Saturday, May 16, 2009

May 16 2009: Living standards will never be the same

Samuel Gottscho Sailing away to sea 1933
Central Park Lake framed by the Sherry-Netherland and Plaza hotels

Ilargi: What can you say when two of the brightest so far turn on a dime, change their tack 180 degrees and start talking recovery, growth in China and in emerging economies, and the US economy overall being in a much better state than it was just a few months ago, all of it within reach of our hands that are still largely filled with riches? If they were right, this wouldn't be much of a downturn, would it? It'd all have been pretty smooth sailing, a trip down easy lane, and nothing a few trillion dollars the government takes from its citizens can't solve.

Howard Davidowitz must be, though perhaps secretly, relieved that he is so old most of the upcoming mayhem will pass him by. And maybe that's what makes him such a sharp shooter. Needless to say, he doesn't share the Roubini/Rogoff enthusiasm for fairy tale endings. Nor does he have a high opinion of present government policies: "We're now in Barack Obama's world where money goes into the most inefficient parts of the economy.... "

Roubini and Rogoff are now invited to the White House, embassies and think tanks to explain their visions, but in the process those visions have changed to such an extent that they are now useless, worthless and clueless. Both the visions and their proponents, that is. Listening to what they have to say has become a waste of time. Just jot down this somewhere: Roubini says the bottom of the "recession" will take place between November 2009 and February 2010. Rogoff calls an upward bounce in fall 2009, and "perhaps" another dip "in the next couple of years". Easy to check when we get to those points in time.

Today's point in time brings us not only the huge retreat into savings and consumer withdrawal that Davidowitz talks about. The government faces its two biggest challenges to date, a fact that all by itself is more than enough to dispel the myth that the worst is over and the bottom in sight. The once largest and most important company in the country as well as the richest and most populous state are simultaneously threatening to blow up in the face of Washington, and likely before summer is here. Saving California for a few months may be doable, but there are 49 other states in deep trouble, and there is no way they can all be bailed out. As for GM, winding that mess down in an orderly fashion will take years, and banks, jobs and scores of politicians will go down with it.

You can temporarily hide problems in your biggest banks by tinkering with accountancy laws and regulations, and by pumping trillions into them. GM, on the other hand, is about to blow up in the middle of Main Street, where everyone can see it. Davidowitz sums it up in a few words that tell the whole story that everyone is so eager to avoid owning up to: "Living standards will never be the same"

"The Worst Is Yet to Come": If You're Not Petrified, You're Not Paying Attention

The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was "preposterous" to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates. "We're in a complete mess and the consumer is smart enough to know it," says Davidowitz, whose firm does consulting for the retail industry. "If the consumer isn't petrified, he or she is a damn fool." Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: "The worst is yet to come with consumers and banks," he says. "This country is going into a 10-year decline. Living standards will never be the same."

This outlook is based on the following main points:
  • With the unemployment rate rising into double digits - and that's not counting the millions of "underemployed" Americans - consumers are hitting the breaks, which is having a huge impact, given consumer spending accounts for about 70% of economic activity.
  • Rising unemployment and the $8 trillion negative wealth effect of housing mean more Americans will default on not just mortgages but student loans and auto loans and credit card debt.
  • More consumer loan defaults will hit banks, which are also threatened by what Davidowitz calls a "depression" in commercial real estate, noting the recent bankruptcy of General Growth Properties and distressed sales by Developers Diversified and other REITs.

As for all the hullabaloo about the stress tests, he says they were a sham and part of a "con game to get private money to finance these institutions because [Treasury] can't get more money from Congress. It's the ‘greater fool' theory." "We're now in Barack Obama's world where money goes into the most inefficient parts of the economy and we're bailing everyone out," says Daviowitz, who opposes bailouts for financials and automakers alike. "The bailout money is in the sewer and gone."

"That's Not the American Way": Chrysler's Bailout and the Road to Ruin

Chrysler's plan to close about 25% of its dealers is the natural outcome of a series of very unnatural events surrounding its bankruptcy, says Howard Davidowitz, chairman of Davidowitz & Associates. Specifically, Davidowitz was speaking about how the Chrysler bankruptcy was "hijacked" by the Federal government, which allegedly threaten creditors "if they didn't go along with the fiasco of turning the company over to the unsecured lenders." Barack Obama's plan is to "sustain the union" in an effort to secure future votes in five key Midwestern states, Davidowitz says, without hesitation.

"We the taxpayers are bailing out the union [and] bailing out Chrysler, which is an inefficient company that shouldn't survive and can't survive in the long run, anyway." More generally, the Chrysler saga is evidence of how "we keep putting more money into hopeless companies," he says. "That's not the American way. We let inefficient companies collapse and be replaced by more efficient companies. That's the only way this economy can work." By propping up inefficient companies and keeping zombie banks alive, Davidowitz says "we are exactly on the same path as Japan," which is now two decades into its economic malaise.

But there's one key difference between the U.S. and Japan: While they had about $16 trillion in savings and a 19% savings rate when their bubble burst in 1989, the U.S. savings rate was negative a year ago, a now a relatively meager 4.2%. "That's a big problem for the financial stability of the U.S.," says Davidowitz, who had a hard time envisioning an alternative to a very grim scenario for America: "With big government, mad borrowing, and not letting things fail, there's no way we can have [rising] living standards," he says.

Economic Recovery Still Months Away: Roubini, Rogoff

The U.S. economy isn't likely to recover for months, and even then will remain weak for a long time, two well-known economists told CNBC. Nouriel Roubini, co-founder and chairman at RGE Monitor, also known as Dr. Doom, and Kenneth Rogoff, professor at Harvard University's Department of Economics, both said the economy still faces serious challenges. "People talk about a bottom of the recession in June, but I see it more like six to nine months from now," Roubini said. "The green shoots everyone talks about are more like yellow weeds to me." "I think there will be a bounce in the second half of the year from the massive stimulus package," Rogoff said. "But I think the longer run trend is very slow, so we're vulnerable to dipping down again sometime in the next couple of years, like Japan."

Roubini said that the financial crisis was more than a crisis of confidence. "It was a crisis of excessive leverage of housing and the corporate sector," said Roubini. "We're not reducing the leverage, we're pushing the losses from the private sector on the government and increasing public debt. That's going to be a drag for growth." "Housing's going to take five years to recover, and we have a long way to go," Rogoff said. "The broader risks from the downturn are to the dollar and interest rates," Rogoff added. "There's more and more debt and if interest rates go up, we're going to feel it. It's hard to see how we'll have booming growth for the next five years." "I see slow growth for the next couple of years," Roubini said, "even if there is a recovery. Large budget deficits will push out growth."

Is The Crisis Over Yet? The CBO Weighs In
Confidence is returning to most credit markets, consumer spending is likely to rebound for some items (autos and housing repair are leading contenders), and firms in the US are starting to sound more optimistic.  On’s Economix yesterday, Peter Boone and I suggested that we are out of the panic phase of the crisis - in large part because the US fiscal stimulus has reassured people worldwide, but also because President Obama has had a broader calming effect.

Today, the Congressional Budget Office is pointing out that it would be premature to congratulate ourselves too much (disclosure: I’ve joined the CBO’s Panel of Economic Advisers, but none of the information here comes from them).  As you likely know, the administration is proposing to lend $100bn to the IMF, as part of that organization’s increase in resources following the G20 summit.  Peter Orszag, head of OMB, argued that there was zero probability of this money being lost, so $100bn should be "scored" for budget purposes as $0bn – which is how this kind of transaction has been handled in the past.  As the IMF likes to say, it is "the lender of last resort, but the first to be repaid."

After considerable back and forth, the scoring issue was refered to the CBO.  The CBO has reportedly decided there is a 5 percent probability of default by the IMF.  This is an extraordinarily important statement.  Most informed people just assume that the risk of IMF default is zero, because that would essentially constitute a complete breakdown of the global economy and payments system.  But nothing is zero probability, particularly in a world of massive financial panics, incipient protectionism, and improvised global governance. We can discuss if 5 percent is too high or too low; the CBO details are not out yet, so it’s hard to know exactly the time scale they are thinking about – my guess is 5 years. 

In any case, this estimate tells you that – even with the increase in IMF resources to close to $1trn, which will go through if the US approves this $100bn loan – the CBO thinks (a) the crisis is not over, and (b) there is a nonzero probability that the entire global system breaks down.  Take this seriously. Our point yesterday was: don’t throw another fiscal stimulus into the mix at this point, even the IMF – which has become a strong advocate of discretionary fiscal policy under some circumstances – is saying that it will not speed the recovery much.  Save the fiscal space for further stimulus for when you might really need it, i.e., the unlikely, but possible, confluence of circumstances that would constitute another serious panic phase.

U.S. Economy Is No Longer in 'Freefall,' Summers Says
The U.S. economy is no longer in "freefall," Lawrence Summers, director of the White House National Economic Council, said today in a pre-recorded video shown at a forum in Shanghai. "Statistics on sentiment and economic activity suggest a more mixed picture than they did two months ago," Summers said. "The economy appeared to be in freefall, much like a ball rolling off the side of a table, in October. Today, no one will describe the economy in that way."

Industrial production contracted at the slowest pace in six months, as output at U.S. factories, mines and utilities decreased 0.5 percent in April after dropping 1.7 percent in March, Federal Reserve figures showed yesterday. The Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.9 in May from 65.1 in April. "To be sure, the lull that we’re seeing now does not assure that a foundation for continued recovery has been established," Summers said. "It does not assure that when recovery comes, it will be sufficiently rapid to reduce employment on a significant scale."

Credit Card Defaults Reach Record Highs in April
U.S. credit card defaults rose in April to record highs, with Citigroup and Wells Fargo posting double digit loss rates, as the recession slashed more than 2 million jobs since the beginning of the year. "U.S. card credit quality continues to struggle," John Williams, an analyst at Macquarie Research, said in a note to clients. In March, investors gained confidence in the industry after American Express reported better-than-expected credit card default rates, suggesting cardholders' ability to pay bills could be stabilizing.

But the latest numbers dashed hopes of an early recovery, according to reports on the performance of credit card loans that issuers packaged into bonds and sold to investors. "April, in our opinion, still bears some beneficial trickle effect of tax refunds received by customers and therefore is seasonally a relatively better month," Scott Valentin, an analyst at FBR, said in a research note, suggesting a grimmer outlook for the industry in coming months. Citigroup -a big issuer of MasterCard cards- reported its annualized charge-off rate rose to 10.21 percent in April from 9.66 percent in March.

In addition, Wells Fargo said its charge-off rate increased to 10.03 percent from 9.68 percent, while JPMorgan Chase -a big issuer of Visa cards- reported its charge-off rate rose to 8.07 percent from 7.13 percent in the previous month. Discover Financial Services, the U.S. fourth-largest credit card network, said its default rate rose to 8.26 percent in April from 7.39 percent in March. U.S. unemployment—currently at 8.9 percent—is expected to approach 10 percent as the country endures its worst recession since World War Two. Credit card losses are likely to follow that way. If credit card losses across the industry top 10 percent, as some analysts and bank executives expect to happen later this year, loan losses could reach between $70 billion and $75 billion.

The exception in April was Capital One Financial, which reported lower defaults rates in its U.S. business, and beat analyst expectations, as it changed its customer bankruptcy accounting, waiting longer to declare the debts of bankrupt customers uncollectable. Excluding the benefit of that change, Capital One's credit card defaults were in line with March data. "We expect a 'catch-up' in May, which will likely cause a large spike in the May net charge-off rate" of Capital One, Valentin said. Capital One also surprised investors last week after U.S. regulators decided the bank is sufficiently capitalized to face a deeper recession.

Credit card lenders are trying to protect themselves by tightening credit limits, raising standards and closing accounts. They have also been slashing rewards, increasing interest rates and boosting fees to cushion against further losses. American Express was expected to release its monthly credit report in the afternoon. Citigroup shares fell 1.41 percent to $3.50, while Wells Fargo's stock declined 2.72 percent to $25, and JPMorgan Chase's stock dipped 2 percent to $34.83 on the New York Stock Exchange. Capital One was up 0.85 percent at $24.79.

Banks profit from capital raising
Leave it to Wall Street to figure out a way to win big from a government-mandated rush by banks to raise capital. Some financial companies including Morgan Stanley and Wells Fargo & Co. are using their own in-house bankers to advise them on large public stock offerings that are being done to bolster weak balance sheets following the conclusion of "stress tests" that regulators did on them earlier this month. These advisers don't work for free, even when they're doing deals for their own companies. The fees they charge will ultimately go back into corporate coffers, a roundabout way for the banks to generate profits.

Securities law experts say these maneuvers also can mask a company's financial health and potentially open the door for conflicts of interest. "Commercial banks that need capital are going down the hall and asking their colleagues for investment banking advice. Then they are charging themselves a fee for helping themselves," said Anthony Sabino, a professor of law at St. John's University. "That sure doesn't sound like it propagates independent thinking." These arrangements don't violate securities laws and the companies are fully disclosing that in-house advisers are part of the underwriting group. But Sabino and other finance experts still say this is something investors need to keep tabs on as banks look for ways to boost profits in tough times. One thing to watch is what kind of fees they charge.

It's not that the banks wouldn't need the services of investment bankers otherwise. Whether they hire their own staff or an outside firm, these advisers are helping them figure out how to raise money or expand their businesses. That could result in selling off business units, making acquisitions, issuing debt _ or as we've seen in the last week, selling common stock to the public. That has been the favored route to quickly raise capital in the wake of the government's May 7 release of the "stress tests" conducted on the nation's 19 largest banks and other major financial institutions. Those tests found that 10 of the banks need to raise a total of $75 billion in additional capital in order to be strong enough in case the economy gets even worse. That has spurred the likes of KeyCorp, Morgan Stanley and Wells Fargo to rush out stock offerings to fill the capital holes the government found.

