Sunday, October 19, 2008

Debt Rattle, October 19 2008: Deadly Sins and Screaming Giveaways


Harris & Ewing Roadster Umbrella 1913.
Haynes roadster in Washington crossing Pennsylvania Avenue at 14th Street N.W.



Ilargi: Ah, the blessings of globalization... I made a list yesterday of countries known to be in deep financial trouble: Spain, Argentina, Pakistan, Ecuador, Ukraine, Hungary, Serbia, Latvia, Estonia, Lithuania, Romania, Bulgaria, Turkey and Switzerland.

Today, an article in the Independent adds a few more (it also misses some of mine). Hence, I’ll add these countries to the list: South Korea, Russia, Australia, Austria, Kazakhstan, Brazil, India, Indonesia and China.

Of course, as the list gets longer, the problems become more diverse in shape and form. I don't yet see, for instance, Russia or China in immediate danger, while Hungary, Latvia and the Ukraine certainly are.

Still, I also understand how fast events can take place, how rapid a banking system can be forced to its knees. There are gigantic amounts of debt that need to be rolled over and refinanced, and some of that simply won’t happen, while a lot of what will can only succeed at much higher interest rates.

For now, I hesitate to include countries like the US, the UK, Holland, Germany and France in my list, simply because there is so much wealth -old money- still left in these nations. But once more: once the equilibrium is far enough away, and oscillation takes over as the driving force, collapses can happen in a matter of days.

These rich nations have all thrown hundreds of billions of dollars at their banks, and if that doesn’t work, they are more or less staring at an empty toolbox. There will undoubtedly be additional rate cuts, but the last -global- one, two weeks ago, didn’t move anything or anyone; so why would it be different this time? If the same happens with the combined $3 trillion they have injected, then what? $30 trillion? No can do.

Holland today nationalized their last remaining bank, ING, for $14 billion (at least they cut all bonuses for managers). If I’m not mistaken, that means just about all commercial banks in the west are now state-owned. And that can have grave consequences: if the banks go belly-up, the taxpayer will have to cover their losses, an expense that will come on top of the bail-out costs.

For now, though, if I were a betting man, I would predict failures, state bankruptcies, in "lesser" nations. Pakistan counted on China for loans, and apparently the Chinese, after reviewing the books, have said "No way". Hungary obtained an $7 billion emergency loan from the EU, but it should be obvious that any country these days can burn through that sort of money in mere days. Just watch Iceland.

The US and EU might want to prop up the Ukraine, but they would insist on bringing it into NATO. Which is an absolute and total no-go for Russia. Then again, neither Kiev nor Brussels nor Washington wants a Moscow bail-out for the country. Financial check mate.

My litle betting man says perhaps Latvia is now the prime candidate to take the silver medal in bankruptcy behind Iceland.

There is a parallel thread developing throughout the western world, and likely beyond. All levels of government, from federal through states and provinces to communities, are invested in questionable banks and funds. And that will start to hit soon.

European lower-level authorities have billions of dollars invested in Iceland’s frozen banks, as well as Lehman subsidiaries and god knows what else. To date, all is quiet on that front, even though there’s no escaping the mighty rumblings beneath the surface.

Similarly, the state of California has better be praying with all its might; it will not survive much longer if the economy keeps tanking. A $20 billion deficit is looming, and it can’t even get the full first $7 billion in emergency funds. If -make that when- other states start announcing similar shortfalls, not the sky, but the bottom of the ocean is the limit.

A crude example of boon-doggled investments comes to light this weekend, and it will soon have many peers. LA County commuters will see services cut badly, because the transit agency has entered into lease-back deals through AIG, and must now pay up. 30 more transit agencies have done the same.

The global trickle down economy is soon coming to a town near you.



Which country will slither down the slippery slope next?
No country in the world remains unaffected by the Western banking crisis that has ensued. Even the most conservative, safe and responsible states are suffering a backlash.

Iceland, dubbed the biggest hedge fund in Europe as it rode the credit wave upon which we all surfed, is bankrupt. Its banks in crisis, the reverberations have been felt everywhere. Last week the contagion spread further. Financial institutions like the International Monetary Fund and the World Bank, along with domestic governments, have all forced to administer costly monetary sticking plasters to the world's financial institutions.

Estonia, Latvia and Lithuania
The Baltic states are in real trouble. With their public finances in disarray and growth rates rapidly slowing, many pundits are betting that one of these countries is likely to be the next state to suffer an Icelandic-style fate. Personal consumption, which once saw the capitals of these states littered with expensive cars, has slumped badly, due in part to a 40 per cent drop in property prices in Estonia, for example.

It's the first time that these former Soviet states have had to grapple with the problems of the bear economy and the portents at the moment don't look good. The latest crisis has shown the relative impotence of their administrations, with bigger Western European countries paying little attention to these marginal states. Agencies like Fitch have cut their ratings on these countries, making it more difficult for them to raise debt in the future.

Ukraine
The optimism of the Orange revolution that swept President Viktor Yushchenko to power in 2004 seems a distant memory. Ukraine, like Serbia, has been forced to go cap in hand to the IMF to borrow as much as $14bn to stave off a deepening of the financial crisis hitting the country. Like Hungary and other emerging economies, Ukraine's woes have come as foreign investors have pulled cash to place it perceived safer havens in the West.

Holders of the country's domestic currency, the hryvnia, which has lost a fifth of its value of late, have sought to switch to the US dollar. Like many of its neighbours, Ukraine is teetering on the edge of a bank catastrophe, while inflation in the former Soviet state is threatening to spiral out of control. The economic uncertainty is being played out against an increasingly fraught political backdrop, with President Yushchenko at war with Prime Minister Yulia Tymoshenko over early elections.

Kazakhstan
Kazakh President Nursultan Nazarbaev last month signalled his plans to dig the country out of the credit crunch by urging greater co-operation with Russia. Although he claimed that the country has financial reserves and oil growth – expected to reach 2.3 million barrels a day by 2015 – to survive the crisis, President Nazarbaev emphasised that future energy deals with Russia are vital for economic stability.

Last week he added that $50bn of financing for 45 major projects was secure, and that nearly $1.5bn had been raised to continue the government's housebuilding programme. The government also provides guarantees on savers' deposits of up to $41,700. Kazakhstan's central bank said that it would not allow any bank to default on foreign loans, including $15bn due for repayment next year. However, the Royal Bank of Canada ranked Kazakhstan as the joint second-riskiest country with Latvia, behind only Iceland. The government also had to help out its banks when they could not refinance $40bn of loans. Kazakh banks have watched their share prices tumble in recent weeks.

Argentina
Last Wednesday Argentina's stock market fell by more than 12 per cent – its biggest one-day drop in a decade. What makes Argentina more vulnerable than most is that on top of the current crisis it still has to sort out problems going back to its 2002 debt default. "Holdout" banks including Barclays Capital and Deutsche Bank are still mulling a deal that could be scuppered by the current crisis.

Problems in the past also mean that Argentina will be heavily reliant on domestic sources of funding in the future. And it's a future that is looking increasingly vulnerable given the country's dependence on commodity exports, which are falling in price as global growth expectations recede. The country's president has put forward a protectionist plan to safeguard domestic firms against the vagaries of foreign competition and the financial crisis. It's unlikely to work.

Hungary
Last Thursday, Europe's Central Bank took the highly unusual step of lending $5bn (£2.9bn) to Hungary's monetary authorities in an effort to kick- start the local debt market into life after it had ground to a halt. This was the first time the ECB had lent outside the eurozone. It did so because Hungary's banking system is in dire straits, with many predicting it will be the next Iceland. Rumours persist that the government will have to bail out the country's biggest bank, OTP.

Hungary's problems have come about because of the country's reliance on foreign exchange. For example, nearly 90 per cent of new household loans in Hungary during 2008 were made in foreign currencies, mainly in euros and Swiss francs. Its domestic currency, the forint, has plunged in value of late. The portents for Hungary don't look good. Standard & Poors, the ratings agency, is threatening to downgrade the country's debt rating, making it more expensive to raise money in the future. Hungary carries a very large current account deficit and a big external debt load. Growth prospects in the country are also grim.

Turkey
Increasing prices in oil and gas have hit Turkey hard: its current account deficit for the first eight months of the year was 46.5 per cent up on the same period last year, reaching close to $35bn. Unemployment also rose to 9.4 per cent in August, though many economists think that figure underestimates joblessness in the country. The economy grew only 1.9 per cent in the second quarter – the poorest increase since the country's last recession in 2001 – and last week the Istanbul stock exchange fell to its lowest level in three years.

The country is not expected to fall into recession this time around. The International Monetary Fund (IMF) restructured the economy following the 2001 crisis and this should be sufficient to protect Turkey from another major downturn. However, the government is considering setting up a stand-by loan with the IMF, following a three-year $10bn facility that expired in May.

Pakistan
The economic crisis unfolding in Pakistan has spilled over into violence on the streets, with small investors in the domestic stock market having been wiped out. Last week angry protesters circled the Karachi exchange, stoning the borse and calling for more effective state action. Trading in the country has been curbed since restrictions were introduced in August. The government has promised to launch a fund to buy up ailing equities, although this has yet to materialise.

Russia
Panic is gripping the Russian economy. Nearly $1 trillion has been wiped off the value of listed companies in the country, while the stock market has regularly been suspended over the past few months. The government has already pumped more than $86bn into the country's financial system through short-term loans to banks. As with Ukraine, other forces beyond the credit crisis are at work too.

Russia's recent foray into Georgia spooked foreign investors, who pulled their cash out of the country in their droves. Institutional investment, on which Russian companies are so reliant for growth, has also dried up. Estimates suggest that more than $33bn worth of capital has fled the country in the past two months. The dwindling price of oil, which has halved in less than six months, and fears that global demand for the resource will tumble are also weighing hard on the country.

Brazil
Last week the Brazilian stock exchange was suspended as equity values slumped by more than 10 per cent in a day. The value of the Brazilian real has also slumped against the US dollar in the recent crisis. Mining giant Vale and the state-controlled oil group Petrobras both shed more than 12 per cent of their value amid concerns that a protracted global economic slowdown would harm exports of Brazilian economies. And concerns about falling commodity demand could trigger further problems in Brazil – a country that has largely steered a safe course through the choppy waters of the crisis so far.

South Korea
Korea's central bank will today unveil a package of measures to shore up the ailing economy. Confidence in the country is plummeting, with its stock market at a three-year low. The won, the Korean currency, is now at its weakest for 11 years. The regulator is under pressure to guarantee domestic deposits and bank debts in an effort to stave off mass outflows of capital abroad.

South Korea is also heavily reliant on funding from international lenders, with estimates suggesting that as much as 12 per cent comes from abroad. Another big worry for the Seoul administration is the extent of any slowdown in China's economy, which is one of South Korea's biggest export partners.

Indonesia
Last week Indonesia's authorities were forced to take up a $1.9bn loan from the World Bank to plug a hole in its finances. The country's stock market was recently suspended for three days amid concerns that the Bakrie conglomerate, one of Indonesia's biggest and most important companies, was set to go under. Indonesia recently introduced guarantees on bank deposits to stop a run on lenders. It also has one of the highest inflation rates in the Far East, with price growth in the country last month measured at more than 12 per cent.

India
Growth forecasts have been cut. The country's Economic Advisory Council estimates that gross domestic product will rise 7.7 per cent this fiscal year, which still sounds impressive until it is compared to the 9 per cent achieved in 2007-08. Industrial growth has been particularly hard hit, falling to a 10-year low of 1.3 per cent in August. Last year it was 10.9 per cent. The central bank has freed up more than $20bn to strengthen the country's struggling financial markets and has suggested that there could be further measures should stocks continue to fall.

Spain
The Santander banking group might have gobbled up Britain's Alliance & Leicester and the deposit book of Bradford & Bingley, but the company is atypical of an economy which is being propelled toward a deep recession. At the heart of Spain's problem is its property market. The boom times in Iberia have firmly ended, with defaults on property loans tripling in the past few months.

There are more than 800,000 properties in the country sitting unsold and that figure is expected to tip one million by the end of the year. Spain's 45 savings banks have arrears in excess of €25bn (around £20bn).

Last week Spanish authorities passed laws guaranteeing bank debt issued up to the end of next year, amid fears that the drying up of wholesale lending markets could worsen. The level of unemployment in Spain is one of the highest in the eurozone, while growth in the region is expected to slow to less than 1 per cent.

China
It might seem rather perverse to highlight China in a list of danger spots for the global economy, but comments last week from Tom Albanese, chief executive of mining giant Rio Tinto, that the People's Republic was "pausing for breath" sent shockwaves around the globe. The Chinese engine, for which other countries have provided the fuel for so long, is spluttering, with fears that it could grind to a halt much quicker than expected.

Latest growth estimates for the past year predict a fall to less than the double-digit numbers we've been used to. Coupled with that, Chinese officials are grappling with spiralling inflation, while fears are growing that domestic consumers won't be able to pick up the slack left by a fall in foreign demand. Last week Merrill Lynch's China chief said: "China is not big enough to pull other economies out of recession." True enough, but the ability of the Chinese economy to propel Western stock markets further into the mire shouldn't be underestimated.




Greed a deadly sin for the economy
On July 30 Hans Redeker, head of foreign exchange strategy at BNP Paribas, Europe's biggest investment bank, predicted: "The Aussie is going down, big time."

Back then - it already seems like a long time ago - the Australian dollar was sitting majestically at 97 cents to the US dollar, which was taking a battering. But the Aussie did, indeed, go down, big time. Within three months it had crashed by 33 per cent to US65.5 cents. Now Redeker has issued another warning to Australia. We'll get to that. But first, let's look at his track record.

December 2006: Redeker predicted a sharp recession in the United States, saying the condition of its housing market was worse than the experts were stating and the flow-on effects would be much worse than predicted. That was almost two years ago. He was right.

January 2008: He predicted the Aussie dollar was facing two years of decline, and expected to see it fall to 66 cents. He was right. He also predicted a rise in financial market volatility, higher inflation worldwide, higher interest rates in Asia, weakening demand for Australia's minerals exports from China, and a weaker sharemarket in China, all of which would drive down the Australian dollar. Since then, the Shanghai sharemarket has crashed 50 per cent from its peak.

October 2008: Two weeks ago Redeker repeated his claim that abundant foreign money had been available to Australia and too much of it had been spent on real estate, creating a speculative bubble: "The easy money went straight into real estate ?c Australia will now have to generate 4 per cent of GDP to meet payments to foreign holders of its assets. This is twice as high as the burden faced by the US."

After the Australian Reserve Bank slashed key interest rates by 1 per cent, Redeker also told London's Telegraph that he was concerned about what the Australian Government may do: "Yes, Australia has a fiscal surplus, but that does not offer as much protection as people think. If the Government boosts spending further, the current account deficit will spiral out of control."
And what has the Rudd Government just done? Boost spending.

There was certainly no discussion of the current account deficit spinning out of control, or Australia's excessive debt, when the Prime Minister, Kevin Rudd, launched his $10 billion economic stimulus package last week, nor any from the Opposition Leader, Malcolm Turnbull, who offered in-principle bipartisan support. It gets worse. Redeker continued: "There is a risk, however remote, that Australia could face some of the foreign funding difficulties we have seen in Iceland."

Iceland! Iceland was the most leveraged economy in the developed world when it became the first economy to be bankrupted by the credit crisis. You do not want to be mentioned in the same sentence as Iceland unless the discussion is fishing or blondes.

After quoting Redeker, the Telegraph's global business columnist, Ambrose Evans-Pritchard, weighed in with his own commentary: "The immediate problem for Australia's banks is that they gorged on offshore US dollar markets to fund expansion because the interest costs were lower. They were playing on a huge scale with leverage. European banks face much the same problem as dollar liabilities come back to haunt, but Australian lenders have pushed their luck even further."

Gabriel Stein, of Lombard Street Research, weighed in with this, after noting that Australian household debt had reached 177 per cent of gross domestic product, almost a world record: "It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have been coasting after their reforms in the 1990s."

The global financial world is watching the Australian dollar because it holds a key to the great unanswered question of this uncertain era: will the global market punish a currency for its declining interest yield? Or will it reward a currency because of the soundness of its economy? Central banks are acutely interested in the answer.

Evans-Pritchard thinks the early signs are hopeful that the answer is the good one, that nations will be rewarded for having sound economies. But he does not believe Australia can escape the consequences of excess: "Australia has allowed its net foreign liabilities to reach 60 per cent of GDP during a decade-long boom, twice the level of the US. The country will, in effect, have to pay 4 per cent of GDP in the form of rents to foreign asset-holders as the bill for such extravagance falls due."

The bill is falling due. Earlier in the year Australians travelling in Europe would have paid about $1.50 for every euro spent. Today they need $2.10. The Aussie dollar is weak again, despite all the luck of the China boom. This raises a number of awkward questions. Did the lucky country became the greedy country? Did it fail to sufficiently embark on a program of nation-building during the resources boom?

Was most of the bonus redistributed as tax cuts, which were spent chasing bigger mortgages, bigger homes, new cars and general consumption, stimulating short-term economic growth but not enough on long-term productivity and higher savings? During 17 years of unbroken economic expansion and a 10-year commodities boom, it took a lot of people, borrowing a lot of money, taking a lot of unproductive risk, to get to where we are today: a nation with excessive debt and excessive vulnerability to external circumstances barely within our control.




British retailers fear worst Christmas for a generation
Homebase, Debenhams, Burton and DSG International, the electronics retailer, are all likely to show just how bad trading is on the high street when they report results this week. Analysts are now predicting the worst Christmas since the early 1980s as the public rein back spending as fears for job security grow.

Shares in DSG, which owns Currys, Dixons Online and PC World, crashed to 27p on Friday, a two-decade low, on fears that the retailer is at risk of breaching its banking covenants. The company is due to give a trading update on Thursday. Andrew Hughes, analyst for UBS, said on Friday: "We know its banking covenant is a fixed-charge cover on a revolving credit facility which it dips into around October." Mr Hughes said it is unlikely DSG will pay a dividend for the next two years.

John Baillie, Société Générale analyst, added: "It is all doom and gloom for DSG, whose falling share price reflects concern about its financial position. It has a poor balance sheet and cash flow, and is now a penny stock." According to Mr Baillie, the American electronics retail giant Best Buy will further damage DSG's sales when it enters the UK market with $1bn in disposable cash. "Best Buy represents a major medium-term threat and it has expressed its intention to be number one in the UK electronics retail."

Elsewhere on the high street, Debenhams, the second-biggest department store in the UK and part-owned by the troubled Icelandic Baugur group, has suffered a share price slump of 66 per cent to 31.75p over the year, although analysts expect it will reduce debt by £100m this year. Debenhams' like-for-like sales are down by 0.9 per cent, though that is better than rival M&S. Debenhams is likely to cut back its dividend as full-year profits, out on Tuesday, are expected to be down by 17 per cent.

The gloom comes after John Lewis reported last week that turnover at its 27 stores fell by 4.8 per cent week on week, while underlying sales at Waitrose were down by more than 3 per cent. Arcadia, the Topshop to Burton retail chain group owned by Sir Philip Green, is also expected to give a trading update this week. In another move, the sports retailer JJB, which announced a £10m loss in its half-year profits last month, has come under threat of a takeover by Sports Direct this weekend. Sports Direct bought 4.7 per cent of JJB shares after the markets closed on Friday and admitted it also owns 15 per cent of JJB through contracts for differences.

The Office for National Statistics has warned, ahead of its monthly report on Friday, that retail sales figures for September may not accurately reflect the state of UK high streets. So it will publish a margin of error in the figures. The warning is an admission that its retail sales data may not be a reliable guide to retail trends – something economists have long suspected. Moody's forecast of a 1.8 per cent year-on-year increase in sales for September is unlikely to show the real effects of market volatility and falling share prices on major brands.




Los Angeles County to cut commuter service as AIG deals go sour
The next potential victims of the nation's credit crunch: nearly 1.5 million people who ride buses and trains each weekday in Los Angeles County. Transit officials say riders could soon be facing serious service cuts. That's because the Los Angeles County Metropolitan Transportation Authority might have to quickly come up with hundreds of millions of dollars to pay investors under terms of deals it made involving American International Group, the troubled financial and insurance giant.

"I've lost a lot of sleep over this," said Terry Matsumoto, the chief financial service officer and treasurer for the MTA. He said it was "absolutely" certain the agency would have to cut service if the deals sour. The problem, Matsumoto said, could extend beyond the MTA to other large transit agencies that entered into similar deals between the late 1980s and 2003, when tax laws were changed to discourage such transactions. Among those is Metrolink.

The news comes at a tough time for the MTA. The agency recently lost $133 million in state funds, and declining sales tax revenues mean it will have less money to help keep its buses and trains rolling. Between the late 1980s and 2003, the MTA sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals.

Lease-back deals are a common way to raise money in the corporate world. A manufacturer, for example, could sell its factory to investors and then lease it back. The manufacturer gets a large chunk of cash and the investors get a steady stream of lease payments as well as a tax break for their depreciating property. "It's a great way to get a shot in the arm in terms of cash without actually divesting yourself of your property," said Bill Holder, an accounting professor at USC.

Many of the nation's largest transit agencies participated in such deals. Among them are the San Francisco Muni system, the BART rail system in the Bay Area, the Chicago Transit Authority and the Washington, D.C., Metro system. Metrolink, the Southland's commuter rail agency, also sold most of its train cars and locomotives in four lease-back deals -- three of which involved AIG -- and made a $35.5-million profit as a result, said spokesman Francisco Oaxaca.

Metrolink, like the MTA, must now find another firm to replace AIG. "The potential is pretty horrendous across the industry," said James LaRusch, the chief counsel for the American Public Transportation Assn., a trade group for transit agencies. "It's typically going to impact the largest transit agencies," he said, "because they were the ones that had the kind of assets necessary to get into these kind of deals." LaRusch said about 30 of the largest transit agencies in the nation have some involvement in such deals.

"Any time you take money from the agency, you are going to cause a cutback in service," he said. In the case of the MTA deals, AIG provided $1 billion in loans to finance the transactions. The company, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.

Things started to go downhill when AIG ran short of cash after running up billions in losses tied to the housing slump. Its credit ratings were slashed and the firm was on the verge of collapse last month when it was bailed out by the federal government. The lower credit ratings triggered a clause in the lease-back agreements that require the MTA to either find a new firm to guarantee the deals or reimburse investors for their down payments and lost tax benefits, a scenario that could cost the transit agency between $100 million and $300 million.

As a frame of reference, Matsumoto said that $100 million equals about 10% of the MTA's bus service. However, the MTA board has not yet discussed what cuts might be made. The MTA has not found a replacement for AIG, Matsumoto said. "With the current state of the markets, there are no people who are willing to provide a replacement for AIG at any price," Matsumoto said.

The agency has started talking to some investors in hopes of getting them to accept terms more favorable to the MTA, but Matsumoto said he doesn't know if investors are willing to renegotiate. Under a worst-case scenario, Matsumoto said, the bill could rise to $1.8 billion, more than half the MTA's annual budget for this year. "There is no practical way we could ever pay that back," he said.

The agency has met with congressional staffers and asked the U.S. Treasury Department for help, hoping to get a piece of the $700-billion bailout package recently approved by Congress. Some of that money is to be used to buy troubled assets. "They didn't tell us to go fly a kite; that's hopeful," Matsumoto said. "But I don't know how practical it is. We weren't talking to decision-makers."

