Debt Rattle, July 19 2008: Less corn and more hell

Dorothea Lange North of Elma August 1939
"Western Washington, Grays Harbor County, north of Elma.
Hand irrigation on small rented subsistence farm. Family have been on place for one year."

Ilargi: I would not at all be surprised if by Christmas Britain will be declared an economic disaster area, and emergency legislation be adopted.

All the major British banks are trying to raise capital through rights issues, and all seem to fail miserably, indicating that confidence in the power of the economy to rebound is fast approaching zero. Kelvin, that is.

Without constant capital infusion, even prosperous growth economies are certain to collapse; those already in distress fall that much faster.

The British government faces new mayhem on a daily basis, and there’s no stopping it anymore, since it comes from all directions at once. It will therefore have to be absorbed. And that will mean a return to mass unemployment and subsequent new found poverty.

How the streets of London could possible remain quiet in the face of all the misery is hard to imagine. The sense of entitlement among the population has risen to levels never seen before, which adds greatly to the volatility in a society that always looms in downturns.

Looking at the way events are unfolding in Britain, and the speed with which they do, as well as the depths that have been and will inevitably be reached, I can’t help thinking (though I hope I’m wrong) of how historically, governments have habitually reacted to such intense levels of domestic economic decline with flexing muscles abroad, evoking the issue of sacrifices for the motherland to divert attention away from trouble at home.

And I’m afraid that this time around for England there is no staged Falkland war theater available. The target might have to be much bigger this time.


British government faces $200 billion budget deficit

Alistair Darling may see his budget deficit balloon to a record £100bn in the coming year as a potential recession bites, experts have warned.
 
The alert was sounded as the public finances lurched deep into the red in the first solid sign that the economic downturn is now weighing heavily on the Government's accounts. Revenues from income tax, National Insurance, corporation tax, VAT and stamp duty have suddenly dried up as the credit crisis and downturn in the housing market hit the economy, the figures showed.

It came as the Chancellor confirmed that his closely watched borrowing rules are "under review", with many speculating that he is poised either to scrap or loosen them. The news pushed the pound lower and caused the biggest weekly decline in gilts for more than a month as traders speculated that inflation could soon leap even higher.

The Office for National Statistics reported that net borrowing climbed to a record £24.4bn in the first quarter of the financial year. This amounts to 6.7pc of gross domestic product - the highest level since 1996. The result is that Mr Darling is now close to breaking his sustainable investment rule, which insists government debt must not exceed 40pc of GDP.

The ONS said net debt is now at 38.3pc of GDP - up one percentage point on a year ago. The ratio is 44.2pc when Northern Rock is included, although the Treasury insists these debts are temporary. Experts warned that the outlook will become even gloomier in coming months.

Roger Bootle, of Capital Economics, said: "When the economy turns down, all the usual forecasts and carefully calibrated figures from experts prove to be way, way, way off the mark. I suspect that the borrowing numbers will be devastatingly awful. Activity in the City is going to be weak. VAT receipts will suffer. I'm expecting the numbers to be ghastly.

"If there is a normal recession, it could see a borrowing requirement of over £100bn. A downturn as severe as the early 1990s could produce £150bn of deficits - 10pc of GDP." Such high borrowing would push up long-term bond yields, making it more expensive for the Government to borrow in the future, with far-reaching consequences for the economy.

Mr Darling refused to confirm whether he would maintain his golden rule, which forces the Government to borrow only for investment purposes over the economic cycle. However, most expect him to relax the sustainable investment rule, raising the ceiling towards 50pc of GDP. Indeed, he pointed out yesterday that public debt levels in the UK remain lower than in many other major economies, including France, Germany, Italy and the US.

He said: "The key position is this: of course it is right - especially now our economy is being hit by two shocks, the credit crunch and very high oil prices - that we allow borrowing to support the economy. But what is critical is that you do have rules to ensure the public finances are sustainable in the medium term."

One striking point in the borrowing figures was an 18pc annual fall in stamp duty revenues. The Council of Mortgage Lenders said gross mortgage lending fell to £23.8bn in June, down 32pc on a year earlier.

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Confirmed: the lunatics are running the asylum

On Tuesday we speculated whether, by the end of this week, we would be any closer to answering the looming economic question: hard or soft landing?

We were anticipating a raft of scheduled news announcements that looked like being decisive. We were not disappointed. Sitting here reflecting on the week's events, it seems to me the future is clearer. The deterioration in the UK economy revealed by the week's events is at a pace and on a scale that suggests a recession is unavoidable.

This situation will be compounded by public finances in disarray and which cannot come to our rescue, even if there was the political will to do so. The full extent of the US property crisis was finally confirmed by the deteriorating state of the Fannie Mae and Freddie Mac mortgage insurers. The US government has stepped in to support them while announcing emergency measures to curb traders shorting their exposed shares.

The rather poor outlook for the property market here was confirmed by Alliance & Leicester's rapid surrender of its independence to Santander, the Spanish banking group.

Fears of recession were reflected in markets around the world. Even oil got the message. On Tuesday it fell at its fastest rate since 1991, losing $9 a barrel at one stage. At the same time the dollar fell, the FTSE 100 fell and European economic confidence fell, with Germany's outlook the worst on record.

All of this against a backdrop of the Bank of England's inflation report which told us that the Consumer Price Index has hit 3.8pc, ahead of already poor expectations. Wednesday came and went with confirmation of the one thing that optimists have been dreading - a jump in unemployment.

The claimant count jolted up by 15,500 in June, the biggest rate of gain since 1992. Jobless figures are low but now on the rise, like home repossession. There's little point comparing their low levels now with the high levels reached during the last recession. Those previously high numbers were reached at the bottom of the crater.

We're still on the lip. Throughout this crunch week we've had the now regular drip, drip, drip of job losses. It's been a theme of June and July. A few hundred here, a few hundred there but the trend is clear. A slightly eccentric respite arrived on Thursday with the IMF's declaration that it was upgrading its forecasts for UK for this year and next, despite all indications to the contrary.

And then yesterday came perhaps the worst news. The UK budget deficit increased to its widest level since a war-torn country started measuring how much the government was spending versus how much it was earning in taxes in 1946. The gap in the public finances was £24.4bn, and that was only for the first three months of the year.

Labour has led us into recession already in the red. To fund spending commitments and the extra spending bound to come in a recession from rising dole claims, they're going to have to borrow even more. And, of course, as they borrow more their income will fall as tax revenues decline along with economic activity.

Their fiscal "rules" will be broken which is why the Treasury has been looking at rewriting the "rules" to give them the headroom to borrow the extra cash they need. My memories are still fresh of interviewing Alistair Darling in No.11 Downing Street last September, the day before the Northern Rock disaster first became apparent.

