Thursday, May 1, 2008

Debt Rattle, May 1 2008: No more mark-to-market

Dust Bowl, North Dakota

Ilargi: The Bank of England’s statements are becoming so contradictory and confusing that the only conclusion I can see shine through here is that they are very afraid.

Their Financial Stability Report estimates losses for UK banks at $192 billion. Only $24 billion of that has been written down, and still it’s called too high?! Or is it the British journalists that are confused and can’t read? One says the report claims $914 billion in total losses, another says $170 billion. Or is that just subprime?

The most hilarious one of all is the accusation that mark-to-market pricing overstates losses. We see that claim in the US as well. Yeah, if only banks could make up their own price for everything they own, as they’ve done for a decade and more, they’d be rich and stay rich.

And if you and I could do that too, we’d all be rich. Problem is, you can’t sell anything that way, because your delusion is not the same as someone else’s. That's why there are markets?!

The idea of course is that if banks are allowed to mark their own "assets" to whatever model they want, they can swap them for Treasuries with the Fed and the Bank of England (and the ECB?!). The Fed will load them off to the Treasury, which will pass them on to you.

You will then be the proud owner of thousands of billions of dollars "worth" of paper that in reality has no value to speak of. And that will arguably be the biggest crime ever committed in America. It’s being prepared as we speak. What are you doing to protect yourself and your children?

UK banks warned over lending fears
The Bank of England has warned that banks' fears of a financial meltdown may become a self-fulfilling prophecy. Banks previously over-willing to lend are now too reluctant, even with credit-worthy borrowers, it suggests. This increased fear of risk has itself undermined confidence in financial institutions and made them reluctant to lend to each other, the Bank adds.

Its financial stability report suggests the credit exposure not declared by UK banks may be near to £100bn. The quarterly report says that there is a "significant increase" in the risk that a major bank collapse or reluctance to lend will disrupt the financial system. And it says the process of adjustment is proving "even more prolonged and difficult" than expected. The Bank still judges that the most likely outcome is that confidence will gradually return to markets, and does not see that all the exposure will result in losses.

But the size of the problem helps explain why the Bank was prepared to provide an additional £50bn to help ease the credit crunch facing UK banks. In its quarterly Financial Stability Report, the Bank of England warns that there are potentially large exposures that have still not been declared by financial institutions.

The report estimates the total potential losses in "structured credit and monoline-related write-downs and exposures" at $914bn overall. It says UK banks could lose $192bn (£96bn), compared to $232bn for European large financial institutions, and nearly $500bn for the US banks and investment houses. However, the Bank points out that the freezing up of markets has meant that these estimated losses may be inflated because of the difficulty of pricing the complex securities which are now very difficult to value.

It says that "credit losses from the turmoil are unlikely ever to rise to levels implied by current market prices unless there is a significant deterioration in fundamentals." And it estimates that total sub-prime losses could be reduced from $400bn to $200bn once market conditions return to normal. But it says that the crisis has led to the pendulum swinging too far, with risk premia in some markets "swinging from being unusually low to temporarily too high relative to credit fundamentals".

It says the crisis demonstrated that banks' risk management systems were weak, and they had not realised that risks could not be easily dispersed around the financial system but would flow back to the banks themselves. The Bank of England judges that there is a risk that "the currently elevated risk premia in some markets will persist".

"This could lead to a self-fulfilling adverse cycle in which persistent market illiquidity and falling asset prices further undermine confidence in banks and results in a sharper tightening of credit conditions." The report demonstrates how quickly lending is drying up. The Bank's quarterly survey of credit conditions shows that lenders are tightening up credit sharply not just on home loans, but also on household lending and commercial loans to companies.

And the sources of future loans in wholesale money markets have also contracted sharply. The market for "asset-backed securities" such as sub-prime and other mortgages has collapsed - with the value of such assets issued going from $700bn a quarter in the middle of 2007 to just $100bn in the first quarter of 2008.

Banks are overstating losses, says King
Britain's banks are overstating losses from the turmoil in the credit markets and the sub-prime lending debacle, the Bank of England says. Despite frequent official pleas for "transparency" and for the banks to reveal the full scale of potential losses, the practice of "marking to market" – trying to attach a value to unmarketable securities – is creating its own problems, says the Bank.

It poses risks to the economy because banks have, as a result of huge writedowns, restricted lending, worsened the credit crunch and held back economic growth and the housing market, creating a vicious circle. Even so, the Bank cautiously suggests that the cheapness of some mortgage-backed assets, the US Federal Reserve's bold action over Bear Stearns and the Bank's own £50bn Special Liquidity Scheme are beginning to restore confidence in the credit markets, although risks to financial stability remain "high".

The Bank also warns: "Tighter credit conditions mean some rise in financial distress among vulnerable borrowers can be expected, including parts of the commercial real estate sector, some leveraged non-financial companies and some high-risk households...

Many high-risk borrowers may find they are unable to refinance expiring fixed-rate mortgage deals... This will result in a jump in their average effective mortgage rate of around 2.5 percentage points." Around 1.4 million borrowers will be affected in this way this year – if they succeed in getting a loan as house prices fall, with a 1 per cent year-on-year fall revealed by Nationwide yesterday.

Some £12bn has been written down by UK banks during the crisis but, in its latest Financial Stability Report, the Bank says that may be too high. "Prices in some credit markets are now likely to overstate the losses that will ultimately be felt by the financial system," it says. The Bank estimates that depressed market prices for sub-prime mortgage-backed securities imply a default rate of 76 per cent, with a loss to the banks of 50 per cent of the loan, both unprecedented. The Bank's analysis would mean a recovery in these prices, as bargain hunters come to swoop on undervalued securities, with a resulting easing in the credit crisis in the coming months.

House prices fall as Goldman Sachs predicts credit crunch will hit UK hardest
House prices have recorded the first annual decline since 1996 as a leading investment bank gave warning that the economy would be the worst hit by the global credit crisis. The value of an average home fell by 1.8 per cent in April, the sixth successive monthly fall, figures from Nationwide, the second-biggest mortgage lender, show. The average cost of a home is now £178,555, 1.1 per cent lower than in April last year when the average price was £180,314, equivalent to a loss of about £5 a day.

This gloomy news for homeowners came as Jim O’Neill, chief economist at Goldman Sachs, who correctly forecast the collapse of the US property market, said that Britain was likely to be the worst hit of the world’s economies in the fallout of the global credit crisis. Mr O’Neill said that Britain, with its heavy reliance on financial services, was “in the eye of the storm of a delev-eraging world economy” and that British homeowners would bear the brunt of the City’s ensuing slowdown.

“The UK mortgage market is effectively frozen . . . House prices are going to go through negative changes . . . It’s going to be a challenge for UK policymakers,” he said. The credit crunch has already started to affect the housing market as prospective buyers have been deterred by demands from lenders for hefty deposits. Seven of the ten leading lenders will not lend to borrowers who have less than a 10 per cent deposit.

Bank of England sounds alarm on £5bn commericial property defaults
Britain's big banks stand to lose as much as a fifth of their profits as the commercial property market implodes, the Bank of England has warned.The Bank sounded the alarm on a £5bn-plus wave of real estate defaults which could engulf the financial sector before it has even recovered from the sub-prime crisis. It used today's Financial Stability Report to warn that, despite falls of more than 15pc in commercial property prices, banks have continued to pile into the sector and could now face significant losses.

Although it predicted the global financial crisis may soon be at an end, it warned that banks may have to weather losses from other sources. The office and professional building market is in the midst of its biggest crash in more than a decade. However, banks have reported no major write-offs from the slump. The Bank warned this will not persist.

