Saturday, September 5, 2009

September 5 2009: The Great American Affordability Scheme

Unknown POW July 1863
Three Confederate prisoners, Gettysburg, Pennsylvania

Ilargi: Labor Day, Monday September 7, marks the first anniversary of the US takeover of Fannie Mae and Freddie Mac. Prior to the takeover, the two had for over 70 years bought over half of US mortgage loans from lenders and sold them on, packaged as securities, to investors. If you put it in in the right terminology, Fannie and Freddie are just one step shy of the Red Cross and Salvation Army. The Financial Times gives it a try:
[..] many have enjoyed lower interest rates on their home loans because the two companies kept money flowing through the market. Backed by an implicit government guarantee, their mission was to support the US housing market by providing liquidity, stability and affordability for those in need of a mortgage.

This is the sort of description of Fannie and Freddie's activities that has become standard in the US media. But there is something missing, and something crucial at that. By allowing lenders to rake in commissions and other fees for a loan they originate, while selling off the risk of default on that loan to global investors, in a set-up that provides implicit government (re: taxpayer) guarantees for that risk, Fannie and Freddie serve to drive up real estate prices, and dramatically so.

There was a time when mortgage loans were provided for maximum 50% or 60% of the purchasing price, and when they were standard paid off in 5 or 10 years. At today's prices, compared to people's incomes, that is unthinkable. Loans are now paid off in 25, 30 or even 40 years. Moreover, when all accumulated fees are taken into consideration, home-"owners" will more often than not have paid 3 or 4 times the purchasing price of the home once the loan has been paid in full. This is not a typical US phenomenon, government "support" for homebuyers exists in many countries. For example, when I was in Portugal ten years or so ago, I noticed that multi-generational loans were all the fad.

It's a generally accepted sort of scheme, but that doesn't make it any more morally acceptable. The often lauded additional "affordability" offered through a government guaranteed home loan system is of course nothing but a hoax. In essence, what it delivers is the opportunity for someone who couldn't afford a $50,000 house under "normal" conditions to now get financing for the exact same abode for $350,000. And if everybody can "afford" to spend that much more, prices will, as if by magic, rise accordingly. After all, why would anyone try to sell a house for only $50,000 when there's that much credit in the market? Buyers wouldn't even want it, they'd think there was something wrong with it.

So if the home still costs about as much to build, where does all the extra money go? Well, builders become "project developers" and drive fancy cars. Suppliers get a share; until the crash the cement and plastics industries were doing just fine, thank you. Most of it, though, goes to the banks. That is the one and only real effect of Fannie, Freddie, their brethren around the globe, and the government guarantees they offer. Instead of a hard working family paying George Bailey's Building & Loan Association in "It's a Wonderful Life" 50% of their income plus 5% interest for 5 years, that same family, if it wants a home of its own, is forced to pay 30% or 40% of its income for 30 or 40 years to a bank that runs no risk whatsoever and that will charge it fees left, right and center on top of everything else. Is it any wonder that the real wealth of American families has been falling since the early 1970's?

The largest and most important purchase for everyone who wants a family has turned into the largest and most important transfer of money from Main Street to Wall Street. And now that Wall Street’s gambles with all the money raked in through the scheme, as well as the highly leveraged securities written on the loans, turn sour, the government guarantees kick in, and it's up to deeply impoverished Main Street to cough up the cash to pay the piper. Meanwhile, the banks still operate, their traders still make millions, Fannie and Freddie are about to be replaced by a side-scheme operated through Ginnie Mae and the Federal Housing Administration (which will need a taxpayer bail-out before the year is over).

There is one thing more crucial than any other to the present US economy: a program must remain in place which guarantees that people pay far too much for their homes. If that would be let go, there would be no financial or banking system left in the country. Sharply lower property taxes would bankrupt all states, counties and municipalities save for a precious few. And perhaps most of all, the previously incurred losses would be forced to the surface. You can't keep a $350,000 loan in your books for a home right next to a similar one that sold for $35,000.

If we want to ever shine a light on any of this. before the next step in this tragic drama is locked in by the White House, it would be good for an investigative journalist or two (hello, Huffington!) to dig up the answers to a few questions such as these:
  • What is Fannie and Freddie's securities portfolio valued at presently?
  • How did Ginnie Mae end up with over $1 trillion in loans?
  • How did the FHA become insolvent?
  • What is the situation at the various Federal Home Loan Banks? What is the precise role they play in the scheme?
  • What happened to Fannie and Freddie share prices recently that makes them compliant with NYSE rules once more?
  • Who puts money into companies with a combined negative asset value of $260 billion?
  • What would have been the estimated effect if both had been de-listed?

Do Fannie Mae and Freddie Mac provide "affordability for those in need of a mortgage"? No, clearly not, they provide the opposite. They raise home prices by guaranteeing loans at steeply elevated prices. They pervert the market.

Is it true that "many have enjoyed lower interest rates on their home loans" because of Fannie and Freddie? Well yes, but who of sane mind would rather pay 5% + fees on a $350,000 mortgage than 6% + no fees on a $50,000 loan? What sort of discussion is that to begin with? If the government and media keep repeating the positive sides often enough, and god knows they’ve been at it for 75 years now, who will dare be critical?

A system with government guarantees for real estate could work, but never if it is provided through a banking system that seeks to maximize its profits at the expense of the taxpayers whose money is being spent by that government.

It won't stand. The system is broken beyond repair. The boondoggle has extracted so much capital out of the economy that there cannot be a market any longer at the higher price levels. Sure, according to the S&P-Case/Shiller index, prices are down 30% from their peak already. But if you think that’ll be all, imagine what would happen if Fannie and Freddie, or their taxpayer-guarantee providing successors, would be taken out of the market.

Real estate prices can no longer be kept at such artificially high levels, since people can't afford them anymore no matter what guarantee they come with. At the same time, if real estate prices are allowed to fall, by taking the guarantees away, the housing market will implode overnight, taking individual homeowners as well as the banking system and indeed the entire American economy with it.

A real life conundrum. If you don’t want the banks and the economy to implode, you need to keep prices high. But if you keep prices high, there are no buyers, which means the banks and the economy will implode (just a bit slower).

Now, you would think a government would choose the lesser of two evils. Instead, the present administration elects to embrace both evils. What should a government do? In the end, it all comes down to Garrett Hardin again, who said the main task of the shepherd is to minimize the suffering of the herd. What the Fed and White House do instead is try to minimize the suffering of the rich. The only consolation for the rest of us is that it won't work. Unfortunately, we’ll pay a high price to figure that out.

Houses to put in order
Edward DeMarco is all too conscious of the burden he carries as the man in charge of ensuring the vast majority of US mortgages are soundly backed – and that outsiders who invest in them are given due protection too. The acting director of the Federal Housing Finance Agency is regulator of Fannie Mae and Freddie Mac, America’s twin home loan enterprises. "Financing for millions of mortgage transactions executed at kitchen tables, metal desks and bank offices around the country has come from investors all over the global capital markets," he says in an interview.

But as Americans gather at kitchen tables and elsewhere to celebrate Labor Day on Monday, the holiday that traditionally marks the end of summer has added resonance as the first anniversary of Fannie’s and Freddie’s rescue by the federal government. For decades, the two so-called government-sponsored enterprises (GSEs) – private companies operating under a federal charter – had been silent partners in more than half of all home loans made to US borrowers. Their role was to buy loans from banks and other lenders, package them into securities that they guaranteed and sell those on to investors or hold them on their balance sheets.

Individual homeowners were thus seldom aware they had a Fannie- or Freddie-backed loan – but many have enjoyed lower interest rates on their home loans because the two companies kept money flowing through the market. Backed by an implicit government guarantee, their mission was to support the US housing market by providing liquidity, stability and affordability for those in need of a mortgage.

All that was thrown into question on September 7 2008, when their mounting losses and increasingly acute funding difficulties pushed the two abruptly into Washington’s arms. Fannie and Freddie had succumbed to multi-billion dollar credit losses as the housing bubble burst in 2006 and millions of borrowers defaulted on their mortgage payments, eroding their already thin capital cushions. A year into the global credit squeeze, investors became increasingly fearful of collapse and stopped lending money to the two companies, forcing the government to step in.

Now, as the White House begins to draft reform proposals for Fannie and Freddie to be presented along with the government’s 2011 budget in February, the future of these two venerable institutions still hangs in the balance. Supporters of Fannie and Freddie warn that aggressive changes to the way they operate could make mortgages more expensive and put home ownership out of reach for many. Critics counter that downsizing or killing off government support for the two companies would allow markets to assess risk more effectively and curtail the excesses that led to the housing market collapse. The administration of President Barack Obama has so far offered few clues on the nature of its long-term plans for the institutions. An official says only that it is still considering a long list of options and that "no one option is under strong consideration at this time".

Any new structure for the two companies will need to balance political demands for the government to subsidise home ownership with the exigencies of delivering that subsidy efficiently and in a way that poses no systemic threat to the US economy. "There are no obvious choices," says a consultant close to both Fannie and Freddie. "When a bank fails, we know it eventually becomes a bank again, but when a GSE fails, there simply is no model. They have such an important social function that this will largely be a political decision, not an economic one."

What is also clear is that the FHFA will be at the forefront of executing the administration’s plans. "In aggregate the US mortgage market is $12,000bn," says Mr DeMarco, indicating his preferred approach by adding: "I think it would be fruitful to ask, before deciding among the wide variety of possible legal and ownership structures for the GSEs, what do we want the secondary mortgage market to look like? This will shape our other decisions." Acknowledging the importance of Fannie and Freddie to markets as well as holders of the underlying home loans, he says: "Our task now has to be to decide what are going to be the connections between the individual mortgages and the big securities transactions."

Before the takeover, the government’s implicit backing ensured low funding rates for the two companies because investors in the US and abroad were content to buy billions of dollars of Fannie- and Freddie-backed securities at returns only slightly above US Treasuries. But that hybrid public-private model has since been widely criticised for fuelling excessive risk-taking by Fannie and Freddie during the housing boom. Their executives were able to boost returns for shareholders while using the unspoken federal guarantee as a backstop.

The government takeover has come at enormous cost to US taxpayers. Fannie Mae and Freddie Mac have so far tapped nearly one-quarter of a $400bn Treasury lifeline. The Federal Reserve also stepped in with commitments to buy $1,250bn of their mortgage securities and a further $200bn of their debt. As a result of the degree of management and financial control the government now exercises, the Congressional Budget Office will this year begin accounting for Fannie and Freddie as federal operations. It says that will increase the federal deficit by $291bn this year. As the costs of Fannie and Freddie’s conservatorship mount, working out an exit strategy becomes ever more demanding for the government. Both companies and their regulator have said they think it is unlikely they will ever be able to repay the Treasury funds, which are structured as senior preferred stock purchases that carry an onerous 10 per cent dividend.

Complicating the picture is that since the onset of the credit crisis two years ago, and even more so since their takeover last September, Fannie and Freddie’s role in the housing market has swelled. They have backed more than 70 per cent of new home loans since 2008, stepping in as private lenders all but disappeared from the market. Under conservatorship, they have also become the engines of government policy to tackle the foreclosure crisis. They are at the forefront of programmes to modify the terms of home loans for struggling borrowers and refinance those that now exceed the value of the properties on which they are secured.

The sums involved are enormous. At the end of July, the two companies had $5,500bn of outstanding debt and guarantees on securities, approaching the $7,200bn US public debt. The two also hold a combined $1,500bn of mortgages and mortgage-backed securities on their balance sheets. James Lockhart, whom Mr DeMarco replaced as regulator, says: "Over the long term, this high GSE and government share [in the mortgage market] is unhealthy." But others point out that any attempts to reduce the size of Fannie’s and Freddie’s portfolios, combined with the Fed’s own plans to reduce its holdings of GSE securities, could be destabilising for the market. "Who would be the buyers?" asks one former executive at Fannie Mae.

Fannie Mae declined to comment, directing questions to the regulator. For his part, Ed Haldeman, Freddie Mac’s chief executive, says: "It has been made clear to me that the GSEs would have a seat at the table, although not a decision-making one, but I have not yet seen or heard anything official that would give me much guidance as to the government’s direction." Analysts say the government has three basic options. The first would be the equivalent of nationalisation. Fannie and Freddie could be turned into a single government agency that would provide explicit federal insurance on all mortgages that conformed to its requirements. This would allow the government to preserve liquidity in the mortgage market while giving it direct control over providing affordable housing to targeted communities.

Under this model, the existing assets and liabilities of the GSEs could be taken over by a separate "bad bank" that would be capitalised by the government and managed while the mortgages gradually mature or pay off. Alec Phillips, analyst at Goldman Sachs, says: "Nationalisation of at least some of the GSEs’ operations seems probable because Congress seems very likely to want to maintain the GSEs’ affordable housing mission." However, there have also been warnings that such a model would come with all the risks of moral hazard but without the discipline imposed by private shareholders. "What I have seen is that government insurance programmes are high risk and full of moral hazards," said Mr Lockhart in a speech shortly before his resignation. "It is often difficult in a political environment to calculate or charge an actuarially fair price, avoid mission creep and keep federal risks from increasing."

Second, both could be put back entirely into the private sector, perhaps breaking them up into several smaller companies in the process. Private companies would in theory offer the benefits of greater competition and greater efficiency. But both the administration and Ben Bernanke, Fed chairman, acknowledge it was government backing that allowed the two to continue to produce and sell mortgage securities when private firms could not. The third option would be to return Fannie and Freddie to their status before they were taken over. A restored hybrid public-private model could come with a requirement to reduce their portfolios and hold more capital. It could also involve a good-bank/bad-bank split.

The companies could be subject to much more stringent oversight. This could involve regulated returns, similar to utilities such as electricity companies, or supervision by bank regulators. It would also be possible to make the government’s guarantee explicit, with transparent premiums for that privilege paid by the two companies to a government insurance fund. Don Brownstein, chief executive of Structured Portfolio Management, a mortgage-focused hedge fund, says: "The government has little choice at this stage but to make the guarantee explicit. The toothpaste is out of the tube now – every investor in the world knows these companies are too big to fail."

Policymakers will thus have their work cut out for them in the months ahead. The administration’s proposals, whichever direction they choose to take, are likely to require an act of Congress – and the wrangling over Fannie’s and Freddie’s future could continue well into 2010. Recent experience is likely to drive lawmakers to believe some form of government backstop may be necessary to ensure the mortgage market can continue to function even under the most stressed conditions. But as Mr Phillips at Goldman Sachs points out: "It seems unlikely that lawmakers will explicitly endorse returning the GSEs back to their ?previous model after burdening ?taxpayers with billions of dollars of losses."

When the US Treasury and Federal Housing Finance Agency took over the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation – the twin institutions better known as Fannie Mae and Freddie Mac – on September 7 2008, a financial conflagration of unprecedented size was about to erupt. The following days and weeks brought the collapse of Lehman Brothers, the investment bank; AIG, the insurance behemoth; and Washington Mutual, the largest bank failure in US history. The period also saw the hurried acquisition of Merrill Lynch by Bank of America, which has since become the subject of congressional hearings and investigations by the New York attorney-general. The rapid takeover of the government-sponsored mortgage financiers was intended to reassure investors that the home loans market could continue to function even as defaults by homeowners widened their losses.

By July last year, the scale of the losses had prompted the administration of George W. Bush to pass legislation to regulate the two enterprises more closely. Far from taking comfort, however, investors grew nervous. The new regulations called for Fannie’s and Freddie’s regulator to oversee a contraction in the companies’ balance sheets, which in turn led to investors pulling back from buying their debt, fearing it would be less easy to trade. This made it increasingly difficult for the GSEs to fund their operations. "By early September, it was clear that there was no other choice than conservatorship if the enterprises were going to continue to fulfil their mission of providing stability, liquidity and affordability to the market," says James Lockhart, their regulator at the time.

John Koskinen, appointed as chairman of the board at Freddie Mac after the takeover, says government officials "had a pretty good focus on stability. They wanted to conserve the company’s ability to operate and to serve the mortgage market. They felt that if investors lost confidence it would be a major problem for housing." However, just as the July legislation had destabilised the market for Fannie and Freddie’s debt, the structure of the takeover had damaging unintended consequences for the rest of the financial world.

In an attempt to draft the takeover in a way that would compensate the Treasury for taking on the risk of the two institutions, the Treasury’s investment was made senior to $36 billion of preferred stock sold by the two companies. This so-called "cramdown" of the preferred stock – the securities were made close to worthless by the move – led to investor reluctance to commit capital to other needy financial institutions, as the risk of later government intervention was seen as too great. Much of the preferred stock had originally been issued at the behest of Fannie’s and Freddie’s regulator. In addition, regulations on investments in Fannie and Freddie by banks were loosened to expand the market for such securities.

Regional banks, together with US insurers, held the majority of the two GSEs’ $36 billion of outstanding preferred stock, prompting writedowns for many small financial institutions at a time when they were struggling with troubled investments in commercial property and home equity loans. "So now the government has a conundrum," says a former executive at Fannie Mae. "It will be very hard to persuade investors to return to these two companies. There will be a clearing price [a price investors are willing to accept] but for Fannie and Freddie to be effective, investors have to feel confident enough to accept returns lower than on, say, General Electric. That is going to take some work."

Investors Find Love in $260 Billion Black Hole
Some things I’ll never understand. How can a show called "Flip This House" still be on television? Why didn’t the Utah Jazz basketball team change its name after leaving New Orleans? And why in the world did the common shares of Freddie Mac and Fannie Mae go berserk last month? The last of those questions is by far the most difficult to answer.

In case you hadn’t noticed, America’s worst financial companies were the market’s best-performing stocks until a few days ago. The price of Freddie’s common shares more than tripled in August, as did Fannie’s, although this week they have given up some of their gains. It was the same story at their fellow ward of the state, American International Group Inc. While the stock-market values of these government- controlled companies have soared this summer, it’s debatable what those values are.

For instance, you might say Freddie’s market capitalization is about $1.1 billion, based on the company’s $1.64 stock price and the 648.3 million common shares outstanding that Freddie disclosed on the cover page of its latest quarterly report. These are the inputs investors normally use to calculate market caps. It also would be accurate to say Freddie’s market cap is $5.3 billion. That figure is based on the fully diluted shares outstanding of about 3.3 billion that the company used to calculate its loss per common share last quarter.

Similarly, Fannie’s market cap is either $1.5 billion or $7.8 billion, depending on which share count you use. (The stock closed yesterday at $1.37.) The larger share counts include warrants issued to the U.S. Treasury that would allow the government to buy 79.9 percent stakes in the companies’ common shares at a nominal cost. As of yet, those warrants haven’t been exercised, and so the shares haven’t been issued.

The situation at AIG is even more confusing. The cover page for its latest quarterly report shows 134.6 million common shares outstanding, which is about the same as the fully diluted share count on its income statement. Yet in a footnote to an Aug. 13 press release, AIG also disclosed a hypothetical share count, assuming that someday it would have to convert a big slug of the preferred shares it pledged to the government into common stock.

AIG had 697.4 million common shares using that method. Thus, depending on which figure you use, its market cap is either $5.1 billion or $26.5 billion, based on AIG’s $37.95 stock price. All three companies are leaving investors to sort out for themselves which share counts are the right ones to use. Go figure. The larger question is why anyone would pay anything to own any of these companies’ common shares. Elsewhere in their disclosures, Fannie and Freddie tell you straight up that their common equity is worth less than zero.

Unlike other companies, the two government-backed mortgage financiers publish quarterly fair-value balance sheets showing estimates of the real-world values for all their assets and liabilities. (Fair value is the price at which an item would change hands in an orderly, arm’s-length transaction.) As of June 30, Freddie said the fair value of the net assets attributable to its common shareholders was negative $122.6 billion. At Fannie, the number was negative $138.1 billion. Together, from the standpoint of a common shareholder, the two companies amount to a $260 billion black hole.

The only place you’d find a bigger deficit is the federal budget itself.

By comparison, from 1990 through 2007, before they were seized by the government, Freddie and Fannie reported total net income of $35.9 billion and $59.8 billion, respectively. Even if the companies returned to their former glory, there is nothing in their histories to indicate they have the ability to earn their way out of their present deficits. Hope springs eternal anyway. As for AIG, the insurance company’s common shareholder equity was negative $35.4 billion as of June 30, once you take away its $44.2 billion of deferred customer-acquisition costs and $6.4 billion of goodwill. Those assets exist only on paper and can’t be sold by themselves.

In effect, what we have here are three extremely expensive Powerball tickets. Perhaps the bet is that the Treasury might bestow a gift on the common shareholders one day, by forgoing some of its ownership rights in the event the companies can’t repay all their debts to taxpayers. Or maybe the recent rally was just the result of a monstrous squeeze on short sellers who were forced to cover their bearish bets. There’s no way to know what’s going on in Mr. Market’s head at the moment. At least when you play the lottery, the odds of winning and losing are measurable.