He lectured me about the dangers of excessive lending and borrowing. His very words were: "They [borrowers] need to ask themselves, 'can I repay this?' and lenders need to ask themselves, 'If it goes wrong can I get it back?' People do need to think long and hard about this. One of the by-products of the current situation is that, not just at a high level but right across the piece, people will be a bit more cautious."

Will they? Well yes, we will because as taxpayers and consumers we'll be forced to. But who's going to force the Government to stop its reckless and irresponsible behaviour? The salvation of the ballot box in 2010 is still a dangerously long time away as far as the deteriorating health of the economy is concerned.

This week has confirmed many things, including the fact the lunatics really are running the asylum and clearing up the mess is going to be absolutely ghastly.

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Citigroup loss pushes credit crunch hit to $50 billion

Citigroup has taken a further $7.2 billion hit from the credit crunch in the second quarter, pushing the US investment bank giant into an overall loss of $2.5 billion for the period.

The Wall Street bank has now run up over $50 billion in writedowns on declining valuations of mortgage-related securities and losses on loans. Merrill Lynch, which yesterday shocked investors with a larger-than-expected loss of $4.6 billion, has now taken a total $46 billion hit from the credit crunch after writing down a further $9.75 billion in the second quarter.

Despite Citigroup's loss, which compares to a $6.23 billion profit in the second quarter last year, the bank's results were above analysts' expectations who had forecast a steeper decline. Total revenue for the quarter fell 29 per cent to $18.65 billion.

Citigroup's report comes a day after a mixed offering of banking results in which JPMorgan Chase unveiled surprisingly strong profits and Merrill Lynch disappointed the market. JPMorgan announced a better-than-expected 52 per cent decline in its second-quarter profits to $2 billion, dragged down by a $4.6 billion hit from the credit crunch.

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Citigroup plunges into red on new write-downs

Citigroup plunged $2.5bn into the red in the second quarter of the year, after charging a further $14.2bn of write-downs and other provisions, and revealed it is looking to shed $440bn-$500bn of unwanted assets over the next three years.
 
Chief executive Vikram Pandit's moves to refocus the banking conglomerate saw $99bn of assets disposed of in the second quarter and 6,000 jobs go. The bank has now cut a total of 12,000 jobs since its peak of 370,000 last summer, and will make more redundancies as it continues on its path to save $15bn from what it calls "re-engineering benefits."

Chief financial officer Gary Crittenden said the final "goal post" was still some time away but added: "That plan is something we can't wait two years to execute. This is a down-payment towards achieving the end goal." The investment bank is continuing to identify assets for disposal, such as its British mortgage businesses, Future Mortgages and CitiFinancial, which it pinpointed for closure in May.

Despite the size of the write-downs and provisions, the bank's second-quarter results were better than expected, thanks in part to enjoying its second best ever quarter in revenue terms on largely solid trading conditions. Mr Crittenden said that the trading environment remained fairly positive in June, until the last week which was "soft."

After the write-downs, group revenue from continuing operations fell 29pc to $18.65bn, with the bank's consumer business - still its largest - suffered a $700m loss after net credit losses in the US near tripled from 0.87pc to 2.33pc of its lending book.

The investment banking arm saw revenues plunge 71pc to $2.9bn and incurred a $2bn loss after charging a $3.4bn loss on sub-prime exposures, a $2.4bn write-down on bond insurers, and $870m on real estate positions. Despite the size of the losses the results were largely well received, as the figures showed an improvement on the first quarter and were better than analysts had expected.

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Ilargi: The rate of failure among the approximately 8500 US banks is about to start accelerating, probably in large and fast steps. The main reason for most of the smaller ones is their positions in commercial real estate and construction, where "The loss rates are just astronomical."

KeyCorp Stumbles on Loan Losses Outside Its Market

Three months ago, analysts were speculating KeyCorp would help rescue National City Corp. after its bigger Cleveland-based neighbor set aside $1.4 billion to cover bad loans and reported a $171 million first-quarter loss.

Since then, KeyCorp has fallen more than 50 percent in New York trading and analysts now estimate Ohio's third-biggest bank by assets will post a record second-quarter loss of about $800 million because of unprofitable real estate projects in Florida and California. "The loss rates are just astronomical," said Jeff Davis, an analyst at FTN Midwest Securities in Nashville, Tennessee.

Regional banks across the U.S. have been battered by the worst housing crisis since the Great Depression. The 24-member KBW Bank Index plunged 45 percent in the past year, led by declines in National City and Seattle-based Washington Mutual Inc.

IndyMac Bancorp Inc. of Pasadena, California, was seized by U.S. regulators last week in the second-biggest takeover in history by the Federal Deposit Insurance Corp. after a run by depositors left the mortgage lender short on cash.

Like National City, KeyCorp's decision to expand from the slower growing Midwest markets that it knew best resulted in higher loan losses. KeyCorp doubled its forecast of bad debt for 2008 to as much as 1.3 percent of average loans and said in a May regulatory filing that the bill may be larger because of soured loans to homebuilders.

"Commercial real estate and construction lending was one of those products they pursued on a national level," said RBC Capital Markets analyst Gerard Cassidy, who works in Portland, Maine. "It's always very dangerous to do that."

KeyCorp's 50 percent drop in New York trading during the second quarter was fourth-worst in the KBW index. Washington Mutual and National City dropped 52 percent, and Cincinnati- based Fifth Third Bancorp fell 51 percent. The lender raised more than $1.7 billion in June by selling convertible and common shares to cover liabilities after losing a tax case tied to leasing. Some of that money may be used to cover losses from sales of distressed loans, Davis said.

KeyCorp's capital ratios exceeded regulatory benchmarks before raising money, and they were "fortified" by the fresh funds, spokesman Bill Murschel said in an e-mailed statement. "Key doesn't anticipate a need to raise additional capital," he said. KeyCorp probably will report a second-quarter loss of $2.32 a share on July 22, according to the average estimate of 20 analysts surveyed by Bloomberg.

Chief Executive Officer Henry Meyer, who has led KeyCorp since 2001, can't be blamed for the losses, said Sean Ryan, a New York-based analyst at Stern Agee & Leach Inc. Meyer is a victim of "sluggish" markets and slumping house prices, Ryan said. "This is one case where this is actually a good management team," Ryan said. While the list of bank executives who should be fired is increasing, "Key isn't on that list," he said.

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House likely to modify Fannie, Freddie rescue

The House is likely next week to take up a Bush administration proposal to empower the Treasury to back up embattled mortgage giants Fannie Mae and Freddie Mac.

Lawmakers will probably accommodate the broad outlines of a proposal by Treasury Secretary Henry Paulson to offer explicit backing for the two government-sponsored enterprises. But House Financial Services Chairman Barney Frank, D-Mass., and other key leaders are expected to impose parameters that will counter concerns that the plan gives Treasury a blank check.

Paulson asked lawmakers this week to allow the Treasury over the next 18 months to offer the companies an unlimited line of credit and to buy as much stock in them as the Treasury sees fit. He also stressed that "there are no immediate plans to access either the proposed liquidity or the proposed capital backstop." The point of having the rescue plan in place, he said, is to instill market confidence.

