment banks now think that prosperity is just around the corner. Hard to tell whether this is good news or bad news. For what it's worth, Nouriel Roubini thinks that prosperity is a good deal farther down the road. 2009 will be a washout, says Nouriel. And even 2010 will be crappy.

NYT: In the midst of the deepest recession in the experience of most Americans, many professional forecasters are optimistically heading into the new year declaring that the worst may soon be over.

For this rosy picture to play out, they are counting on the Obama administration and Congress to come through with a substantial stimulus package, at least $675 billion over two years.

They say that will get the economy moving again in the face of persistently weak spending by consumers and businesses, not to mention banks that are reluctant to extend credit.

If the dominoes fall the right way, the economy should bottom out and start growing again in small steps by July, according to the December survey of 50 professional forecasters by Blue Chip Economic Indicators. Investors seemed to be in a similarly optimistic mood on Friday, bidding up stocks by about 3 percent.

But in the absence of that government stimulus, the grim economic headlines of 2008 will probably continue for some time, these forecasters acknowledge.

http://www.nytimes.com/2009/01/04/business/economy/04view.html?_r=1&partner=permalink&exprod=permalink


IT’S no wonder that voters’ outrage over exorbitant executive pay is mounting. After all, the government just had to bail out financial firms that paid big bonuses last year to many of the same executives who helped precipitate the current financial crisis.

Nor is it any wonder that Congress is considering measures to limit executive pay — not just in the financial industry, but economywide. So far, the only formal legislative proposal is “say on pay,” which would require a nonbinding shareholder vote on executive pay proposals. But critics complain that this would have little impact and are hungry for stronger measures.

One popular proposal would cap the chief executive’s pay at each company at 20 times its average worker’s salary. But while Congress may well have compelling reasons to limit executive pay in companies seeking bailout money, voter anger is not a good reason to extend pay caps more generally.

(IT SEEMS REASONABLE AND JUST TO ME! DEMETER)

To be sure, executive pay in the United States is vastly higher than necessary. Executives in other countries, whose pay is often less than one-fifth that of their American counterparts, seem to work just as hard and perform just as well. The same was true of American executives in the 1980s.

So why not limit executive pay? The problem is that although every company wants a talented chief executive, there are only so many to go around. Relative salaries guide job choices. If salaries were capped at, say, $2 million annually, the most talented candidates would have less reason to seek the positions that make best use of their talents.

More troubling, if C.E.O. pay were capped and pay for other jobs was not, the most talented potential managers would be more likely to become lawyers or hedge fund operators. Can anyone think that would be a good thing?

In large companies, even small differences in managerial talent can make an enormous difference. Consider a company with $10 billion in annual earnings that has narrowed its C.E.O. search to two finalists. If one would make just a handful of better decisions each year than the other, the company’s annual earnings might easily be 3 percent — or $30 million — higher under the better candidate’s leadership. That same candidate couldn’t possibly make as much difference at a company with only $10 million in earnings.

That’s why companies where executive decisions have the greatest impact tend to outbid others in hiring the ablest managers.

Critics complain that executive labor markets are not really competitive — that chief executives appoint friends to their boards who approve unjustifiably large pay packages. But C.E.O.’s have always appointed friends, so that can’t explain recent trends.

One reason for these trends is that companies themselves have become bigger. As the New York University economists Xavier Gabaix and Augustin Landier argue in a 2006 paper, C.E.O. pay in a competitive market should vary in direct proportion to the market capitalization of the company. They found that C.E.O. compensation at large companies grew sixfold between 1980 and 2003, the same as the market-cap growth of these businesses.

Beyond growth in company size, executive mobility has also increased. In past decades, about the only way to become a C.E.O. was to have spent one’s entire career with the company. With only a handful of plausible internal candidates, pay was essentially a matter of bilateral negotiation between the board and the chosen. Increasingly, however, hiring committees believe that a talented executive from one industry can also deliver top performance in another.

A celebrated case in point was Louis V. Gerstner Jr. Having produced record earnings at RJR Nabisco, he was hired by I.B.M., where he led the computer giant, then struggling, to a dramatic turnaround in the 1990s.

This new spot market for talent has affected executive salaries in much the same way that free agency affected the salaries of professional athletes.

If the market for executive talent is competitive, critics ask, why are C.E.O.’s in an industry paid about the same, regardless of performance? That’s because no one knows with certainty how a particular executive will perform. But most hiring decisions are based on well-researched predictions, and always with hope for success. Executives whose record predicts good performance command a high rate. Their leash, however, has grown shorter.

In the past, a C.E.O. could often stay in the job for many years despite lackluster performance. Today, a C.E.O. who fails to deliver is often dismissed after a year or two.

In short, evidence suggests that the link between pay and performance is tighter than proponents of pay caps seem to think. Since the fall of the former Soviet Union, no one has seriously challenged the wisdom of relegating a high proportion of society’s most important tasks to private markets. And the market-determined salary of a job generally offers the best — if imperfect — measure of its importance.

THE financial industry, however, may be an exception. A money manager’s pay depends primarily on the amount of money managed, which in turn depends on the fund’s rate of return relative to other funds. This provides strong incentives to invest in highly leveraged risky assets, which yield higher average returns. But as recent events have shown, these complex assets also expose the rest of us to considerable systemic risk.

On balance, then, the high pay that lures talent to the financial industry may actually cause harm. So if Congress wants to cap executive pay in financial institutions receiving bailout money, well and good.

Elsewhere, however, the more prudent response to runaway salaries at the top is to raise marginal tax rates on the highest earners, irrespective of occupation. Again, relative salaries drive job choices. The jobs with the highest pretax salaries will still offer the highest post-tax salaries, just as before, so this step will not compromise the price signals that steer talented performers to the most important jobs.


Robert H. Frank, an economist at Cornell, is a visiting faculty member at the Stern School of Business at New York University.

http://www.nytimes.com/2008/12/28/business/economy/28view.html?ref=business


THE financial crisis is a result of many bad decisions, but one of them hasn’t received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund. If regulators had been less concerned with protecting the fund’s creditors, our current problems might not be quite so bad.

Long-Term Capital was advised by finance quants, or quantitative analysts, who made a number of unsound, esoteric bets, including investments in interest rate derivatives. When Russia’s inability to pay its debts roiled global markets, the fund, saddled with high-leverage and off-balance-sheet obligations, was near collapse.

Because Long-Term Capital owed large sums to banks and other financial institutions, the Federal Reserve Bank of New York organized a consortium of companies to buy it out and cover the debts. Alan Greenspan, then the Fed chairman, eased monetary policy to restart capital markets, which were starting to freeze up. Long-Term Capital’s shareholders were wiped out, but none of the creditors took losses.

At the time, it may have seemed that regulators did the right thing. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis. Today, however, that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.

Of course, there were many reasons for the reckless lending and failures of risk management that led to the most recent systemic credit shocks. And we have now entered the realm of trillion-dollar bailouts, vast contagion across financial institutions, rapid deleveraging of banks and an economic crisis that some people are starting to compare to the Great Depression.

The Long-Term Capital episode looks small when viewed against all of that. But it was important precisely because the fund was not a major firm. At the time of its near demise, it was not even a major money center bank, but a hedge fund with about 200 employees. Such funds hadn’t previously been brought under regulatory protection this way. After the episode, financial markets knew that even relatively obscure institutions — through government intervention — might be able to pay back bad loans.

The major creditors of the fund included Bear Stearns, Merrill Lynch and Lehman Brothers, all of which went on to lend and invest recklessly and, to one degree or another, pay the consequences. But 1998 should have been the time to send a credible warning that bad loans to overleveraged institutions would mean losses, and that neither the Fed nor the Treasury would make these losses good.

What would have happened without a Fed-organized bailout of Long-Term Capital? It remains an open question. An entirely private consortium led by Warren E. Buffett might have bought the fund, but capital markets might still have frozen because of the realization that bailouts were not guaranteed.

And Fed inaction might have had graver economic consequences, especially if a Buffett deal had fallen through. In that case, a rapid financial deleveraging would have followed, and the economy would have probably plunged into recession. That sounds bad, but it might have been better to have experienced a milder version of a downturn in 1998 than the more severe version of 10 years later.

In 1998, there was no collapsed housing bubble, the government’s budget was in surplus rather than deficit, bank leverage was much lower, and derivatives markets were smaller and less far-reaching. A financial crisis related to Long-Term Capital, however painful, probably would have been easier to handle than the perfect storm of recent months.

The ad hoc aspect of the bailout created a precedent for what has come to be called “regulation by deal” — now the government’s modus operandi. Rather than publicizing definite standards and expectations for bailouts in advance, the Fed and the Treasury confront each particular crisis anew. Decisions are made as to whether a merger is possible, whether a consortium can be organized, what kind of loan guarantees can be offered and what kind of concessions will be extracted in return. So far, every deal — or lack thereof, in the case of Lehman Brothers — has been different.

While there are some advantages to leaving discretion in regulators’ hands, this hasn’t worked out very well. It has become increasingly apparent that the market doesn’t know what to expect and that many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.

John Maynard Keynes famously proclaimed that “in the long run we are all dead.” From the vantage point of 1998, today is indeed the “long run.”