Fannie and Freddie woes trump banking debacle
Federal banking agents will be out again late this afternoon, walking into the nation's most troubled banks and taking them over, if today is like most recent Fridays. The government likes Fridays because it gives staff the weekend to reorganize the bank so customers can get to their money when it reopens for business. It has seized an average of four banks each Friday since the end of June, up from one every other week last year, and none in 2005-06. No bank around Philadelphia has failed in this cycle. A lot of the doomed lenders were near Atlanta and other centers of reckless optimism. More than 80 banks have closed to date in 2009. Should we get worried, or angry? Are taxpayers going to get robbed again?

Nope, it's what banks do, every so often, and banks are taking care of the problem, said William Isaac, who headed the Federal Deposit Insurance Corp. under President Ronald Reagan during the run-up to the last big round of bank blowups. "I don't see a whole lot of diffence between the bank failure occurring this time and last time," Isaac told me earlier this week. "Banks get too aggressive in lending, and now they're in substantially weakened condition, and it's time to clean it up. We'll be doing that for the next couple of years," he said from his Florida home, where he rested between calling on bank executives around the country as chairman of LECG Corp.'s financial-services business.

LECG is the national consulting firm that last month agreed to buy the largest Philadelphia-area-based accounting firm, Smart Business Advisory & Consulting L.L.C., of Devon. Richard X. Bove, a bank analyst for Rochdale Securities L.L.C., estimates that maybe 150 to 200 more banks will fail this cycle. Isaac calls that "reasonable," though he notes that only the FDIC really has a good idea, and it keeps the truth hidden, under federal bank-secrecy laws, until a company is actually taken over. Won't FDIC run out of cash at this rate? "Not yet," Isaac said, citing the FDIC's fund balance (about $10 billion) plus billions more in accrued insurance payments that Isaac said the agency had set aside to cover future losses.

If FDIC does run low, Isaacs said, it ought to borrow from Treasury, instead of increasing insurance charges on banks, as it did last year. "Congress does not want the FDIC to be raising premiums at a time we're trying to get banks lending again," Isaac said. "Every dollar the banks put in the FDIC is $10 they don't lend," since banks typically keep about $1 in reserves for every $10 they lend out, and insurance premiums come out of those reserves. Banks - not taxpayers - finance FDIC. Though banks do pass the cost along to the public, like other expenses, as higher fees or lower shareholder profits.

"Fannie Mae and Freddie Mac are much more serious problems," with tens or hundreds of billions in as-yet-undeclared losses on bad mortgage loans, Isaac added. The government's alternatives, since it effectively took over Fannie and Freddie last year: "Keep them as wards of the state forever," Isaac urged. "Or truly privatize them - break them down into much smaller pieces and sell them off. There's no way the private sector can deal with something that large." How'd we get to this point? "Everybody believed [Fannie and Freddie] had the government's backing" when they financed increasingly questionable loans in the 1990s and early 2000s, Isaac said. "They weren't subject to enough discipline."

The Fannie-Freddie debacle is just the latest example of how public support for private enterprise seems to lead to some of the worst economic outcomes. As with health care and college tuition, home loans have been financed in part by taxpayers (through implicit guarantees for Fannie and Freddie debt), but actually spent by private institutions. When the people approving and receiving government-backed payments aren't the people raising the cash (or making the guarantees), institutions like hospitals, drugmakers, and colleges start getting used to the extra cash, and boosting costs. That is also what happened in the home real-estate business, until it blew up in the mid-2000s.

Fannie, Freddie shares jump on NYSE compliance
Mortgage finance providers Fannie Mae and Freddie Mac said on Friday they had regained compliance with New York Stock Exchange share listing rules, reviving their respectability among investors. Shares of Fannie Mae gained 6.7 percent to $1.75 and Freddie Mac rose 4.3 percent to $1.95 in mid-morning trade. The news came 10 months after the companies were notified they had failed to satisfy the NYSE's continued listing criterion when their common stock prices fell below $1.00 during a 30 day period.

The U.S. government was forced to bail out Fannie Mae and Freddie Mac during the depths of the credit crisis in September 2008 and their return to NYSE listing compliance was seen as a modest step in their recovery. "Some people are assuming that because they are going to remain on the NYSE, perhaps that implies something about how the government will treat them going forward," said Charles Lieberman, chief investment officer at Advisors Capital Management, adding that the outlook was buoying the stocks.

Options activity also picked up in the government sponsored enterprises as investors started to believe the companies' shares would recover. "As the stocks have performed well in the past few weeks, we have seen heavy speculative call option buying in the front month September $1 and $2 strikes," said Joe Kinahan, chief derivatives strategist at thinkorswim, a division of TD Ameritrade Holding Corp. "The fact that their option premiums are so cheap in real money terms makes it an easy for investors to be involved and have low risk for a nice potential return."

Fannie Mae and Freddie Mac, along with a few other financial stocks, have dominated trading on the New York Stock Exchange in late August with many attributing the recent rally to short-squeezes. Fannie Mae stock is off a year-low of 30 cents reached on November 21 while Freddie Mac shares traded above a 52-week low of 36 cents hit on March 9. Freddie Mac Sept $1 and Sept $2 calls were among the most active contracts early on Friday. During the first 30 minutes of trade, the Sept $1 FRE call traded 15,834 times, exceeding its previous existing positions of 13,956 contracts. The Sept FRE $2 call had volume of 6,648 lots, according to Reuters data.

Fed Tries to Prepare Markets for End of Securities Purchases
The Federal Reserve is trying to prepare investors for an end to its housing-debt purchases, while keeping interest rates near zero, reflecting an economy pulling out of a recession with little momentum. Federal Open Market Committee members discussed extending the end date of the agency and mortgage-backed bond programs, minutes of the group’s Aug. 11-12 meeting showed yesterday. The move would be aimed at avoiding disruptions in housing credit at a time when recovery prospects are clouded by rising unemployment and slowing wage gains, analysts said.

While the economy is projected to expand this quarter, central bankers had "particular" concern about the job market, signaling that the FOMC may need to see a peak in the unemployment rate before it begins withdrawing monetary stimulus. Some policy makers saw dangers of "substantial" declines in the inflation rate, yesterday’s report showed. "They need to see labor markets improve and inflation stabilize, and not fall, before they even have a serious discussion about increasing interest rates," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York and former member of the Fed’s research staff.

A government report tomorrow is projected to show the unemployment rate rose to 9.5 percent in August from 9.4 percent in July, threatening to curtail consumer spending. Other areas of the economy have indicated the deepest recession since the 1930s has ended: manufacturing grew for the first time in 19 months in August, and home sales and prices have risen. Chairman Ben S. Bernanke and his fellow FOMC members next meet Sept. 22-23 in Washington. "They see positive economic growth, no job growth, a very slow decline in unemployment, and a huge vulnerability to anything that could shock confidence," said Christopher Low, chief economist at FTN Financial in New York. "I would be really surprised if they tightened at all next year."

Treasury securities rose yesterday as the minutes said Fed officials expressed "considerable uncertainty" about the strength of recovery. Yields on benchmark 10-year notes declined to the lowest level in more than seven weeks, before closing at 3.31 percent in New York. Stocks dipped, with the Standard and Poor’s 500 Index closing down 0.3 percent to 994.75. Bernanke, 55, was nominated to a second term as chairman by President Barack Obama last month after overseeing a record expansion of the central bank’s balance sheet in a campaign to prevent a depression. Seeking to unfreeze credit and revive growth, the Fed has loaned to banks, provided backstop financing for the commercial paper and asset-backed securities markets and injected liquidity through direct purchases of securities.

Central bankers extended their $300 billion U.S. Treasury securities purchase program by a month in August and continue buying up to $1.25 trillion in agency mortgage-backed securities and $200 billion in the debt of agencies including Fannie Mae and Freddie Mac. A number of policy makers judged that a "tapering of agency debt and MBS purchases could be helpful," the Fed minutes said. Officials postponed a decision on extending the initiative, which is scheduled to end in December. An extension would be "an attempt to make quantitative easing potentially less disruptive when it ends," Feroli said. Central bank officials have indicated differences on when to begin withdrawing the monetary stimulus.

"We have to begin to pull back from our extraordinary programs," Philadelphia Fed President Charles Plosser said yesterday while noting a risk of faster inflation in the future. Speaking in an interview with CNBC, he declined to say whether the Fed should begin raising the main interest rate next year. Fed district bank presidents Jeffrey Lacker of Richmond and James Bullard of St. Louis last week said the central bank may not need to complete its purchases of mortgage securities. New York Fed President William Dudley by contrast stressed an exit is "premature," citing "high unemployment" and weak growth.

Policy makers saw the economy recovering "slowly" in the second half of this year, and still "vulnerable to adverse shocks," the Fed minutes said. U.S. Treasury Secretary Timothy Geithner cautioned yesterday that it’s too early to remove policies aimed at reviving the economy. "We’ve come a very long way but I think we have to be realistic, we’ve got a long way to go still," Geithner told reporters in Washington as he prepared to leave for a meeting of Group of 20 finance ministers and central bankers on Sept. 4-5 in London.

Most Fed officials expected "subdued and potentially declining wage and price inflation over the next few years," the minutes said. "A few saw a risk of substantial disinflation." The Fed’s preferred measure of inflation, the personal consumption expenditures price index minus food and energy, rose 1.4 percent for the 12 months ending July. "They are not tightening anytime soon," said Mark Spindel, chief investment officer at Potomac River Capital LLC in Washington, which manages about $100 million. "They are going to be sitting there with unemployment approaching 10 percent and inflation falling."

Troubles For 'Prime' Borrowers Intensify
The long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories. The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers. "The subprime pain is in the rearview mirror," says Sanjiv Das, head of Citigroup Inc.'s mortgage business, which is seeing delinquencies rise among prime borrowers, who make up three-quarters of its mortgage portfolio.

In many cases, these "prime" customers, whose high credit scores afforded them the best interest rates on mortgages and credit cards, lost their jobs over the past few months and only now are running out of temporary fixes that have been keeping them afloat. The trend signals more bad news for U.S. banks. Rising delinquencies on prime mortgages helped drive the total mortgage-delinquency rate to a record 9.24% in the second quarter, according to the Mortgage Bankers Association. The data reflect loans at least one payment past-due. Such delinquencies on mortgages made to prime customers rose 5.8% in the second quarter, compared with a rise of 1.8% among subprime customers. Still, the delinquency rate for prime loans was 6.4%, far below the 25.4% rate for subprime loans, according to the Washington-based trade group.

"We view this as a change in the nature of the problem. These borrowers were underwritten conservatively, and they were able to manage their payments for some period of time," says Michael Fratantoni, vice president of single-family home research for the mortgage bankers' group. HSBC Holdings PLC, which was one of the first banks hit by a wave of subprime defaults in the U.S., says its portfolio of prime credit-card loans is performing worse than its subprime group. One reason for the switch, the bank has said, is that many of its subprime borrowers are renters, who have demonstrated a better payment history on their credit cards than prime borrowers, who are homeowners now getting hit by falling house prices.

The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at subprime borrowers, who found themselves locked into unaffordable mortgages and weighed down by credit-card debt. These subprime borrowers tend to have fewer financial levers to pull to stay current on their debt payments, so they default relatively quickly. Many of those bad subprime mortgages have worked their way through the financial system, causing billions of dollars in losses to the nation's banks. Credit-card issuers, meanwhile, have been quick to cut off these subprime borrowers, who were in the first wave of delinquencies and defaults.

For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them since it is harder to tap the equity in their homes to pay their bills if they lose their jobs, according to a report issued this week by Standard & Poor's. In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money. They also are typically slower than subprime customers to seek help for financial problems because they are concerned about the stigma associated with such assistance, credit counselors say.

About 40% of the strapped consumers seeking help from the OnTrack Financial Education & Counseling center in Asheville, N.C., are prime borrowers, up from 15% last year, says Tom Luzon, director of counseling services at the United Way agency. Many of these clients already scaled back their lifestyles after losing their jobs or seeing their salaries slashed. Some are small-business owners whose companies foundered as a result of the recession. "They have made adjustments and made adjustments, but then you get to a point where you can't adjust anymore," says Mr. Luzon, who is a former banker. "People who are middle-class wage earners initially may have severance pay and think they have plenty of time to find a job, but then they start using credit cards to support living expenses," he says.

Recession Job Losses: 3 Views
If a picture is worth a 1,000 words, well then consider the following 3k word sworth of info on the current recession (in size order):

Comparing Recession Percentage of Job Losses

via Chart of the Day

Comparing Recession Job Losses as % of Employment

via Economix

Comparing Percentage Job Losses, post WW2

via Calculated Risk

Unemployment Is Much Worse Than You Think
There's another disturbing trend in the unemployment data (as if the headline rate wasn't enough):

In the average recession, most job losses are attributed to temporary, cyclical factors--i.e., when the economy comes back, the jobs will, too.  In this recession, however, more than half of jobs lost are gone for good.

PIMCO portfolio manager Tony Crescenzi explains (charts from Bloomberg):

Structural rather than cyclical influences on unemployment are running well above normal during the current recession, as is highlighted by the percentage of the unemployed that are “not on temporary layoff.” 

Data from the Bureau of Labor Statistics show that 53.9% of the unemployed were not on temporary layoff in August, up from 39.1% a year earlier and well above the 30-year average of about 34%.  The current level is well above the peak of previous cycles, which tended to move above 40% and was as high as 44.9% in May 1992. Many job losses are occurring in industries with broken business models and jobs won’t return quickly.  This will put downward pressure on wages.


In terms of numbers of people, data from the BLS show that 8.1 million people were characterized as "not on temporary layoff" in August, up from 7.880 million in July and 3.72 million a year earlier.  The not-seasonally-adjusted figure for "Permanent" job losers totaled 6.406 million, up from 3.609 million.  These figures represent a very large proportion of the roughly 7 million decline in nonfarm payrolls (the tally on payrolls is produced via a survey of business; the figures on unemployment and both the "not on temporary layoff" and "permanent" job losers categories are derived from the survey of households).


Sen. Byron Dorgan (D-ND) saw it coming 10 years ago

Fixers Aim to Fix Fixes With Another Phony Fix
by Bill Bonner

From California comes word that the summer program of Singularity University came to an end this week. The idea of SU is simple enough. Put smart people together with the latest technology; let them figure out solutions to the world’s problems.

‘The Singularity’ is an idea from Ray Kurzweil. The gist of it is that computers will soon be smarter than humans; by the middle of this century they’ll be smart enough to figure out how to get smarter and smarter, faster and faster.

No doubt, many of them will go into finance. And no doubt, many will make a fast buck. But will more smartness really make the world a better place? According to the singularists, increased brainpower will be able to solve all sorts of problems – from global climate change to market crises.

But the brain is a big disappointment. No mechanical engineer has ever improved the old-fashioned kiss. Nor has any brain ever straightened out the business cycle. Dumb as a slide rule, the brain does what it is told to do; it doesn’t ask questions. Tell it to build a bridge and it is on the case. Put it to work packaging tranches of toxic assets or selling aluminum siding…it is just as happy with one task as with the next. And the more a man’s brain bends to a challenge, the more it elbows out of the way his finer senses…and the dumber the man becomes. He turns his back on his own intuition as well as the accumulated wisdom from previous bust-ups and bruises. Like a man who has gone crazy, as G.K. Chesterton put it, all he has left is his sense of reason. Then, with nothing more to work with, he comes down on his work like a blacksmith’s hammer on a fine Swiss watch.

During the bubble period, the big banks were the biggest employers of top graduates from the world’s top schools. Oxford, Cambridge, Harvard, Yale…the financial sector drew them in like flies to an open latrine. The financial industry made so much money it had a hard time explaining it. The smart dudes did not toil in the fields, neither did they spin. Then, what did they do? They earned millions, bought BMWs and got dates with actresses. They claimed they were doing a fine job of allocating the world’s wealth and making everyone better off.

But when the bubble blew up, it was apparent that the financial world they created was fragile and perverse. Not a single one of the largest Wall Street banks survived without government handouts. And a news report from this week tells us that Americans were so damaged by the Bubble Epoque that their discretionary spending has now been cut to levels not seen in 50 years. The geniuses wiped out a half-century of economic progress in the richest, most successful economy the world has ever seen.

Smart people were also to blame for the biggest single error of the last century: central planning. The central planners thought they could fix the supposed evils of the natural economy with logic and reason. The idea was so alluring half the world fell for it. If the Nobel Committee had been on the ball they would have given Karl Marx a prize.

If the bug had come from stupid people…smart people might have avoided it. They might have come through the period without permanent scaring. But the wheezy intellectuals behind it were too clever for their own good. They soon infected the top universities…and the government. They convinced almost everyone that central planning was the wave of the future and that anyone who stood against it was a bumpkin, a parasite or a fool. Then, in the name of human progress, they took control in two of the world’s largest countries and turned them into prison camps.

But by the last decades of the 20th century it was obvious even to central planners themselves that it wouldn’t work; in both Russia and China, the planners simply gave up.

Central planning didn’t work because people had plans of their own. They resisted. Then, the planners brought down their hammers. "If you’re going to make an omelet, you have to break some eggs," said chef Vladimir Lenin. The "Black Book of Communism" puts the death toll as high as 100 million.

Then too, central planning didn’t work for less obvious reasons. Planning requires information. The planners had plenty of it. But private individuals had far more – local, current, more accurate information from first-hand observation and experience. With better information, they could make better plans. Most important, individuals didn’t limit themselves to only the fresh fruit of their rational brains. They put their hearts in it…and drew on instinct and tradition – the distilled spirits of previous generations – giving them a huge advantage over the apparatchiks.

But the brains kept at it. When the forensic experts sifted through the debris from the 2007-2008 financial blow-up they found fingerprints from a whole list of Nobel winners. It was they who had developed the formulae and the theories that deceived investors, and themselves. They believed they could tame risk…by calculation! They figured out the odds and worked out prices – to as many decimals as needed to put investors to sleep. And then along came a risk they had not foreseen – the risk that their own formulae were claptrap and that they were idiots.

Meanwhile, the brains were at work in the public sector too. There, they were still pushing central planning…albeit on a much less ambitious scale than in the last century. In Western countries, government economists fixed lending rates and credit policies in order to encourage over-consumption. In the East, they fixed exchange rates and recycled credit back to their customers in the West in order to encourage over-production. And what ho! Wouldn’t you know it; now the world has too much debt and too much capacity.

And so the brains are back on the job. In China, the government boosts production. In America, the central planners are trying to boost consumption. In short, the fixers are still fixing. And soon, the world will be in an even worse fix than it is now.

Stiglitz Says U.S. Economic Recovery May Not Be 'Sustainable'
The U.S. economy faces a "significant chance" of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said. "It’s not clear that the U.S. is recovering in a sustainable way," Stiglitz, a Columbia University professor, told reporters yesterday in New York. Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.

Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of "malaise," in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn -- an occurrence that economists call a "W-shaped’ recovery. "There’s a significant chance of a W, but I don’t think it’s inevitable," he said. The economy "could just bounce along the bottom." Stiglitz said it’s difficult to predict the economy’s trajectory because "we really are in a different world." He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.

"These institutions are not only too big to fail, they are too big to be managed," he said. Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system. The U.S. Treasury Department, in a statement yesterday, said it wants a global agreement requiring banks to increase their capital cushions to be reached by the end of next year.

Stiglitz, 66, said that while $787 billion in federal government stimulus is propelling growth this quarter, there’s no guarantee the economy will maintain its momentum. On whether the U.S. needs another injection of stimulus, Stiglitz said it’s best to "wait and see." "We did have a very big stimulus, and that stimulus has added to economic growth and will be adding in the current quarter," he said. "But the question going forward in 2011 is the stimulus is coming off, and that’s a negative."

A U.S. government bailout of Lehman Brothers Holdings Inc., which filed for bankruptcy a year ago, wouldn’t have prevented the global economy from sliding into a recession, Stiglitz said. "Whether Lehman Brothers had or had not been bailed out, the global economy was headed for difficulties, a fact that seems increasingly evident as the world sputters in its recovery," he said. U.S. GDP shrank at a 1 percent annual rate from April to June, following a 6.4 percent pace of contraction in the first three months of the year. The drop was the fourth in a row, the longest contraction since quarterly records began in 1947. The world’s largest economy has shrunk 3.9 percent since last year’s second quarter, making this the deepest recession since the Great Depression.

Stiglitz won the Nobel Prize in economics in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said. Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. "With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation," he said.

While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts. The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said. "Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar," Stiglitz said. "That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system."

Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said "the logic is compelling" for a new global currency. The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said. "In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way," Stiglitz said. "The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done."

While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, "that era is over," he said. "We’re moving to a more multi-polar world." Between the fall of the Berlin Wall and the collapse of Lehman Brothers was "the short period of American triumphalism, where we dominated the global scene. That period is over," Stiglitz said.

Economic Recovery? What The Hell Are They Talking About?
They are telling us the economy is getting better and is already in recovery. It's like some cheerful pal is visiting a friend in the hospital. The poor guy's lying there deep in a coma, totally paralyzed, unconscious, every bone broken, and a well wisher walks in and shouts in the ear of the patient, "You look fabulous. Your toenails are still growing. That means you're on your way!"

