Friday, February 6, 2009

February 6 2009: Dance to the moment you live in


G. G. Bain Two Faces Have I Summer 1915
Dance to the tunes of an Edison Home Phonograph, Broad Channel, N.Y.



Ilargi: The US has lost 3.6 million jobs in the past 14 months, half of which were in the past 90 days. That’s 20.000 each and every day. If this rate continues, the US will lose 7.5 million jobs this year. On Wall Street, today's reaction to the news is rising stocks. With so many Americans falling into the abyss of poverty and despair, not only do costs for companies fall, the chances for more and more taxpayer trillions being doled out also rises exponentially. Yes, there is still profit to be made from the misery of other people. So you would almost think that nothing's changed. But that's not true.

The stimulus and bailout plans merely accelerate a process that has long since become inevitable: the final demise of our economic system, our economies, our way of life and indeed our societies. No more free markets, no more capitalism, no more global trade or globalization, and no more democracy. Of course most of these things have long ago ceased to be anything but religious deliriums, but don't ever underestimate the power of belief. It will, in this case, linger for a while longer, until it's too late for most of us to prepare in any sensible fashion. And the usefulness of preparations is itself highly debatable in nations and communities where 95% or more of people have not prepared themselves for any sort of substantial change in the conditions of their lives.

How toxic hope can be is as obvious as a deafening siren with a blinding light when we look at the next round of delivering the scarce remaining wealth of the poor into the hands of the greedy few. But it's the poor who will soon need all the help they can get if we would want to prevent mass starvation, disease and uprisings. They won't get that help. The world at large will not recognize that capitalism has died until it no longer makes any difference whether it does or not. The people with their hands on the triggers and buttons are where they are because the deceased system put them there. They will only execute those measures which they think might in some magical manner revive the dead. Grabbing hold of ever more of other people's money is the only way they see to do it. You can take your money out of your bank, and that's certainly an idea, but you can't keep the ruling classes from spending what you have not yet earned. There is the catch. They got you by the balls.

A Fed official talks about the threat of deflation later this year while we have been in deflation for a long time. There's another president telling us there's no time to waste in pushing through an even bigger plan. Sounds familiar. There's a pattern there: the next plan is always bigger. More people start to wake up to the fact that we have entered a depression. But it doesn't matter anymore. A depression is a phenomenon that relates to a capitalist system, and we no longer have one of those. Still, we will pretend that we do until the last bit has been sucked out of the last sucker. Today's Dow rally is the next step in that process. In capitalist terms a Black Friday is one in which stocks go down. Not this one. The system has stopped functioning. That's hard to accept, to recognize, to live. It’s all we've ever known. We will keep talking till the lights go out. It's all we know how to do. But don't despair. Dance. Enjoy the moment you live in.





Ilargi: Update 2.00 AM EST: Stoneleigh tells me that my comments below should be posted right here.


What I said above is that capitalism is dead, and therefore so is the form of organization our societies have been built on. As for faith and hope: they tend to become blind, and I don't think that's such a good thing. There's a great story at dieoff.org from a concentration camp survivor who claims that hope is what made the victims succumb to their fate, and that without it they would have fought harder to survive.

Having hope and faith that our present political and economic systems will somehow rise up again, or turn around, in Obama's words, doesn't seem to me to be the best way to approach the future. Not all hope is necessarily good, nor is all faith. It all depends on what you believe in, and what you hope for. Clinging to notions that are already dead, though it may be the most common trait among people, prevents people from moving forward with their lives. Which in times of drastic changes, and that is where we are, is a handicap, not an asset.

I can take this a bit further: we are people who plan our future lives, we buy homes, we pay into pension plans, we rely on having money when we stop working at age 65, we do all these things. But the homes we bought are losing any value they once had, and our pension plans lost some 40% in just the past year. For 90+% of people under 55, that dream, hope, faith, call it what you want, will never happen. Still, how many people do you know who have today accepted that as a fact? It's much easier to BELIEVE that a new president will repair the leaks in the boat. But he couldn't even if he wanted to.

Why would hoping for something that is illusional, that will never happen, be a good thing? Sure, 1% of the people in Dachau survived. Is that an excuse for the other 99% to die hoping, instead of doing it fighting?




And there's this:

The Hope That Kills

"Despite the madness of war, we lived for a world that would be different. For a better world to come when all this is over. And perhaps even our being here is a step towards that world. Do you really think that, without the hope that such a world is possible, that the rights of man will be restored again, we could stand the concentration camp even for one day? It is that very hope that makes people go without a murmur to the gas chambers, keeps them from risking a revolt, paralyses them into numb inactivity.

It is hope that breaks down family ties, makes mothers renounce their children, or wives sell their bodies for bread, or husbands kill. It is hope that compels man to hold on to one more day of life, because that day may be the day of liberation. Ah, and not even the hope for a different, better world, but simply for life, a life of peace and rest.

Never before in the history of mankind has hope been stronger than man, but never also has it done so much harm as it has in this war, in this concentration camp. We were never taught how to give up hope, and this is why today we perish in gas chambers.

Borowski, pp. 121-122








A "New" Bailout Plan? Hardly.
I watched our President's brief address on prime time this evening. His delivery was passionate. His message, strong and partisan. His intentions were clear. Rally support for his stimulus program. In the wake of a few really bad days of press, his honeymoon period clearly over, I thought he did a strong and ballsy thing. Problem is, the plans being bandied about concerning the financial sector are still off the mark. How is it, after the mistakes made by Paulson and the prior Administration that we are still unclear as to what the plan should be? As I've said before, I just don't get it.

But now it's even worse. It seems as if the discussion among those in power has gone back to what we had during Bush II, injecting capital into sick institutions, yet on "tougher" terms than we had previously. Simply doing more of something that was flawed from the beginning isn't going to help solve the problem any better. Why the brainy President Obama or the equally brainy Larry Summers don't seem to get this is beyond me. From tonight's WSJ Online:

The Obama administration's financial-rescue plan is shaping up to include capital injections with tougher terms than the first round and an expansion of an existing Federal Reserve lending facility that could potentially buy up toxic assets clogging the system, according to people familiar with the plans.

********************

Instead of buying preferred shares, as it did before, the government is discussing taking convertible preferred stakes that automatically convert into common shares in seven years. Such a move could help banks as they look for ways to bolster common equity. When a bank takes a loss, it has to subtract that amount from the value of its common equity. As losses mount, investors increasingly believe banks need to find ways to shore up this first line of defense on their balance sheets.

To get money, banks would likely have to pay a higher dividend to the government than the 5% rate the government charged in the first round of infusions and agree to a host of new restrictions, such as lending above a baseline level, reporting frequently on their use of the money and curbing executive salaries. While Treasury wouldn't preclude healthy banks from participating, the stricter terms would likely attract primarily weaker banks in need of capital.

Does anyone else see how dumb this is? Let's see:


  1. The sickest banks with the lousiest managements get access to Government (read: taxpayer) capital.

  2. The Government is looking to play accounting/ratings games by making the instruments convertible into common after seven years, by which time any self-respecting and solvent bank will have paid off the preferred well before its conversion date.

  3. The curbs on salaries will likely cause many firms to reject Government capital even if they are very sick, preferring to hang onto their compensation "call option" and hope that things turn around in order that their firm avoids bankruptcy. By this time they will have scooped out far more compensation than what is permitted under the new Government guidelines.

And let's not forget these not-so-trifling issues:

  1. Banks with toxic asset-laden balance sheets will still be reluctant to lend, even with Government capital injections. And forcing them to lend will only put us right back in to the world of the GSEs (Fannie Mae, Freddie Mac), which may well cost taxpayers several trillion dollars.

  2. Bad managements will still be running the show, even after losing billions or even tens of billions of dollars.

  3. Common equity holders and debt holders are still being bailed out, perpetuating a moral hazard that should have ended months ago for many (Citi, BofA, etc.).

Have we learned nothing over the past six months? The ideas being proposed simply won't work, and I don't care which Harvard Ph.Ds are saying so. It is a matter of transparency. It is a matter of good governance. It is a matter of creating healthy institutions that are in a position to fund the renewal and growth of this country. Current plans do not contemplate any of these things. Why not? That is a mystery. President Obama has his chance to take a stand, the right stand, and I'm afraid his first big step forward will in fact be two steps backwards. And the country will suffer for it.




Let's Start Brand New Banks
Everyone agrees that the United States urgently needs a few good banks. Turning bad banks into good banks is a difficult and risky way to get them. It's simpler and safer to start entirely new banks. In this context, "good" means a bank with assets and liabilities that are easy to value using market prices. At a good bank, officers, regulators and investors can be confident about the value of the bank's capital. The government has $350 billion in Troubled Asset Relief Program (TARP) funds that it can use to encourage new bank lending. If this money is directed to newly created good banks with pristine balance sheets, it could support $3.5 trillion in new lending with a modest 9-to-1 leverage. Right out of the gate, the newly created banks could do what the Fed has already been doing -- buying pools of loans originated by existing banks that meet high underwriting standards. If the TARP funds go to existing banks, much of them will end up stuck in financial institutions that are still bad after the transfer. We know from the previous round of TARP that giving more capital to bad banks generates very little net new lending.

Proposals for turning existing banks into good banks -- recapitalizing them, nationalizing them, transferring the toxic assets off their balance sheets, or insuring the toxic assets -- require prices for all these hard-to-value assets or, worse still, prices for derivative contracts on the toxic assets. (Calling the derivatives "insurance" doesn't make them any easier to price.) Without reliable market prices for the hard-to-value assets, any proposal for turning bad banks into good banks could lead to huge transfers of wealth between taxpayers and bank shareholders. If the government lets new banks provide the new lending that the economy needs, it could return to clearly stated and familiar policies for bank regulation. The government could announce that it will not invest any new capital in a troubled bank that it hasn't yet taken over. Nor will it offer troubled banks any transfers or implicit subsidies. It can stick to a policy of assigning accurate values to assets as new information comes in. It can follow the usual FDIC procedures for protecting depositors and taxpayers and for deciding when to take over a distressed bank, and managing careful workouts that avoid the turmoil that a Lehman-style bankruptcy proceeding can cause.

With a return to a clearly articulated and familiar pattern of bank regulation, investors from the private sector could invest in the banking sector without fear that they will be competing with zombie banks that receive ongoing subsidies and transfers from taxpayers. Provided that the government accelerates the approval process, investors from the private sector can quickly create the new banks that the government backs. Over time, they can also buy the government's shares in these banks. Investors from the private sector can also invest in existing banks that truly are good banks. The government should move first and signal unambiguously that new banks with at least $350 billion worth of capital will enter the market quickly. Over time, the private sector will deliver on this commitment. The government's role is merely to act as a temporary bridge. There are, to be sure, risks of political interference from government involvement in banking, but all of the current proposals for increasing lending require more government involvement. The challenge is to find one that increases lending and does the least harm.

If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish. If instead the government combines open-ended and opaque financial support for troubled banks with promises of tight supervision and punishment for bad behavior, the risks are large and grow over time. The brewing backlash against the existing players from the financial sector is almost certain to burn hotter as the recession wears on, and new election campaigns get underway. If the new administration ties its fate to the existing players, it could lose its room to maneuver on countercyclical policy and be put under political pressure to intervene in bank decisions in ever more intrusive ways.

Because they can and will borrow, new banks will be much more effective in leveraging TARP funds. They will undertake more total lending, bring more trading to financial markets, and do more to limit the depth of the recession. As a result, investing the TARP funds in new banks will do more to help the troubled but potentially viable existing banks than giving funds directly to them. Banks that are not viable, the ones with liabilities that substantially exceed their assets, will lobby vociferously against a return to historical patterns of bank regulation. They will say anything to postpone a looming FDIC takeover. The administration should not listen to threats and pleas from these doomed banks. It does not have to rely on them to get new lending going quickly and on a large scale. New entrants could give us a few good banks. That, plus an FDIC that can do its job, is all we need.




Psst...It's a Depression, Not a Recession
Today, dear reader, we’re going to let you in on a big secret. Pssst...we’re in a depression, not a recession. As we explained yesterday, economists have no sure way of separating the two. But they are profoundly different. In the few words that follow, we’ll explain why...and why this one deserves the "D" and not the "R." And since we always look on the bright side, here at The Daily Reckoning , we’ll also explain why this worst of times for most people can be the best of times for you.

But first, we turn to the news. We’ll see what a depression looks like – just from reading the headlines. The Dow fell 121 points yesterday. That leaves only about 4,000 or 5,000 more to go...before the index reaches its depression bottom between 3,000 and 5,000. That could take a long time...depressions always take time. It might not happen before 2010...or even before 2020. Oil held steady at $40. Oil seems to be stuck around the $40 level. The dollar/euro exchange rate seems stuck too – in the $1.28-$1.30/euro range. So too with gold – at about $900. Gold gained $9 yesterday...bringing it back over $900. Credit card delinquencies are at a record high.

The Chinese are now buying more automobiles than Americans. Disney profits fell 32% in the first quarter (Disney needs to get on board with the Gregorian calendar...why is it reporting 1Q results now?). Panasonic reported a loss of $4.2 billion; it said it was cutting 15,000 jobs. In the face of this depressing news, President Obama has said that if Congress doesn’t get off its duff and pass his stimulus plans the consequences could be "catastrophic." Naturally, the Democrats are mostly behind their main man. But the Republicans have ideas of their own. Instead of cutting Obama’s $880 billion boondoggle program, they’re adding more...such as $6.5 billion for medical research. They’ve added on some tax cuts too...bringing the total plan to nearly $1 trillion, according to this morning’s report.

What is amazing is not that both political parties favor boondoggles, they always have, but that anyone thinks that throwing money around like this will reflate the bubble economy. But that’s just what makes our job so entertaining – everyone thinks he knows what he is talking about...and no one has a clue. At the foundation of their faith in the Obama stimulus plan...or any of the others for that matter...is a simpleton’s insight: that if private citizens stop spending government should take up the slack. But if it were that easy, there would never be any downturns...because politicians are all too eager to spend money, all they need is an excuse.

The typical recession is nothing more than the economy taking a little breather after a brisk walk. A depression, on the other hand, occurs after a long, uphill sprint – when the economy clutches its chest and falls down dead. Even in a recession, the meddlers spring into action. Interest rates are lowered...government spending is increased (usually too late to make any difference) and the economy resumes its perambulation. The policy makers take on a depression as though it were just a particularly bad recession. They cut rates further...and spend more money. But it has no effect – except to retard the necessary adjustments. A depression is not merely a pause...it is the end. Unless the meddlers can work miracles – such as raising the dead – they will just make things worse. Because, while they are trying to revive a corpse, they are standing in the way of change.

Recessions are a natural feature of the inventory cycle. The economy gets a little over-stocked...and has to clear the shelves. Prices are cut. A few people are laid off. And then, after a few months, everyone is back in business... It’s "laissez les bons temps roulez," as they say in New Orleans. Depressions are a natural feature of a much bigger cycle. A part of capitalism that people love to talk about when the going is good...but despise when it turns against them. We’re talking about what Schumpeter describes as "creative destruction." Everyone loved "creative destruction" in the late ’90s – when they thought it added to their balance sheets. Now, they beg government to save them from it.

What we are witnessing in the economy is creative destruction at work. And what we are witnessing in politics is a bunch of numbskulls trying to stop it. What’s being destroyed? Trillions of dollars’ worth of asset values, of course. Millions of jobs. Hundreds of thousands of businesses. In a recession, the basic plan or formula for the economy is still valid. The economy just needs a little time...and maybe a little monetary boost...before it continues growing. Typically, inventories are sold down...so a new burst of production can begin. But in a depression, the problems are structural.

One way of understanding this is just to look at balance sheets. Whether you are a business or a family, you can only afford so much debt. When you get too much, you have stop and pay it down. And when it becomes so great you can’t pay if off – because you don’t have enough income – you have to declare bankruptcy. A depression is when a whole economy declares bankruptcy...or should. Because it can’t pay its debts. Businesses, for example, have been built for a level of demand that no longer exists. It is not a question of waiting a few months. By the time consumers are ready to buy again, the whole economy will have moved on.

Imagine, for example, a guy who built a nationwide chain of stores just to sell iPods to teenagers. The business may have been a great success – for a while. And he took out huge loans so he could expand...and take advantage of the demand. But then comes a depression. He says to himself: ‘I’ll just get some more financing...and wait it out.’ But who’s going to lend to him? By the time the kids begin buying again, iPods will be like vinyl LPs. His business is history. His lenders have lost money. The loans should be written off and the business should be destroyed, not mummified and preserved. A depression is when the whole economy changes its business plan, in other words. And that takes time...and creative destruction.

How much time? Well, in the United States alone there is about $6 trillion too much private debt...$1 trillion too much output capacity...and millions of "excess" workers. How long will it take to retrain, retool, and re-absorb these excesses? We don’t know. The last depression took about 20 years...and a major war (talk about creative destruction!) Then, the United States was making the structural shift from a Japan-like capital investment-led economy...to a post-WWII consumer-led economy. In Japan itself, its post-WWII capital investment-led boom hit a wall of creative destruction in 1990. Now, 19 years have gone by...and it is still adjusting to the new world economy.

All we know so far is that this depression has wiped out more than $30 trillion of dollars’ worth of investors’ capital. We suspect it will wipe out another $30 trillion worth before its creative destruction is over. Our guess is that it will also destroy the U.S. consumer-economy model...and the dollar-based world monetary system. That’s the destructive part. For the creative part...and how you can get ahead during a depression...stay tuned...more tomorrow.




U.S. Jobless Rate Soars as Payrolls Plunge by 598,000
The unemployment rate in the U.S. climbed to the highest level since 1992 in January and payrolls tumbled as the recession showed no sign of abating. The jobless rate rose to 7.6 percent from 7.2 percent in December, the Labor Department said today in Washington. Payrolls fell by 598,000, the biggest monthly decline since December 1974, after dropping by 577,000 in the previous month. The loss of jobs, at employers ranging from manufacturers like Caterpillar Inc. to retailers such as Macy’s Inc., is shattering consumer confidence and crippling spending. President Barack Obama is likely to use the first employment report since he took office to prod lawmakers into agreeing on a compromise economic stimulus package by the end of this month.

"We’re losing jobs at an alarming pace and bracing for more weakness," Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, said before the report. "The private sector is flat on its back at this point. The government needs to step in with a stimulus, the sooner the better." Treasuries slipped while stock-index futures headed higher after the figures. Contracts on the Standard & Poor’s 500 Stock Index gained 0.3 percent to 843 at 8:34 a.m. in New York. Benchmark 10-year note yields rose to 2.92 percent from 2.90 percent late yesterday. With a revised decline of 597,000 jobs in November, revisions subtracted 66,000 workers from previously reported payroll figures for the last two months of 2008. The U.S. economy has now lost a total of 3.57 million jobs since the recession started in December 2007, the biggest employment slump of any economic contraction in the postwar period.
Last month’s losses mark the first time since records began in 1939 that job cuts exceeded half a million in three consecutive months.

Payrolls were forecast to drop 540,000, according to the median estimate of 75 economists surveyed by Bloomberg News. Estimates of the decrease ranged from 400,000 to 750,000. The jobless rate was projected to jump to 7.5 percent. Forecasts ranged from 7.3 percent to 7.6 percent. The House of Representatives last week passed an $819 billion stimulus package that includes tax cuts and infrastructure spending. The Senate is working on a plan that is closer to $900 billion. "A failure to act and to act now will turn crisis into catastrophe and guarantee a longer recession," Obama told lawmakers on Feb. 4 in Washington.

Today’s report showed factory payrolls decreased by 207,000, the biggest drop since October 1982, after declining 162,000 in the prior month. Economists had forecast a January drop of 145,000. The decrease included a loss of 31,300 jobs in auto manufacturing and parts industries. Caterpillar, the world’s largest maker of construction equipment, on Jan. 30 said it plans to cut 2,110 workers in addition to the 20,000 reductions it reported earlier in the month. Payrolls at builders declined 111,000 after decreasing 86,000. Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 279,000 workers after cutting 327,000. Retail payrolls decreased by 45,100 after a decline of 82,700. Financial firms reduced payrolls by 42,000, after a 27,000 decrease the prior month.

Government payrolls increased by 6,000 after shrinking by 10,000 the prior month. Saks Inc., Target Corp., Starbucks Corp. and Home Depot Inc. last month reported plans to reduce workers. Others following suit in February include Macy’s. The second-largest U.S. department-store company said it will cut 7,000 jobs, eliminate executives’ merit increases for 2008, and trim its contribution to staff 401(k) retirement-savings plans. "This is a time when nothing should be considered a sacred cow," Macy’s Chief Executive Officer Terry Lundgren said on a conference call with investors and analysts. News of job losses continued this week. PNC Financial Services Group Inc. will reduce almost 10 percent of its workforce by 2011, and Estee Lauder Cos., the maker of Clinique and Bobbi Brown cosmetics, will slash 2,000 jobs over the next two years.

Government jobs are now also in jeopardy. The U.S. Postal Service plans to trim headcount through attrition and early retirement, and has asked lawmakers to allow it to reduce its six-days-a-week delivery schedule to pare expenses. The average work week remained at 33.3 hours in January. Average weekly hours worked by production workers fell to 39.8 hours from 39.9 hours, while overtime decreased to 2.9 hours from 3 hours. Average weekly earnings rose by $1.67 to $614.72. Workers’ average hourly wages rose 5 cents, or 0.3 percent, to $18.46 from the prior month. Hourly earnings were 3.9 percent higher than in January 2008. Economists surveyed by Bloomberg had forecast a 0.2 percent increase from December and a 3.6 percent gain for the 12-month period. With today’s report, the Labor Department also issued revisions to payrolls going back to 2004. The annual benchmark revision, which aligns the data with corporate tax records and covers the period from April 2007 to March 2008, subtracted 89,000 workers from payrolls in the 12 months ended in March, exceeding the 21,000 reduction Labor estimated in October.