We’re not quite dead, but we are seriously ailing. As we look ahead, we may be tempted again to put off the hard choices. But perhaps the next “long run,” too, is no more than 10 years away. If we take the Keynesian maxim too seriously, and focus only on the short run, our prospects will be grim indeed.

Tyler Cowen is a professor of economics at George Mason University.

http://www.nytimes.com/2008/12/28/business/28gret.html?_r=1&emc=eta1

WITH home prices in free fall and mortgage delinquencies mounting, pressure to modify troubled loans is ratcheting up.

But lawyers who represent candidates for modifications say the programs are hobbled by the complexity of securitization pools that hold the loans, as well as uncertainty about who actually owns the notes underlying the mortgages.

Problems often emerge because these notes — which are written promises to repay the full amount of a mortgage — weren’t recorded properly when they were bundled by Wall Street into pools or were subsequently transferred to other holders.

How can a loan be modified, these lawyers ask, if the lender cannot prove that it actually owns the note? More and more judges are asking the same thing about lenders trying to foreclose on borrowers.

And here is another hurdle: Most loan servicers — the folks responsible for handling all the paperwork surrounding monthly mortgage payments — aren’t set up to handle all of the details involved in a modification.

Loan servicing operations are intended to receive borrowers’ payments; producing loan histories and verifying that payments were received or junk fees were not applied is considerably more labor intensive. This cuts into profits.

“These servicers are not staffed up and they don’t have a chance in the world to do the stuff they are supposed to do,” said April Charney, a consumer lawyer at Jacksonville Legal Aid. Many servicers continue to stonewall troubled borrowers who ask for a history of their loan payments and fees, she said.

“This is your biggest, hugest expense — your home — and when you ask for a life-of-loan history your servicer tells you to get lost,” she said. “And when you ask for a list of charges in the loan history that’s not going to happen.”

So even if loan modifications were to rise rapidly, it is unclear that borrowers can trust what lenders tell them about what they owe.

HORROR STORIES AT LINK

Good Night, W.



Hope you two have dreams of the Hague.


Good night Hank, Alan, Ben and buddies. Hope you end up bankrupt.

WE will see the rest of you TOMORROW!

http://www.clipsyndicate.com/publish/video/801852/lessons_from_warren_buffett_fixing_the_economy

This lady makes me look like Gandhi! She's got the goods on Wall Street Fraudsters, and is ready to indict!

http://www.rfkactionfront.com/2008/12/is-prozac-causing-all-of-these-stock.html

Way back in March of 2000, Slate.com ran a story titled, "Is Prozac Driving Wall Street?" It included the following nugget which now seems prescient:

Randolph Nesse, author (with George Williams) of Why We Get Sick: The New Science of Darwinian Medicine, estimates that about 20 million Americans are on antidepressants. And at least some people who take these drugs "become far less cautious than they were before, worrying too little about real dangers. This is exactly the mind-set of many current investors." If indeed "investor caution is being inhibited by psychotropic drugs," a Wall Street bubble "could grow larger than usual" before popping "with potentially catastrophic economic and political consequences."


Prozac and other anti-depressant use became widespread starting in the early 1990s. In fact, according to the Washington Post, the use of such drugs by all adults has nearly tripled in the last decade (nearly 1 in 10 adults in one one of them). And the massive rise in antidepressant use also corresponds with the ending of one recession (1992) and three subsequent enormous stock market bubbles and busts (internet, telecom, and housing).

But while the correlation is dramatic, causation is difficult if not impossible to prove. I think a more likely explanation for all the stock market bubbles is that corporate power has grown so dramatically over the last 30 years that passing effective regulation became impossible. With the corporate titans, left to self-police, it became inevitable that we'd see a massive game of financial musical chairs as they pumped all of the wealth out of one sector of the economy after another (they basically sucked all of the wealth out of retirement funds, real estate, and the public treasury over the last 10 years).

But here's my point -- I believe it is precisely the rise in corporate power -- that is causing the rise in anti-depressant use (not the other way around). It is precisely the way that corporate power tears down communities and families and dehumanizes our world that plunges so many people into anomie and despair. So for example, when Wal-Mart comes into a town and destroys all of the small retail businesses and the middle class jobs and community that went with them -- and forces people to work at low wages so we can all buy cheap Chinese-made imported goods -- that has GOT to cause an increase in depression in a town. Now multiply that by thousands of sectors of the economy that have been overwhelmed by corporate power over the last decade or two and you have the depression epidemic we have now.

Look, I'm not saying that depression isn't a real medical condition. I believe it is and I want people who experience depression to find healing. If that's in the form of a pill, great. But, do 1 in 10 Americans suffer from this medical condition and has the rate of this rare medical condition suddenly tripled over the past ten years? I think not. My point is that -- IF indeed the leading cause depression is not some unexplainable medical phenomenon but rather the very real suffering caused by the very awful corporations who have come to dominate our lives -- THEN we've got a huge problem on our hands. Because under ordinary (pre-Prozac) circumstances the rise in human suffering might cause people to ask the question -- "Hey how come everyone is so miserable?" And we might reach for collective solutions that work to change the conditions in which we all live. Instead, the problem is now INDIVIDUALIZED AND MEDICALIZED -- "individuals have medical problems it's not society's fault" -- and through massive prescription drug use, we may be silencing the very canaries in the coal mines we need to save our society from further ruin.

Just some food for thought ya'll.


1 comments:

mknowles said...

Prozac mixed with a little Viagra...

Bear in mind how much money big corps. make off anti-depressant sales, as well as how it is generally in big. corps.' interests to keep us all pacified with drugs and tv, so we don't notice how overworked we are and how our quality of life has deteriorated; so we remain optimistic -- dare I say "HOPE"-ful -- that our piece of the pie is just about to materialize . . .

Personally, I think depressive tendencies may be something like the sickle-cell anemia gene -- not so great for the carriers, but helpful to the larger population. Just as recessive sickle cells confer immunity against malaria and thus help populations survive epidemics, so depressives serve as "canaries in the goldmines" for the rest of society, being among the first to notice when things really are going wrong and it's time to devote some energy to fixing them.

http://interfluidity.powerblogs.com/posts/1226367450.shtml


But, today I am white-hot mad over AIG, and I need to vent. Yves Smith has done a beautiful job of describing the ridiculous awfulness of today's "restructuring".http://www.nakedcapitalism.com/2008/11/aig-looting-continues.html

More importantly, she uses words with the appropriate intensity and valence: "banana republic", "looting", "Mussolini-Style Corporatism".

For so many years, Milton Friedman passionately argued that there is a relationship between economics and political life. In particular, he believed capitalism to be uniquely compatible with a free society.

What kind of society is compatible with an economy managed by a cadre of large, politically connected firms whose operations and those of the state are intimately connected, and which cannot be permitted to fail since that would bring "chaos"? Friedman would have remembered. "Mussolini-style corporatism" can't be quarantined at the corner of Liberty Street and Maiden Lane. Trillion dollar bail-outs represent claims on scarce resources. If times get hard, the idea of scarcity will become a lot less abstract. The state will be called upon to enforce "property rights", including rights to the property that the state is right now giving away (and which in turn are being given away to the truly deserving). First there are economic emergency measures. Later there may be emergency measures of a different sort. Mixing my libertarians, there is more than one road to serfdom.

It is so odd, how we are becoming inured to these sums, $150 billion for AIG, $140B in tax breaks to encourage consolidation into bigger and more dangerous banks, the hundreds of billions in equity infusions under the modified TARP plan, etc. The Fed's balance sheet has expanded by more than a trillion dollars over the course of several weeks, almost all of which is used to offer one form or another of covert subsidy to financial firms. A bit hyperbolically, I thought, I once compared the scale of the Fed's interventions to the direct cost of the Iraq War. Now that seems quaint. The scale of the government's response to the financial crisis now completely dwarfs the direct costs of that war, as well as any plausible estimates of the indirect (financial) costs. (Obviously, the real costs of war are not financial, and run much deeper than our economic problems. I hope the comparison doesn't seem flip.)

Of course, we are constantly told, all of this is an "investment", no money has been spent, the taxpayer may even turn a profit.

That's an argument that sounds reasonable only until you give it a moment's thought. Nearly all "government spending" (outside of entitlement transfers) is investment. When we build schools, run head start programs, buy fighter jets, and fund our court system, that is not "consumption". We don't do those things because we enjoy them, but because they create ongoing payoffs that we believe outweigh the opportunity cost of our funds.

When a firm purchases inventory, when it installs new machinery or operates a research lab, we don't claim that it has "consumed" its wealth. Investment is something we do in the real world. Financial claims are only faint, imperfect echoes of real investment. There is a bitter irony in the fact that, precisely when bankers have profoundly debauched the value of paper claims, taxpayers are being told that they are not spending, they are investing, when they buy unmarketable securities. Of course it would be "spending" to build a power grid or an airport.

Now, perhaps the government is a very poor investor. But do we have reason to believe that it is more skilled or less corrupt when it invests in financial claims rather than real projects? I find the case for a 16% real return on early childhood education far more compelling than the case for 5% nominal coupon on Goldman preferred stock.

