Saturday, November 21, 2009

November 21 2009: It's the stupid economy

National Photo Co. Miriam Auerbach 1924

Ilargi: At times it seems overwhelmingly necessary to call spades spades, put some people in their rightful places, and subsequently flush them down. There are such copious amounts of half-truths, full-blown lies, carefully concocted spin and other forms of fantasy flying around the ether and other media channels that it must be impossibly hard for many to tell reality from garbage.

And I don't even want to go into the fellow finance writers who choose to put their entire credibility on the line with extremely poorly guided forays into climate science, spurred on as they are by a bunch of hacked emails, and concluding that "global warming is a scam". It may get them new fans, but they won’t be of the thinking kind, while those who are must now think twice when reading their words on other topics. By all means, guys, be my guest. But being unburdened by knowledge does not give you a license to speak. Not you, nor Palin nor Beck.

I would like to stick to the economy, with an inevitable side step into politics. It took less than a year for President Obama's approval numbers to fall below 50% for the first time, and that number -which finds its origin in a deteriorating economy- will increasingly shape policy, and to an extent not seen for quite some time.

Don’t be surprised if Tim Geithner is sacrificed unceremoniously and without much further hesitation. Not to thoroughly change economic policies or anything of that kind, don't be a fool. The pollsters are simply, as we speak, working overtime to see what Geithner's departure, combined with the potential nomination of one of a number of possible new candidates for his post, would do for Obama's popularity. Simple and cold calculation. It won’t be easy to find a candidate who would lift the poll numbers substantially. And policy wouldn't change anyway, since the Geithner Goldman clan will maintain a firm grip on the Treasury. One obvious candidate, Paul Volcker, seems to have disqualified himself with his resistance to the very popular Audit the Fed movement. No-one with a Goldman past has a shot.

But these are still all things that are out in the open, that we can see. We need, I think, to look much more closely at the reality of where the economy stands. ”It's the stupid economy" can have more than one meaning. Not unlike "It’s the stupid climate", for instance. It's very much an economy defined, shaped, presented and experienced by the stupid. And as long as that situation lasts, the select few fat fingers that are capable of actual thought can have their way with everybody else's wealth. As Dylan Ratigan aptly puts it: Why would banks use taxpayers’ money to do lending when they can take it and speculate in dark markets, and are allowed to do so by the government, where the profits are theirs and the losses can be returned to the taxpayer?

What we have seen in the first 11 months of the present administration is not just that those responsible for the mess have not been punished for their illegal acts, or that trillions in taxpayer money have "somehow inadvertently" ended up in the wrong hands. 2009 so far has seen a concerted and highly successful effort by those responsible for the crisis to get a much tighter grip on government finance, make legal what wasn't, free up unparalleled amounts of public money, and make sure it flows into their pockets. It's the simple and complete gutting of the entire US economy and, in its wake, American society.

It started -if we forget Alan Greenspan and Robert Rubin for a moment- in 2008 under Hank Paulson, with Geithner in a prominent role (which he now seeks to hide) at the New York Fed, and it grew exponentially once Geithner and Summers had been cemented into their places by the president. There is nothing accidental about this, it's not a question of mistakes due to wrong ”accents" or incomplete information, as many like to claim. Paulson and Geithner's TARP, as Elizabeth Warren says one again, had the specific and explicit purpose of boosting lending to small businesses. A year later, that lending is down. Need we say more?

The government suggests that the unemployment situation is improving, and is doing so because of its efforts. But while the Bureau of Labor Statistics' Non-Farm Payroll Survey claims that job losses have improved from minus 741,000 in January to minus 190,000 in October, the U3 unemployment rate has gone up relentlessly, from 7.6% in January to 10.2% in October. It has, moreover, done so in increments that don't have any apparent connection with the non-farm job loss numbers. How is that possible? The unemployment rate is based on a separate BLS survey, the Household Survey. In short, job losses are not coming down, or if they are, in much smaller numbers than it pleases Washington to publicly tout.

And we have talked enough about the difference between U3 and U6 numbers. Using U3 is just another method for Washington to make things look better than they really are. It seems that if you haven't called to say you have no job in the last 5 minutes, you’re no longer counted as jobless. It is then assumed that you either have become so discouraged you've decided to lay down and die, or, alternatively, you've discovered you're independent wealthy after all.

Which takes us to the next bit of rubble: the "success" of the stimulus package in creating jobs. Whatever you hear or see about that, rest assured: it's an unmitigated disaster. So much so that it's nigh impossible to believe that is accidental. The government resorts to downright lies about the program, 30,000 jobs in a district that doesn't even exist, a school that saves 600+ jobs where it only has 300 to begin with, it's a long list. Really, if the program were even a modest success in reality, you wouldn't hear these things, the spin doctors would make sure numbers would come in clean.

When confronted with doubts such as these, politicians et al. routinely claim that only a fraction on the allotted money has been spent, that it will all fall into place in 2010, and that they're on course to create the 3.5 million jobs Obama promised way back when. Well, if we may be so bold as to guesstimate that less than half of the jobs claimed as having been saved or created so far are real, then the total of some 300,000 created in the first 10 months of the program will just about have to be equaled every single month for the next 11 months. And lest we forget, Obama also claimed way back when that the stimulus would make sure the unemployment rate wouldn't rise beyond 8.1%. Yes, but we didn't have the data, yes, but nobody could have foreseen how bad it would get. Yes, yes. Call me.

It's interesting to note that no matter how hard it is to gauge how much has been spent on the job stimulus, what seems very clear is that the total amount Obama has delivered towards employment creation will by year end in all likelihood be less than the total amount in bonuses projected to be paid by Wall Street's main financial institutions. The total amount in Wall Street bonuses is set to exceed $162 billion, according to MSNBC, and if you ask me, that fact alone should be enough to bring down the president's poll numbers below the freezing point. By the way, MSNBC also estimates bank profits through Q3 ‘09 at $22.5 billion. $139.5 more in bonuses than in profits. Yes. Call me for that too.

So how do the media and their experts see all this? Here's for a last batch -for now- of spades called spades. The New York Times reports: New Consensus Sees Stimulus Package as Worthy Step. There are some gems here, on the topic of a second stimulus package, something I've long qualified as inevitable, and just as inevitably to be presented under a different name.
"It was worth doing — it’s made a difference," said Nigel Gault, chief economist at IHS Global Insight, [..] "I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’"
"The economy was weaker than we thought at the time, so maybe in retrospect we could have used a little bit more and little bit more front-loaded," said Joel Prakken, chairman of Macroeconomic Advisers, another financial analysis group, in St. Louis.
[..] Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy. "There should have been more direct federal spending that would have added to aggregate demand," he said. "Temporary tax cuts and one-time transfers to seniors were largely saved and didn’t stimulate spending."
Among Democrats in the White House and Congress, "there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument," said Mark Zandi, chief economist of Moody’s and an occasional adviser to lawmakers. Even so, "the stimulus is doing what it was supposed to do — it is contributing to ending the recession,"
Christina D. Romer, chairman of Mr. Obama’s Council of Economic Advisers, said attention to that too-rosy projection [Obama's claim that unemployment would halt at 8.1%] "prevents people from focusing on the positive impact of the fiscal stimulus. So of course I find that frustrating."
Economists said Republicans’ recent proposals to rescind unspent money would be a mistake. James Glassman, a senior economist at JPMorgan Chase & Company, said: "If we could be absolutely convinced that the growth we’re getting is for reasons beyond the help the government is giving, then that would make sense. But the fact is we can’t be certain of that."

These people don't live in America, these people are clowns that make up stories that fit their jobs and the worldviews connected with them.

The problem is not that the stimulus was too small, or that circumstances unpredictably deteriorated, or that too much went into tax cuts and not into spending.

The problem is that the government in 2009 has spent many times the amount spent on unemployment to hand out to banks.

The problem is that there still isn't even a actual plan, or a vision for that matter, for the future of America's people and their jobs. Or, if there is, it's not known, and likely for dark reasons. Perhaps the millions that lost their jobs this year and the millions more that are bound to follow them soon have already been written off as unnecessary hindrances to the greater glory of some. Why should we continue to feed those who can no longer produce additional profits for us?

The real problem for America is that the administration hasn't even tried to solve or mitigate or alleviate what is hurting American citizens. On the contrary, the average American is much worse off now than they were a year ago. They just don't know it yet. They will soon enough.

The problem, also, is that there's no way back. The trillions handed to the banks and the mortgage industry will not be returned, and neither can the government, whether it's this one or the next, spend as much again, not without doing -additional- irreparable damage to America's economy and society.

Ilargi: Don't be just an observer on a couch. This is not TV. You can be part of the Automatic Earth. By donating.

We run our Fall Fund Drive (please see the top of the left hand column) right now. Your donations -and visits to our advertisers- make this site possible. Without you, there can be no Automatic Earth.

We'd like to thank all our past, present and future donors for your confidence in us.

Lawmakers want Geithner out

Commercial Real Estate Will Collapse
by Stuart Saft

The commercial real estate market is on its last legs and unless drastic actions are taken, the effects on the broader economy will be catastrophic. The obvious problem is the excessive amount of debt placed on the properties and the amount of debt that has to be refinanced during a relatively short period of time.

Between now and 2013, at least $1.3 trillion of financing comes due, of which $160 billion was the result of securitizations. Unfortunately, as a result of the virtual disappearance of the secondary market, the weakened condition of the banks, and the amount of debt already held by insurance companies and pension funds, even under the best of circumstances, less than half of the outstanding debt can be refinanced. This is compounded by the collapse of the commercial rental market in the last 18 months as a result of the Great Recession. For example, office rents in prime areas of Manhattan that were in the $100-$120 a square foot range in 2007 are now trading (with rent concessions and work letters) at half that amount.

After two years of one financial crisis after another, the Fed has fewer cards to play, and the foreign investors who bailed out commercial real estate investors in the past are sitting on the sidelines waiting for the prices to collapse. This problem is exacerbated by the lingering effects of the recession: absence of credit; growing job losses as a result of falling prices, consumer demand and credit; the insolvency or near insolvency of so many institutions; and the loss of confidence in the U.S. economy by our trading partners.

In the last few weeks there have been a series of court decisions that will have repercussions in the credit markets for years to come making an already cautious lending community absolutely paranoid, and restricting credit even if available. In Syracuse, N.Y., a state court refused to allow Citigroup to foreclose a mortgage on what was to be the second largest mall in the country even though it had no tenants. In a recent decision in the General Growth Properties bankruptcy, the court held that the special purpose entities structure was not bankruptcy-proof.

The court also ignored the fact that General Properties fired the independent directors of the special purpose entities and appointed new ones without telling anyone, including the fired directors, for seven weeks. Finally, last week in the Tousa bankruptcy in Florida, the bankruptcy court set aside the subsidiary's obligations and grants of security and ignored the savings clause in the loan documents to reverse a legitimate transaction meant to save the company.

The recent court decisions demonstrate how courts can override the words and intent of loan documents and lenders' remedies notwithstanding the widespread concern about the fiscal health of our lending institutions and the need for them to recover to unfreeze the credit markets and permit economic growth to resume. The media regularly contains stories about home owners who have been able to avoid foreclosure and have their debt canceled because of administrative or technical errors by the lenders. One would think that the courts believe that the money people borrowed to buy homes magically appeared and did not come from other people’s savings, investments and retirement accounts.

Has any court considered that, when they preclude a bank from foreclosing a mortgage, the home owner, who actually borrowed the money and is refusing to repay, is actually stealing the savings of their neighbors? So far, the courts seem to believe that they are playing the role of Robin Hood and ignoring creditors' rights. This behavior is also causing lenders to think twice before making loans.

As far as commercial loans are concerned, lenders have been hoping that something will happen to avoid their being required to either foreclose or declare a default. Both would have an immediate adverse impact on the lenders’ financial condition and could result in a need to raise more regulatory capital to avoid being taken over or merged into another institution or reporting another mess to their shareholders. However, delaying the recognition of the problem will not cause it to disappear.

In order to avoid a collapse that will result in a significant erosion of capital and the likely freezing of credit again with consequences worse than a year ago, the following steps should be taken immediately:

  • The Federal Reserve should provide a credit facility to commercial real estate owners as a lender of last resort with the government obtaining an equity interest (but not control) over the real estate in order to avoid the real estate from being dumped on the market, thereby further depressing values, which will also provide lenders with a way to liquidate their loans.

  • Lenders should not be required to appraise real estate that they own, are part of special assets or the subject of workouts using a mark-to-market standard but, recognizing the current aberration in the market place, using a "fair value" approach that recognizes the need to sell in an orderly transaction. What helped to destroy the S&L industry in the late 1980s and bring on the last real estate recession was the need of solvent banks to mark the real estate assets to market.

  • The City of New York (and the taxing authority in other jurisdictions) should reduce the real estate tax assessments on commercial properties to reflect the loss in value rather than making owners pay real property taxes based on assessments that are no longer relevant and then wait years to obtain a refund to help offset lost revenues.

  • Courts must begin to take cognizance of the fact that ignoring the terms of loan documents is not in the best interest of anyone except the owners of assets that no longer have value in excess of debt. Until the lenders begin to provide credit again, the economy is not going to grow and unemployment will increase.

  • Until the commercial market corrects itself, municipalities and states should suspend unfunded mandates that require large capital outlays by building owners that are not safety related (e.g., this is not the time to demand that buildings comply with new "green" standards) unless the municipality provides an economic benefit (i.e., tax abatements) to the property owner.

  • The Internal Revenue Code should be modified to suspend the passive activity rules and reduce the depreciation period for real estate acquired between 2010 and 2013 in order to make the acquisition of commercial real estate more attractive for domestic investors and offset the loss of value in the current market, which actions are just an income tax deferral and not a loss in revenue.

  • The Internal Revenue Code should also be modified to reduce the negative tax implications for foreign investors in purchasing and holding US real estate.

  • Finally, the federal government needs to focus on policies that will produce jobs and an environment that will spur job creation.

In all probability the subprime collapse and the damage done to the broader economy could have been averted by faster government intervention. In the current environment, there are just a few weeks left before phase two of the Great Recession commences due to the hundreds of billions of dollars in credit that will be lost from commercial defaults. Fixing the problem afterward will be far more expensive and damaging to the nascent economic recovery.