The jobs problem you don't know about
The sharp jump in layoffs gets all the attention, but it's the lack of hiring and job openings that pose greater risks for the labor market and economy. January was one of the worst months for layoffs ever, with nearly a quarter-million job-cut announcements grabbing headlines.
But the real problem in the U.S. labor market today isn't layoffs. It's a hiring freeze that is gripping most work places - and has not gotten nearly as much attention as the job cuts. "The hiring rate has caved. That's why the job market is as bad as it is," said Mark Zandi, chief economist with Moody's Economy.com. "Given this low hiring rate, unemployment would still rise even if layoffs were falling."

The government's key employment report, released Friday morning, doesn't detail hiring and job openings. It instead gives overall change in the number of workers on U.S. payrolls. It was another terrible report, with employers shaving 598,000 jobs off of U.S. payrolls, the biggest drop in 34 years. The unemployment rate climbed to 7.6%, which was a 16-year high. Both results were worse than economists' forecasts. But since 2000, the Labor Department has also tracked hiring, job openings and layoffs. And the most recent readings on those statistics show that the level of hiring and job openings has actually tumbled more than layoffs have soared. Through November, the number of layoffs was up 17% from year-earlier levels. But the amount of workers who were hired during November was down 26%, and the number of job openings tumbled 30%.

While layoffs are likely up from the November levels, the hit to hiring has also gotten much more severe, according to experts. And that means that once people do lose their job, it's going to be even tougher to find a new one. The Conference Board's tracking of online job listings shows a decline of more than 1 million listings in the last two months alone. That's a 23% decline in postings since November. The weakness in job postings is widespread, with only two states, North Dakota and Wyoming, having fewer unemployed people than advertised job openings. During the last recession in 2001, there was not nearly as sharp a drop in hiring and job openings. In fact, the hiring and job opening rates, which compare new hires and openings to the overall number of workers, are both at their lowest level on record.

And economists say that even if the number of layoffs peaks soon, the pace of hiring and job openings may remain soft for months to come. "The issue of hiring is often overlooked," said Gad Levanon, senior economist for The Conference Board. "But it's the key to the labor market. In the last recession, layoffs reached their peak in late 2001. But hiring didn't reach its lowest level until 2003, and that's when the job losses finally ended." Andrew Reina, practice director for job placement firm Ajilon Finance Solutions, said hiring freezes are now the rule at most companies.

"A lot of our clients are looking at hiring freezes, certainly in the short term, and most likely through the first half of this year," he said. Economist Robert Brusca of FAO Economics added that hiring freezes are an easier way for many companies to reduce work forces than layoffs, since even in bad times people will leave companies on their own. And he said the hiring freezes won't end until companies have some confidence that the economy and demand for their products are ready to turn around. "It's pretty clear that fear is running the show right now," he said. 




Recession Job Losses Surpass Three Million
U.S. employment plunged in January, a government report showed, bringing total job losses since the recession started in December 2007 to 3.6 million. Half of those losses occurred in the last three months alone, and the stepped-up pace of layoffs in recent months suggests no end in sight to the economic downturn. The report, which included another sharp rise in the unemployment rate to a 16-year high, will likely up the heat on U.S. lawmakers to enact a large fiscal stimulus package. Nonfarm payrolls, which are calculated by a survey of establishments, tumbled 598,000 in January, the U.S. Labor Department said Friday, the most since December 1974 and well above the 525,000 drop Wall Street economists in a Dow Jones Newswires survey expected. December was revised to show an even steeper decline of 577,000. The government included revisions for all of 2008, which showed that the U.S. lost about 3 million jobs last year, roughly 400,000 more than first thought. The economy has shed 3.5 million jobs since January 2008, the largest 12-month decline since the government started compiling those figures in 1939.

"Job losses in January were large and widespread across the major industry sectors," said Keith Hall, Commissioner of the Bureau of Labor Statistics. Mirroring the government data, a Who's Who from Corporate America including Caterpillar Inc., Home Depot Inc., Black & Decker Corp. and Microsoft Corp. all announced layoffs in January. The unemployment rate, which is calculated using a survey of households, jumped 0.4 percentage point to 7.6%, the highest since September 1992. Some economists think the jobless rate may hit 9% in coming months. By some broader measures, labor-market conditions are even worse than the main numbers suggest. When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers actually reached 13.9% last month, up almost five percentage points from a year earlier. The employment-to-population ratio was the lowest since 1986.

With no more room to lower official interest rates, which are near zero, Fed policymakers now have to rely on quantitative easing through the Fed's balance sheet to pump money into the financial system. Officials will likely face more pressure to widen their efforts to perhaps even include purchases of longer-term Treasury securities. Average hourly earnings increased a modest $0.05, or 0.3%, to $18.46. That was up 3.9% from one year ago. Friday's numbers, along with grim automobile and retailer sales reports, suggest that the economy hasn't stabilized after the fourth quarter's 3.8% slide in gross domestic product, which was the steepest since 1982. According to Friday's report, hiring last month in goods-producing industries plunged by over 300,000.

Within this group, manufacturing firms cut 207,000 jobs, the most since the 1982 recession, with losses concentrated in fabricated metals and motor vehicles and parts. Construction employment was down by 111,000. Service-sector employment tumbled 279,000. Business and professional services companies shed 121,000 jobs, the third-straight six-figure loss, and financial-sector payrolls were down 42,000. Retail trade cut over 45,000 jobs, the 12th-straight loss, while leisure and hospitality businesses shed 28,000, as households curtail nonessential spending. Temporary employment, which economists consider a leading indicator of future job prospects, fell by more than 76,000. Among the sole bright spots were health care and education, which tend to be more labor intensive and less productive than manufacturing and other services. Employment in those sectors together rose 54,000. The government added 6,000 jobs. The average workweek was unchanged at 33.3 hours. However, a separate index of aggregate weekly hours fell 0.7 points to 102.6.




States' Jobless Funds Run Low
A growing number of states are running out of cash to pay unemployment benefits, a sign of how far social-welfare systems are being stretched by the swelling ranks of the jobless in the deteriorating U.S. economy. Unemployment filings have soared so high in recent months that seven states have already emptied their unemployment-insurance trust funds, which were supposed to see them through recessionary periods. Another 11 states are in jeopardy of depleting reserves by year's end, according to the National Conference of State Legislatures, which published a January report entitled "The Crisis in State Unemployment Trust Funds." So far, states have borrowed more than $2.3 billion in emergency funds from the federal government, money they are required to pay back. The national unemployment rate is expected to hit 7.5% when January job data are released Friday, and rates are approaching double digits in some hard-hit industrial states. Nearly 4.8 million people collected unemployment insurance last week, the most since federal officials began tracking such data 40 years ago.

New York has already borrowed more than $330 million to pay unemployment claims, according to the U.S. Department of Labor. In the past, New Jersey borrowed from its trust fund to pay for other expenses, and now it has only a few months of payments in reserve. Even states with relatively flush trust funds such as Tennessee are warning that they could go broke in the next year if unemployment levels stay high. Although West Virginia has relatively high reserves, business leaders already warn they will push for cuts in unemployment benefits to forestall tax increases. Some states like Kentucky have automatic triggers raising employer contributions when the insurance fund falls, but many states do not. The crisis is most stark in South Carolina, where unemployment has approached 20% in some poor counties, and where the state of the unemployment trust fund, little noticed in boom times, has sparked a standoff involving the governor. At the same time, proposals to raise payroll taxes to alleviate the crisis are going over like a lead balloon in state legislative sessions that started last month. While the economic-stimulus package being debated in Congress would pump billions of dollars into the unemployment system, it would also increase the amount of benefits paid. It wouldn't solve the core problem of the state trust funds' depleted reserves and balances outstanding.

"You collect money when times are good and pay it out when times are bad, but no one anticipated such bad times," said Diana Hinton Noel, labor analyst for the National Conference of State Legislatures. Employers argue that raising payroll taxes isn't an option, as they cannot afford to pay more taxes in the midst of an economic crisis. Worker advocates worry that officials will impose some type of shared-sacrifice solution, in which benefits for the unemployed could be cut to lessen a payroll-tax increase. Like many other states, South Carolina's unemployment trust fund was flush a decade ago. In what was deemed a tax break for businesses, the state lowered the rate that employers paid in payroll taxes for unemployment insurance. In 2001, the fund had a balance of more than $600 million, according to the governor's office. But the fund balance began to drop precipitously three years ago, as the state began paying out more for jobless benefits. The trust fund went broke last fall.

At the request of the state's Employment Security Commission, Gov. Mark Sanford sought an emergency loan in September from the federal government. But Mr. Sanford balked at signing a second request in December, demanding that the state agency agree to an outside audit and prove the authenticity of its data, which he routinely questions. He relented hours before the New Year's Eve deadline in what became a well-publicized standoff. "You got 77,000 individuals out of work, and the unemployment check is the only lifeline they have," said Roosevelt T. Halley, executive director of the state agency. "There was this mental anguish that there wouldn't be a check for them." Gov. Sanford said he is using the only leverage he has to make the agency and its legislatively appointed leaders better stewards of public money. "Who held the unemployed of South Carolina hostage? The agency," he said. "If you watch $600 million disappear over six years, and you have zero elbow room except to ask for an emergency loan, you put them as hostages."

So far, the state has borrowed more than $110 million in emergency funds from the federal government, according to the Department of Labor. But unemployment filings are rising so rapidly that the amount requested just weeks ago for this quarter won't meet the growing need, Mr. Halley said. The amount the state paid in benefits per week reached $20 million in January, compared with $14 million in December, Mr. Halley said. The impasse continues as Gov. Sanford threatens to fire agency officials unless they provide data by Feb. 9 proving the legitimacy of each unemployment filing, and more details about employers.  While the proposed U.S. stimulus package will likely bulk up unemployment benefits, the focus is on extending benefits to the long-term unemployed and expanding jobless insurance to part-time employees. The package is likely to extend the grace period for interest on federal money loaned to states like South Carolina, but they would probably need to pay it back. Options include raising the payroll tax, pulling money from other state funds or potentially restricting eligibility, said Ms. Noel of the National Conference of State Legislatures, adding, "Unfortunately, they're all difficult choices to make."




Canada loses 129.000 jobs in January
Canada recorded its most devastating monthly drop in employment ever in January, losing 129,000 jobs as the U.S. recession dug its claws deeper into the Canadian economy. With the auto industry and other manufacturing sectors scaling back dramatically last month, the national unemployment rate soared to 7.2 per cent, up from 6.6 per cent in December. That's the highest unemployment rate since November, 2004. The losses, predominantly full time, were well beyond any economist's projections, and confirmed for several analysts that their already bleak expectations for the Canadian economy should be revised down.

"In the near term, there's nothing to look forward to," said Avery Shenfeld, senior economist at CIBC World Markets, who believes the Canadian economy contracted at a steep four per cent pace in the first quarter after a significant contraction in the fourth quarter of last year. "This won't be the end of the job losses." Since October, when the Canadian economy took a major turn for the worse, workplaces have shed 213,000 jobs or 1.2 per cent of the work force. The losses were mainly full time. In January, the carnage was concentrated in Ontario's manufacturing sector. Factories let go 101,000 people last month across the country, as many of the layoff notices announced in recent months were put into effect.

The auto sector took the brunt of the cuts, but many other manufacturing sectors were scaling back too, Statscan said, pointing to furniture, computers, appliances and clothing. It's a reminder that despite the transition of the Canadian economy away from manufacturing to rely instead on services and natural resources, factories are still a core part of Canada's prosperity, Mr. Shenfeld said. "Manufacturing no longer carries the heft it had in bygone days in terms of its share of employment, but its ups and downs still have much to do with the business cycle. You don't trigger a recession by people getting their hair cut less often," he said. Manufacturing has been downsizing for a few years, as the Canadian economy restructures, economists said, but the most recent cuts are closely linked to the severe U.S. recession taking a toll on Canada's exports.

"It's one thing when the U.S. economy goes down the tubes, but when it's led by autos and lumber, could it be any worse?" Dale Orr, chief economist at IHS Global Insight, asked rhetorically. The Canadian job market was due for a big blow, he said, since economic output over the past year has diminished even while employment was expanding. Now, employers are reconciling their work forces with their contracting production. "I didn't really see this happening quite so quickly," he added. Since manufacturing was the source of most of the job losses, Ontario's job market was hammered. The province lost 71,000 positions, the largest drop in three decades.

The provincial unemployment rate jumped 0.8 percentage points to 8 per cent, the highest in over a decade, surpassing Quebec's 7.7 rate. In addition to deep problems in the auto sector, employers in Ontario truck transportation also eliminated 30,000 positions. British Columbia and Quebec also registered big employment declines, with B.C. shedding 35,000 jobs and Quebec losing 26,000 positions. The other provinces registered little change. In the desperate search for a silver lining, economists pointed out that job losses were concentrated in one sector – manufacturing – and in three provinces. They also recalled that the monthly job numbers have been very volatile lately, and suggested that job losses of this scale are very unlikely to be repeated.

"One of the key themes here is if you take away the manufacturing sector, the numbers weren't all that surprising," said Derek Burleton, director of economic analysis at Toronto-Dominion Bank. He is sticking with his forecast for job losses totalling 325,000 this year – a sad story, but not catastrophic. "You could take these numbers and run for the hills, but we're not going to adjust our forecast," he said. By sector, the only industry with any notable gain in employment was health care and social assistance, where the number of jobs rose by 31,000. Every sector on the goods side of the economy registered losses, while the services side of the economy remained mainly stagnant. The private sector was responsible for most of the decline in employment, cutting 101,200 jobs. But the public sector contracted too, losing 42,000 positions.

"The fact that most of the job losses were in the private sector adds to worries that the economy has significantly throttled back," said Charmaine Buskas, senior economics strategist at TD Securities. Average hourly wages actually rose in January, increasing at a 4.8-per-cent pace from a year ago. That's the fastest pace since last May. Those increases won't last, but it's a positive sign that those people who have jobs still have plenty of money to spend, said Mr. Shenfeld. By demographic, adult men suffered the most job losses. Employment among people aged 25 to 54 dropped by 111,000, Statscan said, and two-thirds of the decline was among men.

In another sign of weakness in the job market, the participation rate also declined in January. The participation rate measures the proportion of the working-age population actively working or looking for work. It dropped to 67.4 per cent in January from 67.6 per cent in December – a sign that some people have lost hope of finding new jobs. The grim jobless numbers are a stark reminder of the depths of the financial crisis, says Ontario Finance Minister Dwight Duncan. "They're obviously deeply troubling," he told reporters Friday in Niagara Falls, Ont., where members of the McGuinty government are holding a caucus meeting. He acknowledged for the first time that the job losses last month in Ontario, which have pushed the province's unemployment rate to its highest level in more than a decade, will cause a "dramatic decline" in revenue for the province.

The government is planning to unveil the provincial budget by the first week of March, which will show just how sharply corporate tax revenues have dropped. Premier Dalton McGuinty said earlier this week that the province is facing "substantial, multi-year deficits." Ontario plans to spend about $4-billion this year on infrastructure projects – its share of the federal program. This is in addition to the $8-billion the province earmarked for infrastructure projects last year. The infrastructure spending is a key part of the Harper government's stimulus package to help the economy. But Mr. Duncan cautioned that these projects can only do so much to help the economy. "Make no mistake," Mr. Duncan said. "This is not going to fix every problem." He said he does not share the same optimism as federal Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney that economic growth will begin to rebound next year. "I thought [they] were way too optimistic," he said.




Exploding ARMs Roil Bernanke's Drive to Calm Markets
Joe Ripplinger took out a $184,000 mortgage in 2006 and makes his payments every month. Now he owes $192,000. The 66-year-old Minneapolis house painter has a payment- option adjustable-rate mortgage. It allows him to write a check for $565 a month even though he owes $1,300. The difference is added to the mortgage, and when his total debt reaches $212,000, or after five years have passed, he said his monthly minimum could jump to about $2,800, which he can't afford. "We're barely making it right now," Ripplinger said.

The estimated 1 million homeowners with $500 billion of option ARMs are beyond the help of interest-rate cuts by Federal Reserve Chairman Ben S. Bernanke. While subprime borrowers face an average increase of 8 percent or less when their adjustable- rate mortgages reset, option ARM homeowners may see their monthly payments double after their adjustments kick in. "We call them neutron loans because they're like a neutron bomb," said Brock Davis, a broker with U.S. Express Mortgage Corp. in Las Vegas. "Three years later the house is still there and the people are gone." Once option ARM borrowers' loan balances reach a predetermined limit, called a negative amortization cap, usually 110 percent to 120 percent of the mortgage amount, their payment rates immediately increase. They also automatically shoot up after five years. Otherwise, increases typically are capped at 7.5 percent of a borrower's initial payment per year.

"These could be called long-fuse, exploding ARMs," said Kathleen Keest, former assistant Iowa attorney general and now senior policy counsel at the Center for Responsible Lending in Durham, North Carolina. "I've heard people say they are the most complicated product ever offered to consumers. They are the real liar loans." The loans accounted for 8.9 percent of the almost $3 trillion in U.S. home loans made in 2006, up from 8.3 percent in 2005, according to an estimate by industry newsletter Inside Mortgage Finance. Originations of option ARMs fell 50 percent during the first nine months of last year, the newsletter says. One in five option ARMs packaged into bonds last year required less than 10 percent down payment and no proof of a borrower's income, according to a Jan. 22 report by New York- based analysts at UBS AG, Europe's largest bank by assets. Two percent required no down payment at all from the borrower, the analysts said.

Delinquency rates on option ARMs tend to be low in the early years, misleading some investors to think they will remain safe, said Sean Kirk, a debt trader at Seaport Group LLC, a New York- based securities firm focused on bonds of distressed or restructured companies. Four types of home buyers typically get option ARMs. Speculators, who plan to sell the property quickly, made up 12 percent of all option ARMs packaged into bonds last year, according to UBS. That included only borrowers who identified themselves as investors and not residents, who get lower mortgage rates. Wealthy people have used the loan for its flexibility, according to Thornburg Mortgage Inc. in Santa Fe, New Mexico. The rest either took out the loans as an "affordability" product to buy more expensive homes, according to Standard & Poor's, or borrowers may have been misled about the terms, according to federal bank regulators.

"I never heard of a payment-option ARM before," said Ripplinger, the Minnesota borrower. "We thought they were putting us on a 30-year fixed. They didn't put us on a 30-year fixed. I believe that's why a lot of people are losing their homes now." Borrowers who tapped home equity in refinancing represented more than 44 percent of the option ARMs underlying securities created in each of the past four years, according to UBS. Minnesota passed legislation in August requiring mortgage brokers to act in borrowers' best interest, a law that may have made Ripplinger's mortgage illegal, said Brandon Nessen, executive director of Minnesota ACORN, a housing activist group in St. Paul. "You can't make a loan that puts someone in a worse position than they were in before," Nessen said. Sophisticated borrowers can take out option ARMs and avoid problems, said Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington. It's just that mortgage sellers marketed them to people who didn't understand the terms and couldn't afford them, he said.

"It was used to cheat people," Rheingold said. "It helped artificially keep housing prices higher than they should have been." Delinquencies of more than 90 days on option ARMs increased to 5.7 percent in the fourth quarter from 0.6 percent in the same period of 2006 on loans held by Countrywide Financial Corp., the Calabasas, California-based company said in a regulatory filing last week. Lenders hold loans in their portfolios when they don't bundle them into securities for sale to investors. Countrywide had $28.3 billion in option ARMs in portfolio at the end of October, according to Inside Mortgage Finance. The only banks with more were Charlotte, North Carolina-based Wachovia Corp., with $117.8 billion, and Seattle-based Washington Mutual Inc., with $57.9 billion, according to the Bethesda, Maryland-based newsletter. Option ARMs, which can adjust monthly, are more attractive for banks to keep in portfolios than fixed-rate loans because they adjust at the same time as savings accounts and other deposits used to fund the loans.

Countrywide wrote down the value of $35 million of the loans in the fourth quarter, up from $1 million a year earlier, according to a regulatory filing. The company agreed to be acquired by Charlotte, North Carolina-based Bank of America Corp. after losing as much as 89 percent of its market value. Wachovia-originated option ARMs were higher quality than other companies' option ARMs, Chief Executive Officer G. Kennedy Thompson said in a Jan. 30 conference call. That's because the bank made sure borrowers could stay current on monthly payments at the reset amount, not just the teaser interest rate, which can be as low as 1 percent, he said. That was a standard that regulators, including the Fed, recommended in 2006 after the total U.S. foreclosure rate climbed to a five-year high. It has since surged to the loftiest level since at least World War II, according to data compiled by the Washington-based Mortgage Bankers Association. Tougher lending guidelines have made it more difficult to refinance into new option ARMs.

"The option ARM volume that was done was part of the excess," IndyMac Bancorp Inc. CEO Michael Perry said in a telephone interview from his office in Pasadena, California. IndyMac, the second-largest independent U.S. home lender, made $43 billion of the loans from 2005 through the third quarter of 2007. "Obviously we've been through what we've all been through, there's many things we regret," Perry said. IndyMac no longer makes the loans because mortgage-bond buyers aren't interested, he said. Washington Mutual also is no longer offering option ARMs to borrowers who put down little or no money or home equity as a deposit, CEO Kerry Killinger said on a conference call last week. "Washington Mutual continues to offer option ARMs under tightened credit standards," Alan Gulick, a spokesman, said today by phone. The company's unpaid principal balance of option ARMs exceeded their original principal amount by $1.73 billion at the end of 2007, almost double the $888 million of a year earlier, Washington Mutual reported on Jan. 17.