It is likely that taxpayers will turn a paper profit on their paper claims against financial institutions. But that's not because they are good "investments". It's making these investments good is now a constraint on government action. The Fed cannot behave in ways that would compromise the value of the trash on its balance sheet. Once AIG was too big to fail, it cannot fail, no matter how big the black hole grows. Once GM enters the penumbra, very soon now, it also must not fail. Of course, we will not count this terrible loss of policy freedom as a cost.

That cost may be quite large. A commonly held view is that yes, the Fed's interventions are extraordinarily expansionary, and yes that could lead to inflation sometime far in the future. But for now we have D-leveraging, D-flation, D-pression to worry about. The Fed retains its traditional tools to fight inflation with, when the time comes. It will be able to sell Treasury bonds for cash and "mop up" all this "liquidity" it has "injected" into "the system".

But wait. The Fed doesn't hold very many Treasury securities any more (see Kady Liang). It would have to sell off some of the other stuff. Maybe we get lucky, and by the time we need to fight inflation, all those "money good" CDOs turn marketable again. Maybe not, though, and then the Fed will have little choice but to tolerate a great inflation or watch its own balance sheet implode. When the inflation comes, bright investment bankers will have already converted the bonuses we paid them into real property. It will be ordinary savers, and especially workers without bargaining power, who will be stiffed with the bill.

I think either a great inflation or a catastrophic deflation are pretty much unavoidable. It's the distributional effects that have me white hot with rage. We are sowing the seeds of inflation by making those most deserving of catastrophe whole, while doing nothing for those whose wages may soon achieve purchasing power parity with the emerging world. I'm actually cool with inflation — hey, all my money's in gold. A sharp inflation would be a kind of large-scale Chapter 11, a systemic debt-to-equity cramdown, debtholders get their claims devalued but the firm's nation's economic life goes on. However, inflation is a wealth transfer, and we should be conscious of from whom and to whom. For every dollar of Federal largesse that goes into the Wall Street bonus pool, three dollars should go into extremely generous unemployment benefits, paid sabbaticals for workers to return to school and retool, anything and everything to give people bargaining power to negotiate higher wages without all the hassle a union. Let's pass the "Take this job and shove it act of 2009".

Because the only thing worse than a great inflation with a wage/price spiral is a great inflation without one.

THERE ARE MANY MORE LINKS TO SUPPORTING THESE ARGUMENTS AT THE LINK.

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


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

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

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

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

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

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

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

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

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

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

Now for the securities lending business.

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

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

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

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

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

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

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

Yves Smith has a 9 November 2008 post at her Naked Capitalism that closely parallels my thinking about AIG'S bailout, i.e., it's a bankruptcy fraud. Here's a link: http://www.nakedcapitalism.com/2008/11/aig-looting-continues.html.

I describe a bustout at my 30 July 2008 post, http://skepticaltexascpa.blogspot.com/2008/07/london-banker-on-covered-bonds_30.html.

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

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

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

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

More on this topic (What's this?)
"Goldman big winner in government's revised bailout of AIG" (naked capitalism, 11/11/08)
AIG Up to Its Old Tricks, Yet Another $10 Billion in Losses (naked capitalism, 12/9/08)
Modeling Failure (Financial Armageddon, 11/3/08)

Read more on American International Group at Wikinvest

http://www.nytimes.com/2008/11/22/us/22home.html?em


The housing crisis has kept thousands of older Americans who need support and care from moving into retirement communities or assisted-living centers, effectively stranding them in their own homes.

Without selling their houses or condominiums, many cannot buy into retirement homes that require a payment of $100,000 to $500,000 just to move in. So they are scratching themselves off waiting lists, canceling plans with packing services and staying put, in houses that fit well 30 years ago, but over the years have become lonely, too large or too treacherous to navigate.

“It is part of the hidden problem of the recession,” said Larry Minnix, president of the American Association of Homes and Services for the Aging. “Every neighborhood, every family’s got them.”

Facilities that have watched their waiting lists wither and their occupancy rates fall in the last year are now scrambling to bring people through their doors. Some assisted-living centers have called in real estate agents to teach prospective residents about online advertising and how to clean and preen their homes for showings. Others have set up programs with banks to provide bridge loans to homeowners, or are discounting apartments and offering low-interest loans.

The Cedar Community, which provides a range of housing for the elderly in West Bend, Wis., has seen independent-living occupancy rates drop by 4 percent this year. There were so many people waiting for their homes to sell that the facility decided, in some cases, to let new residents pay month-to-month until they could unload their houses and use the proceeds on the facility’s entry deposit.

“We’ve never done that before,” said Tracey MacGregor, a spokeswoman at Cedar Community.


...Across the country, occupancy rates for independent and assisted-living facilities have fallen slightly in the last year, by about 2 percent through the middle of 2008, according to the National Investment Center for the Seniors Housing and Care Industry.

But the problem is playing out acutely in hard-hit areas like Florida, where the vacancy rate at some facilities is up 20 percent to 30 percent over last year, said Paul Williams, director of government relations for the Assisted Living Federation of America. At Luther Manor, a retiree community in Milwaukee, the number of residents moving into independent living has dropped 20 percent this year. In southern Ohio, 65 percent of the people who visited the Bristol Village retirement community this year said they could not buy a unit because their homes were still hanging around their necks.

For these businesses, each occupied room generates thousands of dollars each year. Retirement condos charge monthly fees ranging from a few hundred dollars to $5,000, while the average price for private-pay care in assisted living is $3,013 per month, or $36,156 per year, according to a MetLife study.

She is still living independently in her condo in suburban Chicago, but it's becoming more difficult. She's 80, and now that the complex is no longer receiving its monthly fees because absentee landlords don't pay and neither do the renters, maintenance has become a problem. Sidewalks and parking areas aren't cleared of snow, and now my mother is afraid to go outside. She's fallen twice already and has enough sense not to risk that kind of accident again. She can't afford to move into another place because her money is tied up in a condo that's been for sale for two years.


Tansy Gold, who is honest enough to admit she does not want her mother moving in with her.

http://www.nakedcapitalism.com/2008/11/cheery-chart-no-corporate-profits-for.html

In case you are starting to look to past crises for clues as to how our financial mess might play out, here is a Great Depression factoid. From Levy Forecast, November 2008 (hat tip reader Scott, no online source):

http://1.bp.blogspot.com/_rWY3qGfe6gc/SSj11vlEuMI/AAAAAAAABcg/PedhAUXkRtw/s400/Picture+2.png

Note that the report itself argues that the US will have a "contained" depression, with deep recession conditions for a protracted period and an anemic recovery. It does not believe the zero operating profits pattern of the Great Depression will be repeated.

http://www.nakedcapitalism.com/2008/11/geithner-to-become-treasury-secretary.html


Oh dear. As reader Marshall said, "Well, it's not Summers...it's even worse."

I had really hoped for Volcker. That would have been 1000 points on the Dow, and more important, he is the only one I can think of who has the stature to negotiate with our friendly foreign funding sources about the future of the dollar. I have it from someone supposedly very well plugged in that he was offered the job and the Obama crowd was trying to persuade him to take it for a year....

http://www.guardian.co.uk/business/2008/nov/09/barack-obama-tax-havens-crackdown

President-elect Barack Obama plans to crack down on international tax havens, including Jersey, Guernsey and the Isle of Man, within weeks of taking power in January, putting him on a collision course with Gordon Brown.

There is growing international pressure to outlaw the secretive practices of tax havens as a key part of reforms to the world's battered financial system, as the leaders of the world's 20 most powerful economies gather for a major conference in Washington next weekend.

Britain has been notably lukewarm, but Obama, whose approval will be key to any reform package over the next 12 months, was one of the signatories of the Stop Tax Haven Abuse Act, legislation put to Congress last year that blacklisted Jersey, Guernsey and 32 other jurisdictions. Key aides to Obama said he will introduce a similar law as part of a wide-ranging revenue-raising and tax-reform package, within weeks of taking power.

Obama advisors estimate the measure could raise at least $50bn (£32bn) per year in lost US tax revenues, and Washington sources say leading accountancy firms have already hired lobbyists in anticipation of a fierce battle to water down the proposals.

Key measures are likely to include: revealing the beneficial owners of secretive trusts; prohibiting accountants from charging fees on specific tax services; and identifying 'offshore secrecy jurisdictions' that 'unreasonably restrict US tax authorities from obtaining needed information'. The measures could end years of financial secrecy that have protected the super-rich and international businesses as they move money from one jurisdiction to another.

Joe Guttentag, deputy assistant secretary for international tax in the Clinton administration and a key figure in the Obama campaign, is likely to drive the policy through, along with Professor Reuven Avi-Yonah, who helped frame the act. 'It is expected that something like this will happen,' Avi-Yonah told The Observer. 'There is a sense that if you can raise revenue by doing this, it will not be controversial.'

The measure comes as the UK faces international condemnation for blocking moves in the United Nations to upgrade its tax committee to intergovernmental status.

Brown has been keen to portray himself as the leader of efforts to reform the global financial system, boosting his credibility at home and distracting attention from the looming recession.

But as the Prime Minister prepares to set out his proposals for next weekend's conference in a speech at the Guildhall tomorrow night, anti-poverty campaigners will stage a noisy protest, urging him to 'call time on global greed'.