Others that aren't required by the government to boost capital have decided to raise funds anyway. Bank of New York Mellon Corp., U.S. Bancorp, Capital One Financial Corp. and BB&T Corp. say they want to use the proceeds from common stock offerings to repay federal bailout funds received last fall. Since the results of the "stress tests" were announced, there have been about $20 billion of stock offerings from banks that accepted money from the government's Troubled Asset Relief Program, according to data-tracker Dealogic. The fees for advising those deals top $530 million. The typical fees for lead underwriters handling an initial public offering _ the first time a company sells stock to the public _ can run around 5 percent or more of the amount raised. Fees run around 3 percent to 5 percent when a company does a subsequent, or follow-on offering, which is what the banks are currently doing.

That means for a $1 billion follow-on offering, the underwriters get as much as $50 million in fees. "The bank ends up with the same amount of cash (from the stock sale) no matter who does the offering," said Philipp Schnabl, an assistant professor of finance at New York University's Stern School of Business. By hiring its own advisers, "they get to retain the profits," he said. In the last week, Wells Fargo raised $8.6 billion in a follow-on offering of common stock. Lead underwriters were JPMorgan Chase & Co. and Wachovia Securities, a division of Wells Fargo. For its work, Wells Fargo's Wachovia unit made nearly $35 million in fees. JPMorgan's cut was $78 million, according to a securities filing from Wells Fargo.

Morgan Stanley's in-house bankers were the lead advisers on its own $4 billion stock offering this month, receiving $105 million in fees from the transaction. Citigroup, which was also an adviser, got $5.5 million, according to regulatory filings. For both deals, the underwriting fees were below 3 percent, which is on the low end of current industry norms. Both companies declined to comment. These arrangements may be viewed as just moving money around within a company, but they do have some upside to them, said Bruce Krasting, a 25-year Wall Street veteran and now a private investor and financial blogger. The banks' own advisers could be in the best position to place the new equity since they already have relationships with existing shareholders like mutual funds, Krasting said. Those investors may also be inclined to hold onto their shares longer, rather than just flipping them to make a profit, he said. Even though these deals are perfectly legal, investors should remember that even an arm's length transaction might wind up just moving money from one pocket to another.

Feds Throw Jamie Dimon A Bone
Uncle Sam has granted JPMorgan's CEO Jamie Dimon at least a small consolation prize after forcing the firm and other senior lenders to take massive losses on debt tied to fallen automakers Chrysler and General Motors. Dimon's firm is scoring lead mandates to help both troubled auto companies restructure as well as handling the planned merger of Chrysler's finance arm with GMAC, resulting in lucrative fees for the bank. To be sure, those fees aren't likely to completely offset the roughly $2.5 billion JPMorgan lost after the government's auto task force arranged a retooling of Chrysler's debt shortly before the car company careened into bankruptcy and many senior secured lenders got back mere pennies on the dollar.

However, that JPMorgan was tapped to handle the Chrysler Financial-GMAC marriage underscores a certain quid pro quo that has developed between Uncle Sam and the bank, which slowly has become the government's de facto lender of last resort. That relationship has been blossoming since last year, when the onset of the financial market's unprecedented credit crisis led the Federal Reserve to arrange a shotgun marriage of JPMorgan and Bear Stearns, in order to prevent the latter bank from collapsing. Sheila Bair's Federal Deposit Insurance Corp. then called upon the bank to merge with Washington Mutual last year after the beleaguered Seattle-based thrift stumbled due to souring mortgages and faced a run on the bank.

JPMorgan has long been viewed as one of the healthier banks, despite the fact that it will face serious headwinds in consumer lending, including credit cards and residential mortgages. Dimon's firm was among the 19 largest lenders tested under the government's so-called stress test but wasn't forced to raise any additional capital. Meanwhile, its peers, including Wells Fargo, Citigroup and Bank of America, all were told to raise billions more in cash to gird for a potentially rough economic climate. Typical merger and advisory fees for Chrysler and GM transactions and debt restructurings could range anywhere from $40 million to $70 million, depending on the complexity of the deals, sources said.

However, copping favored bank status by the government has its perks. Sources have told The Post that JPMorgan may be called upon to gobble up smaller regional and super regional banks teetering on the brink of failure -- a move that plays right into Dimon's push to expand JPMorgan into an even bigger national franchise.

Government Money Is a Toxic Asset
Remember those "toxic assets" that were clogging the financial system a few months ago? Well, despite all the billions in government bailout programs, they're mostly still there. And in trying to clean up the system, the Obama administration has actually created a new category of toxic assets that banks desperately want to get off their books -- namely the U.S. Treasury's forced infusions of capital. We'll look at these unintended consequences of the bailout, but let's start by reminding ourselves how the toxic assets mess began. These were bundles of loans that were packaged into securities and then sold off in different slices that supposedly carried tailor-made risks and rewards. But it turned out the credit ratings on the bundles were unreliable, and investors began to fear that they couldn't trust what was inside the wrappers.

The panic began with "subprime" mortgage-backed securities, but it spread to other securities that were backed by student loans, auto loans and the like. These asset-backed securities, as they were known, couldn't be sold -- or even valued reliably -- and the big banks that held them began taking huge write-downs that pushed them toward insolvency. The Obama administration has struggled to revive the market for asset-backed securities. The problem isn't with securitization, they argue, but with restoring investor confidence. So they have launched a variety of schemes aimed at detoxifying the credit system that developed during the 1990s. Not coincidentally, the U.S. Treasury team during that financial boom included Lawrence Summers and Timothy Geithner, who are now Obama's top financial advisers.

To restart the securitization machine, Treasury and the Federal Reserve have proposed a series of programs with tongue-twister names. They include the Term Asset-Backed Securities Loan Facility (known as "TALF") and the Public-Private Investment Program (known as "P-PIP"). But these programs have had limited success, so far. The Treasury argues that securitized lending is slowly coming back, thanks to TALF. That program made available up to $200 billion in public loans to support new issuance of asset-backed securities. A Treasury fact sheet boasts that $13.6 billion of these new securities have been issued this month, more than double the combined total for March and April, with $9.6 billion financed though TALF.

That's all fine, but the new issues are a small fraction of the securitized lending that was taking place two years ago -- for the simple reason that investors remain wary of buying and selling the bundles of debt. In the fourth quarter of 2006, the total issuance of asset-backed securities (excluding mortgage-backed securities) was $250 billion; in the fourth quarter of last year, that total was just $5 billion. The market has come back a little from that low point, but not much. Private lenders are extremely wary of having the federal government as a partner. And this phobia about government money could actually cripple Geithner's plan for public-private partnerships to buy up toxic mortgage securities. After the public flaying of AIG executives' bonuses, financial CEOs became wary of taking P-PIP loans -- fearing that they would be attacked as profiteers or morons, depending on whether they made or lost money. Many analysts predict P-PIP will have few big-name players.

Fear of federal funds has become so acute that leading bankers are competing to see how quickly they can pay back last year's capital infusions from the Treasury. Jamie Dimon, the chief executive of J.P. Morgan Chase and perhaps the industry's most successful banker (a relative term), says he wants to pay the government capital back as soon as possible -- and as for P-PIP, forget it. Summers and Geithner keep hitting the credit restart button. But what if the securitization process itself is the problem? What if the mistake of the 1990s was that we strapped a casino to our economy, and let the roulette wheel take control? Summers and Geithner may want a better-regulated casino, but is that really the right way to build a new foundation for the economy?

You can argue the question either way, in the abstract. But the future of securitized lending will be decided, in the end, by the markets. The Fed can offer loans to encourage new issues of debt securities, and the Treasury can insist on better labeling for the bundles. But if investors don't want to play the securitization game, it's over. Rather than repackaging, the best solution, as with real toxic waste, may be to bury it.

Former Federal Pensions Chief Faces Criminal Probe
The former head of the federal pension insurer inappropriately interfered in a contracting process that ultimately led to the hiring of Goldman Sachs, JPMorgan Chase, and Blackrock to manage billions of dollars in assets and earn $100 million or more in fees, a federal watchdog concludes in a draft report distributed on May 14. BusinessWeek has learned that a criminal investigation into some of the allegations raised in the report has been requested by a group of senators and will begin shortly. The report calls into question the process used to award contracts for managing some $2.5 billion in assets at Pension Benefit Guaranty Corp. The report's author, PBGC Inspector General Rebecca Anne Batts, who will also handle the criminal probe, recommends that the Cabinet secretaries who oversee the agency consider whether the contracts should be revoked. The PBGC's acting director said the agency would decide whether to revoke the contracts.

Among other things, the report says Charles E.F. Millard, who stepped down on Jan. 20, improperly contacted some of the firms potentially bidding on the contracts and later sought and received job-hunting help from an unnamed executive of Goldman Sachs after the company had been awarded a contract to manage up to $700 million. The report also says Millard was warned not to engage in much or all of the activity it calls into question. The inspector general's inquiry was already under way before Millard's departure. Millard said earlier this month that he has been doing some consulting work while exploring different job opportunities.

All of this comes at a challenging time for the PBGC, which could become the steward of one of the large pension plans at bankrupt or struggling companies in the auto industry and elsewhere. Now, more scrutiny is sure to come. Representative George Miller (D-Calif.), chairman of the House Labor Committee, which released the draft report, announced that the committee will launch an investigation of its own, calling the questions over Millard's conduct "very serious." Herb Kohl (D-Wis.), chairman of the U.S. Senate's Special Committee on Aging, also announced a hearing, to be held on May 20, looking into the allegations and into broader concerns about the PBGC.

Senator Charles Grassley (R-Iowa) said in a statement that he and three fellow senators—Edward M. Kennedy (D-Mass.), Max Baucus (D-Mont.), and Michael Enzi (R-Wyo.)—also support further investigation. A spokeswoman for Kohl's office said Millard had received a subpoena to appear at the hearing. In a brief e-mailed statement, Millard's attorney, Stanley Brand, said Millard's efforts to improve the PBGC's financial health were "carried out in a transparent and ethical manner." The report says it didn't find evidence of criminal activity by bidders for the contracts, though the scope of the inquiry so far has remained internal. Spokeswomen for Goldman, JPMorgan, and Blackrock declined to comment.

The PBGC's board—Labor Secretary Hilda Solis, Treasury Secretary Timothy Geithner, and Commerce Secretary Gary Locke—has asked the agency's interim director to determine whether the contracts in question should be reevaluated. The PBGC insures defined-benefit pension plans—traditional pensions that pay retirees a set monthly amount for life—and as of Sept. 30 managed nearly $50 billion in assets for plans that have been abandoned by the companies that originally sponsored them, usually after bankruptcy or insolvency. At the heart of the inspector general's inquiry is a controversial decision made in early 2008 to gradually shift billions of dollars from bonds, which make up the bulk of the agency's assets, into stocks, real estate, and private equity investments. The goal, supporters say, was to improve returns and therefore the odds that the agency's gap between its assets and its potential obligations—about $11 billion, currently—would close, avoiding the need for a government bailout at some point down the road. Critics called the move hasty and ill-informed and said it would subject the agency's assets to too much additional investment risk.

Although the shift was approved in February 2008, a PBGC spokesman said no assets have been moved yet under the "strategic partnership" contracts to farm out asset management. "We will work with our board to decide whether these contracts should be terminated and whether strategic partnerships fit into the board's investment approach going forward," said Vince Snowbarger, the PBGC's acting director, in a written statement. Future PBGC directors won't be allowed to be directly involved in procurement, he added. In addition to the contract Goldman Sachs was awarded to manage up to $700 billion, Blackrock and JPMorgan each received contracts to manage up to $900 million in real estate and private equity assets, the report said.

Goldman's supporting role in the inspector general's report once again highlights that company's often cozy connections with the halls of government power. Those ties have earned the firm the nickname "Government Sachs," from the fact that Henry Paulson, President George W. Bush's last Treasury secretary, once ran Goldman, to the close ties between Goldman and AIG, and the bank's receipt of $12.9 billion of AIG's bailout money. Meanwhile, President Barack Obama received nearly $1 million in campaign contributions from Goldman employees, second only to University of California workers. The PBGC report documents 29 emails between Millard's PBGC account and a Goldman pal, including the extensive assistance by the banker in Millard's job search. That assistance ranged from making introductions to passing along Millard's résumé, biography, and press clippings to CEOs at other financial firms. Millard called the allegation of impropriety "ridiculous" and said he had a "deep personal relationship" with the Goldman executive.

In a written response from Millard that is attached to the report, the former director insists: "I always acted in the interests of the agency." In a letter Millard sent Batts, dated Apr. 28, Millard defends his position on the PBGC panels as an attempt to get things done at an agency that in the past hadn't always moved quickly. And some of his defenders imply there may be a political motivation to Batt's report since Millard is an active Republican. Batts notes that her inquiry began long before the November 2008 election and says she has seen no evidence of partisanship. The investigation, begun on Sept. 17, 2008, as a simple review of the PBGC's implementation of its new investment policy. But within a few weeks it had broadened into a look at Millard's behavior after Batts was approached by an unnamed whistleblower with specific allegations. By Oct. 31, when the PBGC was to issue the contracts with Goldman, JPMorgan, and Blackrock, Batts suggested holding off, but Millard wouldn't, Batts said in a telephone interview.

According to the inspector general's report, a whistleblower accused Millard of contacting executives at firms bidding for PBGC business "in order to enhance his future employment prospects." The inspector general's subsequent investigation found 29 emails documenting the extensive efforts the unnamed Goldman executive made on Millard's behalf. The draft report notes that some PBGC employees involved in the investment portfolio "believed that the former Director made some decisions based on his relationship with certain industry members and not on the merits themselves." Because Millard didn't record details of his calls, visits, and emails, "we could not determine whether [his] communications with Wall Street firms had any impact on his decisions," the report says. However, Millard's actions "made PBGC vulnerable to allegations of bias, improper influence, or abuse of position."