Warren: Wall Street comeback, Main Street plunge

Banks face major commercial real estate storm
Sooner or later, office buildings and other commercial real estate financed during the credit bubble will generate hurricane-scale losses for banks. Banks in recent years have been hammered by losses on home mortgages, buyouts and corporate defaults. Now, lenders face big losses from loans backed by commercial real estate, where a stagnant economy will eventually take its toll, financial services executives told the Reuters Global Finance Summit.

"The commercial real estate business still has not been marked down. It's not been marked to market," Cantor Fitzgerald LP Chief Executive Howard Lutnick said. "The economy can't, in my opinion, grow fast enough that the tenants are going to go out and start hiring and growing and building and take up all these rents at $60 a foot. It's nonsense." U.S. banks held $1.65 trillion of commercial real estate loans on their balance sheets as of November 4, according to the Federal Reserve. Total assets were $11.8 trillion.

Yet banks have postponed their day of reckoning, extending loans in hopes the economy will improve and demand for space will rebound. Banks have resisted selling assets, or taking them away from underwater borrowers, in fear of setting a new and lower market price. It is a strategy neatly summarized as "a rolling loan gathers no loss," Lutnick quipped. Lutnick, whose firm is now building out a real estate restructuring business, noted the equity invested in almost every transaction during the peak bubble years of 2005 through early 2007 has been wiped out. Lenders are under deep stress, because the value of their collateral has fallen.

But there is a limit to how long landlords can hold out for the old pre-recession rents. And once one building is marked down to reflect lower rents, neighboring buildings also should fall in value. Lutnick added most commercial loans come in the form of five-year balloon loans, so a wave of 2005-vintage assets will test creditors next year. "When you're in the eye of the hurricane, it sure feels good until you look at the TV screen and then you say, 'look, the hurricane is all around you,'" Lutnick said.

Banks do have a few things going in their favor. Chief among them is a friendly Federal Reserve, whose policy of free money lets banks reap windfall lending profits. "The Fed has pushed interest rates down to nothing. The spreads on portfolios and securities are generating a huge amount of net interest income," Broadpoint Gleacher Securities Group Chief Executive Lee Fensterstock said at the Summit. "That will enable them to resolve some of their commercial real estate positions." The commercial real estate problem also pales in size next to the previous waves of mortgage, leveraged loan, credit card and other consumer loan losses.

FBR Capital Markets analyst Paul Miller, while generally negative on banks, on Wednesday played down the danger of commercial real estate losses. "There's a lot of structural forbearance built into the commercial real estate market," Miller said, meaning it is easier for borrowers to postpone and amend their terms. Even so, the combination of poorly underwritten loans and a slowing economy will lead to many landlords walking away and handing over the keys. Individual credits, meanwhile, are much larger. "There's going to be a lot of empty buildings coming back to banks' balance sheets," Miller said.

Is a second stimulus coming?

U.S. Mortgage Delinquencies Reach a Record High
The economy and the stock market may be recovering from their swoon, but more homeowners than ever are having trouble making their monthly mortgage payments, according to figures released Thursday. Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.

The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound. Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.

"I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down," said the housing consultant Ivy Zelman. The overall third-quarter delinquency rate is the highest since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008. The combined percentage of those in foreclosure as well as delinquent homeowners is 14.41 percent, or about one in seven mortgage holders. Mortgages with problems are concentrated in four states: California, Florida, Arizona and Nevada. One in four people with mortgages in Florida is behind in payments.

Some of the delinquent homeowners are scrambling and will eventually catch up on their payments. But many others will slide into foreclosure. The percentage of loans in foreclosure on Sept. 30 was 4.47 percent, up from 2.97 percent last year. In the first stage of the housing collapse, defaults and foreclosures were driven by subprime loans. These loans had low introductory rates that quickly moved to a level that was beyond the borrower’s ability to pay, even if the homeowner was still employed.

As the subprime tide recedes, high-quality prime loans with fixed rates make up the largest share of new foreclosures. A third of the new foreclosures begun in the third quarter were this type of loan, traditionally considered the safest. But without jobs, borrowers usually cannot pay their mortgages. "Clearly the results are being driven by changes in employment," Jay Brinkmann, the association’s chief economist, said in a conference call with reporters.

In previous recessions, homeowners who lost their jobs could sell the house and move somewhere with better prospects, or at least a cheaper cost of living. This time around, many of the unemployed are finding that the value of their property is less than they owe. They are stuck. "There will be a lot more distressed supply entering the market, and it will move up the food chain to middle- and higher-price homes," said Joshua Shapiro, chief United States economist for MFR Inc.

Many analysts say they believe that foreclosures, instead of peaking with the unemployment rate as they traditionally do, will most likely be a lagging indicator in this recession. The mortgage bankers expect foreclosures to peak in 2011, well after unemployment is expected to have begun falling. There was one sliver of good news in the survey: the percentage of loans in the very first stage of default — no more than 30 days past due — was down slightly from the second quarter. If that number continues to decline, at least the ranks of the defaulted will have peaked.

"It’s arguably a positive, but it doesn’t undermine the fact that there are still five or six million foreclosures in process," Ms. Zelman said. The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure. The mortgage group’s survey noted, however, that the F.H.A. was issuing so many loans — about a million in the last year — that it had the effect of masking the percentage of problem loans at the agency. Most loans enter default when they are older than a year.

When the association removed the new loans from its calculations, the percentage of F.H.A. mortgages entering foreclosure was 30 percent higher. The association’s survey is based on a sample of more than 44 million mortgage loans serviced by mortgage companies, commercial and savings banks, credit unions and others. About 52 million homes have mortgages. There are 124 million year-round housing units in the country, according to the Census Bureau.

U.S. Office Vacancies May Approach 20% Next Year
Office landlords in the U.S. will confront vacancy rates approaching 20 percent next year as employers hold off hiring, commercial property brokers Jones Lang LaSalle Inc. and Grubb & Ellis Co. said today. Jones Lang, the world’s second-biggest publicly traded commercial property firm, predicted vacancies will rise to 19.5 percent late next year, while Grubb & Ellis estimated a peak of 18.7 percent. "The road to economic recovery throughout 2010 will remain turbulent," Chicago-based Jones Lang said in a report. "While 2010 will be the year a global commercial real estate recovery begins, robust, broad-based growth is not expected until 2011."

Demand for offices, retail space and apartments dropped during the recession as rising unemployment cut the space needed to house workers and prompted consumers to reduce spending. The delinquency rate for all types of commercial real estate loans held by banks may top 10 percent by the second quarter of 2010, Jones Lang said. Offices will be the last type of commercial property to recover, said Robert Bach, chief economist for Santa Ana, California-based Grubb & Ellis.

Next year "won’t feel like a classic recovery, but it will certainly feel better than 2009," Bach said in a conference call. Higher U.S. office vacancies will reduce rents 5 percent to 7 percent in 2010, according to Jones Lang. Leasing may reach bottom in the fourth quarter of 2009. Leases are being signed at about 40 percent less than peak rates, said David Arena, president of Grubb & Ellis New York. Vacancies for all classes of Manhattan office space probably will reach 11.2 percent next year, up from 9.8 percent in 2009, Grubb & Ellis said.

In California, San Francisco’s office vacancies will be almost 18 percent next year, while Silicon Valley will see an increase to 22 percent, Grubb & Ellis’s Chuck Hunt said. Rents of top-quality offices in downtown San Francisco should start to rebound by 2011, according to Grubb. The vacancy rate in Los Angeles probably will rise in both 2010 and 2011, with a corresponding decline in the rents, according to Grubb & Ellis.

Average U.S. office values may fall as much as 50 percent from the top of the market in 2007 to the projected bottom in 2010, Josh Gelormini, head of capital markets research for Jones Lang, said. Almost $500 billion of commercial mortgages will mature annually the next few years, putting pressure on banks to either roll over the loans or foreclose on properties, Federal Reserve Chairman Ben Bernanke said in a Nov. 16 speech to the Economic Club of New York. "The performance of this sector depends critically on the ability of borrowers to refinance," Bernanke said.

Survey Shows Hard Times Before Recession
Even before the recession, more than one in five Americans could not afford to pay for basic needs without help from family, friends or outsiders, according to a survey by the Census Bureau. Fourteen percent of all Americans and 26 percent of blacks who responded to the 2005 survey reported that at sometime in the preceding year they were not able to meet essential expenses, like paying bills for basic needs, avoiding foreclosure and buying sufficient food.

"Presumably, this would be more severe than just being late with your utility payment," said Kurt J. Bauman, a bureau analyst. In addition to household income, a variety of measures of well-being were recorded in the bureau’s Survey of Income and Program Participation, which was released on Thursday. While 99 percent of the nation’s 113 million households reported having a refrigerator and a stove, that means that more than a million households lacked those appliances. Ninety-nine percent also said they owned a television.

The survey found that more American households had air conditioners and microwave ovens than computers. Since 1998, the share of households with a personal computer increased to 67 percent, from 42 percent. The poor, the elderly and people without a high school diploma were least likely to own one. Ninety percent owned landline telephones (down from 96 percent in 1998) and 71 percent owned cellphones (up from 36 percent). Among households headed by people under age 30, more owned cellphones (81 percent) than landlines (71 percent).

Since the survey was conducted well before the recession started in December 2007, presumably many measures of economic well-being have since gotten worse. Still, 9 percent of households over all and more than 25 percent of those below the poverty line could not afford nutritionally adequate food without resorting to food pantries or other emergency supplies, or to scavenging. Compared with the 1990s, people over all said they were more likely to expect help if they needed it from family, friends, social services agencies or religious institutions. Black and Hispanic respondents, though, were a little less likely to expect such help; blacks were a little more likely to have received it.

Generally, people surveyed were more likely than in the 1990s to say they were satisfied with the safety and overall condition of their neighborhoods. Still, in 2005, 20 percent of blacks said they stayed at home because they were concerned about their safety, and 32 percent of blacks said they were afraid to walk alone at night. Because respondents were not asked to elaborate, some of the results seemed anomalous. Almost the same proportion of householders lacking medical insurance said they were as satisfied with health services as those who were insured.

New Consensus Sees Stimulus Package as Worthy Step
Now that unemployment has topped 10 percent, some liberal-leaning economists see confirmation of their warnings that the $787 billion stimulus package President Obama signed into law last February was way too small. The economy needs a second big infusion, they say. No, some conservative-leaning economists counter, we were right: The package has been wasteful, ineffectual and even harmful to the extent that it adds to the nation’s debt and crowds out private-sector borrowing.

These long-running arguments have flared now that the White House and Congressional leaders are talking about a new "jobs bill." But with roughly a quarter of the stimulus money out the door after nine months, the accumulation of hard data and real-life experience has allowed more dispassionate analysts to reach a consensus that the stimulus package, messy as it is, is working.

The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama’s promise to "save or create" about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police and other workers.

"It was worth doing — it’s made a difference," said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass. Mr. Gault added: "I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’ I’m afraid the answer is, yes, we did badly but we would have done even worse without the stimulus."

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years — longer for major construction — considering the probable length of the "jobless recovery" under way as wary employers hold off on new hiring.

But there are criticisms, mainly that the Obama team relied last winter on overly optimistic economic assumptions and oversold the job-creating benefits of the stimulus package. Optimistic assumptions in turn contributed to producing a package that if anything is too small, analysts say. "The economy was weaker than we thought at the time, so maybe in retrospect we could have used a little bit more and little bit more front-loaded," said Joel Prakken, chairman of Macroeconomic Advisers, another financial analysis group, in St. Louis.

While some conservatives remain as skeptical as ever that big increases in government spending give the economy a jolt that is worth the cost, Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy. "There should have been more direct federal spending that would have added to aggregate demand," he said. "Temporary tax cuts and one-time transfers to seniors were largely saved and didn’t stimulate spending."

Even the $787 billion price tag overstates the plan’s stimulus value given changes made in Congress, economists say. Nearly a tenth of the package, $70 billion, comes from a provision adjusting the alternative minimum tax so it does not hit middle-income taxpayers this year. That routine fix, which would do nothing to stimulate the economy, was added in part to seek Republican votes. But to keep the package’s overall cost down, provisions that would stimulate the economy — like aid to revenue-starved states and infrastructure projects — got less as a result.

Among Democrats in the White House and Congress, "there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument," said Mark Zandi, chief economist of Moody’s and an occasional adviser to lawmakers. Even so, "the stimulus is doing what it was supposed to do — it is contributing to ending the recession," he added, citing the economy’s third-quarter expansion by a 3.5 percent seasonally adjusted annual rate. "In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus."

Politically, however, the president is saddled with his original claim that, with the stimulus, the jobless rate would peak at 8.1 percent — a miscalculation that Republicans constantly recall. While the administration has said its economic assumptions were in line with private forecasts, most of which also underestimated the recession’s punch, it was more optimistic than most. "That was a mistake," said Jeffrey A. Frankel, a Harvard University economist and former Clinton administration official who is a member of the National Bureau of Economic Research panel that judges when recessions start and end. "I thought so at the time."

Christina D. Romer, chairman of Mr. Obama’s Council of Economic Advisers, said attention to that too-rosy projection "prevents people from focusing on the positive impact of the fiscal stimulus. So of course I find that frustrating."

Much federal infrastructure money has gone not to new job-creating projects but to finance existing plans, which otherwise would be unaffordable to states. So the stimulus has not "supercharged" transportation construction as was hoped, said Charles Gallagher, an asphalt company owner, speaking for the American Road and Transportation Builders Association, but it has nonetheless been "a welcome Band-Aid" to offset state cuts. "Many contractors across the nation have been able to sustain, if not add to, their work force," he said.

That sort of impact is what makes federal aid to state governments rank high in economists’ reckoning of the stimulus value of various proposals. Every dollar of additional infrastructure spending means $1.57 in economic activity, according to Moody’s, and general aid to states carries a $1.41 "bang" for each federal buck. Even more effective are increases for food stamps ($1.74) and unemployment checks ($1.61), because recipients quickly spend their benefits on goods and services.

By contrast, most temporary tax cuts cost more than the stimulus they provide, according to research by Moody’s. That is true of two tax breaks in the stimulus law that Congress, pressed by industry lobbyists, recently extended and sweetened — a tax credit for homebuyers (90 cents of stimulus for each dollar of tax subsidy) and extra deductions for businesses’ net operating losses (21 cents).