They fear Brown is too wedded to the light-touch regulation New Labour has championed for the past decade to be in the vanguard of a new economic system. 'Brown seems to have spent the past two weeks resuscitating the International Monetary Fund and refilling its coffers, so that it can lend on the same basis as the past 20 years,' said Nick Dearden, director of the Jubilee debt campaign. 'He doesn't seem to have done any soul-searching about how this crisis began.'


NOW THAT'S CHANGE WE CAN BELIEVE IN!

has championed for the past decade to be in the vanguard of a new economic system. 'Brown seems to have spent the past two weeks resuscitating the International Monetary Fund and refilling its coffers, so that it can lend on the same basis as the past 20 years,' said Nick Dearden, director of the Jubilee debt campaign. 'He doesn't seem to have done any soul-searching about how this crisis began.'"

Love that last paragraph - especially the concluding point, uttered by Nick Dearden, director of the Jubilee debt campaign:

"He (Gordon Brown) doesn't seem to have done any soul-searching about how this crisis began." It's going to be my new signature, because it hits the nail on the head, as regards the state of denial of our corrupt body politic in the UK, after 28 years of lunatic, inbridled greed at the public's expense (a public, however, whose existence they rarely and then only fleetingly acknowledged). "The people of this country have never been better off" was the customary mantra.

The fact that it has taken a Daily Mail financial commentator to state that "wages" should not be a dirty word, says it all. As Dan Atkinson, the Mail's Economic Editor, expatiated, in order to boost the profits of the companies' owners, workers' wages have been depressed (the "jet up" system, I call it, though I believe its antonym, "trickle down" is the received usage), with the banks, instead, extending credit with a simple-minded, uncritical promiscuity. "Stop me and buy one" overtures, e.g. credit-card junk mail, having become a central plank of the right wing's economic paradigm. Reminds me of when I was child, asking my Uncle Bill when he was up from Wales trawling Lyle Street, one of his "ham" radio haunts, why "that woman" walked towards him in such a friendly way.

NOTE: From someone who worked for the Cato Institute and is a writer for the WSJ editorial page

http://online.wsj.com/article/SB123146363567166677.html

SEE LINK FOR GRAPHS

http://www.leap2020.eu/GEAB-N-29-is-available!-Phase-IV-of-the-Global-Systemic-crisis-Breakdown-of-the-Global-Monetary-System-by-summer-2009_a2435.html

-The G20-meeting held in Washington on November 14/15, 2008, is in its essence a historical indicator that the Western - above all Anglo-Saxon - monopoly on global economic and financial governance, is coming to an end.

Nevertheless, according to LEAP/E2020, this meeting also clearly demonstrated that this kind of summits is doomed to inefficiency because they concentrate on curing the symptoms (banks’ and hedge funds’ financial difficulties, derivative markets’ explosion, financial and currency markets’ dramatic volatility, ...) rather than the fundamental root of the current crisis, i.e. the collapse of the Bretton Woods system based on the US Dollar as sole pillar of the global monetary system.

Without a complete overhaul of the system inherited from 1944 by summer 2009, the failing of the current system and that of the United States at the center, will lead the whole planet to an unprecedented economic, social, political and strategic instability, and more specifically to a breakdown of the global monetary system by summer 2009. In light of the technocratic jargon and calendar of the declaration released after this first G20-meeting (totally disconnected from the speed and scope of the unfolding crisis (1)), it is more than likely that the disaster will have to happen for the fundamental problems to be seriously addressed and for the beginning of a reply to be initiated.

Four key-factors are now pushing the Bretton Woods II (2) system to collapse in the course of the year 2009:

• Fast weakening of the central players: USA, UK
• Three visions of the future of global governance will be dividing world’s largest players (United-States, Eurozone, China, Japan, Russia, Brazil) by spring 2009
• Unbridled speeding-up of the last decade’s (de-)stabilizing processes
• Increasing number of more and more violent backlashes.

LEAP/E2020 already extensively described factors 1 and 4 in previous editions of the GEAB. Therefore we will concentrate on factors 2 and 3 in the present edition (GEAB N°29).

The agitation that has seized global leaders since the end of September 2008 indicates that panic has struck at the highest level. Worldwide political leaders have now understood that the house is on fire. But they have not yet perceived something obvious: that the very structure of the building is involved. Improving fire-regulations or reorganizing emergency services will not be sufficient. To use a strong symbolic image, the World Trade Center’s twin towers did not collapse because firemen were late or because water was missing in the automatic fire-system, they collapsed because their structure was not meant to support the shock of two airliners hitting them in just a few minutes.

Today’s global monetary system is in a similar situation: the twin-towers are the Bretton Woods system, and the airliners are called « subprime crisis », « banking failures », « economic recession », « Very Great US Depression », « US deficits », … a whole squadron.

Today’s leaders, who all belong to the collapsing world (including Barak Obama (3)), cannot possibly imagine how to solve the problem, just like central bankers in 2006/2007 could not possibly imagine the scope the unfolding crisis could reach (4). It is their world which is disappearing under their eyes, their beliefs and their illusions (sometimes similar) (5). According to our team, a 20 percent renewal of worldwide leaders is required to begin to see sustainable solutions (6) appear. This is indeed, according to LEAP/E2020, the « critical mass » needed to permit any fundamental change of perspective in a complex not very hierarchical human group. Today we are still far from reaching this critical mass: in order to contribute to finding solutions to the crisis, those new leaders must accede power in full awareness of the crisis’ specific nature.

According to LEAP/E2020, if global leaders fail to realize that in the next three months and to take actions in the next six months, as explained in GEAB N°28, the US debt will « implode » by summer 2009 under the shape of the country’s defaulting or the Dollar’s dramatic devaluation. This implosion will follow closely a number of similar episodes affecting less central countries (see GEAB N°28), including the United Kingdom whose already huge debt is ballooning at the same pace as Washington’s (7). In the same way as the US Federal Reserve saw, month after month, its « Primary Dealers » (8) being swept away by the crisis before it was itself confronted to a real problem of capitalization and therefore survival, the United States in the coming year will witness the implosion of all countries too-closely integrated to their economy and finance, and of their allies financially too-dependent on them (9).

The role the Europeans can play in the matter is essential (10). The Eurozone in particular must send out a strong message towards Washington: « The United States will fall into an economic and financial pitfall in 2009 if they cling to their past « privileges ». Once the world has given up on the Dollar, it will be too late to negotiate ». With more than 550-billion USD, the Eurozone owns the third largest reserve (ex-aequo with Russia who is not very accurate on that aspect) after China and Japan, and before the Gulf oil-monarchies (see table above). It therefore has the diplomatic weight, the financial weight, the economic weight, the commercial weight and the monetary weight required to compel Washington to face realities (11). The EU altogether will follow because non-Euro EU countries are all on the verge of a severe crisis of their currency or economy or both (12). Without the Euroland, their outlook is very gloomy in the short and medium term. As a matter of fact, the Euro is the only currency a growing number of initially reluctant (Iceland, Denmark…) or skeptical (Poland, Czech Republic, Hungary…) countries now wish to join (13).

Sign of the times, the Financial Times has started to list the US federal state’s tangible assets: military bases, national parks, public buildings, museums, etc… everything has been evaluated for a total amount of approximately 1,500-billion USD, i.e. more or less the probable amount of the budget deficit in 2009 (see the detail of these assets in the chart below). No wonder why Taiwan, despite its dependence on the security provided by Washington, decided to stop buying one of the three great components of the US public deficit, the Fannie Mae and Freddy Mac securities (despite the fact that they were « rescued » by the government (14)); or why Japan is now a net-seller of US T-Bonds.

All those who, despite our advice in the past two years, invested in Fannie and Freddy securities or in stock markets or in large US private equity banks or in the banking sector in general, have no reason to worry: it will not happen because « they » will prevent it! A problem remains however: “they” are now panic stricken and “they” understand nothing to this situation “they” were never prepared to face. Like we explained in the GEAB N°28, 2008 was only the detonator of the global systemic crisis. Now comes Phase IV, phase of the aftermath!


---------
Notes:

(1) Here is the final communique released and a first non-committal analysis from the French press (Journal du Dimanche, close to the Paris government) which gives an idea of the opinion of the media throughout the Eurozone. Obviously the G20-Summit did not manage to calm down the crisis, it could even result in enhanced worry, seen the US refusal to agree on addressing the real problems.

(2) Whatever may think Gordon Brown and Nicolas Sarkozy, as well as some rather unprofessional media, Bretton Woods II dates back to the 1970s. In 1971 indeed, the US unilateral decision to give up the Dollar/Gold peg, soon followed by the Jamaica agreement in 1976, put an end to the initial Bretton Woods framework and marked the beginning of a system of floating exchange rates (Bretton Woods II).

(3) The future president of the United States seems to have for sole aim the implementation of his campaign program (social security, infrastructure, middle-class tax reduction,…), listed before the crisis, and requiring major expenses, when the US federal state is already over-indebted. It was a perfect program… for an America that no longer exists except in electoral speeches.

(4) On this subject, read our anticipations in GEAB N°17 and N°18.