Regional banks are feeling the effects of option ARM delinquencies, said Andrew Laperriere, managing director of New York-based research firm International Strategy & Investment Group. FirstFed Financial Corp., the Santa Monica, California-based savings and loan whose net income slumped 75 percent last quarter, blamed option ARMs hitting their negative-amortization caps for higher delinquencies. More than 1,800 of its borrowers hit the limits, and 2,400 more may this year, the company said Jan. 25. Laperriere estimates that 85 percent of option ARM borrowers owe more than their original loan balance. "The problem is, you can refinance an option ARM to a 30- year conventional loan at a 5.5 percent interest rate, and you're still looking at your payment going up 150 percent," Laperriere said. "That's pretty ugly." About $460 billion of adjustable-rate mortgages are scheduled to reset this year, with the next spike in resets coming in 2011, when $420 billion in mortgages will adjust to new interest rates for the first time, according to New York-based analysts at Citigroup Inc. That's the year that Joe Ripplinger's payment will jump, provided he doesn't reach his negative amortization cap before then. "It's the worst thing we could have done," he said.




Ohio Congresswoman Marcy Kaptur advises her constituents to go Mortgage Squatting




Public Revolt Builds Against Rip-off Rescue Plans for the Economy
by Naomi Klein

Watching the crowds in Iceland banging pots and pans until their government fell reminded me of a chant popular in anti-capitalist circles in 2002: "You are Enron. We are Argentina." Its message was simple enough. You--politicians and CEOs huddled at some trade summit--are like the reckless scamming execs at Enron (of course, we didn't know the half of it). We--the rabble outside--are like the people of Argentina, who, in the midst of an economic crisis eerily similar to our own, took to the street banging pots and pans. They shouted, "¡Que se vayan todos!" ("All of them must go!") and forced out a procession of four presidents in less than three weeks. What made Argentina's 2001-02 uprising unique was that it wasn't directed at a particular political party or even at corruption in the abstract. The target was the dominant economic model--this was the first national revolt against contemporary deregulated capitalism.

It's taken a while, but from Iceland to Latvia, South Korea to Greece, the rest of the world is finally having its ¡Que se vayan todos! moment. The stoic Icelandic matriarchs beating their pots flat even as their kids ransack the fridge for projectiles (eggs, sure, but yogurt?) echo the tactics made famous in Buenos Aires. So does the collective rage at elites who trashed a once thriving country and thought they could get away with it. As Gudrun Jonsdottir, a 36-year-old Icelandic office worker, put it: "I've just had enough of this whole thing. I don't trust the government, I don't trust the banks, I don't trust the political parties and I don't trust the IMF. We had a good country, and they ruined it." Another echo: in Reykjavik, the protesters clearly won't be bought off by a mere change of face at the top (even if the new PM is a lesbian). They want aid for people, not just banks; criminal investigations into the debacle; and deep electoral reform.

Similar demands can be heard these days in Latvia, whose economy has contracted more sharply than any country in the EU, and where the government is teetering on the brink. For weeks the capital has been rocked by protests, including a full-blown, cobblestone-hurling riot on January 13. As in Iceland, Latvians are appalled by their leaders' refusal to take any responsibility for the mess. Asked by Bloomberg TV what caused the crisis, Latvia's finance minister shrugged: "Nothing special." But Latvia's troubles are indeed special: the very policies that allowed the "Baltic Tiger" to grow at a rate of 12 percent in 2006 are also causing it to contract violently by a projected 10 percent this year: money, freed of all barriers, flows out as quickly as it flows in, with plenty being diverted to political pockets. (It is no coincidence that many of today's basket cases are yesterday's "miracles": Ireland, Estonia, Iceland, Latvia.)

Something else Argentina-esque is in the air. In 2001 Argentina's leaders responded to the crisis with a brutal International Monetary Fund-prescribed austerity package: $9 billion in spending cuts, much of it hitting health and education. This proved to be a fatal mistake. Unions staged a general strike, teachers moved their classes to the streets and the protests never stopped. This same bottom-up refusal to bear the brunt of the crisis unites many of today's protests. In Latvia, much of the popular rage has focused on government austerity measures--mass layoffs, reduced social services and slashed public sector salaries--all to qualify for an IMF emergency loan (no, nothing has changed).

In Greece, December's riots followed a police shooting of a 15-year-old. But what's kept them going, with farmers taking the lead from students, is widespread rage at the government's crisis response: banks got a $36 billion bailout while workers got their pensions cut and farmers received next to nothing. Despite the inconvenience caused by tractors blocking roads, 78 percent of Greeks say the farmers' demands are reasonable. Similarly, in France the recent general strike--triggered in part by President Sarkozy's plans to reduce the number of teachers dramatically--inspired the support of 70 percent of the population.

Perhaps the sturdiest thread connecting this global backlash is a rejection of the logic of "extraordinary politics"--the phrase coined by Polish politician Leszek Balcerowicz to describe how, in a crisis, politicians can ignore legislative rules and rush through unpopular "reforms." That trick is getting tired, as South Korea's government recently discovered. In December, the ruling party tried to use the crisis to ram through a highly controversial free trade agreement with the United States. Taking closed-door politics to new extremes, legislators locked themselves in the chamber so they could vote in private, barricading the door with desks, chairs and couches. Opposition politicians were having none of it: with sledgehammers and an electric saw, they broke in and staged a twelve-day sit-in of Parliament. The vote was delayed, allowing for more debate--a victory for a new kind of "extraordinary politics."

Here in Canada, politics is markedly less YouTube-friendly--but it has still been surprisingly eventful. In October the Conservative Party won national elections on an unambitious platform. Six weeks later, our Tory prime minister found his inner ideologue, presenting a budget bill that stripped public sector workers of the right to strike, canceled public funding for political parties and contained no economic stimulus. Opposition parties responded by forming a historic coalition that was only prevented from taking power by an abrupt suspension of Parliament. The Tories have just come back with a revised budget: the pet right-wing policies have disappeared, and it is packed with economic stimulus. The pattern is clear: governments that respond to a crisis created by free-market ideology with an acceleration of that same discredited agenda will not survive to tell the tale. As Italy's students have taken to shouting in the streets: "We won't pay for your crisis!"




Recession: the road to revolution
A spectre haunts the gatherings of the political elites of much of the world as they contemplate the imminent collapse of the economic and political model they have fondly supported for the last 30 years. Politicians and economists wedded to the current neo-liberal model of capitalism rail against one possible outcome of the current crisis that they regard as totally beyond the pale, something that is absolutely unthinkable and undiscussable and only mentioned to conjure up an alarming image that will frighten the children.

Yet the spectre is in fact a perfectly respectable economic philosophy invoked from time to time and in different places over several centuries. It has a name – protectionism – often associated with the writings of Friedrich List, a 19th-century professor of political economy who opposed free trade, supported government intervention in the economy and advocated the erection of protectionist tariff barriers to protect a country's industry and agriculture. His book, The National System of Political Economy, published in 1841, was highly influential both in the United States and in Bismarck's Germany. List was an early opponent of globalisation. He accused Adam Smith of "cosmopolitanism", of constructing the notion of a beneficent global community that clearly flew in the face of the facts.

For most people know otherwise. They know, with List, that the global community is an invented phantom. Nearer home, they have no reason to expect that the EU will protect their interests. Indeed, they vote against its proposed constitution whenever they get the opportunity. Europe is moribund, and the only community they know and recognise is the nation state to which they belong, and whose elected government they require and expect to defend their work, their culture and their way of life. Yet governments in the neo-liberal era have other concerns and have manifestly not been doing anything of the kind. As a consequence, as the banks go bust and the economic situation deteriorates, British workers have appeared on unofficial picket lines to defend their jobs, just as the citizens of Bolivia were led to demonstrate spontaneously a few years ago against the privatisation of their water supply. People learn quickly. As Lenin recognised: they can learn in 20 days what they forgot in 20 years.

Such a huge chasm between the faulty ideology of the governing elite and the growing political understanding of the great mass of the people leads eventually to regime change, as has happened in country after country in Latin America during the last decade. This is the spectre, even more dramatic than protectionism, that now looms over Britain and the continental partners with whom it has joined forces in the neo-liberal madness of recent decades. Suddenly, the probability emerges that few of today's governments will be here in a couple of years time; they will be replaced, and replaced again if they fail to come up with credible solutions. And the solutions will be national rather than global, supportive of the local society envisaged by List rather than the failed cosmopolitan vision of the neo-liberals.

Today's crisis is far more wide-ranging than most politicians and commentators are prepared to admit. It will last for at least 10 or 20 years, not just for one. It will go on and on, producing utopian programmes, reverses and changes along the way. This is not 1929, nor yet 1917. It is more comparable to the preliminary rumbles of 1789, to the collapse of the ancien regime and the start of a long revolutionary period of huge untried experiments and uncertainty. There is an apparent flaw in this argument, of course, for today there is no left or right, and there appears to be no group of impatient intellectuals waiting for their ideas to be seized and picked up by the next group of leaders.

The upheavals of 1789 were preceded by decades of Enlightenment debate, with political ideas that could be expanded and promoted by successive generations of revolutionaries. Today, so complete is the grip of neo-liberal ideology on the political and media structures of the west that no alternative ever gets an adequate airing. There seems to be an ideological vacuum. Yet this is not really so. There are plenty of ideas about and many of them are being tested in Latin America by a new generation of political leaders put in power by rebellions from below. They just remain below the radar of the media and the political class, who pay no attention. Protectionism (in different forms and guises) is one new/old idea; the recovery of history is another. So too is the revival of the economic activity of the state, a state characterised by justice and efficiency, and as different from the Soviet Union as from the delirious construction of the ideologues of neo-liberalism.

In this unfolding scenario, forgotten questions will be asked again: why do we allow the media to be dominated by foreign owners and foreign programmes? Why is our economic activity in the hands of foreign corporations? Why are we forced by advertising to purchase products that we have no desire or need to consume, simply in order to sustain the country's economy? Why do we leave thousands of acres in the hands of private landowners? Why does our country make no effort to be self-sufficient in food? Why do we still pretend that Britain is an imperial country, 50 years after the end of empire? Why do we remain allied to the most dangerous and reactionary country in the world?

Such liberating ideas can only come to the top of the agenda if the present political structure is demolished and swept away. Fortunately, the current systemic crisis is making this ever more probable. Our leaders, of course, ignore the likelihood of their imminent demise and scare us with innumerable arguments: protectionism is perceived at worst as an open door to fascism, at best as a forerunner of a yet more disastrous economic disaster. We should ignore the smoke screen of mystification that they try to erect and welcome the coming seismic upheaval. Then we will have to ride the political struggles of the consequent tsunami wave, and look forward with optimism to a more constructive and hopeful future.




SEC chief says agency to act like "hair is on fire"
The new head of the Securities and Exchange Commission took steps on Friday to reinvigorate the agency's policing of Wall Street, two days after a congressional hearing chastised SEC investigators for failing to uncover Bernard Madoff's alleged $50 billion fraud. "I like to tell the staff we are going to act like our hair is on fire," SEC Chairman Mary Schapiro told reporters after an appearance at a conference. Schapiro halted a Bush administration program that made it harder for SEC lawyers to negotiate settlements with companies and vowed to cut red tape for investigators probing possible wrongdoing.

The now-abandoned pilot program requiring SEC investigators to seek commission approval for settlements "discouraged staff from arguing for a penalty," Schapiro told a Practicing Law Institute conference in Washington. Schapiro, who promised Congress during her own confirmation hearing that she would take the handcuffs off the SEC's enforcement division, took action on Friday to speed up the process for approving formal orders. Schapiro said she was looking for ways to improve how the agency handles tips and whistleblower complaints.

The agency was blasted by members of a House Financial Services subcommittee earlier this week for ignoring Wall Street tipster Harry Markopolos, who repeatedly urged SEC officials for nine years to take a closer look at Madoff's business. The SEC did not uncover Madoff's alleged fraud until his sons told authorities he had confessed to running a giant Ponzi scheme, authorities said. After a year in which the financial sector was brought to its knees and U.S. markets lost trillions of dollars, Schapiro said the SEC must play a critical role in reviving the markets and bolstering investor confidence.

"We have to have a laser-like focus right now on investor protection," Schapiro said. The new chairman said she wanted to give shareholders a greater say about corporate boards, and plans to create an investor adviser committee. "I would like to have a mechanism to have regular contact with the investor community so we can hear the issues they are concerned about," she said.




SEC, Treasury not discussing suspending fair value rule
The U.S. Treasury Department and the Securities and Exchange Commission are not discussing the suspension of a controversial fair value accounting rule blamed for billions of dollars in bank losses, a source familiar with matter said on Thursday. Speculation that the U.S. government would suspend the accounting rule surfaced earlier on Thursday, sending U.S. stocks higher. But the source said no such discussions had taken place between the Treasury Department and SEC. Key policymakers have suggested that the rule could be amended. Sen Christopher Dodd, the Democratic chairman of the Senate Banking Committee, said it might be possible to modify fair value accounting rules for banks facing steep write-downs of troubled assets without abandoning the underlying accounting standard.

Dodd told reporters on Wednesday evening that at least one former bank regulator was discussing how to approach the difficult issue without "walking away from" fair value (also called mark-to-market) standards. The issue of how to value distressed assets held by U.S. banks has been one of the most difficult challenges in constructing a bank rescue plan, according to industry sources and lawmakers. The Obama administration is expected to outline next week how it plans to handle the second $350 billion of a $700 billion financial rescue fund also known as the Troubled Asset Relief Program (TARP).

If the government buys some bad assets as part of the rescue, it could force banks to drastically write down billions of similar assets. That could create further instability unless changes are made to the accounting rule which requires assets to be valued at market prices. Earlier in the week, Democratic Rep Barney Frank, the influential chairman of the House Financial Services Committee, said the accounting rule should not be abolished but said it can make bad situations worse. "One of the things I think we should be exploring is the extent to which you can retain mark-to-market but make the consequences discretionary with the regulators rather than automatic," said Frank, a Democrat from Massachusetts.

Investors favor the accounting rule because they say it allows them to see what is truly on banks' balance sheets. Critics such as publisher Steve Forbes, banks and some lawmakers blame it for the billions of dollars in bank write-downs. Industry groups such as the U.S. Chamber of Commerce and the Financial Services Roundtable are pushing for changes to the accounting rule. "Temporary suspension of the (fair value) rule will allow the goals of (the second phase of TARP) to be realized," said Scott Talbott, the Roundtable's senior vice president of government affairs. "If uncorrected, the current accounting rule would trigger losses across the industry. These losses would weaken balance sheets and reduce the ability of banks to lend," he said.

The Chamber of Commerce, does not want the rule to be suspended, but said improvements were needed. The Chamber urged the Treasury Secretary, accounting rulemakers and regulators to put a system in place to split the losses or write-downs into credit and liquidity losses. Credit losses occur when a borrower no longer has the ability to repay a loan and requires a company to immediately recognize the loss. Liquidity losses are potential losses and there is an expectation that a borrower will still be able to repay the loan. Those losses are not recognized until the asset is sold.

Currently write-downs in assets such as mortgage-backed securities are recorded as credit losses, which some characterize as misleading since some of the tranches within the mortgage-backed security are still performing. The Chamber sent a letter on Thursday to Treasury Secretary Timothy Geithner, SEC Chairman Mary Schapiro and the Financial Accounting Standards Board Chairman Robert Herz. The SEC already has given the financial industry some wiggle room and has said hard-to-value assets do not have to be marked down to fire-sale prices. But that initial guidance was not enough. Now the SEC and FASB are working on more guidance to help banks determine the value of an asset when there is little or no market trading. The SEC and FASB declined to comment




US Treasury overpaid $78 billion under TARP
The U.S. Treasury looks to have overpaid financial institutions to the tune of $78 billion in carrying out capital injections last year, the head of a congressional oversight panel for the government's $700 billion bailout program told lawmakers on Thursday. Elizabeth Warren, a Harvard law professor, said her group estimated the Treasury paid $254 billion in 2008 in return for stocks and warrants worth about $176 billion under the Troubled Asset Relief Program, or TARP. Warren said the Treasury, under then-Secretary Henry Paulson, misled the public about how it would price them.

"Treasury simply did not do what it said it was doing ... They described the program one way, and they priced it another," Warren said at a hearing before the Senate Banking Committee. She added that Paulson "was not entirely candid" in describing TARP's bank capital injection program. Members of the committee condemned management of the TARP program, which is barely four months old. "Implementation ... proceeded in a chaotic, unorganized and ad hoc manner," said Democratic Sen. Daniel Akaka of Hawaii. Warren said Treasury may have had a reason for paying more for investments than they appear to have been worth at the time of the transaction. "Once again, Treasury needs clear goals, methods, and measurement," she said. Warren will release a report Friday on TARP.

Neil Barofsky, another watchdog for the TARP program, told the Senate committee his office is turning to criminal investigations. "That's going to be a large focus of my office," he said. Barofsky, the inspector general for TARP within Treasury, told the Los Angeles Times in an interview Wednesday that misrepresentations in applications for TARP funds would be grounds for criminal prosecution. The Obama administration plans to unveil a new strategy on Monday aimed at reviving paralyzed credit markets, helping struggling homeowners, and lifting the economy out of recession. Tighter TARP management is expected to be a part of that package. A preview of that came on Wednesday when the White House announced a $500,000 annual cap on executive pay at companies receiving TARP money.

On projections by some analysts that the TARP program may need more money soon, Indiana Democratic Sen. Evan Bayh said, "There will be no additional funding for this program without airtight assurances that it will be better managed." The TARP was launched last year by the Bush administration in response to an alarming slowdown in global capital markets triggered by a housing slump that undermined mortgage-backed bonds carried on the books of major financial institutions. Congress approved the $700 billion program after Paulson said it would be used to buy broken bonds and clean off banks' balance sheets. But days after that approval, Paulson changed the focus to buying preferred shares in banks.

Warren told the banking committee that after three months on the job, her panel is still not getting enough answers from Treasury. She described the bailout as "an opaque process at best." Barofsky raised concerns about potential fraud in one of several programs funded by bailout money -- the Federal Reserve's Term Asset-Backed Loan Facility (TALF). "Treasury should consider requiring that some baseline fraud prevention standards be imposed," Barofsky said in his first report to Congress. He told the committee the government has collected more than $271 million in dividends from its TARP-financed bank shares and said the department needs a strategy for administering its holdings. A Treasury spokesman said the department would adopt many of Barofsky's recommendations.

Treasury holds $279.2 billion in preferred shares from 319 financial institutions, paying dividends of between 5 and 10 percent, according to Barofsky's report. The government also received common stock warrants from 230 institutions, most of which are now out of the money. The largest positions in warrants include AIG, Bank of America, Citigroup and General Motors. Yet another watchdog group -- Congress's Government Accountability Office -- told the committee Treasury needs to keep closer track of TARP money disbursed and that the program needs internal controls and "a clearly articulated vision."




Regulator Says Bailout Fund Is Misleading the Public
Watchdogs monitoring the government’s bank bailout called for an overhaul Thursday, with one accusing those running it of misleading the public, while senators slammed the program as chaotic and poorly managed. Under the $700 billion program meant to stabilize the financial system, the Treasury Department has so far spent nearly $300 billion to bolster financial institutions and automakers in exchange for preferred shares and warrants. But in buying those securities, Henry M. Paulson Jr., then the Treasury secretary, misled the public about how it was going to price them, said Elizabeth Warren, a Harvard law professor and head of an oversight panel for the bailout, known as the Troubled Asset Relief Program, or TARP.

"Treasury simply did not do what it said it was doing," Ms. Warren said at a hearing before the Senate banking committee. Many members of the panel condemned management of the program, which is barely four months old. The program proceeded "in a chaotic, unorganized and ad hoc manner," said Daniel K. Akaka, Democrat of Hawaii. Neil M. Barofsky, another watchdog for the program, told the Senate committee his office was turning to criminal investigations. "That’s going to be a large focus of my office," he said. On projections by some analysts that TARP may need more money soon, Senator Evan Bayh, Democrat of Indiana, said, "There will be no additional funding for this program without airtight assurances that it will be better managed."

The Obama administration plans to unveil a strategy on Monday aimed at reviving the credit markets, helping struggling homeowners and lifting the economy out of recession. Tighter TARP management is expected to be a part of that package. A preview of that came Wednesday when the White House announced a $500,000 annual cap on executive pay at companies receiving TARP money. The Bush administration began TARP in response to an alarming slowdown in global capital markets set off by a housing slump that undermined mortgage-backed bonds carried on the books of major financial institutions. Congress approved the $700 billion program after Mr. Paulson said it would be used to buy broken bonds and clean off banks’ balance sheets. But days after that approval, Mr. Paulson changed the focus to buying preferred shares in banks.

Ms. Warren, head of TARP’s Congressional oversight panel, told the banking committee that after three months on the job, her panel was still not getting enough answers from Treasury. She described the bailout as "an opaque process at best." Ms. Warren said she plans to release a report on Friday that calculates Treasury put about $254 billion into financial institutions in 2008, but got only $176 billion in value. "That’s a shortfall of about $78 billion," she said, adding that Mr. Paulson "was not entirely candid" in his description of TARP’s bank capital injection program. Mr. Barofsky, the independent TARP inspector general at Treasury, raised concerns about potential fraud in one of several programs financed by bailout money, the Federal Reserve’s Term Asset-Backed Loan Facility. "Treasury should consider requiring that some baseline fraud prevention standards be imposed," Mr. Barofsky said in his first report to Congress.

He told the committee the government had collected more than $271 million in dividends from its TARP-financed bank shares and said the department needed a strategy for administering its holdings. A Treasury spokesman said the department would adopt many of Mr. Barofsky’s recommendations. Treasury holds $279.2 billion in preferred shares from 319 financial institutions, paying dividends of 5 to 10 percent, according to Mr. Barofsky’s report. The government also received common stock warrants from 230 institutions, most of which are now out of the money. The largest positions in warrants include the American International Group, Bank of America, Citigroup and General Motors.