But Frank has said he will propose that the line of credit be subject to the national debt ceiling of $9.815 trillion, most of which is already used. In effect, Frank's provision would effectively cap how much the companies could borrow from the Treasury.

The House will also consider provisions that would require Fannie and Freddie to not pay dividends to investors until the government is paid back the money it's loaned. It's also possible lawmakers will insist that any securities the Treasury buys be preferred stock, meaning the government would have priority over common shareholders in the payment of dividends or, if they're liquidated, assets.

Once congressional staffers finish writing the legislative language, the Congressional Budget Office will have to estimate the cost of the rescue plan to federal coffers. The Fannie and Freddie rescue plan will probably be attached to a broader foreclosure relief bill that has been in play for months. The House is expected to vote on it on Wednesday. If it passes, it will then be returned to the Senate for consideration.

The housing bill includes measures to strengthen the regulation of Fannie and Freddie and to create a new program of government-backed mortgages for borrowers at risk of foreclosure. It also is now expected to include a provision that would grant $4 billion to states to buy up and rehabilitate foreclosed properties.

The White House has threatened to veto the bill over the $4 billion provision. But House Speaker Nancy Pelosi and other Democratic leaders are no longer as concerned about a veto since the Bush administration has placed a high priority on getting a rescue plan as well as GSE reform in place as quickly as possible. "I don't think the president is going to veto this bill," said Pelosi at a press conference this week. "I don't think so."

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Freddie commits to raising $5.5 billion in capital

Freddie Mac committed on Friday to raising $5.5 billion in capital and said it has registered with the Securities and Exchange Commission.

However, few investors may be interested in plowing more money into the company, an analyst said after the announcement.
Freddie committed to its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), to raise $5.5 billion of new core capital through one or more offerings. The sales will include new common stock and preferred securities, the company said.

The timing of the capital raising will depend on market conditions and other factors. In an early assessment of recent results, Freddie said its performance during the second-quarter should leave the company with capital that's more than the 20% surplus required by OFHEO. The SEC registration isn't related to any specific offering of securities by Freddie. However, it shows that the company has been able to get its accounting and financial reporting up to date and accurate enough to satisfy the regulator.

Freddie agreed to register with the SEC in 2002. But the company was hit by an accounting scandal soon after and had to restate several years of results. Since then, Freddie has been trying to get its financial reporting back up to date. "Their commitment to stronger capital is appropriate and prudent," OFHEO director James Lockhart, said in a statement.

"Becoming an SEC registrant is a major step forward in the history of Freddie Mac, one that OFHEO and investors have been awaiting for a long time." But the housing market slump and global credit crunch have proved even bigger challenges to Freddie and rival Fannie Mae.

Both companies may need more equity capital because they have huge mortgage exposures that are souring as the housing bust deepens. They own or guarantee more than $5 trillion in home loans and have borrowed over $1 trillion to invest in mortgage securities.

Fannie successfully raised new capital earlier this year. Freddie also unveiled plans to raise $5.5 billion at around the same time, but hasn't managed to get the deal done yet. Fannie and Freddie shares slumped last week, prompting the government to unveil a plan to support Fannie and Freddie if needed because the companies are so important to the mortgage and housing market.

The three-point plan, announced by Treasury Secretary Henry Paulson, included the extension of a larger line of credit to the companies. The government is also seeking authority to buy stock if needed. Selling new securities to investors in the private market would avoid the need to use taxpayer's money in a government bailout of Freddie. It would also help Freddie avoid stricter regulations -- the third prong of the Treasury's plan to support the companies.

Freddie shares jumped 10% to $9.18 on Friday. The stock has surged more than 70% since Tuesday. However, the company has lost almost three quarters of its market value since the start of 2008. Unfortunately, Freddie may struggle to raise the equity capital it needs in the private market, according to one analyst.

"While we view the steps FRE is taking to raise capital positively, we believe interest from outside investors is limited and we expect any capital injection will be highly dilutive to common shareholders," Kevin Cole, an analyst at Standard & Poor's Equity Research, wrote in a note to clients on Friday. "Any capital injection will depend heavily on the current share price and is difficult to predict," he added, reiterating his sell recommendation on the stock.

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Stern Says Fed Shouldn't Wait for End of Crisis to Raise Rates

The Federal Reserve shouldn't wait for housing and financial markets to stabilize before it begins raising interest rates, central bank policy maker Gary Stern said.

"We're pretty well-positioned for the downside risks we might encounter from here," Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview yesterday. "I worry a little bit more about the prospects for inflation." The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, reinforced traders' forecasts for a rate increase by year-end.

Stern indicated that Treasury Secretary Henry Paulson's rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump. "We can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course," said Stern, 63, the Fed's longest-serving policy maker. "Our actions will affect the economy in the future, not at the moment."

The bank president compared the credit crunch to the one in the early 1990s, which restrained economic growth for almost three years. That's a more sanguine assessment than others have. The International Monetary Fund has said it's the worst financial shock since the Great Depression. Former Fed Chairman Alan Greenspan said it's the most intense in more than half a century.

Traders' estimates of a rate increase in October rose to 64 percent yesterday after Stern's remarks were published, from 58 percent earlier in the day. Stern dissented three times in favor of raising rates in 1996. He is the only FOMC member who's served with three chairmen: Paul Volcker, Greenspan and Ben S. Bernanke. He became the Minneapolis Fed president in 1985.

His comments yesterday underscore that "the Fed has grown more uncomfortable with the inflation situation," Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York, wrote in a note to clients. Stern spoke two days after government figures showed consumer prices surged 5 percent over the past year, the biggest jump since 1991. Excluding food and fuel, so-called core prices rose 2.4 percent, higher than the 2.1 percent average over the last five years.

"Headline inflation is clearly too high," Stern said. He added that he's concerned that will feed through to core prices and public expectations for inflation. As long as energy and food costs level off, core inflation ought to slow over the next year, Stern said.

Crude oil has surged 73 percent in the past 12 months, and rose to a record of $147.27 a barrel on July 11. Worldwide, prices for food commodities such as wheat and rice were 43 percent higher in April than a year earlier, according to the United Nations Food and Agriculture Organization. Stern declined to say when policy makers may shift toward raising rates.

"We're going to want to, in my opinion, reverse some of those interest-rate reductions," he said. "I don't think there's any question about that. But exactly when depends on how things evolve from here." The FOMC halted its series of seven reductions last month, after reducing the benchmark rate to 2 percent, from 5.25 percent last September.

Traders anticipate the Fed will boost its main rate at least a quarter point from 2 percent in October, after keeping borrowing costs unchanged in August and September. There's a 79 percent probability of a move by year-end, futures prices show.