(5) This goes for the USD-reserves of many countries such as China, Japan and the Gulf oil-monarchies. Today’s leaders are not able to imagine that the hundreds of billions of USD piled up in their reserves are only worth 50 or 30 percent of their face value. It will belong to their successors to make rational conclusions and invent a different global system.

(6) That is to say conceptually relevant and efficiently implemented.

(7) As a matter of fact, because of its strong recession, the United Kingdom is already accounting for a large part of the EU’s slowdown in 2009. Great-Britain will be the « sickman » of the EU in the years to come.

(8) It is informative to read on Wikipedia the history of « Primary Dealers », those banks chosen by the US Federal Reserve as privileged partners and sole ones allowed to deal with the Fed. Indeed after a few decade-long period of stability, the list has suddenly begun to shrink as « primary dealers » began to be swept away by the crisis in 2008.

(9) Talking about dependent allies, Pakistan and Ukraine are already under IMF perfusion, and Turkey’s credit rating is about to be downgraded. Egypt, Israel and Colombia should soon join the list.

(10) Joseph Stiglitz also underlines this point in his article dated 11/11/2008 in the Telegraph

(11) Our team is far from believing that the Eurozone is not confronted to severe difficulties as well (on the economic outlook, see GEAB N°28 in particular), but in a historic crisis such as the one currently unfolding, these problems are minor compared to those the US, the UK or even Asia will face in the next year.

(12) For instance Latvia has just nationalized as a matter of urgency the country’s second largest bank, Hungary is under ECB and IMF perfusion, Polish growth is collapsing, Denmark and Sweden will join the Eurozone in the couple of years, UK is in distress...

(13) Source: NRC, 11/13/2008. Unlike the US, currency faced to a general move on the part of countries willing to « un-peg » from the Dollar, or even create alternative currencies such as the Gulf’s oil-monarchies and their project of common currency by 2010. Source: GulfNews, 09/22/2008

(14) Fanny Mae’s announcement of a new record-high loss in the third quarter (29-billion USD) might provide an explanation. Sources : Barron’s, 10/24/2008; MarketWatch, 11/10/2008

http://www.globalresearch.ca/index.php?context=viewArticle&code=ENG20081124&articleId=11117

On Friday November 21, the world came within a hair’s breadth of the most colossal financial collapse in history according to bankers on the inside of events with whom we have contact. The trigger was the bank which only two years ago was America’s largest, Citigroup. The size of the US Government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be ‘too big to fail.’

November 25, 2008 "Global Research" -- The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker’, whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.

‘Spitting into the wind’

A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September. Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.

That means half of the public's money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.

Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.

It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.’ surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.

Some Citigroup details

The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.

Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.

The scale of the hidden losses of perhaps the twenty largest US banks is so enormous that if not before, the first Presidential decree of President Barack Obama will likely have to be declaration of a US ‘Bank Holiday’ and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.



Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10% and the government absorbing 90%. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the Government’s Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It’s by no means certain they will salvage the dollar system.

The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions. Total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.

The madness over a Detroit GM rescue deal

The health of Citigroup is not the only gripping crisis that must be dealt with. At this point, political and ideological bickering in the US Congress has so far prevented a simple emergency $25 billion loan extension to General Motors and other of the US Big Three automakers—Ford and Chrysler. The absurd spectacle of US Congressmen attacking the chairmen of the Big Three for flying to the emergency Congressional hearings on a rescue loan in their private company jets while largely ignoring the issue of consequences to the economy of a GM failure underscores the utter lack of touch with reality that has overwhelmed Washington in recent years.

For GM to go into bankruptcy risks a disaster of colossal proportions. Although Lehman Bros., the biggest bankruptcy in US history, appears to have had an orderly settlement of its credit defaults swaps, the disruption occurred before-hand, as protection writers had to post additional collateral prior to settlement. That was a major factor in the dramatic global market selloff in October. GM is bigger by far, meaning bigger collateral damage, and this would take place when the financial system is even weaker than when Lehman failed.

In addition, a second, and potentially far more damaging issue, has been largely ignored. The advocates of letting GM go bankrupt argue that it can go into Chapter 11 just like other big companies that get themselves in trouble. That may not happen however, and a Chapter 7 or liquidation of GM that would then result would be a tectonic event.

The problem is that under Chapter 11 US law, it takes time for the company to get the protection of a bankruptcy court. Until that time, which may be weeks or months, the company would need urgently ‘bridge financing’ to continue operating. This is known as ‘Debtor-in-Possession or DIP financing. DIP is essential for most Chapter 11 bankruptcies, as it takes time to get the plan of reorganization approved by creditors and the courts. Most companies, like GM today, go to bankruptcy court when they are at the end of their liquidity.

DIP is specifically for companies in, or on the verge of bankruptcy, and the debt is generally senior to other outstanding creditor claims. So it is actually very low risk, as the amount spent is usually not large, relatively speaking. But DIP lending is being severely curtailed right now, just when it is most needed, as healthier banks drastically cut loans in the severe credit crunch situation.

Without access to DIP bridge financing, GM would be forced into a partial, or even a full liquidation. The ramifications are horrendous. Aside from loss of 100,000 jobs at GM itself, GM is critical to keep many US auto suppliers in business. If GM failed soon most, possibly even all of the US and even foreign auto suppliers will go under. Those parts suppliers are important to other auto makers. Many foreign car factories would be forced to close due to loss of suppliers. Some analysts put 2009 job losses from a GM failure as high as 2.5 million jobs due to the follow-on effects. If the impact of that 2.5 million job loss is seen in terms of the overall losses to the economy of non-auto jobs such as services, home foreclosures caused and such, some estimate total impact would be more than 15 million jobs.

So far in the face of this staggering prospect, the members of the US Congress have chosen to focus on the fact the GM chief, Rick Wagoner, flew in his private company jet to Washington. The Congressional charade conjures up the image of Nero playing his fiddle as Rome goes up in flames. It should not be surprising that at the recent EU-Asian Summit in Beijing, Chinese officials mooted the idea of trading between the EU and Asian nations such as China in Euro, Renminbi, Yen or other national currencies other than the dollar. The Citigroup bailout and GM debacle has confirmed the death of the post-1944 Bretton Woods Dollar System.

The real truth behind Citigroup bailout

What neither Paulson nor anyone in Washington is willing to reveal is the real truth behind the Citigroup bailout. By his and the Republican Bush Administration’s adamant earlier refusal to take an initial resolute action to immediately nationalize the nine or so largest troubled banks, he has created the present debacle. By refusing on ideological grounds to instead reorganize the banks’ assets into some form of ‘good bank’ and ‘bad bank,’ similar to what the Government of Sweden did with what it called Securum, during its banking crisis in the early 1990’s, Paulson and company have created a global financial structure on the brink.

A Securum or similar temporary nationalization would have allowed the healthy banks to continue lending to the real economy so the economy could continue operating, while the State merely sat on the undervalued real estate assets of the Swedish banks for some months until the recovering economy made the assets again marketable to the private sector. Instead, Paulson and his ‘crony capitalists’ in Washington have turned a bad situation into a globally catastrophic one.

His apparent realization of the error of his initial refusal to nationalize came too late. When Paulson reversed policy on September 19 and presented the nine largest banks with an ultimatum to accept partial Government equity ownership, abandoning his original bizarre plan to merely buy up the toxic waste asset-backed securities of the banks with his $700 billion TARP taxpayer money, he never revealed why.

Under the original Paulson Plan, as Dimitri B. Papadimitriou and L. Randall Wray of the Jerome Levy Institute at Bard College in New York point out, Paulson sought to create a situation in which the US ‘Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by "healthy" ones.’

Paulson soon realized the scale of crisis, largely triggered by his inept handling of the Lehman Brothers case, had created an impossible situation. Were Paulson to use the $700 billion to buy up toxic waste ABS assets from the select banks at today’s market price, the $700 billion would be far too little to take an estimated $2 trillion ($2,000 billion) in Asset Backed Securities off the books of the banks.

The Levy Economics Institute economists state, ‘It is probable that many and perhaps most financial institutions are insolvent today -- with a black hole of negative net worth that would swallow Paulson's entire $700 billion in one gulp.’

That reality is the real reason Paulson was forced to abandon his original ‘crony bailout’ TARP plan and opt to use some of his money to buy equity shares in the nine largest banks.

That scheme as well is ‘dead on arrival’ as the latest Citigroup nationalization scheme underscores. The dilemma Paulson has created with his inept handling of the crisis is simple: If the US Government paid the true value for these nearly worthless assets, the banks would have to write down huge losses, and, as Levy economists put it, ‘announce to the world that they are insolvent.’ On the other hand, if Paulson raised the toxic waste purchase price high enough to protect the banks from losses, $700 billion ‘will buy only a tiny fraction of the 'troubled' assets.’ That is what the latest nationalization of Citigroup is about.

It is only the beginning. The 2009 year will be one of titanic shocks and changes to the global order of a scale perhaps not experienced in the past five centuries. This is why we should speak of the end of the American Century and its Dollar System.