It projected that if a tenth of outstanding commercial property loans default this could cost the UK banking sector £5.1bn, or 19pc of its annual pre-tax profits. British banks have become highly reliant on commercial property. It accounts for 38pc of their lending to non-financial companies - double the total of a decade ago. Despite the price falls, banks have increased lending to the sector in recent months, the report warned.

Although real estate firms are breaking the covenant terms on millions of pounds worth of loans, many lenders are holding fire from calling foreclosure - leaving them even more vulnerable if the economic climate worsens. The report nevertheless insisted that the financial crisis could soon come to an end, and said some of the most troubled asset-backed securities may now be undervalued.

Sounding an unusually positive note, the Bank's deputy governor for financial stability, Sir John Gieve, said: "The pricing of risk in credit markets seems to have swung from being unsustainably low last summer to being temporarily too high relative to fundamentals. So, while there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually." The report said the eventual losses from the sub-prime crisis were likely to be closer to $170bn (£86bn) than $1 trillion, but that the system of mark-to-market pricing had pushed up the forecasts.

FOMC Insanity And Other Silly Things
We also have rumblings flying around about deficiency notices coming into and going out of Pension Funds from both a steelworkers and longshoreman's unions. This is an extremely serious matter and totally unappreciated in the market. See, these funds were sold (and eagerly bought) a lot of this crap paper. CDOs, SIV "commercial paper" and similar trash. All served up by the Wall Street Boyz.

If you have a defined-benefit pension of any sort, whether you're a teacher, a union worker or otherwise, you may have a very serious problem that is not yet formally recognized by you - but it will be, and with disastrous consequences. Anyone who was wondering if this "credit crunch" and "The Era of Fraud and Ponzi Schemes" was going to hit Joe Sixpack right in the wallet, or whether this was just another "LTCM" type of bump in the road, you should be aware that not only is this going to hit Joe, its going to flatten him.

Essentially NONE of these losses have yet been recognized and reported. Zero, zip, nada, nothing. Yet these losses will be ruinous for millions of Americans, who are having their retirement security destroyed outright while Wall Street has reaped billions of dollars in bonuses. You who think that Joe "won't care" need to wake up and get off your duffs - and head straight over to or, look up your Rep and Senators, and get on the phone.

The message needs to be loud and clear - the fraudsters in our financial industry need to be indicted, prosecuted, and jailed, with the illegally-gotten profits that they gained recaptured via asset seizures to the maximum extent possible, including not only from the executives but from the firms themselves.

But heh, its only YOUR retirement (or your Teacher, Longshoreman and Teamster) buddies that are at risk, right, and Dick Bove says you should buy the banks - you know, those same folks who created and profited from this insane Ponzi Scheme. Got it.

The Consumer is ok? Uh huh. Try again:
"Statistics show that about 35 percent of all credit card holders are already exhibiting signs of possible default. Late credit card payments result in fees many consumers can't afford.
Credit card debt accelerated to unprecedented heights since bank loans began to dry up due to mortgage defaults. Total U.S. credit card debt reached almost $800 billion in November 2007, up from around $680 billion in March of last year, according to the latest available government statistics. "

35 percent eh? Note that about half of all cards are paid in full every month, so if 35% of all cardholders are at risk of default, that means that about 65% of all who carry a balance are. Let me guess - that's bullish, right, and it has been widely reported in places like CNBC. Oh wait - that hasn't been reported on CNBC at all? Why not?

The Fed's Financial Bailouts Will Rob Americans of Their Future
On March 31st, Treasury Secretary Paulson announced a plan to police the financial markets to curtail the possibility of future financial disasters such as the sub prime mortgage meltdown now rocking America. And he did it with a straight face. This plan, that sounds so good on the surface, in fact lays the groundwork for the next big financial bubble, heralds a new era of hyperinflation, and assures further runs on the U.S. dollar.

Commentary on the plan centered on the extension of the powers of the Federal Reserve to supervise non-bank financial houses like stock brokers, derivative dealers, insurance companies, private banks, and even hedge funds. At least this is how it is being packaged for the public. The cynical point out that this restructuring and massive increase in the powers of the Fed is like locking the barn door after the horse is gone. What is not being pointed out to the public are the revolutionary implications of the Fed's new supervisory position. For as it stands above these financial institutions as regulator, the Fed now also stands beneath these institutions as lender of last resort.

In the middle of March, America faced a systemic collapse of its financial system that threatened to quickly spread to the rest of the developed world. Secretary Paulson and Fed Chairman Bernanke crafted a quick fix for Bear Stearns and other troubled brokerage houses, but this was an emergency action which could only postpone disaster, not prevent it.

A chance at long-term survival of these institutions requires a lender of last resort with enormous resources. But even the 800 billion dollar balance sheet of the Federal Reserve is not enough to anesthetize the credit explosion in the real estate market alone, which stands at around 12 trillion dollars. To say nothing of the commercial real estate, auto loan, and credit card markets. What the Treasury and the Fed have realized is that in the last 40 years, they have pumped so much money into the system that excessive leverage has become a way of life. Almost every individual, and institution holds assets of which their real ownership is minimal. In other words, everybody is in debt up to their eyeballs.

Most of this debt has been packaged into derivatives by the wizards who operate in the back rooms of the capital markets. The result of this huge leverage is that the government no longer has the funds to avert a systemic financial disaster. The sort of money it would take to do that could only be captured from the future earnings power of the American people and the debasement of their currency.

Paulson's plan is being sold to us as a responsible act of government looking out for us, in an attempt to save us from our own irresponsibility. We like government to look out for us and save us from ourselves. We don't want to be forced to accept the consequences for creating this huge debt overhang, so we are all too willing to accept his plan without looking behind the curtain.

If we did take a look, we would see that Paulson's plan is really a huge mortgage on our future and the future of our children. In the final analysis, the Fed is financed by the Treasury, which is financed by borrowing, taxing Americans, and robbing them by the debasement of their currency.

Citi's share sale shows capital woes are lingering
Citigroup's surprise $4.5 billion common-stock issuance Wednesday hammered home the fact that the bank still faces capital issues, and it keeps pressure on the largest U.S. bank to demonstrate that it's equipped to ride out the credit crisis, analysts said.

"The fact that the company raised such a small amount of capital at this time confounds us," Oppenheimer analyst Meredith Whitney wrote in a research note Wednesday. "By our estimates, we believe Citi needs to raise an additional $10 [billion]-$15 billion or sell several hundreds of billions' worth of assets in order to truly shore up its capital position." Even before Citigroup revealed Wednesday morning that it had upped its offering size to $4.5 billion from $3 billion, analysts were crying foul that the bank had not gone nearly far enough in its pursuit of fresh capital.

Wednesday's offering was Citigroup's fifth capital-raising effort in five months, which has seen the bank garner more than $40 billion and put its Tier 1 ratio at 8.6% by the end of March. But, even with those efforts, Citi is still falling short of the mark, analysts said, and that could be a signal that the bank is struggling more than it would like to admit.

"Although the company indicated that it was raising the common equity to 'optimize' its capital structure, we struggle to see how selling more expensive common equity optimizes its capital structure unless it was at risk of having its debt downgraded by one of the rating agencies," said William Tanona, an analyst for Goldman Sachs, in a note to investors.

And the financial-services behemoth is still grappling with a difficult operating environment, analysts said, which does not leave it ideally positioned to handle major turmoil if the market gets worse. n"Our biggest concern related to Citi rests squarely with its impotent earnings power," Whitney said. "If economic deterioration accelerates faster than our current projections, there would clearly be risk to our estimates." Whitney said Citi faces continued pressure on multiple fronts, including constrained earnings power and pressure on four of Citi's 10 core businesses.