Minutes of the Fed's June 24-25 gathering, released July 15, showed that some Fed officials favored an increase in rates "very soon." Bernanke this week said there are risks to both inflation and growth, abandoning the FOMC's June assessment that the threat of a "substantial" downturn had receded.

"This is a very challenging policy environment," Stern said yesterday. "I don't think we ought to pretend that" an end to the credit crisis "won't take some time," he said. The Fed on July 13 offered Fannie Mae and Freddie Mac access to direct loans from the central bank in case the firms needed the financing before Congress acts on Paulson's rescue plan.

The Treasury chief is seeking power to make unlimited loans to and purchase equity in the companies if needed. Stern said the Treasury proposals are "clearly designed to bolster Fannie and Freddie, and to address" risks the firms' troubles pose to the credit crisis and housing slump.

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More Charges May Be Sought Against Ex-Bear Fund Managers

Federal prosecutors said Friday that they may seek additional criminal charges against former managers of two Bear Stearns Cos. funds who were indicted in June in the collapse of the funds last year, which cost investors more than $1 billion.

At a hearing in Brooklyn on Friday, Assistant U.S. Attorney Patrick Sinclair said the government was anticipating the possibility of additional charges against Ralph Cioffi and Matthew Tannin, the former managers of two high-profile bond portfolios in Bear Stearns' asset-management unit. "The government is not prepared to announce what those charges may or may not be," Mr. Sinclair said.

If prosecutors do bring additional charges against the men, they hope to do so by early fall, Mr. Sinclair said. Mr. Cioffi, 52 years old, and Mr. Tannin, 46, were charged with conspiracy, securities fraud and wire fraud in a nine-count indictment in June. Mr. Cioffi also was charged with insider trading.

The criminal charges against Messrs. Cioffi and Tannin are the most high-profile ones to emerge so far as regulators and law-enforcement personnel probe financial missteps that fueled a global credit crisis last year.

The funds -- the Bear Stearns High Grade Structured Credit Strategies Master Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Master Fund -- imploded in June 2007 as credit markets contracted, costing investors more than $1 billion.

Prosecutors have alleged that Mr. Cioffi, Mr. Tannin and others believed the funds were "in grave condition and at risk of collapse" as early as March 2007 and didn't disclose the true state of the funds to investors and lenders.

The government also claims Mr. Cioffi began the process in late March 2007 to transfer $2 million of his $6 million investment in one of the funds to another Bear Stearns hedge fund, Structured Risk Partners, fearing a potential meltdown. Mr. Cioffi, who also had supervisory authority oversight over that fund, never told investors he transferred the money, prosecutors said.

The closing of the funds marked the beginning of problems for Bear Stearns, which was forced to sell itself to J.P. Morgan Chase & Co. after being pushed to the brink of failure because of a liquidity crunch in March. Shareholders approved the sale of the 85-year-old investment house to J.P. Morgan for just $1 billion in May. Bear Stearns had a market value of $20 billion in January

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Stocks face heavy earnings week with new hope

Investors will start next week -- one of the most loaded of the second-quarter earnings season -- hopeful that a nascent positive tone on Wall Street will continue to lift stocks. Crude oil prices seems to be on a downtrend while earnings so far seem to be not as bad as feared.

"This was an inflection week," said Alec Young, strategist at Standard & Poor's. "We've switched from never-ending worries about credit, the economy and oil to actually looking at earnings. Although fundamentals still need to improve, stocks precede fundamentals." The past week saw some of the biggest financial institutions, such as Citigroup Inc. and Wells Fargo Co. post second-quarter results that came in above Wall Street's already lowered expectations.

Even Merrill Lynch, whose results came in lower than expected, saw its shares rise modestly Friday. According to Thomson Financial, 73% of the 88 S&P 500 firms that posted results last week topped expectations, above the average 60%. "The good thing about bear markets is that they price in such bad news that it becomes easy at some point to surprise positively," said Alec Young, strategist at Standard & Poor's.

"This time around, we've seen this happen especially in the financial arena. The results are not good but they're not as bad as people feared." Investors will next week turn to more earnings from the battered financials, with Bank of America and American Express both due to report results on Monday, along with Wachovia Corp. and a flurry of regional banks throughout the week.

The Dow Jones Industrial Average gained nearly 50 points, or 0.4%, to end at 11,496 on Friday. The S&P 500 rose fractionally to 1,260, while the Nasdaq Composite dropped 29 points, or 1.3%, to close at 2,282.

Technology firms, whose stocks have rallied because of expectations they'd post much better earnings growth than in other sectors, came under pressure Friday after disappointing earnings from internet icon Google Inc., as well as from software giant Microsoft Corp. and chip-market AMD . The tech sector might still redeem itself with earnings from bellwether Apple Inc. and Texas Instruments.

"The big question is 'did we make a low?'," said S&P's Young. "I think at least we may be entering a new trading range, given the remaining skepticism in the market. But this might mean that it will last longer than the March to May rally, which wasn't based on realistic grounds."

The week was heavy with some big and small developments, which helped the Dow industrials rise 3.6%, the S&P 500 gain 1.7% and the Nasdaq 2%. The week began with investors full of anxiety over the fate of giant mortgage lenders Fannie Mae and Freddie Ma , whose shares had continued to slide in spite of a government plan to back their bonds.

But the fate of the financial sector seemed to turn around Wednesday, after the Securities and Exchange Commission said it would strictly enforce rules banning illegal trades believed to have hurt the stocks of big financial institutions.

"We have to wonder how much of the huge gains on Wednesday was really about a brightening outlook for financials or about whether hedge funds and other fast money players now have to play by the rule," said Ken Tower, market strategist at Covered Bridge Tactical.

Oil also fell for a fourth session in a row Friday, losing more than $16 in the week to finish below $129 a barrel. But boosted by the surge in prices since the start of the year, many energy companies, such as Schlumberger, are posting stellar results and also helped lift stocks this week.

For CBT's Tower, the extent of the damage done to stocks since late May, along with the combination of the government bail-out of Fannie Mae and Freddie Mac, new SEC enforcements and slumping oil prices, are providing conditions for the market to try and advance.

"We did reach a peak in fear and we have all the elements of a significant market low," he said. "But I think that we'll have test 1,200 on the S&P and 11,000 on the Dow, before we can have a longer-lasting market event."

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What, me bear?

Some investors and strategists, anxious to put the devastation of the credit crisis behind them, hope the market's recent entry into bear territory signals the worst is almost over for U.S. stocks.

A cautious rallying cry is starting to emerge from some of the most bullish strategists on Wall Street, such as Al Goldman, chief market strategist at Wachovia Securities. Stephen McClellan, Wall Street veteran and author of "Full of Bull," says the profile of your portfolio has to be different in a bear market.

"Bear markets occur approximately every four to five years and do one very good thing -- they create great buying opportunity for the long term," Goldman said in a note outlining his latest market call. "The problem is: how does one know whether a bear market is about over, half over, or just getting started?"