How destructive that process will be to the citizens of the United States who are the prime victims of Paulson’s crony capitalists, as well as to the rest of the world depends now on the urgency and resoluteness with which heads of national Governments in Germany, the EU, China, Russia and the rest of the non-US world react. It is no time for ideological sentimentality and nostalgia of the postwar old order. That collapsed this past September along with Lehman Brothers and the Republican Presidency. Waiting for a ‘miracle’ from an Obama Presidency is no longer an option for the rest of the world.

http://www.thenation.com/doc/20081110/greider2/print

October 30, 2008 "The Nation" -- The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders?

Leo W. Gerard, president of the United Steelworkers, raised these explosive questions in a stinging letter sent to Paulson this week. The union did what any private investor would do. Its finance experts vetted the terms of the bailout investment and calculated the real value of what Treasury bought with the public's money. In the case of Goldman Sachs, the analysis could conveniently rely on a comparable sale twenty days earlier. Billionaire Warren Buffett invested $5 billion in Goldman Sachs and bought the same types of securities--preferred stock and warrants to purchase common stock in the future. Only Buffett's preferred shares pay a 10 percent dividend, while the public gets only 5 percent. Dollar for dollar, Buffett "received at least seven and perhaps up to 14 times more warrants than Treasury did and his warrants have more favorable terms," Gerard pointed out.

"I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal--50 percent invested and 50 percent as a gift--is quite consistent with the Republican version of spread-the-wealth-around philosophy."

The Steelworkers' close analysis was done by Ron W. Bloom, director of the union's corporate research and a Wall Street veteran himself who worked at Larzard Freres, the investment house. Bloom applied standard valuation techniques to establish the market price Buffett paid per share compared to Treasury's price. "The analysis is based on the assumption that Warren Buffett is an intelligent third party investor who paid no more for his investment than he had to," Bloom's report explained. "It also assumes that Gold Sachs' job is to protect its existing shareholders so that it extracted from Mr. Buffett the most that it could.... Further, it is assumed that Henry Paulson is likewise an intelligent man and that if he paid any more than Mr. Buffett--if he paid $1 for something for which Mr. Buffett would have paid 50 cents--that the difference is a gift from the taxpayers of the United States to the shareholders of Goldman Sachs."

The implications are staggering. Leo Gerard told Paulson: "If the result of our analysis is applied to the deals that you made at the other eight institutions--which on average most would view as being less well positioned than Goldman and therefore requiring an even greater rate of return--you paid a$125 billion for securities for which a disinterested party would have paid $62.5 billion. That means you gifted the other $62.5 billion to the shareholders of these nine institutions."

If the same rule of thumb is applied to Paulson's grand $700 billion bailout fund, Gerard said this will constitute a gift of $350 billion from the American taxpayers "to reward the institutions that have driven our nation and it now appears the whole world into its most serious economic crisis in 75 years."

Is anyone angry? Will anyone look into these very serious accusations? Congress is off campaigning. The financiers at Treasury probably assume any public outrage will be lost in the election returns. I hope they are mistaken.

About William Greider
National affairs correspondent William Greider has been a political journalist for more than thirty-five years. A former Rolling Stone and Washington Post editor, he is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism (Simon & Schuster) and--due out in February from Rodale--Come Home, America.

http://www.wsws.org/articles/2008/oct2008/pers-o27.shtml

In an unusually frank article published in Saturday's New York Times, the newspaper's economic columnist, Joe Nocera, reveals what he calls "the dirty little secret of the banking industry"--namely, that "it has no intention of using the money to make new loans."

As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.

Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.

Asked by one of the participants whether the $25 billion in federal funding will "change our strategic lending policy," the executive replies: "What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling."

Referring to JPMorgan's recent government-backed acquisition of two large competitors, the executive continues: "And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way, and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."

As Nocera notes: "Read that answer as many times as you want--you are not going to find a single word in there about making loans to help the American economy."

Later in the conference call the same executive states, "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side."

"It is starting to appear," the Times columnist writes, "as if one of the Treasury's key rationales for the recapitalization program--namely, that it will cause banks to start lending again--is a fig leaf.... In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation."

Early this month, he explains, "in a nearly unnoticed move," Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.

Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.

Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.

What the Wall Street Journal on Saturday called the "strong-arm sale" of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.

All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.

In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would "help American consumers and businessmen get credit to meet their daily needs and create jobs." If the bailout was not passed, he warned, "More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account.... More businesses would close their doors, and millions of Americans could lose their jobs ... ultimately, our country could experience a long and painful recession."

One month later, the bailout has been enacted, and all of the dire developments--banks and businesses disappearing, the stock market plunging, unemployment skyrocketing--which the American people were told it would prevent are unfolding with accelerating speed.

While Obama talks about the need for all Americans to "come together" in a spirit of "shared sacrifice"--meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs--and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.

As the World Socialist Web Site warned when it was first proposed in mid-September, the "economic rescue" plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.

The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.

While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.

Barry Grey

IS THIS THE BEGINNING OF THE END OF CITIGROUP? AFTER HOW MANY TAXPAYER DOLLARS?


http://news.yahoo.com/s/nm/20090111/bs_nm/us_citigroup_7

By Dan Wilchins Dan Wilchins Sun Jan 11, 8:38 am ET

NEW YORK (Reuters) – Morgan Stanley could pay $2 billion to $3 billion or more for a controlling stake in Citigroup Inc.'s Smith Barney retail brokerage business, two people familiar with the matter said.

The cash would be a big boon for Citigroup, which is under tremendous pressure from the U.S. government to shore up its balance sheet after taking $45 billion of government capital in October and November, they said.

The bank is considering multiple options in addition to the Morgan Stanley deal.

"Everything is on the table," one of the people familiar with the matter said, adding that the bank may put its toxic assets into a separate unit as a preliminary step toward shedding them.

Dismantling the rest of Citigroup would be difficult, one person said, noting that there are not many buyers for financial assets now. A few smaller businesses or groups may be sold off -- Citi has discussed internally the possibility of selling its Banamex Mexican banking unit, for example. But splitting up Citigroup completely is unlikely, he added.

Terms of the Morgan Stanley deal are still being worked out. Under the current plan, Citigroup and Morgan Stanley would set up a joint venture for their combined retail brokerage businesses. Morgan Stanley would own 51 percent, control the venture, and expect to buy Citigroup's remaining share over the next five years.

CRUCIAL CAPITAL

Morgan Stanley would initially pay Citigroup around $2 billion to $3 billion or more, with further payments coming as Morgan Stanley bought more of the business.

When Citigroup does the deal, it will likely be able to boost the value on its books of its remaining stake in the Smith Barney business, creating additional capital.

Capital is crucial for Citigroup, which has posted more than $20.3 billion of net losses for the four quarters ended Sept 30. The bank said late on Thursday that it has about $2 billion of gross exposure to LyondellBasell, whose U.S. operations and nearly 80 other affiliates filed for bankruptcy protection this week.

That should result in a $1.4 billion pre-tax charge in the just completed fourth quarter, the bank said.

The bank faces massive writedowns in areas ranging from credit cards to mortgages in the coming quarter. Analysts expect the company to lose 78 cents a share this quarter before special items, according to Reuters Estimates.

Citigroup's directors are considering replacing the bank's chairman, Sir Win Bischoff, with lead director and former Time Warner Chairman Richard Parsons as soon as next week, the New York Times reported. Citigroup declined to comment.

Bischoff would not be the only official to depart Citigroup. Robert Rubin, a senior counselor at the bank, stepped down on Friday. He will remain on Citigroup's board until the annual meeting later this year.

Morgan Stanley was not immediately available for comment.

http://www.informationclearinghouse.info/article21140.htm


November 03, 2008 "Information Clearinghouse" -- Redistribution is never an issue when the money is flowing upwards. It's only when working people are poised to get a few scraps that all hell breaks loose. That's when self-styled "mavericks" and their political cadres spring into action and unleash their vitriol at anyone who challenges the failed "trickle-down" dogma of the investor class. When Barak Obama naively pointed out the need to "spread the wealth" the media descended on him like a pack of feral hounds. The gaffe was followed by weeks of derision and vicious attacks. McCain branded him a the "Redistributionist-in-Chief" while his rabid friends on wingnut radio invoked the musty specter of Karl Marx.

What a load of malarkey. Neither McCain nor his media pals mention how the nation's wealth has already been "redistributed" via unfunded tax cuts for the rich, gluttonous $634 billion Pentagon budgets, or trillion dollar bailouts for Wall Street sharpies. That's why the national debt has skyrocketed to $11.3 trillion and the country is on the brink of default. It has nothing to do with the proposed extension of unemployment benefits for the victims of the financial crisis or the prospect of $300 billion in additional stimulus to revive the moribund economy. The Bush administration would never hand out stimulus checks unless it had a gun to its head. But, the fact is, their plan to shift the nation's wealth to the richest 1 percent of the population has been such a glorious success, that consumer spending has seen its sharpest decline in history. Demand has collapsed. And, even though the Federal Reserve has dropped the Fed Funds rate to 1 percent, has flooded the financial system with liquidity, (Federal Reserve Credit jumped $69.6bn to a record $1.873 TN, with a historic 7-wk increase of $985bn!) and is providing a backstop for money markets, commercial paper, insurance companies, investment banks, real estate, and dodgy mortgage-backed securities; consumers are continuing to lose ground because of falling home equity, exploding personal debt, and growing job losses. The Fed's liquidity-injections are not getting to the people who need it most--the workers-- so the economy is tanking. It's that simple.