She reiterated that she expects the bank will need to slash, or even eliminate, its dividend in coming quarters. Whitney maintained her estimates of a loss of 45 cents a share for 2008 and a 90-cents-a-share profit in 2009. She said she continues to have a negative outlook on Citi due to its weakened earnings power and pressure on its dividend that likely require more capital.

Goldman's Tanona said he believes that one or more of the ratings agencies had expressed displeasure over the bank's capital mix, and he guessed that that factor had triggered the issuance. "If our assumption is correct," Tanona said, "it suggests that additional capital raises will likely also be in the form of common equity, which is most dilutive to shareholders, [and] conversely, we view this as a positive for debt holders."

Disappearing now: $6 trillion in housing wealth
A Washington think tank is warning that housing prices are falling at an accelerating level, destroying wealth at a pace that will cost the average homeowner $85,000 in lost wealth this year alone. The projections by the Center for Economic and Policy Research are based on the numbers in Tuesday's Case-Shiller home price index, which showed accelerating price declines in most big cities.

The annual rate of price decline over the last quarter was 24.9% in the 20-city index and 25.8% in the 10-city index," the center said in its Housing Market Monitor today. "At this rate of price decline, the excesses of the housing bubble will have largely disappeared by the end of the year. At the same time, the price decline implies an incredibly rapid loss of wealth. In real terms, the rate of price decline in the 20-city index would imply a loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner."

I'm a so-so student of economic history, but I'd have to bet that, even adjusted for inflation, the only time that many Americans have lost that much wealth in a short period of time would have been during the Great Depression. I'm not even sure it happened during the Depression. (I understand: This hasn't happened yet; it's only a prediction.)

Bond insurers face new payments on CDOs
U.S. bond insurers, including MBIA Inc and Ambac Financial Group , will likely need to make new interest payments for structured deals backed by residential mortgage debt, as more homeowners default on their mortgages, Citigroup analysts said on Wednesday.

This could place an even greater strain on the companies' cash flows at a time when they are already grappling to sustain capital levels adequate for their top ratings, the analysts said in a report. Bond insurers have written protection on collateralized debt obligations, or CDOs, which pool residential mortgage-backed debt, and these are increasingly defaulting as they breach terms and conditions in the deals.

Around $190 billion in CDO debt based on residential mortgage bonds issued in 2006 and 2007 have hit notices of default, representing around 55 percent of the total issuance of these deals, Citigroup said. Most of the defaults have been due to the deals breaching the required ratios of collateral, which typically stops interest payments except to holders of the most senior-rated CDO pieces.

Stop Begging Ben for Help Cooking Banks' Books
Orange County, California, gave us much of the mortgage mess. Now one of its local congressmen is seeking new ways to keep us from knowing how bad it is. Meet U.S. Representative Gary Miller, a real-estate developer by trade, whose home county once included five of the nation's 10 largest subprime home lenders. Last week, Miller succeeded in getting a little-noticed amendment attached to a bill aimed at helping struggling homeowners refinance their mortgages.

The insert would require the Federal Reserve to "study" the Financial Accounting Standards Board's rules on mark-to-market accounting and report back to Congress. Without these rules, we might never have known so many banks had such big holes in their balance sheets. What Miller really means by the word "study," though, is this: "Dear Ben, tell us how we can gut the rules." Miller's amendment would require the Fed, led by Chairman Ben Bernanke, to examine "the feasibility of modifications of such standards ... during periods of market fluctuation."

The goal would be to let lenders "continue to carry mortgages on residential property at risk of foreclosure and assure the availability of credit to refinance at-risk residential mortgages." In other words, let's see if we can get banks to lend more money by letting them show more capital than they actually have. Miller's press secretary, Scott Toussaint, confirmed the Republican lawmaker dislikes the FASB's rules. "In today's economy, mark-to-market accounting causes many asset values to be understated, write-offs to be overstated, and the credit crisis to be exaggerated," he says. "The volatility in the marketplace may not be indicative of the banks' true financial condition."

If banks really are overstating their losses, though, then they're not marking to market. They're marking to something else. As for volatility, it is the reality of today's economy. What investors don't know can kill them. Just ask Bear Stearns Cos.
Perhaps there is a silver lining here. Maybe if the Fed did study the rules, it would realize their true shortcoming: The problem with mark-to-market, or fair-value, accounting is that there isn't enough of it.

U.S. Credit Card Debt Soars to Unprecedented Heights
Studies indicate that credit card defaults and related write-offs increased drastically since 2006. Today, lenders write off 33 percent more in credit card debt than they did two years ago. Statistics show that about 35 percent of all credit card holders are already exhibiting signs of possible default. Late credit card payments result in fees many consumers can't afford.

Credit card debt accelerated to unprecedented heights since bank loans began to dry up due to mortgage defaults. Total U.S. credit card debt reached almost $800 billion in November 2007, up from around $680 billion in March of last year, according to the latest available government statistics. In the aftermath of the U.S. mortgage crisis, the credit card bubble may be next to burst. In the past few years, banks have aggressively marketed credit card ownership and usage to consumers with limited income and low credit scores.

Credit card standards remain lax, while loan standards have tightened to a degree. More than 50 percent of senior loan officers said in a January 2008 Federal Reserve survey that they performed a more rigorous analysis before approving a mortgage or car loan over the prior three months. Only 14 percent said so in a mid-2007 survey of the same nature. Banks and lenders have tightened their lending standards following the collapse of the subprime market.

With borrowing venues drying up, American consumers may be drawn to credit card debt, creating defaults similar to those in the mortgage market. Credit card debt—much like mortgages—are bundled and sold by investment banks as asset-backed securities. "Rising credit card debt since April 2006 amid the decrease in the mortgage expansion rate resulted in a substantial shift to credit card borrowing from mortgage debt," according to a recent report titled "House of Cards: Consumers Turn to Credit Cards Amid the Mortgage Crisis, Delaying Inevitable Defaults." The report was published by the Center for American Progress (CAP), a nonpartisan Washington, D.C.-based research institute.

The rules of the credit card game usually aren't transparent and are difficult to follow even by many sophisticated consumers. Just take any credit card agreement: Caveats are written in difficult-to-understand "legalese." Words like "late fees, annual fees, over-limit fees, cash-advance fees, balance-transfer fees, annul fees, setup fees, fees to pay balance by telephone," and so on, are confusingly sprinkled throughout the contract.

"Credit card debt tends to carry substantially higher costs than other forms of credit, due to myriad fees in addition to high interest rates. The result is that many borrowers unwittingly slide deeper and deeper into debt as they fall prey to the lack of transparency in credit cards," said CAP staff.

Consumer spending up but much of gain reflects higher prices
Soaring prices for food, gas and other everyday products pushed up consumer spending to a faster pace than expected in March. The Commerce Department reported Thursday that consumer spending was up 0.4 percent in March, double the increase that economists had forecast.

However, once inflation was removed, spending edged up a much slower 0.1 percent. That represented the fourth straight lackluster performance as consumers have been battered by record gasoline prices, a deep slump in housing and rising job layoffs. In other economic news, the Labor Department reported that claims for unemployment benefits rose by 35,000 to 380,000. That was a much bigger increase than the 18,000 than private economists had expected and highlighted the strains that the weak economy is putting on the labor market.

The report on jobless claims came a day ahead of a report on unemployment for April. Economists expect that report will show that the unemployment rate edged up to 5.2 percent, from 5.1 percent in March. The economy is expected to lose 70,000 jobs, for the fourth straight month of job losses. Consumer spending is being carefully watched out of concerns that too big of a slowdown will push the country into a recession, since two-thirds of economic activity comes from consumers.

The government reported Wednesday that the overall economy, as measured by the gross domestic product, eked out a tiny 0.6 percent growth rate in the first three months of this year as consumer spending slowed to the weakest pace since the second quarter of 2001, when the country was slogging through the last recession. Despite the slightly positive GDP performance, many economists believe that the economy has fallen into a recession and it will be reflected by a negative GDP figure in the current April-June quarter.