Amid the uncertainty, Wall Street strategists often turn to historical precedents, hoping they'll provide some sort of framework that can help them anticipate future market action. In that context, some form of optimism about stocks can be partially justified: By the time the bear-market threshold is reached, two-thirds of the damage to stock prices is already done.

A market is considered to be in bear territory when it has dropped 20% from a previous peak. It is considered to be leaving bear territory when a bottom is reached and followed by a subsequent rise of 20% from the trough. Yet, for investors, most of the pain is felt on the way down, as has been the case since stocks began to fall in October of 2007, just as a slumping housing market revealed mounting problems at financial institutions holding bad home loans.

For many market strategists, a bear-market mentality began late last year, and any market rally since then, including a two-and-a-half-month-long uptrend between March and May, was already considered a bear-market rally. "A bear market is like a recession," says Jack Ablin, market strategist at Harris Private Bank. "Whether or not we actually cross the definitional threshold or not is immaterial -- it certainly feels like one."

Excluding the current bear market, the average drop in the broad S&P 500 index is 34.11%, and the average length is 20.3 months, according to Standard & Poor's. It's now been more than nine months since the S&P 500 hit its peak of 1,562 on Oct. 10, 2007. After the failed attempt to rebound between March and May, the major stock indexes finally began breaching the symbolic 20%-decline mark in late June/early July.

For the current bear to match the exact length and scope of the average bear market, the S&P 500 would need to fall another 14% before hitting a trough within one to two months, and then rebound by 20% within 11 months. Of course, the catch is that an average is just an average and the disparity between the 11 bear markets experienced by the S&P 500 since 1937 tells the tale.

"We have to remember that there are important differences between bear markets that determine the outcome and the length," said Hugh Johnson, chairman of Johnson Illington Advisors. The first bear market on record for the S&P 500 was also the harshest and the longest: It began on March 6, 1937 and went on for 62 months during which time the S&P lost 60% of its value.

By contrast, a shock to the system, such as the stock market crash of 1987, preceded one of the two shortest bear markets on record. The S&P 500 lost 34% and quickly recovered by 20% within only three months.

Even at a smaller level, the type of dramatic, panic-driven selling action, as seen on Black Monday on Oct. 19, 1987, is actually the type of capitulation that analysts look for to determine a real trough has been established, allowing for the market to start bouncing back on solid ground.

But in spite of many scary ups and -- mostly -- downs since last year, the market's decline since October 2007 has thus far failed to produce the hoped-for capitulation."The level of fear is great, sidelined cash and shorts are at record levels, and it is very difficult to find a bull," Wachovia's Goldman said in his note at the start of the week. "All of these factors are seen in the area of a potential bottom, but they are no guarantee we won't see the stock market lower," he said.

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Ilargi: If the bright and oh-so impartial geniuses of the IMF say it's the right thing, we all know what to do, don’t we: Buy Buy Buy..... I can't wait till Monday. I'll bring the pearls, you bring the swine.

Relief from gloom as IMF raises growth forecast

The International Monetary Fund (IMF) has raised its global economic forecast for this year and 2009 because the effects of the credit crisis were not as bad as expected.

The IMF yesterday revised up estimates it made in April and said it now expects the world economy to grow by 4.1 per cent this year, up from 3.7 per cent. Next year's growth will be 3.9 per cent, slightly higher than April's 3.8 per cent prediction but still much lower than the 5 per cent notched up in 2007.

The IMF revised up its forecasts for growth in the UK. The fund had forecast 1.6 per cent growth in the UK this year and next but it now expects expansion of 1.8 per cent in 2008 and 1.7 per cent in 2009. With the economy slowing, the Treasury is now set to concede that its fiscal rules on spending and debt need reworking to allow the Government to borrow more into the downturn.

The slowdown has put the public finances under severe strain, with public sector borrowing on the rise and receipts from stamp duty and other taxes falling. The fund said the effects of the financial crisis that started with the US sub-prime meltdown were still seeping into the world economy but more slowly than expected. The US fiscal stimulus package is also supporting spending by American households for now, it added.

The American economy will expand by 1.3 per cent this year and not the 0.5 per cent it estimated in April. Growth in 2009 would slow but to 0.8 per cent rather than the earlier 0.6 per cent projection. Despite the upgrades, the IMF warned that the outlook for the world economy was uncertain, with financial markets fragile and inflation on the increase.

"The global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere, notably in emerging and developing countries," the fund said in an update of its World Economic Outlook. "The top priority for policymakers is to head off rising inflationary pressure, while keeping sight of risks to growth."

Central bankers are grappling with slowing economies and rising prices as energy and food prices increase, due mainly to growing demand in developing economies. The price of oil fell for the third day running yesterday, partly on the growing belief that the slowing world economy will reduce demand in manufacturing powerhouses such as China. Crude oil fell by $5.31 a barrel to $129.29 in New York.

The IMF revised up slightly growth forecasts for emerging and developing economies to 6.9 per cent in 2008 and 6.7 per cent in 2009 but the projections were still down sharply on the 8 per cent growth last year. The key Chinese economy is expected to slow to about 10 per cent from about 12 per cent last year.

Beijing said yesterday that gross domestic product cooled to 10.1 per cent in the second quarter from 10.6 per cent in the first quarter. Higher interest rates and fiscal restraint are needed in emerging economies to ward off inflation, the IMF said.

There is less call for raising interest rates in advanced eco-nomies because inflation expectations and labour costs will be tamed by slowing growth, the report said. The Bank of England has said the slowing economy should help to bring Britain's surging inflation back to target.

The IMF's more optimistic outlook was reflected in stock markets yesterday as concerns about the financial sector ebbed, at least for now. The FTSE 100 rose 2.6 per cent to 5,286.3, rebounding after hitting a three-year low on Wednesday. The pan-European FTSEurofirst also jumped, closing up 2.7 per cent. In the US, the Dow Jones Industrial Average closed up 1.85 per cent.

There was mixed economic news from the US yesterday. Figures for housing starts came in better than expected but were found to have been boosted by a change to New York's building code.

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Ilargi: Howard Archer at Global Insight is one of the few analysts who have a shred of credibilty left. But he’s risking it now. UK home prices have more than tripled over the past decade. And now Archer claims they’ll sink by a combined 30% "before the market begins to recover" in 2010.

In reality, prices will come back to where they were 10 years ago, meaning they’ll come down 65-70%, plus whatever the oscillation that comes with such a downswing will add in negativity.

And even suggesting that the market will recover within two years? I find that irresponsible claptrap. Every single person who even thinks of buying a home with a hefty mortgage attached, whether in North America or in Europe, before 2012, should be strongly discouraged and scared away. And that's just because we can't tie their hands behind their backs.