So what should be done?

Whoever becomes the next president will have to rethink traditional views on redistribution. It's not a dirty word. The only way to stop the bleeding and save the country from economic ruin is by enacting an aggressive program to rebuild the middle class. Stimulus checks and government-funded infrastructure programs simply ignore the more deeply-rooted systemic and ideological problems. What's really needed is a reversal of 3 decades of Reaganism and an admission that that flawed "supply side" market-based doctrine has thrust the country towards financial annihilation. Market fundamentalism has increased the share of national wealth among the richest 1 percent to the highest point since the Gilded Age. "The wealthiest 1 percent of Americans held more than half the nation's direct holdings of publicly traded stocks in 2004 according to the Federal Reserve". (Wall Street Journal) Those figures have ballooned since 2004 and created the same kind of economic polarization that exists in third world countries. A recent report by the Organization for Economic Cooperation and Development (OECD) showed that "The United States has the highest inequality and poverty rates in the 30-country organization after Mexico and Turkey, and the gap has increased rapidly since 2000...In the United States, the richest 10 percent earn an average of $93,000, the highest level in the group. The poorest 10 percent earn an average of $5,800 - about 20 percent lower than the OECD average." Neoliberalism in America has triumphed; the middle class is busted!


The American worker needs an "across the board" pay raise, greater union representation, and a seat on the corporate board. Stimulus checks are a quick-fix with no enduring value. What's needed is structural change and decisive action to redirect wealth away from America's burgeoning oligopoly to the worker bees whose labor keeps the system running. That means the markets have to be strictly regulated, taxes have to increase for anyone making over $250,000 per year, and workers wages will have to surpass the rate of inflation. The best way to rev-up the economy is to rebuild the middle class so they can buy the things that American businesses produce.

Marriner Eccles, who served as FDR's chairman of the Federal Reserve summed it up like this:


"As mass production has to be accompanied by mass consumption. Mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery."

Eccles was an astute economist who understood the negative effects of overcapacity and demand destruction. When wages fail to keep pace with production, the system becomes unstable and crisis-prone. Credit expansion only adds to the problem making the ultimate meltdown even worse. When peak credit is reached, borrowers can no longer make the interest payments on their loans and the bubble begins to unwind. That's the situation we're in right now.

October was the worst month on record for global stock markets. Even the blue chips got hammered. Gold, oil, retail, and durable goods have all dropped significantly. Deflation has wrapped itself around the economy like a python and is causing declines in every asset-class. New York Times journalist Peter Goodman summed it up like this:

“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics, a consulting and forecasting group. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”

Economists saw in the data a testament to the degree to which many households are so strapped that the very culture of American consumption has been altered. ("Economy shrinks with consumers leading the way", Peter Goodman, NY Times)

The stock market fell more than 30 percent in October, commodities recorded their worst month in half a century, credit markets are still underperforming, and consumer confidence is at all-time lows. In fact, according to a CNN/Opinion Research Corp. poll: "Three-quarters of U.S. residents believe things are going badly in the United States and large majorities are angry and frightened... The poll found that two-thirds of those questioned said they were scared about the way things are going while three of four, 75 percent, said conditions in the United States are "stressing them out."

"It's scary how many Americans admit they are scared," said Keating Holland, the broadcaster's polling director. "Americans tend to downplay the amount of fear they have when facing tough times. The fact that more than six in 10 say that they are scared shows how bad things are getting." (CNN: "Most in US Scared and Angry")

Americans are scared and for good reason. Government policy is being concocted by a Mafia of right wing corporatists, Wall Street tycoons, and strident Chicago-school class warriors. Their interests are different then the people they are supposed to serve. Financial-industry rep Henry Paulson has devoted all his time to saving his banker buddies while maxed-out workers slip further into debt and destitution. Of the more than $1 trillion the Fed has spent to prop up the financial system, not one dime has gone to anyone who wasn't a banker. It's all gone to Paulson's friends. Meanwhile, the economy is sliding into the most severe recession in the last 80 years and there's no help in sight for homeowners who are underwater on their mortgages or about to lose their jobs.

The surest way to destroy the economy is to hand over control of the financial system to investment banks and speculators. That's what transpired before the Great Depression and Wall Street has restaged the same coup today. By overturning critical market regulations, the investment alchemists have created a toxic stew of exotic debt-instruments, shadowy off-balance sheets operations, and opaque derivative contracts, all designed to avoid prudent capital requirements. The investment banks and hedge funds have been creating credit from thin air while supportive regulators in the Bush Administration have applauded from the sidelines. Now the monstrous equity bubble has imploded triggering systemwide deleveraging which has left consumers with little access to credit, soaring food and fuel costs, and an uncertain jobs market. Naturally, demand has suffered as people hunker down and try to prepare for the economic slump ahead. Here's how Franklin Roosevelt summed it up nearly a century ago:

FDR: “…Our basic trouble was not an insufficiency of capital. It was an insufficient distribution of buying power coupled with an over-sufficient speculation in production. While wages rose in many of our industries, they did not as a whole rise proportionately to the reward to capital, and at the same time the purchasing power of other great groups of our population was permitted to shrink. We accumulated such a superabundance of capital that our great bankers were vying with each other, some of them employing questionable methods, in their efforts to lend this capital at home and abroad. I believe that we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer. Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income.” (Pam Martens, "FDR Explains the Crisis: Why it feels like 1932" Counterpunch)

$13 trillion has already been drained from global markets as the humongous credit bubble continues to lose altitude. Trillions more will be provided to keep the listing financial system afloat. Who will provide the crumbs to working people when production slows, credit contracts, profits shrink, businesses default, home equity vanishes and unemployment soars? So far, Paulson has shrugged off the idea of another stimulus package and dragged his feet on the FDIC's plan to rewrite mortgages to slow the rate of foreclosures. All of the Treasury Secretary's energy has been devoted to transferring the nation's wealth to his Wall Street colleagues. (Now that's redistribution!) Similarly, Fed chief Bernanke (who approved every one of Greenspan's misguided initiatives) has shown more interest in defending the shabby and "unsustainable" structured finance system than finding ways to help hard-pressed workers. Just last week, Bernanke defiantly made a speech in which he defended "securitzation"--the sale of chopped up mortgages as securities--which caused the present meltdown. Bernanke stated:

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

What gall. So Bernanke would restore the same system and create the very same risks, just so he could "reduce the originator's (the banks) exposure" and generate greater profits for Wall Street investment banks? Is Congress so out of touch with reality that they can't see the threat that Bernanke poses. This is madness in the extreme.

FDR again: "We cannot allow our economic life to be controlled by that small group of men whose chief outlook upon the social welfare is tinctured by the fact that they can make huge profits from the lending of money and the marketing of securities--an outlook which deserves the adjectives ‘selfish’ and ‘opportunist.’ ” (Pam Martens, "FDR Explains the Crisis: Why it feels like 1932" Counterpunch)


The bubble that is now deleveraging started with the Fed's low interest monetary policies which subsidized debt and rewarded speculation. The massive expansion of credit by the investment banks and hedge funds distorted the market by keeping the price of money "too low for too long" pushing savers into risky investments. That ignited asset-inflation in the secondary market and sent real estate prices skyrocketing. Now that foreclosures are steadily rising, the foundation for the scheme has eroded and the pyramid is crashing to earth.

Libertarians and conservatives tend to blame the crisis on working people who took out mortgages that were beyond their ability to pay. But that is not where the responsibility lies. Bankers fully grasp the science of lending money. If that wasn't the case, then why does the Fed lower interest rates when it wants to stimulate the economy? It's because they know that the allure of cheap money creates an incentive for speculation that seduces borrowers into spending money they don't have for things they don't need. Debt-burdened homeowners are just the victims of a nationwide banker's scam. They are not to blame.

The only way to rebalance the economic system and mitigate the effects of a deep recession, is to admit we're on the wrong track and make the necessary course correction. So far, the main recipients of the US taxpayers' largess--the banks--have already acknowledged that they will not use the bailout money to provide credit to consumers and businesses as intended, but will divert their windfall into bonuses for their employees, dividends for their shareholders and to buy-up weaker banks. On top of that, no criminal charges have been filed against any of the main players who engineered the biggest incident of securities fraud in history. The banks and hedge funds will not have to return any of their ill-gotten gains. Given the power and influence of the financial lobby, how else can one put the economy on even-keel, rekindle flagging demand, and rebuild the middle class without an aggressive plan to redistribute the wealth? (Restoring the Truman-era 93 percent marginal tax on anything over $250,000 would be a step in the right direction)

Novelist Honore d'Balzac said, "Behind every fortune is a crime". The perceptive Frenchman must have anticipated the gaggle of venal money-grubbers who currently occupy the penthouse suites in lower downtown Manhattan. There's only two ways to deal with selfishness and cynicism on this scale; regulation and taxation. Nothing else will work.