China May Revalue Yuan by 10% to 15%, Says JPMorgan's Gong
China may revalue the yuan by 10 to 15 percent in the coming months as policy makers seek to temper inflation close to an 11-year high, according to Frank Gong, head of China research at JPMorgan Chase & Co. The currency's 16 percent gain since the last revaluation of 2.1 percent on July 21, 2005 has failed to curb import prices, and attracted funds seeking to take advantage of continued yuan gains which have flooded the economy with excess cash.

"Given global crude oil prices where they are now and continued rising global resource and commodity prices, the government is weighing the pros and cons of a one-step, large revaluation of renminbi," wrote Hong Kong-based Gong in a research report. "They can continue on the path of accelerated appreciation seen in the first quarter but the negative aspect of it is the hot money inflows." Policy makers have pledged to allow further flexibility in the yuan as it rose at the fastest pace last quarter since the decade-long link to the dollar was abandoned.

The advance has paused this month because China is reconsidering its policy of quickening gains because it hurts exports and fuels hot money inflows, Market News International said yesterday, citing unidentified government officials and economists. "It is very surprising that policy makers and think- tankers in Beijing are seriously debating the issue," wrote Gong.

"At the very least, we expect the renminbi to continue its accelerated pace of appreciation to reach 6.3 against the dollar by the end of this year." The chances of a one-off adjustment are higher than the 10 to 20 percent odds previously forecast, wrote Gong in the note published yesterday. He was unavailable for comment today.

EU bails out German bank for $7.8 billion
The European Union has approved a $7.8 billion bailout for Germany's regional WestLB bank, which was rattled by it's exposure bad U.S. debt. The German regional bank had a net loss of 1.6 billion euros ($2.5 billion) last year, significantly higher than predicted because of the crisis. The state of North Rhine-Westphalia joined the rescue bid to help cover payment defaults. The EU Commission approved the package to protect the bank from volatile markets Wednesday.

"The Commission's investigation found that the risk shield constitutes state aid, but that the aid is in line with EU rules" since the aid is limited in time and is reversible," the EU said in a statement. In February, the German state, WestLB's biggest shareholders, moved to shield it from further subprime risks, reaching a deal to provide 3 billion euros ($4.67 billion) to help cover its risks in a struggling securities portfolio.

That came after the Duesseldorf-based bank said its original risk shield of 2 billion euros ($3.11 billion) would not be enough.
"The Commission has demonstrated again that it can move very fast in order to provide legal certainty and financial stability to banks in difficulty," said EU Competition Commissioner Neelie Kroes. State aid programs must be vetted by the European Commission to make sure it does not impede the rules of fair competition with the 27-nation EU. Germany now has to present the Commission with a full restructuring plan by Aug. 8.

Homes Razed by Spain Stun Foreigners as Slump Deepens
Over the past decade, developers built about 100,000 illegal homes in Spain, and consumer advocates say thousands of those are now threatened with demolition as regional governments try to deter clandestine construction. The crusade may discourage the foreign buyers who fueled Spain's housing boom, deepening a slump that began last year.

"The problem is very serious," says Rafael Pampillon, an economics professor at the Instituto Empresa in Madrid. "When a country has a system or set of institutions that allow illegal houses to be built and corruption to exist then evidently foreign investment is going to flee." At least one house has already been bulldozed. In January, Len and Helen Prior lost their three-bedroom villa in Almeria. The 63-year-olds from Berkshire, England, paid 350,000 pounds ($694,155) for the house in 2003.

Each of Spain's 8,111 town halls has the authority to make planning decisions and issue building permits with little oversight from the regional or national governments. As property prices soared, some local officials were drawn into schemes to profit from new home construction. The local governments with the largest concentration of new housing, including Valencia, Alicante and Marbella, declined to say how many homes may be destroyed in their communities. Andres Lara, a spokesman for Spain's Housing Ministry, and officials at each of the 17 regional governments referred questions to the municipalities.

Government officials won't provide figures because it puts them in an "abysmal light," says Bernardo Hernandez Bataller, a Spanish lawyer and president of a European Union committee that advises on financial services and consumer protection. "It's safe to say the demolition orders could run into thousands," Bataller says.

Home prices almost doubled in the eight years through 2006, as buyers took advantage of a booming economy, stable employment and low borrowing costs. About 2 million foreigners own property in the country, according to Ciudadanos Europeos, which works to protect the interests of Europeans in Spain. Spanish residential property prices fell in real terms for the first in more than a decade during the first quarter, as interest rates rose and banks tightened lending because of the global credit shortage.

The number of foreigners and non-residents buying homes in Spain fell 42 percent last year, according to the Housing Ministry. Their share of total transactions dipped to 9.5 percent from 12 percent. The slowdown in the housing market, which represents 9 percent of gross domestic product, is rippling through the economy. GDP will expand 1.8 percent in 2008, less than half last year's pace, and unemployment will rise for the first time in more than a decade, the International Monetary Fund says.

Huge falls in US property prices bring little hope for end to credit malaise
Las Vegas down 22.8 per cent; Miami down 21.7 percent; Boston down 4.6 per cent. The latest Case-Shiller Index, the principal measure of the health of the American real estate market, tells its own sorry tale. Just as unbridled confidence once created a feverish psychology dictating that property prices could only ever go up, now it seems US home buyers are frightened that if they venture into the market for a bargain, they will be merely catching a falling knife.

Why buy now, they ask, when prices in six months or a year will be even lower – and that is if they can find a mortgage. This deflationary mindset goes some way to explaining the malaise in the US sub-prime and the wider "prime" property market, and, thus, the continuing global credit crisis. Most economists believe the crunch will only end when American property value bottoms out.

Of that there is little sign. In the meantime, the markets have priced in a quarter percentage point cut in interest rates by the US Federal reserve today, to 2 per cent. US interest rates would then be at their lowest since 2004. The Fed has slashed its benchmark rate by 3 percentage points since last September. Prices of median US family homes extended their slide in February, falling 2.6 per cent from the previous month, with an annual decline of 12.7 per cent.

Richard Iley, of BNP Paribas Global Markets, commented: "Even taking into account that prices have fallen several percentage points in early 2008, prices on a nationwide basis could easily fall another 20 per cent. Inevitably declines in the key bubble areas will likely be much greater, potentially dropping 30 per cent, even 40 per cent in many instances." US home repossession orders soared by 23 per cent in the first three months of 2008, more than double their rate last year.

Ilargi: Gillian Tett, senior finance editor at FT, is mostly pretty much on. But now even she becomes an ordinary cheerleader. Maybe I should once more put that down to fear.

To pick two things: there are no signs, none, that the securitization business will return to “normal” soon. I don’t think it ever will. And I think that’s good; it has allowed for all this leveraged nonsense. But Tett claims banks going back to leveraged loans is a positive thing.

And look at this: ”... companies are starting to borrow money again. In the US, for example, April was a record month for bond issuance by non-financial companies in the investment-grade sector, while in Europe such issuance was at its highest levels in recent years.”

How is that a good thing? If you ask me, these companies are simply desperate for money, and they MUST borrow, or die.

A passing storm?
Next month the city of Birmingham, Alabama, will host its annual pet parade and May Crawfish Boil. But this year's festivities risk being overshadowed by more dramatic events. Jefferson County, in which Birmingham is located, is one of the most indebted municipal governments in the US, owing an estimated $7,000 (£3,550, €4,500) for every adult and child. In recent years it took advantage of easy lending conditions in the municipal bond market, mainly to fix its ailing sewerage system. But since the credit crunch started last summer, funding costs have soared and investors have been less willing to lend. The county is now struggling to meet its interest payments.