Fed Calls Emergency Consultants to Treat AIG, Stricken Markets
Every Sunday night, New York bankruptcy lawyer Marshall Huebner spends a 13-hour shift on call as an emergency medical technician. His day job involves work on another sort of rescue: The government’s $152.5 billion bailout of American International Group Inc. "There’s a stronger parallel than you would think," Huebner, a partner at Davis Polk & Wardwell, said in an interview. Helping resuscitate the insurance giant takes "a lot of the same qualities that I think stand you in very good stead with emergency medicine -- the ability to remain calm in almost any situation, and the ability to assess, triage and treat, even in a crisis." Huebner, 41, is part of an army of outside lawyers and consultants the Federal Reserve has called upon to help fight the biggest financial crisis in 70 years.

While the central bank won’t disclose how much work it has outsourced, Fed watchers say the institution is relying on Wall Street experts to an unprecedented extent, seeking help from insiders in the very industries where the turmoil originated. "I don’t think the Fed has seen anything like this," former New York Fed general counsel and AIG executive Ernest Patrikis said in an interview. "AIG just got so complex in terms of private corporate matters that you just need that outside expertise." Patrikis is now with the law firm of White & Case in New York. In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.

Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. BlackRock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds. Last month, the House passed conditions for releasing the remaining $350 billion of financial-rescue funds, including a requirement that the Fed give details of the contracts and selection process for the mortgage-backed securities purchase program’s managers. The Senate isn’t planning to take up the legislation. BlackRock is also managing and selling assets acquired in the Fed’s $29 billion rescue of Bear Stearns Cos., as well as securities called collateralized debt obligations the central bank purchased in the bailout of AIG, the largest U.S. insurer by assets.

Such contracts show how the Fed’s in-house staff has been overwhelmed by new responsibilities that the central bank has taken on in handling the crisis.  "Once the government starts getting into the business of restructuring companies, there are competency deficits," said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. "It’s inevitable they’ll go back to Wall Street for advice." Still, he said, "the man in the street would say, ‘We’re paying to fix somebody else’s mistake by paying the very people who are part of the system that produced the mistake.’" Alabama Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee, said the issue of hiring so many outsiders is a "major concern."

"It’s necessary with the magnitude of the intervention," Bachus said in an interview. "They lack the staff internally. But that comes with opportunity for conflicts of interest. It’s a quandary." Before the government hired him, Huebner had advised JPMorgan in talks with the Fed, ultimately unsuccessful, about organizing a private rescue of AIG. Huebner has also advised Morgan Stanley, Credit Suisse and Bank of America Corp. on derivatives and other transactions. "It’s complicated stuff that lawyers inside the government wouldn’t do ordinarily, and the stakes are high enough you want really good, experienced counsel," said Stephen Cutler, JPMorgan’s general counsel and former enforcement chief at the Securities and Exchange Commission. To be sure, the Fed hasn’t outsourced all day-to-day contacts with AIG. The New York Fed has observers at all AIG board and board committee meetings. Fed employees stationed inside AIG "monitor the company’s funding, cash flows, use of proceeds and progress in pursuing its global divestiture plan," the Fed reported to Congress in November.

The Fed hasn’t publicized its hiring of Davis Polk or other consultants and declined to provide information for this article. "The Fed doesn’t participate in stories about our consultants," New York Fed spokesman Calvin Mitchell said in an e-mail, adding the Fed doesn’t want outside advisers to use their dealings with the central bank as a marketing tool. Before taking on the Fed’s AIG assignment, Huebner shepherded Delta Air Lines Inc. through bankruptcy in 2005 to 2007. Delta’s former general counsel, Kenneth Khoury, credits Huebner with getting the airline through the process in "near- record time." "He’s a brilliant lawyer, he’s a good guy and he’s a creative dealmaker," Khoury said.

As an emergency medical technician for Hatzolah, an all- volunteer emergency services and ambulance provider, Huebner spends Sunday nights on-call at his home on Manhattan’s Upper East Side, with an ambulance ready at the curb in front of the building. "Some Sunday nights, there are no calls," he said in the interview at his 21st-floor midtown Manhattan office, decorated with African and Asian art and photos of his wife and four daughters. "Other Sunday nights, it’s brutal." At other times, he monitors radio calls "whenever I reasonably can." As a Fed consultant, Huebner often joins midnight conference calls and many days works on AIG matters at the New York Fed’s headquarters near Wall Street. Huebner balances his Fed and AIG work with the bankruptcy of Frontier Airlines and the Minneapolis Star Tribune newspaper. "I am expected to parachute into situations that, frequently, others have failed to figure out how to solve," Huebner said. "You need to decide where to operate and where to cauterize."




Bailout Talks Turn to More Equity Stakes
The Obama administration's financial-rescue plan is shaping up to include capital injections with tougher terms than the first round and an expansion of an existing Federal Reserve lending facility that could potentially buy up toxic assets clogging the system, according to people familiar with the plans. The discussions are still fluid and much could change. But efforts to create a so-called bad bank to purchase distressed assets and to insure other assets against future losses appear less central to the administration's thinking. Still, some within the administration continue to push those efforts and they could wind up as part of the plan that will be detailed Monday by Treasury Secretary Timothy Geithner. To deal with the toxic assets at the heart of the financial crisis, the administration is considering expanding the Fed's consumer-lending facility, known as the Term Asset-Backed-Securities Loan Facility.

The TALF was set up to spur the consumer-loan market by having the Fed lend up to $200 billion to investors who buy securities backed by car loans, credit card debt, student loans and small business debt. The Obama administration is discussing expanding the TALF to provide financing for other older assets, such as mortgage-backed securities. Also under discussion is another round of capital injections that would carry stricter terms and likely be used by weaker banks in need of money instead of the healthy banks that were targeted in the first round. Instead of buying preferred shares, as it did before, the government is discussing taking convertible preferred stakes that automatically convert into common shares in seven years. Such a move could help banks as they look for ways to bolster common equity. When a bank takes a loss, it has to subtract that amount from the value of its common equity. As losses mount, investors increasingly believe banks need to find ways to shore up this first line of defense on their balance sheets. 

To get money, banks would likely have to pay a higher dividend to the government than the 5% rate the government charged in the first round of infusions and agree to a host of new restrictions, such as lending above a baseline level, reporting frequently on their use of the money and curbing executive salaries. While Treasury wouldn't preclude healthy banks from participating, the stricter terms would likely attract primarily weaker banks in need of capital. The efforts are expected to be combined with a broad foreclosure-prevention program that would spend $50 billion to $100 billion to help homeowners in danger of losing their homes. The evolving discussions reflect the difficulties facing the Obama administration as it endeavors to come up with a new look for the maligned financial bailout. It wants to create a comprehensive plan that appears different from the one crafted by the Bush Treasury, but is running into many of the same thorny questions encountered by former Treasury Secretary Henry Paulson, such as how to value the bad assets owned by banks.

The administration has also been wrestling with how to help resolve the financial crisis while not appearing to bail out banks at the expense of taxpayers. The administration has been trying to find the balance by crafting programs that use taxpayer dollars but on terms that don't make it seem like a giveaway, including the executive-pay curbs announced this week. At the same time, in order to revive the financial system, the administration needs to create a program that encourages banks to participate. That tension has been one of the complicating factors in creating a so-called bad bank to buy up toxic assets from financial institutions. To help banks the U.S. needs to pay a high enough price for the assets. But lawmakers are already angry about accusations that Treasury overpaid for assets and the Obama administration wants to avoid being seen as bailing out banks at the expense of taxpayers. If the government pay too little, banks would have to take further losses.

The discussions have shifted several times. As recently as last week, the apparent centerpiece of the revamped plan was a "bad bank" and an insurance program to protect losses on the remainder. Both ideas may still be included. Fed and Treasury officials have said since announcing the TALF program in November that it could be expanded to include other asset classes. But the program is untested and hasn't yet been launched. Finalizing the details of the plan have proved challenging. Under the program, investors, including many hedge funds, would get cheap, nonrecourse financing from the Fed which they would use to buy asset-backed securities tied to auto loans, credit card debt student loans and small business loans. Officials are still sorting through the terms they would offer. A report issued by the Treasury Department's inspector general Thursday warned the TALF program was potentially vulnerable to private-sector fraud unless it included tough safeguards.




US explores converting stakes in banks
US officials are examining ways gradually to convert government stakes in banks into ordinary shares as banks accumulate losses, according to people close to the discussions. The point would be to provide a drip-feed of additional common equity as needed to cover losses – without the government owning a larger stake in the banks than is necessary. Timothy Geithner, Treasury secretary, will announce the financial sector rescue plan on Monday along with a set of policies designed to reduce foreclosures and boost the housing market. The Treasury declined to comment on its deliberations.

One idea that has been considered by policymakers is for the government to change its existing holdings in the banks, which have taken the form of preferred shares – non-voting stock that carries a fixed dividend – into convertible preferred shares that could be converted into common stock. Under this proposal, the shares would automatically convert into common equity if there were a decline in a bank’s health – as measured by its so-called tangible equity ratio, for example. The government may also make future capital injections in the form of such convertible preferred shares. Some policymakers think this would give the government more "bang for the buck" than buying more preferred shares.

Bank stocks, meanwhile, rallied on Thursday as bankers expressed fresh confidence that the US authorities will find ways to circumvent mark-to-market rules as part of the new financial rescue package. Executives who have talked to government officials recently said one option for the government would be to buy toxic assets below the value at which banks value them on their balance sheets, but provide a government security equal to the difference between government’s purchase price and the marked value. That would enable banks not to crystallise their losses on the assets for a number of years and wait and see whether they recover in value. Executives and policymakers who have spoken to key officials believe the plan to be presented by Mr Geithner will have insurance-style guarantees on bank portfolios of assets at its core, but will include a so-called "bad bank" that will acquire securities that have already been heavily written down.

However, sources cautioned that the final shape of the rescue plan would be decided by Lawrence Summers, the National Economic Council director, and Mr Geithner. Elizabeth Warren, an independent monitor appointed by Congress to scrutinise the bank recapitalisation programme, said on Thursday that the Bush administration overpaid by $78bn when it injected more than $250bn into bank preferred shares starting last year – a subsidy element of about 30 cents in the dollar. This is slightly higher than the 25 cents in the dollar subsidy estimated by the Congressional Budget Office. Meanwhile, the Obama administration moved to quell talk of a rift between Paul Volcker, the former Federal Reserve chairman, and Mr Summers, following a report by Bloomberg that claimed Mr Volcker was unhappy about slow progress in setting up an independent panel of economic experts he is set to chair.




Toyota's annual losses three times higher than predicted
Global giant Toyota cast more gloom over the car industry today after it said annual losses would be three times higher than its original estimate. The Japanese company - the world's largest car maker - is now forecasting operating losses of 450bn yen (£3.4bn) for the year to March amid larger than expected sales declines. The loss will be Toyota's first in more than 70 years. The firm employs 4,200 staff at its assembly plant in Burnaston, near Derby, and 695 people at its engine-making base in Deeside, north Wales.

Toyota said global car sales for the year were likely to be 220,000 lower than expected at 7.32 million due to the "greater-than-expected contraction of the automotive market". The company sold almost nine million cars in the previous year. As well as a collapse in sales, the firm has also been hit by the increase in value of the yen, reducing overseas revenues. In the UK, the firm has already implemented cost savings, including cutting shifts at Burnaston, where the Avensis and Auris models are made, as well as four weeks of non-production.

The Burnaston plant is capable of turning out 285,000 cars a year but the speed of the production line has also been slowed. The news from Toyota continues a grim week for the industry after new car sales slumped by almost a third. The Society of Motor Manufacturers and Traders said 112,087 new cars were registered in January, the lowest January figure since 1974 and a fall of 30.9 per cent compared with a year ago. Meanwhile fellow car firm Ford announced plans to cut 850 jobs. The firm's Transit van plant in Southampton will be hardest hit, with between 400 and 500 jobs set to go by May.




Bank of America, Citi Hit by Fitch Downgrades
Fitch Ratings on Friday downgraded Bank of America's and Citigroup's individual ratings and preferred shares to junk status, as the banks face increasing pressure from mounting losses and the souring economy. BofA and Citi, each of whom have sold $45 billion preferred equity stakes to the Treasury Department through the Troubled Asset Relief Program and had billions more in illiquid assets guaranteed by the federal government, could just be the first in a string of downgrades from the ratings agency, as it applies new criteria for evaluating banks in receipt of bailout funds. A report issued by Fitch on Wednesday says that risk of deferral on preferred stock has greatly increased as a result of the current crisis. The report refers to capital infusions in the banks over recent quarters that have provided a buffer against weakened earnings.

"While the additional capital is helpful in some respects, the additional debt service burden created heightens the risk for these entities as well," the report says. "[T]he high level of government support ... complicates and, indeed, potentially materially increases the risk that coupons on hybrid instruments will be deferred." James Moss, a managing director of Fitch's financial institutions group, said that decisions on other "major, systemically important banks," are currently in the committee stage. "As much as the list will be relatively short, it's going to involve names that you've heard of," he says. Other large financial institutions that have received preferred equity injections under the Treasury Departments' Troubled Asset Relief Program include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Wells Fargo and US Bancorp.

Noting Merrill's $15 billion fourth-quarter loss and additional performance pressures going forward, Fitch lowered BofA's individual rating to C/D from C and its rating on the preferred stock to BB from BBB, with a negative rating watch for both. Fitch reaffirmed Bank of America's A-plus long-term and F1+ short-term issuer default rating, with a stable outlook for the long-term rating. The ratings agency expressed concern over expected losses on BofA's home equity loan, credit card portfolio and commercial loan book, and noted that although government backstops to $118 billion in Merrill assets, additional charges on unprotected assets may hinder performance. Bank of America CEO Ken Lewis said in a CNBC interview Friday that he does not anticipate that his company will take additional money from the government, and added that he's hoping to repay the bailout money "within three years."

After reaching a multiyear low of $3.77 during the previous session, Bank of America shares were lately gaining 26.4% to $6.11 in Friday trading. Fitch downgraded Citi's individual ratings to C/D from C. It also cut its rating on Citi's preferred shares to double B from triple B. The individual downgrade reflects "current and expected financial performance challenges," despite the company's efforts to build its loan loss reserves, Fitch says. "Nevertheless, global economic difficulties are causing the inflow of new problems ranging from U.S. and international consumer exposures to large corporate exposures. Consequently, provisioning needs are expected to remain quite elevated for 2009," Fitch says. Fitch has concerns regarding the "large servicing costs" related to the large stake the government has taken in the company, which will cost $1.8 billion a quarter in preferred and trust preferred shares in Citi's capital structure.

"When combined with a weak performance outlook, the magnitude of these ongoing costs raises the probability for deferral," the note says. Fitch affirmed Citi's long-term and short-term issuer default ratings of A plus and F1 plus respectively, "given Citi's systemic importance and the magnitude of support measures from the U.S. government," it said in a note. The company in January was forced by the government to split in two: Citicorp, the good bank and Citi Holdings, the bad bank. Citicorp, the so-called "good bank," will be comprised of its global institutional business as well as continuing consumer bank. Citi Holdings, the so-called "bad bank" will be comprised of its brokerage and asset management arm, consumer finance and a special asset pool. Shares of Citi surged 8.6% to $3.83.




Bank of America Gains as Bove Praises Chief, U.S. Aid
Bank of America Corp., the largest U.S. bank, climbed as much as 25 percent in New York trading after analyst Richard Bove called the bank a "strong buy" because of its positive cash flow and government support. Bank of America shares jumped $1.10, or 23 percent, to $5.94 at 12:07 p.m. in New York Stock Exchange trading after yesterday touching its lowest level since 1984. Chief Executive Officer Kenneth Lewis bought 200,000 shares on Feb. 4, and four directors bought a combined 150,000 shares this week. Bank of America on Jan. 16 accepted a $138 billion package of U.S. loan guarantees and additional capital. The U.S. last year committed $25 billion to the bank and Merrill Lynch & Co., which was acquired this year.

"I have always believed Ken Lewis may be the best operating manager of any bank in the United States," Bove said in his report. "I continue to think that this company has $5 per share in earnings power." Bank of America had ratings on its preferred shares lowered to non-investment grade by Fitch Ratings, which cited rising losses from credit card, home equity and commercial loans. Fitch lowered its rating to "BB" from "BBB" and the ratings could be cut further with the outlook deemed negative, analysts David Spring and Sharon Haas said today in a report. Fitch didn’t change its overall "A+" rating on Bank of America, citing its "systemic importance and the magnitude of support provided by the U.S. government."

Demand for securities with characteristics of both debt and equity that Bank of America and other financial companies used to cushion their loan losses has slumped this year on fears that the government may take over the securities and not pay anything. The hybrids fell 11 percent in the U.S. in January, more than they did in all of 2008, according to Merrill Lynch index data. "We see a heightened risk of deferrals on the Bank of America preferreds," Spring said in an interview. "Deferrals are not the same as defaults, but it’s an undesirable event for investors that we want to capture in our ratings." Following the U.S. capital injections, preferred and trust preferred instruments now total more than $100 billion, or more than half of Bank of America’s total tangible equity, Fitch noted. Debt service related to the securities exceeds $5 billion annually, the firm said.




Shining a Bright Light on a Dark 401(k) Secret
The existing 401(k) system is a scam far greater than anything Bernie Madoff could have conceived. His $50 billion Ponzi scheme is dwarfed by the $12 trillion 401(k) rip-off imposed on plan participants by their employers, and the mutual fund and insurance industries. Until now, an objective evaluation of 401(k) plans has been extremely difficult because of the complexity of these plans and the cleverly hidden costs which would take a pension actuary to uncover. These excessive fees have dramatically reduced employees account balances. By some accounts, the combination of poor investment options, high expenses and poor planning have caused many plan participants to have a zero return on their 401(k) investments.

A recently launched web site, Brightscope, may change everything. Brightscope crunched 401(k) plan data from public resources and compiled an extensive database of information. Using over 200 data points, including plan costs, amount of matching contribution and quality of investment options, it assigned a numerical rating to each plan. It then compared the rating to the lowest, average and highest rating in the peer group. It also calculated how many additional years an employee in a given plan would have to work, and how much was lost in retirement savings, compared to the highest rated company in that peer group. The results are eye-opening.

Here's an example: I took a look at the 401(k) plan for Starwood Hotels. This plan has a whopping $635 million in assets and 45,000 participants. The average account balance is only $14,000. You would think Starwood would regard these assets as a sacred trust and would want to do everything possible to maximize the returns of its employees, many of whom are at the low end of the socio-economic scale. The Brightscope investigation and rating paints a far different picture. The Starwood plan had a rating of 39. The average rating for its peer group was 43. The highest rated plan in the group had a rating of 67. Brightscope calculated that Starwood employees would have to work an additional eleven years to achieve the additional $159,700 earned by employees with the highest rated plan in its group. That's a lot of guests to check in, bags to carry, meals to prepare and rooms to clean.

Brightscope rated the plan cost as "highest," and the company generosity as "below average," among other ratings. It is not surprising that the participation rate in this plan is just "average." Brightscope's transparent ratings should have a very positive effect on 401(k) plans. Companies pay for a full report and analysis which will permit them to improve their score by changing their plan. Plan participants will now have an objective basis for lobbying their employers for better plans. Access to the ratings system is free. 401(k) plans have been accurately described as
The world's largest skimming operation - a $7 trillion (now $12 trillion) trough from which fund managers, brokers, and other insiders are steadily siphoning off an excessive slice of the nation's household, college, and retirement savings.
Now that this dirty secret is open to public scrutiny, maybe employees will be able to get the retirement plans they deserve. Let's see if Starwood leads the way.




Sales Fall Sharply for Retailers Not Named Wal-Mart
The nation’s retailers said they suffered a fourth consecutive month of steep sales declines in January, underscoring a broad and sustained shutdown in consumer spending. "For the last 10 years people bought cars and refrigerators and TVs like they were going grocery shopping," said Mike Moriarty, partner at A. T. Kearney, a management consulting service. "Now people are grocery shopping like they’re buying a car." Sales for the entire retail industry fell 1.6 percent last month compared with the same month a year ago, the International Council of Shopping Centers, an industry group, said Thursday. The research firm Retail Metrics put the industry decline at 1.8 percent and said that without Wal-Mart Stores, the nation’s largest retailer, sales would have fallen 5.6 percent.

January is always a slow period for stores, but nowadays big-box retailers and luxury chains are contending with paltry sales trends and profit margins that have been hurt by excessive discounting to attract consumers. Stores with weak balance sheets "are not going to make it through the summer," said Claire Gruppo, managing director of Gruppo, Levey & Company, a New York investment bank. On Thursday, Fortunoff, the nearly 90-year-old upscale home furnishings and jewelry chain, became the latest retailer to file for Chapter 11 bankruptcy protection. Several chains that reported sales figures on Thursday beat low expectations, but most still turned in double-digit declines. Analysts were not surprised. As they had expected, the most successful stores were the ones selling quality and name-brand essentials at low prices.

"When there’s a need for product, whether that’s food, consumables, kid’s apparel — nondiscretionary items at a value and at a convenience — then the consumer is shopping," said Matthew F. Katz, a managing director in the retailing practice of AlixPartners, a reorganization firm. Wal-Mart, for instance, exceeded expectations. The retailer posted a 2.1 percent increase, not including fuel, at stores open at least a year, a barometer of retail health known as same-store sales. "Our sales results were driven by a continuation of gains in customer traffic," said Eduardo Castro-Wright, vice chairman of Wal-Mart.
Wal-Mart also said it would no longer offer monthly sales forecasts. Instead, it will offer guidance four times a year. "We believe this guidance is a more appropriate measure for our investors," said Tom Schoewe, Wal-Mart’s chief financial officer, "particularly in volatile times when consumer swings are more difficult to predict. This is more consistent with the long-term view we take on our business."