Many of the questions around Millard's conduct stem from his "unprecedented" role on the committee that evaluated bidders and awarded contracts; ordinarily, PBGC directors haven't served in that capacity. Batts says she told Millard that serving on the committee was "unwise," but he continued when told there was nothing expressly illegal about it. Members of the committee aren't supposed to contact bidders during a "blackout" period, when they are being evaluated—something Millard was told several times, the report says. Yet Millard made phone calls to 8 of the 16 firms bidding on the contracts, including all four finalists and the three firms that were ultimately chosen, Batts wrote in the report.

At least nine calls were made from or received at Millard's phone to Goldman Sachs during the three-month blackout period, most to an executive directly involved in the bidding process, Batts wrote. Another six calls were made to or from a key Blackrock official, and at least 10 calls to or from a managing director at JPMorgan. The report says Millard's explanations for the contacts changed over time, and it suggests that several of those explanations didn't hold up. Batts called the contacts a violation of PBGC policy and federal acquisition regulations. Millard's "improper actions raise serious questions about the integrity of the process by which the winners…were selected," Batts wrote.

A Bank Is Survived by Its Loans
In a mortgage market gone crazy with generous loans, no one was more generous than World Savings. Lots of banks offered mortgages that allowed borrowers to pay less than the amount of interest being charged, but World was virtually alone in making loans that let the borrower continue to make small payments for a decade, rather than two or three years. Most banks forced the borrower to start making much larger monthly payments if the amount owed — an amount that could rise each month if the borrower made the minimum payment — rose to 110 percent of the appraised value of the home when the loan was made. World saw that as stingy. It did not force the payments up until the amount owed was 25 percent greater than the original value.

You can’t get loans like that any more, of course. But World’s old mortgage loans live on. Other banks, where escalating monthly payments are either here or on the immediate horizon, are facing the need to foreclose or renegotiate many loans. Within a year or so, most of those loans will have vanished, for better or worse for the homeowners and for the neighborhoods those homes are in. Few of the World borrowers face such imminent disaster, however. And that is why it is fascinating to follow the progress of World’s mortgage portfolio. Some of those homeowners may end up all right, being able to wait out the depressed housing market.

And if the local housing market fails to recover? Homeowners there may still be able to wait out the process, making monthly payments that could well be less than the cost of a comparable rental. If such an “owner” thinks prices are unlikely to ever come back, he or she could rationally decide to stay in the home while doing little to maintain it. That would make the house even less valuable for the bank when it finally did foreclose, and it could also damage the value of nearby properties. No one expects renters to do major maintenance work, but in this case there is no landlord who sees the necessity of such spending. Would you like to buy the house next door? None of that will matter to World Savings. Golden West Financial, the owner of World, was bought by Wachovia in 2006, at the height of the mortgage boom.

Not realizing it might be acquiring a time bomb, Wachovia made things worse. World had demanded minimum annual payments of 1.95 to 2.85 percent of the loan balance, but that fell to 1.5 percent soon after the merger was announced. After the deal closed, Wachovia cut the minimum payment to 1 percent, thus offering the most generous terms at the time housing prices were most inflated. It was not until mid-2008, long after the housing market began to crumble, that Wachovia stopped making such loans. Wachovia is also gone, sold to Wells Fargo at the end of last year. The new Wells Fargo quarterly report paints a sad picture of the portfolio of “pick-a-pay” loans that World and Wachovia originated.

The amount owed on such loans at the end of March was $115 billion, which Wells estimates is 107 percent of the current value of the properties underlying the mortgages. Just over half the owners are paying the minimum allowed, causing their debt to rise each month. A loan-to-value ratio of 107 percent is bad enough, but it is an average and many loans are in much worse shape. For loans in California, the average is now 120 percent, and the figure is no doubt much higher in such troubled areas as the Central Valley and the so-called Inland Empire, where nearly a third of the California loans were made. Wachovia estimated that last September the loan-to-value ratio in the Central Valley was 132 percent. Since then, the median sales price of homes in that area has fallen another 20 percent.

In all, more than 70 percent of the pick-a-pay loans are in California, Arizona or Florida, three states where prices rose the fastest during the boom and have since fallen the most. Wells says it thinks 61 percent of the loans in those three states will not be paid as required by the mortgage, in contrast to 36 percent of the loans in other states. One sad aspect of all this is that World Savings said it tried to be more responsible than many lenders during the craze. It did not sell its loans into securitizations, so it knew it stood to lose if a loan went bad. Virtually all of the pick-a-pay loans were for less than 80 percent of the appraised value of the home, and the average was just 71 percent. World said it made loans only to those who could afford the stepped-up monthly payment after the reset, and said it did not lend to subprime borrowers.

For many years, the strategy appeared to work brilliantly. World had virtually no foreclosures, as you would expect in a world where the lender had a large equity cushion at the beginning of the loan and home prices went up year after year. But this is a different world. Herbert and Marion Sandler, who controlled World and served as its co-chief executives, were among those who deplored the excesses of their competitors. Their loans, they said, called for minimum payments to rise by just 7.5 percent a year, so people would not face a sudden payment increase that could throw them out of their homes if the mortgage could not be refinanced.

All that was true. But since the loans had no provision to stop the amount borrowed from continuing to rise even after the value of the home fell sharply, the loans allowed for the possibility — now all too real — of creating a class of zombie homeowners with no real stake in the homes they occupy. Only $325 million of the loans — less than a third of 1 percent — will reset by the end of 2012. Wells Fargo has written the value of the pick-a-pay portfolio down by about 20 percent, and is offering to restructure some of the loans. But many of the owners may have no reason to seek such a restructuring. It would take a big concession to lower their monthly payments, and an even larger one to get the principal value of the loan down to the current value of the house. The result may be perverse: a prolonged foreclosure crisis, with Wells Fargo watching helplessly as the condition and value of some houses depreciate for years to come.

GM, Bonds & Beyond

GM Retirees Waterboading Bondholders With Obama’s Help
General Motors Corp.’s likely bankruptcy filing is being cast in some quarters as a fight between "money people" intent on making a killing and honest efforts by the government to save a company and jobs. In reality, GM’s demise comes down to a fight between retirees. On one side are GM’s unionized retired workers. On the other, are the rest of us -- either in retirement or saving for it. Guess who will lose as things now stand? Under the restructuring plan on the table, GM’s retirees would get 39 percent of the company, along with the promise of a $10 billion payment into their health-care trust fund. That is in exchange for $20 billion GM owes the fund.

Not making out so well are current or future retirees who depend on the performance of mutual funds, 401(k) plans and insurance companies that invested in GM bonds. These debt investors, who are owed about $27 billion, will get just 10 percent of the company. And that probably won’t change. GM Chief Executive Fritz Henderson said on a conference call Monday that there are no plans to modify the terms on offer to bondholders, even as he said a bankruptcy filing now looks "more probable." That’s outrageous. The deal is nothing short of a political rip-off, with the Obama administration currying favor with an organized voting bloc in the form of the United Auto Workers union at the expense of unorganized retirees. The current deal "can be seen as one that serves up bondholders on the altar of political self-interest," CreditSights Inc. analyst Glenn Reynolds wrote in a report last week titled, in part, "Waterboarding Bondholders."

"The powers that be will not face any major constituency risks by screwing some mutual funds, insurance companies, pension managers, and hedge funds (who often manage pension and endowment money etc.) out of their fair and equitable treatment," Reynolds wrote. Not that you’ll hear much about the rights of these investors if and when the fur starts flying over a GM bankruptcy filing. Instead, we’ll again hear talk about the "money people" -- the label President Barack Obama pinned on debt investors at Chrysler LLC who refused to swallow the terms foisted on them by the company and government officials. Expect the fight at GM to be cast in similarly expedient terms of "working man vs. evil money people," Reynolds’s report noted. And those who raise objections to the government’s plans "will be dubbed Wall Street holdouts and obstructionists."

Yet the "money people" label will be particularly unfair at GM. Unlike Chrysler, whose debt was concentrated in the hands of a small group of institutions, GM’s bonds are held far and wide. The holders include Fidelity Management and Research, Franklin Advisers Inc., and Pacific Investment Management Co., which manage the retirement savings of millions of Americans. The Polish Beneficial Association, the Knights of Columbus, and the Grand Lodge Sons of Hermann in Texas were also recent owners of GM bonds. Not your typical Masters of the Universe. Then there are mom-and-pop investors, who may not be happy with the terms on offer. Some of them have gone so far as to create a Web site to air their grievances. This site is backed by the 60 Plus Organization, a senior advocacy group that bills itself as a conservative alternative to the AARP.

That’s not to say that the Chrysler experience won’t cow some GM bondholders. Loomis Sayles & Co. said last week that it had sold all its GM bonds in April and had quit the bondholder group trying to negotiate a better debt-exchange offer. The odd thing is that the administration probably recognizes that it can’t, and shouldn’t, rob bondholders. So it came up with a proposal that they will have little choice but to reject. GM’s offer "must look to bondholders like something Tony Soprano dreamed up," Gimme Credit analyst Shelly Lombard said in a research note late last month. No wonder GM’s bondholders have groused that Steven Rattner, the Treasury Department’s chief auto adviser, has acted as if he has them over a barrel. The administration, meanwhile, will be able to blame the bankruptcy filing on the "money people." Then, it can go out and attack the bondholders, scoring more political points.

While potentially bringing short-term political gain, this strategy has a long-term cost: further erosion in investor confidence in the financial system. After all, if bondholders know that the government will deliberately try to trample their rights, or demonize them for trying to exercise them, there are two options. Shy away from purchasing debt that exposes an investor to the government, or charge more for the increased risk. Neither is good for markets or the non-unionized retirees who depend on them. It’s also strange coming from an administration that, along with the Federal Reserve, has pledged $12.8 trillion to try and restore investor confidence in the financial system.

Chrysler Plan Makes Dealers Feel Like 'Piece of Meat'
Stanley Balzekas Jr. served in the U.S. Army and survived six months in World War II German prison camps. His Chicago Chrysler-Jeep franchise won’t survive the automaker’s cutbacks.
Balzekas’s family has been in the business since 1919, when his father, Stanley Sr., a blacksmith from Lithuania, opened his first dealership. In the early years, Balzekas Motor Sales Inc. carried Pontiacs, Chevrolets and Studebakers. It’s been a Chrysler-only shop since 1933. "After 90 years, we are a piece of meat," said Balzekas, 85, whose two sons and one daughter also work at the dealership. A letter from Chrysler LLC early yesterday notified him that "we are no longer a dealer," he said in a telephone interview.

From Virginia to California, Chrysler’s decision to cancel 789 dealership agreements forced franchisees to assess what they’ll do next, prepare to dismiss employees and ponder how to wind down decades-long relationships with their customers. The reductions represent about 25 percent of the 3,200 Chrysler, Dodge and Jeep-brand dealers. Those who survive stand to gain business as their ranks are thinned. Those on the cut list will be gone by about June 9, Chrysler said. In Seaside, California, fourth-generation dealer Donald Butts will lose the Jeep brand from his Pontiac-Cadillac-Jeep store on June 9. "I cannot see how this will help them recover, walking away from entire markets," Butts said in a telephone interview. Butts, who declined to give his age, said his family began selling General Motors Corp.’s Buicks in 1907 and took on Jeep about 25 years ago.

Butts will have to give up Pontiac, too, because GM’s survival plan calls for dropping that brand. GM said today it was notifying 1,100 dealers whose franchise agreements aren’t being renewed. Shrinking the number of Chrysler outlets helps ensure profits for the remainder, President Jim Press said. Stronger dealers help Auburn Hills, Michigan-based Chrysler because they’ll have the resources to invest in their properties, maintain a uniformly high level of service, and sell more cars, Press said on a conference call. Chrysler culled mostly among retailers that had annual sales of 100 or fewer vehicles; sold just one Chrysler brand; or carried Chrysler vehicles along with those of other automakers, he said. Surviving dealers will be urged to purchase autos and supplies of replacement parts from those being closed, Press said. Dealers on the list collectively accounted for 14 percent of the company’s sales, Press said.

Job losses, which Chrysler said it didn’t estimate, will be part of the fallout. Butts, the California dealer, said at least three service technicians would have to find work elsewhere. He owns another dealership selling Honda Motor Co.’s Acura brand and wouldn’t say how many of his 39 employees would be affected. John Gunning, 69, was among the dealers on the shutdown list who said he saw the move coming because his Manassas Dodge in Virginia sells only one of Chrysler’s three brands. "There are still a lot of things up in the air," said Gunning. "Obviously I am disappointed, but I’m not amazed." Gunning used to be on Chrysler’s national dealer advisory board. Last month, his dealership was the top-selling Dodge outlet in Northern Virginia. He also owns a dealership for Fuji Heavy Industries Ltd.’s Subaru, which he will keep open, he said. "I’m not convinced Chrysler is going to make it anyway," he said. "I just want to try to save my Subaru franchise."

Yesterday’s list may not be the last one. Turin, Italy- based Fiat, which will control a new company that is buying most of Chrysler’s assets, will make the final determination on which dealers are kept as part of the new automaker. "I’m furious," Jeff Duvall, 50, co-owner of Duvall Chrysler Dodge Jeep Inc. in Clayton, Georgia, said after getting his closure notice. "I’m beyond furious. You mark my word, I’m going to fight this tooth and nail." His store opened less than a year ago in the town about 150 miles northeast of Atlanta, he said. "We’ve spent thousands and thousands of dollars on architecture plans and engineering plans," he said. "We were about to start construction on a new facility." Duvall said he mailed a $4,000 check yesterday to Cincinnati-based Squire Sanders Dempsey LLP, which is representing the dealers targeted for closing. The law firm will petition the bankruptcy court to keep the franchise agreements.