MTA board member Richard Katz said: "The feds need to be concerned. If they bailed out the companies, they also need to bail out the public agencies impacted by the companies' actions." The credit crunch has eased a bit in recent days as interest rates for inter-bank loans have inched downward and short-term lending to corporations has picked up. But it's unlikely that conditions will improve fast enough to provide significant relief to the MTA.

Both Matsumoto and LaRusch said the Federal Transit Administration encouraged transit agencies to make lease-back deals as a way to make money. The MTA said it made about $65 million on the deals.

But an FTA spokesman disagreed. "FTA was not a cheerleader for these transit lease-back agreements," agency spokesman Dave Longo wrote in an e-mail. "We reviewed lease-back agreements submitted to us by transit agencies in terms of their compliance with federal transit law requirements. When we determined those agreements met the requirements, we approved them from that perspective."




Moscow supermarket shelves increasingly empty in Soviet era reminder
Russian shoppers have been served an uncomfortable reminder of the Soviet era after finding shelves in some Moscow supermarkets empty, a further sign that the woes of the financial markets have begun to affect the mainstream economy. For a generation of Russians who queued daily in the snow for the most basic of staples, the symbolism of a bare supermarket shelf is so powerful that it could potentially destroy the reputation of Vladimir Putin, the prime minister, as saviour of the world's largest country.

The shortages are not yet widespread. Even so, goods have begun to vanish from dozens of Moscow supermarkets over the past fortnight. At a branch of the supermarket chain Samokhval in southwestern Moscow, a handful of shoppers pushed their trolleys through empty rows of shelves that once groaned under the weight of imported wares. The deep freezes hummed, although there was nothing to freeze. Only a row of baked beans, a few jars of olives and sealed cupboards filled with vodka and cheap wine interrupted the void.

Unlike in the dying days of the Soviet Union, when the madcap policies of a bankrupt ideology inflicted deprivation across the country, today's shortages are very much rooted in modern Russia's enthusiastic embrace of capitalism. Samokhval, which has 60 outlets across the capital, is the victim of a credit crunch whose tentacles have spread to virtually all sectors of the Russian economy. With trust a commodity in short supply, distributors have been unwilling to refinance the chain's debts and have stopped supplying. Similar problems have affected Mosmart, which has 58 outlets and is also suffering from empty shelves.

The breadlines are unlikely to reform any time soon -- most supermarkets seem to be operating almost as normal -- yet such shortages seem extraordinary in a city that revels in its reputation as the world's most expensive. A consumer boom, built on runaway oil prices, has turned Russians into some of the world's most aggressive spenders. Yet the global financial crisis and investor jitters over Russia's increasingly aggressive foreign policy and its propensity to intervene in the private sector at the whim of the Kremlin have led to share prices tumbling.

The Moscow stock exchange's main indices lost over nine percent yesterday, and have fallen over two-thirds since touching all-time highs in May. So rapidly have events moved that many Russians are almost unaware of the meltdown. A government-ordered news blackout of the market's woes has helped perpetuate the ignorance, convincing many that it was only the West that was affected. Tabloids have run stories claiming that Britons are so short of cash they can no longer bury their dead. Despite the shortages, shoppers at Samokhval seemed either unconcerned or fatalistic.

"Life gets better, it gets worse," said Yevgenia Krasovskaya, a doctor. "Difficult times are followed by good times. Even if there is a little less now, what difference does it make so long as the basics are there? We've been through much worse than in the past." But Samokhval's checkout girls were more pessimistic. "We're worried," said Svetlana, who would not give her surname as her supervisor was lurking nearby. "The management tells us everything will be ok, but I don't believe it."




Putin May Use Credit Squeeze to 'Destroy' Oligarchs
Vladimir Putin came to power in 2000 vowing to destroy Russia's oligarchs "as a class." Within two years, he'd driven two into exile and imprisoned another. Now, he may use the global markets meltdown to finish the job.

The $50 billion that the prime minister and President Dmitry Medvedev have pledged to lend cash-strapped companies will extend state control over business leaders. Billionaires seeking bailouts -- including Oleg Deripaska, Russia's richest man, and Mikhail Fridman -- will have to give authorities veto power over their companies' financing decisions. "This will give the state more leverage over the country's biggest companies and main industries," said Chris Weafer, chief strategist at UralSib Financial Corp in Moscow. "In 2008, there is only one real oligarch: the state."

All this marks a reversal from a decade ago, when oligarchs bankrolled Boris Yeltsin's almost-insolvent government. As recently as April, Russia's 100 wealthiest citizens had a combined fortune equivalent to about a third of the economy, Forbes magazine estimated. The nation's 25 wealthiest businessmen have seen their worth shrink by $230 billion, or 62 percent, according to Bloomberg calculations. And Putin controls the strings on the biggest remaining purse -- $531 billion in government reserves, which he is doling out through state-run Vnesheconombank, or VEB, where he presides as chairman of the supervisory board.

The oligarchs made their fortunes in the 1990s, as the government moved corporate ownership into individuals' hands and state authority was weak. They subsequently loaned the government money to prop up Yeltsin in return for shares in choice assets, including OAO Norilsk Nickel, Russia's biggest mining company. Their support didn't prevent the government from defaulting in 1998 on $40 billion of domestic debt and devaluing the ruble.

Putin came to power as president less than two years later with the help of Boris Berezovsky, a businessman and politician in Yeltsin's inner circle who popularized the term "oligarch." Berezovsky's influence was chronicled in "Godfather of the Kremlin," by Paul Klebnikov, the Forbes Russia editor slain in 2004. A few months after taking office in July 2000, Putin told Mikhail Khodorkovsky, at the time Russia's richest man, and about two dozen other business leaders that their wealth was safe as long as they stayed out of politics and refrained from influencing national policy.

Berezovsky, now 62, became an early victim of Putin's anti- oligarch crusade. Berezovsky fled to London in 2001 in the face of Russian fraud charges he calls politically motivated. By the end of 2003, Putin had brought the nation's business leaders to heel. The most celebrated case involved Khodorkovsky. He was arrested and convicted of tax evasion and fraud. OAO Rosneft, the state-run oil company, took control of most of his OAO Yukos Oil Co., once Russia's biggest crude exporter.

The government now controls about 44 percent of oil production and all natural-gas exports. Khodorkovsky called the case against him retribution for political opposition to Putin, who denied that accusation. In the years that followed, the number of dollar billionaires swelled from a handful to more than 100, as prices for oil and other commodities surged to records and companies opened up ownership to passive foreign investors. Now, the tables have turned.

"The oligarchs are lobbying the government for access to state funds," said Alexander Lebedev, 49, a billionaire who owns 30 percent of state-run airline OAO Aeroflot. "It's not freely available to anyone who comes along." The attached strings are short. Central Bank First Deputy Chairman Alexei Ulyukayev said Oct. 1 that Vnesheconombank would gain the right to bar borrowers from seeking other loans "to avoid increasing the level of liabilities." The effect, according to Weafer: The state will "dictate" how companies invest and develop.

Vnesheconombank has received applications for more than $50 billion in loans, chairman Vladimir Dmitriev said on Oct. 13. The government has also pledged more than $13 billion to buy stocks and bonds through Vnesheconombank this year and next and $36 billion in emergency subordinated loans to other banks. State-owned companies and producers of oil, gas, metals and fertilizers will get most of the government money, said UniCredit SpA analysts Julia Bushueva and Elena Myazina in Moscow. Rosneft, chaired by Deputy Prime Minister Igor Sechin, may receive 47 percent of $9 billion in loans allocated to oil companies, the Kommersant newspaper reported Oct. 14.

With competition for government loans stiff, frozen credit markets also may force Russian companies to pay off creditors by selling assets to cash-rich investors, including the government, Bushueva and Myazina said. More than $363 billion of corporate and bank debt is due to be repaid by July 2009, a third to foreign banks, they said. Gazenergoprombank, a lender controlled by state-run Gazprom Group, said on Oct. 15 it will acquire all of Moscow-based Sobinbank. Vnesheconombank is in talks to buy Globex, a Russian bank that's having difficulties because of investments in real estate, Kommersant reported today.

Businesses caught in that potential credit squeeze include Deripaska's Basic Element, Fridman's Alfa Group, and Vladimir Yevtushenkov's AFK Sistema, Bushueva and Myazina said. Already this month, the value of Deripaska's stakes in Canadian auto-parts maker Magna International Inc. and German builder Hochtief AG sank so much that he ceded the shares to foreign banks that had accepted them as loan collateral.

The state's growing sway over oligarchs extends beyond how they run their businesses. Putin and other top officials met individually with about 50 of the country's wealthiest businessmen and ordered them "dump money into Russia's financial system" to prop up the sinking stock market, says a report by Stratfor, a U.S.-based risk advisory group. The initial injection of private funds, together with government measures sent the benchmark Micex Index almost 30 percent higher on Sept. 19 in a short-lived rally. Since then, the index has dropped 43 percent. "Going after their personal finances, especially money they hold abroad, is a whole new level of control," said Lauren Goodrich, a Stratfor analyst.

While the U.S. and European governments also are increasing oversight of their economies by buying stakes in financial institutions, growing state dominance in Russia threatens to increase corruption and reduce corporate disclosure, said James Beadle, chief investment strategist at Pilgrim Asset Management in Moscow. That view was echoed by Berezovsky, the businessman who fled to London. "This time, the corrupt bureaucrats will win," Berezovsky said.




Dutch prepare to pump $12 billion into ING
Dutch financial group ING is in talks with the Dutch government about a state-backed cash injection estimated to be worth up to 9 billion euros ($12.12 billion), the Sunday Times reported. The Netherlands' biggest listed bank, which said on Friday that it was about to announce its first-ever quarterly loss, is expected to announce a deal in the next 24 hours, the paper reported.

ING's Chief Executive Michel Tilmant was in talks with the Dutch central bank all day yesterday negotiating a deal, the Sunday Times said. Dutch public broadcaster NOS also reported that ING was working on a plan over the weekend to boost its capital position and that details could emerge on Sunday. ING declined to comment on the reports on Sunday. A spokesman for the firm said on Saturday that ING was considering several options to shore up its capital position, including taking government money.

As governments around the world have waded in with billions of dollars of state cash to help stabilize their banks, the Dutch government has set aside 20 billion euros to pump capital into its financial institutions.
ING said on Friday it expected to post a net loss of about 500 million euros ($674 million) for the third quarter, its first quarterly loss since the group was formed in 1991. That sent its shares to a 13-year low.

ING's results had initially proven to be more resilient through the credit crisis than many of its peers, such as Belgian-Dutch rival Fortis, which was broken up earlier this month, partly nationalized by the Dutch government and partly sold off to French rival BNP Paribas.

If ING were to make use of the Dutch government program, it would follow similar steps taken by several British and Swiss banks this week that also tapped emergency funding lifelines from their respective governments.




1 million barrel OPEC cut not enough
A crude oil production cut of even 1 million barrels per day at OPEC's upcoming emergency meeting is unlikely to reverse slumping prices in the short term, analysts said Sunday, amid mounting calls by several cartel members to take action to keep prices at the $80 per barrel level.

A decision by the Organization of Petroleum Exporting Countries to hold an emergency meeting next Friday clearly signaled the group's concern that the recent pummeling of crude prices would erode revenues needed to sustain government spending and weather broader fallout from the global financial crisis. The meeting had initially been moved up to mid-November, about a month earlier than scheduled, but was pushed to Friday as the oil price dropped below $70 per barrel.

Analysts said some key producers may be eying the meeting as the first step in reasserting control over the market, particularly as the cartel has argued that record rallies earlier this year were driven more by speculation than supply and demand. "What they really want to do is position themselves now in a situation where they can manage markets ... a lot more comfortably next year, and potentially for the recovery in 2010," said Raja Kiwan, a Dubai-based analyst with the Washington-based oil consultancy, PFC Energy.

Kiwan and other analysts expect the 13 member group, which produces about 40 percent of the world's crude, to slash production by at least 1 million barrels per day. OPEC is looking to buoy a market in which the price of a barrel of benchmark West Texas Intermediate crude has fallen about 50 percent from record highs of $147 in July on the New York Mercantile Exchange. Over a three day period last week, the November-delivery contract on the Nymex dropped $11 per barrel, rebounding slightly on Friday only on the back of OPEC's announcement of the emergency meeting.

But even that gain could be short lived, say some analysts, as the market factors in the anticipated cut ahead of the meeting. "In the very short-term ... OPEC will likely prove unable to significantly alter the prevailing market sentiment, particularly as crude traders look to equities as a barometer of global economic health (and hence oil demand)," said a recent PFC Energy report. That presents OPEC with a dilemma. If they announce too big a cut, they risk fueling the global financial crisis. But, cut too little, and $80 per barrel will be wishful thinking. Some OPEC officials have said prices closer to $100 per barrel are ideal.

"I don't think there's been this sense of urgency since the Asian financial crisis," said Kiwan, referring to the market collapse in Asia in the late 1990s. "I think those memories are still seared into the minds of (OPEC) ministers." Independent Kuwaiti oil analyst Kamel A. Al-Harami agrees. He argues that given such a delicate balancing act, disagreements are likely at the meeting between dovish Saudi Arabia and traditional price hawks like Iran. Even if the members agree on a production cut, 1 million barrels will not be enough and "there will be cheating on the quotas from day one," said Al-Harami, who served as former president of Q8, the retail arm of the Kuwait Petroleum Corp.

Al-Harami believes the group is being hasty in moving to cut production and believes they should hold off until at least the winter when demand for energy for heating picks up. But OPEC is making it clear that the time for waiting is over. Chakib Khelil, Algeria's oil minister and OPEC's current president, said Saturday that the cartel "is going to take the decision that favors keeping market prices stable." "There will be a reduction, and it is necessary that it's significant to establish balance between supply and demand," Khelil was quoted as saying by the country's APS news agency.

The stakes are high ? both for a meaningful production cut and for quota compliance, something on which OPEC has typically fared poorly. Over the past few weeks, the slide in prices has become more pronounced as the global financial crisis sapped demand for crude oil in the developed countries. The International Energy Agency, the U.S. Energy Information Administration and, most recently, OPEC have all lowered their forecasts for energy demand heading into next year. Such revisions, in tandem with the price drops, are particularly worrisome for some top producers like Iran ? the cartel's second largest crude exporter, which relies on oil revenue for about 80 percent of its government budget.

Iranian officials have repeatedly said crude at $100 seems fair. Others, including Qatar's oil minister and Venezuelan President Hugo Chavez, have pushed for levels closer to $80-90. Iran and Venezuela, in particular, have reason for concern because their production is heavier and more sulfurous and, as a result, sells at steep discounts to lighter crudes like the U.S. benchmark WTI. The OPEC basket, the weighted average of prices for crudes produced by OPEC countries, stood at $63 per barrel on Friday, according to Kiwan.

The Saudis have so far stayed quiet. But analysts said Riyadh is well aware that developing nations, in particular, will not be silent if presented with steep cuts that could undermine U.S. and European-led efforts to stave off a global recession and shore up financial markets. PFC Energy's Kiwan said while other cuts could follow the expected reduction of 1 million barrel per day, the immediate focus is on halting the price slide.

"One of the keys here is that OPEC is not judging its failure or success on the short-term," he said. "What it's hoping to do is provide fundamental support for recovery in the long-term," a plan which requires them to keep supplies tight going into next year. Ultimately, added Al-Harami, "the biggest player is Saudi, and what Saudi decides, the others have to follow."




Latin America feels the pinch of global economic crisis
The abrupt end of the worldwide commodities boom has stunned Latin American nations that had bet the farm on the idea that raw materials were a ticket to boundless prosperity in the globalized economy.

A galloping sense of insecurity has replaced the swaggering confidence that insatiable demand would keep prices up for products such as soybeans, copper, wheat and coffee. But commodities have tumbled in value in the wake of the financial meltdown. Some even fear that Latin America's most prolonged growth spurt in years could be over, ushering in an era of renewed austerity.

"We're sailing without a compass," said Nilson Wirth Monteiro, a consultant with Link Investments in Sao Paulo, Brazil, the epicenter of Latin America's largest economy. "There's no compass to indicate how commodities and global markets will behave." Leaders such as Brazilian President Luiz Inacio Lula da Silva initially boasted that their nations were inoculated against the "jazz effect" -- as Argentine President Cristina Fernandez de Kirchner mockingly dubbed the spreading crisis in an address at the United Nations.

But that early sense of insouciance has largely vanished. Credit has become extremely tight and earnings from commodity exports are tanking. Regional stock markets have followed Wall Street's nose-dive. Central banks from Mexico City to Santiago, Chile, have disbursed cash to bolster suddenly shaky currencies

Argentina, one of the world's leading producers of soybeans, corn and wheat, could lose as much as $6 billion next year in agricultural exports, according to one estimate. Many governments, including Brazil's, may have to rethink ambitious plans meant to improve infrastructure and reduce poverty.

"Latin American leaders have in a few days gone from preoccupation with the phenomenon happening elsewhere in the world to abject fear," noted the Washington-based Council on Hemispheric Affairs, in a report released Friday. "There is a growing nervousness that once again Latin America cannot escape the consequences of the globalized financial connections that run through the United States."

With prices down from record highs, alarmed farmers who covered vast tracts of pampas and rain forest in Brazil, Argentina, Paraguay and Bolivia with soybeans are wondering whether the boom has turned to bust. Anxiety has replaced the rural bluster. It has been a traumatic turn of events for an affluent rural class that had grown accustomed to reveling in soaring futures prices on their BlackBerries even as they navigated tractors through shimmering expanses of soybeans. "We don't know where we're headed," said Alejandro Giordani, a soy producer in Argentina's Santa Fe province. "We don't have any certainty about the price of soybeans, and that scares us, especially now in the planting season."

Commodities as diverse as beef from Argentina, iron ore from Brazil and zinc from Bolivia had reached new highs, sparked in part by sales to China and India. Now anxious producers cross their fingers in hope that the economic meltdown will not cause a free-fall in demand from Asia. "We know that millions of people will continue entering the formal economy in emerging economies like China and India," Giordani said. "That gives us some hope."

Some countries are clearly better prepared than others. Chile has socked away $20 billion in windfall export earnings from copper. Brazil has a highly diversified economy, with a huge domestic market and $200 billion in reserves. Countries such as Brazil and Argentina are much less intertwined with U.S. markets than Mexico and those of Central America, where U.S. trade and remittances from immigrants in the United States are economic pillars. Argentina's status as a chronic investment risk could actually work in its favor, because there is relatively little foreign money poised to flee.

"I think Argentina will be OK, as well as Brazil," said Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, which released a study on the possible effects of a U.S. recession on Latin America that noted that in 2007 trade with the United States represented less than 2% of the gross national products of Argentina and Brazil. In contrast, U.S. trade in 2007 accounted for 21% of Mexico's gross domestic product, 15% of Venezuela's GDP (mostly from oil), and about 5% of the GDPs of Peru, Chile and Colombia.

"But," Weisbrot said, "everything depends on how badly the rich countries screw up and how much the world economy slows." The rampant uncertainty has put a halt, for now, to the prospect of unending good times through the exports of foodstuffs and minerals. "The mood is guarded, and there is a great apprehension in Brazil, just like in the United States, that the worst has yet to come," said David Fleischer, at the University of Brasilia. "Unfortunately, no one knows where the bottom of the barrel is yet."




Latin American nations edge away from U.S.
In a matter of weeks, a Russian naval squadron will arrive in the waters off Latin America for the first time since the Cold War. It is already getting a warm welcome from some in a region where the influence of the United States is in decline. "The U.S. Fourth Fleet can come to Latin America but a Russian fleet can't?" said Ecuador's president, Rafael Correa. "If you ask me, any country and any fleet that wants can visit us. We're a country of open doors."

The United States remains the strongest outside power in Latin America by most measures, including trade, military cooperation and the sheer size of its embassies. Yet U.S. clout in what it once considered its backyard has sunk to perhaps the lowest point in decades. As Washington turned its attention to the Middle East, Latin America swung to the left and other powers moved in.

The United States' financial crisis is not helping. Latin American countries forced by Washington to swallow painful austerity measures in the 1980s and 1990s are aghast at the U.S. failure to police its own markets. "We did our homework - and they didn't, they who've been telling us for three decades what to do," the man who presides over Latin America's largest economy, President Luiz Inacio Lula da Silva of Brazil, complained bitterly.

Latin America's more than 550 million people now "have every reason to view the U.S. as a banana republic," says analyst Michael Shifter of the Inter-American Dialogue think tank in Washington. "U.S. lectures to Latin Americans about excess greed and lack of accountability have long rung hollow, but today they sound even more ridiculous."

From 2002 through 2007, the U.S. image eroded in all six Latin American countries polled by the Pew organization, especially in Venezuela, Argentina and Bolivia. (The others were Brazil, Peru and Mexico.) People surveyed in 18 Latin American countries rated President Bush among the least-popular leaders in 2007, along with President Hugo Chavez of Venezuela and just ahead of basement-bound Fidel Castro of Cuba, according to the Latinobarometro group of Chile.

In three years of presidential elections ending last year, Latin Americans chose mostly leftist leaders, and only Colombia and El Salvador elected unalloyed pro-U.S. chief executives. In May, the prestigious U.S. Council on Foreign Relations declared the era of U.S. hegemony in the Americas over. And in September, Bolivia and Venezuela both expelled their U.S. ambassadors, accusing them of meddling.

Along with the loss in political standing has come a decline in economic power. U.S. direct investment in Latin America slid from 30 percent to 20 percent of the total from 1998 to 2007, according to the U.N. Economic Commission for Latin American and the Caribbean. The U.S. still does $560 billion in trade with Latin America, but in the meantime other countries are muscling in. China's trade with Latin America jumped from $10 billion in 2000 to $102.6 billion last year. In May, a state-owned Chinese company agreed to buy a Peruvian copper mine for $2.1 billion.

Other countries are also biting into U.S. military sales in the region. Boeing Co. is vying with finalists from France and Sweden for the sale of 36 jet fighters to Brazil. Venezuela's Chavez has committed to buying more than $4 billion in Russian arms, from Sukhoi jet fighters to Kalashnikov assault rifles. In April, Brazil and Russia agreed to jointly design top-line jet fighters and satellite-launch vehicles, and Brazil is getting technology from France to build a submarine. "Similar deals could have been made with the United States had it been willing to share its technology," said Geraldo Cavagnari, of the University of Campinas near Sao Paulo.

Last month, Russian Prime Minister Vladimir Putin offered to help Chavez develop nuclear power. Even Colombia, the staunchest U.S. ally in South America, isn't limiting its options. After expressing alarm about the Russian warships earlier this month, its defense minister, Juan Manuel Santos, promptly headed for Russia himself to discuss "better relations in defense." Chavez says he expects to hold joint Russian-Venezuelan naval exercises as early as November. Bolivia also is looking to deepen ties with Russia and Iran.

Although the Islamic republic's ambassador has yet to arrive in South America's poorest country, its top diplomat there announced recently that Iran will open two low-cost public health clinics. And while Bolivia's only announced Russian hardware purchase is five helicopters for civil defense, Moscow's ambassador told the Associated Press - after Bolivia booted the U.S. ambassador - that Russia has every right to help Latin American nations arm themselves. "We know of many historical cases of U.S. intervention in Latin American countries," said the diplomat, Leonid Golubev.