If it cannot reach some kind of agreement with its lenders in the coming weeks, Jefferson could become the site of the largest municipal bankruptcy seen in the US - overshadowing even California's Orange County fiasco from the 1990s. Some 860 miles away on Wall Street, the mood is quite different. A belief is growing that the turmoil in credit markets that began last August could finally be abating. "The first quarter was the roughest I have ever seen in nearly 20 years of being in the business," says Bruce Thomson, co-head of capital markets at Bank of America. "But there are now signs that we are working our way through the issues that have caused such widespread problems."

This improved sentiment can be seen in many corners of the credit world, leaving some observers hoping that the green shoots of recovery are about to spread through the financial system as a whole. Even the municipal market is showing signs of better health - though perhaps too late for Jefferson County. The optimists have plenty of reason for spring cheer. Last year's upheaval in credit markets was essentially brought on by high levels of foreclosures on risky US mortgages amid a sharp fall in house prices. As these problems spread through the system, the price of many securities fell sharply - and some markets stopped functioning altogether as investors refused to trade.

In recent weeks, however, activity in a number of these markets has started to resume. In leveraged loans, for example, some banks have concluded deals, helping to clear their backlogs of unsold assets. This has been accompanied by a partial recovery in the price at which these loans are traded in secondary markets. Some banks are also starting to rid themselves of troubled mortgage-linked assets. Senior officials at UBS, for example, say the Swiss bank recently sold a large chunk of its mortgage-linked securities to outside investors "at our writedown prices". While UBS took large losses on these sales, the fact that deals are starting to occur means that mortgage-linked prices have found bottom in recent weeks, judging from related derivatives indices such as the ABX index.

This switch in sentiment is pulling more investors back into these markets. "Both our sales desks and client visits report a significant switch by real, long-only investors - such as pension funds and insurance companies - towards investment-grade debt securities," says Jan Loeys, of JPMorgan Chase. "These are largely investors who have been out of credit [market purchases] for some time." They are using what he calls a "turnround in momentum" to pick up bonds and other instruments.
Stocks have rallied too - cheered by a perception that a feared collapse of the financial sector has been averted by aggressive central bank intervention and banks' own willingness to confess to their losses, take writedowns and raise fresh equity to bolster their balance sheets. "With banks now shoring up their balance sheets, equity markets have rallied as the perceived threat of protracted financial market distress has eased," say analysts at ING Barings.

Moreover, companies are starting to borrow money again. In the US, for example, April was a record month for bond issuance by non-financial companies in the investment-grade sector, while in Europe such issuance was at its highest levels in recent years. While many of these groups are paying higher premiums relative to government debt, recent falls in official interest rates are in many cases reducing the interest payments they are having to make relative to, for example, a year ago.

Yet not even the optimists would deny that these signs of recovery remain, at best, tentative and patchy. There is still little demand for high-yield debt, or bonds that carry ratings below investment grade, and even some highly rated companies still struggle to raise short-term funds. Banks are finding it very hard to relaunch their securitisation businesses - the process whereby loans are repackaged into bonds. "Most people I talk to say it could be 2009 or even 2010 before the market really restarts," Rick Watson, head of the European Securitisation Forum, told a conference in London this week.

The markets are still plagued by some startling pricing anomalies, which reveal the continued sense of dislocation and fear. While hedge funds and other investors used to rush to take advantage of such quirks, and thus trade them away, most remain too nervous to jump back in yet.

The power struggle: fuel price soars, oil firms' profits leap, home bills climb
The price of power and who foots the bill for Britain's rocketing energy costs took centre stage yesterday as the oil giants Shell and BP unveiled huge combined profits of £7.2bn, made in just three months, and consumers were hit with a new round of steep rises in prices from gas and electricity to air travel.

Npower, Britain's fourth largest domestic power supplier, signalled the start of what experts said will be another round of price increases in gas and electricity after it abolished its cheapest online dual fuel tariff and raised charges for new internet customers by up to 20 per cent. Industry analysts expect all energy bills to rise by another 20 to 25 per cent by next spring, pushing another one million Britons into fuel poverty.

The hike was just one of several being absorbed by consumers yesterday, ranging from an increase of up to £30 per return flight in the fuel surcharge paid by British Airways' passengers, to petrol pump prices now averaging 109p per litre of unleaded fuel. One forecourt in Kent was charging 129p per litre.

Amid a row about the "extreme" size of the first-quarter profits announced by BP and Shell, which exceeded City expectations, Gordon Brown called on the oil companies to invest more in increasing production in the North Sea. The Prime Minister admitted he was "very worried" about the impact of rising oil prices on pensioners and families, as opposition politicians pointed to the growing disparity between corporate profits and the financial squeeze being felt by households.

Sarah Teather, the Liberal Democrat business spokeswoman said: "Many people will feel deeply uncomfortable that some of the world's wealthiest companies are experiencing a profit surge at a time when household budgets are under tremendous pressure. "Consumers are already facing huge price hikes in food and utility bills. Now petrol prices seem to be rising, while oil companies' profits are going sky-high.

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Treasury eyes stronger powers for Fed
The Federal Reserve could use proposed new regulatory powers to try to stop credit and asset market excesses from reaching the point where they threaten economic stability, the US Treasury said on Tuesday. David Nason, assistant secretary for financial institutions, said the Fed could even use its proposed “macro-prudential” authority to order banks, hedge funds and other entities to curtail strategies that put financial stability at risk.

By “leaning against the wind” in this way, the US central bank could “attempt to prevent broad economic dislocations caused by potential excesses”, he said. His comments come amid debate inside the Fed as to whether it should try to do more to contain asset price bubbles, following the housing and dotcom busts. Some see enhanced regulatory powers as a better tool for this than interest rates.

The proposed new powers – outlined in a Treasury blueprint published last month – require legislation and may never be authorised. But policymakers see the plan as offering a template for future regulation. The blueprint envisages giving the Fed roving authority to collect, analyse and publish market data from a wide range of institutions, from banks to hedge funds.

“The market stability regulator must have access to detailed information about all types of financial institutions,” said Mr Nason.
Hedge funds are uneasy about this proposal. However, many European central bankers are eager to acquire the kind of macro-prudential powers the Treasury would like to give to the Fed. Meanwhile, data showed accelerating US house price declines and further declines in consumer confidence.

Ilargi: There are some pretty savvy folks at Minyanville. That makes it all the more remarkable to see by how many miles Mr. Practical misses the mark in commenting on the FT article above. Slower technological development? What the fcuk is that supposed to mean? Is that really the worst consequence of the corporate fascism he sees happening?

Free Market In Jeopardy
For those of you that laughed when I have remarked about the markets moving to socialization where government bureaucrats control pricing of risk and the allocation of capital, please read this news story. It's being floated and vented in Europe first to garner support from a more socialistic society. Do not underestimate the dark power of this legislation and do not listen to the innocuous presentation by government officials.

It's certainly a ways from this proposal to controlling markets, but the ability is there and when there is ability, when has the government failed to use it? The slippery slope is steep indeed. The proposal essentially would grant vast authority to the Federal Reserve and the government to virtually control markets. It will give them the ability to gather private market information and unilaterally decide if positions taken with that private money for private investment is somehow negative for the financial system.

It could then force the unwinding of those positions. Initially the powers will be used to supposedly prevent over leverage in the system (that the Fed created itself). But it doesn't exclude the situation where a hedge fund that is long puts can be forced to unwind those puts at the government's discretion.

The Federal Reserve and the treasury are very clever in blaming free markets for the mess we're in to garner more power. Ironically it's government intervention in markets that has caused the problem in the first place. Through their policies creating negative real interest rates for years, speculative forces in the economy have been able to create vast amounts of debt.