UK house prices tipped to fall 20% in two years

The value of homes in Britain could slump by a further 20 per cent in the next two years as the number of buyers continues to fall, experts predicted yesterday. Property values have already dropped by 10 per cent since prices peaked in August last year, wiping £20,000 off the price of an average home, figures from Halifax show.

But Howard Archer, of Global Insight, the economic consultancy, said prices would plummet by a further 20 per cent, or £40,000 on average, before the market begins to recover. “Continued falls in house prices are expected until the first half of 2010, taking the average house price to £140,104, down from £199,600 in August last year,” he said.

Vicky Redwood, of Capital Economics, presented an even bleaker outlook, forecasting that the housing market would not recover until well into 2011. Morgan Stanley, the investment bank, said that if prices fall by 25 per cent in the next two years, more than two million - or one in six borrowers - would be in negative equity.

Prices have been dragged down by a lack of mortgages available to prospective buyers, as lenders, who have struggled to secure funding in the wake of the credit crunch, demand bigger deposits. Mortgage lending in June, traditionally one of the busiest periods, plummeted by 32 per cent compared with the same month last year, figures out yesterday from the Council of Mortgage Lenders (CML) showed.

Michael Coogan, director-general of the CML, gave warning that the situation was unlikely to improve this year. “Activity during a traditionally busy time of year for mortgages has been muted by funding shortages and, more recently, dampened consumer demand. This picture will continue for the rest of this year,” he said.

This will come as a further blow to households struggling with spiralling food and energy prices. The average family is now nearly £470 a week worse off than this time last year, according to Asda, the supermarket. Households had a monthly income of about £538 a week after paying tax during June, 3.2 per cent more than June last year, Asda's monthly income tracker shows.

But this rise was more than offset by a 6.8 per cent jump in the cost of essential goods such as food, clothes, utility bills, housing and transport, with households spending around £407 a week on these items. But there was a glimmer of hope for homeowners as Halifax, cut the rates on some of its home loans by up to 0.2percent for the second time in two weeks. This came after other major lenders, including Nationwide, Abbey and Lloyds TSB also cut their rates.

The rate on Halifax's two-year fixed-rate deal for borrowers with a 25 per cent deposit or equity stake in their property is now 6.47 per cent, down from 6.99 per cent last week. This will save a homeowner with a £200,000 loan more than £750 a year.
But despite this, hundreds of thousands of homeowners will still see their mortgage payments soar. Rates are far higher than they were before the credit crunch hit last autumn, despite recent falls in the base rate.

“Borrowers on tight budgets will have to plan ahead to manage higher mortgage payments than they have been used to,” Mr Coogan said. About 1.5 million homeowners will come to the end of fixed-term deals this year. Three quarters of potential first-time buyers are abandoning plans to get on to the property ladder, a recent survey by Moneycorp, the foreign exchange group, suggested.

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Barclays foreign investors raise stakes to 16%

Qataris are now Barclays' largest shareholders, after the majority of existing investors snubbed the bank's £4.5 billion cash call. New Asian and Middle East investor now own 16 per cent of Britian's third largest bank.

The Qatar Investment Authority (QIA) and Challenger, an offshore investment vehicle set up by Qatar's Prime Minister to invest family wealth, own a combined stake of almost 8 per cent in the British bank following the capital raising. Barclays chose to raise cash from strategic investors after watching the share prices of rivals HBOS, Royal Bank of Scotland (RBS) and Bradford & Bingley fluctuate wildly during their rights issues.

Sumitomo Mitsui Banking Corporation, the Japanese bank, agreed to pay £500 million for a guaranteed 2.1 per cent stake in the bank. The QIA, Challenger, China Development Bank (CDB) and Temasek, the Singaporean wealth fund, said that they would take up whatever was left over from the remaining £4 billion worth of stock after existing shareholders were given an opportunity to buy in.

Shareholders took up just 19 per cent of the 1.5 billion new shares on offer. As a result, the QIA will hold 6 per cent of Barclays and Challenger just under 2 per cent. CDB, which was already a shareholder in Barclays, will retain its 3.1 per cent share in the bank and Temasek, the Singaporean wealth fund, will take its stake from about 2 per cent to between 2.5 per cent and 3 per cent.

Shareholders were offered 3 new shares at 282p each for every 14 existing shares. But take-up of Barclays' offer had been expected to be low because the company's share price has lagged the offer price since it was announced . Yesterday the stock closed at 2 90.5p after a rally in the bank sector.

It is the second time Barclays has raised cash from strategic investors. CDB and Temasek first invested in the bank last year, when Barclays needed extra money to fund its takeover battle with RBS for ABN Amro.

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Ilargi: As the Greeks knew so well, the Gods have always had a taste for irony.....

New baby boom gives birth to growing demand

Recession could be looming but humankind keeps going forth and multiplying. In fact, women in the UK are having more babies than at any time since the 1970s, according to the latest official statistics.

So while other markets are shrinking, sales of nappies, romper suits, baby food and all manner of products and services for these new arrivals are booming - fuelled by improved fertility treatment and the tendency for foreign-born mothers to have more babies.

Witness Mothercare yesterday, which unveiled a 20.7pc rise in sales during the first quarter. "The birth rate has popped up a bit. Clearly for us that's good as it's absolutely in our sweet spot," says Ben Gordon, chief executive of the retail chain.

Mothercare's figures provided fresh evidence that babies are the ultimate recession-proof weapon. But it's not just the higher birth rate that's boosting the market. "Guilt is another emotion driving sales of baby products," according to a recent Mintel survey. "That includes more premium toiletries, as parents find they have less time with their children due to work pressures."

Mintel says sales of babies' and children's toiletries reached £303m in 2007, up 22pc since 2002. The market is set to grow a further £73m by 2012. It adds that many women are delaying childbirth till their 30s and 40s, which means parents are likely to have more disposable income to indulge their children.

Premium products are benefiting, according to Mothercare, whose new pushchair, the My3, shot straight in at number one in its best sellers, despite costing £400. Increasing pressure to look after your children's health is also helping companies such as Jakabel, a specialist in sun protection and swimming aids/toys for children. Josu Shephard, managing director, says sales are up 30pc this year.

Baby food is booming too. According to IRI, the total baby food market (excluding milk) has risen £15m in the past year to £182m, having risen £32m from £150m in 2005. Organix, founded in 1992 and today owned by Swiss food group Hero, is number four in the market, with £26m retail sales, up 24pc last year.

"Some of our growth is undoubtedly driven by the fact that there are more babies," says Anna Rosier, managing director of Organix. "Mums have a certain amount of money in their budget and they'll always overspend on babies rather than on things for themselves, such as clothes or getting their hair done."

Ms Rosier references also a greater focus on family in society and better maternity rights among the other factors behind the baby boom. But despite the option of longer maternity leave, Jocelyn Ashton, founder of nursery firm Building Blocks, says that the downturn is forcing many mothers back to work sooner than they would hope. It's great for her business.