Thomas Shannon, U.S. assistant secretary of State for the hemisphere, wouldn't comment directly on whether the U.S. has lost influence in Latin America. But he added that there is no doubt that the U.S. still holds most of the military power in the Caribbean, and said it has no interest in reviving "Cold War rhetoric." Shannon also noted that overall U.S. aid to the region will reach $2.2 billion for 2009, to total more than $14 billion during Bush's presidency.

However, critics point out that roughly half that aid is for the military or counternarcotics, and that Washington sends more money annually to Israel alone. Even U.S. giving has been dwarfed by Chavez's checkbook diplomacy, which easily eclipses U.S. aid between outright gifts and discounted oil. His largesse has lured several longtime U.S. friends. Honduras' president, Manuel Zelaya, said last month that after pleading with Washington and the World Bank, he accepted $300 million a year from Chavez for agricultural investment to help fight rising food prices. "Allies, friends, did not help me when I asked," he said.

Costa Rica's president, Oscar Arias, says Venezuela offers Latin America about four or five times as much money as the United States. Costa Rica has become the 19th member of Petrocaribe, through which Chavez sells Caribbean and Central American nations cut-rate oil at very low interest. The diminished profile of the U.S. in Latin America comes after a history of welcomed influence dating back to President Franklin Roosevelt's "Good Neighbor" policy of the 1930s, which emphasized cooperation and trade over military intervention.

There have been major bailouts, such as Washington's $20 billion rescue of Mexico in the 1994 peso devaluation crisis. As former Assistant Secretary of State Otto Reich noted, "We are the assistance bureau of first choice for the region." But the U.S. has an ugly legacy of covert intervention in countries including Chile, Nicaragua, Guatemala and Cuba. Chile's center-left president, Michele Bachelet, was jailed and tortured by a U.S.-backed military dictatorship in the 1970s. She recently recalled telling Washington's ambassador to Chile an old joke: "Some say the only reason there's never been a coup in the United States is because there's no U.S. Embassy in the United States."

The United States has also long served as chief educator to Latin America's elite. Correa is among its presidents with a U.S. graduate degree - though that didn't stop him from accusing the CIA of infiltrating his military, or refusing to renew a lease for U.S. counterdrug missions to fly out of Ecuador. With the U.S. facing its own financial crisis, it's unlikely to be able to leverage economic influence in Latin America anytime soon. Sen. Barack Obama's senior adviser on Latin America, Dan Restrepo, acknowledges that his candidate is essentially proposing a symbolic shift in style - albeit adding a special White House envoy for the Americas.

"Barack doesn't see the United States as the savior of the Americas, but as a constructive partner," Restrepo told the AP. Reich, an adviser to Sen. John McCain who served three Republican presidents in the region, put it even more bluntly. "No matter who is elected in November, there is not going to be any money for Latin America," he said. "Latin Americans expecting financial resources, any kind of help from the United States, they are barking up the wrong tree."




Rebuffed by China, Pakistan May Seek I.M.F. Aid
President Asif Ali Zardari returned from China late Friday without a commitment for cash needed to shore up Pakistan’s crumbling economy, leaving him with the politically unpopular prospect of having to ask the International Monetary Fund for help.

Pakistan was seeking the aid from China, an important ally, as it faces the possibility of defaulting on its current account payments. With the United States and other nations preoccupied by a financial crisis, and Saudi Arabia, another traditional ally, refusing to offer concessions on oil, China was seen as the last port of call before the I.M.F. Accepting a rescue package from the fund would be seen as humiliating for Mr. Zardari’s government, which took office this year.

An I.M.F.-backed plan would require Pakistan’s government to cut spending and raise taxes, among other measures, which could hurt the poor, officials said. The Bush administration is concerned that Pakistan’s economic meltdown will provide an opportunity for Islamic militants to capitalize on rising poverty and frustration. The Pakistanis have not been shy about exploiting the terrorist threat to try to win financial support, a senior official at the I.M.F. said.

But because of the dire global financial situation, and the reluctance of donor nations to provide money without strict economic reforms by Pakistan, the terrorist argument has not been fully persuasive, he said. “A selling point to us even has been, if the economy really collapses this is going to mean civil strife, and strikes, and put the war on terror in jeopardy,” said the official, who declined to be identified because he was not authorized to speak to the news media. “They are saying, ‘We are a strategic country, the world needs to come to our aid,’ ” he said.

Pakistani officials said they had received promises from the Chinese to help build two nuclear power plants, and pledges for business investment in the coming year. But Pakistan had also hoped China would deposit $1.5 billion to $3 billion in its central bank, according to senior officials at the I.M.F. and Western donor countries. The infusion of cash would have helped with payments for oil and food as currency reserves dwindle, officials said.

Shaukat Tareen, the new Pakistani financial adviser who accompanied Mr. Zardari to China, began to prepare the public for an I.M.F. program on Saturday, saying for the first time at a news conference that if Pakistan could not stabilize its economy within 30 days, it “can go to the I.M.F. as a backup.” “We may have to go to Plan B,” he said.

Economic hardship has been mounting across Pakistan for several months. Electricity shortages have become so dire that even middle-class families in big cities have to ration supply, with power cuts for 12 of every 24 hours, with one hour on, and one hour off. Food prices have soared, making some basics, even flour, too expensive for the poorest to afford. No large-scale riots have occurred, but concern is mounting that such protests are not far off. The new government has reduced subsidies on fuel and food, and the central bank moved on Friday to ease an intrabank liquidity crisis.

In addition, new rules were imposed several weeks ago on the Karachi stock exchange to stop sell-offs. But none of those steps have stanched the crisis in confidence. The central bank’s currency reserves have dipped to $4 billion, enough to cover payments for oil and other imports for about two months. As it became clear over the past two days that the Chinese were not going to provide a cushion for Pakistan, the rupee slumped to a record low.

The thin results from the China trip were of little surprise to Western donors. Asked about the likelihood of Pakistan winning the direct cash infusion it was seeking, a senior Chinese diplomat was reported by Western officials to have said, “We have done our due diligence, and it isn’t happening.” “What we needed is $3-to-$4 billion,” said Sakib Sherani, a member of the government’s economic advisory panel and chief economist at ABN Amro Bank in Pakistan. That amount was necessary “to build confidence,” he said.

The central bank governor, Shamshad Akhtar, said in a telephone interview on Saturday, “We are very open to all kinds of financial support.” She added, “We’ve taken a lot of corrective actions, and we plan to take more.” But Zubair Khan, a former commerce minister and a critic of the government’s economic management, said confidence would improve once Pakistan arranged an I.M.F. rescue package. Mr. Khan said that the alternative would be the imposition of controls on imports and capital flows that could do long-term harm to the economy.

Meanwhile, the American financial crisis is also expected to hurt ordinary Pakistanis. Remittances from Pakistanis living abroad to their relatives in Pakistan were expected to be about $7 billion this year, about $3 billion of that from Pakistanis living in the United States. But those remittances are likely to dwindle, affecting real estate values in Pakistani cities and families who live in poorer rural areas.

Mr. Zardari had approached the China trip with considerable fanfare, saying he was looking forward to visiting a country that had enjoyed a warm relationship with Pakistan, particularly during the rule of his father-in-law, Zulfikar Ali Bhutto. His visit to Beijing followed a trip there by the chief of the army, Gen. Parvez Kayani, and came at a time when the relationship between Washington and Pakistan was strained over how to deal with the escalating threat from the Taliban and Al Qaeda.

Javed Burki, a former Pakistani finance minister, said China had provided $500 million in balance-of-payments support in 1996, when Pakistan was on the brink of default. He had flown to Beijing to ask for the money and his request was fulfilled. But those days are over, he said, because China is no longer inclined to grant cash outright without structural reforms from the receiving government, he said.




Sarkozy, Bush Call for Series of Summits on Financial Crisis
The leaders of the U.S., France and the European Commission will ask other world leaders to join in a series of summits on the global financial crisis beginning in the U.S. soon after the Nov. 4 presidential election. President George W. Bush, French President Nicolas Sarkozy and European Commission President Jose Barroso said in a joint statement after meeting yesterday that they will continue pressing for coordination to address "the challenges facing the global economy."

The initial summit will seek "agreement on principles of reform needed to avoid a repetition and assure global prosperity in the future," and later meetings "would be designed to implement agreement on specific steps to be taken to meet those principles," the statement said. European leaders have pressed to convene an emergency meeting of the world's richest nations, known as the Group of Eight, joined by others such as India and China, to overhaul the world's financial regulatory systems. The meetings are to include developed economies as well as developing nations.

"The first task is to stabilize the financial markets in our own countries," Bush said in welcoming Sarkozy and Barroso to the Camp David presidential retreat in rural Maryland. "Given that the world has never been more interconnected, it is essential that we work together because we're in this crisis together." He stressed that any steps to prevent future crises must maintain and strengthen the free-market system. "It is essential we preserve the foundations of democratic capitalism," Bush said.

Sarkozy and Barraso are pressing Bush for a G8 agenda that includes stiffer regulation and supervision for cross-border banks, a global "early warning" system and an overhaul of the International Monetary Fund. Talks may also encompass tougher regulations on hedge funds, new rules for credit-rating companies, limits on executive pay and changing the treatment of tax havens such as the Cayman Islands and Monaco.

Sarkozy and Barroso, in separate statements, welcomed Bush's offer to host the first summit. "We want to work hand in hand with the Americans to create the capitalism of the 21st century," Sarkozy said. "The meeting should be held rapidly, perhaps before the end of November. Since the crisis started in New York, maybe we can find the solution in New York." Barroso said an "unprecedented level of global coordination" is needed to address market instability. "The international financial system -- its basic principles and regulations and its institutions need reform. We need a new global financial order," he said.

U.S. Treasury Secretary Henry Paulson and French Finance Minister Christine Lagarde also attended tonight's meeting at Camp David. United Nations Secretary-General Ban Ki-moon today offered to host a summit at UN headquarters in New York City by early December. The leaders decided to pursue a series of summits because the task was too ambitious to be dealt with in a single meeting, White House spokesman Tony Fratto told reporters later.

It was "a reasonable expectation" that the first summit would be scheduled for November though "not necessarily" in New York, he said. Fratto didn't name a location and said there are numerous logistics hurdles in bringing together "a large number of countries in a very short time." He said it was "premature" to say whether a second summit would be held before Bush left office in three months.

British Prime Minister Gordon Brown is pushing for greater cross-border oversight of the global financial system. He has said each of the world's top 30 banks should be under the supervision of a panel of regulators from the countries where those institutions do business. "The reform of the international financial system is not only necessary to prevent a crisis happening again, it is essential to end the current crisis," Brown said on Oct. 16.

Bush, 62, has cautioned that any revamping must not restrict the flow of trade and investment or set a path toward protectionism. The G8 nations are Britain, Canada, France, Germany, Italy, Japan, Russia and the United States. The U.S. hasn't committed itself to the sweeping terms of Europe's agenda, White House press secretary Dana Perino said yesterday. "There are other countries that are going to have ideas, as well," she said.




Hong Kong Finance Chief Warns of More Challenges
Hong Kong Financial Secretary John Tsang warned of further economic challenges ahead for the city amid global financial turmoil, company closures and investment losses. "The financial crisis will have a considerable economic impact on the economy, and people in Hong Kong should be ready for the challenges," he told reporters today after officiating at a ceremony. "Still, Hong Kong's fundamentals and its system are healthy and our economy remains very strong."

Tsang's comments came after three Hong Kong retailers and a toymaker collapsed within two weeks and as tightened credit conditions make it more difficult for smaller companies to refinance debt. Hundreds of Hong Kong investors protested in the streets last week over losses on so-called minibonds guaranteed by bankrupt Lehman Brothers Holdings Inc.

"We expect Hong Kong's economic activity will be very slow but still outperform other counties in Asia in the next six months," said Kenny Tang, director of Tung Tai Securities Co. in Hong Kong. "China will contribute to Hong Kong's meager growth looking forward, and the city still has a solid financial basis, backed by its strong reserves and lack of foreign debt." Tai Lin Radio Service Ltd., a 60-year-old Hong Kong electrical appliance retail chain, was forced to close yesterday after accumulating HK$100 million ($13 million) debt.

U-Right International Holdings Ltd., operator of about 600 clothing outlets in the city and in China, had funds frozen after it was unable to meet a demand to pay HK$850 million of debt. Hong Kong's High Court on Oct. 6 appointed Deloitte Touche Tohmatsu as liquidator of the Hong Kong-listed company. Smart Union Group Holdings Ltd., a Hong Kong-listed contract toymaker, said yesterday the city's High Court appointed two liquidators to take control of its assets. The company closed two factories in China's Guangdong province, Shanghai-based National Business Daily reported.

"The retail industry is definitely one that will be severely affected by the ongoing crisis," Tsang said. "The health of small-to-medium-sized enterprises in Hong Kong is very important to us." The Hong Kong Association of Banks, which includes HSBC Holdings Inc. and BOC Hong Kong (Holdings) Ltd., agreed yesterday to a government plan to buy back Lehman's minibonds at market prices, after consumer allegations that sellers misrepresented the risks involved in the securities.

The Hong Kong Monetary Authority, the city's de facto central bank, said yesterday it referred to the Securities and Futures Commission 24 cases related to sales of the Lehman- guaranteed products. "We're very happy about the banks accepting our buyback suggestion," Tsang said today. "We will continue investigating some of the false-selling cases and establish a mechanism to facilitate dispute settlements between the banks and the investors."




South Korea Backs $100 Billion in Debt to Calm Markets
South Korea will guarantee $100 billion in bank debts and supply lenders with $30 billion in dollars to stabilize its financial markets. The government will provide tax benefits for long-term equity and bond investors, while the Bank of Korea will buy repurchasing agreements and government bonds to boost won liquidity, the heads of the finance ministry, central bank and financial regulator said in a statement from Seoul. Policy makers held an emergency meeting on Oct. 17 to hammer out the plan.

South Korea is struggling with Asia's worst-performing currency, a shortage of U.S. dollars and a stock market that has lost 38 percent this year. The guarantee on bank debts comes after Standard & Poor's said last week it may cut the credit ratings of the nation's largest lenders, which triggered the worst plunge in the won since the International Monetary Fund bailed the nation out in December 1997.

"They have to do that because the market was pushing them by attacking the Korean won," said V. Anantha-Nageswaran, chief investment officer for Asia Pacific at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager for the wealthy. "They know what the stakes are. The currency could completely careen out of proportion."

The government and state-run lenders including Korea Development Bank will guarantee as much as $100 billion of external debt taken up by Korean banks from Oct. 20 to June 30 next year, according to today's statement. The guarantee is valid for three years. South Korea joins countries in Europe, along with Hong Kong and Australia, in providing state backing to banks to help fund lending amid a global financial crisis.

"We will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market," Finance Minister Kang Man Soo told reporters in Seoul, at a press briefing with central bank Governor Lee Seong Tae and Jun Kwang Woo, head of the Financial Services Commission. S&P, in a report released Oct. 15, said South Korea's banks face a more than 50 percent chance the credit crunch could threaten their foreign-currency funding. Domestic lenders have $235.3 billion of foreign-currency liabilities, with about $32.7 billion due to mature in the fourth quarter, according to the Financial Supervisory Service.

"Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans," Moody's Investors Service said in an Oct. 16 report. That's forced them to rely on the wholesale market for about 44 percent of their total funding, with international markets accounting for as much as 12 percent, the ratings company said. Policy makers decided that a recapitalization of the nation's financial institutions or an expansion of deposit guarantees are "not necessary." Still, the government will "take proper actions" should the need arise, according to the statement.

To boost the supply of U.S. dollars in the domestic market, South Korea will provide the banking industry with $30 billion from its foreign-exchange reserves, according to the statement. The government had already promised to supply a total of $15 billion to small firms and the swap market, while the Bank of Korea said on Oct. 17 it will change rules in the foreign- exchange swap market to increase banks' access to funds.

The U.S. financial crisis is making it more difficult for companies worldwide to secure dollars as banks hoard cash to meet their future funding needs. South Korea's currency and swap markets are experiencing a dollar shortage as local businesses, which expect the U.S. currency to strengthen against the won, don't want to sell their dollars yet. "Providing dollar liquidity will stop the vicious circle of a shortage of dollars in banks and firms leading to a weaker won," said Lim Jiwon, a senior economist at JPMorgan Chase & Co. in Seoul.

Authorities will continue "smoothing" operations in the currency market to avoid "extreme volatilities," the statement said. To encourage long-term investing, the government will give tax benefits to investors who hold equity or corporate-bond funds for more than three years, today's statement said. The breaks include an exemption from taxes on dividends. South Korea's benchmark Kospi stock index has lost 38 percent this year, heading for its first annual decline since 2002. The measure plunged 9.4 percent on Oct. 16, the biggest one-day fall since September 2001.

South Korea will inject 1 trillion won ($767 million) in Industrial Bank of Korea, the nation's biggest lender to small- and mid-sized businesses, by transferring its equity stakes in the state companies. "The government has done what it can do at the moment to join global efforts to help stabilize the markets," said Seo Chul Soo, a fixed-income analyst at Daewoo Securities Co. in Seoul. "More steps may be needed if the global markets remain unstable."




Mark-to-market battle far from finished
The Financial Accounting Standards Board's final guidance on fair-value accounting released earlier this month won't end the heated debate surrounding the issue. The American Bankers Association is currently the leading critic, saying that fair value has exaggerated losses at financial institutions. On the other side, organizations such as the CFA Institute continue to argue such accounting provides investors with much-needed insight into valuing the assets of financial institutions.

ABA president and CEO Edward Yingling sent a letter to Securities and Exchange Commission chairman Christopher Cox last week asking the SEC “to use its statutory authority to step in and override the guidance issued by FASB.” The SEC had no comment in response to the letter but is currently working on a study looking at the effects of fair value, or mark-to-market, accounting on recent banks' failures as well as potential alternatives to the practice. That study, which was demanded by Congress as part of its $700 billion bailout legislation earlier this month, is due Jan. 2.

The Center for Audit Quality also wrote a letter to the SEC last week. In it, Cindy Fornelli, Executive Director of CAQ, expressed concern that the suspension of fair value isn't in the public interest. “For now, rather than use the power the SEC was granted to suspend FAS 157 [on fair value accounting], the organizations have continued to offer guidance in the changing market and provide clarification to reporting entities struggling to implement it,” said law firm Morrison & Foerster in a report last week. “Until the SEC releases its report in January 2009, fair-value measurements likely will remain a topic of discussion for those in the financial and accounting industries.”

In its new guidance, FASB issued an example of how to value securities in inactive markets and reminded preparers of financial statements that they needn't depend on market prices if they are deemed to be what an asset would fetch in a “distressed” sale or “forced liquidation.” Instead, they should merely take those prices into account along with what their internal models would suggest the price should be in normal markets. FASB went so far as to say that it is not appropriate to automatically conclude that any transaction price in times of market dislocation reflects fair value.

However, the board also stated that even in times of market dislocation, it isn't appropriate to conclude that all market activity represents forced liquidation or distressed sales. “What the FASB staff position does is clarify what was meant by the terms of FAS 157 with an overriding theme of "there are not hard and fast rules, you should use your judgment and be prepared to justify its use upon inquiry,'” Christopher Wright, managing director at Protiviti, said in an e-mail to Financial Week.

The ABA believes that FASB is refusing to recognize the realities of the current situation. The ABA asked the SEC to override the new guidance on fair value and replace it with guidance that clarifies that fair value in an illiquid market does not include forced or distressed sales at all, so banks could ignore those prices and rely exclusively on their internal models.

The ABA also asked FASB to provide guidance on “other than temporary impairment.” When a company decides to hold a security to maturity, it typically carries it at cost. But when the security has been impaired for longer than a temporary period, the company has to mark it to fair value. It's a principles-based standard within U.S. generally accepted accounting principles, the application of which requires a great degree of judgment.

“Determining whether impairment is other than temporary often requires the exercise of reasonable judgment based upon the specific facts and circumstances of each investment,” the SEC and FASB said in their clarifications on fair value released on Sept. 30. U.S. GAAP doesn't provide bright lines or safe harbors in making that judgment, they said, but added that rules of thumb that consider the nature of the underlying investment can be useful tools.

The regulators also noted that the greater an asset's decline in value, the greater the period of time until its recovery can be anticipated, and the longer that decline persists, the less evidence necessary to conclude that something other than a temporary decline has occurred. And because fair value measurements and the assessment of impairment may require significant judgments, “clear and transparent disclosures are critical to providing investors with an understanding of the judgments made by management,” the regulators said.

The ABA wasn't available for comment, but said in its letter that issues such as providing guidance on “other than temporary impairment” in an illiquid market need to be resolved so they can be implemented for third-quarter reporting. Several accounting experts have said third-quarter earnings may improve, thanks to the SEC and FASB allowing the use of internal inputs to value securities.

In a report published last week, Joyce Joseph-Bell, an analyst at Standard & Poor's, said there might be a short-term earnings boost through a mark-up for some previously written-down assets, “as values are based in greater use of intrinsic valuation assumptions.” That still may not be enough for financial institutions. The ABA also asked the SEC to temporarily suspend work by standard-setters on projects that would require fair value in any future standards.




Layoffs spreading across corporate America
Shock waves from the global financial crisis are now being felt in almost every corner of working America as companies press the eject button on increasing numbers of employees. While the ax has been falling for months in the financial and home-building industries -- where the current economic downturn started -- as well as the Detroit auto industry, makers of everything from soft drinks to water filtration systems have unveiled hefty rounds of job cuts in recent weeks as they brace for what some predict could become a long and deep recession.

In the past week alone, companies including PepsiCo Inc and Danaher Corp said they would lay off thousands of workers, while the state of Massachusetts disclosed plans to cut its payroll by 1,000 as it faces a tax shortfall. The situation is poised to worsen as the holidays approach and many businesses scrutinize budgets for the coming year. The sad truth is that Christmas layoffs are common in tough times.

"It's a fairly grim outlook," said Michael Goodman, director of economic and public policy research at the Donahue Institute of the University of Massachusetts. "I don't know of any sector of the economy that will be spared."

A four-week moving average of new U.S. government jobless claims last week hit its highest point in seven years. Ed Yardeni, chief investment strategist for Yardeni Research, is hoping that the U.S. government's $700 billion bailout package will slow the job cuts. "If this rescue plan doesn't work, then... you could see something much worse that could feel like a recession or a depression, with all sorts of people losing jobs," Yardeni said.

A survey of more than 100 chief financial officers and other senior executives -- conducted Wednesday -- found 56 percent expect to reduce payrolls over the coming year. A majority polled by CFO Magazine also predicted falling revenues and plan to cut operating costs by at least 5 percent.

Workers are scared. Some 47 percent polled last month by Workplace Options said news of the financial crisis made them fearful about job security, and 25 percent said they had begun scanning help-wanted ads or updating their resumes. "I'm being more conservative about spending -- I'm concerned," said Donald Gaunt, a 52-year-old construction worker from Smithville, Rhode Island, who said he has enough work to last through the end of this year but wasn't sure about 2009. "It hasn't been this bad since the early 1980s."