"It’s worth it," said Duvall. "All I want is an opportunity to represent Chrysler and sell and service their products." Andy Gill, 64, was relieved that his Dallas Dodge Chrysler Jeep in Dallas, Georgia, escaped the cuts. While his store stands to benefit as others in the region fold, he said he felt the anguish of colleagues losing their businesses and wondered aloud about the toll on Chrysler from folding so many retailers. "They just fired 800 of their customers," Gill said. "The dealer buys the car from the factory. Our customers are the people who buy from us. That rationale kind of makes me scratch my head." Balzekas, the Chicago dealer, said he will keep his operation open at least until the inventory of 125 new and used vehicles is sold. After that, he said, he isn’t sure of what he’ll do, except for one thing: He won’t go back to doing business with Chrysler. "They don’t care," Balzekas said. "I told them, ‘Why don’t you work with smaller dealers, listen and get out there? Talk to people. Don’t sit in the high towers.’" He said he broke the news to his 22 full-time workers yesterday morning. To soften the blow, he treated them all to a pizza lunch.

GM in Bankruptcy May Speed Dealer Cuts to Match Chrysler’s Pace
General Motors Corp.’s plan to slash its dealer network by the end of 2010 may accelerate, matching the pace set by Chrysler LLC, in a bankruptcy the biggest U.S. automaker says is probable. GM began telling 1,100 U.S. dealers yesterday their franchise agreements wouldn’t be renewed, meaning they would stop selling cars in about a year. A day earlier, Chrysler informed 789 U.S. dealers they’d stop selling cars by June 9. A Chapter 11 filing would help GM shed franchise accords that would otherwise be binding. Using the courts to hasten dealer consolidation would help meet the goal of a "speedy" bankruptcy as outlined by Chief Executive Officer Fritz Henderson in a May 14 Bloomberg Television interview.

"If GM files bankruptcy, the landscape will change to reflect what Chrysler is doing with its dealer body," said Billy Donley, a franchise and distribution attorney for Baker & Hostetler LLP in Houston. The shutdowns are GM’s first step to pare domestic dealers to a range of 3,600 to 4,000 from 5,969 by the end of 2010. Having fewer retailers may allow the survivors to sell more cars at higher prices, boosting profit. "It’s a cruel day, but it’s one of the casualties of the situation," said Mike Robinet, a CSM Worldwide Inc. analyst in Northville, Michigan. "Dealer consolidation is a fairly substantial reason that Chrysler had to go into bankruptcy and a very good reason why GM will need to go in as well."

GM told dealers in a letter the locations targeted for closing were measured by benchmarks including sales volume, customer feedback, capitalization, profitability and pairings with competing brands. The notices went to "1,100 underperforming and very small sales-volume U.S. dealers," GM said in a statement. "It’s not something we do without a lot of consideration," Mark LaNeve, GM’s North American sales chief, said on a conference call. "The dealers receiving these letters, unless they haven’t been paying attention at all, it should be no surprise at all to them." LaNeve said GM would follow the same reduction plan whether the automaker restructures in or out of court. An "orderly" wind-down would help preserve the value of dealers’ inventory, he said.

Chrysler, racing to complete an alliance with Fiat SpA and form a new company that would exit bankruptcy in as little as two months, gave its dealers less than four weeks to wrap up operations and sell off their cars and spare parts. Susan Garontakos, a GM spokeswoman, said in an interview that she couldn’t speculate on how a bankruptcy proceeding might alter the company’s timetable. "What’s currently on the table would change if they go into bankruptcy," said Donley, the Baker & Hostetler attorney. "They may not let dealer agreements expire, they may just leave them in court." The dealers losing their franchise accords included R.L. Reising Sales Inc. in the Chicago suburb of Beecher, Illinois, which learned by letter that it will have to stop selling Chevrolets. "It’s like someone rips your guts out," said Joseph Reising, 49, the dealership’s vice president. Founded by his grandfather, the retailer has sold GM vehicles since 1929 and employs 15 full-time workers. "It leaves a big hole."

Yesterday’s moves are in addition to about 470 dealers being shed as GM disposes of its Hummer, Saturn and Saab brands and drops Pontiac. GM has said it expects some dealers to leave voluntarily. GM plans to focus on its remaining Chevrolet, Cadillac, Buick and GMC brand dealerships in the future. GM fell 6 cents, or 5.2 percent, to $1.09 yesterday in New York Stock Exchange composite trading. The shares have tumbled 95 percent in the past year. In contrast to Chrysler, which waited until it filed bankruptcy to cancel dealerships, GM is moving to reduce its retail network now, saying it still hopes to avoid restructuring in court. Still, Henderson in the May 14 interview said that bankruptcy is "probable" as GM works to shave operating costs and shrink debt and union-retiree obligations by $44 billion. LaNeve said GM’s dealer consolidation won’t affect whether the automaker files for court protection, adding that the company needs to reduce its retail outlets in or out of bankruptcy.

GM didn’t make a list of dealers public, so the names surfaced more slowly than those on Chrysler’s roster, which were disclosed in a U.S. Bankruptcy Court filing. Kenneth Keeton, owner of Keeton Motor Co. in Fordyce, Arkansas, said he received a letter from GM yesterday informing him GM would let his Buick-Pontiac-GM franchise agreement lapse in 2010. "It ain’t no big deal to me," said Keeton, whose 42-year- old store is among four dealerships, including another GM outlet, in a town of about 5,000 people. "The last 10 years, it’s cost me more to do business with them than it’s worth." Keeton, who said his dealership employs about 10 people, said he plans to stay in business selling used cars and offering service and towing.

China Grapples With Bigger Role in New World Order, Zhou Says
China’s policy makers, grappling with their bigger voice on the global stage, have yet to agree on what they want from a new world financial order, central bank Governor Zhou Xiaochuan said.
"Many issues are new to us and we haven’t formed a collective opinion about them," said Zhou, speaking at a conference in Shanghai today. "There are some scholars’ views on those issues but we haven’t reached a consensus at a national level or set any goal." Zhou this year has already called for the creation of a new international reserve currency and his central bank blamed the financial crisis on "complacency" and a conviction in the U.S. that markets always correct themselves. China, the only major economy among the top five globally that is still growing, wants the International Monetary Fund reorganized to give developing countries more voice.

"In the past China only dealt with internal adjustments needed to take advantage of opportunities in the world," said Shanghai-based Andy Xie, former chief Asia economist for Morgan Stanley. "Now China faces the challenge of participating in reorganizing the world. That’s never happened before." China needs to think carefully about what it wants, what it stands for, and how it will participate in a remaking of the global financial order, Zhou said. China’s fallen into its higher-profile role on the global stage as a consequence of the global crisis and it’s not prepared,’’ said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. "Zhou’s saying to policy makers: ‘We need a coherent global strategy rather than the unilateral strategy we’ve had in the past.’"

The central bank’s research arm in March said that "market forces, if unchecked, will lead to asset bubbles and ultimately a disastrous market clearing in the form of a financial crisis like the current one." A lack of coordination among regulatory agencies and communication between regulators and central bankers and finance ministers in some advanced countries hampered efforts to manage the financial crisis, the research arm said. Zhou said that the global financial crisis can’t be resolved by the G-7 alone and added that emerging economies need to have more involvement in working out solutions.

Canadian March Factory Sales Fall to Lowest Since '99
Canadian factory sales unexpectedly fell in March to the lowest level since May 1999, reflecting a drop in demand for durable goods such as aerospace products and motor vehicle parts.
Factory sales declined 2.7 percent from the prior month to C$41.4 billion ($35.2 billion), Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg predicted factory shipments would increase 1 percent, the median of 20 estimates. Sales have plunged by about one quarter since peaking in July. Canadian manufacturers have cut 103,700 jobs since December after demand from the U.S. plummeted in the second half of last year and commodity prices fell.

The Bank of Canada last month cut its benchmark lending rate to a record 0.25 percent in an effort to boost growth and said it would keep it there until the second quarter of 2010 if inflation remained subdued. Manufacturers "are not out of the woods yet," said Benjamin Reitzes, an economist with BMO Capital Markets in Toronto, adding that the economy probably shrunk in March. "They’re unlikely to bounce back until we see a bounce back in auto production, which is at least two or three months away." Still, manufacturing declines in coming months will probably be more muted than November’s 6.1 percent drop and December’s 7.7 percent plunge, Reitzes said. Canada’s currency, known as the loonie, weakened 0.9 percent to C$1.1792 per U.S. dollar at 4:02 p.m. in Toronto, from C$1.1691 yesterday. One Canadian dollar buys 84.8 U.S. cents.

United States Steel Corp. said March 3 it would idle most of its operations in Canada and lay off 1,500 workers. Steel prices have fallen by more than half since touching a record of $1,068 a ton in July. Chrysler LLC shut down two Canadian plants indefinitely on May 1, laying off about 7,100 employees, the Canadian Broadcasting Corp. reported. Still, improving labor and financial markets may signal the country’s economic slump is nearing an end, Prime Minister Stephen Harper said last week. "We may not be in a recovery, but I think we might be in a position where it’s not getting worse, where it’s truly plateauing," Harper said May 8 in an interview, adding he’d like another "month or two" of data before coming to that conclusion. In March, sales dropped in 15 of the 21 industries tracked by the statistics agency.

Sales of durable goods slid 4.4 percent in March, the fourth decline in five months. Aerospace sales fell 32 percent in March. Auto-parts manufacturers recorded an 18 percent drop. While vehicle sales jumped 22 percent in March, they were about 50 percent lower than they were in November 2007, Statistics Canada said. Excluding the automotive industry, manufacturing sales fell 3.6 percent. After adjusting for price changes, factory sales declined 2.4 percent, the statistics agency said. "This is not great news for what was otherwise shaping up to be a decent March gross domestic product number," Charmaine Buskas, an economist with TD Securities in Toronto, said in a note to clients.

Not a Good Time to Be Middle-Aged
In this recession, it is better to be old. Being young has some advantages, too. But being in the middle of the spectrum — in your 30s or 40s — seems to be the worst place to be. The Pew Research Center released a poll of Americans this week that found people over 65 were generally suffering less from the recession. Fewer of them reported being forced to cut back on household expenses or said they had trouble meeting rent or mortgage obligations. "The most vivid finding to emerge from this survey is that older Americans — most of whom have already retired and downsized their lifestyles — have been far better insulated from the current storm than those who need to worry about keeping their jobs and building up diminished retirement accounts," wrote Rich Morin and Paul Taylor of Pew Research.

The elderly benefit from a greater safety net than do other Americans. Many are collecting pensions, and Social Security and Medicare are available. Just 7 percent of those over 65 reported problems in obtaining or paying for health care, a third the proportion of younger adults. The collapse in stock prices last year also caused less damage to those over 65. The poll found that 23 percent of elderly Americans reported losing at least 20 percent of their investments last year, well below those further from retirement. Those over 65 presumably had more conservative investments, which fared better.

The proportion of those 18 to 29 who reported large losses was even smaller, at 15 percent. It appears that many of them lost little because they had little in the way of investments to lose. Older Americans have also been less affected by rising unemployment. Fewer of them are working, of course, but the number of people over 65 with jobs has risen by 3.9 percent since November 2007, when the total number of people with jobs hit a peak. Since then, the younger the worker, the more likely he or she was to lose a job. This recession differs from recent ones in that regard. While the youngest workers have always been the most vulnerable, those over 65 fared worse than those in middle age in the three previous recessions — in the early years of the 1980s and 1990s, as well as the beginning of the current decade.

A rise in the number of people over 65 with jobs may not be good news, of course, since it could indicate that some retired people were being forced back into the labor market by declines in their investments. But at least many of them were able to find jobs. The Pew poll found that the recession was having its deepest immediate impact on those in the "threshold generation," ages 50 to 64. They were most likely to have suffered significant investment losses, and three-quarters of them said the recession would make it harder for them to afford retirement, a greater percentage than of either older or younger Americans. But if that generation does end up working longer, workers in their 30s and 40s could find themselves facing more competition for jobs and promotions. Even if the recession does end this year, as the more optimistic economists forecast, the effects of it could be felt for years to come.

The pain in Spain proves too much as expat Britons pack their bags
Janine Richmond was busy packing boxes this week, ready to leave her home near Marbella for the last time. After six years living on the Costa del Sol, Mrs Richmond and her husband, Nicholas, reluctantly took the decision to return to Britain with their two young daughters. "We just couldn’t make it work any more financially," she said, as she prepared for an emotional farewell. "We would have loved to have stayed but things are too hard here for my husband and we cannot last any longer." The Richmonds, like a growing number of British expats, are heading home as the sun sets on their Spanish dream.

The low value of the pound, the end of Spain’s decade-long building bonanza and the global financial meltdown have conspired to make Britain a more attractive place to many expatriates, despite the deepening recession at home. The Spanish sunshine and way of life cannot hide the dire recession into which Spain is falling. Unemployment stands at 17.4 per cent — more than double the European average — and more than four million people are out of work. The property market, which had employed large numbers of Britons in southern Spain, is stagnant. No new homes have been built for four months by any big developer. Mrs Richmond, 38, moved with her family to Spain in 2003 when Mr Richmond, 40, a salesman, was offered a job. At that time Spanish growth was outstripping the rest of Europe and jobs were plentiful. Next week, as they unpack the boxes at a relative’s home in Amersham, Buckinghamshire, they face the prospect of starting again from nothing.

Theirs is a familiar story. "The sun is nice but it doesn’t pay your bills, that’s the bottom line," said Richard Shears, who works in real estate in Marbella, on the Costa del Sol. After seven years in Spain Mr Shears and his wife, Judith, are planning to return to London at the end of the year. "The opportunities are very thin on the ground here. The real-estate market is very flat right now," said Mr Shears, 38.
He said the Costa del Sol, which depends on British holidaymakers, had seen a noticeable reduction in the amount tourists were spending. "One newsagent told me he took €100 last Sunday whereas he would normally have taken 1,000." "People are going back because there are still more opportunities at home and you have the support of family and friends."