But who are the people who are telling us we're in recovery? Who are they? The news anchors? The political pundits? Economists? Manufacturers jacked up on caffeine and already a nervous wreck about Christmas sales? The reptoid aliens lulling us all into a dizzy sense of false hope? Somebody must behind this blissful point of view. And if you don't see it, if for some reason you don't share this spoonful of Mary Poppins sugar, then what's wrong with you? Should you take an anti-depressant so you can get with it? Maybe you need Ambien to keep you asleep through what is proving to be the most profound transformation in American economic history any of us have ever seen.

I don't want to sleep through it.
I don't want to go broke either.

As far as I can see, the economy has not bottomed out at all. Pluto is going direct at zero degrees Capricorn the second week of September, and that is very likely to be a rude awakening for everybody who believed the old days were coming back and fell for the notion that we've seen the last of tough times. We are not, however, all on our way to Pleasure Island. You've got to step back and see the bigger picture. The direct motion of Pluto signals not only a fifteen year trend while in Capricorn, but a new ninety-five year trend in global economic policies and world political alliances we have not seen since the start of World War One. Think about that and draw your own conclusions.

Nobody can deny that unemployment and health care are certainly real concerns here in America, but they could actually turn out to be mere symptoms of a deeper and more serious unease underlying the collective psyche, and thus distractions from the enormity of the changes taking place in American societal values. In astrological clinical situations we constantly witness the fact that Pluto brings enforced changes. It's never voluntary. It's rarely pleasant, and it always involves tremendous displacement and discomfort wherever it transits. In Capricorn it engenders fear on the part of leaders that their authority is being undermined and their power put in jeopardy.

As a result they cling more fiercely to their positions. They pass their fear on to the people they govern, knowing full well that the way to control people is to make them afraid and give them the sense that only their leaders can protect them from calamity. For a long time the masses accept this parent-child relationship. The few dissenting voices are silenced or passed off as wackos and even traitors. Little by little, however, corruption begins to be exposed and those who were supposedly being protected, eventually feel that they are not being protected, but oppressed. A confrontation between the forces of order and chaos becomes inevitable. In order to maintain social order, those in the position to govern seek to control the masses even more, mainly because they know that a revolution can cause more chaos than any oppressive or unjust regime it overthrows.

We are heading toward such a confrontation. People aren't totally stupid. They know something is going on when stores are going out of business right and left and it costs twenty dollars to buy lettuce, tomatoes and mayonnaise they can't even make a sandwich with. On radio and TV they hear every day advertisements for those who are going to relieve them of their credit card debt, urge them to send in their gold for cash, promise quick cash for their homes to avoid foreclosure, and all sorts of seductive offers to give them the sense that somebody is going to save them.

For one thing there is nowhere to run and nobody is going to save you. This is not the moment to lift our eyes to a rainbow coming out of the clouds and walk toward it with glassy hope in our eyes. On the other hand, I'm not getting hysterical and heading for the hills with a generator and a hundred pounds of beef jerky. I feel hopeful, but only as I am willing to keep working my ass off. It's a period for grim determination and the knowledge that enlightened dedication is the key to prosperity. You have to know that you're going through it and you'll come out of it with no illusions that it's all behind you already.

In every market place, competition is going to be keener than it has ever been in our lifetime. If you are in the work force and have a product or service to offer, you have to throw yourself into it and make sure that product or service is unique, elegant and economical. That is the path to economic prosperity. People are going to demand quality again. They can no longer afford to buy, throw out and buy new. Unique, elegant, economical. Remember those three words. One more thing: Sooner rather than later you will have to take sides between those who refuse to yield to change and those who demand it.

Sinking Feeling
As Treasury Secretary Timothy Geithner headed off to London on Thursday for two days of meetings with central bankers and finance chiefs of the Group of 20 nations, he carried a letter outlining the Obama administration's plans to boost capital levels for banks around the world. Now, most people who haven’t been following this issue may scratch their heads and wonder, "Hasn’t this been done already?"

That’s an awfully good question. The financial system went into spasms last year, requiring a staggering bailout by the taxpayers, because major banks took reckless bets on derivatives and shaky mortgages—capital levels be damned. When the Titanic sank in 1912, it only took a few months for the U.S. and British governments to conduct inquiries and then to take action, boosting the number of lifeboats on sailing vessels. Heck, the U.S. Senate convened an inquiry within hours.

Yet here we are, a year later, and it’s hard to find much in the way of concrete steps to prevent a future apocalypse from taking place. A Pecora-style panel of inquiry has been created, but hasn’t done anything yet. And as for the root causes of the crisis, scant action has been taken. Geithner was quoted saying on Wednesday that boosting bank capital levels are "a critical part of making the financial system safer in the future." So why the delay?

Bank capital is just part of the picture. It’s far from clear that raising bank capital levels by itself will affect the behavior of banks. Surely it won’t be of much value if banks seek out loopholes—such as by playing around with off-balance-sheet structures—or if they simply act irresponsibly. What’s needed is a concerted effort to change the culture of both the banks and the regulators we rely upon to keep the banks honest.

Keep in mind that bank CEOs are fully aware of how much of a capital cushion they have at any given time, just as Captain Smith knew perfectly well how many lifeboats he had hanging off the boat deck. It’s now a matter of historical record that Bear Stearns CEO Alan Schwartz, and his predecessor James Cayne, failed to raise a sufficient amount of capital, despite pleas by insiders, long before the bank went belly-up. Likewise, Lehman Brothers CEO Dick Fuld was so hyperfocused on short-sellers like David Einhorn that he failed to keep a proper inventory of his financial lifeboats.

While all this was happening—while two major banks were behaving like overgrown hedge funds—regulators were asleep at the switch. The Securities and Exchange Commission not only failed to push these two banks to increase their capital levels but also seemed oblivious to the whole thing. After Bear Stearns collapsed, SEC chairman Christopher Cox told the Senate Banking Committee that Bear Stearns had a "capital cushion well above what is required to meet Basel standards…up to and including the time of its agreement to be acquired by J.P. Morgan Chase." Capital, he pointed out, is not synonymous with liquidity, and not a full measure of a bank’s financial health.

I think that Cox was downplaying his agency’s mismanagement of the financial crisis. But I’d agree with him to this extent: A capital cushion is not synonymous with responsible, ethical management, particularly when regulators like Cox lack a proper grasp of what is going on. That’s where the "corporate culture" of regulators comes into play.

A good example of the deep-seated problems there emerged on Wednesday, in a damning report by the SEC Office of Inspector General on the Bernard Madoff scandal. The OIG report is a recitation of serial incompetence, inexperience, and, at times, downright cowardice—SEC officials visiting Madoff, being alternately charmed and bullied by him, and failing to take the most elementary steps to ensure that an adequate investigation was conducted. The SEC’s incompetence was not solely a failing of the Bush administration, but reached back into the 1990s, when Arthur Levitt, a self-proclaimed "investor champion," chaired the SEC.

It’s impossible to imagine an FBI white-collar investigation being handled quite so grotesquely. The reason is that the FBI, whatever its other failings, is geared toward the handling of "bad guys." To the SEC, however, the people it regulates—the Madoffs and Dick Fulds and Alan Schwartzes of this world—are "industry giants," politically potent friends, and, of course, potential employers. This is what is known as "regulatory capture."

That attitude, unfortunately, persists not just at the SEC but among all regulators, including the Federal Reserve and the Treasury, where ex-New York Fed chief Geithner has a history of being far too close to Wall Street. Radical action is needed, led by the federal government, to change the behavior of Wall Street. Safeguards need to be put in place to prevent banks from taking risks that put the economy in jeopardy—and the penalties need to be draconian. It will require a tough attitude, more steely J. Edgar Hoover-like confrontation and less Chris Cox-style cluelessness. Boosting capital levels is a start, and a weak one. Leaving it at that is a recipe for yet another disaster.

Where is the pent-up demand?!?
by David Karsboel

Please tell me!

Yes, we respect the momentum in stocks. Yes, we can see the stimulus – both monetary and fiscal. Yes, there might be "cash on the sidelines". Yes, frightened fund managers might be chasing their benchmarks. Yes, the recession has been long and deep. Yes, housing has become so much cheaper. Yes, earnings have already dropped a third. Yes, we can!

But please tell me where the pent-up demand is? Show me how the roasted demand-pigeons will fly into the mouths of the priced-for-perfection equities. The rally in equities seems to imply that Western consumers have set aside thousands of dollars and Euros in every one of the bubble years. But if that is the case, why are they continuing to default on their debt obligations? Indeed, why are they spending less and less and paying off more and more of their debt? Why are "cure rates" (i.e. the share of delinquent mortgages that begin generating cash again) on even prime mortgages collapsing? According to the Fed, 6.49% of all US bank loans and leases are now delinquent - the most since 1985, when data began.

To me, it looks like the consumers have finally hit the wall where there is essentially no pent-up demand left. After decades of systematic and constant demand stimulation via artificially low interest rates and the emergence of the "demand-driven economy" (as if there ever was any such thing!), we have succeeded in borrowing so much from future demand that our present GDP has
been overstated by 10-30%. How many resources have been put to use in order to make American consumers push their excessive debt-financed consumption to new highs? How many malls, shopping centers, financial intermediaries, debt extension companies and SUV dealers have been set up for which there is no long-term use? And by how much has that overstated prior GDP figures, since these types of companies were mal-investments and need to be written off?

Pent-Up Demand
There is no fixed definition of pent-up demand – the demand that Keynesians assume will be released if rates are cut enough – but if we assume that it consists of the last two years of savings and the home equity, the following picture emerges:

Note, how much pent-up demand policy-makers could unleash in 1982 by cutting rates or taxes. The total pool was more than 250% of GDP. Today, as a result of persistently low savings rates and massive home equity extraction, the total pool of pent-up demand is below 100% of GDP – and only rising due to a higher savings rate in recent quarters. In other words, the pent-up demand by this definition has never been lower since 1960.

This is why the Keynesian central bankers can’t sleep at night: Their eternal demand-stimulation does not work any longer. The pent-up demand is non-existent (by historical standards) and therefore cannot be released, even if rates are aggressively cut. Total bank lending has dropped almost 6% from the top in late October 2008. That has never happened before. The picture is the same in the Eurozone and (of course) in Japan:

Bank credit is being reduced because de facto insolvency is widespread in the financial system and because there is no effective demand for new credit. As long as consumers are frightened of being laid off, the savings rate will stay high and probably approach the level of the 60s and 70s. Too many consumers have become painfully aware of how much they have depended on credit lines from the bank system and how much that means in today’s world.

Demand is going to disappoint
The Keynesians never get tired of telling us that 70% of GDP is consumption. This is obviously a misleading statement – as if we can consume ourselves rich. If we want growth in the Western economies, this percentage has to come down and investment and savings should be higher. This is the only long-term solution to the extreme difficulties that we are confronted with. Only by growing our capital base will we be able to increase production and growth. It is time we learn from the Chinese or simply look in the history books and be inspired from how the economy of our ancestors could grow even though they didn’t consume 70% of their income immediately.

The future economy of the Western countries will be investment-driven – if driven at all. Unfortunately, it also means that the companies that are most dependent on consumption will be underperforming in the years to come. Demand is permanently impaired and will not come back to 2007 levels soon.

Lehman downfall triggered by mix-up between London and Washington
A breakdown in communications at the highest level between the US and the UK led to the shock collapse of the investment bank Lehman Brothers in September last year, a Guardian/Observer investigation has revealed. The downfall of Lehman, which triggered the biggest banking crisis since the Great Depression, came after a rescue bid by the high street bank Barclays failed to materialise. In London, the Treasury, the Bank of England and the Financial Services Authority all believed that the US government would step in with a financial guarantee for the troubled Wall Street bank.

The tripartite authorities insist that they always made it clear to the Americans that a possible bid from Barclays could go ahead only if sweetened by US money. But in Washington, the former Treasury secretary Hank Paulson has blamed Lehman's demise on Alistair Darling's failure to let Washington know of his misgivings until it was too late. Paulson has told journalists that during a transatlantic phone call the chancellor said he was not prepared to import the American "cancer" into Britain – something Darling strongly denies.

With finance ministers and central bank governors from the G20 countries meeting in London on Saturday, the first-hand accounts of those handling last year's events underline a rift between London and Washington over who was to blame for the demise of Lehman, which triggered a month of mayhem on the financial markets. Lehman's demise sent shock waves around an already fragile financial system and raised fears that any bank, anywhere in the world was vulnerable to collapse. Within three days, HBOS had been rescued by Lloyds TSB. A month later RBS, HBOS and Lloyds were propped up with an unprecedented £37bn of taxpayer funds.

Hector Sants, the chief executive of the Financial Services Authority, said: "I have sympathy for the US authorities given the complexity of the problems they faced that weekend but I do believe it was a mistake to let Lehman's fail." As well trying to find a solution for Lehman, the US authorities were also aware that Merrill Lynch was on the brink and that weekend it was taken over by Bank of America. While admitting the UK authorities had botched Northern Rock a year earlier, Sants said the collapse of Lehman had more dire consequences. "Without the future market shock created by Lehman Brothers' collapse, RBS may not have failed," said Sants.

"Was Lehman the cause or was it the manifestation? It was our view that if Lehman had been supported you would not have seen such a dramatic reduction in liquidity." Sir John Gieve, deputy governor of the Bank of England last September, said: "It was a catastrophic error. It caused a loss of confidence in the [US] authorities' ability to handle the financial crisis which really did change things and proved hugely costly." The UK tripartite authorities – the FSA, the Bank of England and the Treasury – had expected the US government to stand behind Lehman in the way that it had backed two crucial mortgage lenders the previous week and helped to orchestrate the bailout for Bear Stearns in March.

No explanation has ever been given for the lack of government funds offered in the final weeks of the Bush administration, which had to step in to prop up the insurance company AIG days after Lehman's demise. The UK tripartite authorities were concerned about the financial system in the spring of 2007 and asked their American counterparts to participate in a "war game" to prepare for the collapse of a major US bank and develop a response to a financial crisis. However, the war game, which was to have included the UK, Switzerland, the Netherlands and the US, never took place because of a lack of willingness to participate by the US regulatory bodies.

Turning up the heat on non-bank lenders
by Elizabeth Warren

We know that big banks need reigning in, but Elizabeth Warren argues that it is time for serious oversight of non-bank lenders — like mortgage brokers or payday loan outfits — as well. A strong, well-funded CFPA would not only protect consumers from the abusive practices of these largely unregulated businesses, but it would also benefit the small banks that are hurting from the current system.

The big banks are storming Washington, determined to kill the Consumer Financial Protection Agency (CFPA). They understand that a regulator who actually cares about consumers would cause a seismic change in their business model: No more burying the terms of the agreement in the fine print, no more tricks and traps. If the big banks lose the protection of their friendly regulators, the business model that produces hundreds of billions of dollars in revenue — and monopoly-size profits that exist only in non-competitive markets — will be at risk. That’s a big change.

But there is an even bigger change in the wind: regulating the non-banks. Democrats and Republicans alike agree that the proliferation of unregulated, non-bank lenders contributed significantly to the financial crisis by feeding millions of dangerous financial products into the economic system. Non-bank institutions were active participants in the race to the bottom among lenders. From subprime mortgage loans to small dollar loans, they showed how to wring high fees and staggering interest rates out of consumer lending. Their fine-print contracts, and new tricks and traps, transformed the market.

Despite widespread agreement about the problem, the U.S. has never made a sustained, systemic effort to regulate non-bank lenders. As lending abuses became more obvious, there was no effort to close regulatory gaps and loopholes or to devote federal resources toward the oversight of non-bank institutions. The reasons are many, but one of the most benign explanations is that policymakers for too long assumed that states could deal with the non-banks because the non-bank lenders are often small and often operate locally (although Countrywide showed that state-based organizations can metastasize rapidly). As it turns out, the states actually faced several limitations in reining in these lenders.

States, just like the federal government, were subject to intense lobbying by creditors. In short order, many states changed their rules to undercut basic protections. For example, the consumer finance industry succeeded in rewriting state interest rate regulation to allow for massive increases in allowable effective rates — even when the advertised rate looks far lower and obscures the true cost of credit. In many states, making an end run around local usury laws is now as easy as running around a single fencepost. At the same time, state legislatures face the perpetual lag-behind problem. They are unable to adjust to a rapidly changing financial services market, too slow to identify problems and not capable of changing the laws quickly enough to head off serious problems.

Moreover, resources are always constrained at the state level, and the enforcement of consumer credit laws competes with a wide variety of other state obligations. When consumer credit laws were violated, states often lacked the capacity to undertake serious investigations or to prosecute offenders. Some states made heroic efforts, but others left consumer financial issues far down their priority list.

The problem of enforcement has been exacerbated by a serious structural problem. When an abuse surfaced-for example, a local paper ran a news story about an unfair practice or a consumer group assembled evidence of sharp practices-local officials often responded by jumping on small banks. The non-banks were often scattered and difficult to find, while the biggest financial institutions were typically protected from local prosecution through pre-emption. That left the small banks holding the bag.

These small banks, often those with state charters, were the easiest institutions to locate and the cheapest to prosecute — even if they were only tangentially involved in deceptive practices. The result was that the worst offenders slipped away. Non-banks could shut down for a while, and then reappear when the heat was off. In effect, the state enforcement structure benefitted the big banks and the non-banks. The CFPA presents the first real opportunity to change that harmful structure.

First, the CFPA will regulate consumer financial products across the board-using the same rules for all mortgages or for all small dollar loans, regardless of whether the mortgage or the loan is issued by a national bank, a state bank or a non-bank. The old practice of different sets of rules and different regulatory structures for the same products would disappear. Instead, the CFPA would create a coordinated set of baseline rules applicable across the board. Consolidated rule-making will also stop the practice of lenders shopping around for the regulator with the weakest rules. Bank holding companies have enjoyed an enormous advantage by having the freedom to structure their many business divisions to exploit regulatory weakness.

They can operate a federally chartered bank when preemption is valuable to them. At the same time, they can purchase the products of non-banks in bulk, creating informal partnerships that exploit gaps in the state regulatory system. In fact, the Center for Public Integrity found that 21 of the 25 largest subprime issuers leading up to the crisis were financed by large banks. (Remember this the next time you hear a lobbyist blaming the crisis on non-banks and denying the role of the bank holding companies.) With consistent rules across the board, the CFPA would put an end to these practices.

Consistent rules are important, but, as we now know, it isn’t enough to have good rules on the books. There must also be a serious effort to enforce those rules. With the right sources of funding and some smart strategic thinking about how to force non-banks to follow the same rules as other lenders, the entire landscape of consumer lending would change.

From history, we have learned that an agency’s source of funding is critical to its success. By allowing the Agency to tax lenders directly — perhaps a dime for every open credit card account, a quarter for every open mortgage, etc. — Congress can make sure that the CFPA stays well-funded in the years ahead. The right funding structure will allow the Agency to develop the capacity to go after the non-banks and the dangerous products they originate, and it will insulate the Agency from political efforts to starve-the-regulators into inaction. Moreover, as we now know, the cost of even a well-funded agency is dwarfed by the cost to the government and the economy as a whole of bank failures. The cost of the failure of just one thrift – IndyMac — was almost ten times the annual budget of the Securities and Exchange Commission.

New forms of strategic thinking will also be needed. By creating a system for mandatory lender registration, for example, CFPA will be able to keep track of the consumer lenders out there — something that no current regulators have the tools to do. To encourage compliance, the CFPA can work with other federal agencies — like the Treasury Department or the Internal Revenue Service — to identify unregistered lenders. In states that already register certain non-bank lenders, the CFPA can work off those registrations and collaborate with state officials. This is tough work, but a consumer agency with expertise and resources will rise to the challenge.

The CFPA can also get smarter with enforcement by exploiting concentration points, places where small players are effectively grouped together. In the case of mortgage brokers, for example, without the large bank holding companies and their subsidiaries as customers for the loans they place, many would be out of business. Focusing regulatory attention on the buyers would create substantial leverage over the brokers as well. If the sponsors and funding mechanisms for the worst practices go away, so will the worst practices.

There is more that we can do to deal with non-bank lenders, but only if Congress creates a strong CFPA. If we stick with the status quo — which treats loans differently depending on who issues them and places consumer protection in agencies that consider it an afterthought - we know what will happen because we have seen it happen before. Lenders will continue their tricks and traps business model, the mega-banks will exploit regulatory loopholes, and the non-banks will continue to sell deceptive products. In that world, small banks will need to choose between lowering standards or losing market share, and they will still get too much attention from regulators while the non-banks and big banks get too little. Dangerous loans will destabilize both families and the economy, and we’ll all remain at risk for the next trillion-dollar bailout.

Regulating the non-banks hasn’t been tried in any serious way. The CFPA offers a real chance to level the playing field, to add balance to the system, and to change the consumer lending landscape forever. Harvard Law School Professor Elizabeth Warren is currently chair of the Congressional Oversight Panel created to oversee the banking bailouts and first proposed a new federal agency for consumer financial products in 2007.