Workers in the financial sector, as well as those involved in home building and at the struggling Detroit automakers, have already been hit by round after round of layoffs. The failure of investment banks Lehman Brothers Holdings Inc and Bear Stearns Cos resulted in tens of thousands of people losing their jobs, but even banks that have survived the crisis, including Bank of America Corp and Citigroup, have cut head count dramatically.

General Motors Corp said this week that it would close plants in Michigan, Wisconsin and Delaware and cut more than 4,000 jobs. The cuts are spreading into other sectors:
  • PepsiCo on Tuesday said it would cut 3,300 jobs, almost 2 percent of its work force, in a bid to cut costs.
  • Danaher, which also makes Craftsman tools, said on Thursday it would lay off 1,000 workers and close 12 plants.
  • Rockwell Automation Inc said it would lay off about 3 percent of its staff, or 600 people. That news came on September 30, the last day of the U.S. manufacturer's fiscal year.
  • Textron Inc, the world's largest maker of corporate jets, said an unspecified number of jobs would be cut as it scales back its financial operation.
  • Leggett & Platt Inc, which makes bed springs and store shelving, said it was cutting back hours at some factories and, in the words of Chief Executive Dave Haffner, "must move to reduce staff. We are already doing so." It did not disclose the number of jobs it plans to eliminate.

Temporary employment may also prove harder to find. Consumer electronics retailer Best Buy Co, which normally bulks up staffing in the holiday season, plans to cut seasonal hiring by as many as 10,000 workers this year after hiring about 26,000 in 2007.

"When we see job losses and rising unemployment, this does not just affect those who lost their job," said Lawrence Mishel, president of the partly labor-funded Economic Policy Institute think tank. "Wages grow more slowly when there's higher unemployment, so the downturn will be affecting most working families through reduced hours of work," said Mishel. "This is not something that affects a small part of the workforce."

With the pace of layoffs picking up, the cycle becomes a vicious one, pressuring consumer spending and hurting home values yet again. "As people lose their jobs, they cut back on their consumption, and people are less able to afford their mortgages, which are already strained," said Ron Blackwell, chief economist at the AFL-CIO, the largest U.S. labor federation. "And so people lose their houses, which continues to aggravate the financial problems. So it's reinforcing in that way and it's also spreading.

"This recession -- and I didn't see it this way a month ago -- is going to be global in scope," Blackwell said.




California Saved by Mom&Pop as Borrowing Rates 'Choke' Issuers
California, the biggest U.S. state borrower, raised $5 billion to avert a cash shortage by turning to the bedrock of the municipal bond market: its own taxpayers. California, a bellwether for state and local government debt, was able to boost its offering of short-term notes this week by 25 percent from $4 billion after a marketing campaign targeting individuals helped draw more than $3.9 billion of orders, an all-time high.

"Mom and Pop really came through," said Tom Dresslar, spokesman for California Treasurer Bill Lockyer in Sacramento. Demand from individuals helped California avoid asking for emergency help from the federal government, a prospect Governor Arnold Schwarzenegger said may be needed as the credit crisis gripping the world economy deepens. It also left the state less dependent on the Wall Street firms, hedge funds and other institutions that have retreated from the $2.66 trillion market, underscoring the growing importance of individual investors.

Households increased their municipal holdings to $912 billion at mid-year from $900.4 billion in the first quarter, according to the most recent Federal Reserve data. That gives them 34.3 percent of the market, making them the largest single group of investors. The interest by individuals contrasts with waning demand from institutional investors and decreased support from banks and securities firms beset by $660.8 billion in writedowns and credit-market losses since the start of 2007, according to data compiled by Bloomberg.

Municipal borrowers from Hawaii to Maine pulled more than 200 debt offerings totaling at least $14 billion since mid- September, when Lehman Brothers Holdings Inc. filed its record bankruptcy, Bloomberg data show. "The market's been virtually frozen," said David Joyner, head of the North Carolina Turnpike Authority in Raleigh, which shelved plans to raise $600 million to begin work on a toll road. "The cost of capital is beyond what we can afford at the moment."

Individuals are attracted to tax-exempt yields that rose to 6.01 percent this week on 20-year general obligation bonds, the highest since 2000, based on the weekly Bond Buyer 20 index. The yield is a record 1.77 percentage points more than Treasuries, compared with an average 0.67 percentage point less during the past two decades. "This is viewed as a historic opportunity for the individual investor," said Joe Darcy, who manages $5 billion in municipal bonds for Dreyfus Corp. in New York.

Individuals, known as retail buyers, also purchased almost four out of every five bonds that New York sold this week, according to a release from the city. The most populous U.S. city more than doubled the deal to $550 million after orders exceeded the amount of bonds available. Michael Bloomberg, New York's mayor, is founder and majority owner of Bloomberg News parent Bloomberg LP. Demand from retail investors helped Sarasota County sell $74 million of revenue bonds in September, said Richard Gleitsman, a debt service manager for the county.

"We sold 86 percent of those to retail," Gleitsman said in an interview. "There's still a market for retail sales because people are looking to park in high quality debt." California, seeking to lure this core audience, routinely runs radio and newspaper advertisements in major cities before debt sales, and last year started a Web site to aid individual investors. This week, ads featured Schwarzenegger, who said he purchased $100,000 of the notes that will provide needed cash for salaries and services until tax revenue arrives.

California was able to boost the size of its borrowing because of the demand from individual buyers, and lower the yield range on the debt by a quarter of a percentage point. More states and municipalities may begin to increase the period they sell bonds directly to individual investors to three days from one in response to waning institutional support for the market, said Fred Parkes, vice president of municipal finance at Toussaint Capital Partners LLC in New York. New York was the first to introduce a so-called retail order period about a decade ago, he said. "That experiment paid off remarkably well," said Parkes. Toussaint Capital Partners was one of the brokerage firms that participated in California's note sale.

California, which has more than $45 billion of general obligation bonds, still had to pay a yield of 4.25 percent on the notes due June 22, 2009, the most on record relative to Treasuries. "At those yields, the notes are a screaming giveaway," said Jim Lebenthal, known for promoting tax-exempt bonds in radio and television ads as founder of Lebenthal & Co. in New York. "If you can compare them to anything of a similar quality, they are irresistible." California's rate exceeded the 3.37 percent it paid last year on a similar, larger note sale, when Treasuries were yielding more.

"The good news" is the state got the deal done, said Paul Brennan, who oversees about $12 billion in municipal bonds for Nuveen Asset Management in Chicago. "The bad news is that it's at much higher yields than they had obviously contemplated just a few weeks ago." With investors wary of owning all but the safest U.S. government bonds, New York's cost of borrowing for 15 years increased 1.59 percentage points from its previous sale on Sept. 10, a week before Lehman's failure deepened the credit crisis that began last year.

Investors pulled almost $400 million out of municipal bond mutual funds during September, the first monthly outflow this year, according to AMG Data Services of Arcata, California. Redemptions accelerated this month, with fund outflows rising to $3.4 billion so far, including a record $2.3 billion in the week ended Oct. 15, the data show. "We are still in a situation of no buying and lots of forced selling," said Ron Fielding, senior portfolio manager at OppenheimerFunds Inc. in Rochester, New York, with $23 billion under management.

Wall Street firms had already been pulling back earlier in the year. Broker-dealers, which abandoned the $330 billion auction-rate market after being inundated with unwanted securities, cut their holdings of municipal bonds and notes 22 percent to $51.8 billion from a record $66.1 billion at the end of the first quarter, according to Fed data. Ohio and Boston-area agencies put off their plans to raise money for transportation projects this week, adding to the estimated $100 billion of capital-improvement bond issues shoved aside by market turmoil this year, according to Municipal Market Advisors, a Concord, Massachusetts-based research firm.

The Massachusetts Bay Transportation Authority, operator of Boston's mass-transit system, held off borrowing $350 million after investors demanded yields of about 6 percent, a full percentage point more than anticipated, said Jonathan Davis, chief financial officer. The bonds, rated AAA by Standard & Poor's, were intended to refinance debt, replenish reserves and pay for projects. "I just about choked when I saw the interest rate," Davis said. "We're hoping we'll see some downward pressure on interest rates in the next couple of weeks. It all depends on buyers coming back."

The Metropolitan Transportation Authority that runs buses, trains and subways around the New York City area had delayed the start of its latest revenue bond offering earlier this week amid rising costs. Underwriters led by JPMorgan Chase & Co. revived the deal yesterday, taking orders from retail investors. The final amount from them wasn't immediately available.
The bond sale was completed today with $550 million, $50 million more than planned at the beginning of the week. The authority, which also ran radio ads to promote the sale, offered 20-year tax-exempt securities rated A by S&P at a price to yield 6.75 percent, about 2.4 percentage points higher than benchmark taxable Treasury bonds.

The last time the MTA, operator of the largest mass-transit network in the U.S., sold fixed-rate transportation revenue bonds in early February, the agency offered a maximum yield of 4.86 percent on debt due in 2037. Even smaller municipal issuers able to harvest demand from individuals are likely to see similar jumps in their borrowing costs, said Matt Dalton, chief executive of Belle Haven Investments in White Plains, New York. "They're going to be shocked at the cost of funds," Dalton said. "They've been through a decade" of getting financing at around 3 percent to 4 percent "and that's over."




Community Banks Must Wait for Paulson Aid
Community banks that Federal Reserve Chairman Ben S. Bernanke calls a key link between financial markets and the U.S. economy face a longer wait for government aid than their bigger competitors. The Treasury is urging small and regional banks to contact their primary regulator for details on how to access $125 billion in funds -- half of a $250 billion sum set aside to recapitalize the nation's lenders. Five federal regulators plus the states, meanwhile, are waiting for more guidance from the Treasury.

"I don't think that when they rolled this out they understood there would be all these problems," said former Treasury official Wayne Abernathy, now an executive vice president at the American Bankers Association in Washington. "The sooner they can get the details out, the better." Treasury Secretary Henry Paulson's aides are working to standardize procedures for putting capital into thousands of banks of varying size, charter and health. The voluntary program will serve as triage for the banking system -- giving some institutions a lifeline of money, while rebuffing weaker ones.

Investors have responded optimistically to Paulson's bank rescue. Standard and Poor's Small-Cap Regional Banks Index of 37 small lenders rose 6.7 percent yesterday to 86.75 and is up 55 percent from a low this year reached on July 15. Shares Rally Shares of KeyCorp, the third-largest bank in Ohio, are up 36 percent since Paulson announced plans to buy equity stakes in banks big and small. Regions Financial Corp., Alabama's biggest bank, is up 30 percent. Zions Bancorporation, a Salt Lake City- based lender operating in 10 western states, is up 27 percent. "We are in the process of evaluating the requirements of the program for Key and our shareholders," said KeyCorp spokesman Bill Murschel.

Smaller banks must decide by Nov. 14 whether they want to participate in the Treasury program, said Camden Fine, chief executive of the Independent Community Bankers of America, a Washington-based group that represents lenders such as CountryBank USA in Cando, North Dakota, and Easton Bank and Trust Co. in Easton, Maryland. "Many banks can't step through the corporate hoops," Fine said. The "Treasury is willing to make some accommodation along that line, but we haven't heard definitively."

Fine said he anticipates the department will release more details next week, which may help with the decision. Some information about the plan is starting to emerge. The Treasury is making accommodations to allow privately held banks to participate and trying to find a way to help lenders that don't issue the kind of preferred shares that the U.S. wants to buy, Abernathy said. Treasury spokeswoman Jennifer Zuccarelli said the program is being assembled speedily. "Regarding smaller banks, we are working with the regulators to quickly establish details for participation in this program," she said.

The next step is out of banks' control, as the Treasury has to decide which applicants deserve the money. "There's going to be a sorting process as to the financial health of banks and thrifts," said University of Connecticut law professor Patricia McCoy, a former member of the Fed's consumer advisory council. "The ones that are either on the ropes or look like they might be on the ropes will not get capital infusions." Some community bankers said they don't have enough information yet to decide whether to participate.

Central Virginia Bank, a state bank that's part of the Fed system with about $500 million in assets, is in search of new capital to replace an $18 million investment in Fannie Mae and Freddie Mac preferred shares, said Larry Lyons, the bank's president and chief executive officer. "We're very interested," said Lyons, whose bank is based in Powhatan, Virginia. "We just have not had an opportunity to look at this thing in detail and look at what our other options are." For banks that intend to sign up, board approval will likely be required. For banks that are undecided, or those that don't normally issue the type of preferred stock the Treasury is buying, the administrative challenges are even greater. "It is complicated," Fine said.

Paulson earlier this week set aside $125 billion for "healthy" banks of all sizes, after persuading nine major U.S. lenders to accept another $125 billion in fresh capital. The Treasury says the big banks will get their cash in "days" to start lending again. Half of U.S. bank deposits are in those nine large banks, with the remainder spread across the country in smaller firms. Any delays by the Treasury in getting money to the local level threaten to slow economic growth in areas where job losses are mounting and consumer spending weakening.

When Congress was considering the rescue program, the Treasury secretary said he opposed capital infusions into troubled banks because it amounted to a sign of failure. With the credit crisis worsening and bank lending frozen, Paulson changed his approach. "It's an absolutely horrendous time to go out to the market and raise capital," Lyons said. "If things aren't too bad and too onerous in this Treasury proposal, we might consider doing that and then two or three years from now, we could go out and just raise capital in a normal fashion and pay that off."




AIG’s fire sale is sparsely attended
When the Federal Reserve bailed out American International Group last month, the support—in the form of an $85 billion loan—came with some major strings attached. With the credit markets frozen and the stock market taking roller-coaster dives, those strings are now strangling AIG.

AIG has since arranged for a second line of credit for $37.8 bilion. As of Thursday, the insurer had drawn down $82.9 billion, or two-thirds of the $123 billion available. Meanwhile, the company’s plan to pay off the onerous debt through asset sales—its only feasible means of raising capital—has not yielded a single deal. Under the terms of the original two-year loan, the Federal Reserve received a 79.9% stake in the insurer, and AIG will pay 8.5 percentage points over three-month Libor, an initial gross commitment fee of 2% of the total loan facility and a fee on undrawn amounts of 8.5% a year.

“Time is not on their side,” said John Ward, chief executive of Cincinnatus Partners, a private equity firm specializing in the insurance industry. “They’ve got to move quickly. It’s very expensive to keep that loan.” The company continues to hemorrhage money on credit default swaps tied to billions in bad mortgage bets. The bulk of the loan money has gone into meeting collateral calls and unwinding the securities lending program that put the company on the brink of bankruptcy.

Changes in the financial markets over the last few weeks have made it impossible to find viable buyers for AIG’s assets. “The underlying businesses that comprise the AIG franchise are good businesses, and they’re valuable well in excess of the $85 billion loan,” Mr. Ward said. “The challenge is getting the right suitors to the table in a market where everyone’s been wounded in the last couple of weeks.” Although most other big insurers have some exposure to collateralized debt through their investments, their balance sheets a few weeks ago appeared much stronger than AIG’s, since they did not originate deals like AIG did.

But insurers’ stocks have been pummeled in the broad sell-off that has been ongoing since CEO Edward Liddy’s announcement on Oct. 3 that AIG would sell assets. In the week immediately following the announcement, the stock prices of likely buyers Ace, Travelers and MetLife all fell by more than 20%. At the same time, debt availability, already tight, virtually disappeared.

MetLife raised $2 billion with an Oct. 8 stock issuance, but it sold shares at a discounted $26.50 each, just days after they had been selling for more than $40. MetLife said it would use the proceeds for general corporate purposes and potential “strategic initiatives.” “Given the credit markets right now, it’s difficult for insurance companies to get financing to do these deals,” said Andrew Colannino, vice president of property and casualty at A.M. Best.

Even as the credit markets eased slightly last week, equity markets remained volatile, recording their biggest plunge in decades Wednesday. On Thursday, Fitch Ratings revised its ratings outlook to negative from stable for 12 insurance and reinsurance sectors globally, and confirmed its negative outlook on six other sectors, including the U.S. life insurance sector. Ratings downgrades in September sparked the liquidity crisis that almost bankrupted AIG. “Some of the potential suitors [for AIG businesses] may have stumbled into some unexpected turbulence in the markets themselves,” Mr. Ward said.

Even though none of AIG’s rivals have acquired any of the company’s subsidiaries, they may still benefit by stealing market share or personnel, analysts said. “Anytime you have a situation like this, there’s going to be a strain on employees and policyholders,” Mr. Colannino said. “But AIG is doing everything it can to hold on to employees at this point. I haven’t heard of any mass defections yet. I am sure policyholders may be looking for alternatives” when their renewals come up.

AIG has not publicly put forth a timetable for the sales, but Mr. Liddy has said the company may sell more or fewer assets depending upon the prices they draw, its ability to “monetize” the value of securities in its financial products division and, possibly, its participation in the Treasury’s Troubled Assets Relief Program.

On Thursday, AIG appointed a new chief financial officer, David Herzog, to help oversee AIG’s plan to address its capital structure and pay down the credit facility. Mr. Herzog, 48, had been AIG’s controller since 2005. He replaced Steven Bensinger, who had served since May as AIG’s vice chairman of financial services and acting CFO. The management change followed a public uproar and threatened legal action by New York attorney general Andrew Cuomo over alleged improper bonuses and other payments to former executives.

Under the second lending agreement with the New York Fed, the Fed would borrow up to $37.8 billion worth of investment-grade, fixed-income securities from AIG’s domestic life subsidiaries in exchange for cash collateral. “It’s designed to provide liquidity to our securities lending program but give protection to the Fed,” said AIG spokesman Joseph Norton.

Another wild card: former chief executive Maurice “Hank” Greenberg, who has himself been rumored to be interested in purchasing some of AIG’s subsidiaries. Mr. Greenberg, also a major AIG shareholder, sent a letter to Mr. Liddy and AIG’s board last Monday proposing an alternative to the onerous terms of the original $85 billion AIG loan.

“AIG cannot pay off this loan from the proceeds of selling assets in this market, nor can it pay the annual interest rate from earnings,” he wrote in the letter, filed with the Securities and Exchange Commission. “As a result, thousands of jobs will be lost, pensioners will lose their savings and millions of shareholders will be disenfranchised. It is a lose/lose plan.” Instead, Mr. Greenberg wants to give the Fed non-voting preferred stock with a dividend of about 5.5% and a 10-year right of redemption at a 10% premium

Mr. Ward doesn’t expect the Fed or AIG will “take the proposal seriously.” “The proposal is not nearly as good for the federal government, which reached the agreement with AIG when it was on the brink of bankruptcy,” he said. “You can’t come in after the pressure is off and get the Fed to reconsider the terms.”




EU climate change push in disarray as Italy joins Iron Curtain revolt
Europe’s commitment to ambitious green goals became the latest victim of the global financial crisis yesterday when a growing number of EU countries rebelled, claiming that the plans were now too expensive. Plans for binding European legislation by December were dropped as the EU watered down the carbon dioxide blueprint that it had announced with a fanfare 18 months ago.

The revolt by eight countries, led by Italy and Poland, left the EU’s self-proclaimed mission to shape a global, postKyoto agreement on greenhouse gases in disarray. President Sarkozy of France, which holds the rotating EU presidency, led the way in appealing to all 27 countries to stick to their targets. But tempers flared at the quarterly European Council in Brussels, with Silvio Berlusconi, the Italian Prime Minister, clearly furious at the pressure being applied. During a stand-up row behind the scenes, he told Mr Sarkozy that the targets would crucify Italian industry.

“Our businesses are in absolutely no position at the moment to absorb the costs of the regulations that have been proposed,” Mr Berlusconi said later. Donald Tusk, the Polish Prime Minister, said: “We don’t say to the French that they have to close down their nuclear power industry and build windmills, and nobody can tell us the equivalent.” In an extraordinary break with EU protocol, both leaders said that they did not have to stick to the deal because neither had been in office when it was signed by their predecessors in March 2007.

The eight countries have the voting power to form a blocking minority, should they choose to do so. Under the original deal, EU countries would cut carbon dioxide emissions by 20 per cent from 1990 levels by 2020 – rising to 30 per cent if it encouraged global agreeement. Mr Sarkozy succeeded in preserving the overall goal but he faces an increasingly uphill task to hold various countries to their individual contributions.

The row erupted at the same time as Britain strengthened its policy. Giving his first speech to the Commons as Energy and Climate Change Secretary, Ed Miliband said that Britain would increase its target for reducing greenhouse gas emissions by 2050 from 60 per cent to 80 per cent. The target, which is to be written into the Climate Change Bill, brings Britain into line with scientific advice. Mr Miliband said that tackling global warming was too important to be watered down even in a recession. “In tough economic times, some people will ask whether we should retreat from our climate change objectives,” he said. “In our view, it would be quite wrong to row back.”




Where is my swap line? And will the diffusion of financial power Balkanize the global response to a broadening crisis?
Some emerging market central banks have noticed that they – unlike the Bank of Japan, Bank of England, Swiss National Bank and the European Central Bank – don’t have access to unlimited dollar credit through reciprocal swap lines with the Federal Reserve.
Peter Garnham of the FT, drawing on Derek Halpenny of Tokyo-Mitsubishi UFJ, observes:
Analysts say the unlimited dollar currency swaps set up between the Federal Reserve and central banks have helped bring stability to currencies through alleviating institutions desire to purchase dollars in the spot market to satisfy overnight funding requirements. “In contrast, the lack of currency swaps put into place between the Federal Reserve and emerging market central banks has likely helped to exacerbate the pick up in emerging market currency volatility” says Derek Halpenny, at the Bank of Tokyo Mitsubishi UFJ.

Think of Korea. There is “a shortage of dollars in the Korean banking system” – and Korean banks (and the Korean government) are scrambling to obtain them. That is likely adding to the pressure on the Won. For all the talk about how the G-7 has lost relevance, in a lot of ways the recent crisis has reinforced the G-7’s importance. Banks in G-7 countries that borrowed in dollars have access to unlimited dollar financing from their central banks – dollar financing that comes from the fact that the main G-7 central banks have access to large swap lines with the Fed.

Banks in emerging market countries have no such luck. Korea is a highly developed emerging economy. In a lot of ways it already has emerged. But it isn’t part of the G-7 (or G-10) and doesn’t have a swap line with the Fed that allows the Bank of Korea to borrow dollars from the Fed by posting won as collateral. That means that it has to rely on its foreign currency reserves – and its government’s capacity to borrow dollars in the market – to support its banks. Unless, of course, Korea could draw on a set of East Asian swap lines, and effectively borrow from Japan and China.

The old global architecture for responding to financial crises had, in my view, two essential components: First, the major countries themselves were responsible for acting as the lender of last resort (and the bail-outer of last resort) to their own domestic financial system. Since the advanced economies banks’ had liabilities denominated in their own countries’ currency (US bank deposits are in dollars, British deposits are in pounds, and so on) this wasn’t hard.

And emerging economies had to turn to the IMF (sometimes reinforced with “second line” financing from the G-7) for dollar (or DM or pound or Euro) financing – whether to help meet their government’s own financing need, to help the emerging economies’ central bank provide a “hard currency” lender of last resort to its domestic financial system or to provide the emerging economy more foreign currency reserves to backstop its currency. And since emerging market governments often borrowed in dollars or euros rather than their own currencies – and since many emerging market savers held dollar or euro denominated domestic deposits – emerging economies often had a need for significant financing.