Economists said Republicans’ recent proposals to rescind unspent money would be a mistake. James Glassman, a senior economist at JPMorgan Chase & Company, said: "If we could be absolutely convinced that the growth we’re getting is for reasons beyond the help the government is giving, then that would make sense. But the fact is we can’t be certain of that."

Is the Fed Creating New Bubbles?
Its easy-money policy has Asia worried. But Bernanke says fears of a speculative surge are overblown. America's super-easy monetary policy has drawn a blast of criticism lately from the high and mighty of Asian finance. President Barack Obama and Federal Reserve Chairman Ben S. Bernanke stand accused of blithely ignoring the risk of new asset bubbles and more economic mayhem. As critics see it, the Fed helped inflate the tech and housing markets over the past decade and is setting up the global economy for another doozy with its near-zero short-term interest rates. Global investors can borrow dollars cheaply and invest the borrowed funds in assets ranging from Indonesian stocks to copper futures contracts, a strategy known as a carry trade. During Obama's recent Asian swing, China Banking Regulatory Commission Chairman Liu Mingkang warned that U.S. monetary policy is creating "new, real, and insurmountable risks to the recovery of the global economy, especially emerging-market economies." Bank of Japan Governor Masaaki Shirakawa and Hong Kong Chief Executive Donald Tsang issued similar warnings.

But there are two sides to this story. In detailed speeches and impromptu remarks, Bernanke and other top Fed officials have been making an interesting case that there's less to the much feared bubbles than meets the eye. First, they say few if any asset classes are obviously overvalued. Second, they say that trying to prick bubbles by raising interest rates could kill the nascent economic recovery. And third, they argue that the better way to cope with overheated markets is to strengthen financial institutions so they can withstand the inevitable bust—something Bernanke & Co. admit they've failed to do in the past. On Nov. 16, Bernanke and Vice-Chairman Donald L. Kohn made it clear in separate appearances that asset markets are not the focus of Fed monetary policy. The next day in Hong Kong, Federal Reserve Bank of San Francisco President Janet L. Yellen said, according to her prepared remarks, that it's "far from clear" that the Fed should "seek to lean against potentially dangerous swings in asset prices."

The Fed's seeming nonchalance about excesses isn't going over too well in U.S. financial circles. New York University economist Nouriel Roubini argues that the Fed is inviting speculative excesses in all kinds of risky assets by providing cheap dollar financing for what he calls "the mother of all carry trades." Massachusetts Institute of Technology economist Simon Johnson faults Bernanke's predecessor, Alan Greenspan, for ignoring the risk of bubbles and says, "The intellectual apparatus of Greenspan is still there." Adds Richard Bernstein, CEO of Richard Bernstein Capital Management: "[Bernanke] and Greenspan said that identifying bubbles was difficult, but that cleaning up after them was manageable. That has clearly been shown to be untrue." Actually, Bernanke isn't saying that it's impossible to outsmart the market and spot a bubble in the making—only that "it's extraordinarily difficult." Right now, he told an audience of 1,800 at a Nov. 16 Economic Club of New York luncheon, "it's not obvious to me that there's any large misalignments in the U.S. financial system."

The Fed chief has a point. Even though U.S. stocks have risen more than 60% since March, prices are within their historical range in relation to projected earnings for the coming year. Oil has more than doubled, to $80 a barrel from $34 in February, but that seems like a reasonable level with the bounceback in global demand. Treasury bonds don't seem overpriced given today's subdued inflation, and junk bonds are fetching normal premiums over Treasuries. Even emerging-market stocks and bonds, which many consider to be overpriced, are well within their historical ranges for value, says John Higgins, senior international economist for Capital Economics, a London consulting firm. Yes, gold at more than $1,000 an ounce does reflect fear among some investors about a resurgence of inflation, but the inflation expectations of the bond market and the public remain contained. Roubini's "mother of all carry trades" is not much in evidence, either. If lots of investors were borrowing dollars to invest in other assets, there would be an obvious spike in dollar loans. Instead, U.S. bank lending remains way off its peaks. Securitized lending in dollars by Wall Street firms is also down.

Complaints from China and Hong Kong about the Fed's low rates are even easier to dismiss. If they allowed their currencies to appreciate vs. the dollar, as the U.S. has urged, the threat of asset bubbles would quickly recede. The Fed has to set rates for the good of the U.S. economy, which is clearly still in need of cheap money. On Nov. 18 the Commerce Dept. reported an 11% drop in October in the annual rate of starts on housing construction. The unemployment rate of 10.2%, nearing a postwar high, is weighing on all sectors of the economy. Still, what if bubbles do start to form? The Fed says it will deal with them only to the degree that they affect its "dual mandate" from Congress—to keep overall prices stable and attain full employment. Jacking interest rates up and down in an effort to tame the stock market or other asset prices could cause bigger swings in prices and employment, Kohn said in a Nov. 16 speech at Northwestern University's Kellogg School of Management.

Instead of using interest rates to deflate bubbles, the Fed intends to employ what it calls "macroprudential regulation." That means regulating banks with an eye on markets, not just the bank's balance sheet. For example, a lending strategy that might look safe for any single bank is dangerous when lots of banks follow the strategy and all try to get out at once. One idea being pushed by the Fed and the Obama Administration is to require banks to tighten underwriting standards in good times, and build up thick capital buffers that could be used in bad times. "It's akin to caring for an entire ecosystem rather than individual trees," says Yellen.

The Fed's critics continue to worry that keeping interest rates near zero is the monetary equivalent of pouring gasoline on a fire. Paolo Pellegrini, who helped prick the housing bubble as a bearish hedge fund manager at Paulson & Co., says that trying to discipline markets through banking regulation while at the same time plying them with cheap money is "like having a very strongly worded law that says 'don't murder' and then going out and handing people lots of guns." The debate over how to deal with asset bubbles isn't going away. It's "perhaps the most difficult problem in monetary policy of the decade," Bernanke acknowledged at the Economic Club luncheon. For now, count on the Federal Reserve to keep interest rates extremely low until the recovery is well established—no matter what's happening in asset markets.

FDIC announces 124th bank failure
State regulators shuttered Commerce Bank of Southwest Florida in Fort Myers, Fla., Friday night, bringing the 2009 national tally to 124. Customers of Commerce Bank of Southwest Florida bank are protected, however. The Federal Deposit Insurance Corp., which has insured bank deposits since the Great Depression, currently covers customer accounts up to $250,000.

Central Bank in Stillwater, Minn., will assume all of the failed bank's $76.7 million in deposits, according to the FDIC. Central Bank also entered into a loss-share agreement with the FDIC on $61 million of Commerce Bank's $79.7 million in assets. The single branch of Commerce Bank will reopen on Monday as a branch of Central Bank. Customers of the failed bank can access their money over the weekend by writing checks or using ATMs or debit cards. Checks will continue to be processed, and borrowers should make mortgage and loan payments as usual.

The FDIC also said customers should continue to use their existing branch until they receive notice from Central Bank that the takeover has been completed. An average of 11 banks have failed per month this year, and the federal coffer is thinning under the massive strain. The fund now stands below $10 billion, down significantly from $45 billion a year ago. Friday's closure will cost the FDIC an estimated $23.6 million.

After factoring in expected closures, the agency says its insurance fund is in the red and will remain there through 2012. Over the next four years, the agency expects bank closures will cost $100 billion. The bank failure count for 2009 is still far from 1989's record high of 534 bank closures which took place during the savings and loan crisis, when the insurance fund also carried a negative balance. The tally is nearly five times the number that failed in 2008, and the highest tally since 1992 when 181 banks failed. 

Grayson, Spitzer take aim at the Fed

China's 8.9% Growth? No Way
Gordon G. Chang

Beijing has spent its way to a sugar high.

On Oct. 22, Beijing announced that gross domestic product grew by 8.9% in the third quarter of 2009 compared with the corresponding period last year. The National Bureau of Statistics also reported that growth for the first three quarters was up 7.7%. The 8.9% figure confirmed the economy's upward trend. Growth, according to official statistics, tumbled to 6.1% in the first quarter, well off the double-digit figures seen in 2007 and the first half of last year.

The economy picked up during this year's second quarter, when it expanded 7.9%. Now it is clear that China will attain for 2009 at least the 8% target that Premier Wen Jiabao set in January. China's leadership is evidently satisfied. As the State Council noted on Wednesday, "The positive trend of recovery has been consolidated." How could it not have been? Since last November, Beijing has spent perhaps as much as $900 billion--from its own funds as well as those of the larger state banks--to jump start its $4.3 trillion economy. No government can disburse that amount of cash without creating some economic activity.

Yet China's economy, for all the stimulus it has received in 11 months, is underperforming. As an initial matter, reported third-quarter growth was slightly below the 9.1% consensus estimate of economists. More important, it is unlikely that 3Q expansion was anywhere near the claimed 8.9%. This claim is not consistent with other statistics. The economy, for example, is still dependent on exports: Before the massive government spending, about 38% of GDP was attributable to sales abroad. Yet exports tumbled 23.0% in July, 23.4% in August and 15.2% in September. Another important indication of slowing activity was the third-quarter drop in imports. They fell 14.9% in the first month of the quarter,17.0% in the second and 3.5% in the last.

And what took up the slack? The other two legs of the economy are, of course, investment and consumption. On consumption, retail sales, a crucial indicator of activity at China's shops, zoomed up during the last quarter, increasing by no less than 15.2% in any of the three months of the period.

There are fundamental problems with this key statistic, however. First, Beijing includes government purchases in the number as well as goods shipped from factories but not yet sold to consumers. Because the retail sales figures include these extraneous items, it is no wonder they do not correlate with statistics showing consumer price declines in each month of the July-September period--down 1.8%, 1.2% and 0.8%--plus increases in M2 in all three months. In September this broad measure of money in circulation jumped 29.3% after increasing 28.4% and 28.5% in the two prior months.

Because these numbers are consistent with trends evident throughout the year, we have to ask a simple question: How can a country have robust consumer sales, nagging deflation and rapid monetary expansion all at the same time? One reason is that vast quantities of consumer goods are now sitting in warehouses.

Beijing, in the 1990s, ordered factories to churn out goods in periods of low demand, and there are indications that officials are resorting to this tactic now. While optimistic analysts point to astounding car sales--up 70.5% in July, 94.7% in August and 83.6% in September--there are reports that central government officials have ordered state enterprises to buy fleets of vehicles and that these businesses are storing them in parking lots across the country.

These stories are as yet unconfirmed, but they are consistent with statistics showing that gasoline sales have been flat this year--up only 6.4% in August, for instance, and sliding since then from all indications. So here's another question: At a time when economic activity is supposedly rising at a quick pace, how can large increases in passenger vehicle sales not be accompanied by corresponding surges in fuel usage?

The answer is that Beijing's statisticians have gone back to their old tactic of making up figures to support the Politburo's predictions. The Chinese economy is probably growing due to state-led investment, but it cannot be doing so at the rates claimed. Wen Jiabao's stimulus plan is, above all, grossly inefficient. For all the money he is pouring into the economy, the country is getting a small return in economic output. That's why Premier Wen, despite the high growth numbers he's been reporting, consistently refuses to end his stimulus program. If his numbers were real, he would be worried about overheating. But he's apparently not.

Of course, Premier Wen should be concerned about the imbalances and dislocations that are developing due to his spending. Global investors immediately sent equity markets lower after Beijing's announcement of third-quarter growth as they were spooked by, among other things, China's over-reliance on stimulus and the lack of private investment.

They have every reason to be concerned. To create a "sugar high" of growth, China's central officials are busy renationalizing the economy, burdening the state banking system with loans that will go bad, undermining consumption by promoting investment, building excessive industrial capacity and engaging in mercantilist tactics to promote exports. The credit surge they're engineering will probably end up making Chinese enterprises less competitive, just as Japanese companies choked on too much money during their great bubble. The temporary advances in prices for Chinese stocks and property, the direct result of diverting Beijing's stimulus money into unproductive uses, are bound to scar the economy next year.

In the meantime, however, Beijing will continue to boast about its economic management . As a National Bureau of Statistics spokesman said on Thursday, "We can say we have made obvious and remarkable achievements in our economic growth." Unfortunately, for the Chinese people and the rest of us, that is not true.

Japan says economy back in deflation
The Bank of Japan moved towards a neutral stance on the risk of inflation on Friday even as the government formally declared that the world’s second-largest economy has entered deflation for the first time since 2006. The government’s declaration sets the scene for heightened tension with the bank, which has been resisting public calls by politicians for greater aggression in the fight against deflation. "We want the BoJ to extend support on the monetary policy front in overcoming deflation," said Naoto Kan, deputy prime minister. Hirohisa Fujii, finance minister, and Shizuka Kamei, financial services minister, have also called on the central bank to do more.

The bank’s policy board kept interest rates on hold at 0.1 per cent on Friday, but said "there is a possibility that inflation will rise more than expected" due to higher commodity prices, offset by a risk it could fall due to lower public expectations for medium- to long-term inflation. In previous statements it only mentioned the risk of inflation declines. The adjusted balance of risks suggests the bank is moving further away from the use of policy instruments such as quantitative easing. The bank said it would "maintain the extremely accommodative financial environment", however, indicating that no rise in interest rates is expected.

Consumer prices were down by 2.2 per cent on the previous year in September, or by 1.0 per cent excluding fresh food and energy. Although year-on-year inflation first turned negative in February, the government only now declared that "the Japanese economy is in a mild deflationary phase". The basic difference between the bank and the government is whether or not looser monetary policy can create inflation when factories are standing idle and there is limited demand to borrow. Japan’s experiment with quantitative easing earlier this decade created a large increase in bank reserves, but had a debatable effect on inflation, since only a small part was passed through to the economy via increased bank lending.

Takuji Aida, senior economist at UBS in Tokyo, said that the government’s fiscal stimulus was not enough and it should do more. "We think the government can do more to raise the expected inflation rate than the BoJ," Mr Aida said. In one indication that the government intends to maintain a high level of spending, Masayuki Naoshima, trade minister, told reporters that he supported an extension of incentives for scrapping cars in favour of new models, and subsidies for the purchase of more efficient televisions, refrigerators and air conditioners past their current expiry date in March.