"We have seen a big increase in full-time places. There are lots and lots of babies being born but the economy is forcing parents back to work. "If you're planning on conceiving that's a good time to get on the waiting list. We have 180 people on the waiting list, and 78 kids."

Lucy Martin of Gina's Nannies agrees. "Our business hasn't been affected at all by the credit crunch. We probably have more clients than we've ever had." So it's "pooh-pooh" to the recession, then.

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New Evidence Brought In California Countrywide Lawsuit

California Attorney General Edmund G. Brown Jr. stepped up his lawsuit against Countrywide Financial while providing more specific details into the mortgage lender’s alleged deceptive practices.

Brown’s amended lawsuit contains more evidence surrounding Countrywide’s “dangerous lending practices,” including individual cases where borrowers were deemed ultra-high risk but still granted an adjustable-rate home loan.

In one case, an 85-year old disabled veteran with a 509 credit score and a debt-to-income ratio of 60 percent was given a three-year ARM that defaulted just months later. Another two cases highlight unsound underwriting decisions tied to the approval of pay option arm loans, which were eventually approved and defaulted upon within a year.

The amended suit notes that 19 percent of loans originated by Countrywide in 2005 were option arms, and that the loans carried a gross profit margin of about four percent, double those guaranteed by the FHA.

It also claims that the mortgage brokers it took on as partners “misrepresented and obfuscated” the actual terms of these high-risk loans, playing down the impact of negative amortization and telling borrowers prepayment penalties could be waived if they refinanced with Countrywide.

“As of April this year, 21.11% of the mortgages owned by Countrywide Home Loans were in some stage of delinquency or foreclosure, including 47.97% of originated non-prime loans, and 21.23% of Pay Option ARMs,” the suit says.

“In January and March, 2008, Countrywide recorded 3,175 notices of default in Alameda, Fresno, Riverside, and San Diego counties alone, representing an aggregate total of delinquent principal and interest of more than $917 million,” the suit said.

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Calpers Lost 2.4%, Worst Performance in Six Years

The California Public Employees' Retirement System, the largest U.S. public pension fund, said it lost 2.4 percent in the 12 months ended June 30, as stock declines caused its worst performance in six years. The performance of the fund, with $239 billion in assets, compared with a 19 percent gain in the previous fiscal year. Calpers, as the fund is known, said its stock portfolio lost 10.7 percent.

"It was difficult for any investor to make positive returns in stocks this past year, but we realized gains in other areas, ending the year in good financial shape," said Anne Stausboll, the fund's temporary chief investment officer. "The stock markets will rebound, and when they do, Calpers will be ready."

Merrill Lynch in a June report said public pension funds are expected to lose on average 5.1 percent, mostly because of lower global stock prices triggered by turbulence in the credit markets. The Standard & Poor's 500 Index of stocks declined 15 percent during the fiscal year, while the Dow Jones Industrial Average fell 16 percent. The MSCI World Index, excluding the U.S., was off 9.7 percent.

Calpers said its bond portfolio earned 7.7 percent, up from 6.6 percent last year. The fund also said it returned 22.9 percent in a new asset class linked to inflation during the nine months since those investments began. It earned 19.6 percent on private equity positions for the 12 months ended March 31, while real estate holdings gained 8.1. Final fiscal-year earnings for those two asset classes won't be reported for another month.

The fund has sought to generate greater returns to cover growing public worker retirement costs by expanding into commodities, emerging markets, and investments pegged to inflation. "The funds with significant equity allocation definitely took a hit," said John Haugh, an analyst with Merrill Lynch in New York. "Public plans have shifted away somewhat from equities, and that's helped them endure some of the pain."

The pension fund has said it needs to earn an average of 7.75 percent in a so-called "smoothing policy" that allows it to spread its gains and losses out over 15 years as a way to ensure it doesn't have to ask state and local governments for more money. Over the past five years, the fund has earned an average 11.4 percent.

In the past year, the fund's board agreed to invest in commodities for the first time. Managers were earlier allowed to take short positions in U.S. stocks, betting on their decline; purchase stocks in emerging markets, such as China and India, and expand private-equity holdings.

The loss follows the departure of the fund's two top officials, Fred Buenrostro, chief executive officer, and Russell Read, chief investment officer, who announced they were leaving for private sector jobs. In January, Christianna Wood, who ran the system's global equity department for five years, left to become CEO of hedge fund Capital Z Asset Management.

Calpers last year placed its first direct investments in commodities and in February approved putting as much as 3 percent of its investments in raw materials, seeking to take advantage of soaring worldwide prices. In December, the fund agreed to shift more of its portfolio from stocks and bonds into private equity, real estate and securities that perform well when inflation accelerates.

"Commodities over the last year were not a bad place to be, that's for sure," Haugh said. The California State Teachers' Retirement System, the second-biggest U.S. public pension fund, said yesterday that it is likely to report it lost 3.7 percent for the fiscal year, its worst one-year decline in a decade and the first loss since 2002.

The $154.4 billion New York state pension fund, the third- largest in the nation, has yet to report earnings for its fiscal year that ended March 31. The fund earned 12.8 percent the previous fiscal year. New Jersey's state employee pension fund lost about $4.4 billion, or 3.1 percent of its assets, during the 12 months ended June 30, that fund reported July 15.

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Ilargi: I'll admit that not knowing -of- James Grant likely brands me as a heathen and an ignorant nincompoop. Yesterday, a Wall Street reporter spoke highly of Grant; then again, that reporter said many silly things. So perhaps it’s good providence that the Wall Street Journal today runs a Grant article. But now comes the next problem: I’m not impressed.

Why No Outrage?

"Raise less corn and more hell," Mary Elizabeth Lease harangued Kansas farmers during America's Populist era, but no such voice cries out today. America's 21st-century financial victims make no protest against the Federal Reserve's policy of showering dollars on the people who would seem to need them least.

Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed's crash program of interest-rate therapy.

Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn't the nation's small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as "triple-A." Yet it's the savers who took a pay cut -- and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren't enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people's money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people's wrath?

The American people are famously slow to anger, but they are outdoing themselves in long suffering today. In the wake of the "greatest failure of ratings and risk management ever," to quote the considered judgment of the mortgage-research department of UBS, Wall Street wears a political bullseye. Yet the politicians take no pot shots.

Barack Obama, the silver-tongued herald of change, forgettably told a crowd in Madison, Wis., some months back, that he will "listen to Main Street, not just to Wall Street." John McCain, the angrier of the two presumptive presidential contenders, has staked out a principled position against greed and obscene profits but has gone no further to call the errant bankers and brokers to account.

The most blistering attack on the ancient target of American populism was served up last October by the then president of the Federal Reserve Bank of St. Louis, William Poole. "We are going to take it out of the hides of Wall Street," muttered Mr. Poole into an open microphone, apparently much to his own chagrin.