Five more banks fail -- 89 so far in 2009
Five small regional banks were closed by regulators on Friday evening, pushing 2009's tally so far to 88 institutions. Of the five failures, two were in Illinois, and there was one each in Arizona, Iowa and Missouri. Customers of the banks, however, are protected. The Federal Deposit Insurance Company, which has insured bank deposits since the Great Depression, covers each customer account up to $250,000. In Illinois, Platinum Community Bank, in Rolling Meadows, and InBank, in Oak Forest, were the latest institutions to be cosed by regulators. This makes for a total of 15 failed Illinois banks this year. The last one to go under was Mutual Bank, in Harvey, on July 31, 2009.

The Office of Thrift Supervision was unable to find a buyer to take over the assets of Platinum Community, which were estimated at $345.6 million with deposits of $305 million. As a result, the FDIC will begin mailing customers checks for their insured deposits beginning on Tues., Sept. 8. That means customers are out of luck over the weekend and cannot access any of their Platinum Community accounts. "The bank is gone. It no longer exists," said David Barr, spokesman for the FDIC. "We couldn't find an appropriate buyer. We don't do that very often."

For those Platinum Community customers expecting direct deposits from the federal government -- such as Social Security and Veterans' payments -- MB Financial Bank will handle the transactions. But customers must use the MB Financial branch at 2251 Plum Grove in Palatine, Ill., to access those funds. Unlike Platinum Community, MB Financial agreed to purchase the assets and deposits of Illinois' other failed bank, InBank. MB Financial receives InBank's $212 million in assets and $199 million in deposits, and customers' funds are automatically rolled over to the new institution. The three branches of InBank will open as normal on Sat., Sept. 5, as new MB Financial outlets. Customers can continue using their debit cards and writing checks as normal.

In the West, the assets and deposits of First State Bank of Flagstaff, Ariz., were sold off to Sunwest Bank, based in Tustin, Calif. All First State customers -- totaling $95 million in deposits -- automatically become new Sunwest clients. This is the third bank failure in Arizona this year. The last institution to go under was Union Bank in Gilbert, on Aug. 14, 2009. Check writing privileges and debit card transactions will continue as normal through the weekend. On Tuesday, all six branches of First State will reopen as outposts of Sunwest Bank.

In the Midwest, Vantus Bank, in Sioux City, became Iowa's first bank to fail in 2009. It had been nearly a decade since the state faced a bank closure. Great Southern Bank of Springfield, Mo., is assuming Vantus' $368 million in deposits. It will take a fwe weeks for Great Southern to finalize the transaction, but until then customers can continue using the existing branches of Vantus as well as write checks and use their debit cards. Great Southern is also managing Vantus' $458 million in assets until it can sell them off later.

Customers of First Bank of Kansas City, in Kansas City., Mo., can now call Great American Bank of De Soto, Kan., their financial home. When the bank was closed on Friday, it became Missouri's second failure of 2009. When the sole branch of First Bank reopens on Saturday, it will be an outpost of Great American Bank. Customers can continue writing checks and using their debit cards as normal. Great American Bank bought the banks' $16 million in assets and approximately $15 million in deposits. The FDIC estimates that these five bank failures will cost the Deposit Insurance Fund a total of $401.3 million. Anyone who needs further information about what deposits or insured or needs additional details on their bank's failure can visit or call 1-800-537-4048. 

Questions Arise As FDIC Fails To Disclose Key Details On Bidders For Failed Banks
The federal agency charged with resolving failed banks and selling their assets is hiding key details about the transactions.

The identities of losing bidders and the prices they've offered for failed bank assets are some of the details currently not being fully disclosed. For decades, this information was publicly available. But this year the Federal Deposit Insurance Corporation abruptly decided to limit the flow of information.

It couldn't have come at a worse time. In addition to the bailout of financial companies like Citigroup, AIG and Bank of America, the federal government is on the hook for another $80 billion through a little-reported FDIC program designed to encourage private investors to buy failed banks and their assets.

When banks fail, the FDIC effectively takes them over, with an eye towards returning them to the private sector as soon as possible. In the past, the FDIC typically solicited bids from other banks. Now, private equity groups have been added to the list of eligible investors. Regardless of what type of investor is ultimately chosen to take over a failed bank, the FDIC is required by law to choose the "least costly" bid.

As first reported by American Banker, it's documents from those very deals that the FDIC has largely not released, despite numerous official requests via the Freedom of Information Act, the law that ensures public access to U.S. government records. While the winning bids are disclosed, most of the losing bids are not.

"We don't know whether the government got us the best deal," said Kenneth Thomas, an independent bank consultant and finance lecturer at the University of Pennsylvania. "We're not talking millions -- we're talking billions of dollars."

For example, one of the bids for BankUnited, a failed Florida-based lender that had about $13 billion in assets at the time it was sold, failed to secure victory despite the fact the potential buyer offered the most money for the bank's assets.

Not disclosing the documents appears to run counter to a pledge made by President Barack Obama on his first full day in office.

"The Freedom of Information Act is perhaps the most powerful instrument we have for making our government honest and transparent, and of holding it accountable," he said Jan. 21. "And I expect members of my administration not simply to live up to the letter but also the spirit of this law."

As first reported by The Wall Street Journal this week, the FDIC has assumed most of the risk on about $80 billion worth of loans and other assets from failed banks. Known as "loss shares," the deals encourage investors to buy failed bank assets by typically guaranteeing at least 80 percent of potential future losses.

From the WSJ:
In most cases, the FDIC agrees to cover 80% of future losses on a big portion of the assets, and 95% on the rest. The FDIC says it doesn't anticipate facing the 95% loss-coverage scenario on any deal...

The agency expects it will eventually have to cover $14 billion in future losses on deals cut so far. The initiative amounts to a subsidy for dozens of hand-picked banks.

Since the start of 2008, the FDIC has cut 53 such deals, said David Barr, an agency spokesman.

Unlike most federal agencies, the FDIC does not receive appropriations from Congress. Rather, it relies on fees from the banks it oversees. The deposit insurance fund, which protects most bank deposits, now stands at about $10.4 billion; this time last year it was at $45 billion. It's supposed to insure about $4.8 trillion in deposits.

If that fund runs dry, the FDIC has a temporary $500 billion credit line to the U.S. Treasury through the end of next year. It was recently permanently increased from $30 billion to $100 billion.

Thomas argues that's part of the problem. Without knowing what the failed bids were offering, he said, it's impossible to know how much money the taxpayer may ultimately lose.

"The fund will go negative -- there's no doubt about it," he said.

The FDIC has not technically denied FOIA requests for the losing bid documents. Rather, the agency has simply delayed sending its decisions.

But a review of agency records shows that the FDIC has increasingly denied the public access under the Freedom of Information Act.

Through this week, the rate of denied FOIA requests has doubled from last year. In fact, FOIA requests are being denied at a higher rate than at any point during the notoriously-secretive George W. Bush administration.

The rate is based on requests made since January. The agency is required to report its FOIA-related statistics on a fiscal year basis (Oct. 1 to Sept. 30). But if the trend over the last eight months holds up, the denial rate will set at least a 10-year high.

From American Banker:
Some observers also questioned whether the FDIC can legally withhold such records and accused the agency of flouting the Freedom of Information Act, which details what can be kept confidential and requires public disclosure in all other cases.

The agency has posted a short note on its Web site explaining the delay.

"The FDIC is currently undertaking a review of its disclosure policy concerning failed institution bids to ensure that the bidding process encourages an open flow of information and attracts the maximum participation by interested parties," it notes. "The FDIC has delayed processing of FOIA requests for bid information pending completion of that review."

Thomas said the agency's position is "indefensible."

"It's not the kind of information that will cause bidders from walking away from the table," he said. Rather, the more information that is available the more informed bidders will be, and that will ultimately increase competition for the failed banks, he said.

But Thomas speculates the reason behind the FDIC's delay is due to concerns expressed by private equity investors.

"It's only because private equity is at the table," he said.

Private equity investors were involved in purchasing IndyMac and BankUnited, two of the biggest banks to fail since the financial crisis began.

Thomas added that he's been "led to believe" that private equity groups have bid on at least one of the two biggest failed banks of the year, Texas-based Guaranty Bank and Alabama-based Colonial Bank. Both failed in August. Combined the two banks had assets of about $38 billion at the time of their respective failures, according to the most recent figures available.

Last week the agency adopted final guidelines governing private equity group purchases of banks. Some of the elements were watered down from the proposed rules.

From BusinessWeek:
The changes are less stringent than initially proposed, and FDIC Chairman Sheila C. Bair told BusinessWeek they are justified. The agency, she noted, has received several dubious bids for failed banks. One private equity firm proposed to flip the bank to another investor quickly. Another wanted an offshore company to own the bank, making it less transparent. Private equity firms "have greater risks to us than established banks," Bair said. "We want them in, but we want to set some ground rules that will address the heightened risk."

"There hasn't been a lot of activity from private equity firms," agency spokesman Barr said. "Those that are making the noise about bids are not bidding on failed banks." The FDIC expects to announce its final decision regarding failed bids by the end of the month.

Hawaii Governor warns of 'fundamental' shift in government
Gov. Linda Lingle on Thursday warned Hawaii residents of a "fundamental restructuring" of state government, including layoffs and cuts to public assistance benefits, because of the state's continuing budget woes. The governor said in a Webcast she plans to decrease payments to social service program beneficiaries and eliminate programs that can effectively be provided by federal or local agencies, or by volunteers.

Lingle said some state offices must be closed and some administrative duties consolidated in areas of government she oversees, which include health and welfare, business and economic development, transportation, and land and natural resources. More layoff notices for state workers also are likely in coming months, Lingle said, adding to the nearly 1,200 employees who already have received such letters.
Her proposed changes are aimed at shoring up the state's budget, which is now $884 million in the red for the biennium that runs through June 2011. "Even with all of the prudent cuts in spending we have already made, we are still facing a budget shortfall because we are spending at a rate that exceeds our actual and projected income," she said.

However, Lingle offered no specifics, including when the proposed restructuring would occur. "As we make specific decisions, I will share them with you and the reasons for them," she said. Hawaii's constitution gives the governor wide discretion over state spending that falls under her purview. The Legislature, which isn't scheduled to meet again until January, could call a special session and attempt to block or revise her actions, but that would take time and create a messy political fight.

The governor's Internet speech, which was marred by technical problems, came less than 24 hours before the start of binding arbitration hearings that will decide the next labor contract between the state and the Hawaii Government Employees Association. The union has nearly 30,000 members. Lingle's timing annoyed Rep. Marcus Oshiro, D-Wahiawa-Poamoho, who charged that she was making an "insincere and disingenuous attempt" to sway the neutral member of the three-person arbitration panel toward siding with labor proposals from the state.

"It was more like an opening statement that one makes before the trial begins," said Oshiro, chairman of the House Finance Committee. "When you hold these kinds of media events on the courthouse steps, it tells you that you may be uncertain about your case." Still, Oshiro said he welcomes a discussion about ending or shrinking state programs while defining what core services the state should provide. Randy Perreira, executive director of HGEA, refuted Lingle's assertion that union leaders favor layoffs instead of furloughs.

"HGEA and its negotiating teams recognize that the members prefer furloughs to across-the-board pay cuts, and to that end have proposed furloughs effective in October," Perreira said in a statement.
Lingle had wanted to unilaterally furlough 15,600 state workers under her direct control for three days a month to help close the budget gap. But a state judge ruled that unconstitutional, and private talks on furloughs between state officials and the union have bore no fruit. The governor also reduced appropriations to the university system, the Department of Education and the Hawaii Health Systems Corp. by 14 percent in recent months.

In Thursday's address, Lingle said she will "attempt to avoid" more cuts to public schools and the University of Hawaii system. But she said she will urge educators to find other money to finance nonessential programs. Lingle added that tax increases would hurt an already ailing economy, and draining the hurricane and other special funds would not fill the budget gap. "These actions we must take are not unlike a business that loses one-third of its income and therefore must reprioritize its budget by scaling back on certain expenses and activities, and focusing on its core business," she said.

Judge orders state nursing, rehab cuts restored
Nearly 1,000 of Washington's most disabled citizens are cheering and state budget cutters are headed back to the drawing board after an unexpected court ruling Friday. A judge ruled the state improperly cut publicly-funded nursing and rehabilitation services for many of the state's most vulnerable citizens. Facing an unprecedented budget crisis, legislators cut the services to save $20 million, arguing the recipients could find services through other community programs.

But attorneys for some of those affected say there aren't other options and that their health has deteriorated in the two months without the rehab program. One of those who filed suit is Quincy Proctor. He is living in a small room in a supported living center. He lost hope of getting back his own apartment when the state cut funding that paid for nurses and therapists who were helping him fight to walk again after a stroke. "That's where I knew I had lost," said Proctor.

The judge on Friday ordered the state to restore the program immediately. "The judge determined that by cutting them off without giving them notice or the opportunity for a hearing to challenge it, they essentially violated their due process rights," said Andrea Brenneke, Proctor's attorney. Proctor is convinced he can walk again and lead a productive life with the right help.

"It will help me help myself. All those people who tried to help me, they were not doing it in vain," said Proctor. The governor's office did not respond to our request for a comment on the story, so nobody is saying how the state will make up for the millions of dollars the ruling places back in the budget. The state could decide to kick these people out of the program, but it would need to give them due process first.

A matter of retribution
by Gillian Tett

How many financiers do you think ended up in jail after America’s Savings and Loans scandals? The answer can be found in a fascinating, old report from the US Department of Justice*. According to some of its records, between 1990 and 1995 no less than 1,852 S&L officials were prosecuted, and 1,072 placed behind bars. Another 2,558 bankers were also jailed, often for offenses which were S&L-linked too. Those are thought-provoking numbers. These days the Western world is reeling from another massive financial crisis, that eclipses the S&L debacle in terms of wealth destruction. Yet, thus far, very few prison terms have been handed out. For sure, there have been a few high-profile dramas. Bernie Madoff is one, obvious, example.

But one reason why the Madoff drama has grabbed so much attention and already sparked a slew of books this month, is precisely because there are precious few other financiers behind bars, or facing momentous fines. Compared to the S&L days, the level of retribution so far seems almost non existent. Why? In part, it may be a matter of timing. The wheels of American justice often grind slowly, and many cases are now passing through the system. Navigant, a financial consultancy, for example, says that private investors have filed more suits against financial companies in the last two years than they did in the S&L days. And some are now seeing the light of day.

Yesterday, an American judge rejected attempts to block a lawsuit lodged by Abu Dhabi Commercial Bank against Moody’s, Standard & Poor’s and Morgan Stanley – meaning that case, which involves structured notes, will soon get underway. Separately, federal investigators have opened inquiries into at least 25 companies, including Lehman, AIG, Fannie Mae, Freddie Mac and Wamu. Yet, in private many lawyers, and some government officials too, seem pretty cynical about just how many jail sentences or fines these initiatives will produce. In part that is because of the sheer complexity of the financial deals in the recent crisis, and the fact that these deals were often deliberately and cleverly constructed to "arbitrage" the law (ie skirt, but not break it).

Another big issue is the sheer number of powerful parties that typically participated in complex finance deals. Few private law firms have the resources or desire to go head to head with numerous Wall Street banks at one time, particularly since the Supreme Court has made it harder to bring and win securities cases in the last couple of years.. And government agencies are often short of resources too, partly because some, such as the FBI, have been forced to divert staff in recent years to terrorist financing issues. However, another key problem is a lack of knowledge in Western courts about complex finance. That makes it time-consuming to hear cases. It also makes verdicts unpredictable.

Some senior figures in the financial world are looking for solutions to this. Jeffrey Golden, a prominent lawyer who helped to create the modern derivatives world, for example, thinks there is an urgent need for a specialist, cross-border financial court (in much the same way, say, that there are specialist family or trade courts.) This, he argues, could be staffed by former derivatives experts and lawyers, since these not only understand finance but also have a vested interest in ensuring that their beloved derivatives business is built credible foundations. But there seems limited chance that Golden’s sensible suggestion will fly soon. Right now, in other words, the Western financial system is stuck with a legal structure that seems ill-equipped to cope.

And that is worrying on several levels. On a personal level, I have little taste for seeing hordes of bankers heading for jail, or facing massive fines. Nor do I have any illusion that public or private prosecutions will resolve bigger structural flaws. A witch-hunt might be a media distraction. But, on the other hand, if there is no retribution against financiers, it will be very difficult to force a real change in behaviour. After all, no amount of twiddling with Basel rules or pious statements about bonuses will ever scare a financier as much as the thought of jail.

Moreover, without some retribution it will also be hard to persuade voters that finance is really being reformed, or has any credibility or moral authority. That is bad for politicians and regulators. However, it is also bad for bankers too. So, in the months ahead, keep a close eye on what happens to the legal cases in the system and, above all, watch to see just how many do (or do not) quietly die, compared to those S&L days.

*DoJ, Financial Institution Fraud special report, June 30 1995; cited in The Great Texas Savings and Loan Financial Debacle; By Tom S. King

Backpedaling, China Eases Proposal to Ban Exports of Some Vital Minerals
Chinese officials said on Thursday that they would not entirely ban exports of two minerals vital to manufacturing hybrid cars, cellphones, large wind turbines, missiles and computer monitors, although they would tightly regulate production. China produces more than 99 percent of the world’s supply of dysprosium and terbium, two rare minerals essential to recent breakthroughs in high-technology industries.

A bureaucratic reshuffling in Beijing this year prompted a review of Chinese policy, and regulations were drafted that would ban the export of these minerals. That incited anger and dismay from Western governments and multinational companies that depend on Chinese supplies. Wang Caifang, deputy director general of China’s Ministry of Industry and Information Technology, tried on Thursday to allay concerns that the draft rules would become the final policy, saying the regulatory review was still under way.

"China is very responsible. We will not take arbitrary decisions. All our decisions will be consistent with scientific development," she said in a speech at the Minor Metals and Rare Earths 2009 conference in Beijing. "China will not close its doors." During an interview after her speech, Ms. Wang said that China would continue to set an annual quota for the export of each mineral, adding, "I don’t think it will be zero." Dysprosium and terbium are two of the most valuable, scarcest and most sought-after minerals among the 17 rare-earth elements. China mines 93 percent of the world’s rare-earth minerals, which have a wide range of obscure but crucial industrial applications, like the manufacturing of ceramics and stainless steel.

A copy of the draft rules, viewed Thursday, said China would further reduce its combined annual export quotas for all rare-earth elements to 35,000 tons a year, from 53,000 tons last year and almost 66,000 tons as recently as 2005. The draft policy also clearly stated that exports of dysprosium and terbium were to be prohibited along with exports of three other rare-earth elements: thulium, lutetium and yttrium. But Ms. Wang seemed to back away from that.

By cutting exports, as well as putting a total tax of 42 percent on exports of dysprosium, terbium and some of the other rare-earth elements, Beijing officials have successfully required manufacturers of advanced magnets, motors and other technologies to move their factories to China, where the minerals are readily available. Ms. Wang called Thursday for additional development in China of high-value industries using rare-earth elements.

China and Australia have been locked in a tug of war this summer over minerals. China accuses Australia of being too aggressive in trying to maximize the value of its iron ore reserves and has detained four Rio Tinto executives in China, accusing them of bribery. Rio Tinto has denied its employees broke the law. But China has also tried to increase its control over the rare-earth market, and Chinese industry officials have complained publicly in recent weeks that Western countries do not pay enough for their supplies.

State-owned Chinese companies are in the process of buying large stakes in two Australian companies developing rare-earth mines: a 25 percent stake in Arafura Resources, which the Australian government has already approved, and a nearly 52 percent stake in the Lynas Corporation, which the Australian government is still reviewing. Late Wednesday, the government again extended a deadline for a decision.

Early this year, the Chinese government’s semi-independent Office of Rare Earths was put under the clear supervision of the Ministry of Industry and Information Technology. The ministry has close links to domestic Chinese industries and a history of policy activism with minimal public consultation. This summer, with little warning, the ministry tried to require that filtering software be installed on all computers sold in China. In the face of heavy international and domestic criticism, the ministry retreated a day before the policy was to take effect.

Ms. Wang has played a central role in Chinese policy making on rare earths for many years. But there has been persistent speculation in the Chinese mining industry in recent months that she might retire after the recent bureaucratic reshuffle. Ms. Wang said after her speech that she was not ready to retire. Ms. Wang’s retirement could introduce more uncertainty into the management of the rare-earth industry in China and complicate planning for foreign companies that need those reserves.

Governments and companies in the West and Japan have become increasingly worried in recent weeks that China could halt exports of rare-earth elements. Susan Stevenson, a spokeswoman for the United States Embassy in Beijing, noted that World Trade Organization rules strongly discouraged export restrictions. "We would be concerned by any W.T.O. member’s policies that appear to be inconsistent with its W.T.O. obligations," she said. On June 23, the United States requested formal consultations with China at the W.T.O. over Chinese restrictions on exports of nine other industrial materials.