Wal-Mart’s discount competitors also fared better than the rest of the industry. Sales at BJ’s Wholesale Club were up 7.6 percent, not including fuel, this January compared with last January. Sales were down 3.3 percent at Target and 2 percent at Costco but those figures were an improvement over the chains’ December sales figures. The freeze in discretionary spending continues to weigh most heavily on department stores, especially luxury chains. Same-store sales fell at Neiman Marcus (down 24.4 percent), Saks (down 23.7 percent) and Nordstrom (down 11.4 percent). Sales at lower-priced department stores also dropped: 16.4 percent at J. C. Penney, 13.4 percent at Kohl’s, 12 percent at Dillard’s, 8.2 percent at Bon-Ton Stores and 4.5 percent at Macy’s.

Business was hardly better elsewhere at the mall, where most retailers had double-digit declines, including Gap (down 23 percent), American Eagle Outfitters (down 22 percent), Abercrombie & Fitch (down 20 percent), Zumiez (down 14.8 percent), Wet Seal (down 14.7 percent), Children’s Place and Pacific Sunwear of California (both down 11 percent). Limited Brands was down a comparatively rosy 9 percent. Some niche chains managed, however, to buck the trend. Aéropostale, the affordable apparel retailer that has been on a roll lately, had an 11 percent sales increase in January. Another specialty retailer for teenagers, Buckle, had a 14.7 percent jump. Sales at Hot Topic, another mall chain store aimed at teenagers, were up 6 percent, mainly from selling gear inspired by the vampire romance film "Twilight."

Still, the American consumer — grappling with rising unemployment, tight credit markets and falling stock portfolios — is not spending freely. The savings rate rose to 3.6 percent in December, up from 2.8 percent in November, after years in negative territory. To stay alive, retailers are consolidating their operations, eliminating jobs and closing stores. Last month, Fortunoff closed its Fifth Avenue store in Manhattan. "The jewelry and home goods businesses have been hit particularly hard by the economic downturn," Charles Chinni, Fortunoff’s president and chief executive, said in a statement on Thursday. "However, we are actively seeking a buyer for the business, and we will continue to do so in the Chapter 11 process." Fortunoff had already sought bankruptcy protection last year but was bought in March for $110 million (including $80 million in cash) by NRDC Equity Partners, the private equity firm that owns the Lord & Taylor department store chain.

NRDC had planned to put Fortunoff goods into every Lord & Taylor store and expand the number of Fortunoff’s regional outdoor furniture stores from 16 to more than 300. But that plan has been scrapped. Private equity firms, like everyone else, are hunkering down and spending as little as possible these days. "What we all want to know is, ‘How long does this go on?’ " asked Marie Driscoll, a retailing analyst with Standard & Poor’s Equity Research. The International Council of Shopping Centers, the trade group, said sales for the retail industry would continue to decline, falling 1 to 2 percent in February. And the National Retail Federation, an industry group, sent a letter to the Senate, calling for national sales tax holidays. The federation said in its letter that it was "extremely concerned" that the package of economic stimulus measures passed by the House last week was not enough to jump-start consumer spending. "Long-term economic stimulus is critically important," said Steve Pfister, the federation’s senior vice president, "but immediate economic stimulus is absolutely essential."





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Fed’s Bullard Sees Possible Deflation Risk This Year
Federal Reserve Bank of St. Louis President James Bullard said the U.S. may experience short-term deflation and that such a development might exacerbate the housing crisis. “I am worried about deflation,” Bullard said today to a meeting of financial analysts in Clayton, Missouri. “Unexpected deflation would worsen the situation in our housing and mortgage markets.” The Fed this week extended its emergency-lending programs by six months through Oct. 30, citing “continuing substantial strains in many financial markets.” The Federal Open Market Committee left the benchmark interest rate as low as zero on Jan. 28 and said it’s prepared to buy Treasury securities to revive lending. Such purchases would extend the Fed strategy of using its balance sheet to reduce borrowing costs. The new program may benefit several types of borrowers, because long-term government bond yields influence interest rates on mortgages, corporate bonds and municipal debt.

The Fed will keep the main interest rate at as low as zero “for the foreseeable future,” Bullard said. Still, he said investors shouldn’t conclude from that that the Fed is “on the sidelines” because policy makers have turned to “innovative, unconventional” measures. Bullard, 47, expanded on his deflation comments after the speech, telling reporters he sees a “downside risk on inflation” with the recession likely to persist until the third quarter. “You could end up in negative territory” on prices, he said. “I am worried about it, partly because of the global nature of this recession and I think we are not going to get any good news into the fall of this year. That is going to continue to put downward pressure on prices for a period. Policies have to be designed to avoid that outcome.” Bullard said the current quarter could prove to be the low mark for the recession, while adding the October-through-December period may be revised downward.

The U.S. economy shrank at a 3.8 percent rate in the fourth quarter, the most since 1982. Central bank officials and private economists predict the contraction will continue at least through the middle of this year. “If it is like past recessions, even severe ones, you would get a bounceback at some point,” Bullard told reporters. “You would get some impact from the stimulus package. You would expect the consumer to at least flatten out, or possibly increase at some point. You would expect other aggressive policies we have undertaken to have some impact.” The Labor Department may report tomorrow that the economy lost 540,000 jobs in January and the unemployment rate jumped to a 16-year high of 7.5 percent, according to median forecasts in a Bloomberg News survey. The U.S. lost almost 2.6 million jobs in 2008, the most since 1945.

Companies from Macy’s Inc. to PNC Financial Services Group Inc. have announced job cuts as consumers and businesses rein in spending. Bullard said the Treasury’s Troubled Asset Relief Program needs to be directed at helping to resolve issues with bad assets held by banks, which he called a precondition to financial markets and the economy improving. “You have to face the problems directly in financial markets, do our best to get those fixed, before we can get back to a growing economy,” he said. He also said housing prices are now near “fair value” and therefore unlikely to fall much further. “I think the bubble component is out of housing prices,” though markets can sometimes ”overshoot” on the downside. Bullard took over as president from William Poole, who retired on March 31. While he won’t vote on interest rates this year at the Federal Open Market Committee, his turn in the rotation among Fed bank presidents will be in 2010.




In times of crisis, Parisians take to scavenging
It's closing time at a market in Belleville, a working-class neighborhood in Paris, and a young woman in a black parka and white cap is rummaging through the abandoned crates. After a thorough inspection, she slips a cauliflower and some slightly squashed oranges into her shopping bag. "That's going to be my dinner," says the woman, who will only give her name as Yng. Nearby, an old man with a black beret selects two mangoes from the bottom of a battered cardboard box. He earlier bought a bag of apples, then filled his basket with discarded fruit and vegetables.

"Glanage," or gleaning, is a French tradition that reaches back to the Middle Ages, when people would go over the fields after the harvest and gather any crops that remained. But today, the practice is becoming more widespread in cities, in what charity workers and social activists describe as a sign of growing economic despair. At the market in Belleville, three women curse each other in French and Arabic as they fight over a bag of leeks. "Those are mine, I picked them up," one of them says, pressing the bulging bag to her chest. "Thief!" another one shouts at her.

Around them, more than 10 other people of all ages gather as much as they can before the cleaning crew arrives. Some of the traders encourage them. "It's a gift, a gift," says Ali, a stall owner who declines to give his second name. "I give it away, otherwise it would just be discarded anyway," he adds, as two women hastily fill their blue plastic bags before hurrying away. "It's difficult for me, I have six children and my husband is dead," says a woman in a black headscarf. Like the other foragers, she prefers to remain anonymous.

Fields and markets are no longer the only hunting grounds of thrifty "glaneurs." Every evening, people collect fruit, eggs and yoghurts past their expiry date from containers behind the big supermarkets. Christophe Auxerre, national secretary of Secours Populaire, a charity, sees the revival in foraging as a symbol of growing social problems. "There are people who go hungry in our country. On the 15th of every month, there's no money left to fill the plates," he said. "There are shop owners who deliberately put the eggs on top in the rubbish bin so that people can pick them up." His charity has helped two million people in 2008, compared with 1.5 million in 2007.

A report presented last week by Martin Hirsch, a left-wing former charity boss who is now in charge of a government-backed social welfare program, found that today's "glaneurs" come from a great variety of social backgrounds. "(The economic crisis) is one more element in the picture of a vulnerable section of society, who have to be helped in a very concrete way," Hirsch told reporters. "Apart from the poverty line, there's the concept of 'what's left to live on' -- what's left to pay for food, clothing, transport and so on -- and for some people, that's just a few euros per day," he added.

For a small group of scavengers, gathering discarded food is also a way of protesting against a consumerist society and its wastefulness, and against the rising cost of living in France. Left-wing activists have been organizing "wild picnics" in supermarkets for the past few months, taking products off the shelves and offering them to customers for free -- a creative interpretation of a French law that gives customers the right to taste certain products before buying them. "We do that at the end of each month, when the pockets are empty. It allows us to pass on a message: everything is going up, except salaries," said Victor Porcel, a member of l'Appel et la Pioche, a left-wing movement.




ECB delays on interest rates despite German industrial slump
The European Central Bank has held interest rates at 2pc, rebuffing calls for drastic action to prevent the onset of a deep slump after Germany and Spain both suffered the worst fall in industrial orders in modern history. German orders crashed 25pc in December year-on-year, roughly in line with the manufacturing melt-down underway in Japan and Korea. "This is astonishingly weak data from Europe's industrial heartland," said Julian Callow, Europe economist at Barclays Capital. Spanish orders fell 20pc. Europe's car industry has been the hardest hit sector. There is such a glut of unsold vehicles that they are being left on ships at anchor, clogging up the ports of Northern Europe.

"We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe. The ECB has been very slow to grasp that we are facing a dramatic collapse of the global economy," said Mr Callow. "Europe thinks it can recover on the US coat-tails as it has done before, but it is very different this time. The whole world faces an extremely toxic downturn affecting all sectors. Spain is imploding. French house prices fell 9.9pc in the fourth quarter of last year, which is the steepest fall since the data series began in 1936." He added: "The eurozone economy is being 'hollowed out' and the really big threat is rising unemployment. This is going to cause serious social and financial strains, but there is a lack of leadership in Europe."

Jean-Claude Trichet, the ECB's president, signalled a half-point cut at the next meeting in March and opened the door for further "non-standard measures" to boost the bank's balance sheet. This does not yet include the purchase of bonds – a political can of worms in the eurozone, where the ECB is prohibited from "monetising" the debts of member states. Critics say the ECB is falling far behind the US, Japanese, British and Swiss central banks, which have all slashed rates to near zero. Both the Fed and Bank of Japan have already moved to the next stage of stimulus by purchasing bonds or stocks directly. "This is negligence. Rates should have been slashed to 1pc," said Dierk Hirschel, chief economist for the German union confederation.

Graham Turner, from GFC Economics, said the ECB was playing with fire by waiting so long. "We've had a monstrous decline in German orders and the ECB just blinked. It confirms fears that we're not going to get quantitative easing from them without a major fight. This is a major risk for euroland because the damage in Spain, Ireland and Eastern Europe is starting to panic people." The wait-and-see line has led to an open rift within the ECB's governing council. Cypriot governor, Athanasios Orphanides, a former official at the US Federal Reserve, has challenged the ruling orthodoxy of Bundesbank chief Axel Weber that rates cannot be cut much further without running out of ammunition, calling such arguments a "dangerous fallacy". Central banks retain a nuclear arsenal for use against debt deflation.

The economic slump – Deutsche Bank fears a 4pc contraction of German GDP this year – is rapidly turning into a political crisis as countries scramble to protect their core industries and head off spiralling job losses. French President Nicolas Sarkozy booked a prime-time television slot last night to reassure voters after the biggest protests in 20 years. His planned €6bn (£5.3bn) bail-out for the French car industry has taken a starkly protectionist turn with talk of a "Made-in-France" clause to ensure that recipients of government credits use French sub-contractors. Neelie Kroes, the EU's competition commissioner, said any such move would be "contrary to EU state aid and single market rules. It would not be in the interest of France, of French car-makers, or of any member state to see a resurgence of protectionism in Europe. Raising barriers within Europe cannot be the way out to this crisis."

Luc Chatel, the industry minister, denied any plans to discriminate against foreign suppliers, but said companies receiving state help must commit to producing in the home market. "There is no question of the state helping out a car manufacturer which might decide to close plants in France," he said.
Germany, Britain, Sweden and Italy are all preparing bail-outs for their own car industries, mostly designed to ensure that aid stays at home rather leaking out. The EU's Czech presidency said there was a danger of a "race towards national subsidies". It is drawing up plans for an EU-wide car rescue to be agreed at the March summit of EU leaders, mostly focused on bonuses for buyers who exchange old cars for the latest "green" models.

The return to nation-state reflexes poses a grave risk to smaller countries such as Belgium which host foreign car plants but have no native car industry. The Belgian government is holding crisis talks over the fate of an Opel plant in Antwerp, seen as an orphan factory likely to be sacrificed. Gunther Verheugen, the EU's industry commissioner, said Europe's car industry is bedevilled by 20pc to 30pc over-capacity. Output has dropped from 12m vehicles in 2007, to 11m last year, and will most likely fall below 10m this year. There are a dozen plants too many, and 400,000 jobs may have to go. "There is no guarantee that all the producers will still be there by the end of the year," he said.




French President Nicolas Sarkozy accuses Gordon Brown of ruining British economy
Nicolas Sarkozy, the French President, has accused Gordon Brown of ruining Britain's economy and vowed not to repeat his mistakes in a frank interview which has sparked a cross-channel diplomatic row. Mr Sarkozy, who is under pressure over his own handling of the downturn, made his remarks during a live 90-minute grilling screened on three television channels when asked whether he was considering economic stimulus measures similar to Mr Brown's VAT reduction. In comments said to have caused anger in Downing Street, he replied: "The British chose a recovery plan by boosting consumer spending, notably by cutting VAT by two per cent. It is plain to see that it has brought absolutely no progress.

"When the English decided to cut VAT by two per cent, a certain number of politicians rushed to tell me that I should do the same. Since then, not only has consumption in England not gone up, it continues to go down. "The reason is simple: because it's in people's heads. If the consumer no longer consumes, he won't change just because we add or subtract one VAT point, it's because he's scared for his future, he's scared for his job and says to himself: 'I must save, because bad times are coming'. "In France, we chose investment because when we put France into debt by taking money to invest, in return we have assets, infrastructure. When you put your country into debt to pay for operating costs, you have nothing in return for your debt and you ruin the country.

"If the English did that it's because they don't have any industry left. Gordon Brown cannot do what I am doing with carmakers [giving them up to 6 billion euros]... in construction and other industries, because they haven't got any left." His remarks led a clearly-irritated Downing Street to seek urgent clarification from the Elysée Palace. In public, the Prime Minister's official spokesman insisted that Mr Brown understood that the French leader was speaking in a "domestic context" and had not meant his words as an "attack". But, he added: "The Elysée have been in contact this morning to assure us that these remarks were not meant as a critique of our economic policy - which is nice."

Privately No 10 is said to be "angry" at the overt criticism of the Prime Minister's response to the recession. Downing Street refused to reveal whether the telephone call to clarify the remarks was initiated by the French or British governments. The two leaders did not speak, leaving officials to attempt to repair relations, and are not due to meet until a summit in Germany at the end of the month. Mr Brown's spokesman said: "The Elysée have been in contact this morning to assure us that these remarks were not meant as a critique of our economic policy. "We saw the news reports last night. They have been in contact. It was not meant as an attack. I will leave it to the Elysée to explain why that is not a criticism.

"We appreciate the context in which the President made those comments, in the context of a domestic French political debate about France's future economic policy." George Osborne, the shadow chancellor, said: "President Sarkozy is the latest international leader to condemn Gordon Brown's main policy for tackling the recession. "We said at the time that Brown's flagship VAT cut would only make things worse and would be an expensive failure. "Gordon Brown claims to have saved the world. It would appear that world leaders increasingly disagree."




UK company collapses up 124% in three months
The number of companies filing for administration jumped by nearly 125 per cent in the final three months of last year as the financial crisis and the sharp economic downturn took its toll. Consumers also felt the pain as the number of bankruptcies last year soared to the highest level since records began in 1960. Over 350 people a day are now becoming insolvent. The total number of businesses going bust, which covers administrations and liquidations, rose by more than 50 per cent as increasing numbers of companies struggled to access finance or secure insurance. Some 2,018 businesses entered into administration — the insolvency scheme usually used by larger companies — between October and December last year, up from 575 in the final quarter of 2007, figures from the Insolvency Service show. This is an increase of 251 per cent.

However, that figure includes the administration of one company that had 729 managed service businesses. Stripping out that collapse in September 2008, the number of businesses filing for administration hit 1,289 in the final three months of the year, up 124 per cent from the comparable period. While today's data was worse than expected, experts warned that the figures were set to rise higher in the coming year. Malcolm Shierson, a partner in the recovery and reorganisation practice at Grant Thornton, said "These numbers are bad, but they are going to get progressively worse as business and consumer confidence continues to fall. "Companies across all sectors will struggle when they need to refinance their debt as lenders rein back on corporate lending.

On top of this, the arteries of business are being clogged up as credit insurers cut back on the provision of cover for suppliers and contractors." The number of people going insolvent surged by nearly 20 per cent. Some 19,100 people went bankrupt in the final three months of the year, up 22 per cent compared to the same period in 2007. A total of 67,428 people went bankrupt last year, up from 64,480 in 2007, and the highest figure since records began in 1960. The number of borrowers entering into an Individual Voluntary Arrangement (IVA) — a form of insolvency open to those with unsecured debts of £15,000 or more, was up 12 per cent.




Biggest slump in UK manufacturing output for 35 years
Manufacturers endured their biggest quarterly slump in output for 35 years in the three months to December, official figures showed today. Industry output in the final quarter of 2008 was 5.1 per cent below the July to September period - the worst since 1974, according to the Office for National Statistics (ONS). The figures also showed a 2.2 per cent fall in output in December on the previous month among manufacturers - representing a tenth successive month of decline in the worst run for the sector since 1980. The December fall was even worse than already pessimistic predictions. Jonathan Loynes, of Capital Economics, said: "The figures maintain the picture of unrelenting gloom in the manufacturing sector.

"The real worry, though, is that the various surveys suggest that things are set to get even worse over the coming months, with no signs at all that the drop in the exchange rate is yet boosting manufacturers' export order books." The biggest quarter-on-quarter falls were in metal processing and manufacturing and transport equipment, which includes the crisis-hit car industry. The Bank of England yesterday slashed interest rates to a new record low of 1 per cent to combat deepening recession as the UK's economic woes mount. David Kern, chief economist at the British Chambers of Commerce, said: "The worse-than-expected production figures confirm that there is no sign as yet that the recession is easing." He added that the figures were worse than implied by January's fourth quarter GDP figure, which showed a recession-confirming 1.5 per cent decline between October and December.




Bank of England to bypass commercial banks
The Bank of England will launch a scheme next week that allows it to bypass banks and effectively lend direct to companies in its latest efforts to reverse the effects of the credit crunch on the British economy. The Bank of England said Friday that under its £50-billion ($73-billion U.S.) Asset Purchase Scheme, it would buy investment-grade sterling paper issued directly by big British companies as well as from banks via the secondary market. "This could channel funds directly to parts of the corporate sector whilst also underpinning secondary market activity ... and so removing obstacles to corporate access to capital markets," the BoE said. The scheme will launch Feb. 13, and short sterling futures jumped on the news as traders priced in a reduction of the cost of interbank funding.

"It's one of the first measures we've seen during the crisis which in essence bypasses the banks (and) allows corporates to borrow directly from the Bank of England," said Jonathan Loynes, chief European economist at Capital Economics. "So in that sense you could possibly see it as a first admission that banks are not going to get back to normal conditions in the foreseeable future." BoE Governor Mervyn King has said that banks' failure to lend to businesses and consumers poses the single biggest threat to the British economy as it faces its sharpest downturn in decades. The central bank has slashed rates by four percentage points since October, but lending conditions remain tough and firms are struggling to raise alternative financing from capital markets.

The BoE said it wanted to start buying corporate bonds – which have maturities measured in years – as well as the shorter-term commercial paper "as soon as possible," and was consulting dealers. But in this case it was only considering buying "modest" quantities to facilitate market-making rather than subscribing directly to corporate debt issues. The BoE said it would consult on extending the scheme to include syndicated loans and asset-backed securities with viable securitization structures, as well as how it should help the market for bank debt covered by the government's Credit Guarantee Scheme.

"The Bank will keep under review whether there is a case for proposing to the Chancellor (Alistair Darling) that the list of eligible assets or currencies could usefully be expanded," the BoE said in the statement. The BoE asset purchase scheme, which was announced last month, does not increase the money supply as the central bank will sell treasury bills to banks to fund it, soaking up the money that it gives out in return for the commercial paper. The scheme lays the groundwork for a policy of so-called "quantitative easing" if policymakers deem this necessary should interest rates approach zero. The BoE would need permission from Mr. Darling to stop selling treasury bills to fund asset purchases, meaning the scheme would boost the money supply.




Bank of England heads into unknown to beat depression lurking in the shadows
The Bank of England pushed deeper into uncharted territory yesterday in its fight against deepening recession, cutting interest rates to 1 per cent – the lowest in its 314-year history. The move to reduce rates by another half-point was the fifth cut in five months that have marked a fall from 5 per cent. The verdict from the rate-setting Monetary Policy Committee came after a spate of alarming news that fuelled fears about the scale of Britain’s slump. The decision was welcomed by business leaders and will give another rapid boost to the pockets of four million homeowners whose mortgage bills are tumbling.

Over the past year the average borrower with a £150,000 repayment mortgage has seen monthly bills drop by £356, or almost two fifths, to £565. But savers, who vastly outnumber homeowners, will suffer a further heavy blow to their fast-dwindling returns. The Bank’s move sparked immediate accusations that it was guilty of an "assault on savers". A typical saver with a cash deposit of £50,000 faces a cut in annual interest earnings from £1,345 a year ago to as little as £155. Explaining its decision to reduce rates again, the Bank painted a bleak picture of the state of the economy, which, official figures say, shrank by 1.5 per cent in the previous quarter.