Obama's Little Red Book

Presidential candidate Barak Obama is more Milton Friedman than Chairman Mao, but there is room for hope. In an interview with Chicago Public Radio station WBEZ-FM, Obama noted that the Supreme Court under Chief Justice Earl Warren "never ventured into the issues of redistribution of wealth and sort of more basic issues of political and economic justice in this society," and "to that extent as radical as I think people tried to characterize the Warren Court, it wasn't that radical".(Wall Street Journal)

Hmmm. Perhaps, an Obama presidency wouldn't be so bad after all.

http://www.marketwatch.com/News/Story/Story.aspx?guid={D7BE5772-B293-4ED0-B36E-CE2FBA1F1EDC}

By Ruth Mantell, MarketWatch

WASHINGTON (MarketWatch) -- With almost 2.6 million job losses last year, American consumers, once seen as unflappable, pulled back.

On Wednesday, the government is scheduled to report retail sales for December, and economists expect a record sixth consecutive month of declines. While falling gas prices have relieved consumers to some extent, job losses are pinning down confidence to near-record lows, which translates to weak spending, wrote analysts with CIBC World Markets.

"With the U.S. economy in the throes of its first consumer-led recession since the early 1990s, the 2008 holiday sales season has surely been a dud," according to CIBC. "With so many economic indicators pointing to a horrible fourth quarter no one expects this report to bring anything but bad news. The only real debate is how horrible it will be."

Analysts polled by MarketWatch are expecting a drop in retail sales of 1.7% for December, following a decline of 1.8% in November. Excluding autos, analysts are looking for a decline of 1.9%, compared with 1.6% in the prior month.



On Friday, consumer sentiment results come out for early January from the Reuters/University of Michigan survey. Although the reading improved in December, it remained at relatively low levels with consumers reporting that lower prices provided some needed relief, but continued job losses and income declines were worrisome. Analysts polled by MarketWatch expect the January data to retreat.
"Deep holiday discounting boosted consumer sentiment in December, but we do not expect this to repeat in January. Continued volatility in financial market and horrific news with respect to the economy and labor markets should outweigh lower gas prices," according to a Credit Suisse research note.
Consumer, producer prices

On Friday, the Labor Department will report the consumer price index for December. Analysts polled by MarketWatch are looking for a drop of 0.9% on the back on lower gas prices, compared with a drop of 1.7% in the prior month. Excluding energy and food prices, analysts expect a second consecutive of no change.

Lower energy prices mean that the PPI could fall more than 1% for the third consecutive month, according to Bank of America analysts.


Also Friday, the Federal Reserve will report industrial production data for December, and economists are expecting another drop. A recent report from the Institute for Supply Management showed that U.S. manufacturing activity dropped to a 28-year low in December.
For November, the Fed reported that output fell 0.6% on broad-based weakness across manufacturing industries, and analysts polled by MarketWatch expect a December decline of 1.5%.
"Manufacturing output should see a large decline because of the whopping 2.4% drop in manufacturing hours worked," according to Credit Suisse analysts. "This is consistent with December's nightmare ISM manufacturing report."

In its battle against the financial crisis, the U.S. government has extended its full faith and credit to an ever-growing swath of the private sector: first homeowners, then banks, now car companies. Soon, President-elect Barack Obama will put the government credit card to work with a massive fiscal boost for the economy. Necessary as these steps are, they raise a worry of their own: Can the United States pay the money back?

The notion seems absurd: Banana republics default, not the world's biggest, richest economy, right? The United States has unparalleled wealth, a stable legal tradition, responsible macroeconomic policies and a top-notch, triple-A credit rating. U.S. Treasury bonds are routinely called "risk-free," and the United States has the unique privilege of borrowing in the currency that other countries like to hold as foreign-exchange reserves.

Yes, default is unlikely. But it is no longer unthinkable. Thanks to the advent of credit derivatives -- financial contracts that allow investors to speculate on or protect against default -- we can now observe how likely global markets think it is that Uncle Sam will renege on America's mounting debts. Last week, markets pegged the probability of a U.S. default at 6 percent over the next 10 years, compared with just 1 percent a year ago. For technical reasons, this is not a precise reading of investors' views. Nonetheless, the trend is real, and it is grounded in some pretty fundamental concerns.

The most important is the coming surge in the federal debt. At the end of the last fiscal year, in September, the total public debt held by the American people (excluding debt issued to the Social Security Trust Fund or held by the Federal Reserve) stood at $5.8 trillion, or 41 percent of gross domestic product -- about what the debt-to-GDP ratio has averaged since 1956. But the Congressional Budget Office projects deficits of $1.9 trillion over the next two years. Add almost $800 billion of stimulus spending, and U.S. debt soars to 60 percent of GDP by 2010 -- the highest level since the early 1950s, when the nation was working off its World War II and Korean War debts.

The other major cause for concern is that the federal government has taken on massive "contingent liabilities" -- loans and guarantees that don't become actual costs until the borrower defaults and the federal guarantee has to be honored. For example, Washington has purchased $45 billion of preferred stock of Citigroup but has also agreed to backstop up to about $240 billion of its losses. Bianco Research, a Chicago financial research firm, puts the total of such contingent liabilities (as of Dec. 29) at more than $8 trillion. The U.S. government won't shell out anything close to that, of course; it may not pay out any money and might even turn a profit. But the worse the economy gets, the more likely it is that some of those contingent liabilities will become actual liabilities.

More:

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/09/AR2009010902325.html

There are some who see a ray of hope in the recent jobless claims reports, which have dropped back to “only” 467,000 in initial unemployment claims, down from 491,000 for the last week, after being over 500,000 for several weeks. Those numbers are seasonally adjusted. That hope disappears if you look at the actual numbers. For the current reporting week ending January 3, 2009, the advance number of initial claims came in at 726,420. Last week’s advance number was 717,000. We have been above 600,000 new initial claims every week since the third week of November. Continuing claims jumped massively, by 744,000 to 5,316,124.

No conspiracy here. This is what happens when you try to smooth a volatile trend by using seasonal adjustments. If you use past performance as the tool by which you smooth the trend, when the trend changes, the seasonally adjusted numbers will be either too large or too small. Thus, the data understated the growth of jobs in 2003 because recent past performance had been bad, and it is now understating the number of unemployment claims and actual unemployment.

http://clusterstock.alleyinsider.com/2009/1/jobs-numbers-much-worse-than-you-think

http://www.youtube.com/watch?v=dnT21hmlT4o


I want my bailout money
Keep the bills coming
Sweet green cash just drippin like honey
I’m a new kind of thug with a Washington buzz ’cause
Dealing debt pays better than dealing drugs
What do you think will happen when they double the money supply?
The falling dollar makes it harder for you to survive
They take those billions and trillions and give it to their own kind
Hope you don’t mind bein robbed blind

How do you think we got runaway credit?
Ain’t nothin goin down unless the crooks in Washington let it
Now they regret it but they still don’t get it
Cause the economy is crashin so bad it needs a paramedic

I want my bailout money
Sweet green cash just dripping with honey
Gotta keep this economy running
I need another hit of my bailout money

Look at the stash, it’s like a mad dash for the cash
They got the taxpayer takin it in the ass
the CEOs they are havin a blast
While the workin poor trying to make the paycheck last

The bailout money is created with new debt
While they rollin in their limos and private jets
All the workers on the street drippin sweat
While collar hustlers are takin everything they can get

They put the nation on a hyperinflation track
No Presidential administration can take it back
And now the taxpayers pickin up the slack
Like they put a high dollar Big Brother monkey on your back

I want my bailout money
Sweet green cash just dripping with honey
Gotta keep this economy running
I need another hit of my bailout money

The prisons are filled with brothers caught on a fifty-dollar jack
But when Whitey takin trillions, the cops they turn their back
The incompetent bankers, they get their jobs back
Cause those crankers smoking money like it was crack

They take your car, your home, everything that you own
And when you’re jobless and broke, you still gotta pay the loan
If you’re thinkin of stealin some food, please don’t
Just go to Washington and you can steal everything you want

How we gonna solve this, dissolve the big scam
We resolve we won’t let ‘em steal from a fellow man
Gotta raise our hands and ask “What is this?”
Then we put the Federal Reserve out of business!

You take a look at a dollar bill, you see that eye above the pyramid lookin back at you
That eye is laughin at you suckers!

I want my bailout money
Keep the con running
Sweet green cash just dripping with honey
Gotta keep this economy running
I need another hit of my bailout money

Aren’t you tired of payin for that? Tired of breakin your back for that?
Bein oppressed and suppressed while you keep payin your tax for that?
We gotta get out of this financial trap
And it’s never gonna stop until you take your country back

The politicians are useless, don’t you know that they used us
And the bankers refused us while the media schooled us
The authorities knew this was happening to us
Cause they make more money every time that they screw us

You didn’t think they’re printing all that funny money just for you, did ya?

Drownin’ in debt but the Fed isn’t done yet
What are we gonna get?
Gonna print funny money
Budget’s in the red, economy nearly dead
Politician’s said that we
Gonna print funny money
Hangin’ by a thread, the people are bein’ bled
But get it through your head that we
Gonna print funny money
The bankers gotta stay ahead, gotta make more bread
That’s when they said, “Print more money!”

Song and Lyrics © 2009 by Michael Adams, All Rights Reserved