Applying for state benefits in Spain might prove difficult for many British expatriates, many of whom speak little Spanish. "Here if you want to get help from the authorities you have to wade through red tape which even the Spanish don’t understand half of," said Mr Shears. As the Shears’ employers know nothing of their plans, their identities have been changed. No official figures exist for how many are heading home. The British Embassy estimates that one million Britons live at least part of the year in Spain. Many of them choose to remain officially living in Britain for tax or pensions, so to British authorities they never actually left. The British Embassy has posted advice for those returning on its website. Expat websites feature forums on the subject.

For those hunting for jobs in Britain, the idea of swapping the Spanish sun to start again in the gloom of Britain in recession may seem strange. However, many returning expatriates say that although things are tough in Britain, competing for jobs with Spaniards who have the advantage of the language and family contacts often makes it harder in Spain. Others say British expats experiencing financial problems often lack family and friends to fall back on. For thousands of pensioners who hoped to spend their twilight years sunning themselves on the costas, the fall in the pound has forced them to head home. Andrew Anderson, 73, a retired architect from Edinburgh, who is president of the Costa del Sol British Association, has had enough. "We have seen the value of our pensions go down by 30 per cent. You get used to a certain lifestyle but we can’t maintain that now," Mr Anderson said.

Public beats private sector career financially, research finds
Graduates who 30 years ago shunned a public-sector job because they thought they would be financially better off in the private sector badly miscalculated, it is claimed today. Research from PricewaterhouseCoopers (PwC) suggests that for middle-rankers, better job security and pensions in the public sector can more than outweigh the drawback of a lower headline salary over a lifetime. In its report, The Tortoise and The Hare, PwC traces the careers of two fictitious 1981 graduates, one joining a clearing bank, the other joining the Civil Service. Both have middle-ranking careers, both marry at 29, both buy a small house in 1990, both will die aged 80 in 2040. The banker starts on a base salary 15 per cent higher than the civil servant and also collects bonuses periodically but occasionally loses his job and from 50 can find work only as a self-employed financial adviser and retires at 65, five years later than his counterpart in the Civil Service.

More prepared to take risks than his cautious Whitehall counterpart, the banker saves less initially, invests more in equities and puts up no deposit on his house purchase. PwC calculates that the civil servant has £1.15 million to spend over his lifetime and leaves £340,000 to his children. The banker, by contrast, has £870,000 to spend and bequeaths £260,000. Although the banker is better off initially, by the age of 49 their financial fortunes cross and the civil servant is much better off for the last 30 years of his life. John Hawksworth, head economist at PwC, said that the illustrations overturned the conventional wisdom. "Our analysis suggests that in many cases it could be the public-sector tortoises that will end up with much better pensions and more wealth to pass on to their children and grand-children," he said.

"It’s a striking illustration of the long-term value of job security and public-sector final-salary pensions and, conversely, the potential perils of relying on volatile financial markets for your employment and your pension." From 61, the private-sector worker goes part-time, further depressing his earnings. His defined-contribution pension also drags down his financial position, even though he and his employers contributed 4 and 6 per cent of salary, respectively, from the age of 21. The civil servant does far better on the pension, paying in only 1.5 per cent of salary over the course of his career, but retiring five years earlier on almost half of his final salary and receiving a tax-free lump sum of three times his annual pension.

Russian Economy Shrank Annual 9.5% in First Quarter
Russia’s economy shrank an annual 9.5 percent in the first quarter, the worst contraction in 15 years, as industrial production slumped and the government’s 3 trillion ruble ($93.5 billion) stimulus package failed to boost lending. Gross domestic product shrank 23 percent from the previous quarter, the Federal Statistics Service said on its Web site today, citing preliminary data. The annual decline was forecast by Deputy Economy Minister Andrei Klepach on April 23. While the first-quarter performance indicates Prime Minister Vladimir Putin’s stimulus plan was insufficient, investors are anticipating a recovery. The ruble rose 0.3 percent today, capping its 12th weekly advance, after crude oil rebounded and the central bank predicted a current-account surplus. The Micex stock index rose 0.2 percent and is up 62 percent this year.

"The big dip in industrial production jumps in your face," said Tatiana Orlova, a Moscow-based economist with ING Groep NV, who plans to lower her forecast for a 2.7 percent contraction this year. "The government should be worried. It’s very easy to come up with headlines announcing bailout measures, but the situation shows that you have to adjust them. It’s hard to do these things fast." President Dmitry Medvedev has criticized the work of the government this week, while Putin was on a trip to the country’s Far East, Japan and Mongolia. A $9 billion slate of guarantees aimed at kick-starting lending to the companies designated as strategic enterprises had "failed," Medvedev said on May 13.

Today, Medvedev poured cold water on the government’s bid to diversify the economy away from a dependence on exporting oil, gas and metals. The average price of Urals crude oil in the first quarter of the year is 111 percent lower than in the year before period at $44.08 per barrel. Urals was at $56.94 per barrel today. Energy, including crude oil and natural gas, accounted for 68.7 percent of exports to the Baltics and countries outside of the former Soviet Union in the first two months of the year, according to the Federal Customs Service. "There have been no significant changes in the technological level of our economy," Medvedev said in a meeting today outside Moscow.

The country’s venture fund, special economic zones and so- called techno-parks, all aimed at nurturing high-tech industries, "exist only on paper," he said. Businesses are also to blame and only invest where a "high, quick return" is guaranteed, he said. Productivity in Russia is one-fourth the level in the U.S., Medvedev said at the meeting with ministers, including First Deputy Prime Minister Igor Shuvalov and Economy Minister Elvira Nabiullina. Alfa Bank, Russia’s largest privately owned bank, yesterday joined Goldman Sachs Group Inc., Citigroup Inc. and the International Monetary Fund in revising down the forecast for growth this year. Alfa cut its outlook to a 5.7 percent contraction from a drop of 3 percent.

First-quarter declines in the construction industry and transportation, seen as proxies for economic activity, suggest "further negative surprises," according to Alfa economist Natalia Orlova. Tatiana Orlova, at ING, said she expected the contraction the first quarter to be the deepest in the year. While the economy is not improving, "at least it is deteriorating at a slower pace," she said. The stimulus measures, that were approved in the revised budget, which was approved in April, will gradually start to slow the fall, she said. The economy grew 8.7 percent in the first three months of last year, the second-highest rate since the third quarter of 2000.

America’s phobia of banks
by Simon Schama

Unaccustomed as they are to being told to stand in the corner wearing dunces’ hats, American bankers, so it’s been reported, are getting grouchy about the "stress tests" inflicted on them by the Treasury as a condition of receiving bail-out funds. They have, it’s rumoured, been "pushing back" against restrictions on executive pay. Beggars, it seems, can be choosers. But before they get just a bit above themselves, perhaps they should ponder the long history of the love-hate relationship between banking and government in America.

They could do worse than to take a look at the $20 bill. For there, breaking into the space separating the words "Federal" from "Reserve" is the cresting mane of Andrew Jackson, the most hair-conscious president of the United States. Aside from cultivating his pompadour as the insignia of a free frontier spirit, his locks tied in an eelskin, the seventh US president was also the sworn enemy of paper currency and central banking. Jackson, who was in the White House from 1829-1837, was a new brand of politician in American life. No one would confuse him with the Virginian gentlemen-planters who had dominated high office in the early republic. He had been Indian fighter, scourge of the British and darling of the frontier crowds. But what really got his dander up was the Bank of the United States, the institution granted the monopoly to print paper money. The "Monster", he declared at the height of his presidential knock-down battle with its president Nicholas Biddle, "wants to kill me but I will kill it".

And destroy the Bank of the United States Jackson did, vetoing the Senate’s renewal of its charter in 1832 and running for re-election as the champion of People v Monster. The result of the liquidation of monetary regulation was predictable: wildcat speculation. Two months after Jackson left office in March 1837, the second of the great American financial meltdowns was under way (the first was in 1819). Another swiftly followed in 1839 under the administration of Jackson’s hand-picked successor, Martin Van Buren. On the eve of the civil war, Jackson’s wish for monetary decentralisation had come true beyond his wildest dreams There were 7,000 local currencies circulating in the republic and an epidemic of counterfeiting. It took Lincoln’s Banking Act of 1862, born of a desperate need for dependable credit to fight the war, for a modicum of monetary order to be salvaged from what Biddle had accurately prophesied would be monetary anarchy.

Jackson, as John Meacham’s recent, elegantly written and excessively generous biography reminds us, was an exceptional figure in American politics in many ways: in his repellent enthusiasm for the ethnic cleansing of Native Americans, his dismissal of inconvenient Supreme Court opinions and his certainty that he was the incarnation of popular democracy in heroic action. This armour-plated egotism allowed him to brush off a Congressional vote of censure as if it were an affront to the American people. (It had been provoked by his attempt to bleed the Bank to death by diverting Treasury deposits to local state banks). The fact that enthusiasts of a central bank – from Alexander Hamilton who had created the first in 1791 – to Jackson’s enemy Biddle, were admirers of the Bank of England, only reinforced the conviction of the veteran general that such institutions were damnably un-American. Whether his bankophobia was the cause of his re-election in 1832 is open to debate but there is no doubt that in his mistrust of paper currency and his almost paranoid suspicion of the Bank’s monopoly of issue, Jackson tapped into a pulsing vein of American insecurity about the moral character of money.

Europeans and other foreigners in the 19th and 20th centuries had become so accustomed to characterising Americans as being in thrall to the Almighty Dollar, that they sometimes neglected to notice a strain of national schizophrenia on the subject of pecuniary wealth. Generation after generation, preachers, newspapermen and frontier politicians fervently railed against the poison of cupidity and the citadels of the eastern seaboard where Big Money ruled. From the time around 1790, when Thomas Jefferson, that lyricist of the agrarian life (as long as slaves did the heavy lifting), attempted to persuade President George Washington that Alexander Hamilton’s plan for a central bank was a threat to American liberties, the tripwire of suspicion about banks, especially central banks, has seldom stopped humming. Fortunately for the directors of Bank of America and Citibank, Barack Obama has few of Jackson’s allergies to what "Old Hickory" reviled as the "monied aristocracy". But then, so far as I know, Obama hasn’t been burned by paper transactions the way Jackson was.

In the 1790s the track to success for any ambitious young man on the frontier was through land speculation, the law or soldiering and Jackson had done all three. In 1795 he spent three weeks in Philadelphia trying to sell a property of some thousands of acres of frontier prime. Eventually, he found a buyer who paid with a promissory note. Short of supplies, Jackson purchased cartloads with the endorsed note. Not long after, the suppliers of those goods informed him that his buyer’s bankruptcy now made him liable for the balance of the note. The debt crushed Jackson’s economic prospects for a long while and left him with an abiding mistrust of paper instruments of exchange.

Like Jefferson, who in almost every other respect was a more sophisticated mind, Jackson came to believe paper money at best an unreliable creature of financial whim (those depending on it never sure how much it might be discounted), and at worst the choice tool of a conspiracy to enslave through debt. Silver coin had circulated through the country both before and after independence, and Jackson, as authentically populist as his campaign advertising, preferred, for transactions, something on which one could bite.

So the president wilfully misled the country about the evils of the monopolistic Bank of the United States, claiming not only was it an unconstitutional interposition between the elected government and the people but that it had failed in its responsibility to establish a sound paper currency throughout the republic. In fact, in the unstable conditions of America in the 1830s, the paper of the Bank of the United States was by far the most dependable medium of transactions from Maine to Louisiana. But Jackson was convinced that unless the Bank perished, American democracy would always be infected by its machinations. What was at stake was the battle of rural and urban values for the economic soul of America. In some ways this was almost as momentous as the struggle between the slave south and the free north for it went to the heart of what America was supposed to be: a place where simplicity and transparency ruled in small moral communities, or a self-energising machine of unlimited economic growth and power: Field of Dreams or Citizen Kane?

Jefferson, whose apostle Jackson claimed to be, had set the tone by seeing in the wholesomeness of the country the purest forms of social virtue. "Those who labour in the earth are the chosen of God," he declared in one of his striking excursions into piety. The cities, on the other hand, were "pestilential" swamps of seductive luxury . But Jackson went further than his cynosure. He was not so naive as to imagine the indebtedness incurred by two American wars against the British would somehow retire itself, and understood, after a fashion, the indispensability of a central bank in managing the securities without which the US government would not have been able to conduct its public business. (A quarter of the debt was held by foreigners.) But he also believed that the Treasury, under the control of elected appointees, was the more democratic office to see to these obligations. So Jackson made the liquidation of the Bank of the United States a centrepiece of his presidency.

Along with the destruction of the Bank, Jackson hoped to rid the republic of what he insisted was the great paper currency swindle. In his farewell address, the outgoing president dealt eloquently with the need to preserve the Union against north-south sectionalism that threatened to undo it. But the subject to which he most passionately warmed was "the paper money system". "Recent events", he told the American people (referring to his struggle with Biddle), "have proved that the paper money system may be used as an engine to undermine your free institutions ... those who desire to ... govern by corruption or force are aware of its power and prepared to employ it."

Paper encouraged speculation; speculation enslaved citizens to the bank monopolists, and those who got hurt were "the bone and sinew" of the country, "men who love liberty and desire nothing but equal rights and equal laws", "the agricultural, mechanical and labouring classes of society". The stranglehold exercised by a central bank, which could make "money plenty or scarce at its pleasure", was a "despotic sway" that made American liberties, well, not worth the paper they were printed on. The Bank of the United States was dead but woe betide the US should ever a successor arise again, as the agency through which "the monied interest" could tyrannise the honest majority!