The Bank said that it now expected a similar slump in national income in the present quarter, with the world in the throes of what it called a "severe and synchronised downturn". Confidence among households and businesses was sinking, while companies and families faced a continued credit drought, it added. As a result, it said, consumer spending was weak while businesses were slashing jobs and drastically cutting investment. The Bank’s stark assessment, which it will spell out in detail next week in its quarterly Inflation Report, came a few days after the International Monetary Fund predicted that Britain would suffer the most brutal downturn this year of any leading world economy. The IMF expects the UK economy to shrink by 2.8 per cent this year, its worst since the Second World War.

Against this backdrop, some City economists questioned why the Bank did not go further yesterday. But most predicted that yesterday’s rate cut would be swiftly followed by more, taking rates to zero, or very close to that, within weeks. The Bank is also expected to begin moves towards so-called "quantitative easing" – in effect, printing money to pump up the economy by buying up assets from high street banks. More details of the first steps are due within days. As fearful consumers retreat from the high street and homeowners fret over plunging property values, there was some respite from the deluge of bad news yesterday as Halifax, the nation’s biggest mortgage lender, reported that house prices ticked upwards last month. House prices rose by 1.9 per cent in January as bargain hunters snapped up cheap properties. However, prices are still 17 per cent lower than January last year.

City economists said that this slight rise did not indicate a recovery in the housing market, forecasting a further 15 per cent slump in prices this year.
The interest-rate cut was good news, nevertheless, for thousands of borrowers who have mortgage deals pegged below the base rate, as their repayments tumble to near zero. About 1,500 borrowers on Chelteham & Gloucester’s mortgage, which is set at 1.01 per cent below the base rate, will pay only a few pence interest for their loan each month, and will receive a refund on this payment. Others who have a £100,000 interest-only loan with Nationwide Building Society at 0.76 per cent below the base rate will see their mortgage bills fall from £60 to less than £20 a month. Tens of thousands of other homeowners will also see their mortgage bills shrink again as several of the country’s biggest lenders said immediately that they would pass on the half-point cut in full to borrowers on deals linked to their standard variable rate.

Halifax – which is part-owned by the taxpayer – Lloyds TSB, Barclays, Nationwide and Skipton Building Society said that they would cut their standard variable rates by 0.5 percentage points. Northern Rock, the state-owned bank, and Royal Bank of Scotland, which is majority-owned by the taxpayer, both said that they had made no decisions on rates. Abbey and HSBC are also dragging their heels. But yesterday’s decision by the Bank of England dealt a further blow to savers, who have seen their returns plummet as interest rates have been cut to historic lows. Adrian Coles, director-general of the Building Societies Association, said that the cut was "an assault on savers". "Savers dependent on interest income have not seen prices fall by a similar amount – their lifestyles have taken a significant blow," he said. The average rate paid on an instant access savings account has fallen to 0.81 per cent from 2.69 per cent in February last year, figures from the Bank of England show.




Stampede by Britain's banks to beat bonus crackdown
Banks dependent on taxpayer support are planning to rush out hundreds of millions of pounds in bonuses to senior bankers and traders before a threatened crackdown. As ministers prepared to curb excessive remuneration, it emerged that Barclays and Lloyds Banking Group were poised to follow Royal Bank of Scotland (RBS) by paying bonuses within weeks. Lloyds, which has taken £17 billion in rescue money from the Government, appears ready to give hundreds of millions of pounds to top executives and more junior staff. Barclays, which has tapped the Bank of England for billions of pounds in loans and guarantees, is believed to be planning even larger payouts. According to the terms of its purchase of the North American division of the collapsed Lehman Brothers, Barclays is due to pay $2.5 billion (£1.7 billion) in bonuses to traders and dealmakers on Wall Street in the next few days.

Ministers reacted angrily to reports in The Times that RBS was preparing to give bonuses to thousands of senior bankers and traders. Banks applying for government insurance to underwrite toxic assets and free up cash for lending are likely to have to meet conditions preventing them paying excessive remuneration, officials said. A White Paper to be published alongside the Budget in April will beef up supervision of banks by giving nonexecutive directors more powers to hold bank chiefs to account. However, senior bankers suggested that the clampdown would come too late to prevent bonuses being paid for 2008.

No final approval of bonuses has been made but UK Financial Investments, the Treasury body that owns the stakes in RBS and Lloyds, is prepared to see limited payouts as long as it is convinced that they are in the long-term interest of taxpayers. Banks argue that bonuses will help to retain and attract good staff and so hasten the end of their need for government support. Many are obliged to pay them because of the wording of employment contracts. Richard Pym, who earns £750,000 a year as executive chairman of the state-owned Bradford & Bingley, collects a £140,000 guaranteed bonus next month. The bonus, agreed before B&B’s collapse, has to be paid regardless of performance. Mr Pym will also collect a further bonus of £187,500 in respect of the first half of 2009.

Lloyds said that any director bonuses would be paid in shares at the end of 2009 and that staff bonuses would be lower than in previous years. Barclays, which reports its annual results on Monday, is expected to pay large bonuses to the tens of thousands of employees in Barclays Capital. Last year they were paid an average of £182,000 each. Eight former Lehman high-flyers taken on by Barclays Capital in New York have reportedly been locked into contracts paying $10 million to $25 million a year. Government officials said that all banks would in future have to adopt new incentive structures. Gordon Brown expected decisions to reflect the conditions of the economy and the performance of the banks. “There are no rewards for failure in what we are proposing,” he said.

Lord Mandelson, the Business Secretary, warned RBS that it risked alienating ordinary people if it gave its traders and bosses “exorbitant” bonuses.
George Osborne, the Shadow Chancellor, said: “It would be an insult to struggling taxpayers if the Government allowed banks we part-own to pay out big cash bonuses. To increase taxes on people earning £20,000 to pay the bonuses of someone earning £2 million is totally unacceptable.” Any measures in Britain are likely to fall short of the plans by President Obama to enforce a $500,000 cap on the pay of bank executives bailed out by US taxpayers. No 10 said that Mr Brown agreed with Mr Obama that a new approach to rewards was needed, although it was not thought possible to introduce an industry-wide pay ceiling without breaking contracts.




Jeremy Clarkson apologises for calling Gordon Brown a 'one-eyed Scottish idiot'
Jeremy Clarkson has apologised after referring to Prime Minister Gordon Brown as a "one-eyed Scottish idiot". The Top Gear presenter's comments were condemned by the Royal National Institute of Blind People (RNIB) as "totally unacceptable". Clarkson, 48, was speaking in Sydney, Australia where he is hosting Top Gear Live, a stage version of the popular BBC show. During a discussion on the economy, he compared Mr Brown unfavourably with Kevin Rudd, the Australia prime minister, who had addressed his country on the scale of the financial downturn. "He genuinely looked terrified. Poor man, he's actually seen the books," Clarkson said of Mr Rudd.

"We have this one-eyed Scottish idiot who keeps telling us everything's fine and he's saved the world and we know he's lying, but he's smooth at telling us." Lesley-Anne Alexander, chief executive of the RNIB, said: "Mr Clarkson's description of Prime Minister Brown is offensive. Any suggestion that equates disability with incompetence is totally unacceptable. We would be happy to help Mr Clarkson understand the positive contribution people with sight loss make to society." In a statement issued by BBC Worldwide, Clarkson said: "In the heat of the moment I made a remark about the Prime Minister's personal appearance for which, upon reflection, I apologise."

Professor Alistair Fielder, trustee of leading research charity Fight for Sight, said: "These comments are highly discriminatory as they imply that someone with defective vision cannot function as an intelligent person, which is obviously incorrect." Mr Brown lost his sight in one eye after an accident playing rugby. A Downing Street spokesman declined to comment on Mr Clarkson's jibe, saying only: "Mr Clarkson is entitled to his own interpretation of the economic circumstances." The remarks reignited the debate about BBC hypocrisy in the wake of Carol Thatcher's sacking for referring to a tennis player as a "golliwog" in a private conversation off air.

Lord Foulkes, a former Labour Scottish minister, said: "If the BBC banned Jonathan Ross for what he said and they have taken Carol Thatcher off air for something she said in private, then something should be done about Clarkson." Scottish politicians reacted angrily to Clarkson's remarks. Iain Gray, the Scottish Labour leader, said: "Such a comment is really a reflection on Jeremy Clarkson and speaks for itself. Most people here are proud that the Prime Minister is a Scot and believe him to be the right person to get the UK through this global economic crisis." Mr Brown was far from Clarkson's only target during the Sydney press conference, where he was joined by co-presenter Richard Hammond.

He insulted Top Gear fans, saying: "You should see some of the apes that turn up." Turning to the show's motorcycle stuntmen: "They're French, so if they get killed it's not the end of the world." The outspoken presenter also continued his anti-green crusade, blaming this week's snow on "too many green people in the world not buying enough Range Rovers", thereby failing to speed up global warming. Of the Top Gear team he joked: "We don't have a carbon footprint. That's because we drive everywhere." Clarkson's litany of ontroversial remarks include a joke about lorry drivers murdering prostitutes, which prompted hundreds of complaints.




If loans are not there, base rate is irrelevant
The global economy may not be in a depression yet, as Gordon Brown’s slip of the tongue suggested earlier this week. But the outlook, particularly in Britain, is grim. So grim that yesterday’s interest-rate cut by the Bank of England was criticised by some as too timid. This might seem an odd way to describe slashing rates by a third, from 1.5 per cent to 1 per cent. But many economists were urging the Bank to cut rates close to, or indeed all the way to, zero. There were good reasons for the Bank to hold back, however. For a start, it is not clear that a bigger cut would make that much difference.

As any mortgage applicant or cash-strapped company will tell you, it is not the cost of borrowing that is the problem, it is the availability. If you can’t get a loan it is not much consolation being told it would be cheap if you could. Moreover, there are risks involved in cutting official interest rates further. It puts more pressure on the finances of savers, who have already been subjected to a vicious squeeze. Yesterday’s cut means that savers have seen their average interest income drop by 83 per cent since July 2007, according to the Building Societies Association.

If banks and building societies pass on the latest cut in full to savers, some may decide to withdraw money that is earning next to nothing, which will mean there is less money to lend to new borrowers. The other risk in cutting rates, which is known to worry the Bank of England, is the impact on the pound. Lower interest rates make it less attractive for international investors to park their money in sterling and could further weaken the currency. The sharp drop in the pound over the past six months is providing a welcome boost to British exporters but, in spite of a strengthening in recent weeks, there is a justifiable concern that sterling could go into free fall. This would make them reluctant to lend to government to fund the bailout of the system.

The Bank of England may well cut rates again next month. More important will be its plans, which it is expected to detail today to buy various forms of IOUs owned by banks and issued by companies. This should have the effect of reducing interest rates that companies pay, which are much higher than the official Bank rate. As a further step, the Bank could make these purchases without issuing bonds to pay for them. This would increase the money supply – essentially, if not literally, "printing money" – which should help get the economy growing again. It is these measures, rather than rate cuts, that may stop recession turning into depression.




Economic Crisis Causes Spike in Crime in Russia
President Dmitri Medvedev is calling for constant police monitoring to maintain social order in Russia amid growing unemployment and crime linked to the global economic crisis. Mr. Medvedev is also warning law enforcement officials to fight crime instead of harassing businesspeople. Speaking to hundreds of law enforcement officials at the Interior Ministry in Moscow, President Medvedev said growing unemployment could exacerbate crime in Russia. Mr. Medvedev says the main task for law enforcement is paying more attention to social order, because Russia finds itself in a rather complicated situation influenced by the global economic crisis, which has increased unemployment and the country's other social problems.

As a result, says the Kremlin leader, individuals seek to take advantage of the situation, adding that police should not allow it to become more complicated than it already is. He proceeds to task law enforcement with monitoring the situation throughout the regions of Russia and the country in general. The nationwide Moskovskiy Komsomolets newspaper reports shoplifting is spreading among Russia's unemployed. Grocery stores are also being hit, and in some cases, individuals are reported hiding out of view of surveillance cameras to eat food on the premises. The newspaper says the number of daily shoplifting arrests in Moscow in January averaged 21, one-third higher than the same period two years ago.

Police last weekend were called out en masse in a number of Russian cities to monitor anti-government demonstrations sparked by economic difficulties. Most were poorly attended, with police outnumbering demonstrators, but about 3,000 people participated in the Far Eastern city of Vladivostok. President Medvedev also alluded to corrupt officials who make money by shaking down legitimate entrepreneurs. The Kremlin leader says much has been said recently about preventing bureaucrats from interfering in business, especially small and medium-size firms. He warns law enforcement that they should only conduct searches if there is official notice of wrongdoing and within the framework of a criminal investigation.

Russian bureaucrats and police are widely accused of blackmailing legitimate business, based on random searches and trumped up charges. President Medvedev says police should also combat growing crime by foreign workers. Millions of them came to Russia in recent years from impoverished post-Soviet states to do menial work. Many of those migrants are not only losing their jobs during the current crisis, but are also being attacked, even killed, by nationalist groups who blame foreign workers for driving down wages and taking jobs away from Russians.




Russia retreats from costly bail-outs
The euro has fallen sharply on mounting fears of a financial crisis in Eastern Europe after Kazakhstan devalued by a fifth and Fitch Ratings cut Russia's debt to BBB, just two notches above junk. Both countries have seen a collapse in tax revenues following the oil price crash over the past six months. Fitch said the Russian economy would grind to a halt this year, leading to strains in the banking system. "The scale of capital outflows and the pace of decline in Russia's foreign exchange reserves have materially weakened the sovereign balance sheet. The fall in commodity prices and the dislocation of the global capital markets has left Russian banks and companies struggling to refinance external debt," said Edward Parker, head of Fitch's team in Eastern Europe.

Russia's finance minister, Alexei Kudrin, told reporters in London that the Kremlin was preparing a fresh rescue for the banks, injecting $40bn in core capital. But he gave warning that it would not squander taxpayers' money saving every Russian company in distress. "The government is not responsible for private sector risks," he said. This is a major shift in policy. Mr Kudrin had been mulling blanket guarantees for some 260 companies, but the Kremlin has clearly awoken to the danger that global investors will not underwrite such a strategy. The euro dived almost 2pc against the dollar in early trading to $1.2853 as traders digested the news, fearing that rising instability in the region will increasingly spill over into core Europe. The markets are watching closely to see if the Kremlin can maintain civil order in the face of spreading protests without resorting to police coercion on a large scale.

Fitch said capital outflows from Russia had reached $94bn in the fourth quarter of last year, a pattern that "might continue if there is an ongoing lack of confidence in the country's financial outlook and institutions". Russia's foreign reserves have plummeted by $210bn from their peak last summer, falling to $385bn. Russian companies may have trouble rolling over some $140bn of external debt (mostly dollars), especially after the 35pc slide in the rouble over recent weeks. "This will be a drain on foreign exchange reserves," said Mr Parker. Lars Rasmussen, East Europe strategist at Danske Bank, said Russian companies had amassed $508bn of foreign debts (30pc of GDP). "There is a risk of corporates not being able to meet debt payments," he said.

The Kremlin is to announce a major belt-tightening package today as it adjusts to oil prices at around $40 a barrel. The current long-term budget is based on assumptions of oil at $95. The lion's share of the government's revenues come from oil and gas. Meanwhile, the Kazakh central bank has finally been forced to let the tenge fall by 22pc, an inevitable move once Russia had let the rouble fall. The move raises fresh questions about the strength of the country's banks, which have to roll over half their $40bn foreign debts this year. Devaluation adds to the burden. "We cannot discount further nationalisation moves," said Luis Eduardo Costa, an analyst at Commerzbank. Oliver Weeks from Morgan Stanley said Kazakhstan's move "reinforces the spiral of competititve depreciation in the region, forcing further devaluations."




China outraged after India bans all toy imports
India has banned all imports of toys from China for six months, in the first major example of protectionism following the financial crisis. The ban came amid growing global tensions about protectionism, with Europe and Canada warning the US about its determination to get consumers to buy American goods and wildcats strikes in the UK over the use of foreign workers. State media reported that the Chinese government is likely to appeal to the World Trade Organisation to reverse the ban, which is the latest blow to China's beleaguered toy industry.

China makes three-quarters of the world's toys, but a combination of safety fears and the global slowdown has hit the sector hard. By the end of last year, the number of companies exporting toys from China had halved to just over 4,000. Tens of thousands of factories have been shuttered, according to toy trade associations in Hong Kong. India imports around half of its toys from China and its market is worth around Pounds350 million a year. The Indian government gave no reason for the ban, although Raj Kumar, the president of the Toy Association of India, said politicians were acting in the interests of the economy and consumer safety.

In December, the Chinese government raised the export tax rebates for Chinese toys by 14 per cent in a bid to help manufacturers. According to Mr Kumar, the rebates put Indian toy manufacturers at an unfair disadvantage. "The ban cannot hold water. The Indian side is doomed to lose in the court if the Chinese government appealed to the WTO Dispute Settlement Body," said Fu Donghui, managing director of Allbright Law Firm Beijing, and a legal expert on trade issues. "In the past, the Chinese government always kept silent. But the situation is changing, and resorting to the WTO is the right choice to prevent the trade partners from abusing the WTO regulations," he told the state-owned China Daily newspaper.

Some commentators suggested that the ban might be a rebuff to China for its close relationship with Pakistan. Indian politicians were outraged at the end of January when Shah Mahmood Qureshi, the Pakistani foreign minister, announced that he had given China carte blanche to negotiate on Pakistan's behalf with regard to the terrorist attacks in Mumbai. The Pakistani foreign minister said that he had told He Yafei, a Chinese special envoy, to "go to Delhi and you have a blank cheque from us". He added that Pakistan was ready to do whatever China suggests. A spokesman for India's Congress party said there was "no scope for mediation or intervention by anyone else" in negotiations between the two countries. In 2007, the world's leading toymaker, Mattel, recalled over 21 million Chinese-made toys because of fears of poisoning from their lead paint.




Recession: glimmers of hope?
The pace of economic decline is slowing. Housing sales are picking up, even if prices are falling. Credit markets have begun to thaw. This is the time-honoured pattern you expect to see when the downward spiral burns itself out and the cycle slowly starts to turn, helped this time by an unprecedented global monetary and fiscal blitz. But it may equally be a false dawn. The Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94pc in the worst fall in shipping history. Copper prices are also edging up after plunging by two-thirds from their June peak. So are lumber prices.

The debt markets have opened like a flower in spring, at least in one sense. Companies issued $246bn (£171bn) in bonds in January, the most since the credit crisis began. France's EdF has raised €9bn (£8bn). Shell and RWE each raised €3bn this week. Blue-chip groups can borrow again. "The mood is upbeat. There are swathes of cash pouring back into credit," said Suki Mann, a credit strategist at Société Générale. "The market closed down after the Lehmans collapse so there was a lot of pent-up demand, but they are having to pay materially higher spreads than pre-Lehmans." So far this has not helped the rest of the corporate universe. Average yields on BBB-rated debt are a prohibitive 19.6pc. "The market is absolutely closed. There is no trickle-down yet," he said.

The interbank freeze has started to thaw, again in one sense. David Buik, from BGC Partners, said interest spreads on three-month dollar Libor have come down to 1pc from the extremes above 2pc at the height of the panic. "The cost of money is coming down, but the banks are still not lending to each other. It's virtually moribund," he said. The US Federal Reserve's loan survey this week showed that lending is again picking up, albeit tentatively. The number of banks expecting to tighten credit has fallen from 80pc in the autumn to nearer 60pc, the lowest in a year. Mortgage demand has stabilised, though that is small comfort in a country where 19m homes are standing empty and foreclosures are running at 6,000 a day. The number of evictions reached 2.2m last year. But at least the Fed is taking drastic action by purchasing mortgage securities (with printed money) in order to drive down the costs of home loans. The rate for 30-year mortgages has fallen to 5.28pc from 6.5pc two months ago.

The first fruit of these actions is ripening. Pending home sales rose by 6.3pc in December, led by the South and Midwest, a sign that the great glut of unsold houses may start to clear – albeit at very low prices, and very slowly. Some 45pc of the all homes sold in December were foreclosures or distressed sales. US house prices have fallen 27pc from their peak, according to the respected Case-Shiller index, dropping every month since July 2006. They will fall further. The downward momentum is overwhelming, and the $200bn "option-arm" time-bomb is only just starting to detonate as these rates ratchet up. But it is telling that the shares of builders D.R. Horton, Toll Brothers, and Lennar have begun to rally. The ITB builders share index has risen 45pc from its nadir in December.

The bloodbath in manufacturing industry across the world since September has been frightening – Korea's GDP fell by an annualised 21pc rate in the fourth quarter – but the leading indicators in a clutch of countries look slightly less awful. China's PMI purchasing index rebounded for a second month in January, even if actual output has been declining for four months. "There are tentative signs of stabilisation. China's manufacturing is no longer in free-fall," said BNP Paribas. The indexes also bounced in the US, the eurozone, and Britain, despite cataclysmic car sales. The inventory cycle of the OECD club of rich states may be turning. Companies ran down their stocks during the credit crunch when capital costs soared. At some point this process must exhaust itself, forcing companies to start producing again. Michael Vaknin from Goldman Sachs said we are getting "closer to the point" in the re-stocking cycle where industrial output stabilises.

Veterans of Japan's Lost Decade know that these moments of optimism can be intoxicating – and costly. Japan had four bear market rallies before investors finally had the stuffing knocked out of them. Global debt deflation this time may prove just as powerful. "Nothing moves down in straight lines," said SocGen's perma-bear Albert Edwards. "There will be little bounces. But our view is that investors can afford to be lazy and wait. There is not a cat's chance in hell that this really is the bottom of the cycle."