If by "we," Mr. Poole meant his employer, he was off the mark, for the Fed has burnished Wall Street's hide more than skinned it. The shareholders of Bear Stearns were ruined, it's true, but Wall Street called the loss a bargain in view of the risks that an insolvent Bear would have presented to the derivatives-laced financial system. To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet.

In June 2007, Treasury securities constituted 92% of the Fed's earning assets. Nowadays, they amount to just 54%. In their place are, among other things, loans to the nation's banks and brokerage firms, the very institutions whose share prices have been in a tailspin. Such lending has risen from no part of the Fed's assets on the eve of the crisis to 22% today. Once upon a time, economists taught that a currency draws its strength from the balance sheet of the central bank that issues it. I expect that this doctrine, which went out with the gold standard, will have its day again.

Wall Street is off the political agenda in 2008 for reasons we may only guess about. Possibly, in this time of widespread public participation in the stock market, "Wall Street" is really "Main Street." Or maybe Wall Street, its old self, owns both major political parties and their candidates. Or, possibly, the $4.50 gasoline price has absorbed every available erg of populist anger, or -- yet another possibility -- today's financial failures are too complex to stick in everyman's craw.

I have another theory, and that is that the old populists actually won. This is their financial system. They had demanded paper money, federally insured bank deposits and a heavy governmental hand in the distribution of credit, and now they have them. The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future.

Before the Great Depression of the 1930s, there was the Great Depression of the 1880s and 1890s. Then the price level sagged and the value of the gold-backed dollar increased. Debts denominated in dollars likewise appreciated. Historians still debate the source of deflation of that era, but human progress seems the likeliest culprit. Advances in communication, transportation and productive technology had made the world a cornucopia. Abundance drove down prices, hurting some but helping many others.

The winners and losers conducted a spirited debate about the character of the dollar and the nature of the monetary system. "We want the abolition of the national banks, and we want the power to make loans direct from the government," Mary Lease -- "Mary Yellin" to her fans -- said. "We want the accursed foreclosure system wiped out.... We will stand by our homes and stay by our firesides by force if necessary, and we will not pay our debts to the loan-shark companies until the government pays its debts to us."

By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar.

So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share). Thus, the Wall Street of the Morgans and the Astors and the bloated bondholders is today an institution of the mixed economy. It is hand-in-glove with the government, while the government is, of course -- in theory -- by and for the people.

But that does not quite explain the lack of popular anger at the well-paid people who seem not to be very good at their jobs. Since the credit crisis burst out into the open in June 2007, inflation has risen and economic growth has faltered. The dollar exchange rate has weakened, the unemployment rate has increased and commodity prices have soared. The gold price, that running straw poll of the world's confidence in paper money, has jumped. House prices have dropped, mortgage foreclosures spiked and share prices of America's biggest financial institutions tumbled.

One might infer from the lack of popular anger that the credit crisis was God's fault rather than the doing of the bankers and the rating agencies and the government's snoozing watchdogs. And though greed and error bear much of the blame, so, once more, does human progress. At the turn of the 21st century, just as at the close of the 19th, the global supply curve prosperously shifted. Hundreds of millions of new hands and minds made the world a cornucopia again. And, once again, prices tended to weaken.

This time around, however, the Fed intervened to prop them up. In 2002 and 2003, Ben S. Bernanke, then a Fed governor under Chairman Alan Greenspan, led a campaign to make dollars more plentiful. The object, he said, was to forestall any tendency toward what Wal-Mart shoppers call everyday low prices. Rather, the Fed would engineer a decent minimum of inflation.

In that vein, the central bank pushed the interest rate it controls, the so-called federal funds rate, all the way down to 1% and held it there for the 12 months ended June 2004. House prices levitated as mortgage underwriting standards collapsed. The credit markets went into speculative orbit, and an idea took hold. Risk, the bankers and brokers and professional investors decided, was yesteryear's problem. Now began one of the wildest chapters in the history of lending and borrowing.

In flush times, our financiers seemingly compete to do the craziest deal. They borrow to the eyes and pay themselves lordly bonuses. Naturally -- eventually -- they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government's first responders -- the Fed, the Treasury or the government-sponsored enterprises -- bearing the people's money. One might suppose that such a recurrent chain of blunders would gall a politically potent segment of the population. That it has evidently failed to do so in 2008 may be the only important unreported fact of this otherwise compulsively documented election season.

Mary Yellin would spit blood at the catalogue of the misdeeds of 21st-century Wall Street: the willful pretended ignorance over the triple-A ratings lavished on the flimsy contraptions of structured mortgage finance; the subsequent foreclosure blight; the refusal of Wall Street to honor its implied obligations to the holders of hundreds of billions of dollars worth of auction-rate securities, the auctions of which have stopped in their tracks; the government's attempt to prohibit short sales of the guilty institutions; and -- not least -- Wall Street's reckless love affair with heavy borrowing.

For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street's biggest broker-dealers could hardly bear to look themselves in the mirror if they didn't extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets. "Leverage," as the laying-on of debt is known in the trade, is the Hamburger Helper of finance.

It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets as highly leveraged as Wall Street's requires a keen eye and superb judgment. The rub is that human beings err. Wall Street is usually described as an industry, but it shares precious few characteristics with the metal-fasteners business or the auto-parts trade. The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders.

Rather, they open their doors to pay their employees -- specifically, to maximize employee compensation in the short run. How best to do that? Why, to bear more risk by taking on more leverage. "Wall Street is our bad example because it is so successful," charged the president of Notre Dame University, the Rev. John Cavanaugh, in the time of Mary Lease. He meant that young people, emulating J.P. Morgan or E.H. Harriman, would worship the wrong god. The more immediate risk today is that Wall Street, sweating to fill out this year's bonus pool, runs itself and the rest of the American financial system right over a cliff.

It's just happened, in fact, under the studiously averted gaze of the Street's risk managers. Today's bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder. Bear Stearns is kaput and Lehman Brothers is reeling, but Morgan Stanley perhaps best illustrates the gluttonous ways of Wall Street.

Having lost its competitive edge on account of an intramural political struggle, the firm, under Chief Executive John Mack, set out to catch up to the rest of the pack. In the spring of 2006, it unveiled a trillion-dollar balance sheet, Wall Street's first. It expanded in every faddish business line, not excluding, in August 2006, subprime-mortgage origination (the transaction, intoned a Morgan Stanley press release, "provides us with new origination capabilities in the non-prime market, which we can build upon to provide access to high-quality product flows across all market cycles").

Nor did it pull in its horns as the boom wore on but rather protruded them all the more, raising its ratio of assets to equity to the aforementioned 33 times at year-end 2007 from 26.5 times at the close of 2004. Naturally, it did not forget the help. Last year, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.

Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much. It would not be so bad if the inevitable bout of indigestion were its alone to bear. The trouble is that, in a world so heavily leveraged as this one, we all get a stomach ache. Not that anyone seems to be complaining this election season.

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