This financing though was never unconditional – and was never unlimited. The $35b the IMF lent to Brazil in 2002 and the $20-25b the IMF lent to Turkey in 00-01 seemed big at the time, but it now seems small. That architecture has been extended in one key way in the crisis: European and Japanese banks facing difficulties refinancing their dollar liabilities now have (indirect) access to the Fed. The availability of $450b in credit from the Fed allowed European central banks to lend dollars to their banks without dipping into their (comparatively modest) reserves.

Emerging market central banks generally haven’t been as lucky. Their ability to lend dollars to their own banks is still limited by their own holdings of dollar reserves, their ability to borrow reserves from the IMF in exchange for IMF policy conditionality and their ability to borrow dollars from other emerging market economies with spare dollar reserves. I am still trying to figure out how important a change this is – and to assess whether this new architecture makes sense for a global financial system that has changed fundamentally in some ways but not in others. At one level, the stark divide between banks regulated by a the G-10 countries — which now have access to the Fed as a lender of last resort, albeit indirectly — and the banks regulated by the rest of the world seems a bit anachronistic. The center of the world economy won’t always be in the US and Europe.

On another level, a higher level of cooperation is possible among countries with broadly similar political systems than among more diverse group of countries with different political and economic systems. Similar forms of government, broadly similar (though changing) conceptions of the state’s role in the economy and a standing political alliance* facilitate the kind of cooperation among G-10 central banks that we have seen recently. Korea could presumably be drawn into the club without changing its basic character – Korea is a US ally and a democracy. Iceland could too, if it patches up its relationship with the UK – though the risk that Iceland’s government now has more debt than it can pay makes accepting Icelandic collateral in exchange for dollars a bit more of a problem.

Adding emerging economies with different economic and political systems from the G-7 countries into the “swap line” club might fundamentally change its character. Among other things, the US and Europe basically agree that their currencies should float against each other — and that they should regulate (or, until recently, not regulate) their financial systems in fairly similar ways. There is another key difference between European banks’ need for dollars and many emerging markets’ need for dollars. European banks need dollars to finance their holdings of US mortgages and other US securities. If they didn’t have access to dollar financing, they would either have to borrow euros and buy dollars – pushing the dollar up (and hurting US exporters) or they would have to dump their US assets (hurting US banks holding similar assets).


By lending to European central banks who then lent to their own banks, the US kept some European banks from being forced sellers of risky US assets – and in the process putting pressure on US banks. The US wasn’t acting entirely altruistically. Emerging market banking systems by contrast often need dollar financing not to support their portfolios of US assets but to support their domestic dollar lending. And it is now clear that a broad range of emerging economies do need access to the international banking system to continue the kind of breakneck growth that they have experienced recently — and have been caught up in the recent “deleveraging” of the global financial system. The FT’s Garnham again:
Analysts said emerging market currencies were being hit as foreign investors pulled money out of developing regions, driven by liquidity pressures from the credit crisis. “There seems little now that the authorities can do to reverse the process of deleveraging that is taking place with financial institutions all contracting their balance sheets at the same time,” said Derek Halpenny, at Bank of Tokyo-Mitsubishi.

Hungary is scrambling for euros. Ukraine’s government is scrambling for dollars and euros – both to back its currency and to cover the maturing foreign currency borrowing of its banks. Pakistan’s government needs dollars. Korean banks are scrambling for dollars. As are Russian banks. And Kazakh banks. And Emirati banks.

In many of the oil exporters, the government was building up foreign currency assets (reserves, sovereign wealth funds) while the private sector (including many firms with close ties to the government) were big borrowers from the international banking system. In the Emirates there is an added complication: Abu Dhabi was the emirate building up its external assets, while Dubai was the emirate doing the most borrowing. But across the emerging world, external bank loans have dried up – creating a scramble for foreign currency liquidity.

And emerging markets (and Iceland) are looking for help from a range of sources. Their own central banks’ reserves (Korea, Russia, the Emirates) – or the foreign assets of their sovereign fund (Russia, China, Qatar, Kuwait, perhaps Abu Dhabi).*** The IMF, which is clearly back in business. European central banks (Hungary borrowed 5 billion euros from the ECB, the Nordics swap line with Iceland — which was recently tapped for euro 400 million). Russia (if it lends to Iceland). Or China. Pakistan was certainly hoping that China would offer an alternative to the IMF; China though does not currently seem to be willing to hand Pakistan a sum that is equal to a couple of days of its reserve accumulation … .

This frantic activity suggests another potential change to the global architecture for responding to crises: the IMF no longer necessarily has a monopoly on hard currency crisis lending to the emerging world. It is now one player among many. That is a fundamentally a reflection of the increased reserves of many large emerging economies. China clearly has more dollars than in needs to maintain its own financial stability, which means that it is an alternative source of dollar financing. Russia may be too – though the large dollar and euro liabilities of Russian banks and firms implies that its own need for reserves could be quite large. It isn’t in as comfortable a position as China.

The diffusion of pools for dollar liquidity available to lend to troubled emerging economies seems at least to me to pose a fundamental issue for the G-7 countries that traditionally have been able to essentially decide on how the IMF’s funds are used among themselves: does the diffusion of financial power a major effort to bring the big emerging powers into the IMF’s fold – and thus to restore a de facto IMF monopoly on large-scale crisis lending? Or would the cost of any “deal” that would lead that countries like China and Russia and Saudi Arabia (which already has a large IMF quota) channel their lending through the IMF prohibitive?

The right answer isn’t clear to me. On one hand, granting the new players significantly more votes might make it next to impossible to build consensus in the IMF – and even a generous increase in the voting weights of key emerging economies might not be enough to convince them to channel their “crisis” lending through the IMF. China might not want to give up on bilateral lending in exchange for say 15% of the IMF’s voting shares. On the other hand, China hasn’t been keen to throw its reserves around over the past few weeks – preferring the safety of Treasuries to Agencies (or a dollar deposit in Pakistan’s central bank) – and might prefer conditional IMF lending to the risk of losing its funds …

For now it seems to me that the crisis likely has increased the gap between the G-7 (and G-10) countries and the rest of the world in a couple of key ways. Inside G-7 land, US banks could lend in euros (and European banks lend in dollars) secure that they had access to a lender of last resort – and the G-7 countries would still be in a position to offer hard currency loans to their “out-of-area” friends through the IMF. Outside G-7 land, countries would rely primarily on their own foreign currency reserves to cover the foreign currency liabilities of their banks – and potentially could use their own reserves to finance their crisis lending to other troubled countries.**

In some ways, that is a world where the gap between the G-7 countries and the rest would gets larger not smaller …
* Switzerland is an exception; it stands outside the “Western’ alliance but has access to the swap lines. But the Swiss have long been a big part of central bank cooperation – Basle and all.
** This leaves aside a key issue, namely the fact that countries outside the G-7 provide enormous quantities of unconditional dollar financing to the US through the buildup of their reserves. That reserve growth is partially a function of the need for countries outside the G-7 world of reciprocal swap lines to hold a lot more foreign currency – but it is also a function of these countries ongoing policy of pegging their currency to the dollar at an undervalued level. It also ignores the debate over whether sovereign funds investments in the US and European banks should be considered private investments for profit, or part of the global policy response to the crisis.




The Last Debt Orgy
Former Federal Reserve Chairman, Greenspan: 'We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power' - February 15, 2005


It is very common among 'sound money' believers to entertain some kind of fascination with Greenspan who spoke out against 'irrational exuberance and 'infectious greed' at the end of the dotcom cycle as he now warns that ' the Fed is not a magic piggy bank'. For them, Greenspan will always be remembered as the engineer who has unleashed the Horsemen, calling for America's demise and the world by extension. The Maestro and his cheerleaders from around the planet should be very happy that the 'guillotine' has become an historical relic, because what is happening is, without a doubt, reminiscent of the events that led to the devastating hyperinflation and the bloody French Revolution.

Loose monetary policy and decades of faulty interest rates are the absolute main culprits. When interest rates fail to control the amount of debts, the opposite happens: it then increases the burden of debt inexorably. Just like printing too much money inflates prices while provoking currency devaluation. More money is then needed to purchase the same goods and services. This is an insidious process that corrupts many minds, from the top down. The top takes advantage of the bottom. And that is why the gap between the rich and the poor worsens, and the middle-class ends up being destroyed. As the above quote by The Maestro stipulates, the FDIC won't be able to do a thing when the USD will become peanuts -- eventually.

While it remains to be seen as to whether chaos and unrest will be witnessed, revolutions also tell us that nothing has changed under the sun and this alone should question us very deeply. Instead of resorting to violence how about starting to put faith in the idea that our neighbors are smart enough to grasp ECON 101, because if we don't, things are only going to become a lot uglier before they get better...

To start with, the TV broadcasts have once again done everything they could to hide a backdoor giga-bailout orchestrated by the Fed to keep the economy lubricated: the banks have borrowed a record $437.5 billion per day from Fed, Reuters attested candidly as of October 16. Let's also mention that the Fed announced a few day before that it would to provide broad access to unlimited borrowing. So what happens when one has to borrow $100 to honor $100 loan?

So, you can imagine where the irresponsible actions of the monetary elites are going to lead us, can't you? But this is nothing surprising from Helicopter Bernanke who has fervently pursued Greenspan' s task aimed at eradicating the cash-strapped middle-class in favor of foreign banks holding too many dollars, and which they were about to dump if anything was done. Ellen Brown, who monitors the situation closely, sums it up like this: FMae and FMac, along with AIG had to be bailed out to prevent the 1 quadrillion dollar derivatives from detonating - temporarily.

Furthermore and astonishingly, this also means that these $700B dollars were just a part of a political sponsored media circus to create a diversion. For the record, let's consider the Fannie and Freddie debacle: Barney Frank in 2003 said that Fannie Mae and Freddie Mac were not facing any kind of financial crisis... then we have Bill Clinton who asserted that Democrats resisted standards for two institutions... on the top of that we now have Obama who is a top recipient of Freddie and Fannie lobbies pushing for no-doc loans, nothing-down houses, equity-line hustles, phony appraisals, in short gleefully shaking the money tree in every direction they could.

By the way, did you know that as economic storm was brewing, Congressional Wealth grew 11% last year? While condoning any bailout is unethical for obvious reasons (it only makes matters worse and prevents from prosecuting the evil doers), we also have a classic case government failure. By now it should be obvious that these two lenders must go. More concretely, the American citizens are being tested and must show how far their resilience toward theft can go. Despite themselves they have become the facilitators of toxic and illiquid loans that have come home to roost. Do not count on the Newspapers facing historic debt burden to tell you the truth.
Our government and its owners appear to be testing how much the American public will tolerate. A few years ago, no one could have imagined that the silent majority would quietly accept thefts of this magnitude from a government that stopped tiny payments to single mothers with poor children in the name of welfare reform because the program's $10 billion cost was breaking the federal budget. This isn't socialism, it's fascism. -- Sean Olender, sfgate.com

 Last October 11, the Times.uk asserted that Lehman Brothers demise triggered the hugest corporate debt defaults in history as grave concerns as to whether Washington’s $700B bailout fund will be enough to avert a financial meltdown. It emerged that the Fed Bankers are anxious that if the Treasury is not able to accelerate the speed at which it launches its rescue scheme, it will have no effect. Of course, they know, they are just buying time. It is not without a reason that the IMF Warns of Global Financial Meltdown. As lawmakers and Wall Street Bigwigs are patting each other's backs, it should be useful to mention that Lehman CEO contributed heavily to Democrats - over Republicans nearly 5-to-1!

It is tempting to assume that human beings are a lot more clever nowadays but are they really so? What is left from the 'Industrial Revolution' and its ideology behind that compelled women to join the ranks of the work force, claiming that they would help the family enjoy an unprecedented wealth. Unfortunately this is not what has happened. The reality shows that the average working families are today in debts up to their eye balls and one of the parents often has two jobs. Due to inflation, nearly 30% of US families now subsist on poverty wages. Their children are burdened with student loans that will take 30 years to be repaid. What quality of life may a young couple into medicine expect today with loans topping half-a-million dollars?

The party is over for the borrow-and-spend culture, for an economy based 72% on consumer spending, nothing will never be the same, Peter Schiff concludes. America's $53 trillion debt problem is very real. According to Michael Hudson, writing in the May 2006 issue of Harper’s Magazine, are Americans unwilling to face reality. In the meantime, Wall Street banks in $70bn staff payout, or 10% of US government bail-out package while admitting that the bailout won't work as of Oct 18, 2008. So much for the 'brightest college degrees club' managing the planet - indeed!
It’s clear that the government would like us to use the capital," Mr. Dimon said on a conference call with analysts on Wednesday. "If you are a bank that is filling a hole, you obviously can’t do that.

 While Europe blames and curses America for the global credit crunch, it is ironic that European banks have turned out to be deeper in debt than their US counterparts, contends Evans-Pritchard on 10/5/08. Europe put $2.3 trillion on the line to protect the continent's bank. So much for an EU treaty called The Stability Pact as they are staring into the abyss and wondering who's going to bail out the Euro next? Probably not the UK: the Bank Of England unveiled £500B rescue package early this month.

On October 16, 2008, ECB went nuclear as EU leaders called for a 'civilized' capitalism. Cynically, World Bank President Mr. Zoellick confesses that the G-7 is not working. Indeed when debts are not kept under control, predictions and estimates are always wrong. Instead of getting back to the basics of ECON 101, Zoellick urged the creation of a new larger Group that would include China, Russia, Saudi Arabia and others to solve the world's economic problems. A New World Order!

Long time viewed as a financial Eden, Iceland too has gotten a taste of the 'kiss of death'. As the Icelandic krona is about to become history, Lawmakers have no other option left than contemplate an IMF bailout. To refresh your memory, the IMF is the same lender of the last resort whose advice plunged Mexico, Argentina, Russia ( which might go bust again) and lately Japan into financial turmoil. We can only wish Icelanders a lot of luck! As a matter of fact, indebtedness knows no boundaries (classes and cultures): early this month even Pakistan went under and as a result, is being threatened with a currency crisis. Pakistani leaders still hope to be able to borrow $10B from the bankrupt UK and US. Ireland, long time considered a taxation heaven for European firms, is currently undergoing a massive adjustment due to the bust of its housing bubble.

To make the matters worse, a columnist from the independent.uk asked if Switzerland could become the next Iceland... Thousands of miles away from Ireland, a bad omen suggests that Russia's Crash looks very similar to that of 1929, a Bloomberg columnist reported. Indeed, Russian equities this year have lost 67% so far. As you read this, the Indonesian President suspended the stock exchange indefinitely 'to prevent deeper panic' Delaying outcomes is absolutely senseless because at some point, we'll end up reaching an exponential threshold where conflicting interests and lies - will collide at once.
With a flawed diagnosis of the causes of the crisis, it is hardly surprising that many policymakers have failed to understand its progression. Today’s failure of confidence is based on three related issues: the solvency of banks, their ability to fund themselves in illiquid markets and the health of the real economy. economist.com

 Although (credit induced) financial plagues dot Mankind's history, the financial media often presents debt crises (ie: business cycles) as being facts of life. However, this didn't prevent them from lauding the housing mania at every level they could, as if this time was different. Would they all be suffering from amnesia? Please do your homework and google 'The Bubble That Broke The World' and you will discover the dreaded similarities between the roaring 1920s and today's. .. Flawed diagnosis? are they stupid or do they have a plan?




Ilargi: It’s safe to say that Jim Willie takes no prisoners.

Wall Street Monsters & Meat (You)

Jim Willie



The tag team of JPMorgan as the monster and Goldman Sachs as its harlot represent a powerful pair that is more responsible for destroying the entire US financial system than 95% of the American public has any awareness. The colossus of JPMorgan is a monster, a predator, nurtured by pond scum. It has gobbled up Chase Manhattan, Manufacturers Hanover, Chemical Bank, Bank One, and more over the past two decades. Their profound presence in keeping the USTreasury Bond yields down can never be understated. They do so by managing 85% of the credit derivatives on the planet. They distorted usury prices, as in price of borrowed money, thus aggravating the LIBOR (London InterBank Offered Rate) market in a very visible manner.

The oblong usury prices have contributed mightily to the destruction of the USEconomy itself, created bubbles, killed jobs, and wrecked savings. The ugliest hidden activity for the JPMorgan monster is to manage the Bank of Baghdad, where they manipulate the crude oil price, where drug trafficking money is funneled from Afghan sales, under management by the USMilitary aegis (guys with no uniform stripes or markings). Maybe such illicit money offsets Credit Default Swap losses, making America strong for freedom and liberty.

Goldman Sachs is clearly the investment banking agent for the USGovt, given the privilege of insider trading in unspeakable proportions. They manage the Plunge Protection Team efforts to intervene in financial markets, making America strong for freedom and liberty. The new kid on the block is the FDIC. The Federal Deposit Insurance Corp is steering fresh meat into the corralled JPMorgan stockyards for slaughterhouse feeding. The label of harlot might be too kind, especially from the perspective of senior bond holders. But JPMorgan requires fresh meat (capital) periodically, thus making America strong for freedom and liberty. Nevermind the fires caused after its hearty meals and flatulence.

This article discusses the JPMorgan monster, its behavior, and teeth revealed. Robb Kirby (see his website, click HERE) often covers JPMorgan illicit behavior. This article discusses banking system realignments to destroy savings accounts owned by the people, and the Coup d'Etat just completed. The criminals on Wall Street have taken full control of the USGovt financial management, with blank check written by a thoroughly intimidated USCongress, deceived steadily and easily. Threats and intimidation are central to the successful coup. The Ponzi Scheme has been revealed, even as the frail and tattered Shadow Banking System has been revealed.

The key to the bailouts is its continued Top Down approach, which favors the Ruling Elite and denies all but crumbs to the people, who have been subjected to a foreclosure revolving door on mortgage loan assistance. Since nothing has been solved from this approach, a total systemic breakdown is assured, whose climax will be the current Administration and the Wall Street executives in charge of the criminal syndicate riding off into the sunset in retirement. Rome burns. Much more detail is provided in the upcoming October report due this weekend. The theme is this subset synopsis article is of criminality, deception, monster exploitation, market corruption, and the collapse of a failed system, whose crescendo represents the greatest financial crimes ever witnessed in modern history. Americans do it big! The proprietary Hat Trick Letter covers much more of recent events, interpretation, and analysis, but here, focus on impropriety.

THE MONSTER, ITS BROKER & HARLOT

JPMorgan will require fresh asset meat every several weeks in order to survive, but the process will result in a sequence of severely damaging CDSwap fires. Perversely, the FDIC is their investment banker agent. Two mergers of questionable nature highlight the altered role of the Federal Deposit Insurance Corp (FDIC), which no longer protects bank depositors or their investors, but rather serves JPMorgan Chase. When Bank of America merged with Merrill Lynch, a trend started, one that exposed private stock brokerage accounts. Officially they can be legally borrowed across subsidiary lines. The FDIC averted a failure of Merrill Lynch without the credit default implications. The other event was more blatant, as the FDIC steered Washington Mutual out of bankruptcy failure and into the JPMorgan slaughterhouse.

Inside its chambers, JPM gobbled up the WaMu deposits and benefited from ratio improvements. Senior bond holders were crushed, fully denied due process from bankruptcy. The FDIC has become an ugly investment banker lookalike, serving JPM and not the US public. The FDIC owns a pitifully small $45 billion in funds available for bank bailouts, at June count. When the dust clears a year or more from now, many multiples more will be necessary for many bank failures.

The path of JPMorgan growth into a FRANKENSTEIN took radical changes in course after both the failures of Lehman Brothers and recognition that Fannie Mae & Fannie Mae had to be taken over by the USGovt. To halt the run on their bonds, the USGovt acquired the entire F&F Cesspool. The impact hit the Credit Default Swap market immediately. AIG had been weakened one week earlier from the technical default of Fannie & Freddie, which resulted in broad CDSwap payouts. Ripple effects from the Lehman Brothers failure that followed were deep and broad throughout the system, killing AIG. The Wall Street central harlot (Goldman Sachs) advised the USGovt to assume full control and risk of AIG, as GSachs avoided $20 billion in sudden losses in the nick of time, a pure coincidence!

The entire episode with Wells Fargo bidding for Wachovia, in competition from Citigroup, is steeped in comedy with vampire stars. The grapevine in Washington and Wall Street passes word that the Citigroup versus Wachovia wrestling match was actually a sponsored backdoor bailout attempt to save Citigroup, not just Wachovia. Again, the FDIC was the matchmaker. My term has been 'Dead Marrying the Dead' which still holds true, since Citigroup has been dead for one year. Under the original Citigroup proposal, the FDIC had arranged for guarantees of $42 billion for Wachovia debt by the USFed. The new Wells Fargo deal enabled the US taxpayers to get off the hook. The reversal by the FDIC to serve the public has caused gigantic Wall Street problems, as Citigroup now finds itself in a position more perilous than anyone believed. This battle has flip-flopped once, and might again. Citigroup would probably have died if not for the USGovt purchase of bank stocks.

THE TEETH OF THE MONSTER REVEALED

JPMorgan is a monster predator at work, hidden from view. After the Fannie Mae experience, covering their giant raft of CDSwap contracts, making huge payouts, JPMorgan was close to a bankruptcy. They needed to feed off another bank, to consume private deposits and thus shore up the balance sheet. Lehman Brothers was let go to fail, but its failure would surely trigger a gigantic wave of credit market fires. The Lehman CDSwap resolution has cost roughly $300 billion, paying 91 cents per dollar of coverage on their failed bonds. The Wall Street Powerz permitted Lehman to fail, so as to prevent a JPMorgan failure, thus risking that the fires caused could be contained in CDSwap fallout. The irony is that JPMorgan undoubtedly suffered considerably from that fire in fallout. Now JPMorgan might need another Wall Street failure, for to consume another block of assets, but with yet another ensuing CDSwap fire. JPMorgan is a monster predator at work, soon hungry again. It might be eyeing Morgan Stanley. We might discover a failure in an unexpected place, like a big insurance firm, whose sector condition is not well advertised.

With each big bank failure, whether a commercial bank or investment bank, heavy damage is done to the system. The CDSwap destruction is mostly hidden, with large pillars burned out. We the people hear of the destruction only if and when a major bank fails as a result. No death, no news, however but with potentially significant hidden structural damage. As financial firms pay out vast sums on CDSwaps as in the Lehman case, and the Fannie Mae case, and the Freddie Mac case, the system bleeds capital. Lending suffers. The sequence corresponds to a powerful vicious cycle. JPMorgan will need more deaths to survive, but each death causes more deadly CDSwap fires. JPMorgan is a monster predator at work, which leaves fires on pathways where it last stepped. The best analogy is that CDSwap contract payouts from bond failures are like mini-Hiroshima events that might lead to a bigger such event. Ironically, to save JPM the financial system must destroy the shadow banking system centered in New York City, since Wall Street firms, plus Bank of America are at its center. The system lacks disclosure and transparency, just like Wall Street likes it.