Japan’s economy grew at an annualised rate of 4.8 per cent in the third quarter, fuelled by a mix of stimulus-induced domestic demand, a rebound in exports, and rebuilding of inventories. The central bank board strengthened its language on the current state of the economy. Rather than its October statement that the economy "is starting to pick up", it said the economy "is picking up". Economists are concerned whether the pace of activity will be sustainable once the fiscal stimulus measures expire. Separately, the lower house of parliament passed a debt moratorium bill calling on lenders to ease repayment terms for consumers and small businesses.

Ohio Sues Rating Firms For Losses In Funds
Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech. The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market. "We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters," the attorney general, Richard Cordray, said at a news conference. "At minimum, they were aiding and abetting misconduct by issuers." He accused the companies of selling their integrity to the highest bidder.

Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself. "A recent Securities and Exchange Commission examination of our business practices found no evidence that decisions about rating methodologies or models were based on attracting market share," he said.

Michael Adler, a spokesman for Moody’s, also disputed the claims. "It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption," he said. A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

The litigation adds to a growing stack of lawsuits against the three largest credit rating agencies, which together command an 85 percent share of the market. Since the credit crisis began last year, dozens of investors have sought to recover billions of dollars from worthless or nearly worthless bonds on which the rating agencies had conferred their highest grades. One of those groups is largest pension fund in the country, the California Public Employees Retirement System, which filed a lawsuit in state court in California in July, claiming that "wildly inaccurate ratings" had led to roughly $1 billion in losses.

And more litigation is likely. As part of a broader financial reform, Congress is considering provisions that make it easier for plaintiffs to sue rating agencies. And the Ohio attorney general’s action raises the possibility of similar filings from other states. California’s attorney general, Jerry Brown, said in September that his office was investigating the rating agencies, with an eye toward determining "how these agencies could get it so wrong and whether they violated California law in the process."

As a group, the attorneys general have proved formidable opponents, most notably in the landmark litigation and multibillion-dollar settlement against tobacco makers in 1998. To date, however, the rating agencies are undefeated in court, and aside from one modest settlement in a case 10 years ago, no one has forced them to hand over any money. Moody’s, S.& P. and Fitch have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.

But that was before billions of dollars in triple-A rated bonds went bad in the financial crisis that started last year, and before Congress extracted a number of internal e-mail messages from the companies, suggesting that employees were aware they were giving their blessing to bonds that were all but doomed. In one of those messages, an S.& P. analyst said that a deal "could be structured by cows and we’d rate it."

Recent cases, like the suit filed Friday, are founded on the premise that the companies were aware that investments they said were sturdy were dangerously unsafe. And if analysts knew that they were overstating the quality of the products they rated, and did so because it was a path to profits, the ratings could forfeit First Amendment protections, legal experts say. "If they hold themselves out to the marketplace as objective when in fact they are influenced by the fees they are receiving, then they are perpetrating a falsehood on the marketplace," said Rodney A. Smolla, dean of the Washington and Lee University School of Law. "The First Amendment doesn’t extend to the deliberate manipulation of financial markets."

The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System and other groups, claims that in recent years the rating agencies abandoned their role as impartial referees as they began binging on fees from deals involving mortgage-backed securities. At the root of the problem, according to the complaint, is the business model of rating agencies, which are paid by the issuers of the securities they are paid to appraise. The lawsuit, and many critics of the companies, have described that arrangement as a glaring conflict of interest.

"Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided," the attorney general’s suit maintains, "they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients." To complicate problems in the system of incentives, the lawsuit states, the methodologies used by the rating agencies were outdated and flawed. By the time those flaws were obvious, nearly half a billion dollars in pension and retirement funds had evaporated in Ohio, revealing the bonds to be "high-risk securities that both issuers and rating agencies knew to be little more than a house of cards," the complaint states.

Moody’s Says New York's Credit Rating Could Be Downgraded
Moody’s Investors Service this week warned that the state’s credit rating could be downgraded if the Legislature does not take serious steps to close the $3.2 billion budget gap and revenue continues to lag. The warning, released on Thursday, comes as Gov. David A. Paterson presses lawmakers to come to a consensus on how to address the deficit after weeks of sputtering negotiations. Mr. Paterson has urged reductions to schools and health care, which have long been third rails of state budget politics.

"This is a lot more serious than the interests of some of the legislators who would rather go home and be heroes saying, ‘Look, I didn’t cut school aid,’ or ‘Look, I didn’t cut health care,’ " Mr. Paterson said at a news conference Friday morning in Albany. "People had better get serious here." In its statement, Moody’s warned against one-time measures to close the gap, saying the state must address a stubborn reality: It is spending more than its revenue will support. Lawmakers, for example, have suggested that they may refinance the state’s tobacco bonds and use the proceeds to plug the hole for now, until the economy improves. "The next three months will be critical to the state’s credit rating," the Moody’s statement read.

A downgrading of the credit rating would make it harder and more expensive for the state to borrow money. The current rating is Aa3, Moody’s fourth-highest level. Though Mr. Paterson and legislative leaders have been negotiating for nearly two weeks, an agreement has eluded them as legislators have expressed reluctance to cut money for public schools and health care, which together account for more than half of the state budget.

Legislators are scheduled to return to session on Monday. On Friday several said they were not far from a deal, but negotiations appeared to have been complicated by worries about pressure from labor unions and public anger toward Albany, which has swelled this year after several political crises. But with the Thanksgiving holiday fast approaching and the state facing huge payments to local governments in December — about $1 billion to city and county governments and $1.6 billion to school districts — there is a growing sense that a vote on budget cuts cannot be put off much longer.

"I think none of us imagine we will go to Albany next week without getting this done," said Senator Liz Kreuger, the vice chairwoman of the Senate Finance Committee. "The clock has ticked about as far as it can." One compromise that legislators appeared to be moving toward on Friday involved using some leftover federal stimulus money to fund public schools so the state would not have to pay out of its depleted general fund. Ms. Krueger added that the discussions about reducing health care spending had progressed to the point that legislators were discussing which areas to cut, having agreed to an overall cut that would save approximately $400 million.

But whether the Senate’s proposals will satisfy the rating agencies and the governor, who must ultimately sign any deficit-reduction legislation, is an open question. The three major ratings institutions — Moody’s, Fitch and Standard & Poor’s — all give the state a good credit rating. But Fitch last week also cautioned that the state’s tax revenue was far off earlier estimates and said, "given the uncertainty in the economic and revenue outlook, downside risk remains."

Is $6,300 fair value for gold?
The last parabolic spike in gold took off when central banks joined the fray in the 1970s, hoarding bullion with the same enthusiasm as gold bugs. Dylan Grice from Société Générale says it smells much the same today. He sees an eery similarity between the decision of India’s central bank to buy half the IMF’s entire sale of gold, and the move by France’s central bank to start converting dollars into gold in 1965 — which was, of course, the start of the slippery slope leading to the collapse of Bretton Woods and the closure of the US gold window under Nixon. In the gold mania that followed, the price rose to levels that matched the US dollar monetary base (it reached 140pc at the peak). If that were to occur today after Ben Bernanke’s go at the printing press, gold would have to reach $6,300 an ounce. The US owns 263m ounces of gold while the Fed’s monetary base is $1.7 trillion. Simple equation.

Gold has had its ups and downs, of course. It is trading today at roughly the same real price as in the mid-13th Century — when an ounce bought a light suit of chain mail. It doubled in the late Medieval bubble, before crashing 90pc over the next 500 years after the Spanish gold discoveries by Cortes and Pizarro in the New World, and then the finds in California, Australia, and South Africa — bottoming around 1930. "Gold isn’t intrinsically safer than any other asset. There is nothing mystical about it either," said Mr Grice. However, precisely because gold is almost useless, it makes the perfect currency, and that is the role it is playing right now as flight from fiat paper leads to fresh records each day ($1150 yesterday).

Almost all western governments are insolvent. The total net liabilities of the US and France are both over 500pc of GDP. The UK and Germany are over 400pc. We are bust. To make matters worse — says Mr Grice — central bank credibility has been "permanently ruptured" by their collective failure to see the 2008 crash coming. (He is too polite: they caused the crisis by holding real rates too low for a decade, creating a debt bubble). Given that central bankers have been exposed as mortals/charlatans (ie pretending to command an exact science, when economics is merely a descriptive branch of anthropology), who can have much faith that they will manage the exit from emergency stimulus with skill?

Markets fear that central bankers will try to satisfy political masters by inflating away our debt. (Here too, I have my doubts: my concern is that they do not yet understand the deflationary dynamic underway, and will stay too tight, for too long, until we are in the Japanese abyss. Look at the 7pc annualized contraction of the M3 money supply {not the same thing as the monetary base, at all} in the US over the last three months, which Bernanke refuses to look at because he regards M3 as a barbarous Friedmanite relic.)

Mr Grice’s method is an odd way to calculate fair value of gold, but as good as any in a mania — and certainly no worse than ARPU ratios and "market cap to clicks" in the dotcom bubble. So perhaps gold is cheap. Personally, I take no view on this. As a contrarian, I never like an asset that is in fashion. I loved gold at $252 eight years ago. The higher it goes, the less I love it. Now, what asset today is as underpriced relative to the rest of the market as gold was in the depths of bear market in 2001? The Harare stock exchange looks a good place to start. Any other thoughts?

Stimulus-Jobs Tally in Doubt
The White House stepped back Thursday from its tally of the number of jobs its economic-stimulus package has created or saved through September in the face of mounting criticism over errors in reports filed by recipients of stimulus money. The move came after a testy hearing Thursday of the House oversight committee in which Earl Devaney, chairman of the Recovery Accountability and Transparency Board, which is responsible for monitoring the stimulus, said the number of jobs displayed on the official government stimulus Web site,, at 640,329 was possibly inaccurate.

"It may be a fact that that's what's on my Web site, but that may not be the correct number," Mr. Devaney testified. Hours later, administration officials organized a conference call for reporters and said that the overall total of jobs credited to the stimulus could be lower or higher than the number claimed on the Web site. White House officials didn't offer a precise tally of jobs. Instead, they sought to focus attention on some economists' estimates that without the stimulus, as many as one million more people could be without jobs now. "While the data may be imprecise," the overall conclusions of the stimulus plan's impact are "irrefutable," White House senior adviser Ed DeSeve told reporters.

The House hearing also reviewed a report from the Government Accountability Office, the investigative arm of Congress, which raised questions about 58,000 jobs claimed to have been created or saved by stimulus recipients who said they had not yet received any money. Administration officials said in a blog post released Thursday afternoon that it is possible to see job creation before a recipient gets stimulus money because hiring decisions can be made in the expectation that funds are on the way. The administration has been scrambling in recent days to respond to growing evidence that the data underlying its claims that the stimulus "created or saved" the equivalent of more than 640,000 full-time jobs is flawed in a variety of ways.

Thousands of recipients of stimulus money ranging from small contractors and nonprofit organizations to state and local governments struggled to complete lengthy forms designed to account for stimulus spending and the resulting jobs. In the process, some stimulus recipients claimed to have created jobs that didn't exist, reported spending money they hadn't received, and listed their addresses in nonexistent congressional districts.

Republicans in Congress have pointed to the discrepancies to bolster their arguments that the $787 billion stimulus program hasn't achieved Mr. Obama's goals and hasn't been effective in reversing the rise in unemployment, which is now just over 10%. Some Democrats have also expressed frustration with the shifting accounts of how many jobs can be linked to stimulus spending. The confusion over stimulus jobs comes as House Democratic leaders are trying to fashion a new job-creation measure, and the White House is gearing up for a jobs "summit" in early December.

Most States See Higher Jobless Rates
Unemployment rose in 29 states in the U.S. during October, hinting the threat posed by weak labor markets to the economic recovery might be growing. Labor Department data Friday said 29 states and the District of Columbia recorded unemployment-rate increases from the prior month, while 13 states had rate decreases, and eight states had no rate change. A month earlier, Labor had said 23 states and the District of Columbia reported over-the-month unemployment rate increases in September, while 19 had decreases and eight states had no rate change.

Friday's state-by-state jobless data came two weeks after the Labor Department reported the unemployment rate for the whole country climbed in October to 10.2%, a 26-year high. Persistent labor-market weakness threatens the economy's recovery from the severe recession. "The best thing we can say about the labor market right now is that it may be getting worse more slowly," Federal Reserve Chairman Ben Bernanke said this week. Of all 50 states in October, Michigan had the highest jobless rate, at 15.1%. Nevada was second, at 13.0%. North Dakota was lowest, with 4.2%.

The data showed October non-farm payroll employment increased in 28 states and the District of Columbia, while falling in 21 states and remaining unchanged in one state. Labor two weeks ago said U.S. non-farm payrolls shrank by 190,000 jobs. A separate report Friday said the number of U.S. workers involved in mass layoffs during April fell, the second straight decline. The Labor Department said mass layoffs events in October totaled 2,127 on a seasonally adjusted basis, down from 2,561 in September. Mass layoff events involve 50 or more people at a single employer losing their jobs.

The number of workers involved in the mass layoff actions totaled 217,182, down from September's 248,006. These people are identified as new filers for unemployment insurance. The latest data show new claims for jobless benefits remained steady at 505,000 last week, while the number of continuing claims fell by 39,000 to 5,611,000 in the preceding week. Since the recession began in December 2007, the number of unemployed has increased by 8.2 million and the unemployment rate has grown by 5.3 percentage points.

Mr. Bernanke said jobs are likely to remain scarce and inflation low for some time. The Fed on Nov. 4 decided to keep its benchmark interest rate at a record low zero to 0.25%, citing a sluggish recovery. The central bank said it expects to keep its federal funds target rate close to zero for an "extended period" in the face of high unemployment and low inflation. For the first time, the Fed's rate-setting committee earlier this month spelled out the three key indicators it will be looking at to set rates: unemployment, core inflation and inflation expectations. "Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II," Mr. Bernanke warned.

The jobless recovery is on the way, says OECD
But public borrowing reached £11.42bn last month Figure was highest for the October since records began. The spectre of a global "jobless recovery" was conjured up yesterday by the Organisation for Economic Cooperation and Development, which predicted that "the economic recovery now spreading across OECD countries is still too timid to halt the continuing rise in unemployment".  The warning came as the latest evidence on the supply of credit to the British economy showed little sign of radical improvements. The Bank of England's Trends In Lending Report confirmed that British consumers were still paying off their credit card and other consumer debts, while lending to businesses fell across all the main sectors of the economy in the third quarter of the year. The OECD's latest Economic Outlook also said Britain's public finances were weak and required "concrete" plans to bring the deficit under control.