Auto "clunker" proposal withdrawn from US stimulus
One proposal to help jump start U.S. auto sales was withdrawn late on Thursday and the fate of another was unclear, despite a vigorous endorsement from President Barack Obama, as Senate consideration of economic stimulus legislation accelerated. Sen. Thomas Harkin, an Iowa Democrat, pulled an amendment that would have provided $16 billion in rebates to buyers of new fuel efficient vehicles who traded in their old, poor performing models. Harkin said he would defer the so-called "cash for clunkers" proposal, which had strong support from U.S. automakers.

Lobbyists for those companies this week called it a genuine stimulus for a depressed market. U.S. auto sales plunged to a 27-year low in January. There was no backing, however, for the plan from foreign manufacturers whose operations are clustered in states represented by conservative Republicans. The provision required that the vehicle be assembled in the United States, a nod to General Motors Corp, Chrysler LLC and Ford Motor Co, all struggling financially and all based in economically hard-hit Michigan. Those companies' domestic operations are unionized. Automakers and suppliers are pushing hard for additional help from Washington, which extended GM and Chrysler a $17.4 billion bailout in December.

The Treasury Department has extended domestic auto finance companies capital to help stimulate lending and is considering additional steps to unlock tight consumer credit. Still, U.S. automakers are banking on additional assistance from Congress. Lawmakers also are weighing proposals in and outside of stimulus legislation to fund battery research for plug-in hybrids and other alternative fuels. Also under consideration in the Senate stimulus bill is a $600 million plan for the government to purchase tens of thousands of fuel efficient vehicles to replace inefficient models in the fleet. Obama on Thursday struck back at critics of the plan, saying that it would reduce gasoline consumption and help revive sales.

"It will not only save the government significant money over time, it will not only create manufacturing jobs for folks who are making these cars, it will set a standard for private industry to match," Obama said in an appearance at the Energy Department. Senate Minority Leader Mitch McConnell called the new vehicle program wasteful spending. "I doubt if the government buying $600 million worth of automobiles would provide the kind of stimulus that we're talking about here," McConnell said on Sunday in an appearance on the CBS program "Face the Nation."




Gross Says U.S. Must Spend to Avoid Mini Depression
Bill Gross, co-chief investment officer of Pacific Investment Management Co., said the U.S. may slump into a "mini depression" unless policy makers spend trillions of dollars to spur growth. "This economy needs support from the government, a check from the government in the trillions," Gross said today in a Bloomberg Television interview from Pimco’s headquarters in Newport Beach, California. "There is a potential catastrophe if the U.S. government continues to focus on billions of dollars."

President Barack Obama has proposed a stimulus package intended to spur growth estimated at as much as $900 billion. The U.S. economy shrank by 3.8 percent in the fourth quarter, the most since 1982 as consumer spending recorded the worst slide in the postwar era, the Commerce Department said last week. Pimco won a Federal Reserve contract in December as one of the four managers of a $500 billion program to purchase mortgage-backed securities. The company was also one of the managers selected to run the Commercial Paper Funding Facility in October. The Fed will have to step in and buy Treasuries, Gross said, to keep long-term interest rates low as the U.S. increases its debt sales to finance a growing budget deficit and stimulus programs. Central bank officials said Jan. 28 they were "prepared" to buy longer-term Treasuries.

Government borrowing will probably reach $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc. Speculation has risen that China, which holds $681.9 billion of Treasuries as the single largest investor in U.S. debt, may stop or slow the purchases of U.S. debt as its own economic growth slows. "To the extent that the Chinese and others do not have the necessary funds, someone has to buy them," Gross said. "It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets."

Gross, 64, increased his holdings of U.S. government debt, a category that includes agency securities, in December for the first time in a year, according to the company’s Web site. He said today that he will not buy Treasuries. Gross manages the $132 billion Total Return Fund, the world’s biggest bond fund. The fund gained 4.8 percent last year and has outperformed 99 percent of its peers over the past five years, according to data compiled by Bloomberg. The average government and corporate bond fund lost 8 percent in 2008, Bloomberg data show.




On Corruption
At irregular intervals the U.S. is shaken by high-profile cases of political and financial corruption. Every time the media indignantly denounces the miscreants as if to reaffirm that except for them America remains unspotted and innocent. There is barely a mention of the corrupt practices and conventions inherent in contemporary finance capitalism. Rod Blagojevich, governor of Illinois and would-be grifter, and Bernard Madoff, worldly moneyman, momentarily capture the headlines. With his alleged offer to auction off a U.S. Senate seat to the highest bidder, Blagojevich followed in the steps of Plunkett of Tamany Hall and is a piker compared to Madoff, whose alleged $50 billion Ponzi scheme is apparently history’s largest private financial fraud.

Ex-chairman of the Nasdaq Stock Market and one of its major players, for decades Madoff lubricated his venture by making strategic political contributions and mixed business with philanthropy, in the process raising his social status and soothing his conscience.  The explosion of Wall Street’s government-condoned financial bubble exposed Madoff’s pyramid scheme, which can only be understood in the context of the larger praxis and culture of corruption that makes it so difficult for President Barack Obama to separate the wheat from the chaff as he forms his cabinet, White House staff, and inner circle of advisers. Corruption is a highly polemical word-concept, its rhetorical use adapted to political warfare. Its charges—including bribery, extortion, nepotism—are leveled to mobilize popular and partisan support against incumbents or rivals.

A phenomenon of group psychology and action, the meanings attached to the word corruption have changed from one civilization to another, from one century to another, and from one country to another.  To think critically about corruption is to think about venality not only in politics but also in economics, finance, religion, sports, the arts, education, and social intercourse. Even so, private individuals who tender bribes are judged and penalized much less severely than politicians, government officials, and bureaucrats who solicit and pocket them, presumably because they betray a public trust. The imbalance is greater in societies where the richest of the rich, both individual and corporate, are in a position to corrupt public servants of modest means.

If man is innately venal it is hardly surprising that elected politicians and state functionaries are corruptible. Political society is not ruled by angels mindful of prayer books. By the nature and logic of things, and in the words of Lord Acton, "power tends to corrupt, and absolute power corrupts absolutely." Since corruption is chronic in political and civil society (and at certain moments, as Bertolt Brecht observed, "to find an official who accepts a bribe is to find humanity"), the issue is not corruption as such, but its scale and virulence and pervasiveness. So-called primitive societies may well have been the least open to corruption, since there was little if any separation between the private and public sphere, which is a precondition for bribery to subvert non-venal gift-giving.

But there was bribery, especially of judges, among the ancient Egyptians, Babylonians, and Hebrews. In Greece, by the fourth century B.C.E., bribery developed along with the growth of city, economy, and government, as well as with the need to pack public assemblies. Ancient Rome was never free of venality, though it only began to suffuse civil and political society during the late republic and with imperial expansion: sale of public offices, contracts, and concessions, capped by clientage and the buying off of the plebs with "bread and circuses." Even the office of Emperor occasionally went to the highest bidder.

Whereas ecclesiastic simony was probably the most common graft of the Middle Ages, the purchase or sale of public places, especially judicial and tax offices, became not uncommon in France and England in early modern Europe, as a complement to hereditary offices. Europe’s overseas colonization provided new avenues for corruption in the metropole as well as in distant imperial provinces. Corruption has always been part of and necessary to imperialism, involving the purchase and sale of fat charters, concessions, and contracts for the economic and fiscal exploitation of colonies, particularly for the extraction of nonrenewable resources and commodities. 

Corruption, then, is not equally prevalent always and everywhere.  In moments of radical economic transition and social change, when governmental and legal structures are inchoate and social conventions are in flux—in the United States from 1865 to 1890; in the new states of post-colonial Middle East, Africa, and Southeast Asia; in the lands of the ex-Soviet Union and its former satellites since 1989—corruption becomes rampant and glaring by virtue of unhoped-for opportunities for tempter and tempted alike. Grand corruption overtakes petty graft.

With its moving frontier, particularly from the time of the Civil War to beyond the fin-de-siècle, America excelled in corruption. The legendary robber barons and captains of industry, retrospectively celebrated as the founders of modern American capitalism, built their business empires with calculated recourse to the massive corruption of government—local, state, federal—for private gain.  In a climate of relative and widely condoned moral laxity, fraud and graft ran wild, particularly in the frenetic race for rights of way for railroads; for land grants from the public domain for the exploitation of timber, minerals, and oil; and for favorable tariffs, taxes, and business regulations. To achieve their ends, Cooke and Gould, Vanderbilt and Rockefeller, Huntington and Stanford, Frick and Carnegie spent vast sums to "fix" things. They competed in bribing senators and representatives of both parties, in suborning elections, in buying newspapers, and in seducing public intellectuals.

A few magnates, hoping to cut the cost of fixing things, themselves stood for public office, using their wealth to secure political power. The giants of certain industries, rather than fight each other in the face of relatively toothless government controls, colluded to form lobbies and, eventually, to merge their firms. As of the late 1870s, because of his fraudulent and illegal practices in building up Standard Oil, John D. Rockefeller became a notorious fugitive from justice. To elude process servers he kept crossing state borders until, fearful of being arrested and extradited, he holed up in his estate in Pocantico, New York, surrounded by security guards, to fend off servers of subpoenas. With time, eager to improve his image and status, the oil mogul began to funnel some of his tainted wealth into philanthropic works, prompting Mark Twain’s assessment that through "all the ages three fourths of the support of the great charities has been conscience-money."

In the twentieth century, America’s emergence as an imperial power could not help but bring about an efflorescence of corruption. Compared to the directly ruled Roman and overseas European empires, the indirectly linked U.S. empire gave rise to a military-industrial complex which became cause and effect of constantly rising public expenditures for enormous military contracts which, historically, have been exceptionally conducive to jobbing. The growth of this mighty "defense" establishment, with military bases and subaltern allies the world over, goes hand in hand with imperial America’s global reach for critical and invaluable commodities entailing enormously lucrative but also highly corruptible contracts. This grab is facilitated by the American lead in aeronautics, telecommunications, pharmaceuticals, and computer technology, all of which call for licensing, fraught with influence-peddling.

In this era of universal finance capitalism, yesterday’s pork-barrel and log-rolling politics has been overtaken by hyper-corruption, both straightforward and circuitous, legal and unlawful. With the sweeping deindustrialization of America, there is no longer a senator to represent the state of Boeing nor a corporate CEO—and future defense secretary (GM chief Charles Wilson)—to proclaim that "what is good for General Motors is good for America." The objectives have become altogether less insular: bribes, in the form of campaign contributions and gifts, are designed to influence, if not buy, legislative and administrative decisions to benefit giant interests, many of them transnational. Indeed, with the globalization of economy and finance, corruption has become global as well. Suitors and supplicants resort to it in the quest for business contracts and political leverage.

With corruption systemic in the U. S., not just mega-corporations and financial companies practice it but so do rating agencies and accounting firms. And it festers in the Old World where the Vivendi, Parmalat, and Afinsa/Escala scandals are analogous to the Enron and WorldCom scandals in the New World. Obviously not all the culprits are big-time corporate executives. There remain super-wealthy individuals who fix things as a matter of course. Bill Gates and Sergey Brin, Warren Buffet and George Soros do so aboveboard; the likes of Marc Rich and Boris Berezovsky act surreptitiously.  The latter know no national loyalty: Rich renounced his American citizenship to acquire Spanish, Swiss, and Israeli passports to facilitate staying ahead of the law; Berezovsky fled to the United Kingdom to escape Russian courts. Confirming Mark Twain’s maxim, all make large bequests to philanthropic causes.

Overall, however, most of the great tempters are faceless CEOs who seek to advance corporate fortunes along with their own. Together with well-funded lobbies and pressure groups it is they who do most of the giving to both political parties, leaving organized labor and civic groups far behind. Increasingly, business-friendly Republicans and Democrats, their elections and advancements heavily financed—hence swayed—by big corporations and trade associations, are hegemonic in the legislative, executive, and administrative branches of government at the federal, state, and local levels. The symbiosis between corporate business and corporate government is made possible by the revolving door between the private and public sector. Without severing their links to the Beltway the insiders become outsiders promoting interests pending an eventual return to power. To bolster their pedigrees many seek and secure affiliations with elite universities or think tanks. 

While out of power the highest-level and most visible politicos and functionaries monetize their experience and connections in government, corporate business, and high society at home and abroad. Jimmy Carter apart, ex-presidents today seek and command huge fees for oily corporate speeches. Former cabinet members and top advisors set up, join, or counsel high-powered consulting firms that engage in transnational influence-peddling and lobbying on behalf of domestic and foreign corporate clients, charging fees in keeping with their vaunted access to the inner corridors of political and corporate power: on the Republican side, James Baker III, Henry Kissinger, Thomas McLarty, Peter Peterson, and John W. Snow; Democrats include Madeleine Albright, Sandy Berger, William Cohen, Carla Hills, and Richard Holbrook.

James Baker’s Carlyle Group, with ex-President George H. W. Bush as its senior advisor, is prototypical of these corruption tanks, which, in collaboration with major law, investment, accounting, and public relations firms, constitute a formidable nexus of influence and power.  Retired senior officers of the armed forces similarly cash in on their credentials and access by advising defense contractors and performing as military analysts in the media.

The 21st century is witnessing the birth of a new concert of nations to be dominated by several great powers, not just one. Although their political systems differ radically, they are all anchored in and driven by a new form of state capitalism. The rivalries among the major state actors will be intensified by sharpened competition for access to or control of increasingly scarce resources—energy, food, and water. In addition population growth will continue to be centered in chronically unstable countries racked by poverty and malnutrition. Not a few of these wretched states are endowed with valuable natural resources controlled by narrow and venal inveterate elites.

The reversion to a multinational world system dominated by several great powers practicing a new kind of mercantilism is a boon to corruption. The corruption-mongers of state finance capitalism are working hand-in-glove with the creatively destructive robber barons and fixers of emerging and failing states. The former decry the latter for their crude and blatant corruption and nepotism all the while they wheel and deal with them. As for the likes of Blagojevich and Madoff, they will continue to figure as colorful supernumeraries while serving to deflect attention from the feast of vultures.




The Real Causes of Depression
Let’s dispense with the usual recap of bad news today and go straight to more important matters, like the weather. “Is that rain?” asked a co-worker the other day. “No. It’s the sound of leaves blowing down the street,” we speculated. And it was. Huge drifts of leaves have accumulated on the footpaths in the past week, swirled around by the wind and piling up in banks along the street. All the leaves on the plane trees that line Melbourne’s streets seem to have died at once during last week’s heat wave. Normally, in the autumn, the leaves fall at a statelier pace. The days get cooler and the seasons change at a more natural rhythm.

But not this year. They fell all at once. The whole natural cycle was condensed into just a few days, thanks to the heat wave that scorched the trees last week. And alongside huge piles of dead leaves burnt brown you’ll find the occasional dead brown possum. We stumbled on three the other day, walking up St. Kilda Road. It’s a veritable banquet of organic matter for the flies. The poor little possums lay on the ground, their prehensile tales curled up in a tidy little spiral. By the looks of things, dead possums do not bounce. The plane trees are not native to Australia (they were imported from Britain to Victorianise the place). The possums ARE native. But neither one is suited to the kind of extraordinary heat that set upon the city last week.

Sure, there are hotter places in the world. But if something is designed to live in one environment and finds itself in another, it probably won’t last long if it’s not adaptable. Tomorrow is expected to be another 43-degree day in Melbourne. Which brings us to the economy. Recessions are perfectly natural in the business cycle. Human beings take risks with borrowed money during a growth phase. Some risks pay off. Some don’t. A recession is a reckoning up of the risks. The bad investments are liquidated, asset values readjust, and the next cycle begins. You can only get a depression when the government and the monetary authorities take unusual steps-driven by political motives-to prevent the natural process of recession. This is why today’s policy moves are setting us up for a Depression. And it’s not the first time.

It’s widely believed that the Great Depression had its origins in the slow response of the Fed to the banking collapse that followed the stock market crash. That failure, so the theory goes, was followed by too little fiscal innovation and government spending by then U.S. President Herbert Hoover. But all of that claptrap is exactly wrong, we humbly suggest. The Depression was a foregone conclusion the minute the business cycle was hijacked by manipulation of the credit cycle. A recession is natural. A Depression is always man-made. That’s right; the origin of the Depression is in the credit boom that preceded it. The credit boom of the 1920s made it inevitable that the natural rhythm of the business cycle would be amplified and made more severe. The boom was boomier. The bust was...worse than it had to be.



It was made worse by government policies that put America into debt, allocated capital in the most inefficient hands possible while crowding out business investment, and locked in wages and prices higher than they ought to have been, further delaying the vigorous rebound in employment and wages you usually get in a recovery. To repeat, recessions are a natural and unavoidable part of the business cycle. Depressions are the bill you pay for trying to avoid recessions with even looser monetary policy and more government spending to stimulate consumption. What you need is a cleansing break. What you get is a money-induced fever of pointless economic activity, full of noisy cash registers, signifying nothing.

So here we are on a Friday, waiting for the Depression. How seen we get one depends, in some small part, on what Timothy Geithner comes up with next week and world stock markets receive it. Geithner unveils his plan to rescue America’s banks and get the credit crisis behind us on Monday. It had better be a good plan. What can you expect? Well, for one, we’d be really surprised if there wasn’t a suspension-at least for a period-of mark-to-market accounting. This would prevent the banks from having to realise losses on securities they don’t intend to sell, but are currently held on the books at values well below market value. Another element will be buying “toxic” assets from the bank. At what price? You’ll find out soon enough. It probably won’t be fair value. But it won’t be so far below fair value that it forces the banks to realise huge losses and require even larger infusions of taxpayer capital.

Not to be a stick in the mud, but do you get the feeling that the Feds are already one or two steps behind in the game of “prop up the falling asset values”? Bloomberg reports that, “Moody’s Investors Service is reviewing the ratings of $302.6 billion in commercial mortgage-backed securities as real-estate values drop and property owners fall behind on payments.” Yes. It all feels a bit like the chart below. It’s the dreaded “Black Swan Formation.” We have asked Swarm Trader Gabriel to take a look at it and will let you know next week what he has to say.

Finally, we have been dodging the question of how you deal the infinite growth in a system with finite resources. We’ve been dodging it mostly because it’s such an abstract and theoretical subject that we fear we will bore you to death, and it is not good to kill your present or future customers. But since we are fundamentally optimistic about the answer, let’s push on! The answer is in the architecture of the system you’re talking about and the energy inputs it requires. We have a global economy that’s developed a great deal of complexity thanks, in part, to an abundance of credit. It’s a system of systems built on two key inputs: credit and energy.

The more important input to the current world order is cheap energy. It began when Colonel Edwin Drake drilled his first oil well at Titusville, Pennsylvania in the spring of 1858. The world has never been the same. With the huge amounts of energy available from petroleum came the Industrial Revolution, the acceleration of the division of labour with mechanisation, dramatic increases in agricultural yields (allowing for a major structural shift in employment as fewer people were engaged in growing food and more in making things), the growth of large urban population centers (and later the exodus to the suburbs and the housing boom as the cities went bad), and all the many capital investments and institutions that are somehow related to the fact that energy has been cheep and abundant for the last one hundred fifty years.

So is all that really collapsing now because of the fundamental physical limits on the amount of energy we can get from oil? Can an economy that’s evolved around oil as the chief energy input survive when its rate of growth has been so artificially accelerated by easy credit and fractional reserve banking? See. We told you. It’s a pretty ambitious question. John Robb posts an answer over at his Global Guerillas blog. Robb quotes from Joseph Tainter’s book, The Collapse of Complex Societies. “The method of collapse favored by Tainter as a tipping point is defined by a fundamental change (assumption level) in the underlying costs of running the society. He maintains that every great society is driven to the heights of its organizational potential by leveraging a ‘free’ (for all intents and purposes) energy input. “Unlimited access to this energy resource allows them essentially ‘free’ problem solving and rapid recovery from mistakes. However, once that ‘free’ energy becomes erratically available or expensive, the cost/benefit equations of many (if not most) of that social system’s evolved solutions turn decidedly negative. Collapse, at that point, is inevitable. In our case, this ‘free’ energy input would be fossil fuels (the negligible cost of which underwrites all social solutions).”

In a closed system, the amount of energy available to you is finite. In an open system, it is not. The Earth is an open system. Energy rains down on the planet everyday in the form of solar radiation. We do not, however, have a global economy that’s scaled to live and produce off this kind of energy. Your editor’s guess is that we are headed to a fundamental reorganisation of the world’s economy that will be driven by how we get and use energy. The current system of production is based on cheap energy for the production of goods which are consumed with the help of cheap credit. A graph of the growth of Wal-Mart stores across the U.S. from 1965 to today (where Wal-Mart became the largest private employer in America) reminds us of that scene in War Games with Matthew Broderick. Only in the Wal-Mart example you have little nuclear explosions of consumerism. They should probably be red though, instead of green, those “store strikes.” America bombing itself to debt by cheap Chinese goods imported on container ships (efficient transportation) and distributed via Wal-Mart’s warehouse network (cheap energy and good logistics).

Add to this whole system the historically cheap cost of labour inputs (mostly in the Far East), and you have a global system buckling under its own excess and complexity after an enormous but abnormal rate of growth and innovation. As Bill points out below, creative destruction is a normal part of the business cycle. It’s essential, in fact. And while the Austrian theory of the credit cycle is becoming vogue now for its successful prediction that a boom in credit leads to a later bust, a lot of Austrian theory is also focused on entrepreneurship and human action and wealth creation. If you spend some time in that part of the Austrian textbook, you might actually be encouraged about the future. Why? Entrepreneurs love recessions. Not only is it a chance for investors to buy assets at a discounted price, it’s a time of reorganisation of economic life. People still have everyday wants and needs. And in a recession, there is much less competition. Most people are inclined to be conservative and take fewer risks with their capital.