Liang Shuhe, deputy director of foreign trade at the Commerce Ministry, said in a separate speech at the conference that China was closing unlicensed rare-earth mines because they had caused "lots of environmental damage." Australian and American rare-earth mines being developed now are low on dysprosium and terbium, but Avalon Rare Metals of Toronto is working on a mine in northwest Canada with these minerals. Neo Material Technologies of Toronto recently said that it had found both minerals in tin mine tailings in Brazil.

Dysprosium and terbium are used to make very powerful but lightweight magnets; terbium is also used to make computer monitors. Either or both minerals are added to high-tech magnets to help them stay magnetic even at high temperatures. Many magnets tend to lose their magnetism as they warm up because the atoms in the magnet start to move around and cease to be lined up neatly along magnetic lines; adding a little dysprosium or terbium stabilizes the molecular structure of the magnet and keeps the atoms in line.

U.S. junk bond default rate rises to 10.2%
The U.S. junk bond default rate rose to 10.2 percent in August from 9.4 percent in July as the worst recession since the 1930s left more companies unable to pay off debt, Standard & Poor's data showed on Thursday. The default rate is expected to rise to 13.9 percent by July 2010 and could reach as high as 18 percent if economic conditions are worse than expected, S&P said in a statement.

Default rates have surged from less than 1 percent in 2007 as an economic downturn squeezed corporate revenues and a global credit crunch dried up funding. A 13.9 percent default rate would be the highest since the Great Depression of the 1930s, when it hit 15.9 percent. August's default rate is preliminary and subject to revision, S&P said. Eighteen companies defaulted in August, bringing the year-to-date total to 147.

"Credit metrics in the U.S. show continued deterioration of credit quality and restricted lending conditions," S&P said. In another sign of corporate distress, the rating agency has downgraded $2.9 trillion of company debt year to date, up from $1.9 trillion in the same period last year. Just $73.6 billion of debt has been upgraded, though that is up from $35.8 billion in the same period last year.

"The bright spot for credit markets amid the current economic downturn is an increase in new issuance," S&P said. Junk-rated bond sales have grown to $73.6 billion through August from $35.8 billion in the same period last year. Investment-grade issuance has risen to $603 billion from $537 billion, according to S&P. A reopening of the bond market following last year's credit freeze is allowing companies to refinance debt, keeping defaults lower than they otherwise would be.

Money Fund Floats Plan to Erase $1 Barrier
A year after a money-market fund spooked investors by "breaking the buck," Deutsche Bank AG's DWS Investments plans to launch a money fund with a floating share price. Unlike conventional money-market funds, the proposed DWS Variable NAV Money Fund will allow its net asset value, or NAV, to fluctuate rather than trying to maintain a stable $1 share price. The fund will require a $1 million minimum investment, a regulatory filing said. The idea of floating money-market NAVs has been hotly debated. In the wake of the Reserve Management Co.'s Reserve Primary Fund falling below $1 last fall, regulators have searched for ways to make the $3.6 trillion money-fund industry more stable.

The Reserve fund's troubles triggered massive shareholder redemptions from a broad swath of money-market funds. The Securities and Exchange Commission in June proposed tighter regulations on such funds and asked for comment on whether funds should have floating NAVs. Many in the fund industry are opposed to the idea of floating money-market NAVs, saying the move would essentially destroy the money-fund business. Deutsche Bank declined to comment specifically on the proposed fund. The German bank sees variable NAV money funds simply as another option for investors, not a replacement for stable-NAV funds, says Joe Benevento, a managing director at the bank.

Scrutiny of money-market funds may intensify in the coming weeks. The Obama administration's proposed overhaul of financial regulation, issued in June, called for a report studying the floating NAV issue and other potential money-market reforms. That report is due Sept. 15. The Treasury's money-market fund guarantee program, instituted amid last fall's upheaval to provides a backstop for shareholders in participating funds, is to expire Sept. 18.

In a letter to the SEC this week, Deutsche Bank suggested that floating NAV funds have a starting price of $10 a share and that they don't need to be subject to tighter money-fund rules recently proposed by the SEC. Critics say a floating NAV could increase the risk of a run on the fund. But, "there's less incentive to be the first one out of a fund if all shareholders receive that day's market value," says Deutsche Bank's Mr. Benevento. "Everyone is getting the same treatment."

The global consensus is starting to crack
The novelty is wearing thin. The eager anticipation and diplomatic hoopla that attended the London summit has given way to a certain weariness ahead of this month’s gathering of the Group of 20 leading nations. Back in the spring, leaders of the biggest economies could claim to have saved the world. What on earth do they do for an encore? The G20 has outgrown itself. If you add in the myriad international and regional organisations, some 30 leaders will converge on Pittsburgh. The numbers could rise further. Some of those left off the guest list have gone to extraordinary lengths in the effort to gatecrash.

It matters that Barack Obama is host. Britain’s Gordon Brown won deserved plaudits for his chairmanship in London; and the glow around the US president has dimmed somewhat since those heady days of spring. But Mr Obama is still the leader everyone, including China’s Hu Jintao, wants to be seen with. The Pittsburgh pecking order will be described by who gets time with the leader of the superpower. That said, officials preparing the summit fear it will be something of an anti-climax. In part, that is inevitable. When the leaders last met, many saw a risk that the global financial crisis could yet trigger a 1930s-style depression. For once, a summit communiqué actually mattered. But the point of maximum danger has passed.

Leaders now face the unglamorous task of redesigning the financial system and rebuilding confidence. How can they sustain a recovery led largely by the public sector? How quickly should governments turn off the fiscal taps to start cleaning up their own balance sheets? How can they rein in the banks? Averting a slump looks pretty straightforward against exit strategies, regulatory arbitrage and bankers’ bonuses. Back in the spring, the common cause shown by leaders of rich and rising nations alike seemed to some to preface the dawn of a new global order; at the very least it marked a recognition of the new distribution of power in the world.

True, the G20 met in Washington during the twilight of George W. Bush’s administration. But that was merely a rehearsal for the main event. It needed Mr Obama’s embrace of the multilateralism disdained by his predecessor to usher in a new era of co-operation. In spite of occasional spats, the jagged edges and the inevitable grandstanding of France’s Nicolas Sarkozy, the result was an impressive exercise in co-ordination. The recognition of mutual interest between the US and China was particularly striking.

The world is not yet out of the recessionary wood. Bankers’ bonuses may be grabbing the headlines, but the conversations that will count in Pittsburgh will be about managing the transition to self-sustaining growth. And how can Washington and Beijing avoid a re-emergence of huge economic imbalances? A linked challenge comes from the approaching United Nations climate change summit. If the wealthy and emerging nations represented at Pittsburgh cannot sketch out a deal on sharing the cost of lowering carbon emissions, there is little hope of agreement among the 190-odd delegations due in Copenhagen.

Yet without the urgency imposed by a threat of imminent catastrophe, national politics, and prejudices, are re-asserting themselves. The financial crisis produced one of those rare moments when leaders recognised a coincidence of national and collective interests. But it was a moment. More typically, the debates within the G20 – about climate change, nuclear proliferation and a host of other issues as well as the global economy – illuminate the tension between the two sets of forces recasting the international landscape. On one side, the re-emergence of powers such as China and India is creating a more competitive, multipolar system. These rising nations, understandably, want to assert their own interests after two centuries of western hegemony. On the other side, the fact of closer interdependence deprives even the US of the capacity to act both effectively and independently.

The result is a contest between the centrifugal impulse inherent in a multi-polar system, and the centripetal force of interdependence. Giovanni Grevi, a scholar at the European Union Institute for Security Studies (EUISS), cleverly describes this as an "interpolar world".* But we do not know yet whether competition will prevail over co-operation or vice-versa. There are some encouraging signs. Those who know him well describe Mr Obama as the most intuitively multilateralist US president since Jack Kennedy. Mr Obama, I heard during a visit to Washington earlier in the summer, has long grasped the truth understood by the architects of the post-world war two international order: the US national interest is best pursued through a rules-based global system.

Hillary Clinton developed the argument in a recent speech to the Council for Foreign Relations. The US secretary of state said the US would lead the effort to create "a new global architecture". The aim was a framework in which states had clear incentives to co-operate and strong disincentives to sit on the sidelines or to foster conflict. It was a good speech – perhaps reflecting Mrs Clinton’s hope that she can grab the opportunity that Bill Clinton let slip as president during the 1990s. But to many in the US talk of co-operation still smacks too much of world government. In Beijing and Delhi, meanwhile, the suspicion is that it is all a plot to entrench western power.

As I also heard in Washington, the task of building an international order rests largely with the US, China, India and, to a degree, Russia. Yet it is hard to think of four more jealous guardians of national sovereignty. So we should not expect any quick fixes; unless that is, the G20 manages to manufacture another existential crisis.

OECD upgrades global economic outlook
A recovery in the world’s economy now looks likely to come earlier than had been expected just a few months ago, although the return to normal conditions is likely to be slow and protracted, according to the Organisation for Economic Co-operation and Development. In its interim assessment of the economic outlook for this year, the OECD warned that there are considerable headwinds that will weigh on recovery. "It is important not to get carried away," said Jorgen Elsmskov, acting head of the OECD’s economics department, presenting the outlook in Paris today. For most G7 nation economies, the OECD is now forecasting a smaller contraction than it had made in June, with aggregate gross domestic product expected to decline by 3.7 per cent this year against a forecast of 4.1 per cent made just three months ago.

Within that, however, the UK remains an exception with a full-year GDP contraction of 4.7 per cent now expected for the current year – a forecast that takes account of the sharper-than-expected decline in second-quarter output – against an initial forecast of a 4.3 per cent decline. Indeed, the contrast with earlier expectations in the case of the UK is even more marked because the OECD subsequently raised its forecast to a 4.1 per cent decline in output. Within the G7, the OECD is forecasting growth of an annualised rate, quarter on quarter, of 1.2 per cent and 1.4 per cent respectively. But within that, there are a fairly wide range of forecasted outcomes. Germany is expected to see GDP expand at an annualised rate of 4.3 per cent in the third quarter of this year, easing to an annualised rate of 1.8 per cent in the last three months of 2009.

"Incoming information for the third quarter is better than expected and estimates for the third and fourth quarter are mostly positive," said Mr Elsmkov. But further ahead in 2010, "there is no reason for us to change our assessment which is for a slow recovery", he added. "Banks, households and businesses still have a long way to go to repair their balance sheets and that will create headwinds [on demand]," he said. But the UK economy is expected to contract in the third quarter at an annualised rate, quarter on quarter, of 1 per cent in the third quarter and hold flat in the fourth quarter. Japan is expected to show GDP growth at an annualised rate of 1.1 per cent in the third quarter from the second although this is expected to be followed by a contraction at an annualised rate of 0.9 per cent in the fourth quarter. Mr Elsmkov said the negative turn at year end is partly because of business surveys showing a sharp fall in confidence among smaller businesses which is expected to weigh on output.

But a variety of better-than-expected developments overall led to an improved outlook. In particular, conditions in financial markets appeared much better than they had a few months ago. Spreads between yields on corporate bonds and risk-free government bonds have narrowed considerably, and fewer banks are tightening lending standards. However, spreads on credit default swaps for medium-term debt of financial institutions remain relatively high, suggesting concerns remain about the sector, Mr Elsmkov said. "These improvements owe a lot to government interventions," he added. Overall, the effect of these improvements are likely to aid GDP growth. Other factors expected to boost demand, at least in the short term, are stock building after the rapid pace at which business inventories were disposed of in the first half of this year and a better-than-expected bounce in world trade as firmer export orders emerge.

G20 plans for stimulus exit
World leaders have set out the first steps toward withdrawing emergency support for the global economy even though they warned that the crisis was not over. On the eve of Friday’s meeting of G20 finance ministers to prepare for a summit on financial regulation later this month, the US, UK, France and Germany called for work to start "on exit strategies to be implemented in a co-ordinated manner as soon as the crisis is over".

Tim Geithner, US Treasury secretary, said finance ministers should start to spell out how the "very successful policy response" to the economic crisis could be reversed. Speaking at the US Treasury before flying to London to meet his counterparts from the Group of 20 nations, Mr Geithner said these exit strategies were "very important to [the] confidence" of the financial markets. The London meeting will be followed by a summit in Pittsburgh, hosted by President Barack Obama, on September 24-25.

Jean-Claude Trichet, European Central Bank president, writing in Friday’s Financial Times, has outlined for the first time the principles the ECB would use to unwind the exceptional steps it has taken. The calls highlight how the policy debate has switched from crisis response to presaging a return to normal conditions. A recovery in the world’s economy now looks likely to come earlier than had been expected a few months ago, the Organisation for Economic Co-operation and Development said on Thursday. But it warned that a return to normal conditions would be slow and protracted. The OECD is forecasting that in 2009, the contraction in output among G7 nations will be 3.7 per cent, less severe than the 4.1 per cent decline forecast just a few months ago. The OECD downgraded the outlook for the UK, which will be the only G7 nation not to show growth in any single quarter of 2009.

For 2009, UK gross domestic product is expected to contract at an annualised 4.7 per cent, an even sharper fall in output than the 4.3 per cent decline forecast in June, although the third and fourth quarter outlooks have been revised up marginally. The UK’s recovery was slower than the global recovery partly because of its heavy specialisation in financial services, said Jorgen Elmeskov, acting head of the OECD’s economics department. The global recovery was being led by the manufacturing sector. Mr Elmeskov said the UK’s ability to stimulate demand had been constrained compared with other countries.

Mr Trichet, in his FT article, stressed that it was "premature to declare the financial crisis over". The ECB sees a bumpy road ahead for the eurozone and is wary about global prospects, especially if the US rebound disappoints. The ECB left its main interest rate unchanged at 1 per cent on Thursday. In a joint letter to European Union countries, Gordon Brown, prime minister, Nicolas Sarkozy, French president, and Angela Merkel, German chancellor, wrote: "While cyclical indicators point to economic stabilisation, the crisis is not over."

EU banks face conundrum on state aid approval
European banks are playing for high stakes. No less than 30 of them require European Commission approval for rescues from national governments. Brussels will only give the OK if the banks make sacrifices – generally getting rid of assets. Bank chiefs need the approval, but want to minimise the disposals. Each bailed-out bank has to submit a restructuring plan showing how it will avoid both having an unfair competitive advantage and needing more government money later.

There have been two big test cases. Commerzbank passed by offering to sell its Eurohypo mortgage subsidiary and promising not to buy anything for three years. Belgian-French peer Dexia got knocked back because Brussels was not convinced it was safe. ING has taken note. The Dutch bancassurer has pointedly implied it could cut itself in half by selling its insurance arm. A proactive offer that exceeds the commission’s demands increases the chances of an easy ride. But ING may not have been making a sacrifice. A split could create value and make strategic sense.

Lloyds Banking Group is in a tougher spot. The commission wants it to cut its share of the UK personal accounts market from 30pc to 20pc. But that would probably mean flogging Halifax – the newly-acquired dominant UK mortgage lender which drives Lloyds’ recovery strategy. Lloyds seems tempted by a more confrontational strategy. It has offered to shave a much smaller amount off its market share by selling Cheltenham & Gloucester, a smaller mortgage bank, and some Scottish branches. With a supportive UK government and the December departure of Neelie Kroes, the tough competition commissioner, Lloyds may reckon it can stall Brussels.

But this potential rebel should tread carefully. Annoying Brussels is dangerous, and a fresh inquiry – if no agreement is reached by October – could last as long as 18 months. The uncertainty could weigh on share prices. Relying on kindlier politicians is also risky. A new EU competition commissioner could be tougher, and the opposition UK Conservative Party has promised a competition probe into Lloyds, if it wins next year’s general election. A quick resolution could be the wiser option.

US Federal Government Needs Massive Hiring Binge, Study Finds
The federal government needs to hire more than 270,000 workers for "mission-critical" jobs over the next three years, a surge prompted in part by the large number of baby-boomer federal workers reaching retirement age, according to the results of a government-wide survey being released Thursday.

The numbers also reflect the Obama administration's intent to take on several enormous challenges, including the repair of the financial sector, fighting two wars, and addressing climate change. "It has to win the war for talent in order to win the multiple wars it's fighting for the American people," said Max Stier, president and chief executive of the Partnership for Public Service, the think tank that conducted the survey of 35 federal agencies, representing nearly 99 percent of the federal workforce.

Despite its comprehensive scope, the survey is necessarily imprecise about certain questions in looking so far into the future. The number of hires would be affected, for example, by federal workers deciding to delay their retirement, the government continuing to rely on private contractors to handle some of these jobs, and Congress balking at the price tag of adding new workers to the federal payroll. Nevertheless, the survey makes clear that the majority of new hires will be needed in five broad fields -- medical, security, law enforcement, legal and administrative.

Mission-critical jobs are those positions identified by the agencies as being essential for carrying out their services. The study estimates that the federal government will need to hire nearly 600,000 people for all positions over President Obama's four years -- increasing the current workforce by nearly one-third.

The medical and public health area is most in need of hires, according to the study. Stier described the Department of Veterans Affairs as a "dramatic example" of an agency with pressing needs, as a result of the ongoing wars in Iraq and Afghanistan. VA, according to the report, will need more than 48,000 hires over the next three years, including 19,000 nurses and 8,500 physicians.

Intelligence agencies expect to hire 5,500 people in the next year and "in the same order of magnitude" over the following two years, according to Ronald P. Sanders, chief human capital officer for the Office of the Director of National Intelligence. Such agencies include the Central Intelligence Agency and the National Security Agency. "It's a combination of how much turnover we expect and how much growth we expect in our budget," Sanders said.

The nation's unsettled economy and high unemployment rate may ease the government's task, as workers turn to the federal sector for job security and good benefits. But Stier said many federal agencies will have to fight to attract top talent, particularly in fields in which government cannot compete with private-sector salaries.

"Most are going to see extreme competition with the private sector," Stier said. This could be especially true in fields such as medical, legal and information technology, he said. Yet federal hiring remains a cumbersome process for many agencies. "Fixing the hiring process is a key component in making it work," Stier said.

"Most government agencies have been historically passive, announcing jobs and waiting for people to line up," said Sanders, who served as associate director for policy for the Office of Personnel and Management before joining the national intelligence office. But Sanders said Obama's vow to make government service "cool" and federal efforts to streamline the hiring process should leave the government in good stead to make the hires.

The Department of Homeland Security expects to hire for 65,730 positions by 2012, an increase of more than 48,000 from the previous three-year period. The Justice Department is expecting 4,000 new positions among law enforcement personnel, correctional officers and attorneys in the 2010 budget, said Mari Barr Santangelo, chief human capital officer for the department.

But, federal officials said, the ultimate accuracy of the hiring projections will depend on whether current employees retire as predicted. Despite the projected growth in federal jobs, the size of the government would be no larger than at most other times in the country's post-World War II history, both in relative and absolute terms.

In 1970, for example, the number of civilians on the federal payroll numbered 2,095,100, a figure that represented a little more than 1 percent of the U.S. population. In 2008, the comparable figure was 2,020,200, or 0.66 percent. However, the figures do not reflect the enormous growth of the government contractor force as the result of privatization efforts pursued by previous administrations.

The Obama administration has signaled in its budget its intention to replace many contractors with government workers, particularly in the field of defense acquisition. This is another reason for the predicted surge in government hiring. OPM Director John Berry was unavailable to comment on the report, according to a spokesperson. The survey results are to be posted Thursday at, according to the partnership.

Older Americans Forced To Stay In Jobs Because Of Recession
Older Americans will make up virtually all of the growth in the U.S. work force in the coming years as a nearly unprecedented number hold onto jobs and younger people decide to stay in school. The study by the Pew Research Center, an independent research group, highlights a rapidly graying labor market due to longer life spans, an aging baby boomer population and a souring economy that has made it harder to retire. Pew's survey and analysis of government data, being released Thursday, found the share of Americans ages 55 and older who have or were seeking a job rose to 40 percent this year, the highest level since 1961. In contrast, people 16 to 24 who were active in the labor market decreased to 57 percent, down from 66 percent in 2000.

Asked to identify why they're working, 54 percent of older workers responded that it was mostly because they wanted to, citing a desire while they were still feeling healthy to be productive, interact with other people or to "give myself something to do." A sizable number of them – nearly 4 in 10 – also acknowledged staying put at work partly because of the recession. Among young people 16 to 24, nearly half the respondents said they weren't working because they wanted to focus on school or job training, reflecting a growing view among Americans that a college education is needed to get ahead in life. About 4 in 10 said they looked for work but couldn't find a job.