If we continue to bend to government, we will eventually get what we deserve, fascism. Not the Hitler kind of fascism, but simply the government existing and growing for the sake of the government and not the people. This will result in even more massive mis-allocation of capital and stagnation. It will result in slower technological development and a much lower standard of living for our children.

Ilargi: World food production over the past few decades has been concentrated in the hands of a few large companies. They now have a stranglehold on it. What many people have missed is that most of these companies are historically chemical giants, who now use food to sell their chemicals, in the form of fertilizers, herbicides and pesticides. Some names are Dow Chemical, Monsanto, DuPont, Bayer, Syngenta and BASF.

By manipulating GMO seeds to such an extent that they’ll grow only with these products, and then forcing them onto farmers all over the world, helped by the US government, the IMF and the World Bank, they are now masters over life and death, raking in profits every step of the way, including the food aid we will soon sent over the globe.

Grain Companies' Profits Soar As Global Food Crisis Mounts
At a time when parts of the world are facing food riots, Big Agriculture is dealing with a different sort of challenge: huge profits. On Tuesday, grain-processing giant Archer-Daniels-Midland Co. said its fiscal third-quarter profits jumped 42%, including a sevenfold increase in net income in its unit that stores, transports and trades grains such as wheat and corn, as well as soybeans.

Monsanto Co., maker of seeds and herbicides, Deere & Co., which builds tractors, combines and sprayers, and fertilizer maker Mosaic Co. all reported similar windfalls in their latest quarters. The robust profits are emerging against the backdrop of a food crisis some experts say is the worst in three decades. The secretary-general of the United Nations, Ban Ki-moon, on Tuesday called for the creation of a high-level global task force to deal with the cascading impact of high grain prices and oil prices.

He said that countries must do more to avert "social unrest on an unprecedented scale" and should contribute money to make up for the $755 million shortfall in funding for the World Food Program, which feeds the world's hungry. President Bush told reporters on Tuesday that he's "deeply concerned about people who don't have food abroad," and all three presidential contenders have recently cited high food and energy prices as causes for concern.

Arizona Sen. John McCain, the presumptive Republican candidate, has said he favors scrapping the 51-cent per gallon ethanol tax credit and a 54-cent per gallon tariff imposed on most imported ethanol, ideas abhorred by farmers and many politicians. The crisis stems from a combination of heightened demand for food from fast-growing developing countries like China and India, low grain stockpiles caused by bad weather, rising fuel prices and the increasing amount of land used to grow crops for ethanol and other biofuels rather than food.

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Food companies say they're not to blame for the soaring prices and are committed to working toward a solution. They say bigger profits can be used to develop new technologies that will ultimately help farmers improve productivity. Monsanto says it's designing improved genetically modified seeds that can squeeze even more yield from each acre of planted grain, while ADM says it's investing in tools that can mitigate supply disruptions. "Maybe the question should be not, 'Are you making money?' but, 'What are you doing with the money that you make?'" says Victoria Podesta, vice president of corporate communications at ADM.

UN chief warns of civil unrest amid world food shortage
United Nations secretary-general Ban Ki-moon is concerned about the threat of a world food shortage, saying action must be taken quickly, otherwise there will be unrest on an unprecedented scale. The UN wants extra money to buy food for the needy and it is setting up a special food crisis task force to tackle the problem. With the head of the World Bank and the World Food Program by his side in Geneva in Switzerland, Mr Ban said his new task force has a simple task - to feed the hungry.

And he warned that if nations don't give the money they have already committed, the world will face a crisis unlike anything it has previously seen. "We risk the spectre of wider-spread hunger, malnutrition and social unrest on an unprecedented scale," he said. Mr Ban says 100 million people are estimated to have been pushed into poverty over the last two years.

"We see farmers in developing countries planting less, producing less, due to the escalating cost of fertiliser and energy," he said. Estimates are that world prices for foods like cereals, dairy, meat, sugar and oils are more than 50 per cent higher than they were at the same time last year

Emptying the Breadbasket
For decades, wheat was king on the Great Plains and prices were low everywhere. Those days are over.

At Stephen Fleishman's busy Bethesda shop, the era of the 95-cent bagel is coming to an end. Breaking the dollar barrier "scares me," said the Bronx-born owner of Bethesda Bagels. But with 100-pound bags of North Dakota flour now above $50 -- more than double what they were a few months ago -- he sees no alternative to a hefty increase in the price of his signature product, a bagel made by hand in the back of the store. "I've never seen anything like this in 20 years," he said. "It's a nightmare."

Fleishman and his customers are hardly alone. Across America, turmoil in the world wheat markets has sent prices of bread, pasta, noodles, pizza, pastry and bagels skittering upward, bringing protests from consumers. But underlying this food inflation are changes that are transforming U.S. agriculture and making a return to the long era of cheap wheat products doubtful at best.

Half a continent away, in the North Dakota country that grows the high-quality wheats used in Fleishman's bagels, many farmers are cutting back on growing wheat in favor of more profitable, less disease-prone corn and soybeans for ethanol refineries and Asian consumers. "Wheat was king once," said David Braaten, whose Norwegian immigrant grandparents built their Kindred, N.D., farm around wheat a century ago. "Now I just don't want to grow it. It's not a consistent crop."

In the 1980s, more than half the farm's acres were wheat. This year only one in 10 will be, and 40 percent will go to soybeans. Braaten and other farmers are considering investing in a $180 million plant to turn the beans into animal feed and cooking oil, both now in strong demand in China. And to stress his hopes for ethanol, his business card shows a sketch of a fuel pump. Across the Red River and farther north, in Euclid, Minn., Don Strickler, 63, describes wheat as "a necessary evil." Most years, he explained, farmers lose money on it. Still, it provides conservation benefits and can block diseases in soybeans and sugar beets when rotated with those crops.

Wheat's fall from favor, little noticed when it was cheap, has been long coming. Though still an iconic symbol of American abundance -- engraved on currency and praised in song -- the nation's amber waves of wheat have been increasingly shoved aside by other crops. The "breadbasket of the world," which had alleviated hunger and famine since World War I, now generally supplies only a quarter of world wheat exports.

U.S. farmers are expected to plant about 64 million acres of wheat this year, down from a high of 88 million in 1981. In Kansas, wheat acreage has declined by a third since the mid-1980s, and nationwide, there is now less wheat in grain bins than at any time since World War II -- only about enough to supply the world for four days. This occurs as developing countries with some of the poorest populations are rapidly increasing their wheat imports.

Driving south from Grand Forks, N.D., on a freezing spring day, a motorist travels through a landscape that looks like a scene from the movie "Fargo." Mile after mile, fence posts rise from the snowy fields on each side of the ruler-straight highway. It looks like classic wheat country. But come summer, much of it will turn green from corn and beans. "Last summer it looked like Iowa around here," Braaten said.

Farming Critics Fault Industry's Influence
The authors of a major study that criticizes industrial farming said the agriculture industry is exerting "significant influence" on academic research as Congress weighs how to respond to an unprecedented series of food-safety recalls. The report, by the Pew Charitable Trusts and Johns Hopkins Bloomberg School of Public Health, calls for broader regulation of industrial livestock and poultry farming, including restrictions on using antibiotics for growth promotion.

The study's authors said their experience in putting together the report, which took two years and cost $3.4 million, suggests the farm industry has power to shape debate over regulation. "We found significant influence by the industry at every turn: in academic research, agriculture policy development, government regulation and enforcement," Robert Martin, executive director of the Pew Commission on Industrial Farm Animal Production, wrote in the 112-page report.