This is why the entrepreneur is the hero of Joseph Schumpeter’s capitalism. The capitalist provides surplus capital. But real business innovation and risk-taking comes from the entrepreneur. During a recession, he can form a long-lasting relationship with his customers. But what does that have to do with the current situation? For the better part of one hundred years global trade has expanded, bringing more and more people into the world trade system. We suspect now that it must contract and eventually reorganise itself into smaller, more scalable systems. These smaller systems will produce and use energy more efficiently because they have to. Of course no one is sure what it will look like yet. But it’s likely to be a lot different than what we’re used to. It will have to be, if we’re going to successfully adapt. We have an idea of what the characteristics of these smaller systems will be and will tell you about them next week.

But from an investment perspective, your Permanent Portfolio ought to maintain some small allocation of capital for aggressive growth stocks, especially in the energy space. They will be key to the success of any system which evolves out of the disintegration of the present one. So yes. In a closed system without new energy inputs, there are inescapable limits on growth. We reckon the rate of growth is about to slow down dramatically (contract) as the complex systems and institutions supported by cheap credit and cheap energy collapse. But this does not mean we plan on finding a cave to hide in so we can curl up and die. Far from it. There is only one way through a time like this. You have to have a plan. You have to use your own brain. And you have to have some idea of what’s coming so you can put yourself in a position to avoid the calamity and profit from the opportunity. All easier said than done. But what else are you going to do? Wait for your government check? More on “The Plan” next week. And in the meantime, keep an eye on the efforts of the people who have the most at stake in the current system-the banksters and the Feds-to keep it alive. We reckon there is only one logical way for them to go, and we’ll tell you about it next week too.


46 comments:

Phil said...

A BBC News 24 reporter used a particularly bad choice of words today: "We expected these numbers to be large, and they haven't disappointed" (he was talking about USA unemployment figures)

Anonymous said...

If you are talking about toxic hope as the wishful thinking that unsustainable economics will continue, i agree that wishful thinking is useless and harmful.

However, in this blog you often seem to cross a line into a deeper nihilism .

In the larger regard, hope is never "toxic". neither are faith or compassion.

i agree that a system is most likely over. but systems, times and places always end. so do each and every one of us.

That does not become a reason to abandon faith and hope.

the very point of faith and hope is that they transcend this world of impermenance and suffering..

it doesn't matter if faith and hope fail to pay off materially- that's not their purpose...

to decry it is to become a nihilist.
Sometimes commentary here reads as from a group of nihilists who gloomily pronounce plans for their own subsistence survival while rejoicing in the downfall of others as "what they deserve"...

Is it not contrary to the idea that you are being helpful?

sometimes it smacks of the bitter academic who wants to see the elites fall for not recognizing genius ( ala Karl Marx)

Perhaps wisdom parted as advice to others should be tempered with tolerance for the faults of beings, not pointed to as a way of feeling superior?


just asking...

jal said...

What is the best stimulus for the economy?
If I deposit $100,000 in the bank it will have a 10 time effect ($1,000,000). That seems to be a good stimulus.
However, the governments are saying that they want people to spend and not to save.
Is the multiplier effect better by spending or by saving? I don’t see any difference. (Except that I would end up with no money and some rich dud would end up with a bigger bank account from my spending spree.)
jal

Ilargi said...

Anon, 5:06

First, I think you use the term nihilism (and repeatedly) without truly knowing what it means.

Maybe this helps, from Wikipedia:

"Nihilism (from the Latin nihil, nothing) is a philosophical position that argues that existence is without objective meaning, purpose, or intrinsic value. Nihilists generally assert that objective morality does not exist, so subsequently there is no objective moral value with which to uphold a rule or to logically prefer one action over another."

I doubt there are many people here who recognize me in that description. What I said above is that capitalism is dead, and therefore so is the form of organization our societies have been built on.

As for faith and hope: they tend to become blind, and I don't think that's such a good thing. There's a great story at dieoff.org from a concentration camp survivor who claims that hope is what made the victims succumb to their fate, and that without it they would have fought harder to survive.

Having hope and faith that our present political and economic systems will somehow rise up again, or turn around, in Obama's words, doesn't seem to me to be the best way to approach the future.

Not all hope is necessarily good, nor is all faith. It all depends on what you believe in, and what you hope for. Clinging to notions that are already dead, though it may be the most common trait among people, prevents people from moving forward with their lives. Which in times of drastic changes, and that is where we are, is a handicap, not an asset.

I can take this a bit further: we are people who plan our future lives, we buy homes, we pay into pension plans, we rely on having money when we stop working at age 65, we do all these things.

But the homes we bought are losing any value they once had, and our pension plans lost some 40% in just the past year. For 90+% of people under 55, that dream, hope, faith, call it what you want, will never happen. Still, how many people do you know who have today accepted that as a fact? It's much easier to BELIEVE that a new president will repair the leaks in the boat. But he couldn't even if he wanted to.

Why would hoping for something that is illusional, that will never happen, be a good thing? Sure, 1% of the people in Dachau survived. Is that an excuse for the other 99% to die hoping, instead of doing it fighting?

Anonymous said...

@Ilargi - "the chances for more and more taxpayer trillions being doled out also rises exponentially."

What do we care if a lender is so foolish as to continue extending credit? If the Chinese, Saudis, et al want to pony up an additional $1T, $5T, $10T, why should we deny them the chance?

I mean, it's not like it's gonna be repaid or anything. Did the Federal Republic of Germany (West Germany) inherit either Weimar or Nazi debts in 1949? Of course not.

Well, governments aren't the only thing that are going to change over the next few years. Entire national charters are going to be amended or re-invented similar to the good/bad bank scenario.

The "New USA" won't even have to default/repudiate the former's debt obligations. We'll merely point to the door down the hallway marked "Old USA" to the bill collectors trying to recover their loans.

GreenMan said...

The media (traditional and new) have been referring to "the stimulus package". I hope we all realize that this is actually "the FIRST stimulus package" (or second, if you count the $600 giveaway last year). I expect another one in six months, and another one next year, etc.

This is, or should be, the CPR package - make sure the economy's airways are clear, keep it breathing, and try to get bleeding under control. Stabilize the economy enough to get it to the emergency room.

Some of its provisions are particularly heinous when viewed in this light. Give a tax break for buying a car? Really? No, we need to spend money building a society that no longer needs cars.

Give a tax break for buying a house? No, we need to allow housing prices to fall another 50% or more, then stabilize at levels people can afford.

What it really needs to focus on is re-enforcing the safety net - extending unemployment benefits, etc. Keep people alive while the generation-long task of adapting the economy to new realities begins.

Anonymous said...

I enjoy the contrast between Anon's 5:06 note today, and Ilargi's post. Anon--Faith and hope I don't believe are good examples of "living in the moment". They are based on future belief systems. I respect your statement about tolerance for the faults of beings. If one believes in the sacredness of all life, there are no evil deeds. This is a difficult realization to come to, but once one reaches that conclusion, it becomes right. But perhaps I've just been reading too much Joseph Campbell lately. What Ilargi wrote today is very prophetic, and that is his reason for writing it, simply to help people. How we wish to deal with it in our own live's is up to each of us. I agree with the dancing part. But I also agree with trying to get the word out so less suffering may be needed for a larger number of people. In the end, it will just come down to luck and, dare I say, a precise order of the universe? Fear, however, is not an emotion which is very productive, overall. There are many subjects one could bring up, which I think will describe life for the better after some of this comes to pass. I like to think of those things, instead of the painful process of getting there. The fate of the individual in the big picture is irrelevant.
LB

Anonymous said...

Non Seasonally Adjusted U6 is at 15.4%

Non Seasonally adjusted U3 is at 8.5%

In a depression it doesn't matter which season it is, it's all going downhill anyway...

Ilargi said...

Here's the hope and faith not being what you think they are story:

'This Way for the Gas, Ladies and Gentlemen

“Religion is the opium of the people,” Henri, who is a Communist and a rentier, says sententiously. “If they didn’t believe in God and eternal life, they’d have smashed the crematoria long ago.”

“Why haven’t you done it then?”

The question is rhetorical; the Frenchman ignores it."

ca said...

Ilargi/Stoneleigh --

Eric Janszen and others are asserting that government intervention will at some point include the purchase of stocks for the purpose of supporting the stock market.

Do you agree with this? If so, what would be the unintended consequences?

tooearly said...

I get the feeling that you really believe that the powers that be are sincere in their desire to make things better...and not just for themselves.

tooearly said...

But reading this , i take that back: "It's much easier to BELIEVE that a new president will repair the leaks in the boat. But he couldn't even if he wanted to."

Ilargi said...

More Borowski:

The Hope That Kills

"Despite the madness of war, we lived for a world that would be different. For a better world to come when all this is over. And perhaps even our being here is a step towards that world. Do you really think that, without the hope that such a world is possible, that the rights of man will be restored again, we could stand the concentration camp even for one day? It is that very hope that makes people go without a murmur to the gas chambers, keeps them from risking a revolt, paralyses them into numb inactivity.

It is hope that breaks down family ties, makes mothers renounce their children, or wives sell their bodies for bread, or husbands kill. It is hope that compels man to hold on to one more day of life, because that day may be the day of liberation. Ah, and not even the hope for a different, better world, but simply for life, a life of peace and rest.

Never before in the history of mankind has hope been stronger than man, but never also has it done so much harm as it has in this war, in this concentration camp. We were never taught how to give up hope, and this is why today we perish in gas chambers.

Borowski, pp. 121-122

Ilargi said...

Tooearly

We may be able to agree you chose an appropriate screen name. With all respect.

Ilargi said...

ca said...
Ilargi/Stoneleigh --

Eric Janszen and others are asserting that government intervention will at some point include the purchase of stocks for the purpose of supporting the stock market.

Do you agree with this? If so, what would be the unintended consequences?


This has been going on for ages. The losses are obviously shattering for you and me.

Anonymous said...

Illargi,

When you say capitalism is dead, are you referring to the current structure or are you referring to the death of the market a la Marx?

Fuser said...

Ilargi/Stoneleigh,

You may now close down theautomaticearth. Larry Kudlow just called bottom. Thank you for your efforts. -Fuser

GreenMan said...

"Suddenly, the probability emerges that few of today's governments will be here in a couple of years time; they will be replaced, and replaced again if they fail to come up with credible solutions. And the solutions will be national rather than global, supportive of the local society envisaged by List rather than the failed cosmopolitan vision of the neo-liberals."

====================================

Then the solutions will be regional, rather than national. Then they will be local, rather than regional. And our world will shrink to that which we can visit with a day's walk, or perhaps a day's bicycle ride.

In the 18th and 19th centuries there were still blank spaces on the map, which European explorers gradually explored and filled in. There are no blank spaces, now, except perhaps what Google Earth does not provide.

Yet, as societies become unstable and retreat from global society, those blank spaces will re-appear and expand. If years go by without contact with, say, Pakistan, how much will we really know about what goes on there? The world will once again be a large, mysterious place.

Orion said...

@Fuser:
"You may now close down theautomaticearth. Larry Kudlow just called bottom."

Yessss! And to add to it, we have this gem:

Bank of America’s CEO Rejects Idea of Nationalization



"The idea of nationalizing the bank wasn’t even a “remote possibility,” Lewis said in an interview today on CNBC television. He said “categorically” that the company won’t go back a third time for U.S. aid and that he “has the leeway” to manage the bank independently of the government."


I feel SO good now. Let's all go dancing! Woo hoo!

(For the humor impaired - that was sarcasm)

Orion said...

@Ilargi and the hopeful Anon:


"It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change."
- Charles Darwin.

I think this quote appeared once on TAE. I am often reminded of it these days.

Anonymous said...

Hope and faith in politician, banker, economist, man in general – sorry, you lose!

Hope and faith in the one and only God, Jesus Christ – you win and win and keep on winning!

Terry

jal said...

Here is the actual paper submitted to the Senate.
http://appropriations.senate.gov/News/2009_02_02_The_American_Recovery_and_Reinvestment_Act_of_2009.pdf?CFID=5252439&CFTOKEN=65761514
The ‘‘American Recovery and Reinvestment Act of 2009’’

tooearly said...

right you are.
many of us were tooearly a calling for the crash as well.

tenthousandmilemargin said...

Ilargi,

I see you are predicting the end of democracy and capitalism now.

That seems rather a big call to make without including a supporting argument.

If you meant that the USA would become a socialist dictatorship, or the UK, or some other country, I'd be interested to hear your argument.

But it sounds like you mean all countries, everywhere.

Since capitalism has survived the fall of numerous empires already, and most recently the Great Depression and WW2, some logical support for your argument would be in order. Or is it just a pronouncement?

Mugabe said...

It's interesting how there are roughy three separate narratives about the economic crisis evident in the TAE articles and comments:

1) The CNBC narrative of the Kidlows and Cramers et al. about where is the bottom, when is the recovery, etc. and all back to business as usual.

2) The leftist intellectual narrative, pushed along by those still smarting from the drubbing they took from Reagan and Thatcher almost 30 years ago, and hoping the current crisis will enable them to turn the tables. The Guardian article from today falls in this category, predicting the "revival of the economic activity of ... a state characterised by justice and efficiency." The efficient and just state managed economy is like the unicorn, fondly imagined but never yet observed. Hope springs eternal. And there are the unreconstructed like Robert Reich, who imagine the political clock simply turning back 30 years.

3) The doom narrative of Ilargi and others, who believe it's all dead and over, and just wait impatiently and with a bit of scorn until everyone smells the corpse.

/thehangedman/ said...

Mugabe: And then there's Terry.

Mugabe said...

There is perhaps a fourth narrative that I should have mentioned -- from Buiter, Denninger, Shiff, Shedlock et al. which says quit the debt cold turkey, suffer, and pick ourselves up gradually, but without necessarily a reversion to '70s policies.

rapier said...

We only collapse if our elites allow us to collapse. Through either ignorance or intent. Among our elites and their spokesmen, more and more, the right has the intent. Everyone else embraces ignorance but they don't really count.

A more desirable social order, one where people act more conservatively, out of fear or total involvement in simple survival, can be achieved with economic collapse.

To a point. Corporate asset values must be maintained and the current holders and managers of corporations must stay in place.

http://examinedlife.typepad.com/johnbelle/2003/11/dead_right.html

el gallinazo said...

@Mugabe

"There is perhaps a fourth narrative that I should have mentioned -- from Buiter, Denninger, Shiff, Shedlock et al. which says quit the debt cold turkey, suffer, and pick ourselves up gradually, but without necessarily a reversion to '70s policies."

It strikes me that this is also the position of I&S with two caveats:

1) They see the Greater Depression as far more severe than Shedlock (who does see it as very, very severe.)

2) They would like to see federal governments play a role to prevent citizens from actually dying en mass from the catastrophe. Most Libertarians take a perverse pleasure in seeing people die from poverty. It's an animal dominance thing probably akin to male silverback gorillas killing all the infants when he deposes the recent boss gorilla.

el gallinazo said...

@tenthousandmilemargin

"If you meant that the USA would become a socialist dictatorship, or the UK, or some other country, I'd be interested to hear your argument."

Correction - National Socialist dictatorship.

Argument - open your window and look out.

Ilargi said...

" tenthousandmilemargin said...
Ilargi,

I see you are predicting the end of democracy and capitalism now.


I'm not predicting it, I'm saying it's already happened. Capitalism died when the first bank bail-outs took place, and its demise gets more obvious with every dollar of your money that is used to prop up institutions that have lost out in capitalist games. If they are not allowed to fail, there is no capitalism. It's silly to think you can temporarily suspend the entire principle your economy is based on. Once suspended, it dies.

Democracy died when the system became One Dollar One Vote. This allows for bank bail-outs, which make no sense for ordinary citizens, and only benefit the rich. It's hard to come up with a more anti-democratic idea.

"If you meant that the USA would become a socialist dictatorship, or the UK, or some other country, I'd be interested to hear your argument."

There is no such thing as a socialist dictatorship, that's a contradictio in terminus.

bluebird said...

Catherine Austin Fitts latest: Financial Coup d'Etat

To paraphrase...
We are experiencing a global “heist”. Capital is being sucked out of country after country.

http://solari.com/blog/?p=2058

scandia said...

The Borowski posting challenges politically correct thinking, faith based thinking. The dark tale reminded me of another, the Soviet Gulag. In 2004,Nikolai Getman, a painter and survivor of eight years in the Gulag, died. Over a 40 year period he secretly painted from memory his experience in a Gulag work camp.Unlike the Nazis who kept a visual record of their " way of life " the Soviets destroyed all images of the Gulag. It is a dark history of the Soviet era that Russians still have not examined deeply.
I ordered the catalogue and am reviewing it again this morning. Some 50 million people died in The Gulag and there is no record so far of any person being prosecuted for such a crime.In fact there are those in Russia to-day who call Stalin a hero. It is good to be reminded of the Heart of Darkness in mankind in these times when I " hope" that the criminals who have brought the world economic order to its kness will be charged, prosecuted and punished. Sigh, it is not likely. Just as a few scapegoats were selected to close the Abu Graib chapter so it will be with the nest of vipers in the beltway. Let's have a prayer meeting and forget all that stuff! I wish I could erase that damn Abu Graib image from my mind.The Heart of Darkness respects no national boundaries.

redcatbiker said...

http://www.nytimes.com/2009/02/07/business/economy/07bailout.html?_r=1&partner=rss&emc=rss

Published: February 6, 2009

WASHINGTON — After weeks of internal debate, the Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets.

The new financial industry rescue plan, to be outlined in broad terms on Monday in a speech by the Treasury secretary, Timothy F. Geithner, will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks.

The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline. The goal is to relieve the banks of their worst assets so that private investors might then provide more capital.

Officials hope that that part of the plan is not labeled a “bad bank” administered by the government, although they expect that some might call it that.

No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis. But by relying on a combination of private investors and government guarantees, the administration hopes to reduce its exposure to losses and avoid the problem of having to place a value on assets that the institutions have been unable to sell.

A central element of the plan would be a major expansion of a lending facility begun in November by the Federal Reserve Bank of New York when it was headed by Mr. Geithner. The program, which was initially financed by $200 billion in Fed money and $20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration. ...

Anonymous said...

@ el gallinazo "Most Libertarians take a perverse pleasure in seeing people die from poverty. It's an animal dominance thing probably akin to male silverback gorillas killing all the infants when he deposes the recent boss gorilla."

I'd love to see the polling on that one. If you can't produce evidence, you'll need to retract that one.

el gallinazo said...

I don't respond to nameless people. It's a classist thing.

Bigelow said...

The revolving door between government and corporate positions became commonplace awhile ago. Democracy died with the rise of the socially uncontestable corporate entity. The powerful captured the government, well before the current blatant privatize the gains--socialize the losses outrage. It was always $1 = 1 Vote.

GreenMan said...

The capitalism that is in the process of dying is the Chicago School/Friedman/Thatcher/Reagan brand of free-market fundamentalism and the new Gilded Age it funded. Like a brontosaurus whose head has been cut off, but the body hasn't gotten the message yet that it is dead, it is still stomping and shaking and churning up mud, but the results are inevitable.

Pure central planning/totalitarian socialism has been put to rest. Pure predatory laissez-fair capitalism is dying. The question is not now whether there will be a mix of private and public sector, but what the particulars are. The society that gets it right enough will live on to face subsequent challenges of resource shortages and environmental degradation. The ones that don't, will shatter and suffer depopulation sooner rather than later.

Democracy? The last time we had one of these little dust-ups it disappeared for 2500 years. A noble idea, maybe we'll try it again, someday.

Anonymous said...

@ el gallizano- Thanks for responding. Now if you would like to respond to the question that would be great.

DIYer said...

@Fuser:
If Kudlow called a bottom, I'm loading up on ultrashorts. It'll be like taking candy from a baby...

Anonymous said...

in his 1933 paper--a best one on the debt-deflation theory of great depression ever written--Irving Fisher concludes: "the way out are either via laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place."

He further stated that "[i]f the debt-deflation theory of great depression is essentially correct, the question of controlling the price level assumes a new importance; and those in the drivers' seats--the Federal Reserve Board and the Secretary of Treasury, or, let us hope, a special stabilization commission--will in future be held to a new accountability."

the question is, ergo, how to maintain the price stability through reflation. Steve Keen has suggested that it should be done through wage increase which may be counterintuitive but does make sense. instead of injecting capital into the troubled banks, the money should be given to the wage earners and retirees by raising wages (especially the minimum level) and social security payments. of course, he does not believe such an approach would be taken. not in a country controlled by the moneyed class at least.

z

el gallinazo said...

noname

I am afraid my sense of irony is lost on you.

el gallinazo said...

I have this increasingly foreboding feeling that Obama will turn out to be the Carlos Menem of the USA. A hip, well spoken younger man of apparent populist persuasion; seemingly progressive and a champion of the working class, who once in power sells out to the financiers without qualm or reservation, and completely screws the very people who put him in office. I am not saying this is a fact - just an increasingly strong foreboding.

tooearly said...

"Who once in power sells out"?
Nah, that happened long ago...the evidence is abundant

Anonymous said...

@el gallinazo,

Seriously, you keep responding. Since I take it you have no poll to support your thesis about Libertarians, do you have a reason for thinking that libertarians take perverse pleasure in the suffering of others?

noname

el gallinazo said...

@noname

Now that you have a name, I can respond in good conscience. Yes, I did take a poll both of silverback gorillas who had committed infanticide and self-proclaimed and generally acknowledged Libertarians. The poll consisted of one question: 1) Do you consider yourself a narcissistic asshole, solely interested in your personal aggrandizement and totally or primarily indifferent to the suffering of others in the process?

Among the Libertarians polled were Ayn Rand (through a medium), Ronald Reagan, Gordon Gecko, Allan Greenspan (back when he was a buddy of Rand), Margaret Thatcher, Augusto Pinochet, Milton Friedman, and a hosts of others.

Results: 100% of the gorillas reported no opinion

87.3% of the Libertarians reported that they were not narcissistic assholes, but au contraire, God's gift to humanity. So the poll obviously proves you correct and I withdraw my comment and regret any emotional inconvenience I may have caused you..