That successor – the Federal Reserve to whose good faith and credit Jackson now lends his face – was a long time coming, not established until 1913. The powers that Jackson thought subverted the liberties of the "honest" many – the ability to regulate the money supply – are now deemed indispensable to our financial survival. The difference is that while the Fed is a public institution, the Bank of the United States was not. However, Jackson would still disapprove of the very quality we most prize in the Fed: its independence from the Treasury. For Jackson, political and financial accountability had to be one and the same in a true democracy. But the creation of the Fed on the eve of the first world war owed a good deal to the survival of Jacksonian rhetoric against the "monied interest". Although JP Morgan and John Rockefeller had acted in a public-spirited manner – supplying the wherewithal to prevent a total collapse of the financial system in 1907, Morgan losing $21m during the turmoil – there was concern over the closed-doors nature of their deliberations and the suspicion persisted in the country that the crisis had been concocted so that the moguls could get their hands on the Tennessee Coal and Iron Company at knock-down rates.

Paradoxically, the gold that Jackson had thought to be the common man’s defence against plutocratic fraud was now the target of populist wrath. Once again, it came down to country against city, the farm against the bank. Still very much a net importer of capital, the US, as JP Morgan saw it, would flourish and grow only as long as it could attract foreign, especially British investment. As a debtor, the government was dependent on the credibility of its bond market. Only a dollar pegged to gold, Wall Street and a tight money policy could guarantee those funds, the lifeblood of nascent American commercial and industrial growth. What was the alternative? A currency cheapened by the remonetisation of silver or, heaven forbid, the untamed greenback, would pump up inflation, depreciating any returns on investment. The turn-off for the Rothschilds, Barings and Grenfells would be catastrophic.

The opposite held true in the heartland. Over-production had depressed crop prices and multitudes of homesteaders went under. And out of their distress, out of the West, came a vision and a voice. The vision was for a bimetallic currency; silver coin loosening the supply without running the dangers of a currency destabilised by paper. Silver lodes had been discovered in Nevada and Colorado, in God’s own country, just waiting to be minted. The fact that a year before in 1895, Morgan had sorted out a sudden depletion of gold reserves by negotiation with a mostly foreign syndicate of suppliers, pocketing a fat commission, only made matters worse.

Into the lists against Republican presidential candidate William McKinley rode the goldbugs’ worst nightmare: an impassioned admirer of Andrew Jackson, the small town Nebraska lawyer, lay preacher and Congressman William Jennings Bryan. He was, those who heard him on the Chautauqua evangelical circuit or in Congress said, the most astounding orator they had ever encountered. And Bryan was a Democrat. Before he transformed the party it was an organisation of losers. Only one of its number, Grover Cleveland, had made it to the White House since the civil war and he was a staunch goldbug. But at their Chicago Convention in July 1896, Bryan – even though he would lose the election – revolutionised the Democrats, turning them into the party that would embody the cause of the Common Man in tough times: the party of Franklin Roosevelt, Lyndon Johnson and Obama.

Go to YouTube and you can hear Bryan deliver the speech – or rather a performance of it made four years before his death in 1925 – thought by many to be the greatest in American history. Rich and melodious though the recording is, it can’t hope to reproduce the electrifying oratory at Chicago. Bryan followed a demagogic rant from a South Carolinan racist, and then a woebegone goldbug apologia. The mood was depressed. Bounding to the stage in a baggy-trousered black alpaca suit came Bryan. "I come to speak to you in defence of a cause as holy as liberty – that of humanity." (Lyndon Johnson would nearly plagiarise those words introducing the Voting Rights Act of 1965). The gold standard was the millstone that one part of America had set about the neck of the other. The claim of its champions, of the Republicans, was that they were the party of business. But "the man who is employed for wages is as much a businessman as his employer, the attorney in a country town is as much a businessman as the corporation counsel in a great metropolis; the merchant at the crossroads store is as much a businessman as the merchant of New York ... the miners who go down a thousand feet into the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be poured into the channels of trade are as much businessmen as the ... magnates, who, in a back room, corner the money of the world."

It was an American work of art, this speech; as native to its dark soil as Whitman’s verse or Twain’s fierce ribaldry. It was landscape, social drama and religion all poured into the same hot mould of patriotic social pride. The crowd that heard it saw the cornfields and the prairie pastures in Bryan’s rolling cadences; then he took them aloft over a continent of social pain. It was gold, the stuff of the Midases of Wall Street, that was inflicting this suffering. What did those who hoarded it know of the true America of sweat and prayer? By the famous peroration, Bryan had given the Democratic party, victorious or not, their new gospel. To the Midases "we will answer their demand for a gold standard by saying to them, ‘You shall not press down upon the brow of labour this crown of thorns, you shall not crucify mankind upon a cross of gold.’" Shameless, transported by the gospel truth, Bryan stopped, took some steps back and then, arms out, assumed the posture of the martyred Saviour. Then the din broke over him.

We have, lest it be forgotten, another serious Christian in the White House; another president who, for all the cool threads, winds up his rhetorical passions to speak for Plain Folk. Sure, he won New York. But he also won Indiana. And, unlike Jackson, and unlike Bryan, Obama has never wanted to wage war on the Monied Interests. His inclinations for taking it to Wall Street are a lot less combative than Franklin Roosevelt’s. Obama is trans-racial, trans-sectional, trans-ideological. He believes in a great national cuddle. Whether in the hard times that, for all this financially budding spring, are certain to lie ahead, he can actually be transformational, and make – as American history yearns for him to do – money moral again, remains, as you knew I would say, to be seen.


ca said...

Ilargi --

You say that "Howard Davidowitz must be, though perhaps secretly, relieved that he is so old most of the upcoming mayhem will pass him by."

I thought many of the changes you have spoken about were going to occur in the next 3-7 years. Is this wrong or do you think that Davidowitz will be leaving us sooner than that?

Anonymous said...

“In order to fully understand currency and price movements, one has to realize that the securitization of debt, and creation of derivatives amounted to a huge virtual printing press, primarily fueled by a massive increase in risk appetite which allowed for a huge expansion in the value of claims on financial assets and goods and services. It is worth pointing out, that the Fed has little to no control over this "printing press" at this point, which at last count was responsible for over 90% of the liquidity in the system.”
The Exuberance Glut Or The Dollar Euro Short Squeeze Race Zero Hedge

Armando Gascón said...

"The Pain in Spain", indeed. So these Brits no longer can sell crooked time-sharing deals to their own countrymen and they have to go back home. Good riddance. Notice that they are 'expats', not migrants like other people.

You want to be a success story, move to the USA, OZ, etc. Spain is too difficult even for us Spaniards and all Spanish stories are sad, ugly and they have no happy end.

Anonymous said...

Well life isn't all beer and skittles at any time, but what I heard Roubini say was "I see slow growth even if we recover". Now, is he hedging his bet, like many do, or is he putting a message across despite a full tummy from that White House dinner? Time indeed will tell. How about someone get on the phone and give the guy a call, find out for sure?


also no beer an skittles when a 'h' is left out in href=.

Ilargi said...

CA 9:06 PM,

Looking at Howard, I'm thinking he's 80 if a day. And "Most of the upcoming mayhem" will not be done in a few years, even though the initial phase will.

rapier said...

Since Roubini the individual is now comfortably affluent and has that most precious of assets, fame, which allows hobnobbing with the elites, deference from waiters and attractive women, his message has changed a bit. I think his main message has changed less than one might think but it's the tone which has changed most.

He doesn't express much anger with the elites any more so his empathy with the losers which was mostly inferred is now gone totally.

So if the recession bottoms early next year, fine. If 10 million households disappear into the underclass goes without thought or a care. He will be scouting that second home and contemplating who he will take to Aspen or Paris. Everyone he meets there will be thrilled to chat with the great man.

This is the oldest story in the world. It only ends when the glittering ones feel fear. The thing about this time is the fear is going to be felt not by the glitterati those who do not embrace dark power.

When a US Senator who is most closely associated with Christian values says in hearings that torture has persisted for 500 years because it works I think of Roubini among glittering crystal and slim blonds and think he has made a wise market decision.

Ilargi said...

Anon 10:02

"It is worth pointing out, that the Fed has little to no control over this "printing press" at this point, which at last count was responsible for over 90% of the liquidity in the system.”

Which is what we have been saying for a very long time, and why inflation is not an immediate concern.

Anonymous said...

Ilargi: "Roubini and Rogoff are now invited to the White House, embassies and think tanks to explain their visions, but in the process those visions have changed to such an extent that they are now useless, worthless and clueless."

Ilargi, to put it in balder terms, would you say they've been bought?

I suspect as much, but don't know.


Simon's Phobia article was an odd one. What line was he pushing? Was he trying to say the Dems must devalue our currency, for the public good? Hard to tell, the way he writes. But as for currency devaluation, eh, it's been done. Which is not to say it won't be done again. For the public good, natch.

Other eyebrow-raisers:

"The difference is that while the Fed is a public institution, the Bank of the United States was not."

The Fed is a cartel of private banks, who own the Fed through shares of private stock. 100%. Section 5, Federal Reserve Act of 1913. The banks earn a guaranteed 6% return on Fed Reserve Notes, plus taxpayer-funded interest on the reserves. As of last September, taxpayers were paying the banks $700 billion in interest each year, according to Ellen Brown.

"'Public'. You keep using that word. I do not think it means what you think it means."

"We have, lest it be forgotten, another serious Christian in the White House... Obama is trans-racial, trans-sectional, trans-ideological."


Ilargi, gotta ask, what went through your mind when you read Simon's article?

Reluctant Poseidon Hamster

Anonymous said...

I don't think what Roubini is saying now is all that different than what he was saying a couple of years ago when I watched him on CBC. The world has just caught up with him.

I could be wrong so maybe one should take a bit of time and look see what he was saying then: must be some nebulous strands still lingering in the Internet's memory.

Just did that very thing took a time trip back to something that was loaded on to the net 17 April 2008 Title is :"Nouriel Roubini - a 12 to 18 month recession" (1 of 3) " only watched to firs few minutes (other silly ways to waste time) sounds to me he is more doomer now, but you be the judge.

Anonymous said...

Looks like I am having problems with links tonight. Paste the above in your browser for that old Roubini video.

007Billion said...

Great. "You know what we need? We need pain. We need 12-13% unemployment - get rid of the inefficiency..." - Davidowitz

Blah, blah, Obama's shoving the unions up our ass blather blah.
Stop posting this idiot for the sake of your site, ilargi.

This is the oldest line about pain and suffering of workers and their families being the only sweet smelling sacrifice to the gods of finance - and you're falling for it in spades if you continue to post tripe like this.

What's he worried about? That folks might get organized? Unions, with all their defects are still quite capable of ramping up and demanding many many things which would keep a Davidowitz up sleepless.

el gallinazo said...


"Simon's Phobia article was an odd one. What line was he pushing? Was he trying to say the Dems must devalue our currency, for the public good? Hard to tell, the way he writes"

Well, the guy can definitely write. My take is that the usaco populist men of the people like Jackson and Bryan, (and in his aristocratic way, Jefferson), are colorful and interesting, but when it comes to money, they are total fuck-ups, so leave the care taking of the money supply to the grey, well shod eminences of the central banks and boardrooms. And do not go raging into your tent cities.

Of course the anti-banking populist had their ugly warts to say the least. Jefferson the slave banger, Jackson the man of many an Indian My Lai, and Bryan, who in 1925 in Dayton TN, decided to cut off Australopithecus from the family jewels.

Anonymous said...

Anon 11:39pm - I suspect it's not so much Roubini and Rogoff being bought, rather a case of them selling themselves cheap.

Anonymous said...

Speaking of softened edges, muffled barks, and cocktail hour thrill seekers, the Chicago architect Louis Sullivan had a great line for corralled glitz:

" That this great school, in its perfect flower of technique, lacked the profound animas of a primal inspiration."

Anonymous said...

Gallinazo: "the anti-banking populist had their ugly warts to say the least."

Sure. Still, one has to wonder how much more saintly the bankers of their time were. We'll never know, eh? Wealth buys flattering oil portraits.

Gallinazo: "And do not go raging into your tent cities."

Yes, there's definitely... how to describe it... a paralytic taste to the prose. And an aftertaste of condescending... "Daddy knows best." As when I read this:

"Like Jefferson, who in almost every other respect was a more sophisticated mind, Jackson came to believe paper money at best an unreliable creature of financial whim (those depending on it never sure how much it might be discounted), and at worst the choice tool of a conspiracy to enslave through debt."

Which we're discovering all too late to be pretty much the case: sophistication be damned!

No, Jackson had a point: a point Simon is too lazy to quote at length, or acknowledge, even in the face of present evidence.

Lazy, unimaginative Brit. The unsophisticated devil on my shoulder kinda hopes the guy banked in Iceland.

Reluctant Poseidon Hamster

Starcade, now from Leviathan said...

And the moment, bluntly, that people choose to no longer be able or willing to play along, that's when we go from past TEOTWAWKI (where we are now) to TSHTF.

Starcade, now from Leviathan said...

Someone should tell Davidowitz that the only way to get UE to 12-13% and then get rid of the inefficiency from there is to eliminate the poorest quarter of America's population.

Shame that they don't admit that the only way to balance the budget is on the end of the smoking gun.

Stoneleigh said...

One point to add to the Toby Hemenway debate from yesterday. I think it quite likely that people will flock to cities in the coming depression, the reason being that wealth concentration mechanisms, which always exist in one form or another, will continue to suck wealth out of the periphery in an attempt to prop up a failing center. Witness Arnie threatening to confiscate municipal property taxes in order to pour that money down the giant black hole in California's budget.

Wealth conveyors operate on all scales simultaneously, so that a national capital sucks wealth from the states, the states suck it from municipalities and the municipalities will suck it from their own hinterland. The rural areas, with little power, could be drained through punitive taxation, as they were in Rome, where taxes were so high that people abandoned their farmland. This kind of dynamic is likely to lead to the formation of sprawling slums around major cities, as it has done throughout the world. Look at the Villas Miserias around Buenos Aires for a foretaste of where financial crisis dumps many people.

Those who opt for the rural existence must be prepared for punitive taxation. On the one hand they can be relatively self-sufficient, but on the other, they could face confiscation of land and produce 'for the public good'. Those who choose the urban option will have little means to produce, and will have to live with high personal risk of violence, but may benefit from being closer to the center. Relief programs typically only focus on urban populations.