The overhang of debt around the developed world, said the OECD, is the major factor holding back a more vigorous recovery and the creation of thousands more new jobs. Pressure on public finances will also dampen public-sector employment growth in the the next few years. The OECD expects the jobless rate to peak in the first half of 2010 in America, but it may not be until 2011 that unemployment begins to fall in the eurozone area. The report says the recovery is tepid because economic activity is being held back by families and businesses repairing their finances and reducing their debts. China, the OECD predicts, will lead the global recovery, helped by its limited direct exposure to the financial crisis and by a massive stimulus package. The US, the world's largest economy, is expected to grow by 2.5 per cent in 2010 and a further 2.8 per cent in 2011.

The OECD forecasts that the UK's growth will be 1.2 per cent this year and 2.2 per cent in 2010, "supported by improving financial conditions, an expansionary monetary policy and stronger international growth". But it adds: "The weak fiscal position makes further consolidation necessary; an announcement of concrete and comprehensive consolidation plans upfront would enhance macro- economic stability. Strengthening financial regulation and supervision would also support stability and hinder a build-up of new imbalances at historically low interest rates." The Bank of England's review of bank lending suggests that subdued demand for funds from companies is becoming a more significant factor, rather than the usual complaint that the banks are refusing funds to companies. The Bank reported: "Overall, demand for new bank lending was expected by the major UK lenders to remain subdued during the remainder of the year. The outlook for 2010 would depend on the prospects for working capital and mergers and acquisitions activity in particular. On the supply side, the major UK lenders noted signs of increasing competition."

Nor is the mortgage market much livelier. The Council of Mortgage Lenders said yesterday that gross mortgage lending in October was an estimated £13.5bn – 5 per cent more than the £12.9bn in September but 27 per cent lower that the £18.5bn borrowed in October 2008. The CML said last month's jump was caused by seasonal factors. Its economist, Paul Samter said: "There has been a significant change in the type of lending taking place. House purchase activity has picked up significantly. In contrast, remortgaging has dropped to decade-low levels as many borrowers have little incentive to refinance when they move on to low reversion rates, and others find themselves unable to do so because of equity constraints."

There was cheer on the high street yesterday when the Office for National Statistics (ONS) said that retail sales had jumped by 0.4 per cent in October. Shoppers buying early Christmas presents and those looking to avoid the reintroduction of the 17.5 per cent VAT rate in January pushed sales of non-food items by 0.6 per cent, compared to September, including a 2.1 per cent increase in clothing and footwear sales. Food sales fell by 0.1 per cent during the month. "Very low mortgage interest payments and moderate inflation are boosting the purchasing power of a good many people, thereby giving them scope to step up their discretionary spending," said Howard Archer, the chief UK economist at IHS Global. "It may also well be the case that a large number of people are determined to splash out and really enjoy Christmas after enduring a very difficult year."

The year-on-year figures were equally encouraging, with the ONS recording the biggest annual rise in sales since May last year. Sales were up 3.4 per cent in October, against the same month in 2008, although the numbers were flattered by particularly weak trading last year. Despite the encouraging figures, several analysts pointed to what is expected to be a tricky year for retail sales in 2010. "The consumer faces a number of headwinds in 2010, including rising unemployment, higher taxes and larger National Insurance contributions," said Richard Hyman, a strategic retail adviser to Deloitte. "As a result of these factors, we expect retail sales to take a slight fall of 1.5 per cent next year."

OECD warns Britain risks 'debt spiral'
Britain is at growing risk of a "public debt spiral" unless the Government takes "drastic" action to cut the deficit, according to the OECD, world's leading economic institution. The Organisation for Economic Co-operation and Development said that even if Britain reduces its deficit in line with other leading nations, it will still have the rich world's biggest deficit from now until 2017 and potentially beyond, casting serious doubt on its economic credibility. The warning coincided with shock public finance statistics showing that public borrowing in October was 88 times what it was in the same month last year, making it likely that the Chancellor will miss his £175bn borrowing forecast this year.

The double blow is acutely embarrassing for Downing Street, coming ahead of next month's pre-Budget report and only 24 hours after it pledged to create a Bill to halve the deficit within four years and to reduce debt every year for the coming decade. In fact, the OECD predicted in its annual Economic Outlook, Britain's deficit was likely to be even higher next year than this year, at 13.3pc, raising the prospect that the Government could break its own law in its very first year. Britain's deficit will remain higher than any other major country, including even Iceland and Ireland, unless the Government takes far more drastic action to repair it, said the OECD's acting chief economist Jørgen Elmeskov. "Halving the deficit would be a start, but since the UK is starting out from a deficit which is in double figures, one should go further still," he said. "The concern is that there could be a cost spiral - where debt increases, hitting confidence in the market, which pushes up interest rates, and this leads to even higher deficits."

The prospect of interest payments on Britain's rapidly growing debt rising to 12pc of tax revenues has already prompted Standard & Poor's to issue a warning about the security of the UK's credit rating. The OECD said that it expected the total gross debt levels owed by the British Government to rise from below 50pc of GDP in 2007 to 120pc of GDP by 2017. This would be higher than any other G7 economy apart from Japan, whose gross debt would reach an unprecedented 223pc of GDP. The OECD, which predicted that growth in the rich world would recover this year at a "tepid" rate, also forecast that Britain's economy would grow by 1.2pc in 2010, having contracted by 4.7pc this year.

Its UK debt warning came as the Office for National Statistics said that public sector net borrowing in October was £11.4bn - a record for the month. The shortfall, caused by a slump in tax revenues and the increased cost of supporting the unemployed, leaves the deficit almost treble that of last year. October normally shows a surplus as corporation tax receipts arrive. Shadow Chancellor George Osborne said: "Today is a defining moment in the debate about Britain's debt - the moment when we see that Gordon Brown has not just lost control of the public finances but lost the economic argument about the debt crisis.

UK government deficit now increasing at £3bn a week
The Government’s deficit is now increasing at a rate of almost £3 billion a week, it has emerged, in a blow to Gordon Brown. Barely 24 hours after Mr Brown pledged to halve Britain’s record budget deficit within four years, official figures revealed that the Government is due to borrow even more this year than it forecast in the Budget. In a further embarassment for the Prime Minister, the chief economist of the Organisation for Economic Co-operation and Development said that the Fiscal Responsibility Bill unveiled in the Queen’s Speech this week was not ambitious enough to solve Britain’s fiscal problems. The government borrowed some £11.4 billion in October, bringing the total borrowed so far this year to £86.9 billion - the highest running total in history - according to the Office for National Statistics.

The news is particularly embarrassing since October is usually one of the best months of the year for the public finances, since it is when much of the corporate tax receipts arrive in Whitehall. The Conservatives pointed out that the shortfall in October was 88 times more than the same month last year. Economists said it was now all but certain that the Chancellor, Alistair Darling, would miss his borrowing forecast of £175bn this fiscal year. The Government is due to unveil its latest pre-Budget report on December 9, with Mr Darling expected to pledge that as part of its Fiscal Responsibility Bill, it will reduce its deficits every year for the next decade, and to halve the deficit within four years.

In an interview yesterday Mr Brown appeared to concede that Mr Darling may also need to announce further tax rises. "The Chancellor, in the pre-Budget report, will make any announcements that are necessary," he said. Asked to rule out increases above those unveiled in the last Budget, the Prime Minister said: "I'm not going to say that because there's no decision on that." The Paris-based OECD - the Western world’s leading economic authority - yesterday cast doubt on whether Mr Darling's pledge to halve the deficit in four years would be enough. Its acting chief economist, Jørgen Elmeskov, said: "Halving the deficit would be a start, but since the UK is starting out from a deficit which is in double figures, one should go further still." he said. He warned that unless the Government does so, it could be at risk of a "debt spiral", in which it becomes trapped by an ever-increasing burden due to rising interest costs on its deficit.

The OECD said that Britain would have the biggest deficit in the developed world not merely next year and the one after, but all the way until 2017, unless it took "drastic" action to bring it down by a significant margin. George Osborne, the shadow chancellor, said: "Today is a defining moment in the debate about Britain's debt - the moment when we see that Gordon Brown has not just lost control of the public finances but lost the economic argument about the debt crisis. "The OECD said that more ambitious plans to get a grip on the deficit would, as Conservatives have consistently argued, ‘strengthen the recovery.’"

Goldman Shareholders Miffed at Bonuses
Some of the largest shareholders in Goldman Sachs Group Inc. have urged the Wall Street firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors, according to people familiar with the situation. The investors hold tens of millions of shares in Goldman Sachs, which is on track to make the biggest employee payout in the firm's 140-year history.

Their complaints in private conversations with the company and at analyst meetings show how anger over its big-money culture is spilling into the ranks of investors who typically shy away from debates over Wall Street pay. One frustration: Despite record net income and compensation at Goldman as markets rebound and the firm outmuscles weakened rivals for business, analysts expect its 2009 earnings per share to be 22% lower than in 2007 and roughly equal to its 2006 earnings, according to Thomson Financial.

The decline is caused by issuing more than 100 million shares in the past year to bolster Goldman's financial position and capital. The shareholders have said that reining in the bonus pool would deliver an upward jolt to per-share earnings and the share price, according to people familiar with the discussions. Some major Goldman shareholders also are concerned about a little-noticed change in the company's financial statements that increased the firm's total head count by adding temporary employees and consultants. The change reduced per-employee compensation, making it look like Goldman employees earn less than they actually do.

The figure is a lightning rod for criticism of Goldman because its staff is on pace to earn about $717,000 apiece for 2009. Excluding temporary employees and consultants would increase compensation per employee to about $775,000. In the second quarter, Goldman Sachs began including temporary workers and consultants in its overall employee count, according to securities filings. Some shareholders and analysts estimate the company's 31,700-person work force as of Sept. 30 includes about 3,000 nonpermanent employees. Goldman says it wasn't fiddling with the numbers when it added a footnote to its financial statements in July to reflect the change. The firm's reported compensation and benefits pool always included temporary employees and consultants, but they weren't counted in employee totals, according to the New York company.

As a result, Goldman's average of $661,490 per employee in 2007, widely cited as the high-water mark for Wall Street pay, would be smaller on a comparable basis, the company says. It won't disclose the number of temporary workers and consultants currently on Goldman's payroll. In response to criticism that Goldman should share more of its wealth with investors, company spokesman Lucas van Praag says shareholders "have historically been more focused on the absolute return on equity and on book value per share growth" than per-share earnings.

Since going public in 1999, the company has generated a total return of 159%, compared with negative 2.1% for the Standard & Poor's 500-stock index, Mr. van Praag adds. Goldman shares have more than doubled this year, though they were down $4.07 a share, or 2.3%, to $172.83 in trading Thursday on the New York Stock Exchange. The large Goldman shareholders aren't pushing for a huge downsizing of the bonus pool, agreeing with the company that it needs to reward employees for performance. But Goldman should better reward shareholders for this year's rebound, these shareholders contend.

Roger Freeman, an analyst at Barclays Capital, says he has heard from some shareholders who are concerned about how much Goldman delivers to shareholders. "It is certainly an issue, but there are other considerations," he says. "Goldman has a pay-for-performance culture, and if Goldman violates that pact with employees they run the risk of talented people leaving, which wouldn't necessarily be good for shareholders."

Some investors expect Goldman to pay out a smaller percentage of its revenue in the fourth quarter than it did in previous years. "I would be surprised if they came out with a compensation pool this year that is at the level of prior years," says Tom Marsico, founder of Marsico Capital Management LLC, who often talks to Goldman about compensation and capital allocation. His Denver firm held 10.6 million Goldman shares at Sept. 30

Mr. Marsico is less concerned about per-share earnings than other large Goldman shareholders. Over the years, though, he has unsuccessfully encouraged the firm to reward shareholders in other ways, including a special one-time dividend rather than buying back shares. A one-time dividend this year, however, is unlikely because regulators are working on new capital requirements and Goldman and others would need government approval to issue one. "We think the compensation debate is coming across as a populist issue, when to us it is really about how Goldman and other firms can best allocate capital and how pending changes in the regulatory framework may change all this," Mr. Marsico says.

Michael Mayo, an analyst at Calyon Securities, says reducing the size of Goldman's bonus pool could ease scrutiny of the firm while boosting shareholders, including Goldman employees who own between 10% and 15% of the company's shares. "Employees stand to benefit, the government benefits and shareholders benefit," he says. Goldman isn't expected to announce how much it will pay employees for 2009 until the company reports fourth-quarter results in January. Employees are likely to get less cash as a percentage of total compensation but more restricted shares that would vest in the future, in line with Wall Street's response to criticism that old pay practices encouraged risk-taking.

In October 2008, Goldman received $10 billion from the U.S. government as one of the first nine recipients of taxpayer-funded capital injections under the Troubled Asset Relief Program. Goldman repaid the money in June but continues to benefit from government help. For instance, it has the ability to borrow from the Federal Reserve. Goldman and other firms won that access after Bear Stearns Cos. collapsed and was sold to J.P. Morgan Chase & Co.

Goldman had 576.9 million average diluted shares outstanding in the third quarter, up 29% from a year earlier. As of Sept. 30, the five largest Goldman shareholders were AllianceBernstein LP; a Barclays PLC unit; a State Street Corp. unit;, Wellington Management Co.; and Vanguard Group Inc., according to LionShares, which tracks institutional ownership of publicly traded companies. Goldman reported earnings of $8.44 billion for the first nine months of 2009, up 90% from a year earlier. Compensation and benefits jumped 46% to $16.71 billion. That was equivalent to 47% of the company's net revenue of $35.56 billion.

Tax the windfall banking bonuses
by Martin Wolf

Windfall taxes are a ghastly idea. They are a sop to prejudice, a burden on risk-taking and a form of arbitrary confiscation. No sensible person should support them. So why do I now find the idea of a windfall tax on banks so appealing? Well, this time, it really does look different. First, all the institutions making exceptional profits do so because they are beneficiaries of unlimited state insurance for themselves and their counterparties. As Andrew Haldane of the Bank of England argues, the state has "become the last resort financier of the banks".* In the UK, total support amounted to a staggering 74 per cent of gross domestic product. These must be the largest business subsidies ever.