In all, the number of older workers is projected to increase by 11.9 million in the next few years. They will make up nearly 1 in 4 workers by 2016. "When it comes to work, this recession is having a differential impact by age. It's keeping older adults in the work force longer, and younger adults out of the work force longer," said Paul Taylor, director of the Pew Social and Demographic Trends Project. "Both of these trends pre-dated the current downturn, both have been intensified by it, and both are poised to outlast it." Among other findings:
  • The U.S. labor force is expected to increase by 12.8 million workers from 2006 to 2016, including the 11.9 million who will be ages 55 and older. Workers ages 25 to 54 will increase by 2.5 million, while those ages 16 to 24 will decrease by 1.5 million.
  • After increasing for five decades, the share of women holding or seeking a job has flattened at 59 percent. That is about 13 percentage points below the rate of men in the labor market. Asked to identify their reasons for not working, women were nine times more likely than men to cite child care or other family responsibilities as a major factor.
  • Older workers tend to be happier. About 54 percent of workers ages 65 and older said they were "completely satisfied" with their jobs, compared with 29 percent of workers ages 18 to 64. That reflected the fact that they were working primarily for more social reasons, rather than financial need.
  • Most working mothers prefer a part-time job. Among those with a full-time job outside the home, 6 in 10 said they would like to have a job with fewer hours. By contrast, just 19 percent of fathers with a full-time job and a young child said they would prefer to work part-time.

"Public attitudes about women and work may have changed dramatically over the past generation, but mothers and fathers still experience the tug between work and family in very different ways," Taylor said. "Mothers who have children at home and work full time would rather be working part time, or not at all. Fathers who have children at home are glad to have a full-time job." Pew based its findings on data from the Census Bureau and the Bureau of Labor Statistics. It also interviewed 1,815 people ages 16 and older by cell phone or landline from July 20 to Aug. 2 about their attitudes toward work. The poll has a margin of error of plus or minus 2.7 percentage points.

Poverty Rate For Elderly Americans At 18.6%
The poverty rate among older Americans could be nearly twice as high as the traditional 10 percent level, according to a revision of a half-century-old formula for calculating medical costs and geographic variations in the cost of living. The National Academy of Science's formula, which is gaining credibility with public officials including some in the Obama administration, would put the poverty rate for Americans 65 and over at 18.6 percent, or 6.8 million people, compared with 9.7 percent, or 3.6 million people, under the existing measure. The original government formula, created in 1955, doesn't take account of rising costs of medical care and other factors.

"It's a hidden problem," said Robin Talbert, president of the AARP Foundation, which provides job training and support to low-income seniors and is backing legislation that would adopt the NAS formula. "There are still many millions of older people on the edge, who don't have what they need to get by." If the academy's formula is adopted, a more refined picture of American poverty could emerge that would capture everyday costs of necessities besides just food. The result could upend long-standing notions of those in greatest need and lead eventually to shifts in how billions of federal dollars for the poor are distributed for health, housing, nutrition and child-care benefits.

The overall official poverty rate would increase, from 12.5 percent to 15.3 percent, for a total of 45.7 million people, according to rough calculations by the Census Bureau. Data on all segments, not only the elderly, would be affected:
  • The rate for children under 18 in poverty would decline slightly, to 17.9 percent.
  • Single mothers and their children, who disproportionately receive food stamps, would see declines in the rates of poverty because noncash aid would be taken into account. Low-income people who are working could see increases in poverty rates, a reflection of transportation and child-care costs.
  • Cities with higher costs of living, such as New York, Chicago and San Francisco, would see higher poverty rates, while more rural areas in the Midwest and South might see declines.

With highest jobless rate, Spain rallies
Judging by the amount of road work clogging up Spain's capital city currently, with Madrid practically being unearthed, you'd be forgiven for thinking you were in the midst of a dynamic and growing economy. However, that's anything but the case. Public works programs have been going on across Spain under the government's so-called "PlanE" bid to stimulate the bleakest economy in Europe, where the jobless rate hit 18.5% in July and is expected to top 20% in 2010 as a decade of growth driven by the now-collapsed housing market painfully unwinds.

Spain is in its fourth straight quarter of recession, with output dropping a sharper-than-expected 1% in the second quarter. Future growth prognosis range from cautiously optimistic at Moody's Investors Service to the downright catastrophic: "Spain is a disaster waiting to happen," says a note from Variant Perception, an institutional research house based in London. Despite the gloom, the Spanish IBEX 35 is up nearly 20% year to date, beating 11% gains each from the French CAC-40 and the German DAX . Observers say Spain's few market heavyweights have dragged the index higher, perhaps unjustifiably so given the backdrop.

"We've been cautious on Spain for a long time, really for all the obvious reasons," said David Hussey, London-based head of pan-European equities at MFC Global Investment Management. He said they've held banks such as Banco Santander in the past and just recently sold Spanish telecom giant Telefonica."The way we're playing Spain at the moment is we're not currently invested," said Hussey. "We're looking for obvious opportunities -- sure bombed-out construction companies and banks could be interesting, but we have none of these names at the moment. We're worried about bad debts on the banking side and the pace of deterioration."

Banks account for a third of the IBEX index, with Santander up 56% year-to-date and Banco Bilbao Vizcaya Argentaria up 44%. Share prices of Santander, for example, have held up well because the company is well-capitalized and has stashed away cash during the good years to compensate for the bad, said Hussey.But, he can't shake the worries. "When we speak to the company and listen to what they're saying and see what's going on in Spain, we're still cautious," Hussey said.

"We think the bad debts on residential markets will be worse than they think."He also thinks the market is underestimating those levels. The big bone of contention right now is the fact that Spanish banks have been taking residential developments on their balance sheets before those loans go bad. "Loans aren't getting marked to market. That's a risk."


Gravity said...

You are here because the middle-class is about
to be dissolved.

Its every inhabitant thoroughly liquidated,
its very existence priced into slavery and soylent green shoots.

You will be swallowed by
He who walks behind the Markets.

In His stomachs of retroactive destitution you will find a new definition of insolvency,
as you are slowly attenuated to your true monetary valuation over a thousand years of auditing.

Greenpa said...

"You look fabulous. Your toenails are still growing. That means you're on your way!"

Ok, now THAT really cracked me up. Perfect. :-)

jal said...

I found your articles easy to understand.
One day J6P "will get it".

Nelson said...
This comment has been removed by the author.
90 mooses said...

Re Bill Bonner and central planning

I do like to read mr Bonner's writing, but he is wasting his time warning against central planning. That is all we will have left for the forseeable future as there will "no" capital remaining for the little people to produce the things they actually need. They will turn to big brother for comfort; I just pray it is their secular agnostic brother rather than their born again brother they turn to.

Also: note to survivalist big hunters: please read/listen to some european folk stories/songs before expecting to be able to use your arsenal for putting meat on the table (Robin Hood for example) There are plenty of olde englishe songs about poachers for some inexplicable reason?

Anonymous said...

Hey ilargi how about telling your woes to Rona Ambrose?

And while you are at it would you ask her what happened to the Housing part in the old title of Ministry of Labour and Housing.

Are they distancing themselves from future disaster, the clever bunnies?


Anonymous said...

Hey ilargi how about telling your woes to Rona Ambrose?

And while you are at it would you ask her what happened to the Housing part in the old title of Ministry of Labour and Housing.

Are they distancing themselves from future disaster, the clever bunnies?


Stoneleigh said...

Coy Ote (from yesterday)),

Around here that's called "making hay" and it's the men doing it, younger ones at that. 60-70 lb bales get heavy real fast!

Fortunately I don't have to do it by myself. We usually have 2-3 people stacking a wagon, and 3-4 people unloading it at the other end and stacking it in the loft. The bails do get heavy though. Yesterday the whole team was over 40, but today we managed to coral a youngster :)

PKP said...

Hard times? Not for government bureaucracies.

ric said...

Ilargi says, "Instead of a hard working family paying George Bailey's Building & Loan Association in "It's a Wonderful Life" 50% of their income plus 5% interest for 5 years, that same family, if it wants a home of its own, is forced to pay 30% or 40% of its income for 30 or 40 years to a bank to a bank that runs no risk whatsoever and that will charge it fees left, right and center on top of everything else."

For a culture saturated with "It's a Wonderful Life," this is a perfect sentence. In college, I found so much cognitive dissonance in my econ, finance, and business courses that I threw the baby out with the bathwater and focussed on some of the least practical subjects possible, such as lit & philosophy. I wasn't smart enough to parse the dissonance in finance in a comprehensible way. At the time, I didn't have the benefit of the internet to help provide exposure and access to truly fine minds outside the system, such as those found here.

In a recent e-mail exchange with CA Fitts about the cognitive dissonance found in finance, she talked about the relation between "living capital" and "financial capital," saying: "I, for one, don't think I can understand financial capital without first understanding living capital."

Why is something so simple so rarely understood? Sharon Astyk talks about how the word "tragedy" is often overused, but I think the way the idea behind "living capital" has been tortured, destroyed, and humiliated by our institutions and organizations is Shakespearean in its tragedy because it's about the flaw that kills our civilization. Perhaps the idea behind "living capital" is reserved for a future time.

HappySurfer said...

From yesterday,

I really wonder at you people who give this impression of being "tough, armed and prepared" know what that really means, and have really come across anyone remotely truly like that and actually how "tough, armed and prepared" they really are??!!

I thinks not - just wondering.

Bigelow said...

The financiers will remain untroubled by government prosecutions because their coup has so utterly succeeded. To put a fine point on it, the problem with regulation and retribution is they are dependent on human will. Given enough time the rule of law is redefined/subverted by those supposedly regulated by it. The politicians know who has the money.

“The debate we will now hear is the blame will be placed upon the Republicans and their deregulation policies that caused the collapse of the world economy. This is simply not true! The problem is over-regulation of small firms and no regulation to speak-of for the big firms.” Martin Armstrong, ‘SEE—DUCK—RUN’

theaitrader said...

The primary fallacy when viewing the current market through I&S' lense is that they assume the herd is corraled within some strange limit defined by the powers-that-be. This is a specious view.

Herdonomics, a term I can claim at least somewhat to have coined, means that the herd will, collectively, glom onto that which has intrinsic value to the whole.

The herd, a Darwinian beast in any view, seeks to maximize its return whatever the current limits or markets or what-have-you. If oil is dear and liquid fuels the current panacea for goods or human transport then the herd will seek its ilk in whatever is cheapest to satisfy the need.

If electricity is a decent substitute then that will do and the herd will run itself, en masse, to the latest trend.

The science of what is possible, i.e. what is doable, will be determined by the herd's whims. To use an EROI or ROI or even the ridiculous IRR to calculate the herds' field of view is to impose a limit whose use or view is entirely theoretical.

The real limit of human experience has not yet been plumbed. The stress factors are but stessors toward the old maxim that the mother of invention is need. And when in need the herd and market provides.

gregfb said...


I've gone through the process of arming myself and found the idea of actually shooting and killing someone to protect family and friends hard not only get my head around but especially my heart. I suppose as time goes by I'll see if I am capable of doing so but hope it never happens. I live by the motto "better to have it and not need it, than to need it and not have it".

Anonymous said...

Hippy Surfer-

"I really wonder at you people who give this impression of being "tough, armed and prepared" know what that really means, and have really come across anyone remotely truly like that and actually how "tough, armed and prepared" they really are??!!

I thinks not - just wondering."

What a useful contribution. There you have the reason why defense is not a topic dwelt on here.

Anonymous said...

"The problem is over-regulation of small firms and no regulation to speak-of for the big firms.” Martin Armstrong,

Nope, the problem is too much debt in a monetary system that can only grow as long as someone is willing to get into debt which eventually outstrips the ability to pay and the whole thing goes into reverse.

Anonymous said...

don't worry about the future. Or worry. But know that worrying is as effective as trying to solve an algebra equation by chewing bubblegum

Anonymous said...

One of the most fascinating reports that I've seen is running on CNBC's website right now:

The Crisis: 1 year later

It's a look back at where we were, day by day, exactly one year ago. And it gives reports and videos from then.

It's especially interesting to look at from a perspective of raising your "herding awareness", as you know by now what's really going on, and what's coming down the line.

Once you see that, it puts the MSM news today in perspective. I heartily recommend it.

Ilargi said...

"The science of what is possible, i.e. what is doable, will be determined by the herd's whims."

If it quacks like abiotic oil........

Greenpa said...

Anon 6:04- BBC is running a "retrospective" on the recession too. Pretty good strategy for the spin doctors, really. It's really all behind us, folks.

Lots of good sub articles like "How DO we get those stubborn Chinese to quit saving, and spend more?"

Coy Ote said...

theaitrader - "The science of what is possible, i.e. what is doable, will be determined by the herd's whims."

I have to think not. If population was limited and resources were unlimited, then the "herd's whims" might be a determining factor.

Unfortunately, population is hardly limited, and resources are definitely limited, which leaves us in a vey dire predicament, long term, regardless of anyone's whims.

Bigelow said...

@Anon 5:41

""The problem is over-regulation of small firms and no regulation to speak-of for the big firms.” Martin Armstrong,

Nope, the problem is too much debt in a monetary system that can only grow as long as someone is willing to get into debt which eventually outstrips the ability to pay and the whole thing goes into reverse."

Both are true actually. Any checks and balances chucked out the window and no public regulation is what allows the insane leveraging of debt, too much credit and ugly avarice. Credit within a system run amok to the extreme you rightly point out is what pushes "the whole thing goes into reverse."

Bigelow said...


Howdy. The powers-that-be have gotten very good at circumscribing the heronomics mind. But granted necessity is the mother of invention. All the human imagination has to do is prove via real scientific fact that the law of entropy is flawed.

Emma said...


Wow, what a superior into! You really have a talent for taking complicated subjects and presenting them to a general audience.

Sorry to repeat this but,…Although this (fraud) has been going on for decades, it kicked into “death wish” mode with the passing of the Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999.

The final vote was not 90- 8 (as stated by the D-Senator in Rachel‘s video), it was actually 54 - 44 (basically along party lines) and signed by Pres Clinton. Can any of these guys just tell the truth? Both parties have been complicit.

You can view the official Senate record at the following link:

Thursday, July 18, 2002; Page A29 The relentless expansion of corporate control over our political economy has proven nearly immune to daily reporting by the mainstream media. Corporate crime, fraud and abuse have become like the weather; everyone is talking about the storm but no one seems able to do anything about it. This is largely because expected accountability mechanisms -- including boards of directors, outside accounting and law firms, bankers and brokers, state and federal regulatory agencies and legislatures -- are inert or complicit. By Ralph Nader

Ed_Gorey said...

Nobody owns their home -- ever. Once you finish paying the mortgage, you rent from the state through the wealth tax known as the property tax. Your landlord (the state) can raise your rent anytime he/she desires, and if you can't pay, well then its time to find a new place to live. To me, that doesn't sound like ownership.

PKP said...

Labor Day Picnic

Ed_Gorey said...

Re: Garrison Keillor's "Hog Slaughter"

This audio made me stop and think for a longtime after I heard it a couple of years ago. As a suburban brat who's been insulated from life's troubles my entire life, it made me wonder how corrosive that insulation can be.

The audio version is great if you enjoy the sound of Garrison's voice.

Lake Wobegon- Hog Slaughter

Pentronicus said...

Hippy Surfer

"I really wonder at you people who give this impression of being "tough, armed and prepared" know what that really means, and have really come across anyone remotely truly like that and actually how "tough, armed and prepared" they really are??!!"

No matter how tough, armed and prepared you are, there is going to be someone out there somewhere who is tougher, meaner, better armed, etc. It doesn't matter. You just have to be better than your likely adversary. If you carry a firearm, know and practice tactical techniques, and know that you would use the weapon without hesitation to stop an attacker, you are way ahead of your typical adversary. I don't train for the one in a million government trained psychopath. I train for the person who wants to crack my skull with a baseball bat for a half gallon of milk outside the local QuickieMart.

TexMark said...

Very insightful. After reading it, I have to agree with Gravity and add that we are becoming Mexico where 40% live well, 60% live in poverty and government and corruption rule the day.

hepzibah said...

<< I train for the person who wants to crack my skull with a baseball bat for a half gallon of milk outside the local QuickieMart. >>

awoot hear in da bakwuds its a mostly da no good yunguns on drugs bashin in der grannies head fer her soshul skerity chek

Ah figur if we jus let dem stuf der faces wit all de drugs dey wanz, we doawunt hav no mor problem perty soon, huh? Then no need fer guns sept fer russlin up sum coons an possums, huh?

Anonymous said...

Emma said...


You really have a talent for taking complicated subjects and presenting them to a general audience.

Yes he does -- and with style.

rapier said...

The American dream is to own or control real estate and have its price rise sharply,or at least relentlessly. Be sure never to call it inflation. Before there was a stock market land was Americas primary asset. Later real estate settled into being around half of all assets. However no other asset class had quite the same allure. Stocks and financial assets have had their ups and downs but Americans have never really liked, deep down, the financier and the trader. On the other hand every ordinary citizen could be a real estate investor. Such was respectable.

In post war America the single family home became more and more a store of wealth and a sure thing 'investment'. If you bought smart, location and time, your investment would increase in price smartly. Not inflate mind you, and everyone loves something for nothing. The old idea of owning part of America and profiting from it took on a new urgency. I won't say legitimacy because it was always legit.

The final mania was an accumulation of 300 years cultural wisdom. It's like in our DNA. I am sure Ilargi gets this, in his mind, but it isn't in his bones.

That isn't to say the inflation of all other asset classes hasn't been important. They have, to more and more people to an ever increasing way since the end of WWII. Asset inflation is the road to wealth. Real wealth. Real big wealth. Google and Microsoft wealth. Most don't dare dream of that however.

America cannot exist without asset inflation. The pressure builds to quickly when too many lose all hope of the big score.

Ilargi's take down of the logic mortgage credit is like pissing on the American dream. There has to be a way out. People cannot accept that there isn't.

Anonymous said...

It's simpler than that, 'asset inflation' is just a fancy shmancy way of saying Something for Nothing.

Like in gambling.
Like in addictive gambling
Like in psychotic zombie squid bank speculative 'investment' gambling.

Something for Nothing should replace "In God We Trust" on the dollar bill.

Inflation is baked into the banking system.

Something for Nothing is the power granted banks for 'willing money into existence' by the mere act of loaning it.

How fuckingcrazy is that? The Sheeple love it.

The Sheeple are just plain too stupid to grasp this basic concept.

They are going to eat this halfbaked, dirtbag psuedo idea soon and die slow painful deaths as a result of it.

It's their willfully ignorant, collective lobotomized Destiny to do so. Feel the Burn. They deserve it. They 'earned the right' to choose lethal stupidity, and they are about to be granted that wish in Spades.

The real American dream isn't 'home ownership, it's Something for Nothing, and the Chicks are Free.

Ilargi said...

"The final mania was an accumulation of 300 years cultural wisdom. It's like in our DNA. I am sure Ilargi gets this, in his mind, but it isn't in his bones."

Only an American would suggest this is a typically American phenomenon.

Farmerod said...

"The final mania was an accumulation of 300 years cultural wisdom. It's like in our DNA. I am sure Ilargi gets this, in his mind, but it isn't in his bones."

Only an American would suggest this is a typically American phenomenon.

Nope. Lots of Canadians would suggest this too, especially Canadian politicians and central bankers. We're different here. Better. Morally superior. Financially solid.

Hell, we're apparently going to annex North Dakota. But what exotic destination will Winnipeggars drive to on weekends once Grand Forks flies the maple leaf?

Anonymous said...

Yet another great post. There's a handful of economic sites I visit daily and this site is one of them.

In fact today's lead was especially well crafted. Kudos on your ability to convey a message.

Anonymous said...


"Pretty good strategy for the spin doctors, really. It's really all behind us, folks."

Yes, and here's the bill: $13+ Trillion.

Somehow that sums up the charge-it era very well.

Sure hope everything is all fixed now.

snuffy said...

Mr Happy Surfer wanted to know if I had made the acquaintance of any who were "really tough,armed and prepared...


How about a man who Ambassador Sam Lewis's Personal bodyguard during the Sadat peace accords[volunteered,no less],Who spent 5.5 years with his MOS embassy duty in Israel[Think the movie"Spartan"]...then twenty five years as a LEO with 5 medals for heroic action during this time...3 shootouts in the line of duty,3 dead badguys.He taught SWAT,as well as being has departments firearms instructor.


A marine,Sergent,who,when released by the corps,went back to Asia for a couple years to work as a gem dealer/couriers bodyguard.Based in the Mindanao,when he returned from the east,he spent the next ten years doing martial arts for exercise.Hes joined up then with the first to get serious about his shooting skills....

I admit my younger brothers have poor interpersonal skill,and can be Hard-nosed and harder headed sometimes. And they will even admit to being unloving of 99.995%of the general population .but.
I think they might qualify...fill your description of "tough and prepared".

As you seem to be a bit new here,you will find out more a lot of the posters here have "Had a life"...and a very colorful one's at that...

I wont boor you with my bio,except to say I have been around the block,and over the road,many,many times.

We all know what may well come.I have had a lot of experience at dealing with emergency situations for money...I have seen how "I" react in high stress/high consequence situations.That gives me a certain amount of confidence that I can bring to whatever "Table" is set before me...

How about you?

time for sleep


HappySurfer said...

Hmm should I reply okay,

Me I am not for violence I don't think it is the way to go.

I still stand by what I say,when it comes to "tough, armed and prepared".


The fact you are unsure means you still have to pass the test against people who have many "gold stars".

@ snuffy

Love the "As you seem to be a bit new here" ... no probably been here longer than you this the condescension to prove your point?