Permit the pathogenesis to proceed further, and the majority of Western bank system must be burned in order to leave JPMorgan as prominent survivor to rule over a scorched empire. This process is a sick consolidation. The bank conglomerate is a major crime syndicate colossus, and center of the drug traffic money laundering, coordinated by security agencies, fully condoned by the US Federal Reserve itself. The AIG story is nowhere complete, the latest being their expensive parties. AIG has caused major complications, another monster that will resurface periodically at feeding time. Personally, my wish is to see the RICO law brought forward, at least to deposit the monster in a cage. In done my way, not a single additional USCongressional bill would be approved and granted for a bailout or rescue without rapid investigation, prosecution, turn to state's evidence, asset seizure, restitution, and imprisonment for dozens of Wall Street executives, starting with Hank Paulson.

STOCK MANIPULATION WITH DEEP MOTIVE

Few analysts, pundits, or anchors are aware of the mammoth conflict of interest involved with the USTreasury Bond sales required to pay for all the bailouts. JPMorgan, with the essential aid of Goldman Sachs, plot to bring down the DJIA index and the S&P500 index whenever the USTreasury conducts auctions or needs Congressional passage of key bailout bills. They have sold $194 billion of Cash Mgmt Bills (CMB) in the last two weeks, today $70B, tomorrow another $60B. The big stock declines seen recently work to the BENEFIT of the USTreasury and USFed as agent for auctions. TBill yields are down near zero, in case you have not noticed, with principal prices corresponding almost as high as the bond permits. The USGovt is conducting auctions for TBills at top dollar prices, when its credit rating should be caving in radically upon downgrades. These USTreasurys are destined to enter default at a later date, where the loss to foreign investors will be maximized. Most of the US public has savings dominated by stocks, with little in bonds. So the US public is being fleeced, coming and going, since even money markets contain toxic mortgage bonds. Look for the stock market decline to come to a surprising end when the USGovt has completed the majority of their planned emergency supply sales via auction.

The Wall Street tactics have recently turned more vicious and devious, actually creating volatility, producing fear for political purpose. They accuse hedge funds of driving up the crude oil price, rendering great harm to the USEconomy and US citizens. So they urged unsuccessfully the Securities & Exchange Commission to force hedge funds to reveal their speculative positions. The Wall Street thieves and conmen wish to learn details on hedge fund positions so as to target them illicitly. In a queer twist, JPMorgan has benefited from an interesting double kill. They exploit hedge funds, wreck them, then encourage them into the fold at JPM in brokerage accounts, where their private accounts are rendered vulnerable under the new USFed rules. JPMorgan is a monster predator at work, which is permitted to manipulate markets and clients with total impunity.

There is one more detail. Lest one forget, Goldman Sachs was exempt from the short rule restriction placed on a few hundred financial stocks traded. The reason had something to do with market stability and integrity assurance! Goldman Sachs clearly profited from the ups & down in the Dow and S&P500, lifting stocks after Congressional agreements, pulling them down before those agreements. JPMorgan and Goldman Sachs profit handsomely when the USGovt Plunge Protection Team pushes the stock indexes up with their usual methods. Of course JPM and GSachs are the managers of the PPT efforts. YES, IT IS TIME TO PUKE NOW!!!

HIDDEN USGOVT COUP BY WALL STREET

The USCongress has been subverted by intimidation and ignorance, maybe bribery. Regulators and law enforcement bodies are mere accomplices. The entire US banking system has undergone an unprecedented grand nationalize initiative, including the financial system, when considering the mortgage and insurance giants. The total bailouts are huge when put into perspective. This is a hidden coup, complete with deep fraud, corruption, and ruin for both prosecutors and whistle blowers. The USDollar is caught in the middle of a black hole scrambled with fraud. Paulson is the new Chancellor of US Inc, Bernanke the new Currency Lithography Manager, and Sheila Bair the Investment Banker (a la Goldman Suchs). Paulson assumes all powers over the financial state from the president, via the banking industry control. The government bailout redemption of $trillion past fraud closes the loop. Bernanke manages all efforts to use printed money for the purpose of buying worthless counterfeited and fraud-laced bonds, buying commercial bonds and posted collateral among businesses, as well as making printed paper products available to foreign central banks in relief of past fraud.

Bair will act as the director of slaughterhouse traffic for JPMorgan, which needs a steady supply of bank deposits to offset their destroyed balance sheet from continued credit derivative implosion, thereby betraying the chartered FDIC pledge to protect bank depositors and senior bank bond holders through liquidation procedures, with full recognition of expedience. Hail to the king, long live the king! The US public seems so dumbstruck that it cannot demand even full disclosure of the process, let alone private offshore bank accounts for the new leaders of the successful coup.

The coup formalizes a climax to a Ponzi Scheme. A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service bearing true value delivered. With the ongoing steadfast support offered by Alan Greenspan, they were able to maintain an incredible Ponzi scheme. They sold financial toxic waste products in the form of Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDO), Structured Investment Vehicles (SIV), Unidentified Financial Objects (UFO), and Credit Default Swaps (CDS). My favorite remains the UFOs. The corruption of politicians in Congress enabled the process, with relaxed guidance by the Financial Accounting Standards Board (FASB). The two key ingredients for the Ponzi Scheme are a mythological ideology and a high priest to endorse the game from a credible pulpit.

Alan Greenspan claimed legitimacy of the US banking system, blessed credit growth and fractional bank practices as beneficial, and praised risk pricing systems using credit derivatives as sophisticated. The high priest used to be Greenspan, but now a tag team has replaced him. Hank Paulson is the spearhead for the great coup of the US financial system. Usage of short restrictions rules has been key to both instilling instability at necessary times, and raiding hedge funds. USFed Chairman Bernanke swaps USTBonds for any piece of bonded garbage known to mankind. Mammoth placements of leveraged trades by Wall Street firms make for some of the most grotesque insider trading in US history.

DECEIT & INTIMIDATION

The lies, deceit, backroom pressure, and fleecing of the American public is deep. Take the Emergency Economic Stability Act. Most of the initial $250 billion outlay was not devoted to American bankers, but rather to foreign bankers, primarily in Europe and England, and to purchase preferred US bank stocks. The US public was not told about this redirection, which constitutes misallocation, misappropriation, and fraud. Tremendous backroom pressure was exerted at every step. The underlying assets involved in swaps do not even have to be US-based mortgage bonds. The formerly submitted Paulson Manifesto was revived in a power grab, complete with considerable infighting and squabbles, since Morgan Stanley was given favor. The usage of funds to buy investment stakes in the giant US banks is yet another direct Fascist Business Model tactic, assisting banks close to the power center, yet reeking with corruption.

The sickening irony is that they have no more money to disseminate and distribute. They cannot reveal their lies until they formally request more Congressional funds. Much discussion has come that the USGovt should adopt the Swedish model in the resolution of the current crisis. Not in a New York minute!! That would require heavy stock and bond losses, and more transparency of scum. Interestingly, the market discounts words as worthless, while bailout actions fail to produce even a positive reaction for a full day, until Monday last week when the Dow Jones Industrial index rose over 900 points. That was clearly Wall Street engineering a profitable short cover rally. Check S&P futures positions beforehand, if you can. The credibility of the USFed is close to being destroyed. On October 15, the same Dow Jones index fell over 700 points, almost 8%. Even the global rate cut was rejected by stock markets, a major insult.

Intimidation of the USCongress has been huge and powerful, similar to when the Patriot Act was passed in 2002. The Congress was actually threatened by martial law in the cities of the United States if the big bailout package was not passed two weeks ago! This was not reported on CNN or CNBC, but C-Span did cover it. The mobilization of the USArmy for civilian control is well known in the past couple weeks. See the Third Brigade back from combat duty in Iraq. This account came from Rep Brad Sherman of California. To achieve supposed financial stability, the nation succumbed to totalitarianism by Wall Street thieves, conmen, fraud kings, and criminals. Instead, the bailout only covered up $trillion fraud. My position has been very stable and consistent, that such tactics are typical characteristics of the Fascist Business Model. The state merges with the large corporations, who proceed to terrorize the citizenry after unspeakable protected corruption and theft. To object is to be labeled unpatriotic!

TOP DOWN SOLUTION FAVORS THE ELITE

The top-down approach used to date aids the wealthy bankers, while the homeowners are denied aid. That aid is promised but rarely arrives. The fundamental problem here is that billion$ are devoted to shore up insolvent banks, to redeem their worthless (or nearly worthless) bonds, and to give a giant pass to the executives. Trust has eroded throughout the system. Banks distrust each other's collateral. The result is that eventually the USEconomy will enter not a recession, not a depression, but a DISINTEGRATION PHASE. Despite Bernanke's studious efforts, borrowing from revisionist history, his liquidity is nothing more than bailouts at the top for the perpetrators of the housing bubble and mortgage debacle. The bank system benefits little inside the US walls of finance.

A bottom-up approach might have had a chance to succeed, but a top-down approach is a sham. To expect a top-down solution that actually relieves the housing inventory logjam is insane. That is like feeding a teenager with meals placed inside the human rectum, expecting nutrients to find their way to the rest of the body! The credit mechanisms do not travel upward within the pyramid, but rather in the downward direction, starting with a borrower, a good collateralized risk, and an underwritten loan, when plenty of lending capital is available. The US public has bought this stupid 'Trickle Down' philosophy for years, learning nothing. The USEconomy is on the verge of collapsing. Short-term credit is being denied at key supplier intermediary steps, soon to result in recognized disintegration.

The primary practical objective of this corrupt trio (JPM, GSax, FDIC) is to avoid Credit Default Swap fires, which would bring an end to their reign of terror. This USEconomic failure is in progress and is unstoppable. The 1930 Depression resulted after monumental credit abuse from the bottom up, as hundreds of thousands of people leveraged investments 10:1 with stocks primarily. The 2000 Depression will come after monumental credit abuse from the top down, as hundreds of big financial firms leveraged investments by 7:1 and 20:1 with bonds primarily. The most absurd of all is the CDO-squared, leveraging upon leverage. Total seizures have crippled the banking system. Short-term credit has largely vanished, as letters of credit are routinely not honored at ports in the United States. The panic will continue, especially when supplies dry up.

GOLD & SILVER AWAIT THEIR EXALTED STATUS

We are witnessing the disintegration cited in my recent forecasts. It is a systemic failure, marred by lost confidence and trust in the entire financial system. Expect foreigners soon to pull the rug from under the American syndicates in control. Several key meetings have already concluded, totally unreported in the US press, which occurred in Berlin Germany. Consider it the Anti-G7 Meeting. Implications are profound, and involved the Shanghai Coop Org tangentially, since its member nations possess so much new commodity supply. Consider it the Anti-NATO group. An important and powerful alternative financial system is soon to spring into action, including high-level bilateral barter. Those who expect the current US Regime to continue their financial terror are in for a big surprise.

Expect defaults in the COMEX with gold & silver, whose prices for paper vastly diverge from physical, to the anger of foreigners watching. They hold massive precious metals assets. Disparities now contribute to powerful forces, sure to break the current system. Grand systemic changes come. THE RESULT WILL BE A BREATH-TAKING DISCONTINUITY EVENT.

Ironically, the more inner anguish felt on the falling gold & silver prices, the closer we are to a new financial framework, with the USDollar relegated to a Third World role. A REPLACEMENT GLOBAL RESERVE CURRENCY HAS ALREADY BEEN DECIDED UPON. Its launch awaits the proper moment. The Americans are last to know, as usual. The US leaders are under the illusion of being in control!


90 comments:

FB said...

Hello All,

Ilargi, is there a place where you have all the photos used to date? Some are absolutely striking and moving. I would like to know which are the favorites of the people here.

About JAS writing "So what, if small developing countries fall into chaos due to bankruptcies", I know that each country is largely responsible for its own situation, but that opinion, given the role of the U.S. in this crisis, strikes me as callous to the point of being flippant. JAS, am I misunderstanding you? If so, what did you mean?

Concerning meeting other TAE readers, that would be fun. Anyone here from the Alps, the Paris region or southern Germany (where I will be in a few days)?

Ciao ragazzi,
François

P.S. Ilargi, did you see that you were quoted on TOD (Nate's piece, in the comments). The way the person (Dryki) turned the phrase, it seemed obvious that everyone knew who Ilargi was. No need to elaborate, everyone simply knows. Pretty neat.

Stoneleigh said...

I answered a few questions at the bottom of yesterday's thread, so people who asked questions on mutual funds, student debt etc might like to check back there.

If I missed anyone's question, you may need to ask it again. I was on a course for my new job last week and may have missed a few things. Going forward, I will have less time than I used to, but I'll try to keep up with things as much as I can.

Stoneleigh said...

I don't know if I'll ever get back to Europe François, but if I ever do I'll certainly look you up. There's an outside chance I may have to visit some European energy infrastructure, although the odds aren't that high.

conch shell stewie said...

Is it just me or are the TAE comments posted over the last week or so about Corpo-fascist takeover, violent rebellion in the States, catastrophic meltdown, a new civil war getting a little over the top? I understand the events are moving faster now than they ever have, but try and tone the "Mad Max" and/or "1984" fantasies to a relevant discussion of this financial crisis.

Ilargi said...

".... try and tone the "Mad Max" and/or "1984" fantasies to a relevant discussion of this financial crisis."

I'll second that. Even though some of my observations may trigger such fantasies, my aim is to get people into safer financial, resource and community territory.

The rest of it, as appealing as it may be to some, has no place here.

Rototillerman said...

A week ago or so I posted the link to the second This American Life podcast on the economy. One of the points driven home by that program was the interconnectedness of the CDS (credit default swap) investments. This was done through a practice called "netting," whereby a firm that sold a CDS on say, Lehman Brothers, going under would also buy a similar CDS contract from someone else also with Lehman Brothers as the default target. The goal, of course, was to take advantage of a small difference in price between the contract sold and the contract bought, usually at different times.

This all brought to mind a passage that I'd read in Laurence Gonzales' book Deep Survival, one of the last purchases I made from Ruppert's From the Wilderness site before it ceased operating. I'm going to quote a lengthy passage here, but I think that you'll find it thought-provoking. The parallels between mountaineering accidents and economic collapses are quite striking:


The type of accident that happened on Mt. Hood on May 30th, 2002, was going to happen, as it always does, to someone somewhere. All of the available theory tells us that it is an inevitable part of the larger system that puts climbers on steep snowy slopes in large numbers.

Climbers travel in roped teams without fixed protection all the time. They get away with it, too. They use ice axes like walking canes on descent. All the elements of the system in the Mount Hood accident were normal and can be explained by normal accident theory. It was Charles Perrow who coined the term "system accidents" in the 1980's, and it's a fascinating (if academic) exercise to see his work and both chaos theory and the theory of self-organizing criticality dovetail. The Mount Hood accident involved two broad categories of effects: the mechanical system that the climbers were using, and the psychology and physiology that contributed to the accident.

In recent years, those who study accidents in outdoor recreation have begun to recognize that all accidents are alike in fundamental ways. If you find yourself in enough trouble to be staring death in the face, you've gotten there by a well-worn path. Your first reaction might be: How could this have happened? What rotten luck! But if you are alive afterward, and bother to examine what happened, it will all seem as orderly as the Cajun Two-Step.

What we call accidents do not just happen. There is not some vector of pain that causes them. People have to assemble the systems that make them happen. Even then, nothing may happen for a long time. That is how mountains such as Hood, McKinley, Longs Peak, and others get a reputation as milk runs. Many of the people who get into the worst trouble on such nontechnical peaks are those who have climbed in the Himalaya or South America and come to Denali or Hood with an attitude that they're slumming. Perhaps they're doing a favor for a friend who wants to have the experience. Perhaps they're trying to climb the highest peak in every state. They are hijacked by their own experience combine with ignorance of the true nature of they're attempting to do.

Perrow's "Normal Accidents," first published in 1984, is a work of seminal importance because of its thesis: That in certain kinds of systems, large accidents, though rare, are both inevitable and normal. The accidents are a characteristic of the system itself, he says. His book was even more controversial because he found that efforts to make those systems safer, especially by technological means, made the systems more complex and therefore more prone to accidents.

In system accidents, unexpected interactions of forces and components arise naturally out of the complexity of the system. Such accidents are made up of conditions, judgements, and acts or events that would be inconsequential by themselves. Unless they are coupled in just the right way, and in just the right timing, they pass by unnoticed. Bill Ward had slipped and caught himself before or was in a position where slipping didn't matter. He'd pulled his protection, too, but not just before a serious fall. Perrow's point is that, most of the time nothing serious happens, which makes it more difficult for the operators of the system (climbers, in this case). They begin to believe that the orderly behavior of the system is the only possible state of the system. Then at the critical boundaries in time and space, the components of the system interact in unexpected ways, with catastrophic results.

...Perrow used technical terms to describe those systems [ed: vulnerable to accidents]. He called them "tightly coupled." He said that they must be capable of producing unintended complex interactions among component forces. In his view, unless the system was both tightly coupled and able to produce such interactions, no system accident can happen (though other failures happen all the time).

... I like Perrow's descriptions of such accidents, because while he was talking about a nuclear power plant he could have just as easily been talking about Mount Hood: "processes happen very fast and can't be turned off... recovery from initial disturbance is not possible; it will spread quickly and irretrievable for at least some time... What distinguishes these interactions is that they were not designed into the system by anybody." He's describing the self-organizing behavior seen everywhere in nature, which complexity theorists, such as Stephen Wolfram, believe probably gave rise to life in the first place.


I haven't read Perrow's book, but it sounds like it has broad applicability to systems, including economic systems. Deep Survival, by the way, is a very interesting book with a lot of topics to think about as we ponder our collective and separate fates.

Dan W said...

@ CSS

Give Paulson the conch...

Actually, in response to your "over the top" post---it certainly feels over-the-top and melodramatic, but, in my opinion, sometimes our feelings are useful tools in protecting us from shock.

Here's my point:

The 1st plane hit the world Trade Center Tower...and people in the OTHER tower looked, watched, went back to their desks...shocked beyond response, they simply froze in a state of instinctual, survival-mode denial. A few people broke out of it really quickly and told everyone to run like hell!! Those people survived.

In the case of the current meltdown, the financial and political realities that we face are staggeringly surreal...when the 'swap' house-of-cards finally comes caving in---which the laws of physics and nature say it MUST---then the entire banking system of Fractional Reserves implodes...which it is already in the process of doing.

Do you think, for one moment, that those who are currently in power are going to relinquish their position of power without a struggle? The laws of nature and physics AGAIN point to a global struggle for survival...and as such, I don't see the claims of posts here as being "over-the-top" in terms of the evetualities that we as a species will face---next week, next month, next year???

Remember, there is a significant difference between MELODRAMA and DRAMA. Melodrama (I don't mean to sound patronizing) is just that, conjured drama to fill a void...Drama, on the other hand, is a response to ACTUAL events...

The current events hitting the global econo-political landscape are damned dramatic.

Tyr said...

Hooray (?), my employer (ING) finally made onto TAE. Well they had been sending an awful lot of "reassuring" memo's lately.

Dan W said...

RE: "...I'll second that. Even though some of my observations may trigger such fantasies, my aim is to get people into safer financial, resource and community territory..."

There may be a fine line for some vis-a-vis fantasy and reality. Here's my point: '...getting people into safer...community...territory...' for some folks is a dramatic reworking of their senses of reality, safety, etc. My parents, for example, live in suburban Boston and are both in their 70s. They are "old" Boston types who have an attitude of self-reliance and a non-nonsense, UNdramtic take on life. Talk about Crystals or Indian Food or The Grateful Dead around them and they roll their eyes and head straight for the Bourbon and Tenderloin. So for them, talk of this financial crisi, even in the most rational, UNdramatic tones makes them feel utterly lost and out of control.

I guess what I'm saying is that the spectrum of responses to a crisis vary, and those responses are honest and maybe need to be validated rather than "belittled".

Just my two cents...

Dan W said...

Anyway....back to the matter at hand...this is, hands down, the most illuminating blog on the sphere...INFINITE THANKS to I&S.

Anonymous said...

tyr, I think you should read this:

http://www.cracked.com/article_16676_6-emails-you-get-when-your-company-about-go-under.html

OuttaControl said...

Today I received an email from a work colleague who I have been trying to convince to deleverage while he can, to minimize losses. It was a link to Chris Martenson's Crash Course.

The best part was that he was just forwarding it to me from one of his big 5 Canadian banker friends. I told him that the irony truly made my day.

conch shell stewie said...

dan, I did not mean for my comment to understate the current problems and future consequences, I simply called for a fair judgement of the reactions we have all been seeing here and many other sites.

Here is my problem with those who view the future as a suburban wasteland with littered streets, internment camps, 24/7 CCTV, survival villages, etc, etc. : I've heard it before. I heard the same thing when I read about Peak Oil, Global Warming, Nuclear War, and most recently the insolvency of our Financial System. Isn't it surprising that such a doomed view of the world seems to have vastly different problems which cause it? Doomers import their own fantasies of collapse from oil production plateau to bank failures, without considering the different implications of each event.

The thing about survivalist types is that they often let their preconceived notion of collapse cloud over everything else, so it always has to "end" a certain way.

So what am I saying? Am I saying that things will never get that bad? No. Or that anyone preparing for collapse is wasting his or her time? Absolutely not. What I'm saying is that it is easy to get carried away in fear and anxiety over this type of stuff because we see 90% of the population live out their lives with nothing but the same expectations that they are used to, but you are walking around thinking "We're fucked, we're fucked, we're fucked, we're fucked" which all comes out when you discuss this with other people online.

Dan W said...

@ CSS

lol..."WF,WF,WF!"

Just reminds me of me when I was a kid...I'd hurt my ankle playing soccer, and the doctor would say "what's wrong", and I'd respond, "my ankle is fucked." :)

I agree with you. There is a panic state of mind, perpetuated by the 'survivalist types' that you identify aptly...and they feed off of that MELODRAMA...it fills a void in their lives, I would argue.

I also surely agree that the post-modern, Mad Max, streets on fire, Omega Man SciFi picture is soap operatic and really stretching things.

The "interesting" thing about the current state of affairs is that we are treading on entirely new ground. This is a minefield that has never been mapped, and not only don't we know where all of the ordinance is hidden, but we also don't know what kinds of mines they are. There have been massive economic upheavals in the recent and not-so-recent past, but this event is totally untique in two distinct ways...I believe.

1. We are witnessing the end of the American Empire..which will also mark the end of the first super-empire of the nuclear age. (I would argue that the fall of the Soviet Union was unique in other ways, but there was, in some manner, a "willingness" to the dissolution of the USSR that made the end rather anticlimactic...the U.S.A. is going to go down fighting, which should be fascinating.

2. We are also witnessing the end of the Fractional Reserve System of banking, the end of banking as we have come to know it, and the end of the first age of globalization. This too is going to be marked by extraordinary tectonic shifts, as our definitions of NATION and COMMUNITY are going to undergo significant revision and revolution.

And so...while I do agree with your point, I also feel a strange kinship to those apocolypsians whose rants portend the darkening of the future.

Anonymous said...

FB,

You're right about me sounding too callous about the current situation of small nation-states falling into chaos… but in reality what can the U.S. or EU do about it? Georgia is a great example. If we still had two corps in Germany we may have been able to flex a brigade to the region. But instead we've allowed Georgia to fend for themselves and we will abandon the Ukraine. If we had billions of $ at the ready wouldn't we have already backed up Iceland who's a NATO ally and not allowed Russia to possibly bail them out? The West is fighting a rear guard economic war and only those within a designated firewall with be protected.