Second, the profits being made today are in large part the fruit of the free money provided by the central bank, an arm of the state. The state is giving the surviving banks a licence to print money. Third, the case for generous subventions is to restore the financial system – and so the economy – to health. It is not to enrich bankers, particularly not those engaged in the sorts of trading activities that destroyed the financial system in the first place. Fourth, ordinary people can accept that risk takers receive huge rewards. But such rewards for those who have been rescued by the state and bear substantial responsibility for the crisis are surely intolerable. What makes them yet more so is that the crisis has devastated the prospects of tens, if not hundreds, of millions of innocents all over the globe. The public finances will be devastated for decades: taxes will be higher and public spending lower. Meanwhile, bankers are about to reap huge rewards. This damages the legitimacy of the market economy.

Fifth, it is hard to argue in favour of exceptional interventions to bail out the financial sector at times of crisis, and also against exceptional interventions to recoup costs when the crisis is past. "Windfall" support should be matched by windfall taxes. Finally, these are genuine windfalls. They are, as George Soros has said, "hidden gifts" from the state. What the state gives, the state is entitled to take back, if it is not used for the state’s purposes. So the question, in my mind, is not whether a windfall tax can be justified but whether it can be designed successfully. All taxes have unintended consequences. One must be particularly careful with this one.

Since the aim of policy is to recapitalise the banks, the tax should not reduce their ability to do so. It would be far better then to impose a tax on contributions made to the bonus pool. There is no public interest in such payments. Since it would be a one-off event, it should not affect incentives (unless banks plan to create systemic crises every few years). If the tax applied to all banks operating within a given jurisdiction, it would not affect competitiveness among them. The case seems strong – even more so if the tax could be implemented across major jurisdictions, simultaneously. Yet windfall taxes cannot contain financial excess, precisely because their goal is not to affect incentives. So what is to be done?

As Mr Haldane notes, we have seen "a progressive rise in banking risk and an accompanying widening and deepening of the state safety net". As the liabilities of the banks have become ever more socialised and so equity cushions have become increasingly redundant, the incentive for both limited liability shareholders and employees to game the taxpayer has risen greatly. It is rational for banks to choose risky strategies because they take the upside and taxpayers much of the downside. Over the past half century, UK bank capital has remained at between 3 per cent and 5 per cent of assets, these assets have risen tenfold, relative to GDP, and returns on equity have averaged 20 per cent. Such high returns, in an established industry, must mean either high barriers to entry or excessive risk-taking. The former are undesirable and the latter terrifying, particularly in view of the huge rise in the state’s exposure to the risks.

We will never have a better opportunity than now to redress the deteriorating terms of trade between the banks and the state. A big part of the solution must be to shift incentives. The more credible are the pre-announced limits on support from government, the more effective will be the changes in incentives inside banks, and vice versa. The less we are able to shift these incentives, the more important it will be to impose heavy regulation. The combination of today’s incentives with today’s safety nets and yesterday’s "light touch" regulation was devastating. Yet, regardless of the success of reforms of incentives in – and regulation of – the financial sector, it is reasonable to recoup not only the direct fiscal costs of saving banks but even some of the wider fiscal costs of the crisis. The time has come for some carefully judged populism. A one-off windfall tax on bonuses would make the pain ahead for society so very much more bearable. Try it: millions will love it.

Philanthropy and bank bashing
by Gillian Tett

What exactly was going through the brain of Lloyd Blankfein, head of Goldman Sachs, this week when the bank announced a $500m initiative to help small US businesses? At first glance, the answer might seem obvious. This year Goldman has faced a barrage of political attack, not merely for its part in stoking the credit bubble but also for having made fat profits as that bubble imploded. The fact Goldman is setting aside $500m – or some 3 per cent of its planned bonus pool this year – might be interpreted as an effort to quell the current bank-bashing and consign it to the past. Not for nothing did Mr Blankein say "sorry" for previous mistakes by Goldmans (and others).

While that logic might explain part of Blankfein’s motives, it is almost certainly not the whole tale. For, insofar as the move was really triggered by philanthropy – and, as my colleague Francesco Guerrera wrote on Thursday, it will also help the bank meet government rules – it may not be the current round of banker-bashing that is worrying the bank. Goldman is (in)famous for trying to be ahead of the curve. The really interesting political economy issue that haunts finance now is not the attacks that Goldman (and other banks) have suffered in 2009 – but the question of what could await them in 2010, 2011, 2012 or beyond.

The issue at stake is timing. Recent months have seen a great deal of debate in political circles about the fact that the taxpayer is "footing the bill" for the banking woes. In part that rhetoric has been wrong: thus far the taxpayer has not had to "foot the bill" in a fiscal sense, because governments have not yet tried to confront the rising tide of debt. In most of the Western world, 2009 has been a year of fiscal expansion. Just think, to name one example, of those cash for clunkers schemes. While we know some of the "bill" from the bank crisis ($2,800bn of toxic assets, say) and the impact on the economy (several percentage points of lost gross domestic product), taxpayers have not yet seen their "bill". That will only land in the next few years, when governments hike taxes and slash public spending (or, if they have refused to do this, they face a bond crisis).

If you are an optimist – as investment banking salesmen are paid to be – you can argue that this future bill will not be so painful. By 2011 or 2012, the global economy may be booming and if the fiscal noose tightens gradually, voters may simply adjust, not revolt. Japan has lived with economic stagnation for years without suffering from riots. However, it is very easy to imagine more alarmist scenarios. I think the chance of a real economic boom is relatively low, given the scale of likely future deleveraging. I also fear that the government bond markets will not remain quiet. Moreover, in fiscal policy some crucial "tipping points" might emerge to spark public anger.

Perhaps that will occur when income taxes are hiked above 50 per cent. Or maybe when hospital budgets are cut, or military spending slashed. Either way, the potential list is long. While that might cause political instability (which, of course, would be bad for bond markets) it might trigger a renewed, vitriolic round of bank-bashing – particularly if voters in 2011 or 2012 know that 2010 was a year when banks paid out more, massive bonuses. No wonder that some financial officials and politicians are frantically pleading with bankers behind closed doors to show more restraint in their current bonus round. "Don’t the bankers realise what could be coming?" I heard one senior western finance official tell a room full of bankers this week, as he argued – with passion and a sense of desperation – that it would be a mistake for banks to pay big bonuses.

Can Goldman’s $500m programme protect the bank against that political risk? On paper, the target of its largesse certainly looks politically savvy: small business funding is a huge political headache in the US because of its link with unemployment. The fact remains that $500m is still just 3 per cent of the bank’s bonus pool and even a non-banker can see that is a small sum. As hedging strategies go, this remains far from sure to work. Indeed, the only thing that is crystal clear is that Goldman’s competitors cannot afford any Schadenfreude. As I said, the risk remains that the backlash today is just a foretaste of what is to come – for bankers across the street (and City).

ECB President Trichet warns on bank bonuses
Jean-Claude Trichet, European Central Bank president, has issued his strongest warning yet that banks must keep pay and bonuses "contained" and prepare for the withdrawal of emergency support action. Striking a noticeably stiffer tone than previously, Mr Trichet told a Frankfurt conference that voters would not accept taxpayers’ funds being deployed again on the same scale to rescue banks. His comments reflected ECB fears that financial market improvements will encourage complacency – reducing the impetus for regulatory and supervisory reform. "I understand that the mood in the financial system is one of relief. But as of today, it is too early to declare the crisis over," Mr Trichet said.

The ECB president quoted Goethe – Frankfurt’s most famous son – in a warning about the need for self-restraint: "If I wanted to lavishly let myself go, I could well destroy myself and my environment." Addressing Germany’s financial elite at the 19th Frankfurt European Banking Congress, Mr Trichet said: "Compensation and bonuses must remain contained. Otherwise, we would take risks that Goethe already described." He added: "Profits earned should be used – as a priority – to build capital and reserves, rather than be paid out as dividends or excessive compensation."  Although the ECB is cautious about the eurozone’s economic outlook, improvements in financial markets have brought it significantly closer to unwinding the exceptional policy steps taken after the collapse of Lehman Brothers investment bank last year.

Mr Trichet said the ECB would move gradually but warned that "the financial system and individual institutions within it must act now to ensure that a future removal of central bank support can be managed without painful ‘withdrawal symptoms’." As a first step, the ECB is expected to announce that next month’s offer of unlimited one-year liquidity to eurozone banks will be the last. Mr Trichet also stepped up pressure on banks to increase lending to the real economy as "public support has been provided for this purpose, and the strengthened balance sheets will allow them to lend".  The ECB believes the sharp slowdown in eurozone lending largely reflects weak demand – rather than a widespread "credit crunch". But Mr Trichet said "it will be particularly important that banks intensify their efforts to expand their supply of loans once loan demand picks up".

House Attacks Fed, Treasury
Political frustration over the rescue of Wall Street and high unemployment erupted in the House Thursday, with one committee threatening to impose tighter scrutiny on the Federal Reserve and another trading verbal insults with Treasury Secretary Timothy Geithner. The House Financial Services Committee voted, 43-26, to approve a measure sponsored by Texas Republican Ron Paul, vociferously opposed by the Fed, that would direct the congressional Government Accountability Office to expand its audits of the Fed to include decisions about interest rates and lending to individual banks. The Fed says the provision threatens its ability to make monetary policy without political interference.

The vote was the latest blow to the central bank, which has been become a lightning rod for politicians responding to popular anger that Wall Street was bailed out while the public wasn't. The Fed faces a stinging backlash from legislators from both parties who argue that has too much power and too little oversight. On Thursday, the Senate Banking Committee began debating legislation that would largely remove the Fed from bank supervision over the objections of the Fed and the Obama administration.

The Fed audit provision was added to pending legislation on financial regulation that the committee's chairman, Barney Frank, a Massachusetts Democrat, had planned to put to a vote Thursday. But he abruptly announced late in the afternoon that the bill wouldn't move ahead until after Thanksgiving. The reason: Ten members of the Congressional Black Caucus on the committee said they would oppose the bill to protest a lack of action to address the economic pain borne by their constituents. Although the economy appears to be growing again, lawmakers face increasing pressure in their districts to do more to boost growth and address an unemployment rate now at 10.2% and expected to rise.

Glum views on the economy sparked a retreat from stocks and some commodities, as investors moved to the safety of government debt. The Dow Jones Industrial Average fell 93.87 points to 10332.44. At the Joint Economic Committee, a couple of House Republicans called for the resignation of Mr. Geithner, who, as president of the Federal Reserve Bank of New York, played a major role in last fall's moves to prevent the collapse of the financial system. "The public has lost all confidence in your ability to do the job," said Rep. Kevin Brady, Republican of Texas. Mr. Geithner, in an unusual public display of pique, fired back. "What I can't take responsibility is for the legacy of crises you've bequeathed this country," he told Mr. Brady.

Although several Democrats defended Mr. Geithner at the hearing, some liberal Democrats have been complaining that the Obama administration isn't doing enough to combat unemployment. Rep. Peter DeFazio (D., Ore.) called on Mr. Geithner to resign this week, and said in an interview that Mr. Geithner is too close to Wall Street. "Quite frankly, all the gambling on Wall Street is doing nothing to put people back to work in America and rebuild our economy," the Oregon Democrat said.

One issue that has dogged Mr. Geithner is the rescue of American International Group Inc. last fall. A government oversight report this week charged that the New York Fed caved into demands from Goldman Sachs Group Inc. and other big banks and paid them in full for deals they had made with the insurer. Mr. Geithner said Thursday that the government lacked powers it needed to handle the collapse of a financial company that wasn't legally organized as a bank. "Coming into AIG we had, basically, duct tape and string," he said. The legislation pending in Congress would give the government new powers to manage such a situation.

Mr. Geithner's job status doesn't appear to be in jeopardy and several Democrats leapt to his defense. "He was handed an awful deck of cards when he walked into the job, and he's doing the best he can," said Sen. Charles Schumer (D., N.Y.) in an interview. "I think many Democrats share my views."

Mr. Paul, author of a new best-seller "End the Fed," long has been a critic of the Fed. His economic views make him an outlier in Congress, but his attacks on the Fed have resonated in Congress and with the public.
The Paul provision, and the legislation to which it is attached, would have to clear the full House and Senate before becoming law. Though many lawmakers insist they won't do anything to compromise the Fed's independence on monetary policy, the provision's momentum is substantial. It could be diluted before any bill reaches the president. "Everybody would like to beat up on the Fed and make them the bad guy," said Rep. Melvin Watt (D., N.C.), who opposed Mr. Paul's measure. He said audits would "substantially castrate the Fed so it cannot do what it was set up to do."

Fed Chairman Ben Bernanke has crisscrossed the Capitol in recent weeks, attempting to fend off legislation that would curtail the Fed's power or independence. Lawmakers with whom he has met said he has reminded them how close the U.S. came to economic catastrophe last year and maintained that the Fed's actions were critical to bringing the economy back to growth. But Mr. Bernanke faced a skeptical audience. Some lawmakers told him Americans are angry and want more oversight; others said the crisis demanded a rethinking of the U.S. approach to financial regulation.

"What he says is that at that point in time, with our economy literally ready to tip over the edge, he did a series of things he thought were absolutely necessary," said Sen. Mike Johanns, a Nebraska Republican. "He was trying to convey that this point in time was enormously serious, and the country was about ready to lock up from an economic standpoint. He just says, 'Look, I did what I thought I had to to keep the country going,'" he said.

In an interview, former Fed Chairman Alan Greenspan said it would be "a major loss to the country if the Fed were incapable of running an independent monetary policy. If you have the GAO, after the fact, offering its opinions on whether a certain monetary policy action is correct or incorrect, the active deliberations that are so critical to building a meaningful consensus at the FOMC will begin to become unhelpfully cautious." Mr. Paul maintained that his amendment wouldn't hinder monetary policy, but instead remove a veil of secrecy at the central bank that's unique within U.S. government. At the Fed, "there's plenty of political influence going on now -- presidential politics, influence by Goldman Sachs and the banking industry," he said. "It's all done in secret."

Congressional auditors have been blocked from reviewing the Fed's monetary policy operations, its loans to foreign governments and direct lending to banks since 1978, when a law was passed to shield the central bank from politics. Auditors already have access to the Fed's operations outside of monetary policy, including bank supervision and the special loan facilities created to rescue specific institutions, such as AIG and Bear Stearns Cos.