Mr. Martin said industry representatives tried to block his research team's access to farms. Kay Johnson Smith, executive vice president of the Animal Agriculture Alliance, said she told Mr. Martin he and his staff wouldn't be welcome on the farms because there wasn't enough industry representation on the commission. The Alexandria, Va., alliance is an advocacy group whose funding sources include agricultural producers and food businesses. The parties later agreed to visit the operations together, on tours arranged by the industry alliance.

Vietnam's farmers face paradox of the paddy
When the price of rice jumped to record highs in Vietnam last weekend, Ton Ngoc Luan was working all day in his rice paddies, unaware of the news. By the time he realized what was happening, it was too late. Government intervention was roiling the markets, and his local trader was refusing to buy his newly harvested crop. He was stuck with seven tonnes of unsold rice in his storage shed, waiting for his trader to decide on a fair price.

"We are just countryside folks - we don't understand anything about the price fluctuations," Mr. Luan said in an interview on his farm in southern Vietnam, surrounded by sacks of unsold rice. While the price of rice has doubled in recent months, most farmers are benefiting very little - even in Vietnam, the world's second-biggest rice exporter. Their revenue has increased, but so too have their input costs - especially fertilizer, closely linked to the price of energy.

Fuel, required for pumping water to their rice paddies and transporting their harvest, is another fast-rising cost. Even the cost of labour is skyrocketing as farm workers insist on higher wages because of Vietnam's record-high inflation rate.
In interviews across Vietnam, rice farmers unanimously reported that their costs have nearly doubled since last year, leaving them without any increase in income, despite the surging rice prices in domestic and global markets.

"Every time the price of rice increases, the cost of fertilizer seems to rise by about the same amount," Mr. Luan said. "If the government can somehow stabilize the cost of fertilizer, we could actually increase our incomes." The 38-year-old farmer expects no increase in his income this year, despite the panic buying and soaring prices of the past week. "Only the traders and the processing plants are profiting," he said.

Analysts agree with him. "The profits are not in the hands of the farmers," said Vo Tong Xuan, a rice economist and professor in Vietnam. "The profits are enjoyed by middlemen and speculators who hoard the rice to sell it at a higher price."

Now, a Commodities Conundrum
Although commodity prices are notoriously volatile, the price increases in the past year are off the chart: rice up 122 percent; wheat, 95 percent; soybeans, 83 percent; crude oil, 82 percent; corn, 66 percent; gold, 37 percent.

Behind each of these increases is a particular story of supply that has been constrained or demand unleashed. To varying degrees, all of them reflect the fact that the global economy has just gone through one of its strongest growth periods in a generation, one that has lifted hundreds of millions of people out of poverty and made middle-class consumers out of hundreds of millions more in places like China, India and Brazil.

Given those realities -- and the long lead time required to clear farmland, drill oil wells and open new mines to meet the surging demand -- a bull market in commodities was almost inevitable. But what turned a bull market into a bubble was the sudden arrival of large numbers of new investors and an array of new investment vehicles, many of them involving derivative instruments traded outside the confines of regulated markets.

Speculators have always played a prominent role in commodities markets, but in the past year, they have literally overwhelmed them, causing a dramatic increase in trading volume, volatility and prices and disrupting many of the normal relationships between producers and end-users. Many of these were the same hedge funds and hot-money investors who had gorged on sovereign debt of developing countries, tech and telecom stocks, subprime mortgages and commercial real estate and now needed a new thing to focus on.

Others -- including, it is said, some sovereign wealth funds -- looked to commodities as a hedge against the falling dollar. But perhaps the biggest push came from pension funds, foundations and university endowments whose managers had all gone to the same conferences and read the same academic papers, suggesting that a basket of commodity futures would provide a good hedge against stock and bond market declines.

To meet the needs of these investors, Wall Street and Chicago's commodities houses came up with all sorts of new vehicles, including exchange traded funds, index funds and structured investment vehicles -- the commodities equivalent of mortgage pools and asset-backed securities. There are various estimates of how much of this new investment money flowed into these vehicles in the past two years.

Philip Verleger, an economist who closely studies commodity markets, estimates that the inflow was running at an average of $100 million a day during most of 2006 and 2007, rising to as much as $1 billion a day during the frenzied trading days of February and March. J.P. Morgan put the amount at between $150 billion and $270 billion. And the Bank for International Settlements estimates that the value of all the derivative contracts traded on the unregulated over-the-counter markets surged from about $3 trillion in the spring of 2005 to more than $8 trillion today.

Cooler Climate May Hit North America, Europe Next Decade
Shifting ocean currents could throw some cold water on global warming over the next decade, a new study suggests.Europe and North America may soon experience chillier temperatures, thanks to natural North Atlantic variations that could temporarily mask the effects of human-driven, or anthropogenic, climate change. "We believe that ocean currents and systems could, in the short term, change global warming patterns and even mean temperatures," said Noel Keenlyside of the Leibniz Institute of Marine Sciences in Kiel, Germany.

Keenlyside explained that since record keeping began in the 19th century, the North Atlantic climate has changed in natural cycles that last a decade or more. These shifts are likely associated, at least in part, with natural variations in ocean currents. A new forecasting model, based on past and present sea surface temperatures, suggests the imminent onset of a cool-down cycle for currents in both the North Atlantic and tropical Pacific.

Keenlyside and colleagues, whose study appears in this week's issue of the journal Nature, hope to further quantify this effect and incorporate it into future climate predictions on the decade scale. "I think it's just naive to think that there won't continue to be multi-decadal fluctuations in the [ocean] climate," he said.

Chinese children sold "like cabbages" into slavery
Thousands of children in southwest China have been sold into slavery like "cabbages", to work as labourers in more prosperous areas such as the booming southern province of Guangdong, a newspaper said on Tuesday. China announced a nationwide crackdown on slavery and child labor last year after reports that hundreds of poor farmers, children and mentally disabled were forced to work in kilns and mines in Shanxi province and neighboring Henan.

"The bustling child labor market (in Sichuan province) was set up by the local chief foreman and his gang of 18 minor foremen, who each manage 50 to 100 child labourers," the Southern Metropolis Newspaper said. "The children generally fall between the ages of 13 and 15, but many look under 10," it added. The newspaper said 76 children from the same county, Liangshan, had been missing since the Chinese Lunar Year festival in February, 42 of whom had already left the region to work.

"The youngest kids found in the child labor market were only seven and nine years old," it said. According to a contract exposed by an undercover reporter, a child laborer is paid 3.5 yuan ($0.50) an hour and must work at least 300 hours a month.

"These kids are robust and can do the toughest work," a foreman was quoted as saying, as he pulled a scrawny girl to stand beside him, the paper said. Xinhua news agency said the county government had sent officials to rescue the children, but some were unwilling to leave, having been sold into slavery by their parents or volunteering to work themselves.

The Fed Sinks the Dollar
Against the recommendations of most economists and even the Financial Times of London, the Federal Reserve Board yesterday cut its discount rate by yet another quarter-point, to just 2%. Ostensibly, the intention is to try and spur economic “recovery” – as if a cut in the interest rates would do this. At first glance this seems to reflect the Fed’s ideology that manipulating the interest alone can expand or contract the economy – as if it is like a balloon, with its structure is pre-printed on it, to be inflated or deflated at will to control the level of activity.

This simplistic philosophy was a hallmark of the Greenspan era. Changing the interest rate alone meant that the Fed didn’t have to “think,” didn’t have to regulate markets, raise reserve requirements on bank loans to fuel the asset-price inflation that the Fed confused with real “wealth creation.” It didn’t have to regulate subprime lending or rain in widespread financial fraud. All it had to do was raise interest rates when this gave banks an opportunity to charge more and increase their earnings – or cut interest rates to lower cost of bank borrowing from the Fed.