JAS

el_pollo said...

conch shell stewie

Two years ago Ilargi and Stoneleigh had this weird, over the top fantasy that the world's fiscal system was approaching a meltdown. Ilargi even had this fantasy that our Secretary of the Treasury was more morally corrupt and dishonorable than Tony Soprano. Can you imagine that?! Thank God they toned down these paranoid fantasies and chose not to blog them. I mean, really, who in their right mind would believe this stuff? And it might have upset me.

cmh said...

Francois,
Yes that was me with my anonymous post - done in error. Just exhausted I guess after a 12 hour shift with as per usual no breaks. I also went back and reviewed el_pollo's note on mutual funds, which I'd missed before. I went out with a running group today, and we discussed the economy after - people are reluctant to move out of things due to taxes. So many are not understanding the severity of things.
To you, Stoneleigh and el_pollo, thank you.
My financial planner, as you know said to stay invested as I can't time the markets - now I understand he has as little real understanding of the current geopolitical climate, history and economics as a first year nursing student would have of caring for a post op open heart patient on a ventilator and balloon pump.
When I was in high school I had an excellent history teacher who had gone to grad school at the LSE. At that time I liked science, band and languages more, but I do remember him talking about business cycles and how the economy can be manipulated by the central banks.
I just viewed a video on line by the Money Masters - very frightening and it brought me back to my history classes in high school.
I will make an appt with the bank tomorrow, and on my day off - Wed will have funds transferred into ST GICs. It may take a while to have them transferred, but as Stoneleigh has discussed earlier, it's those who lose the least who will come out on top. To date, I have lost about 40,000. That's a lot of money for someone like me.
On a side note, govts according to this video like wars as they create debt. I remember my mom telling me how the economy picked up during WW ll.
When I was at university, Helen Caldicott came to speak and said that if we faced a third world war, it would be one with massive nuclear weapons. It would leave us with a world we would not recognize, or with no world at all. She asked us to think about a world then where there is no available first aid, pain medication, health care workers, etc. to care for the severely injured and burned. The thought made me feel very sick.
My question is this - have those who truly control the economy not thought about such potential tragedies?
P.S. Francois, I am envious of you going to the Alps, I spent considerable time there in the late eighties, doing backcountry skiing. So beautiful!

Dan W said...

@ JAS

Callousness aside...

This seems to me to be a fascinating moment in history---and disastrous, yes---but fascinating in that the opportunity for a country like the U.S. to make a positive impact upon the new, evolving world, is electrifying! I must admit to liking neither Presidential candidate, but I would imagine that an OBAMA regime, with the right guidance from the people of the world, could navigate these new waters with some grace and be part of a move to the 2nd AGE OF GLOBALIZATION that is far more just, far more humane, and far more sustainable.

I know, I know...pretty naive and Pollyanna-ish of me. But it does seem like the scale of the catastrophe is so unprecedented, that the possibilities for rebirth are also limitless.

conch shell stewie said...

Thank God they toned down these paranoid fantasies and chose not to blog them. - el pollo

Did you not read what I wrote or did you not understand it? Ilargi, Stoneleigh, along with dozens of others did not have "wierd, over the top fantasies" about this before anyone noticed, but a critical analysis of bubble creation, herd behaviour, complex systems, leverage vs. liquidity, etc. Then a conclusion was formed based on that data and analysis. Does this sound like wacky crrrrrrrrrrrrrrrrrazy pot dream?

Go back to the discussions from the past week. All I read was rambling about the Joe Six-Pack revolt against the Banker Boyz or when the next brigade of U.S. troops will be patrolling Main Street America. If you call for a middle class revolt or employing military at home, and don't bother with anything other than unverified news reports or reflection of American society, then yes it is a doomer fantasy. That's why I made the original comment of being too much shrill, high pitched comments than what I was used to reading.

Dan W said...

From Elisa Capone:

"...The The Depository Trust and Clearing Corporation (DTCC) argues that the gross amount ignores bilateral trades among counterparties that cancel out. The net payout will only be in the range of $6bn instead of the average $300bn reported in the press (i.e. divided by a factor of 50)..."

and

"...ISDA CEO Robert Pickel in January 2008 notes in a response to Bill Gross’ (PIMCO) “Pyramids Crumbling” that, based on a recent Fitch study for the year 2006, the difference between gross and net CDS exposure is a factor of 50 and that the total CDS market exposure is not the notional $50 trillion but just $1 trillion..."

Dan W (me) asks:

I'm kinda lost here. How can trades amongst counter parties "CANCEL"? The way I read this is that there is an argument that Default Swaps are being traded in a closed circle...and so "everyone" has a certain amount of insurance against defaults AND a certain amount of insurance that they have SOLD to other parties...so that, supposedly, this 'zero-sum' operation means that most folks will have exposure that is covered to a great extent by others in the loop.

MY take is that, because these swaps don't have to be specifically linked to any particular bond or other instrument, and since they could have switched hands and been traded and sold and bundled with other stuff...that in fact the argument being made RE: "cancelling out" debt is totally farcical at best....and a downright lie in all likliehood.

monkeyboy said...

hey Ilargi, can you tell me why you put Austria on your list of countrys in deep financial trouble? I live in Vienna, so i am curious and there is nothing in the news.

Stoneleigh said...

Dan W,

MY take is that, because these swaps don't have to be specifically linked to any particular bond or other instrument, and since they could have switched hands and been traded and sold and bundled with other stuff...that in fact the argument being made RE: "cancelling out" debt is totally farcical at best....and a downright lie in all likliehood.

The flaw in the argument is counterparty risk. Bets don't cancel out if many parties (if not most eventually) can't pay, as will prove to be the case. Unfortunately not being able to collect on winning bets may mean the 'winner' not being able to pay out on any losing bets they may hold, so the effects of counterparty risk can spread quite quickly.

FB said...

Hello Conch shell stewie,

Ilargi has already seconded your remark about over the top comments, so what should I do, "third" it?

Whatever, I fully approve.

Ciao,
François

Ilargi said...

".. the spectrum of responses to a crisis vary, and those responses are honest and maybe need to be validated rather than "belittled".

Dan, I hope you understand I'm not trying to belittle anything.

Stoneleigh said...

CMH,

My financial planner, as you know said to stay invested as I can't time the markets - now I understand he has as little real understanding of the current geopolitical climate, history and economics as a first year nursing student would have of caring for a post op open heart patient on a ventilator and balloon pump.

Exactly. Most financial planner/advisors have no real understanding of the system they use. Their training doesn't go into anything like that depth.

By the way, market timing goes in and out of fashion. During long expansions a buy-and-hold mentality takes root and market timing is generally discarded. During serious bear markets it always makes a comeback, as bear markets require traders to make quick moves in and out of things rather than holding them complacently.

I am very much of the opinion that you can time the market - probabilistically - if you use the right model. Markets are grounded in human herding behaviour and are governed by collective emotional responses. Those who expect them to be rational will never be able to do market timing as their model is simply wrong.

Human herding - people collectively jumping on and off bandwagons - is predictable to a certain extent. It is possible to judge when moves are close to running their course, and roughly what kind of counter-trend move to expect.

Those who want to take it to another level would also apply fractal geometry and Fibonacci mathematics to herding patterns (these are called Elliott waves after RN Elliott who developed the method in the 1930s). Robert Prechter (a financial analyst with a psychology background) is the foremost practitioner of this technique today.

Check out the video History's Hidden Engine (available free on the net) or the book Conquer the Crash (mentioned below in the recommended books section) if you'd like to know more. Prechter doesn't understand peak oil, climate change or other important aspects of or multi-faceted crisis, but his financial writing is very good.

Dan W said...

RE: "...Dan, I hope you understand I'm not trying to belittle anything..."

Yes...I know...I do. Everything you've done here is amazing and generous...I just wanted to say that 'fantasy' and melodrama exist on a pretty broad spectrum...one man's doomsday fantasy is another man's reality. :)

BobE said...

This afternoon I listened to an excellent BBC radio programme (actually repeated from last Tuesday) on lax regulation and how US lawyers are busy filing law suits against banks (US and UK)for using fancy financial instruments to get debt off their balance sheet and puff up their share value.

File on 4: A Financial Timebomb - mp3

and

Same - realplayer audio

(actual programme starts about a minute in)

Includes the thoughts of Roubini. Plenty of blame spread around in London.

It strikes me that it's all very well asking banks to bring out their 'toxic dead' in the name of 'market transparency' and 'trust'. But if they will face a law suit from angry shareholders, they're more likely to keep the stuff hidden under the carpet.

Who will benefit - lawyers. Who will pay - the taxpayer.

BobE

Anonymous said...

Thank God they toned down these paranoid fantasies and chose not to blog them. - el pollo

Geez stewie

You have a truly undeveloped sense of sarcasm.

An old girl friend, who was diabolically funny, used to say that sarcasm's sole purpose was to make fun of the irony challenged. That sarcasm is the banana peel placed on the floor for the irony impaired to slip and fall on.

Dust yourself off, el pollo strikes again.

Blue Monday

Stoneleigh said...

Over-reaction is certainly a danger under the current circumstances. Just as people are over-optimistic during expansionary times (especially when they are in the grip of a mania and collectively take leave of their senses), they are overly pessimistic during the inevitable contraction. It's not that there's nothing to worry about - there clearly is - but panicking will impair your ability to plan.

One of the reasons that contractions are so painful is that people will collectively over-react to the downside. Often serious events such as disease outbreaks happen during such times, not because diseases are more common then, but the suspicion, lack of trust, anger and xenophobic feelings that come to the fore during such times make appropriate responses much more difficult to implement, hence the impacts tend to be much larger.

Contrast the effects of the first outbreak of the Black Death in the 14th century with the later outbreak in the 17th century. It was the same disease, but the panic-ridden response in the earlier outbreak led to social breakdown and a huge numbers of deaths, whereas the later outbreak was greeted with a sensible program of quarantine and was therefore much less socially devastating. (For anyone interested in this period, the book The Return of the Black Death is well worth your time.)

I don't expect people to respond sensibly to this crisis, which means having to prepare for some kind of social breakdown. However, it is important to avoid being caught up in the collective mood of pessimism, blame and despair yourself. It will be very difficult to resist, as strong collective emotions always are, but if you allow yourself to be sucked into it, you won't be able to accomplish anything constructive for yourself, your family or your community. Keep your head while all around you are losing theirs, as Kipling once put it.

Dan W said...

RE: "...they are overly pessimistic during the inevitable contraction..."

Agreed. I have a bumper sticker on my car that reads:

HYPERBOLE IS MY LIFE!!!

At the same time...this just doesn't look or feel or smell like a contraction. It appears far more corrosive, far more nefarious. The uber-wealthy are being called to the carpet like never before---ahh the WWW----and it seems that an entire system is under siege.

I tend to think that we'll look back on the next 2-5 years in amazement at all of the changes that take place...but I also think that, as humans are quite adaptable, we'll make it through as we have before...unless of course:

a. Islamists in Pakistan oust the current regime and nuke India

b.The Methane venting in the Arctic becomes so pervasive that NYC has an average summer temp. of 114 F degrees by 2015

c. John McCain goes into election day down 6.2 points in the poll aggregate, wins the election, and Diebold executives win several sets on the McCain Cabinet

el_pollo said...

CCS

There was only about a half hour between our postings. If I had read your second posting prior to my posting, I would have altered what I wrote. My posting was obviously tongue in beak.

To the best of my knowledge, there has only been one "doomer" consistently posting to this site. Fortunately, he does not post as another anonymous, and I have reached the point where I have chosen simply to skip reading his comments as unproductive for my needs.

As to "corpo-fascist" fantasies, the recall of an Iraqi urban battle hardened unit to "assist" domestically was written up recently in the Army Times. The construction contracts to KBR for huge detention facilities in the SW amounting to about $500M annually is part of the Congressional record.

I also feel that this blog is most productive when it focuses on financial matters. However, the current fiscal problems will have severe social and political consequences. These consequences form a productive if more minor area of discussion on this blog, and their understanding is essential to each of us navigating the safest and most productive path into our futures.

Ilargi, in his introductory commentary which sets the tone to the blog, does not restrict himself to purely fiscal commentary. His description of Paulson as being more malevolent than Tony Soprano, or his description of the passage of what is now referred to as TARP marking the end of democracy in the USA are not purely fiscal observations.

In short, I personally found your original comment offensive. As mentioned, there has been only one regular doomer at this site, and if you felt a need to address his comments, you should have done it directly instead of painting this hypothetical problem with a broad brush.

Anonymous said...

I'll second el pollo's 7:32 p.m. comment.

Ahimsa

Anonymous said...

Stoneleigh, I would like to do some constructive now for my family -- I just don't know what to do. Much of what is written here is over my head, ie., TED, ST GICs, etc. I'm trying to catch-up, but I am completely overwhelmed. Help?
Eliza

el_pollo said...

Dan W.

"c. John McCain goes into election day down 6.2 points in the poll aggregate, wins the election, and Diebold executives win several sets on the McCain Cabinet"

Dan, get it first from "America's Finest News Source"

http://www.theonion.com/content/video/diebold_accidentally_leaks

el_pollo said...

http://www.theonion.com/content/video/
diebold_accidentally_leaks

cmh said...

Stoneleigh,
Thank you for the video and literature references. I will check them out.
I just got off the phone with a relative who has advised me strongly to not pull my mutual funds out - this is one time blood is not thicker than water.
I've done enough research now to understand that the best thing to do is get into those short term GICs - stat!

Anonymous said...

fb, I beleive Ilargi gets his pictures from the Shorpy photo archive (http://www.shorpy.com/) or from the original source, the Library of Congress search (http://lcweb2.loc.gov/pp/mdbquery.html). Certainy, the pictures show up on Shorpy, and then I see them here a few days later.

Red Sand said...

Umm. Help! What are the implications for the various incarnations of ING? We have some savings with them here in Canada for a family 'project' that is coming up in a few months. We're hoping that the project can happen before things really get bad, but we're wondering about the immediate safety of what we've put aside.

Ilargi said...

"monkeyboy said...
hey Ilargi, can you tell me why you put Austria on your list of countrys in deep financial trouble? I live in Vienna, so i am curious and there is nothing in the news."


Monkeyboy,

i wish I could blame it all on Haider getting hammered in a gay bar before he killed himself. True as that is, it doesn't explain the entire financial mayhem.

Austria will announce tomorrow that they inject $100 billion into their banking system. That is not good, nor for such a small economy. Hey, they've all played at the same crap table, and there is no reason to believe your specific bankers have not, whatever country you live in.

Furthermore, I was looking at the salvation of Constantia, and I think that is a weird tale. Read here, Something about that raises the hair on the back of my head.

Much of what I write about is based on intuition, and that works like a charm. I will have to take a closer look at Wien, though, and I'll get back to the topic.

Anonymous said...

ilargi, where is "Where is my swap line" from?

scandia said...

Just thinking about the range of response to the financial crisis. For example I am someone who wants the doctor to tell me the truth however bad the news may be. Others don't want to know.
In this situation I agree with Stoneleigh, stay informed and keep your head. I cannot influence the great unravelling. I can focus on what is within my power to affect. Let's keep making common sense preparations, let's hold to the value of the common good.

Anonymous said...

ilargi -- when you say many of us won't recognize our towns or cities by Christmas what exactly do you mean? will you describe a tiny bit more of what you see happening and unfolding about when?

Tyr said...

@Red Sands

I wouldn't worry too much yet. ING Groep is a global company but its center is still very much in the BeNeLux and the governments of all 3 BeNeLux countries have said they won't allow a bank to go under. The moment they would do that after giving such a guarantee we would have major bank runs over here and we're not quite there yet.

Also, as reported over here this is not a full state nationalization of ING but an injection of capital by the Dutch government in exchange for securities (and veto-power over major decisions).

At the very least you won't immediately lose access to your money like happened with Kaupthing and the icelandic banks.

Disclaimer: as stated above I work for ING (as a techie) but all my opinions are my own not my employers.

OuttaControl said...

Eliza

If you go back through the last 10 days of Debt Rattles and search for Stoneleigh's comments, you're sure to get some good advice. If you need more specific advice or help understanding terms, I may be able to help. You can contact me at outtacontrol@ymail.com. It's an address I use for this purpose only so I don't check it often. If you write me and I haven't responded, put something in the Debt Rattle comments to twig me.

Anonymous said...

@outtacontrol

Very kind of you. Thanks. I will take your advice and read through the past 10 posts or so.

rumor said...

Red Sand: if you already have the money you need and you know you'll be using it soon, it sounds like your only concern is keeping that money secure for a little while, rather than continuing to grow it. If that's the case, I suggest either just taking it out and storing it someplace safe or, if that's not an option, buying canada savings bonds. CSBs are cashable at any time, and it's the safest investment/savings vehicle you're going to get in the short term.

Stoneleigh said...

Eliza,

I sympathize. This situation is complicated even for those whose job it is to understand finance
(very few of whom actually do IMO, at least in any depth).

Essentially, we've lived through a massive credit expansion that is now imploding. We're looking at a crash of the money supply due to the collapse of credit. This is causing a systemic banking crisis that is very likely to result in people losing access to their savings. As credit is drying up at the same time, purchasing power will be abruptly curtailed.

My usual advice is to get out of debt (which often means renting), sell real estate, stocks, most bonds, commodities, collectibles etc, hold cash and cash equivalents (short term treasuries), don't trust the banking system (FDIC or no FDIC), obtain some control over the essentials of your existence if you can afford it, be prepared to work with others in order to achieve greater preparedness than you could alone. How far you get down the list will depend on your resources, but you will get further if you can pool resources with others.

Stoneleigh said...

Red Sand,

I second Rumor's advice. Your funds are safer outside the banking system.

Ilargi said...

"ilargi, where is "Where is my swap line" from?"

Sorry, it's here.

Brad Setser ia a Roubini little helper, and also a Council on Foreign relations buddy, which makes me mighty itchy, but this i thought merited posting.

Mind you, I don't just post what I agree with, but what gets people thinking.

Ilargi said...

"ilargi -- when you say many of us won't recognize our towns or cities by Christmas what exactly do you mean? will you describe a tiny bit more of what you see happening and unfolding about when?"

If I've been true to form, I would have injected "MAY" not recognize. But yes, that risk is clear.

How fast and furious it'll all come down is in the realm of chaos theory by now. Things are going wrong wherever you look. I wrote earlier today at the Oil Drum:

"It's as simple as it is hard to oversee. We are entering the phase where every institution, private or public, that needs credit lines to survive, is at risk. TED and Libor spreads may be down a tad, but not nearly enough to justify a multi-trillion hand-out. The banks are too deep in debt, simple as that. All the extra mullah they get only serves to fill a tiny bit of a huge pre-existing hole. Since all this credit needs to be rolled over ever 3 or 6 months, victims could drop down anywhere now; that's the hard to oversee part.

There are a zillion enterprises around the globe hanging on by the skin of their teeth, losing turn-over because customers scale back their spending, while at the same time their lenders, if they are willing to lend, do so at much higher rates. This will lead to a zillion pink slips first, and a long line of bankruptcies later.

I wrote today that Latvia is a likely next victim when it comes to countries, that 30 major US transit agencies face large service cuts, and that lower-level governments are in a boa constrictor squeeze. Since it is sort of a 3-D domino game, nobody knows what goes first; chaos theory has its 15 minutes of fame. Keep an eye on Pakistan. Nuclear state, full of wild-eyed youth, and rejected for help by the US and China until now. Iceland will have a hard time, but they have only 300.000 people, a midsize town. Pakistan has 175 million, and one of the fastest growing populations on the planet.

That said, watch the Ukraine. (I like saying The Ukraine, like The Lebanon, and The Netherlands). Everything west of Russia that was once behind the Rusty Curtain has gone from rags to riches in 20 years, with nothing real to show for it. How could they have known? Mortgages in Yen and Swiss Francs. Today, they redefine "wasteland".

Jason R said...

Hey everyone, I've lurked on the blog for a while now. I try and read through every day if possible.

A little about me: I feel like I'm already road kill on this economic melt down super highway. I lost a job do to 'downsizing' last October. Been working for much less at a job I strongly dislike and is much below my skill level and education since.

I'm bit envious of a lot of the other commenters who seem to have some kind of economic padding. And after reading stoneleigh's comments yesterday about those suffering under student debt, I'm even more anxious.

What is to become of those of us in our late 20s early 30s strangled with student debt and little or no padding?

Anyway, an interesting economic measure I saw reported in the Guardian but I've not read about here. The 'Baltic Dry'.

Here is the link:
http://www.guardian.co.uk/business/2008/oct/14/creditcrunch-marketturmoil

And a quote:

The Baltic Dry shipping index, which has been flashing amber signals about the world economy for the past couple of months, is telling us there is something going badly wrong because it is now stuck firmly on red.

The index, a proxy for world trade flows, suffered its second biggest-ever fall yesterday, to 11%, which took it down under the $2,000 mark and it fell another 8% today to $1,809. The drop means it has fallen more than 80% since July's peak of around $12,000 and is now at a three-year low.

The index has long been seen as a good leading indictor of future economic production levels because it charts the cost of freight movements in 26 of the world's biggest shipping lanes of "dry" materials, such as coal, iron ore and grain which feed into the production of finished goods some weeks or months ahead....

The index may also be telling us something scarier. It may be telling us that the world's great industrial powerhouse, China, could be in trouble and that its imports of raw materials are collapsing at a far greater pace than the slow slide in demand from the West for China's finished goods would imply.

There have been increasing concerns about China this year. It has been booming for years and growing, if the official figures are to be believed, at more than 10% a year. That has, in turn, given rise to a stockmarket and housing market boom which now look to be going pop, as ours have done.
The great Asian miracle economy might now be coming apart at the seams, in spite of the official figures suggesting everything is stillfine. But the Chinese authorities cannot control the Baltic Dry.

Ilargi said...

Jason, welcome

I have posted a number of articles on the Baltic Dry recently, and I think the Guardian piece may well have been one of them. Please check before posting, it's getting crowded here. And do keep reading.

Anonymous said...

I hope my comments are not those dismissed as survival-nut drivel.I lean to a doomer attitude,however my lifestyle has moved in this direction for many years....and I discount "stars" vision...it smacks of the worst "doomer porn".

Where ever it ends up will depend on where your at.As the real estate folks use to say..."location,location,location".

I am in a good place,.My savings this week were 2 rolls of Walking Liberties delivered this week..The LP-truck conversion is nearly finished.The mechanic,a friend of mrs.snuffy and myself found a old 14"dia tank needing rework...the sort of that this man is still qualified to do[new valves ect]and installed it in such a way as to hide the fact of its existence.

The question that those like me wonder is how soon will we see the sort of overt actions that will result in J.Q.Public getting a clue as to the extent and depth of this phase -change our society is about to experience.

I have a feeling that these desperate attempts are being made to keep it all wired together 'till the election...

Then,??!