The ones worst off will probably be those in between, who lack the ability to produce much on a small suburban plot, are extremely dependent on life-support services that will no longer be reliable and will be outside the range of relief programs. Suburbia is a trap in many ways.

There are no 'no risk' options and no panaceas, either financially or physically. One must balance the risks and benefits of each option and choose the least worst under the local circumstances. We have chosen to live on a communal farm.

el gallinazo said...

Re Howard Davidowitz

There are two, often quite separate, aspects to economic commentators. One is how clearly they see what is going down, and the other is how they feel about it. I read Mish every day, not because I always like his politics, but because he has a very clear understanding of what is happening and explains it both bluntly and clearly. Mish, at least, is likable. Denninger is personally quite repulsive, yet he often really knows and exposes the reality behind events.

Davidowitz's attitude toward labor was obnoxious, but he did give an insightful portrayal of the different economic and personality forces at play. There was value in listening to him. So much of the MSM couldn't even wash a tick from a hog. So Ilargi gave us some digestible food for thought.

el gallinazo said...

We have an interesting dichotomy of future projections. Stoneleigh sees, like in ancient Rome, the MOTU taxing the rural doomsteads to death in many areas. Yet many here state that they will be too afraid and ineffectual even to foreclose on defaulted houses. Like the great Yogi said, "It's tough to make predictions, especially about the future."

el gallinazo said...

Max Keiser's and Stacey Herbert's latest podcast is a hoot. If you must deplete another hour's worth of peak oil from mother earth, it is a "funner" way than many to do it.

Anonymous said...

Max and Stacy are the George & Gracie of our weird media times. They compliment each other like most great comedy teams.

Anonymous said...

The Chinese are de-monetizing their dollars holdings by changing them into commodities.

They understand something fundementally that the West seems to willfully ignore.

Namely that there is a profound difference between the concept of Capital as real tangible stuff (commodities, etc..) and 'capital' as Debt.The West is based on the quicksand of 'capital' as Debt.This concept is now a Dead Parrot, or should I say, a Dead Parrot that is owed to you sometime in the future with some extra Dead Parrot interest attached to it.

World currencies tied to commodites instead of fractional reserve debt promises are going to hold or rise in relative value on the world stage.

Debt based ponzi promise currencies will sink like a stone.

Anonymous said...

City or country - pick the one that makes you happiest. Things will get tough, each place with its own problems. There's no need to add more misery your plate. My heart is in the country, so that is where I will have the best chances.


bluebird said...

Stoneleigh from yesterday says about 401(k) "My concern is that past a certain point, withdrawal will probably no longer be possible. As more and more people make withdrawals, either because they desperately need the money or they see the writing on the wall, what develops will be akin to a bank run."

Do you also see a stoppage of withdrawals in IRA's also, even if the IRA held only a mutual fund of Treasury Bills, or the IRA is a certificate of deposit at a credit union?

D. Benton Smith said...

Davidowitz can be a charming old bastard, in his whiney barking way, but that doesn't change the essence of his being. And what is that? A host-killing parasite.

What did he ever actually MAKE to warrant or justify the profit that he and his clients skimmed from the flow of money through our economy? What contribution of real value did he make to the society he was gaming?

To 'make money' by denying responsibility for what the money is making is how pimps, pushers and mobsters think, and that's the company he deserves.

Off-shoring jobs? Hostile takeovers financed by leveraged junk bonds? Shorting manufacturers into oblivion? Arms sales? Not a problem, so long as the cash rolls in.

In other words: not until the amassed sins of a corporatocracy gone mad come home to roost does he wail and rend his clothing.

Now that he fears losing the loot of earlier crimes he cries out in pain. But against whom? His fellow money changers who drove our manufacturing base to foreign shores? Nope! He rails against labor unions, people who (regardless of their faults) actually MAKE things.

Shed no tears in sympathy for him or his brethren. They thought they were getting something for nothing, and now it's all being taken back.

The only tragedy in that is how the world was wreaked in the process... for nothing.

Don't think he's your friend just because he's making noises like the enemy of your enemy. He's just another down-on-his-luck pirate, pining for some more easy money.

Stoneleigh said...


Do you also see a stoppage of withdrawals in IRA's also, even if the IRA held only a mutual fund of Treasury Bills, or the IRA is a certificate of deposit at a credit union?At some point, yes. Pots of money put aside for the future will be very much in harm's way in the free-for-all wealth grab that is moving inexorably closer. We aren't there right now, but we will be, quite possibly in less than a year. Excess claims to underlying real wealth will not be resolved in accordance with legal niceties. Instead it will be chaotic and completely unfair. The little guy is going to have a very hard time hanging on to anything.

Stoneleigh said...


Good to see you over from TOD (assuming you are the same person). I always enjoyed your posts and envied your skill set :)

City or country - pick the one that makes you happiest. Things will get tough, each place with its own problems. There's no need to add more misery your plate. My heart is in the country, so that is where I will have the best chances.

I agree, which is why I too live in the country. We have news lambs at the moment, as well as a new puppy, and watching my children take such joy in the new arrivals, rather than being plugged into an electronic world, is worth a lot to me.

Anonymous said...

Stoneleigh - yes, it's me, and I have read TAE every day. And I am truly impressed by what you and Ilargi have accomplished. Your compass seems to be very well calibrated!

Nothing like baby animals to make you smile. We got a livestock guardian dog this year as the foxes were taking the best chickens. She's wonderful and very effective, but she's 100lbs now at 1 year old. I fear we could buy a lot of eggs for what she costs to feed!

Might be something to look into if you've got any predator problems. Not sure how it works with bankers.


Anonymous said...

@ Armando Gasco'n..

Is that really you.... Sergio?

Stoneleigh said...


Glad to see you here :) How are things going with your place?

Our new puppy is a livestock guardian dog - a Hungarian Kuvasz. We haven't had any predator problems so far (with the exception of our own huskies engaging in occasional unauthorized hunting expeditions in our barn), but it seemed like a good idea to get a dog bred to look after all inhabitants. Else is not far off the size of a full grown husky now, at only 4 and a half months old. Females of her breed typically grow to about 90 pounds, although her parents were a little on the small size. She already eats far more than a husky, but we think she's worth it :)

I'm considering breeding her when she's older, as a pack of guardian dogs would probably be a good idea in the future we're moving towards. Kuvasok are not naturally aggressive, but they are firm about who belongs and who does not.

el gallinazo said...

D. Benton Smith

As usual, an excellent comment and perspective. I value your input.

Anonymous said...

Ilargi, you get your ass in a knot when someone posts something you have put up, right?

Well, that David Horowitz thing was in your comments two days ago when it was brought over from Jesse's American Cafe, posted there in an article by by Aaron Task. Up to speed ilargi, up to speed! I think that is your refrain to others in a similar situation.


No great kn owledge about your countries 401 K thingy, but you might check out the idea of getting that mutual fund converted into straight treasuries or cash within that structure, and as long as a monetary collapse follows rather than presages a stock market collapse (don't see why it wouldn't, but I guess anything is possible), move from treasuries after that drop into something solid like utilities. Up here in Canada I have something similar planed as far as a fleeing trapeze act goes.

Anonymous said...

Anon 11:01

Unfortunately, one must quit one's job to cash out a 401k. Might not be the best time to spend afternoons watching Oprah if one has an option.

Posting a link in the comment section is not exactly identical to posting an article in the main body of Ilargi's blog. Strange that you can conflate the two with a dash of contempt for spice.

Stoneleigh said...

Anon @11:30.

Unfortunately, one must quit one's job to cash out a 401k. Might not be the best time to spend afternoons watching Oprah if one has an option.

That is certainly a serious consideration. I agree it's not the time to be volunteering to join the ranks of the unemployed. The right thing to do is very much a question of individual circumstances. Often it will be the lesser of many evils. For some, keeping their retirement savings in the safest instruments will be the best option. For others it would be better to leave behind a job that is very vulnerable to disappearing anyway, and opt for something much more depression-proof, extracting savings along the way.

jal said...

Moving an RRSP from mutual fund to a RRSP bank account is a time consuming thing.
I'm in the process of doing it. When it is completed, I'll give you an explanation of the "hoops" that I had to go through.


Anonymous said...

Stoneleigh - Madison is a "Triple Cross" from a breeder in Wisconsin. She's 50% Spanish Ranch Mastiff, 25% Polish Tatra, and 25% Italian Maremma. She is a big floppy sweetheart - she'll look like she's not paying any attention, but she knows everything that is around. She does not chase anything off into the woods, she stays with her charges and barks to warn them off. Charlotte, our hound dog rescue takes the chasing role. No fox problems this year at all, nor issues with deer eating our stuff.

So far she isn't much use in keeping people away, but that may change as she gets older. She's certainly big enough to intimidate, especially as she looks quite like a wolf sometimes. Absolutely everyone loves this dog - she is mellow and very smart. I'll try to email you a picture.

We have not made much progress this year toward self sufficiency. The old world keeps pulling us back! The kids are busy with school, and a group of us bought out our company from the giant multinational that owned it. It won't last forever, but as we sell products to the electric utility market I thought it might make sense. Still, it has taken time from preparations, and that worries me.

To a great extent, the financial problems have overtaken those directly driven by peak oil, as you and Ilargi had predicted. Accordingly, this has changed our focus on a more personal level. I hope we have enough time an resources to get the other preparations ready - mostly in terms of food production.

Stoneleigh said...


We have not made much progress this year toward self sufficiency. The old world keeps pulling us back! The kids are busy with school, and a group of us bought out our company from the giant multinational that owned it. It won't last forever, but as we sell products to the electric utility market I thought it might make sense. Still, it has taken time from preparations, and that worries me.

I hear you. My kids and my job keep pulling me back into the old world as well, so progress here isn't as quick as I'd like. There are only so many hours in a day, and with a full time job, TAE, fitness training, a farm and a family, there isn't much spare time for developing new aspects of self-sufficiency. We put in a heated greenhouse, but I haven't had to time to grow anything in it yet.

Your line of work sounds pretty promising. I work in grid connections as well, and there's certainly a lot of activity in that field. Now it's because people are thinking about smart grids, but later it'll probably be just about keeping the lights on. Ontario has a new feed-in tariff programme that moving things forward at the moment, and it's part of my job to inform the Ontario Power Authority about the cost structure and public interest benefits of various kinds of renewable energy technology, in order to set appropriate tariffs. The monolithic (government) utility Hydro One is still a major obstacle though. The province gives with one hand and takes away with the other...

Finance will be the dominant factor for quite a while, but energy is still the master resource and the lack of it will come back to haunt us soon enough.

Anonymous said...

Anon May 17, 2009 11:30 AM

"Posting a link in the comment section is not exactly identical to posting an article in the main body of Ilargi's blog. Strange that you can conflate the two with a dash of contempt for spice."

Thanks for that information about 401K's, as well I appreciate your polite criticism, but feel attribution is important and not to indicate ones source is akin to theft. (I could be out of line here as ilargi may not be reading the information in all the comment section of his blog and in that I surely find no crime) On the other point, you are correct, I should not have stooped to that tone of contempt and I should as well not say that he started it first, but oops I guess I just did! Oh dear another blot on my copy book:)

Anonymous said...

stoneleigh says:

On the one hand they can be relatively self-sufficient, but on the other, they could face confiscation of land and produce 'for the public good'. Those who choose the urban option will have little means to produce, and will have to live with high personal risk of violence, but may benefit from being closer to the center. Relief programs typically only focus on urban you really believe that rural people can be self sufficient? it is easy to think that with cheap fuel... what about when fuel gets rare, medicine, etc.? during the depression, farmers went from the country to the city--- not the other way around...

do you really believe people in the city have little means to produce? maybe in mega cities... but as hemenway points out- small cities will be the place to be...

i am moving from the country to a small city-- where there are plots of .25 acres or more... i dont know about you- but i can produce alot of food on a .25 acre... you can have chickens in small cities- even goats... city neighborhood parks will become city neighborhood farms... all with established irrigation... i can picture tennis courts becoming chicken coops...

like i said, i live rurally- and while i moved here for may of he reasons you listed- i am now moving out because of the perspective i have gained from trying to go down the road of 'self sufficiency'...

as hemenway says--- show me anyone or any group who has successfully achieved self sufficiency... they are one in a million odds...

violence may occur in mega cities--- but choose your city carefully- i dont know where you live- but what makes you think violence will not come to the rural areas... i have read accounts from argentina where rural farms were targets because of their isolation-- perps would spend days torturing their prey without any fear of exposure.... rural areas in the US have a huge meth problem... and poverty... and isolation... i would rather not have to deal with them anymore-- especially in a survival capacity...

Anonymous said...


heated greenhouse?

heated with what?

Anonymous said...

Just read on Calculated risk:

"The analogy is there are some glimmers of sun shining through the trees, but we're not out of the woods yet."

'Glimmer' in 'green shoots' out apparently ... whatever happened to good old faithful 'shine'?

Anonymous said...

Anon 12:15

I am glad you did not take offense at my remarks. I hate to give misinformation, so I checked the 401(k) thing a little deeper. Like an IRA, if you pull it before 59.5, you must pay an additional 10% penalty as well as declaring the whole enchilada as taxable income.

The rule about having to leave your job to pull it does not appear to be a federal statue. However, the employer constructs the details of the plan, and that caveat appear to be almost universal.

As to Ilargi giving "finder's" credit, that is rarely done even in Ph. D. theses. Furthermore, considering the volume of world economic reporting he goes through in a day, we have no idea where he first came upon it. And with his current workload, he just doesn't have the time for these sort of niceties, particularly as it may be inappropriate in the first place.

el gallinazo said...


I know you are a Canada resident, but can you think of a way that the government can confiscate non-IRA T-Bills bought through Treasury Direct, other than declaring the individual holder a terrorist or for back taxes or fines? Like we don't have enough nightmares.