GAO audits could publicly reveal reams of information that now remain private, sometimes indefinitely. The Fed doesn't identify banks to whom it lends directly for fear of sparking a disruptive run on the bank. It has suggested that it might be willing to release that information after a lag. The Fed in the past has resisted calls to release information, only to relent. In the 1990s, for instance, after pressure from Congress, the Fed began releasing transcripts of its interest-rate deliberations after a five year lag. Mr. Paul's proposal would delay GAO access to Fed decisions for six months. A companion Senate measure has drawn support from about a third of that chamber.

"If there's anything worse than a secret Federal Reserve, it's Congress controlling it," said Sen. Jim DeMint, Republican of South Carolina. "But I do think that there's a wide majority of Americans who want to know what the Federal Reserve is doing and to make sure that it's achieving its primary purpose, which is to protect the value of our dollar."

Black Caucus Stalls Finance Overhaul
In one of the clearest examples of how the weak economy is overtaking Obama administration priorities, the Congressional Black Caucus forced the House to shelve its revamp of financial-sector regulation for two weeks. According to House Financial Services Committee Chairman Barney Frank (D., Mass.), members of the caucus revolted on the grounds that their constituencies weren't allowed sufficient participation in Treasury and Federal Deposit Insurance Corp. programs, such as the Troubled Asset Relief Program or FDIC oversight of failed bank assets.

They also complained more broadly that the administration wasn't doing enough to create jobs for low-income people or preserve minority-owned institutions such as radio stations, lending companies and jobs programs, a person familiar with the issue said. There are 10 members of the Congressional Black Caucus on Mr. Frank's committee, and their promised bloc vote against the bill could have torpedoed it. The caucus's action wasn't directed at the overhaul, but at the administration's broader response to the economy and job market. It has the practical effect of derailing the effort, at least until after Thanksgiving.

Congressional Black Caucus members said little after the vote was abruptly halted. "The recession has created a unique systemic risk that threatens all parts of the African-American community, including the poor and middle class," Rep. Maxine Waters (D., Calif.) said in a written statement. "I have always been committed to addressing that risk and will continue to do so. This is a critical issue for my constituents." Her office declined to elaborate. The administration's problems with more-liberal lawmakers have been brewing for weeks, based in part on a perception that the new president has made too many concessions to moderate Democrats on policies from health care to Afghanistan.

On Monday, Treasury Secretary Timothy Geithner and White House Chief of Staff Rahm Emmanuel traveled to Capitol Hill for an 8 p.m. meeting with Mr. Frank and members of the black caucus. Mr. Frank said White House officials had been hopeful they could work out a deal by the close of business Thursday. He spent the day shuttling between his panel's votes on financial regulation and a meeting with FDIC officials and caucus members.

Later in the day, however, he was told the black caucus wouldn't vote for the bill because their concerns weren't met, raising the possibility that the administration's initiative to overhaul financial-market rules could be scuttled before it reached the House floor. "They want to continue to have some bargaining power with the administration," Mr. Frank said. Mr. Frank said he was optimistic a deal could be reached when the committee votes again after Thanksgiving. "We believe we will have agreement," he said.

Panel Votes to Broaden Oversight of the Fed
In a display of populist anger toward the Federal Reserve, a House panel voted on Thursday to let Congress carry out sweeping new oversights of the central bank’s policy decisions and operations. The House Financial Services Committee approved a measure proposed by Representative Ron Paul of Texas that would allow Congress to order audits of all the Fed’s lending programs as well as of its basic decisions to set monetary policy by raising or lowering interest rates.

If the measure becomes law, it would expose the Federal Reserve to far more political pressure than it has faced for decades. Fed officials have adamantly opposed the measure, saying it would undermine the central bank’s political independence and gravely threaten its credibility as a bulwark against inflation. The vote on Thursday occurred despite the opposition of Representative Barney Frank, Democrat of Massachusetts, who had wanted to shield the Fed’s decisions on monetary policy from political pressures.

Mr. Paul, a libertarian Republican who has called for abolishing the Fed entirely, has introduced a version of his bill in every session of Congress since the early 1980s and never made any progress. But the Fed’s trillion-dollar efforts to bail out major banks and rescue the financial system provoked a popular firestorm that ignited both right-wing Republicans and left-wing Democrats. Mr. Paul’s amendment would instruct the Government Accountability Office, the investigative arm of Congress, to carry out audits of all the Fed’s operations. Those include an array of emergency lending programs, bailouts of giant financial institutions, dealings with foreign central banks and the central bank’s efforts to drive down interest rates by intervening in bond markets.

Mr. Frank had already agreed that the G.A.O. should be authorized to audit all of the Fed’s rescue programs, but he had wanted to wall off the Fed’s more basic job of setting interest rates to steer the economy. Mr. Paul’s bill would abolish a longstanding exemption that shielded the Fed from Congressional audits of its monetary policy. Supporters of the Fed’s independence have argued the shield provided crucial insulation from political pressure, which would make it much harder for Fed officials to take unpopular action aimed at heading off inflation.

"This is a political warning shot," said Vincent R. Reinhart, a former top Fed official who is now a senior fellow at the American Enterprise Institute. "It says that Congress has a mechanism to opine about monetary policy. The fear is that every time there’s a threat of higher interest rates, someone in Congress will ask for a study of the costs of higher interest rates."

The Fed was not the only institution exposed to political wrath on Thursday. Timothy F. Geithner, the Treasury secretary, came under fire from both conservative Republicans and liberal Democrats at a hearing of the Joint Economic Committee. Representative Kevin Brady, Republican of Texas, told Mr. Geithner he should resign. At the House Financial Services Committee, which was working on a sweeping bill to overhaul financial regulation, Mr. Frank had argued that Mr. Paul’s amendment went too far and would damage the Fed’s credibility.

Fed officials have argued that global investors would immediately become more skeptical about the central bank’s willingness to fight inflation by raising interest rates, which in turn would force the Fed to raise interest rates higher to accomplish it owns goals to keep prices stable. The result, they have warned, could be both higher inflation and slower growth. But Mr. Paul and his supporters argued that the measure would do nothing to undermine the central bank’s independence. Its only purpose was to force the Fed to be more transparent and accountable to the public. In a surprising display of political rebellion, about half the Democrats present and all the Republicans voted for Mr. Paul’s bill instead of a compromise measure drafted by Representative Mel Watt, Democrat of North Carolina.

In a related move on Thursday, the House Financial Services Committee also approved an amendment by Representative Paul E. Kanjorski, Democrat of Pennsylvania, that would give the government new power to restrict financial institutions deemed too big to fail. But Mr. Frank surprised some of his colleagues by postponing a vote on the overall bill until after Thanksgiving. Mr. Frank said he wanted time to address concerns raised by members of the Congressional Black Caucus.

Auditing the central bank: a jolly good thing! (How about the ECB?)
by Willem Buiter

What is so important about H.R. 1207: the Federal Reserve Transparency Act of 2009 aka the ‘Audit the Fed’ bill? This bill "To amend title 31, United States Code, to reform the manner in which the Board of Governors of the Federal Reserve System is audited by the Comptroller General of the United States and the manner in which such audits are reported, and for other purposes." may not sound terribly exciting, but in addition to making the Fed accountable for its quasi-fiscal activities, it could well set an important precedent for the enhanced accountability of operationally independent central banks everywhere.
The Finance Committee of the US House of Representatives has just passed this bill, which is an amendment sponsored by Representatives Ron Paul (Republican) and Alan Grayson (Democrat) to Representative Barney Frank’s HR 3996, the "Financial Stability Improvement Act of 2009?. The amendment allows the US Government Accountability Office to conduct a wide-ranging audit of the financial activities of the Federal Reserve Board. Specifically (and quoting from the website):
The Paul/Grayson amendment:
  • Removes the blanket restrictions on GAO audits of the Fed
  • Allows audit of every item on the Fed’s balance sheet, all credit facilities, all securities purchase programs, etc.
  • Retains limited audit exemption on unreleased transcripts and minutes
  • Sets 180-day time lag before details of Fed’s market actions may be released
  • States that nothing in the amendment shall be construed as interference in or dictation of monetary policy by Congress or the GAO
  • This is the first time an external agency will be able to audit the Fed’s financial arrangements with foreign central banks and with major US banks and other financial institutions, such as AIG.

 There are times one has strange company when supporting a worthy cause. Support for extending the GAO’s mandate came among others from the usual army of Fed bashers, led in the Congress by Representative Ron Paul (one of the co-sponsors of the measure), and by a motley crew of paranoid conspiracy theorists of the Lyndon LaRouche variety, who accuse the Fed of being behind every evil financial deed committed or suspected of having been committed, and may well believe it is a front for the House of Windsor or the Elders of Zion. Well, I’ll just have to hold my nose and remind myself that even a broken clock points to the right time twice a day. A comprehensive independent audit of the Fed’s use of what is, in the final analysis, public money and therefore tax payers’ money is long overdue. This is a major victory for democracy and the public’s right to know what those to whom certain public functions have been delegated and entrusted have been doing with the taxpayers’ money.
Let’s face it, nobody and no institution likes being at the receiving end of greater openness, transparency and accountability. Accountability is a noble cause when you want to impose it on others, but an infernal nuisance when you are subject to it. The amendment that was passed expressly forbids the GAO or the Congress from interfering with the Fed’s independence in managing monetary policy, that is, in setting interest rates and providing liquidity support to markets and institutions. And there is no reason why even thorough, indeed intrusive scrutiny of the Fed’s financial transactions would interfere in any way with the independent pursuit of its monetary mandate. Those who argue otherwise are merely asserting that the wrong set of people - a bunch of shrinking violets - have been appointed to the Federal Reserve Board.
What’s good for the Fed and for American democracy is equally important for the European Central Bank and European democracy or for the Bank of England and British democracy. The ECB has been running a massive cash-for-clunkers scheme for Euro Area banks since August 9, 2007 (perhaps it should be referred to as the ECB’s ‘cash-for-clankers’ or ‘cash for bunkers’ scheme). It has done this by accepting as collateral in repos and other collateralised loan transactions conducted with eligible Eurosystem counterparties by the 16 national central banks (NCB) that together with the ECB make up the Eurosystem. The terms on which this collateral was accepted by the NCBs are not in the public domain in the case when this collateral was illiquid. In the absence of an acceptable market price guide to valuing the collateral, the ECB specifies that a technical price is used, based on internal models and other valuation methods that are private to the Fed.
Despite repeated requests by me to members of the Executive Board of the ECB and to Governors of NCBs belonging to the Eurosystem, neither the internal models used to value illiquid collateral, nor the actual valuations assigned to specific securities offered as collateral have been put in the public domain. This amounts to an outrageous and arrogant denial of the Eurosystem’s duty to account to the European Parliament and to the European citizens at large for its use of tax payers’ money. We have good reasons to suspect that the terms on which the Eurosystem has made collateralised funds available to the Euro Area banks (including many subsidiaries of banks headquartered outside the Euro Area) have included a significant quasi-fiscal subsidy. Banks all over the Euro Area, notably Spanish, Dutch and Irish banks, but also, before the fall, Euro Area subsidiaries of Lehman Brothers and the Icelandic banks, bundled and wrapped large amounts of securities they could not use as collateral anywhere else, and presented the resulting rubbish to the Euro Area NCBs as collateral for central bank liquidity.
Even if such over-valuation of rubbish collateral is the right thing to do, from the perspective of the greater public good of systemic financial stability, there must be transparency about the magnitude of the ex-ante and ex-post quasi-fiscal transfers involved. The ECB is the custodian of public funds. In this fiduciary capacity, it owes a duty of care to the European citizens. And whether or not it fulfils its fiduciary duties appropriately cannot be based on blind faith and unquestioning trust in the inherent goodness and wisdom of the ECB. It is time for a detailed and comprehensive independent audit of the ECB’s financial transactions since the beginning of the crisis. This should include a close examination of the precise terms and conditions, including valuations of illiquid collateral, on which liquidity support, including enhanced (credit) liquidity support has been made available to the Euro Area banks by the NCBs of the Eurosystem.
I want to be clear about what I mean by an independent audit of the ECB and the Eurosystem. The ECB reports on its finances and has its annual accounts scrutinized by outside auditors (as per Aricle 109 B (3) EC Treaty and Articles 26 and 27, ESCB Treaty). This makes sure things add up and there is no evidence of fraud and malfeasance. The ECB is not subject to the full scrutiny of the European Court of Auditors, the panel of financial experts that examines the revenue, expenditures, management, and overall efficiency of the European Union’s bureaucracy. The Court of Auditors only examines the ‘operational efficiency’ of the management of the ECB (Article 27.2 ESCB Statute) and has thus far used a very narrow interpretation of the concept of ‘operational efficiency’. Clearly, the job of auditing the ECB for the proper use of its financial resources cannot be performed by an internal unit of the ECB itself, such as its Internal Audit Directorate or its Audit Committee.
Following the precedent set by the 2003 decision of the European Court of Justice in the OLAF case brought by the European Commission against the ECB (where the ECJ rejected the ECB’s claim that it had the right to set up its own independent anti-fraud regime and that it did not fall under the regime established by the European Regulation concerning investigations conducted by the European Anti-Fraud Office (OLAF)), I would deepen and broaden the mandate of the European Court of Auditors as regards its audit of the ECB’s accounts. There is no reasonable argument that confidentiality concerns and the defense of its monetary policy independence would preclude the same kind of scrutiny of the accounts of the ECB by the Court of Auditors that is granted the US GAO in the Federal Reserve Transparency Act. The results of this enhanced investigation/audit of the accounts of the ECB by the Court of Auditors should, with due regard for reasonable confidentiality concerns, be in the public domain. This kind of detailed and comprehensive independent audit should become a regular part of the reporting and accountability mechanism that underpins the ECB’s independence. The time to start is now. I hope the European Commission and the European Parliament will press the issue.

Deutsche Bank Life Insurance Fund in Hot Water
Two Deutsche Bank funds were designed to profit from premature deaths in the US by buying up life insurance policies. But investors have seen precious little return on their investment. Angry customers are accusing the bank of fraud. Gerhard Strate, a well-respected lawyer based in Hamburg, has seen a lot of things over the years. But he still has a hard time believing the story of the Deutsche Bank funds db Kompass Life 1 and 2, calling it "unbelievable" and "absurd." The closed-end funds buy life insurance policies from Americans and assume responsibility for paying their future premiums. When the original policy-holder dies, the entire payout goes to the fund. It is like short-selling US life expectancy.