But surely not even the ideologically hide-bound Federal Reserve can still imagine that a structural problem – the looming depression from the Fed’s favoritism to the banking sector promoting de-industrialization of the economy – can be solved by lowering interest rates yet again. While the Fed lowers its rate for lending to banks, these banks have not been passing on the rate cuts to their customers. Credit card rates are going up, and entire Christmas trees of penalties are further increasing banks’ rake-off. Mortgage rates remain high, so that real estate markets remain in the doldrums. The banks simply are not lending.

What they are doing is speculating, above all against the dollar. They thus are emulating what Japanese banks did after that nation’s financial bubble burst in 1990. Japan’s banks became the most active players in the international “carry” trade: borrowing at very low interest rates in a weak currency (the yen after 1990, the dollar today) to lend to high-interest borrowers, preferably with strong or at least stable currencies (such as to Iceland before it became so debt-ridden that its currency began to collapse last year; and today, the to European borrowers in euros).

So fiat US credit is being directed to Europe. US banks create or borrow credit at 2%, and lend it out at 6% or more – and get a speculative foreign-currency gain as the euro continues to rise against the dollar.
The aim evidently the same as it was in Japan after 1990. Many banks are nearly insolvent as a result of the b ad real estate loans on their balance sheets. To rescue them (so that it is not necessary to nationalize them, as England recently had to do with Northern Trust) is to help banks “earn their way out of debt” – by making profitable loans.

But bank lending and profitability has become decoupled from the economy at large. Banks are not lending to finance tangible capital investment and new hiring. Helping them thus does not help pull the US economy out of the deepening depression. (A recession is short and is followed by recovery. Today’s looming economic depression is headed toward a widespread forfeiture and transfer of property from debtors to creditors.)
The ultimate effect is to inflate the power of finance, credit and real estate relative to labor’s wages and industrial capital. This is not a way to encourage new tangible investment. It is just the opposite of Keynesianism. Rather than signaling “euthanasia of the rentier,” it is empowering finance and applying euthanasia to labor and industry.

And to Europe, I should add. The Fed’s act to subsidize U.S. bank lending to Europe will help raise the euro’s exchange rate relative to the dollar. This will be a boon to currency speculators. And it will help keep the price of oil and food down to European consumers. But it also will raise the price of European labor and other domestic costs (including the cost of real estate, which is playing a rising role in employee budgets throughout the world). This will tend to make European exports even more expensive in global markets – including the Airbus, much to the joy of Boeing, and European autos, much to the joy of GM and Ford.

In the 1930s, countries competed with one another by imposing rival tariff walls and non-tariff trade barriers (led by the United States) and “beggar my neighbor” currency depreciation (again, led by the United States). But European central bankers for their part are so brainwashed with modern Chicago School monetarist ideology – and so unaware of their own continent’s economic history – that they pursue a knee-jerk reaction to domestic inflation by raising interest rates.

This merely increases their currency value all the more, attracting yet more foreign “carry trade” loans. (Economists call this a “backward bending demand curve” and find it an “anomaly,” as they find most reality to be these days.) So while U.S. monetary policy helps subsidize the banking system relative to the industrial sector and labor, European monetary policy goes along with today’s parallel-universe thinking and undercuts its own industry.

An innocent victim of the dollar depreciation caused by the Fed’s action will be Third World food-deficit countries whose currencies are tied to the dollar. Latin America, much of Africa an Asia will find that in their currencies the price of raw materials denominated in euros will rise. But their domestic wages and other income for the population at large are not increasing. The wage-price squeeze will go on – while their oligarchies no doubt contribute by joining the speculative outflow into hard currencies by moving their domestic funds offshore.


Anonymous said...

I have consolidated student loans that got sold off to Sallie Mae. I am just wondering what all the turmoil in the student loan market place means for the future. I know that under current law, student loans cannot be discharged in bankruptcy. I'd just like know if people think that might change as more people are unable to pay off student loans or if I'm most likely going to be asked to make much higher payments or maybe even get a "margin" call on the balance owed.

Thanks in advance for any advice you have.

el_pollo said...

I was a chem major, physics minor in school. Theoretical physicists love “thought problems,” particular Einstein. It’s said that imagining himself trying to run along side a ray of light got him started on special relativity and imagining himself locked in a windowless, fully equipped laboratory and trying to figure out what was his state of motion, got him started on general relativity. Anyway, here’s a Gedankenexperiment for the dour science.

God appears on the podium of the General Assembly, fully decked out in white beard, muscles, and white robes. He says, “I am feeling pity for my human creations, so I am going to make you a deal. Every human at the age of eighteen will be issued a lamp which when rubbed is good for a hundred wishes. The only restrictions on the wishes are that one may not ask for a lifetime in excess of 100 years, and one may not have a wish granted that harms or constricts the freedom of choice of any other human or being with human like sentience.”

“However, before I put this new order into effect. I am going to hold an election where only the 1000 richest people on earth may vote – yes or no. If a majority votes yes, this new world order will begin.”

Anyone care to speculate on the outcome of the election?

Stoneleigh said...

Your situation is a difficult one. On the one hand, no one can repossess your education as they could a house, but on the other hand you have no asset to sell in order to relieve the debt burden.

I would be very surprised if the rules preventing the discharge of student loans in bankruptcy were loosened at any point, although a wave of defaults will probably make most of them uncollectable in practice.

Students debts are likely to cause problems for those who owe them unfortunately. You're right that this could include higher interest rates, and therefore higher payments. Undischageable debts can be a recipe for indentured servitude as the burden can grow heavier over time.

Your best bet would be to pay off as much as you possibly can by living as frugally as you can manage. If you have any way to raise a lump sum that could be applied to the debt, that would also help. I hope you have no other debts as that would make it more difficult. If you have a mortgage for instance, you would be better off selling, in order to use any equity to get rid of your student debt, and then renting. Hopefully your education will have bought you a good income, at least for the time being.

There is no safe level of debt to be carrying in a deflation. It is better to own nothing and owe nothing than to have the trappings of wealth but be shackled by debt.

I'm sorry this isn't very cheerful advice, but it wouldn't be useful to sugarcoat things. Life will be difficult for young people. As a parent of teenagers myself, I wonder what kind of world they will inherit and what kind of education will be accessible to them in a few years time.

Musashi said...

Schrödinger's chicken?

Brian M. said...

The wish can't harm or constrict the freedom of choice of any other human? Nothing of any importance fits that definition, and I'm not certain that any unimportant things do either. Even a trivial change in a solar system distant from any human-like life, will have minor effects on solar systems with human-like life, and thus restrict choices. Certainly extending one's own life span to 99 years harms and constricts the choices of others. It is an ill wind that blows nobody good, but an impossible wind that blows no one ill.

The rich will vote overwhelmingly for it, as long as they think God will keep his word, because it will keep folks busy with trivialities, rather than focusing on choices that DO harm or constrict the freedom of choice of other humans, which will still be possible the old fashioned way. Besides it is good PR without any cost. And if they didn't the rest of the world might become more unruly than usual. And be sure that the rich will appeal to God if any of the wishes DO in fact hurt them in any way, or restrict their freedom of choice ...

-Brian M.

Anonymous said...


Thanks for the advice, it mirrors what I was thinking and I will be making a concerted effort to get the debt repaid. I am somewhat fortunate in that I have a much lower balance than many of my friends (and a lower rate of 3.5%, but it isn't something that I can get paid off in very near future. I appreciate the advice because it helps me get the discipline to actively pay down as much as I can. By the way, I have a law degree (I was in the first class out post 9/11 and the legal market froze) and I fully anticipate that the legal market will be shrinking dramatically in the next few years. So, for anyone thinking about law school, my advice is not to go, especially if you have to take out loans to pay for it.