Anonymous said...

It gets stranger and stranger...

Found a deal that kept me busy for 2 days moving used plywood...resulting in enough 3/4"acex and cd-ex to cover all my building projects for a couple of years...150-200 sheets.Its not often I scare up 5-8k of free material on craigs list.Todays project is to sort and stack.

The mellowing of 2 of the doom and gloom guys is not unexpected
more a case of being advised to temper their words...and they get to join the party..if not,they would be... discounted..

Ex-pats heading homeis also not surprising..the good times are not rolling now

That us sentor of which you spoke is one of the scaryist yahoos in that group..Iwish he would be caught with a [name your fav. fetish]so as to be ...discounted..He is too weird&powerful now for my liking.

"Down on his luck pirate looking for money"..I had to cleaned up my keyboard on that one D. benton smith...

Brother called to chat...has decided to drop some bucks to get living situation here on"ready standby"...[for when it starts to get a bad.] I build a cabin,or a small moble..and another master gardener/ex-marine in the mix for my tribe.Someone I trust with my life.I see a lot of this stuff happening everywhere now...

To work to work...

bluebird said...

el gallinazo - The has a holding place called 'C of I' where I put money to buy Treasury Bills and the place that I redeem Treasury Bills (rotating in and out). My concern would be that the government would confiscate monies in this 'C of I' before Treasury Bills because 'C of I" is not titled to anyone. I would hope, by then, I would have already redeemed my Treasury Bills back to cash.

Anonymous said...

to D. Benton Smith

You totally nailed the likes of Davidowitz, only now doing his 'death bed' conversion because he see's the Rim of the Financial Event Horizon (FEH) coming into view as the poison fog of Lazy Fare PonziLand lifts from the battlefield.

May he and his parasitic, predatorial Wall St ilk harvest the Whirlwind like the ending in 'Raiders of the Lost Ark'

Pete Deer said...

I think Mr Davidowitz is right about the overall situation vis a vis "The American Consumer" being tapped out after a decade of credit card binging and McMansion flipping. But I find his continuing carping on Big Unions and Big Government as the sole problem at hand is somewhat of a red herring. While I don't doubt for a minute that government and organized labor had a big hand in what we are facing (regulators looking the over way/politicians outright bought and paid for by special interests, union officials screaming for jobs over fuel effeciency/environmental concerns), none of the financial clusterf*ck we are facing could have occured without the active, willing participation and outright backing of Big Business. The corporations have had the juice in this globalised economy for some time, and have left no stone unturned (from which many of the their CEO's have crawled out from under) in their zeal to inflate profits and their bank accounts. Mr Davidowitz's lack of honesty in addressing the corporation's role in our current economic meltdown significantly impacts his credibility to speak to this.

Stoneleigh said...

Anon @12:56,

My greenhouse is connected to my outdoor wood-burning furnace with hot water pipes. That furnace heats the house and provides the hot water, and can heat other things just by adding another loop of pipe. The greenhouse is right next to it, so as to minimize losses.

I wouldn't be able to grow things in the depths of a Canadian winter, but I can extend the growing season considerably, and that could make a big difference.

Stoneleigh said...

Anon @12:53,

do you really believe that rural people can be self sufficient? it is easy to think that with cheap fuel... what about when fuel gets rare, medicine, etc.? during the depression, farmers went from the country to the city--- not the other way around...

Real self-sufficiency would be very difficult, but considerably greater self-sufficiency is possible. It won't be any easy life by any stretch of the imagination though. I am aware that farmers moved to the cities in
the depression. IMO slum dwelling will be the way of the future for many.

do you really believe people in the city have little means to produce? maybe in mega cities... but as hemenway points out- small cities will be the place to be...

It depends. Many people will not be living on large lots with production potential, especially if they bought the property on margin. It would be hard to produce in over-crowded tenements. The book Angela's Ashes contains a fascinating description of life in urban poverty, albeit in Ireland 70-80 years ago, that I think may have more than a few parallels to the future.

i am moving from the country to a small city-- where there are plots of .25 acres or more... i dont know about you- but i can produce alot of food on a .25 acre... you can have chickens in small cities- even goats... city neighborhood parks will become city neighborhood farms... all with established irrigation... i can picture tennis courts becoming chicken coops...

In places that will be true, but only where people don't lose their homes to foreclosure in large numbers. It will also be necessary to flout any number of bylaws that may be subject to sporadic yet disruptive enforcement. They are all manner of laws that prevent people in both urban and rural areas from doing what makes sense. Forgiveness is easier to get than permission, but it can get expensive to achieve selective enforcement, as one is then entering the politics of the personal. The scale of petty corruption coming will be huge. Don't expect people to look the other way unless there's something in it for them.

like i said, i live rurally- and while i moved here for may of he reasons you listed- i am now moving out because of the perspective i have gained from trying to go down the road of 'self sufficiency'...

as hemenway says--- show me anyone or any group who has successfully achieved self sufficiency... they are one in a million odds...

Life will be drastically different no matter which option we choose. Personally, I would like some control over the essentials of my own existence.

violence may occur in mega cities--- but choose your city carefully- i dont know where you live- but what makes you think violence will not come to the rural areas... i have read accounts from argentina where rural farms were targets because of their isolation-- perps would spend days torturing their prey without any fear of exposure.... rural areas in the US have a huge meth problem... and poverty... and isolation... i would rather not have to deal with them anymore-- especially in a survival capacity...

We are not so isolated as to suffer from the worst rural deprivation. Violence is likely in rural areas as well, to a much greater extent than is currently the case. I would still rather be here than in a city.

Anonymous said...

Anon May 17, 2009 12:59 PM,

Does 'pulling it' mean one can't keep treasuries in ones 401K without penalty? I can do that as far as I know here in Canada though instead I hold Canadian savings bonds in my RRSP (Registered Retirement Savings Plan). I would likely convert that as I mentioned above into some very safe item like a utility or an inflation protected bond maybe, if I were to come across that illusive bird, the market bottom.

About Offence, my problem in life is not so much taking offensive as giving offence, and as I am never sure which is the greater sin I try to err on the side of 'giving', in the thought that it is better to 'give' than 'receive' (take):) Even that is up for discussion, is it always better to give than recieve? Oh, so many questions and so little time to laugh at them all ... right;)

About ilargi, don't get me wrong, I quite like him as a person and I will do my bit to keep liking him even if, for me to do so, it means occasionally beating at him him with a stick! He gets quite enough flattery around here to bolster the weakest ego, which I think you will agree isn't his failing.

(Disclaimer: I as well get a kick out of Denninger, another strange taste to tickle ones palatte with.)

el gallinazo said...

After reading the comments, I went back an re-listened to the Davidowitz links. Ilargi took a little flack here for even posting them.

First, he is a man who presumably spent his whole life in the financial sector and never made one worthy tangible thing. But how many tens of millions of Americans would that apply to? The financial sector at its peak represented 40% of what passes for the USA GDP. Second, he spent more time pissing on the unions than the investment banks, but he did come out against all the financial bailouts and said that all the TARP money was in the sewer. He pissed on everything but himself, and as an older male, that in itself deserves some recognition :-) His most objectionable implication was that anything tangible and worthwhile made on American soil was a losing proposition and ridiculous. That did piss me off.

But the vast bulk of what he said was right-on accurate and frankly indistinguishable from what Ilargi has been saying for the last year plus (since he started this blog). I would detail this if challenged.

OK. I read TAE everyday for over a year and have an IQ over 80, so Davidowitz didn't tell me very much I didn't know. But Yahoo Financial is definitely MSM and here is this guy warning (presumably) the masses/ middle class that the current rally is manipulated for suckers because Wall Street is so broke they have to suck the money out of your pockets through subterfuge. There is some redeeming social merit to that. A few less years in purgatory.

Further, I don't think this is a death bed conversion or he is renting his garments. He's nobody's fool, sees through the BS, and I bet he has been shorting at the right times and making money on the crisis. I think he is offended. Most of us at TAE view the old business as usual as corrupt and offensive. But the old corrupt ways have fallen to mega corruption. He is smart enough to know that this level of corruption can only be sustained for months and it pisses him off. The oligarchs are breaking all the old rules. The billionaires are instituting anarchy and he doesn't like it. That's my take.

Anonymous said...

Anon 3:18

It's probably a waste of time trying to compare USA and Canadian tax deferred systems. I am no expert on 401(k) and I never had one, but in short, it is a pseudo-pension tax deferred system that allows both you and your employer to contribute to it. The employer makes up the rules as long as they are consistent with federal statues. As I recall, at Enron, everything in the 401(k) had to go into Enron common stock. That was why the Enron employees not only lost their jobs but their savings as well.

In the more liberal plans, the employees are given several possible options to chose from. One of those options might be treasuries though I suspect that it is somewhat unusual.

As to Ilargi, he works his butt off every day for next to nothing as a public good. Even if he is a bit gruff and caustic sometimes, he deserves our appreciation.

Frank said...

@anonymous 12:53 If you prefer to live in a small city, and believe you can make a living, go for it. My wife and I would rather be farmers than anything we could do in a small city.

Toby Hemenway's move back to Portland was all about calling his rural neighbors beer swilling yahoos. We like our rural neighbors.

Anonymous said...

The old style of corruption on Wall St was almost small town and collegial compared to the OMG Corruption with a capital "C" that has muscled out the old school grifters like Davidowitz.

He's just amazed that he's not part of the new "in crowd" anymore. A white collar geezer scam-man who time has pasted by.

All those guys wanted to steal without getting any dirt under their finger nails.

To Davidowitz from:

Murder in the Cathedral

...Now is my way clear, now is the meaning plain,

Temptation shall not come in this kind again.

The last temptation is the greatest treason.

To do the right deed for the wrong reason.

Anonymous said...

For all the old school Ponzanycrats:

Little Criminals

"What you wanna come back here for?
Thought you're with your uptown friends
Don't need none of your junkie (bond) business
You gonna screw us up again

Get your blackjack off my table
Get your coat out of my rack
We don't need you 'round here jerk off
(Howard) I want you off my back

'Cause we've almost made it
We've almost made it
We've almost made it to the top

Got a gun from Uncle Freddy
Got a station all picked out
Got a plan and now we're ready
Gonna take that station out

So you go on about your business
You just leave us folks alone
We don't need no two-bit junkie
Screwin' up our happy home

'Cause we've almost made it
We've almost made it
We've almost made it to the top."

--Randy Newman--

Anonymous said...

A Few Words in Defense of Our Country

I'd like to say a few words in defense of our country
Whose people aren't bad nor are they mean
Now the leaders we have while they're the worst that we've had
Are hardly the worst this poor world has seen

Take the Caesars, for example
Why with the first few of them
They were sleeping with their sister
Stashed little boys in swimming pools
And burned down the city

And one of 'em, one of 'em
Appointed his own horse to be Counsel of the Empire
That's like vice president or something
No wait a minute that's not a very good example

Here's one Spanish Inquisition
Put people in a terrible position
I don't even like to think about it
Sometimes I like to think about it

Just a few words in defense of our country
Whose time at the top could be coming to an end
We don't want your love
Respect at this point's pretty much out of the question
Times like these we sure could use a friend

Hitler, Stalin, men who need no introduction
King Leopold of Belgium, that's right
Everyone thinks he's so great
Well, he owned the Congo, he tore it up too
Took the diamond, took the silver, took the gold
You know what he left 'em with? Malaria

A president once said
"The only thing we have to fear is fear itself"
Now we're supposed to be afraid
it's patriotic, in fact, color-coded

What we supposed to be afraid of?
Why of being afraid
That's what terror means, doesn't it?
That's what it used to mean

You know, it pisses me off a little
That this Supreme Court's gonna outlive me
Couple young Italian fellas
And a brother on the Court now too

But I defy you, anywhere in the world
To find me two Italians as tight asses as the two Italians we got
And as for the brother
Well, Pluto's not a planet anymore either

The end of an empire, is messy at best
This empire's ending like all the rest
Like the Spanish Armada adrift on the sea
We're adrift in the land of the brave
And the home of the free



Submit your advice said...

Hey, I am a beer-swilling yahoo. Guess I'm in the right place. Today, May 17 in MI I harvested and ate large quantities of : chives, green onions, green garlic, sorrel, parsley, fava greens, pea shoots, baby radish, mustard and turnip greens.

Oh, and if you haven't heard "Little Criminals" on DVD-A 5.1 surround full blast, you ain't lived. That song rocks. At least try it in DTS 5.1

PS long RIG @ 68.40, looking to get out at 70.14 tomorrow morning by 10:30 am

Stoneleigh said...


The worst of the financial collapse should occur over the next 1-7 years, but depression should hang on for longer and energy crisis will be a big part of it. After that I would expect decades of instability at a much lower standard of living than we currently have. The last time a bubble of anything like this scale burst (the South Sea Bubble in the 1720s), it was followed by decades of upheaval and culminated in a series of revolutions late in the 18th century.

Ilargi said...

New post up

Anonymous said...

violence may occur in mega cities--- but choose your city carefully- i dont know where you live- but what makes you think violence will not come to the rural areas...I feel that small towns/villages around the 2000 population mark, off the beaten track, may be a happier medium to living in the city or trying to farm, the latter especially where, if like me, you have no experience on the land.

You could acquire a small block or leasehold of 1/2 to 1 acre "in town" with a house. Being country folk, very often your neighbours will already be growing/raiding some produce in their back yards, which means that yours is less likely to be looked upon enviously.

With enough lead time (2 years?) you should have also developed good relations with the townsfolk whom you could hopefully rely on for protection and support in a crisis, and vice versa.

The last time a bubble of anything like this scale burst (the South Sea Bubble in the 1720s), it was followed by decades of upheaval and culminated in a series of revolutions late in the 18th century.You forget to mention the dieoff; there will also be the turmoil imposed by dieoff which will make the next few decades especially tragic for our species.

Submit your advice said...

Got it. Sweet. Back to the sidelines.