I do have the memory of having seriously depleted my funds,friends,and personal credibility with the y2k fiasco.This tends to keep my preparations/attitudes in check.This may not be a good thing if it all goes as badly as it appears it may.Inaction can hurt you as badly..The big overriding question seems always to be when to hit the big red button.[I still lean to the 5 min. early rather than 5 sec. late]

Those two events,the end of empire and the end of fractional banking mean the end of many things here in the usa.#1Probably the end of "wageslave"living,#2good medical care based on fixing after the fact[We all will work much harder on staying healthy].#3Careers.#4Life Insurance.#5 really bad traffic.[little gas]#6 "Keeping up with the Joneses".#7 Conspicuous consumption[suicidal]Will not be "cool"#8 Couch-Potatoes#9 Overweight children[or men or women for that matter]#10Huge mega-stores,mega-churches,or any event with more than a few thousand people.The energy to put it on would be the limiting factor.One of the most disturbing things to me is the avalibility of medicine will keep a lot of folks on a short leash...this is not good..
There is a lot of things that will end very soon. Or Change.

Remember Darwin.Its not the smartest,or fastest,or prettiest that wins the the game.Its the one who can change the fastest.I&S are telling all of us to be ready to change ,sooner...

Thanks Rototiller, for the heads up on the book "Deep Survival" Its on my wish list

snuffy

dark_matter said...

Snuffy,

I have a lead on 6 New Zealand whites (4 does, 2 bucks) and 9 cages (for expansion) plus feeders for $200. Is that a good deal? I am going to look at them tomorrow (in Woodburn). My wife and kids think I am crazy. If I get these, how much time can I expect to spend on them every day? If you want you can answer me at kreg.morris@gmail plus .com so as not to bog this list down with excessive rabbit talk.

Anonymous said...

Ilargi,

Can you tell me where you got the information that Romania is in trouble? I live here and I'm pretty confident in the ability of the central bank to manage corectly. They've been increasing the interest rate every month this year.
There were a lot of rumors about some banks being in trouble. It turned out to be nothing more than that.
It's clear that the economy is highly dependant on import-export activities and the crisis will hit us too. But from there to being currently in big trouble...
It would be great to understand on which information you based your conclusions.

cmh said...

Jason,
I wanted to post earlier, but I cut my finger quite badly and had to get it dealt with.
I understand where you are coming from. I too once had huge student loan debt, and got laid off. I had to work at another lower paying job for a while.
I lived very simply, either sharing with others or in bachelor or basement suites. I paid myself first with 10% of my wage, then my rent, food and utilities and set aside a small amount for fun every month, then the rest went to my loans (which was most of my second paycheque each month)
I did not own a car, and spent my time doing things that did not cost a lot of money - hiking, cross country skiing, running, cycling, backpacking. When I wanted to go up to Whistler or to Cultas Lake I would rent a car. I lived in Kitsilano in Vancouver and cycled to work. I also did volunteer work which motivated me to want to work with different cultures.
Many of my classmates had bought cars and lived in expensive housing. Later, when I went travelling, they were still paying off their debt.
Keep focused, keep reading this site every day, and stay active and have fun. It seems daunting, but one day you will look back and be very proud of what you accomplished.

Starcade said...

If he's being flippant about "so what if small countries go bankrupt?", he has to understand that the whole reason this sh*t-fest is going on is because the USA is gone first.

JAS, the problem is: They can't do anything about it. They are even more f*cked than the smaller "states". I see a space, very soon, where the entire concept of "nation-state" is _gone_. _Dead_.

conch shell stewie: Those comments are not over the top if you understand what's happening. TPTB have already conceded that there _will_ be unrest Real Damned Soon Now, and have begun to mobilize the military to prepare to go against its own citizenry. Any real businesses left after the shake-out will certainly either be government-owned or government-backed. And remember that the people behind this are of the ancestry that wanted Nazi death camps in the USA during the Great Depression.

So, no, I don't think it's over the top. I give it about two weeks, give or take... Something's going to hit the fan around the (s)election.

The reason you've heard all the stuff before is because that's what people have really thought about our future (Brave New World, 1984, what have you...). The thing is, these f*ckers in power _want this_, for whatever reason you choose to believe. Keep that in mind.

Read up on the proposed FDR overthrow back during the New Deal, and understand that one of the people behind it was Prescott Bush.

And if you honestly believe there won't be a revolt among "Joe Six Pack"s of especially America against the banker elites, you have not been paying attention, or simply just choose not to.


Dan W, in direct response: That's the point -- we are on entirely new ground. The old rules _no longer apply here_. I mean, are you even going to be _allowed_ to go from place to place on your own anymore without the authorities demanding you turn back? (My guess is "no".) Are you going to be allowed to even be outside once TSHTF?? (Same guess.) But the fact is that we are in totally new territory, and, with some of the "types" I've seen wandering around, a hyper-violent situation isn't complete fantasy, in my book.

ff said...

redsand,

ING is leveraged 49 times according to this article.Not good.

http://money.cnn.com/2008/10/06/news/europe.leverage.fortune/index.htm

ff

Anonymous said...

Hi everyone,

Like Jason I've also lurked on this blog for a while, found the original link on TOD which i have lurked on since last May. I like others am very grateful to I&S for all the work that goes into this site.

Stonleigh, I live in the UK and was wondering about your advice on being as liquid as possible. I live off my savings as I lost my job through ill health 2 years ago after my husband committed suicide, and as I am 48 (there is a big ageisim thing in the UK) have struggled to get replacement work.

I have cashed in my shares and unit trusts and I am very lucky I have no debts, I am a saver not a spender. I use Public transport, and live frugally. My garden is very small and subject to flooding so doesnt provide much produce, but my store cupboard has lots of dried and canned goods.

However, all my savings are in UK banks or building societies, which the government are currently backing. Some is also in government savings bonds bought through the Post Office. I dont see how these are different ? and I don't understand what the UK equivalent of the "Short term Treasuries" you refer to is ? I am scared of taking all my money and putting it under the matress at home.

What is it best for me to do to keep safe. Should i just hold my money at home? Should I buy some gold? If like Iceland there was no access to savings in UK banks wouldn't that be the same for my post office savings bonds? I am trying to stay calm but am very frightened, and I don't really understand enough about what is happening to make good judgements at this time.

Thanks again for this site

Maeve

el pollo said...

ff

"ING is leveraged 49 times according to this article.Not good."

That's like being on a seesaw with a large cabbage.

This blog page will not wrap long URL's and just loses the end of them. One imperfect way around this for those not into HTML is to put a space manually into the URL before the end of the column.

el pollo said...

I am trying to figure out what the Lehman CDS settlement means tomorrow (Tuesday). Is this just ho-hum, or does it mean a massacre on Elm Street? Don’t all the parties and counterparties have to pay up then? Won’t we see a cascade of insolvent counterparties? Were the loses in equities last week due to counterparties trying to raise cash for the big day? Will the Tampa Bay Rays take it all?

greg said...

Stoneleigh said...

This is causing a systemic banking crisis that is very likely to result in people losing access to their savings.

Why would they lose access? Closed banks? Run on banks?



sell real estate



I have a small farm why would one want to do that? It has the potential to provide food, fuel and income.


Thanks, g

Dan W said...

@ el_pollo RE: "Lehman"

It seems like that is the $64,000 question. I too wonder about that. I 'suspect' that somehow the truth will not come out: it's becoming more and more clear to me that Paulson and his band of merry scumbags may be amoral morons, but they are expert at obfuscation and dissembling. I assume, as such, that somehow the Lehman CDS and counterparty exposure reality will be twisted and masked so as not to precipitate immediate calamity.

I DO expect, however, some major international firm to collapse under the weight of it's own CDS exposure---and despite all of their nefarious efforts, Paulson and Bernanke and Bush and all of the other criminals will not be able to stem that rising tide.

el pollo said...

greg

Why would they lose access? Closed banks? Run on banks?

Yes. Are you following Iceland? Do you understand the fractional reserve system? Stoneleigh ( I think) believes that the FDIC is a bluff and when the SHTF, they will not infinitely recapitalize it through printing money, but let it sink.

As to selling real estate, Stoneleigh has been advising people who own simply for housing to sell ASAP, first to pay off any mortgage, and second, she feels that the market will trough at 10% of peak levels (for reasons she has explained many times) and there is no point in riding the market down like Slim Pickens riding down the H-bomb at the end of Dr. Strangelove. Since people do need a place to live, she recommends renting and keeping your assets liquid until the bottom is hit.

As to a productive farm w/o a mortgage that could produce food and income - she would not recommend selling this.

Dan W said...

RE: "...the FDIC is a bluff..."

Shakedown Street

Anonymous said...

Just talked to my bank (Everbank) where I have a gold account (pooled). I requested to exercise my option to receive the phyical gold, with a 'fabrication' cost of course, however they responded back, there are NO gold bars or coins available.. you can only cash out or hold.

JAS

Dan W said...

RE: "Amid financial crisis, 20,000 expected to visit Millionaire Fair" (Yahoo!)

I would think that maybe, just MAYBE, these folks would want to keep the flaunting to a minimum. ???

Anonymous said...

she feels that the market will trough at 10% of peak levels (for reasons she has explained many times)

How does one determine peak levels?

n said...

Stoneleigh said "Your funds are safer outside the banking system."

So if I have 30k at the bank I'm supposed to take it out and.. what? Get some short-term Treasuries? Buy gold? Go to the local credit union? Mattress?

BTW, this isn't the money I live off - it's the money I pulled out of investments. (before they tanked, thank god)

Weaseldog said...

conch shell stewie, your argument about the peak oil, financial collapse, etc... Cassandras is interesting but a common viewpoint.

If I may simplify it, it boils down to, "Some people have been wrong about stuff, so everyone is wrong all the time about everything."

As far as Peak Oil is concerned, that will take decades to play out. Arguing that civilization as we know it has survived the end of oil, is a premature conclusion don't you think?

Oil is at peak now from the look of things. Sure Bill O'Reilly and friends say that oil under the US is pretty much infinite, but i don't consider them to be experts, nor does reality seem to bear them out.

The idea that Peak Oil is false, that the oil in the Earth is infinite and we can eventually pump hundreds, thousands, billions of solar masses equivalent out of the Earth and still not see the end, is ludicrous. If there were so much oil that Peak Oil was false, then the Earth would've collapsed into a black hole, long ago.

So if oil is finite, we're dickering about when, not if. And if it is false, our planet was destroyed long before life arose.

On Argentina...

The more I learn about there situation the more I worry. In 2001 they had a corrupt political system full of bribe taking politicians. Their oil production was peaking. They began a fear campaign in the media that said that if they didn't give everything to the banks (Bank of America, and Citicorp were principals), then they risked economic collapse. But if they gave all of their wealth to the banks, then the banks could loan them back their money and it would save the country and there would be a new era of industry and employment.

Instead, the banks loaned back the money at usury rates. They took control of public industries for pennies on the dollar and laid of hundreds of thousands of workers.

The USA is giving away all it's wealth, because once it is all gone, the banks can loan the money back, and make the USA prosperous. This is the theory by which one becomes prosperous by giving away all of one's assets, then going deep into debt.

I have a sinking feeling of Deja'Vu.

The same banks that raped Argentina are playing the same game in the USA and other countries now.

EBrown said...

g,
If you own your small farm outright you should probably hold on to it. If your small farm still mostly belongs to the bank you might consider selling it, rent, and then buy back in at a lower price. Obviously you would not be garaunteed to be able to buy back "your farm", but you might end up with a better situation. If I owned a small farm outright I would most likely hold on to it.
Location also plays a part in my calculus of where to set down. How close to a major city are you? How dependent on the grid is your farm - i.e. do you have 20 acres of flat, dry land entirely dependent on electricity to pump water from a deep aquifer, or do you have 20 acres of hillside and river bottom where you could set up gravity water flow and collect rain? The question list just goes on and on...

el pollo said...

anon 10:58

"How does one determine peak levels?"

The Case-Shiller home price index seems to be the most authoritative index. It is put out by S&P for subscription, and I don't think you can get the data directly. But you can get it in a host of other places by Googling it. Most regions seemed to peak around mid 2006.

n

Stoneleigh recommends enough "in the mattress to get you through several month's of expenses if your income totally dries up. If you are an American, I think your best bet is treasurydirect.gov in 13 week bills.

Greenpa said...

About being overloaded with student debt- my personal suggestion would be- stop paying it. The sooner the better.

We had to do that about a year ago- no real choice. My spouse, Spice, had a huge load of it, and it was killing us. So, we quit.

It was pretty traumatic; for a while- makes you feel like scum to break that promise. But- bit by bit, we got over it.

The fact is, those student debts are supposed to be manageable- they are supposed to cut you a break on payback, if you're going through hard times. Often- they don't. That's not your fault- it's the fault of the same deregulation that's causing so much chaos elsewhere.

When you stop paying, a whole lot of "due process" kicks in. First they'll yell at you. Then they'll offer to talk. etc, etc.

Our choice was- we have bills amounting to $10; and $6 worth of income. Somebody is not going to get paid. Should that be our local mechanic, who keeps us going- or the predatory strangers who tricked us into 27 pages of fine print, while smiling and pretending to be our friends?

The process is long, and will give you chances to change your mind. Meanwhile- you get a little slack to help out.

EBrown said...

n,
yes to many of those. With my savings that I do not need now to live on I opened a treasurydirect account, I have a bit of extra cash in my direct control, and a few years ago I bought some kruggerrands (which I will continue to hold for a while yet). In order to open a treasurydirect account you need to link to a bank account. If you feel better about using a credit union then sure, switch to that, but don't think it will necessarily be any safer than a local bank. I only keep enough money in my bank account to float my weekly/monthly bills. I'd avoid CDs from either banks or credit unions as a repository for your money.

Greenpa said...

JAS - same with silver. Spot price right now is around $9.50 - but when my son tried to buy some ounce bullion coins, they just laughed at him. None available- and IF they got some in, they have a waiting list for customers at $22/oz.

Anon of florida said...

Kunstler writes an interesting metaphor today http://jameshowardkunstler.typepad.com/clusterfuck_nation/2008/10/its-fascinating-to-read-the-commentators-in-mainstream-journals-like-the-financial-times-and-the-wall-street-journal--all-st.html

" To switch metaphors, let's say that we are witnessing the two stages of a tsunami. The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts canceled, and Lehman Brothers-style sob stories played out is like the withdrawal of the sea. The poor curious little monkey-humans stand on the beach transfixed by the strangeness of the event as the water recedes and the sea floor is exposed and all kinds of exotic creatures are seen thrashing in the mud, while the skeletons of historic wrecks are exposed to view, and a great stench of organic decay wafts toward the strand. Then comes the second stage, the tidal wave itself -- which in this case will be horrific monetary inflation -- roaring back over the mud flats toward the land mass, crashing over the beach, and ripping apart all the hotels and houses and infrastructure there while it drowns the poor curious monkey-humans who were too enthralled by the weird spectacle to make for higher ground. The killer tidal wave washes away all the things they have labored to build for decades, all their poignant little effects and chattels, and the survivors are left keening amidst the wreckage as the sea once again returns to normal in its eternal cradle."

If I remember correctly, this is more or less in-line with what I&S pronosticate for 1-3 years(I hope I am not misrepresenting). Link: http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-25-2008.html?showComment=1222432200000#c2766499258142688286

Anonymous said...

"How does one determine peak levels?"

As I understand it and as I think Stoneleigh has said, the peak housing/property level is the appraised or market value of said property at the height of the housing bubble, reached during 2005-2006 in most places. For example, in 2006 my home was worth or would have been appraised at $250,000. In the next couple of years its value will probably decline 80% or 90% of its market value at the height of the housing bubble. Hence, the market value during the next two years will probably decline to the $25,000 to $50,000 range. Its market value has already declined. If I was lucky to sell it today, I could not get more than $80,000 or $100,000 for it. I'm not selling it because I bought the 3 acres and built a house for a total of $60,000 fifteen years ago, and it's paid for. Land is precious.

Ahimsa

Weaseldog said...

I may well be the doomer referenced...

In 1998, I first became aware of Peak Oil. As I have a moderate science background, a good education in higher math and a computer, I was able to use excel spreadsheets to double check a lot of the assumptions made about Peak Oil at the time.

One of the serious constraints to the theory and pretty much everything about resources is the exponential function. This is a top taught in High School classes and quickly forgotten.

What the exponential function shows us is that no matter what resource you're examining, you can make fairly accurate prediction about it's depletion curves even if there are wide swings in the data set. For instance in oil, if you double the assumption about how much there is, the peak only moves by a decade or two. This is because growth in consumption requires dramatic increases in supply to keep going.

To push off the Peak for Oil outside of our lifetimes, we really need to hundreds of times as much oil as we have found so far, or the youngest members of this forum will see the peak, with a much higher population count to feed.

I doubt that will happen as no super giant fields have been discovered since the 1960s, and they are all going into decline. We are flatlining oil production by frantically finding smaller fields and draining them as quick as we can. The Law of Diminishing Returns is catching up to us.

Using High School math, Excel spreadsheets, and public data, I was able to call the 2001 production peak, and guessed that it would trigger the tech market crash after the next full business quarter was over. I may have just been lucky, but I sold almost all of my market positions in January 2001. As I had trouble finding work for a few years when my career went to India, the profits floated my family for a time.

In 2004, world oil production rose again, with it, the housing boom kicked in. Real Estate speculation went high.

Then oil production went flat again. In 2008, we've seen oil production begin to decline again. Following the subsequent spike in oil and fuel prices, the markets have crashed again.

Just like in 2001, fuel prices are now dipping due to demand destruction. in the USA fuel consumption is down a whopping 9%.

This downturn should continue for a few years before a new bubble is successfully blown. It will continue until world oil production ratchets down again. It's crash like the one in 2001 and this one, will be preceded by rapidly rising fuel prices.

This isn't the end of the world. Just the beginning of a new wave of hard times. Oil has not run out.

greg said...



Yes. Are you following Iceland? Do you understand the fractional reserve system? Stoneleigh ( I think) believes that the FDIC is a bluff and when the SHTF, they will not infinitely recapitalize it through printing money, but let it sink.


True, If all banks and whatever else the gov is backing failed then they would not be able to cover the loss.

Our local bank is very conservative, money in treasuries. No asset backed junk.



Location also plays a part in my calculus of where to set down. How close to a major city are you? How dependent on the grid is your farm - i.e. do you have 20 acres of flat, dry land entirely dependent on electricity to pump water from a deep aquifer, or do you have 20 acres of hillside and river bottom where you could set up gravity water flow and collect rain? The question list just goes on and on...


No debt, 50 miles from Wash DC, 60 acres, 12 acres hardwood, rest mostly pasture, w/ stream. Passive solar superinsulated home w/ PV that covers 40%, would like to add solar HW and wind, should reduce the bill to $0.

n said...

RE: treasury direct accounts

Ok here is the thing I don't understand about Treasuries - the advice I'm hearing is to avoid banks, but if in 2 years I want to cash in my Treasury Bills don't I have to go to a bank to get my money? I understand the bank isn't holding it directly, so FDIC is avoided, but if banks "crash" who is going to give me green paper in exchange for my white paper?

Weaseldog said...

n...

When Argentina began to crash in 2001, Bank of America, CitiCorp and other major banks froze all of the accounts.

Old ladies had to wait months to withdraw any of their savings. And then the banks gave them pennies on the dollar. They never got most of their money. The banks just stole it from them. But legally, as the government approved it.

greg said...


Ok here is the thing I don't understand about Treasuries - the advice I'm hearing is to avoid banks, but if in 2 years I want to cash in my Treasury Bills don't I have to go to a bank to get my money? I understand the bank isn't holding it directly, so FDIC is avoided, but if banks "crash" who is going to give me green paper in exchange for my white paper?


What about :

treasury direct



I use Vanguard for my savings, you can buy CDs, treasuries, MM etc through them.

Vanguard

But, will they go belly up too?

Anonymous said...

Maeve, I can not offer much advice on the money front being in the USA but I have a similar situation on the garden front.

Mine is located by a periodic stream that runs behind the house.

I used a raised bed to keep the plants above the high waters and from having wet feet.

I do not know what your land looks like or if you can use this method but it is worth a try.

Best, YurtGypsy

EBrown said...

g,
Sounds to me like you have a very good set-up. Since you're debt free you can put your money to things that will make your farm more comfortable in the coming years... I sure as heck would not sell your place now, and I doubt Stoneleigh or Ilargi would advise you to either.

As for questions about treasuries- I don't think every single bank will go belly-up. When I want to cash out of a treasury note I'll let it mature and have it sent to a currently solvent bank. It's easy enough to link bank accounts to the treasury direct account.

I used to have money with Vanguard, and I think the restrictions placed on getting in and out of Vanguard funds will make it last longer than most mutual fund institutions. I chose to leave Vanguard though because I want fewer intermediary institutions between me and my money. I'd rather hold treasuries in my name than have Vanguard go the way of the dodo and need months to get my money back...

Bigelow said...

Q: “My account at the Treasury is set up to wire the money straight into my bank account, which is frozen. Will my T-bill money get frozen too?”

Mike: Good question. What was your answer?

Martin: I told him to check his mailbox. Instead of wiring his funds, the Treasury had taken the extraordinary measure of cutting hard checks and mailing them out immediately. They want to make absolutely sure he got his money without any delay. The moral of this story is that even in a worst-case banking scenario, the Treasury makes sure you get your money.

Or go back to the early 1930s. A record 13 million Americans — 25% of the workforce — were unemployed. We had a head-spinning wave of bank failures. We had a complete shutdown of the banks. But owners of Treasury bills never lost a penny.”
Weiss Research’s Emergency Q&A - Transcript 10/20/08

dark_matter said...

Everyone should know that at least for now physical gold and silver is nearly impossible to get. I was buying some every month for about a year and about two weeks ago the local coin shop where I had been going was stripped of everything in one day. Now I call every day and he has nothing on his shelves and what does come in sells immediately. And yes, there is a a big price difference between paper PM and physical PM. The US mint has stopped issuing gold coins (maybe silver too). They say it is because demand it too high, which is a weird explanation.

The expectation is that at some point too many people will ask for the real thing, the paper market will collapse and the price will double over night. We may not be in an inflationary period but many people are preparing for that eventuality now. Will people hang on to their PM or be forced to sell into deflation? I don't know.

The other thing that is astonishing is that most people I know have no idea this is going on. I mention it in conversation and they say, "Oh, really".

Weaseldog said...

Dark Matter, do your friends seem to have any idea what it might mean, that physical gold and silver can't be bought?

el pollo said...

greg:

Yes, you have to go to a bank to pick up your money, but with the proper codes, you can pick which bank to send it to a day or two before you want to get it. When your treasuries mature, you can tell TD to keep the money in a non-interest sweep account, which I think they call C&I ore something like that. Then you could pick a solvent bank. It is unlikely that there will be no banks in existence when you want your money back.

el pollo said...

Weaseldog:

i can think of two reasons that physical gold is hard to procure:

1) Most of it is in ingots and people want certified 1 oz coins like krugerrands or maple leafs. This would be a simple fabrication delay problem.

2) The "goldsmiths" are playing the same game that our little floppy hatted pre-banker Italian did in Money as Debt and are selling a lot more receipts than they have bullion. Time for the pitchforks.

Probably both, but (2) is a lot more nuclear.

Weaseldog said...

El Pollo, I've been hearing rumors of #2 for years.

Some friends have shown me back of the envelope calculations that show that much more gold exists on paper, than has ever been mined.

Evidently selling gold on a promise that it will be mined later and acquired is not an uncommon practice.