From what I know the really tough do not get medals what they do does not look good on the citations.


One has to be careful at reacting to the baseball guy by shooting him. IMO this just escalates the problem.

I am not talking about the 1 :1 000 000 psycho but people who may seem ordinary yet have a value judgement which is different from "civil society" and I wonder if the majority who have never experienced this behavior can truly understand their capabilities and would be remotely able to deal with it -

... again me thinks not.

@ Annoymous 5.40

"...There you have the reason why defense is not a topic dwelt on here"

I agree with you and should have kept my mouth shut.

rapier said...

I am not suggesting asset inflation particularly real estate inflation is only an American phenomenon. I will say that it is more strongly embedded in the culture than anywhere in the world because it's roots go back so far. Far in a unique way however for only 400 years ago nobody owned an acre of America. European kings claimed title to it's vast empty spaces. (Native Americans simply didn't exist in any practical way in settlers cognition of ownership)

The vast majority of people coming to America for the following 300 years had a dream of owning part of its frontier or part of its newly developed areas. People who came from Europe where ownership of land was almost impossible for the many. Where ownership had flowed through kings and noble families for centuries.

There ownership of land itself was an end in itself. The idea of capitalizing it or having it inflate in price was barely part of the equation. The first great bubbles the South Sea and Mississippi bubbles were European of course but their foundation was built upon dreams of the Americas.

I guess it's all a rather speculative argument and probably not worth settling. That is who are the worlds best asset inflators. The dream has gone viral now worldwide. Not diminished in the least. While we wait for real estate to turn around we will securitize life insurance policies.

Anonymous said...

How pathetic, middle-aged sorts training for the apocalypse and proclaiming themselves as officially ‘prepared to kill.’ Well, the apocalypse better hurry and get here soon, before the hearing aids and corrective lens fail, before the reactions are nothing more than a tremble with a walking cane. The Mother of all Catharsis is taking far too long in giving birth to just the right moment that would validate all this up-front and advance preparation in steeling the mind and hand for the ultimate purge in a pent-up survivalist. ( This is the point where all the indignant yelps of “ you really think we want it this way, being forced’ to defend ourselves.”)

Of course, we never see these ‘warriors’ take to the urban streets and volunteer their time with the kids who really will pick up a gun and put a bullet in your brain. Fantasy has its limits and borders after all.

Silly me, there is not enough time in the day, month, or year, for the killer in training to stop for the here and now and lend a hand to their fellow human beings who really are suffering from exactly the same plight of societal mayhem and daily trauma they are ultimately preparing for. One must prioritize and ignore the distractions. Well most distractions anyway, even the most Spartan survivalist needs a little daily cyber blogging.

Greed and selfishness wears so many different disguises that even those pulling on their masks are unaware of the irony they protest against, but which now covers their face.


“A peaceful place or so it looks from space, a closer look reveals the human race.”

Anonymous said...

I whole heartily agree that the concept of individual (non royalty) land ownership is an American concept.

Europeans, Middle Eastern, Asian and African cultures barely conceived of primitive forms of collective (non royalty) land ownership, much less single people 'owning' land in large numbers.

I goes back to the selection mechanism/motivation for immigrants coming to the Americas.

The two poles:

Immigrants were losers who could hack it back in the old country, they weren't smart enough to handle the pressure of an entrenched perpetual feudalism.


Immigrants were the truly smart ones who recognized the rigged game of the old country was for fools and weaklings and saw the potential for individual growth that their fellow old countrymen couldn't because they were nothing but a bunch of whipped dogs.

Some mix of these two extremes was probably the norm.

But at the end of the day, millennium's worth of behavioral modification on the vast majority of humans to NOT own their own land or even aspire to the notion was the reigning paradigm for most of human history.

Until America.

I'd be interested in anyone pointing out multiple examples, not just a few freak ones, of significant human cultures where the majority of a community's population, owned land individually for centuries.

Waiting with Baited Breath

Anonymous said...

"we never see these ‘warriors’ take to the urban streets and volunteer their time with the kids who really will pick up a gun and put a bullet in your brain."

Sniff the Java 'Aesthete'

The 'volunteer' efforts to fix anything on 'the street' were never viable, even decades ago.

The Cult of Hyper-individuality which is the predominate feature of Capitalism sucked all the oxygen out of the room as far as 'volunteer' efforts to address social ills.

Despite Ilargi's assertion to the contrary that behavioral selfishness is a universal quality of humans, the America culture perfected the behavior to new heights like none before.

The Derivative Monster of megalomaniacal bad bets is in the quadrillion range, more than all the combined wealth of humanity rolled together.

It's headed to Infinity and Beyond in case you have not been paying that close attention.

Infinity and Beyond in debt = Death

The Derivative Monster, the Crowning Glory of Human Greed Ingenuity, was not conceived or produced by Europeans or Africans or Asians. Not that given enough time they couldn't have done the same, but they didn't , Wall St did it.

All kinds of human behavior potential is universal, but that is a meaningless statement.

Like saying you're pretty tall for your height.

All kinds of humans have the behavior potential to be cannibals.

Most are not.

Americans seem to have realized their potential for financial cannibalism however in a manner most other humans could barely conceive of.

pentronicus said...

Aesthete/Anon @ 10:26

You are correct that there is no escape from old age. The rest of you post seems to be an unfair characterization of some of the posters here based on your image of the stereotypical survivalist. Though I have been around shooters quite a lot, I don't think I have ever met one who resembles that image.

Most people who legally carry and train with firearms do it because they take responsibility for their own self defense. They have decided that they value their lives enough to use potentially deadly force to defend against a potentially deadly attack. They know that such and attack is unlikely, probably easy to avoid, puts them in a legal hell if they use their weapon, and possibly puts them in jail. And of course there are the serious psychological ramifications of taking another's life.

Choosing to have firearms has little to do with a possible apocalypse with zombies climbing over the back fence. It has little to do with fantasy, other than for reviewing 'what if' type scenarios. Neither does greed nor selfishness.

If one carries a weapon it is essential that they are willing to use it to stop and attack. i.e. shoot someone, possibly killing them. If, they are not mentally able to do this, they should not have the weapon. Don't misinterpret this as being blood thirsty or wanting to become Rambo.

Emma said...


Why would you assume that those who have trained in self defense have not or do not go out into the community and volunteer?

You know not what you speak. I will spare you the details, but I do volunteer work everyday AND donate a large portion of my income and possessions to various causes. One action does not exclude the other.

The person I married was also involved in this volunteer work and it was he who made me realize that I was idealizing and romanticizing human nature. Kindness, love and good deeds can ameliorate much suffering, however, it does not change that dark side that is present in ALL of us.

Encapsulated in the dungeon of my psyche is the realization that we all have the potential to do harm. To deny this is to live in an ivory tower and to set oneself up for possible demise. Which may have been your point.

That is, Is it better to ignore the human predisposition for innate self interest (which, history tells us is rife with violence) and allow ourselves to be injured or killed when confronted with the most human of behaviors? Would this act make you ’better”, more ethical, more honorable? Perhaps it would.

Anonymous said...

Aesthete: Why would I even want to spend one moment "helping" someone else's child who has decided to go down the criminal path. I'd rather spend my time with my own children. But it is, as always, amusing to see your stereotypical liberal response--namely, expecting someone else to do something that you believe is worthwhile when--to be honest--you don't do it yourself. It surprises me daily to see ivory tower university leftist dogma that has failed in the real world time and again spout out of your and your compatriots mouths. Just because you are a good writer, Aesthete, doesn't mean you're a good thinker. By the way, you can't save an addict (they can only save themselves), and I surely wouldn't want to try to save a violent sociopath because that would involve having to know them and they are, well, sociopaths. But still, the Aesthete Early Intervention Plan is sure to bear success.

Anonymous said...

Here's a good article on the unemployed:

Jobless for months, these professionals find time to cry, to connect, to hunt for work and to reimagine

The woman in the first photo really has the "deer in the headlights" look.

Richard said...

Its easy to spout nonsense about "houses that cost $50,000 to build" and end up costing $350,000 because of long term financing when you don't bother to do basic math and have never built anything yourself.

In the real world the (now dead) financing system adds a substantial long term cost to home prices, but not 700%. To use a real world example, 5 years ago I built and sold a $325,000 home. It cost $190,000 in construction cost, plus $75,00 for land, well, and septic. If you would like to pay me 700% profit on my costs I'd certainly build you as many copies as you want, complete with financing----.

Anonymous said...

Houses total cost is purchase price PLUS interest on the loan. (3-4X of purchase price)

That is the Reality Based Community.

Not just the building materials and labor plus contractor profit. Get real buddy.

A $150,000 house, stuffed through the bowels of the fiat-no-reserve-overleverage banking 'finance' ponzi ends up costing the buyer of said house 3-4X the purchase price.

Let's be kind and say 3x $150.000 = $450,000

The house and land etc cost approx = $110,000

That makes the total to the buyer = $340,000 in future salary for a very modest house by today's gluttonous standards.

4X from the ponzi loan banksters gives you a total bill of $490,000 over the course of the mortgage, for a mediocre shelter.

Wow, great 'investment'.

If it's a Recourse Loan, and the 'value' of your castle drops in half to say $75,000 because the last mill shut down in town and every other house in your neighborhood has crack/meth junkies living in them, well, damn, that house 'investment' doesn't look so hot, AND you still own the $300,000-400,000 to the bank.

Are the Glory Days of suburban 'home ownership' comin' back soon?

As soon as FMSOOYA (Flying Monkeys Shoot Out of Your Ass)

DIYer said...


You mean if I fall into that thing it'll keep me alive for a thousand years?

Does it have an internet connection?

Greenpa said...

This is an aspect of "weapons", in the abstract, that is far more important than whether Farmer Brown keeps a shotgun for weasels after his chickens.

A few excerpts; last year:

"The United States signed weapons agreements valued at $37.8 billion in 2008, or 68.4 percent of all business in the global arms bazaar"

"Italy was a distant second, with $3.7 billion"

"Weapons sales to developing nations reached $42.2 billion in 2008, only a nominal increase from the $41.1 billion in 2007"

(gosh, you think that money might have been better spent by those countries? The economic stature of Japan and Germany is attributed to many to their being prohibited from indulging in major ams buildups.)

ah, the free market!

Anonymous said...

"If you would like to pay me 700% profit on my costs I'd certainly build you as many copies as you want, complete with financing----."

Just be happy you unloaded that piece of crap before the world ran out of money and suckers. Next!

Gravity said...

Good Gravity,
don't you see what's going on?

Soylent green shoots are people!

Anonymous said...

An ode (sort of):

A nom de plume called Gravity,
Whose words wretch the abdominal cavity,
Predicts deeds of fascist banks,
And corrupt government ranks,
And lays bare our millennial depravity.

Gravity said...
This comment has been removed by the author.
Gravity said...

Why, we are all baked in that pie,
whereof we daintily hath fed,
eating the flesh that we ourselves hath bred, swallowing the fruits of thine own increase.
'Tis true, 'tis true;
witness my knife's sharp point.

Anonymous said...

There seems to be some fairly narrow views of what it means to volunteer. It certainly does not necessitate some pie-in-the-sky societal outcome that is sanctioned from a ‘liberal ivory tower.’ The opportunity to volunteer arises out of many day to day situations. I recently went to a poor section of town to paint some old buildings and a few of the neighborhood kids were very interested and kept asking questions such as how I mixed colors and could they try and so forth. The next week I brought along a few easels just in case they wanted to try and next thing you know we have a weekly thing going and even the local art store is kicking in some paint and supplies. The goal is not to change the world, in fact, there is no goal. I enjoy the hell out of the kids and they seem to be having a good time, too. We are simply working on learning how to see and there is no better way to test your perceptions than the immediacy of two-dimensional feedback. Beyond that, we talk a little about the metaphorical implications of art. That art is not simply about expressing oneself with random flourishers of unrestrained exuberance. We learn that every touch of the brush should be responsible and considered and that in many ways our lives are nothing but bits and pieces of tiny brush strokes and decisions that constitute what our life currently looks like. In other words, think before we act and consider the possibility that we might be putting down the wrong color in the wrong place. And that these choices have produce results and outcomes that one has to look at and live with.

I am asked why come down to the decrepit part of town, why not go where it is more beautiful and clean. My answer is always the same and the idea first dawned on me after reading Rodin a long time ago: that the most deformed and disheveled can become the most beautiful under the alchemical thumb of art. The search for worthy subjects to paint provides an alternate view of how one might consider their own surroundings. Which is why Turner, Whistler and Monet flocked to The Thames to capture the "pollution poetics' as a result of the industrial revolution.

I am not sure how “viable” volunteer work is, but I’m sure not thinking about the financial ‘derivatives monster’ while I’m doing it.


Anonymous said...


You write so beautifully. I wish I could see your paintings.


Anonymous said...

‘derivatives monster’ Here ya go.

Thomas Cole, "The Course of Empire"

Anonymous said...

The derivatives monster is growing exponentially.

It is the demented dream of infinite wealth incarnate.

To say it is unsustainable is to misspeak it's danger by multiple magnitudes.

There are no 'counter parties' left to balance the demonic bets of these derivatives. Such talk is whistling past the graveyard nonsense.

The genie is out of the bottle on this one.

Anonymous said...

while listening to max k on market talk radio, he said what i've been thinking for awhile about china and derivatives.

the chinese intelligence services know that goldman sachs runs the us, there is no government per se anymore, just gs.

max said the chinese have finally figured out they need to attack gs, not the us bond market. the talk of us bonds and whether the chinese will or won't buy more is stupid and a red herring.

when china recently announced that it gave it's official blessing to it's banks that they could renege on derivative contracts, that was a direct shot at goldman and jpmorgan.
if parties start stiffing gs on derivatives, they are finished.

Coy Ote said...

Happysurfer - "Me I am not for violence I don't think it is the way to go."

Me either, if it is possible to avoid it. Niether is hardly anyone I know "for" violence. But I will say this, if and when the proverbial stuff hits the fan I would want a "snuffy" by my side.

As I see things, self defense is not immoral, nor is it illogical. Agression is, and the important thing is to try to know the difference.

I still hope we will, by some near-miracle, find a way through the next few years without blowing the whole shebang to smithereens.

Stoneleigh said...

Anon @1:59,

A $150,000 house, stuffed through the bowels of the fiat-no-reserve-overleverage banking 'finance' ponzi ends up costing the buyer of said house 3-4X the purchase price.

Let's be kind and say 3x $150.000 = $450,000

The house and land etc cost approx = $110,000

That makes the total to the buyer = $340,000 in future salary for a very modest house by today's gluttonous standards.

Unfortunately, the effect of Fannie and Freddie has been to artificially inflate demand for housing, which has also artificially inflated the demand for building materials and labour in the building trades. All have become much more expensive at the same time. Without Fannie and Freddie, all these factors would have remained much lower. By pushing up the price of so many aspects of home building at once, Fannie and Freddie have created an enormous demand for financing to match, which has driven our credit expansion much further than it would otherwise have gone.

Home ownership seems to be an Anglo-Saxon obsession. It is every bit as strong in the UK, Canada and Australia as in the US. All Anglo-Saxon countries appear to be suffering disproportionately from debt crisis as a result. Under prevailing circumstances, home ownership is far more of a liability than as asset, unless one happens to own a homestead free and clear. Even then one will be exposed to sharply rising property taxes as governments at all levels attempt to suck whatever wealth they possibly can out of the periphery in order to fill the gaping holes in their budgets.

Stoneleigh said...

Well, haying is finished for another year - over 500 bales in the hayloft and another couple of hundred off to feed the animals of our farmer friends who lend us their haying equipment. I'm stiff, sore and scratched to pieces, but it's a good feeling knowing that the animals are taken care of for another year or two.

After haying comes mucking out the big barn, and then wood-hauling season....

Anonymous said...

Great post on Reuters blog by Rolf Winkler, much to Stoneleigh's recent comments on Student Loans and Illargi's re. Fannie and Freddie impact on home prices:

John Hemingway said...

Ciao Stonleigh,

First, congratulations on finishing the haying:-) Sounds like quite a workout.

I just wanted to point out that home ownership is also, or at least up until recently was, an obsession in Italy and Spain, too. I'm not sure of the exact figure but I think that the percentage of people who own their own homes in Italy is somewhere between 70 and 80%.


VK said...

Seems like Australia have their own version of shadowstats,

Australian unemployment jumps in June - up 37,000 (0.4%) to 862,000 (7.8%)

Australian ‘under-employment’ up 306,000 (2.9%) to 967,000 (8.8%)

Now 16.6% (1.835m, up 343,000) Australian are unemployed or ‘under-employed’

VK said...

A Tale of Two Depressions, comparing now and 1929 has been updated

One can see that there has been a marginal improvement in world industrial production and the stock market rally has been epic! World trade has gone up slightly but is still well below comparable levels of the 30's.

Interesting stuff, the graph of world industrial production looks an awful lot like a ski slope.

Coy Ote said...

VK - Yes, a very interesting graphic comparison of the two "repressions".

I had the same thought as did one text in the comments... one difference today is the missing comparison of chinese impact, since in the 30's they were not a major world economic factor.

What is your thought on the China factor?--I know you are a rather astute guy on China.

Ahimsa said...

Anon @ 1 PM said:

"Just because you are a good writer, Aesthete, doesn't mean you're a good thinker. By the way, you can't save an addict (they can only save themselves), and I surely wouldn't want to try to save a violent sociopath because that would involve having to know them and they are, well, sociopaths."

Sorry, Anon, but Aesthete is a good thinker.

So what makes you so sure that someone who steals a loaf of bread is a "violent sociopath"? Your outdated Dickensian view of society as black and white/good and evil begs the question: I guess you are the good versus the poor, the exploited, the hungry, the ethnic, the stranger, the beggar, the homeless, who are the evil. I guess that tells us a lot about who is a good thinker and who is not.

Physical and psychological preparation and planning to kill the so-called "violent sociopath" you so much fear might well transform you, long before that imagined encounter, into that quintessential sociopath.

David said...

We have met Aesthete,

And she is the most self-righteous human being on the planet earth.

Bow down and worship the goddess.

You all do not have so much self-worth to even be in the same room as this person.

Consider yourselves purged of your sins by genuflecting to the ultimate goddess . . .


Bow down and worship or die.

Anonymous said...

Thanks Eliza. I put some images up on another listserv a while back ago and received one too many cranks so I am a little reluctant for a repeat on that theme.

Anon 7:05: Thanks as well for the Cole link. I have seen many Cole paintings as well as others from the Hudson River school. I’m not typically a fan of didactic narrative in the visual arts, but Cole’s work reads first and foremost on the visual level …usually one big dark and light shape with some interesting edge work to delineate the shapes. I guess you could say I am in the formalist camp.

Speaking of which, below is an interesting (I found it hilarious) exchange between Richard Diebenkorn and Clyford Still (from Jane Livingston’s, The Art of Richard Diebenkorn,p.31)which puts to rest any notion of amicability and brotherhood between these two artists of the same genre, and I suppose, artists in general:

“ Diebenkorn, despite temperamental differences, was nevertheless interested enough in the eccentric Clyfford Still to invite him to his studio. He and Phyllis arranged for Still to come to lunch. While Phyllis prepared the meal, the two artists climbed to the attic and spent an hour or so looking at work; then, descending the stairs, Still gestured to a seemingly finished painting hanging on the wall and commented that he thought it was one of Diebenkorn’s stronger works. Diebenkorn replied that he had come to have serious doubts about its palette, and was thinking of reworking it. Whereupon Still continued down the stairs, took his coat, and left without saying another word.”


Anonymous said...

And speaking of cranks, here comes good old David, the sites resident guttersnipe who can often be nipping nipping at the heels of posters he finds objectionable.

Oh well, every site needs a seal with a ball on its nose.

Keep on arf, arfing David.

VK said...

@ Coy

China is headed for hard knocks. The only reason the economy is 'growing' is because the Government loosened the easy money taps and flooded the economy with it.

As the credit has dried up, Shanghai has once again entered the lair of the bear. Electricity consumption for the first half of the year was down and they have some serious social issues with healthcare, pollution, income inequality between rural and urban areas and rising rural unemployment and rising unemployment for the 6 million students who graduate annually from University in China!!

I do believe that China will face it's own Civil War moment but that discontent might be focused by the Government towards nationalism. We might see a Japan 1930's style nationalist movement with China unleashing it's fury on the world as exports dry up and no longer can easy money fuel domestic growth.

Anonymous said...

--Home ownership seems to be an Anglo-Saxon obsession. It is every bit as strong in the UK, Canada and Australia--

Sorry to be a nit-pick, but I tend to think an anglo-saxon is only slightly less rare than a sasquatch. Anglo-Celt is a much more apt term. I doubt the involuntary cultural ties between the nations within the british isles could ever be separated. I suspect the English have alot more in Common with the Welsh/Irish/Scots that with the Dutch, Germans or Scandinavians?

Also curious, are there any differences in attitudes to home ownership in quebec than in english speaking canada? I was under the impression that primogeniture was not part of the french culture, so the long narrow parcels along the st lawrence were sliced into increasingling narrow strips with each generation until they were often useless. The importance of the "firstborn" son seems more important in other cultures, Irish just as much as English.

I had heard/read that this was why the french colonies failed; the relative lack of landless younger sons forced to fend for themselves. Just something I recall from my school days, but I'm sure it is more complicated than that.

Pentronicus said...

Ahimsa at 9:18

There is a not-so-subtle distinction here that I think you are missing:

The person who would kill you immediately for your loaf of bread = bad. Respond or die.

The apparently unarmed person who says "Give me your bread or I will kill you!" = bad, but not worth much trouble. Hand him the loaf; it costs less than a homicide inquiry or even five minutes of lawyer time.

The person who begs for the bread = harmless. Help him if you feel like it.

Seeing it this way is the opposite of black and white thinking. Unfortunately, you are looking at this from the perspective of the untrained person. You see it as killing instead of self defense. You see it as point and shoot. I see it as jail time if I goof and a minimum of $20K of legal fees even if I am right.

Your assertion that firearms training may desensitize the trainee is totally groundless and not supported by evidence. Most police will tell you that the persons with licenses are not the problem; it is the criminals with guns. If concealed carry desensitized people wouldn't we see a massive crime wave that correlated with the increased issue of these licenses?

Anonymous said...

--The person who would kill you immediately for your loaf of bread = bad. Respond or die.--

Both my parents grew up during the great depression, and I don't recall either of them ever mentioning the poor murdering for a loaf of bread or pint of milk. Are you (and others) saying that murder in your city is committed over milk and bread? If we have let things slide this far we deserve this society deserves the death penalty. Bring on the Zombies!

snuffy said...

I did not realize I rattled your cage that much Aesthete.

Your point of age being the one factor none of us can "prepare" for is well taken.Most folks have a hard time adjusting to the fact of a "early"ugly demise as a high probability.
My own "preparedness"ethos began back in the y2k non-event that pointed out gross weakness in emergency response planning that I observed by "those in charge",as well as a couple of years seeing upclose and personal how the .gov does emergency planning....

Its a real good idea to be ready in MOST circumstance to be ready to bail you own ass out of a problem....if at all possible.

Petronicus is on the money as far as concerned.Only a fool looks for a fight.Only a Damn fool looks for a gunfight.

As far as volunteer time,I have put 4 years into being a Master Gardener Volunteer on more projects than I can the point of seriously pissing off my wonderful wife.She has this thing about charity beginning at home. That is why I stopped .The fact its a black hole for time,and time is getting short.

We will all have the chance to live "situation ethics"in the near future.I am just grateful for the time I have now where this is only a exercise in electrons...instead of memories I will have burned in my personal mental rollidex...


Anonymous said...

"she is the most self-righteous human being on the planet earth."

She isn't right or wrong, ugly or beautiful. she's just a little different just like all of us are.
Not that I agree with her on a lot of points as I think she is full of crap on why this rush to push threw health-care at this time just as one example, but that's what all of us share as being part of the human species were the same but different and it would be a really boring world if we were all the same although for some unique human reason we have a tendency to be someone were not and that's the part that's really screwed up.

Anonymous said...

anonymous @ 7:25

Can you provide a link to the Max K Market Talk Radio Goldman piece.


Greenpa said...

Back to important stuff- Stoneleigh, how much hay does it take to get an alpaca through the winter there?

We're about 70% decided on going with Icelandic sheep next spring; the myth for them is the live through the winter on the fat on their back and 1 and a half bales of hay. Not likely; but they are good at foraging in snow.

Alpacas are not off our list, though, if we can find some we can afford.

Anonymous said...

@Coy Ote

The other day you gave a link for a bunch of ppt presentations called the 'Crash Course' - thankyou! I am going to see if I can get my nearest and dearest to watch them and buy the argument for doom (or hoepfully at least see where I'm coming from).


VK said...

LOL. So true!,8816,1914857,00.html

"In general, for weight loss, exercise is pretty useless," says Eric Ravussin, chair in diabetes and metabolism at Louisiana State University and a prominent exercise researcher. Many recent studies have found that exercise isn't as important in helping people lose weight as you hear so regularly in gym advertisements or on shows like The Biggest Loser — or, for that matter, from magazines like this one.

The basic problem is that while it's true that exercise burns calories and that you must burn calories to lose weight, exercise has another effect: it can stimulate hunger. That causes us to eat more, which in turn can negate the weight-loss benefits we just accrued. Exercise, in other words, isn't necessarily helping us lose weight. It may even be making it harder.

Dr J said...

VK - this is one of the arguments Gary Taubes makes in his book, "Good Calories, Bad Calories".

Shortly after the book was published, I saw him getting beaten up for his efforts on Larry King Live by Mehmet Oz and that beach boot camp bimbo who had the temerity to tell Gary he didn't understand the First Law of Thermodynamics. My wife said they treated Paris Hilton better!

Oh well, now that a mainstream researcher is saying it, I am sure it will start to be accepted. At least one can hope.

Anonymous said...


You’re posts never rattle my cage, in fact, I have always enjoyed reading your posts. I know all about the gun culture--I grew up in Wyoming. I’m all for self-defense; I spent more than a few years in the Hung I Hsiang Taiwan line of descent. Ultimately, I found that whole mentality to be a dead-end, unless one is practicing for health. And very few activities can compare to an hour of Ba Qua circle walking.

At any rate, I’ll keep my comments more narrow and topic relevant in the future so as not to provoke any more infantile and vitriolic outbursts.


snuffy said...


Do you use led lighting,or some variation/type of lighting at night?My planning for electricity ,or lack thereof,has a small scale microhydro& gassifier& 200watts of solar panels.I understand you have dispensed with the majority of what most folks consider essential,refrigeration ect.I have lived like that for 2 years ,when I lived on a mountainside[big,big hill.]before built my cabin,at Rose Lodge,Oregon.Living in a tenthouse for a couple of years gives you a different outlook on what is needed to be "comfortable".
I have tried to downsize as much as possible,however my [mexican]wife is not real eager to live "without".Canning,drying,rootcellering,ect are getting to be part of the up the frig will be a fight I think .Any good hints on transition?[spice,you can chime in here at any time...]


VK said...

@ Dr J

Indeed the article mentions the book good calories, bad calories by Gary Taubes. Surprised to learn that obese people actually expend more energy.

This was also very interesting

Many people assume that weight is mostly a matter of willpower — that we can learn both to exercise and to avoid muffins and Gatorade. A few of us can, but evolution did not build us to do this for very long.

In 2000 the journal Psychological Bulletin published a paper by psychologists Mark Muraven and Roy Baumeister in which they observed that self-control is like a muscle: it weakens each day after you use it.

If you force yourself to jog for an hour, your self-regulatory capacity is proportionately enfeebled. Rather than lunching on a salad, you'll be more likely to opt for pizza.

snuffy said...

VK,that is interesting...

Bukko_in_Australia said...

David said...
We have met Aesthete,

And she is the most self-righteous human being on the planet earth.

Funny -- she doesn't write like my ex-wife! Barbara, are you pretending to be someone else again?

Anonymous said...

"I’ll keep my comments more narrow and topic relevant in the future so as not to provoke any more infantile and vitriolic outbursts"

No need to do that, as soon as one gives one's permission to let others control what they do they have already lost, the topics here seem to fly around like a bird anyway if not by you then it is somebody else, fight the fight and wage the battle it's all a mind game anyway and no one really has to play unless they chose to.

Nelson said...

Can you drop me an email please?
Just click on my name to bring up my profile.
- N

Anonymous said...

Read Denninger's post today--it's a good one:

Anonymous said...

Read Denninger's post today--it's a good one

You betcha and it makes me glad I sing such a boring national anthem as 'OH CANADA'. Gee, never thought about it but that can't be it's name can it, the first two words in the verse, talk about lack of imagination and tediousness, oh well better tedious than dead in the water.

-J Canuk-

Bukko_in_Australia said...

J Canuk, I kinda like having an anthem titled "Advance Australia Fair" with lyrics such as "our land is girt by sea."

VK said...


"I would estimate around 70 percent of workers took the resignation deal. This is happening all over Guangdong," the factory owner said. "I help the Department of Labor, and they'll help me later on down the line."

Such open-secret programs, writ large, help China manipulate its unemployment rate, because workers who "resign" don't count toward that number. The government estimates that roughly 20 million migrant factory workers have lost their jobs since the downturn started. But, with "resignations" included, the number is likely closer to 40 million or 50 million, according to estimates made by Yiping Huang, chief Asia economist for Citigroup. That is the same size as Germany's entire work force. China similarly distorts everything from its GDP to retail sales figures to production activity. This sort of number-javascript:void(0)padding isn't just unethical, it's also dangerous: The push to develop rosy economic data could actually lead China's economy over the cliff.

Taizui said...


Thanks for the Chinese Cooking link. Perhaps some enterprising student will start a site.

Thanks to John Williams, we know a bit about US book-cooking, but do you have any guess as to how much (or whether) the Chinese versions are more extreme?

Coy Ote said...

Iris - You bet! I do not agree totally with the Martenson "crash course" but find it a pretty good synopsis of our current predicament and many of the reasons for it.

VK Thanks.
- "...We might see a Japan 1930's style nationalist movement with China unleashing it's fury on the world..."

I hope that is your worst case scenario, and does not happen, otherwise it means curtains for enormous numbers of people.

bluebird said...

I watched the Martenson Crash Course last winter, and found it a good summary of the things impacting our lives...economy, energy, environment. I watched for an hour a day, for three days, to complete all the videos, and not get too overwhelmed. There is a lot of info to absorb, great charts and graphs too.

Ilargi said...

"VK said...

Because China does what the US does?

Lisa said...


I have Icelandic sheep. They eat about a bale per sheep per two weeks here in my cold bit of New Hampshire. (Similar to Stoneleigh's climate)

BTW in Iceland they winter the sheep in barns and supplement with fish meal. The sheep are excellent foragers (great for land clearing), but very vulnerable to parasites.

el gallinazo said...

Why are alpacas so expensive in Canada? They serve alpaca steak at two star restaurants in Peru.

Anonymous said...

Coy Ote said...
I hope that is your worst case scenario, and does not happen, otherwise it means curtains for enormous numbers of people.

Please don't lose sleep over visions of chinese imperialism. Don't forget nuclear weapons exist and they have been used: we know the effects. The U S of A is probably the only nation on earth where a high percentage of the population craves the end of the world. That is where the real danger lies.

Anonymous said...

After yesterday's exchange with David, I decided to go back and peruse some of the old posts as David’s writing never really received anything more than a cursory glance from yours truly-- I tend to turn down the volume when the gun phallic types get in full stride. Anyway, I was amazed to read that so many of the other posters on this site are quite sold on the idea of guns as self defense, which tells me that most of them have no idea what they are talking about.

As one poster pointed out, guns serve mainly as a deterrent. And unless one is willing to carry a loaded gun in hand at all times--think Donatello’s “ David”-- guns are actially a very cumbersome form of self-defense, especially in very close range. (Which is more or less is in synch with this sites ‘retreat from the world’ ethos.)

May I suggest it’s not going to be the spitting, snarling lunatic that telegraphs intention from 100 feet away that will present the real threat if and when apocalypse time arrives; it’s going to be that congenial and affable sort who approaches ( and breaches) with a smile on his face and suddenly sticks a knife into the side of a cartoid artery faster than Joe Survivalist can let go of his balls and reach for his phallic replacement.

A good knife fighter-- don’t kid yourself there are plenty of them out there, and they do not fit your stereotypical profile of imminent danger--will slice to pieces most concealed carry types with a smile on their face. These sorts are not stupid; they know full well that Joe Survivalist fancies himself armed and dangerous, but THEY will do their deed on their own terms, in that amicable circumference of strategic advantage.

So it's back to square one, to the world of ’by hand,” once again. You don't really think martial technology and unlimited supplies of ammunition is going to save you after all these years of preparing for a technological limitation, do you?

Well of course, they do, George. It’s a phallic replacement fantasy, steeped in agenda and dripping with a deranged and derisive verbosity.

Anonymous said...

Aesthete directly above

Anonymous said...

First Marc Faber, now Karl Denninger's saying this economy might hold together for years, in spite of the massive debt overload. In other words neither one of them has a clue, one way or the other, when TSWHTF. For that matter, no one else does either. I'll throw out my best GUESS--5 years at the earliest.

Farmerod said...

J Canuk

You betcha and it makes me glad I sing such a boring national anthem as 'OH CANADA'

You're either deceptively sarcastic or worryingly misinformed. Read some Canadian bank financial statements, check out and or, uh, turn on the mainstream news and read between the lines (i.e. compare what is actually happening to what is being projected). If you think we're going to decouple, you're dreaming.

Nelson said...

Anon 1:48,
Yeah, Karl and his followers are so smart that not one of them managed to figure out that Y=1/X is hyperbolic, not parabolic.

Anonymous said...

Farmerod, yes you are just about right on but one would never know that if all one read was TAE. Where have you been reading naughty boy?

As far as the Canadian dollar goes unless sinter side Uncle Carney is still here after the coming election I think it will hold better value than the other end of the dogs tail. Remember we are still a net exporter of about one million barrels a day of black real money gold. (something to be said about being a hewer of wood and a drawer of water,eh:)


Anonymous said...


Yes but not quite as dumb as ilargi using negative feedback when he meant positive feedback. But these slips of the tongue or mind are really too petty to mention as long as the intent is correct , right?

=J. Canuck-

Anonymous said...

Mia Culpa too!

I got that wrong and published before checking... ilargi used positive feedback but meant negative feedback.

-J Canuck-

Stoneleigh said...


I typically feed one bale of hay per day, plus a couple of scoops of grain, for 6 sheep and 2 alpacas. Alpacas are supposed to eat fairly low protein, so sheep pasture and grain can be a bit much for them, but they have no choice since they all co-habit. I have to feed the alpacas their grain directly from the scoop (ie above the heads of the sheep) or the sheep will shove the alpacas out of the way. Sheep are not shy and retiring creatures where food is concerned, and no amount of alpaca spitting will change that. The sheep just look momentarily confused when the alpacas spit at them, and then they go back to being battering rams.

Alpacas are very sweet natured (unless some male competition is going on), but quite shy. They spook easily (run first and ask questions later, so to speak). They have a lot more personality than the sheep. Their fiber is simply amazing - much stronger and softer than sheep wool, and without the itchy lanolin. Up here I've seen females sell at auction for a few hundred dollars each - less expensive than a purebred dog.

pentronicus said...


So, just to summarize your points,

-- Guns are limited in usefulness, especially if not close at hand.

-- A sneaky knife fighter could kill you anyway.

-- Someday you will run out of ammo, forever.

-- Guns are some sort of phallic replacement fantasy thing.

Do you have any worthwhile points to make? You can dress these points in all the hyperbole and imagery you want, but they are still weak. It seems that you have formed your opinions and that you are desperately looking for anything you can find to buttress them.

Stoneleigh said...

J Canuck,

The Canadian dollar is likely to fall against the US dollar once the flight to safety begins in earnest (ie once the market rally is over). The price of oil should fall substantially at the same time, which will further undermine the value of Canadian dollars. The Canadian dollar should do well much later, once the flight to safety is over (breaking the back of the US dollar) and we see supply collapse in oil. The flight to safety could easily last a year though, and oil supply collapse could take even longer.

Canada is deep in bubble territory and Canadians are deep in denial. We'll be playing catch-up soon enough though.

Stoneleigh said...

Enough with the 'sniping' over weaponry please.

cs said...

After a couple of hours on a huge (3m+ hump)white camel from Mali a few years back, I toyed with the idea of camels for transport, ship of the desert and all that. Phenomenal temperature range they can withstand, -50°C to +50°C iirc.
Had a brief search about, seem to be $5-15K, but hardly any for sale..
That's not a bad investment if you were thinking about a business though, especially if the alternative is walking. I don't quite know why there aren't more throughout western europe. Just cos they can survive in the desert, doesn't mean they like it there - reckon they'd be OK in most climates, and hardier than horses or mules...
Bit unwieldy though, needs large fences and corners like an oil tanker. You have to pull their heads at 90° to their bodies to stop them.
More curious though, was the BBCR4 revelation that *apparently* their humps can explode if they eat too much protein.

Anonymous said...

Stoneleigh I quite realize what you say and would move into some US dollars except that I don't think the difference would be worth the risk of unforeseen events, I am old Canada and so not much of a gambler. About the thread, it started as I was merely playing a bit of 'which idiot can jump higher' over the petty comment on Denningers piece. If you would comment on that article it would be appreciated. I rather liked it, especially as it put flesh to my uneducated guess that there was no way that the future could be pressed further into covering the pasts bad bets.

-J Canuck-

Nelson said...

Fair enough, Canuck.
I'm not above correcting typos here at TAE, if for no other reason than to prove I'm paying attention.

I understand that English is Ilargi's third language, which IMO grants him some latitude in simple slips like positive vs. negative feedback, which are after all mere jargon.

But for a native speaker who purports to show us his mad maths, Mr. Denninger's repeated use of the wrong word to describe oh-so-simple a mathematical function leaves me wondering: what other sloppiness is buried in his work?

Anonymous said...

Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”

The end of the empire but I doubt it will go down without a fight.

Anonymous said...


I remember while living in the Okanagan talk about camels once being used there , I guess during the gold rush.

-J. Canuck-

Coy Ote said...

anon 9:29 - "Coyote... Don't forget nuclear weapons exist and they have been used..."

That's exactly my point! It is possible, perhaps even probable given our overall predicament. But no, I am not losing sleep over tragic possibilities.

VK said...

1 Million Jobs lost in August

Via Mish from David Rosenberg.

As an aside, the Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented. We shall see if the nattering nabobs of positivity discuss that particularly statistic in their post-payroll assessments; we are not exactly holding our breath.

The original PDF article from Rosie can be found at

Dr J said...

J. Canuck - camels were tried as pack animals during the Caribou gold rush in BC in the 1860's. It didn't work out so well but their presence there became legendary and is still part of the folklore of that area.

Greenpa said...

Snuffy- we use DC compact fluorescents for work lights (kitchen; ie the NE corner of the 20' x15' house), an AC fluorescent or two in places where the DC wiring isn't installed or is too long a run (12v in the house, 24v in the greenhouse;12v more readily available, but you can find almost anything you want in 24v if you look hard enough).

Frequent on-off stuff with CFL bulbs drastically shortens their lifespan, particularly the DC versions.

We use LEDs where we can; the most reliable ones are automotive 12v sets; look in the truck supply places. They always come with a plastic lens cover designed to focus the light straight out; often just removing the cover results in a more diffuse light pattern.

I use an amber LED truck light for my bed reading light; and sleep vastly better now; take a look here:

CFLs and sleep

We also use LED headlamps to fill in; NMH batteries recharged on a sunny day after 10 AM, so no double storage loss; (get a fast charger, doesn't hurt the batteries and they're smarter; ours fully charges AAs in 20 minutes) Each of us 3 adults has their own headlamp, I'm ahead in the competition at the moment, I've got the most advanced technology; 3AAs, and one LED that puts out nearly 100 lumens- and is dimmable. In long cloudy spells we'll do computer work with just the headlamp for illumination.

I could go on. :-) but I gotta get out in the field for harvest. If you read my early posts on my blog, there's quite a bit of stuff about off-grid living.

Lisa- many thanks for the info! I hadn't heard about the parasites problem- my ground is mostly well drained, anyway. Which parasites?

Stoneleigh- thanks! Could you build a feed trough for the alpacas that would be too high for the sheep to reach? Good to know not all the prices are crazy. How good are the alpacas at grazing grass down tight? My #1 criterion is good mowing characteristics. If I could grow my trees without animal companions, I probably would. But after 30 years, it's clear- you can't. Unless you have unlimited time for mowing, and money for fossil fuels...

Greenpa said...

VK- how about "numb-noggined nabobs"?

Anonymous said...


I get what seems a private site at that second link, is that just open to US viewers? Got the same on Mish yesterday, can you view it?

Dr. J

Thanks, I see my long term memory is still somewhat intact:)

-J. Canuck-

Anonymous said...

Greenpa -- Thanks so much for link about CFLs and sleep. Currently a major problem in my household. That thread sure sheds some light on our situation. *ducking* Sorry, couldn't resist.


Ilargi said...

New post up.

Ihatebroccoli said...

This is really interesting

"Fannie Mae and Freddie Mac give the Treasury each 80% of their (common) stock and $1B (each).
The Teasury promises to keep Fannie and Freddie solvent according to GAAP by lending it money at 10% per year.Fannie Mae shares jumped from 58 cents at the end of July to $2.04 by Aug. 28; Freddie Mac soared from 62 cents to $2.40 in the same period.
The Treasury promises to keep Fannie and Freddie liquid by buying its MBSs, financing the purchase by selling more Treasury bonds, and then holding the GSE MBSs to maturity.
The Treasury, the Fed, and the FHFA will agree on an additional amount--a "commitment fee"--that Fannie Mae and Freddie Mac must pay to the Treasury starting in March of 2010."

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