Deutsche Bank collected some €500,000 ($750,000) from customers for its macabre money-making scheme. But the fund quickly turned into a mega-flop. So far, not one investor has received even a single dividend payment and some may lose their entire principal. Now, Strate has filed a criminal complaint with public prosecutors in Frankfurt on behalf of one of those who invested in the fund. A lawyer from Munich has also announced his intention of filing a complaint of his own, believed to be on behalf of dozens of clients. He is also preparing claims for damages.

There is cause to suspect "that from the very beginning, the promised dividends were not achievable using any realistic suppositions," Strate wrote in his complaint. In addition, he says, investors into the two funds were not adequately informed about one aspect of the scheme's structure: that both funds invest to a large degree in the same policies, thus "making risk management practically impossible." Thus, he argues, the funds may have crossed the line into fraud or at least breach of trust. "Finding out exactly which is a job for the public prosecutors," Strate said.

Karl-Georg von Ferber, a lawyer who represents an association of investors, points to the db Kompass Life 1 annual report for 2006. The policies that had been purchased by the fund are listed in detail. Only two of them had an estimated policy period of four years or less with many listed as not maturing for 10 years or more. Nevertheless, the report promised investors a return of 7.5 percent per year beginning already in 2007. "The way I see it, investors were knowingly misinformed," Ferber says. Deutsche Bank has refused to comment on the criminal complaints. The bank explains away the funds' non-performance by pointing to the recent increase in US life expectancy. As a result, they wrote to investors, "fewer policies matured than expected." Mortality tables, upon which the funds are based, have changed since 2005, the bank explained.

A Deutsche Bank spokesperson rejected accusations that the bank has misled investors. The bank, the spokesperson said, "has always accurately communicated the current situation in the business covered by the funds." Forecasts of life expectancies could not be seen as "absolute numbers" to be used to calculate the cash-flow situation, the bank said. Instead, the bank calculates probabilities for premature or delayed deaths. Nevertheless, the bank -- in the interest of "fairness" -- recently made the angry investors an offer: Should they wish to pull their money out of the funds immediately, Deutsche Bank will grant them 80 percent of their original investment. The funds' rules call for money to stay put until 2015. The offer deadline expires in just a few days. But the investor represented by Strate does not intend "to allow the bank to get away so cheaply."

'Lost Decade' Feared for British Economy
Britain may finally be emerging from recession, but many analysts warn that it is a false dawn. In fact, they argue, the economy here is so ravaged by growing debts and ruined banks that it could well be following in the steps of Japan’s lost decade of the 1990s. The parallels are eerie: Like Japan, Britain enjoyed more than a decade of booming growth, fed by aggressive bank lending and real estate investments. Haunted by the comparison, policy makers have been extra aggressive in using fiscal and monetary levers in hope of preventing the stagnation and banking stasis that plagued Japan for so many years.

Some economic indicators over the last week have been positive: an uptick in retail sales, fewer jobs lost and an export revival. Yet analysts say they may well turn out to be teasers that cloak deeper, more structural flaws in the economy. In addition to rising debt, the tax base is collapsing and the crippled banking industry has yet to show it can generate profit by lending to companies.

"We expect 1 percent growth next year and 0.7 percent in 2011," said Douglas McWilliams of the Center for Economic and Business Research in London. "Technically, it’s a recovery — but it’s a very weak economy indeed." Comparisons with Japan have been made in the United States as well, but some analysts say they think the more appropriate analogy is Britain, given the similarly pronounced contribution of the banking industry to their respective economies.

The prospect of a period of Japan-like stagnation in Britain was publicly aired last month by a senior member of the monetary policy committee of the Bank of England, Adam S. Posen, who was appointed in June. An American and a senior fellow at the Peterson Institute for International Economics in Washington, Mr. Posen was speaking as an outside expert on Japan’s lost decade. He noted that his views were his alone and not those of the bank.

But they carry the weight of one of the decision makers at the central bank, which has been buying billions of pounds worth of government bonds, known as gilts, to inject liquidity into the economy, a policy called quantitative easing. "The United Kingdom has an uncomfortable parallel with the Japanese financial system when the Japanese economy began to recover in the mid-1990s and was unable to sustain it," Mr. Posen said in his speech.

While defending the quantitative easing as necessary and noninflationary, Mr. Posen pointed out that the Bank of England’s huge purchases of gilts — it now owns 30 percent of those outstanding — is in itself a consequence of the British financial system’s inadequacy in providing credit to businesses through the issuance of corporate bonds. In another similarity to Japan, the capitalization of Britain’s private-sector bond market as a proportion of gross domestic product is very low — 0.16 percent, the smallest among the Group of 7 economies and well behind the 1.2 percent in the United States.

For a financial system heralded as one of the world’s most sophisticated, the statistic is eye-opening. It raises the possibility that credit-starved companies, dependent on still-wobbly British banks, may not get the capital they need. That potentially could bring about a double-dip recession or stagnation. Mr. McWilliams, of the Center for Economic and Business Research, forecast that bank lending to companies would decrease over the next two years.

Mr. Posen argued that the Bank of England’s purchases of gilts were unavoidable because the bank needed to bring liquidity to the private bond market. But a growing number of bearish analysts view the bank’s buying spree as perilous to British public finances.

The severity of the problem was underlined this week when the government disclosed an £11 billion ($18.3 billion) borrowing figure for October, which brought the half-year tally to £86.9 billion, the highest level since public records began in 1946. That makes it almost certain that the government’s forecast of £175 billion of borrowing for next year will be exceeded. It would produce a budget deficit of about 13 percent of G.D.P., nearly twice the average in the euro zone.

Simon White, a partner at Variant Perception, a London research firm that caters to hedge funds and wealthy individuals, takes an especially dire view. In a note to clients this week, Variant broached the prospect of a debt or currency crisis as the collapsing tax base — too dependent on real estate, financial companies and the highly taxed rich — leaves the government gasping for revenue but unable to raise taxes without destroying growth.

Taken together with the already high levels of spending, the result is a deficit that grows even beyond 13 percent of G.D.P., further harming the country’s fragile creditworthiness. Both Fitch and Standard & Poor’s view the British economy as the most vulnerable to a downgrade out of the 20 or so countries that carry a triple-A rating. The Bank of England has already spent about £200 billion, or $330 billion, buying British bonds, an amount equivalent to 14 percent of annual G.D.P. Once it stops doing so, interest rates are expected to rise immediately, driving down bond prices. That could prompt already skittish foreign investors, who hold more than 30 percent of government paper, to sell.

To be sure, such an outlook is based on the premise that British politicians will be like their counterparts in Japan in the 1990s and not have the political will to tackle these economic problems. Prime Minister Gordon Brown, whose thin hope of a victory in next spring’s general election rests upon a bankable recovery, has declared a "go for growth" political strategy. The Conservative Party has staked its legitimacy on decreasing debt.

But it has not detailed its program, and some fear that the next government will have little time to get its house in order. "The likelihood of a debt and sterling crisis is just not factored in," Mr. White said. On average, these events have occurred every 15 years since 1947, with the last one in 1992. "If this gets out of control," he said, "it will flip very quickly."


Zeke said...

Maybe it's just me but I feel like I'm on a sinking ship with everyone running around like a chicken with no head. Everybody has an opinion of what's wrong and what should be done. Looks like we're about the change horses in mid stream to use the old saying. I sure don't know much but it looks like utter chaos out there.

Sure doesn't give me a secure feeling!!

soundOfSilence said...

@Coy Ote (last TAE article):

…Mish and Denninger understand numbers

My personal opinion of KD has dropped several notches lately – especially with his recent “open letters.” I will whole-heartedly agree that he understands numbers. He seemed to make much hay out of “interesting ‘meta statistics’ on word counts”… falsify appeared 6 times, hide 5 times, inflate 14 all in 60 MB of zipped data (scientific data at that) –so fooking what?

A theory is not scientific if I can’t falsify it (by observation or experiment). For reference see the writings of Karl Popper on falsifiability and falsification.

The argument that God created the world in 6 days can’t be falsified… the claim by creationist that -well God “just created the world pre-equipped with fossilized dinosaur bones apparently millions of years old” only serves to hide the lack of rigor (absence of falsifiability) in the creationist argument. If we are going to assume that God created the world circa October 4004 B.C. inflated with all the signs of great age… then we might as well just argue that God created the world this morning about 45 minutes before breakfast and outfitted us all with fraudulent memories of what happened "yesterday."


I just used falsify as a root word 4 times along with hide and inflated once each. And I took a lot less that 60 MB of zipped data to do so. Can I draw any conclusions on the underlying intent surrounding the use of “falsify” 6 times in 60 MB (zipped), falsify 4 times in the two paragraphs above and say something like “hey Frank let’s fraudulently falsify the numbers so we can inflate the effects and hide the truth.” Not really but it certainly does sound ominous saying “look at these ‘interesting meta statistics.’”

As the saying goes –there’s lies, there’s damn lies and then there’s statistics. If KD wants to call the government on the carpet for “cherry picking the data” I’m all for it. But as another saying goes –you can’t have you’re cake and eat it too. He ought to hold himself to the same standards.

they know how many scientists and laboratories and monitors all around the globe are studying the effects of our earth-bashing activities… One would hope so. If they can’t – then I’ve got some land in the Love Canal area that I’d like to sell them. Is there significant difference between Love Canal and the plant as a whole (other than scale)?

gylangirl said...

"Don’t be surprised if Tim Geithner is sacrificed unceremoniously and without much further hesitation. Not to thoroughly change economic policies or anything of that kind, don't be a fool."

Precisely. The trick will be to select a replacement with no sign of Goldman Sachs on their resume [yet] - but who can be counted upon to continue to carry water for them in the meantime.

Expect that 40,000 troop movement soon to Afghanistan also. Same idea: get the anti-war liberal base's public opinion defused with incessant preparatory talk about it, pretend to be weighing options seriously, then do what you were planning to do all along - complete with "leaked" "opposing" preferences from generals in the field; after all, must support the troops!

Slam dunk.

David said...

soundOFSilence said:

My personal opinion of KD has dropped several notches lately – especially with his recent “open letters.”

Yes, Karl has become a great disappointment. In the early days, say 12-18 months ago, he had some pithy, valuable, nuggets spread throughout the froth.

But lately, he's all hysterics, and the nuggets are hard to find.

When he sets his mind to it, and focuses, he can bring up some astute commentary. But lately, not so much.

He's caught the Glen Beck disease. Wafted up into the clouds amidst delusions of his own self-reinforcing bubble . . . well, once you arrive there, it's difficult returning, via a soft landing, to earth in one piece.

Sad, really.

But then again, maybe, like the moth, he just got fried by flying to close to the flame.

Here's hoping that Ilargi and Stoneleigh don't become entrapped by the same heat-induced delusions.


Bigelow said...

“JIM: Catherine, getting back to the other economy that’s out there now, the Credit Bubble, Fannie Mae, Freddie Mac, all of this Credit financing, what’s your view in terms of how this ends?

I can’t help but see this whole thing crumbling, and maybe it’s a private initiative that rises from the ashes such as the things that you’re proposing that rebuild this economy, because certainly we have hollowed out this country in terms of what we’ve done to manufacturing. And you can’t create wealth by just printing money and borrowing money.

CATHERINE: Right. I think there are two scenarios.

One is the bust, which is this thing keeps going as long as it can be financed by the U.S.
governmental apparatus, and at some point, you know, as the Japanese and everyone else says, ‘We’re not buying any more of this, we’re not taking more dollars,’ the thing busts.

And when it busts, what you’re going to have is—it’s going to be 1929 but worse.

Because in 1929, there was a lot of social capital in America. It was a much kinder, gentler place I think than it is now. And you had many more people that knew how to
grow their own food, or knew how to function. So one scenario is the bust.

The other scenario though, Jim, is the Orwellian scenario, which is we’ve reached a point, and I’ve written many articles about this, where rather than let financial assets adjust, the powers-that-be now have the control of the economy through the banking system and through the governmental apparatus.

They can simply steal more money, keep financial assets—you know whether it’s the stock market pumped up, the derivatives going, or the gold price manipulated down.

And they simply liquidate all living things rather than let the economy go bust.

In other words, you can adjust to your economy not by letting the value of the stock market or financial assets fall, but you can use warfare and organized crime to
liquidate and steal whatever it is you need to keep the game going.

And that’s the kind of Orwellian scenario whereby you can basically keep this thing going, but in a way that leads to a highly totalitarian government and economy [and] corporate feudalism.”
America's Black Budget And Manipulation Of Markets
Financial Sense NewsHour, May 22, 2004

Mugabe said...

In today's collection, what struck me was the item headlined "Commercial Real Estate Will Collapse." It ends with a long list of proposed Fed and taxpayer bailouts for CRE investors and their bankers. So it wasn't a bearish forecast of doom after all. It was just an attempt to scare legislators into adopting the prescribed bailout. Which they undoubtedly will. Those proposals would string along CRE without any collapse, though with a cost to the public balance sheet. Looks like extend and pretend has a lot of legs left.

Once again I wonder about the connection Ilargi appears to make between its all being lies and bs (yes indeed) and its imminent collapse (maybe, but they keep surprising us.)

The whole crisis could easily be solved by cancelling social security and medicare (but keeping the associated taxes on working people) and using that cash flow to pay down the debts incurred from saving the rich from their little mistakes. On one hand, that seems like an outrageous regressive wealth transfer; and a political non-starter besides. But then again, it's being done before our eyes. Who can imagine the CRE bailout proposed not being enacted into law? Step one is to lever up public debt to impossible heights to fund bailouts. At that point there will be no choice; the survival of the nation will be at immediate risk. So step 2: cancel SS and Medicare. All this talk about pitchforks or guns is nonsense. There was no choice. Also, no crash.

Vern said...

Peter DeFazio, Elizabeth Warren, etc. speak as though Giethner does not understand that his policies are not working. I have listened to him speak; he is smarter than his critics. As long as Giethner's critics refuse to consider the possibility that his policies may be working exactly as he intends them to work, I think they speak with no effect. That is what Paulson's critics said of him, and that allowed him to keep going full speed ahead, and to set the stage for Giethner. I suspect they (the critics) were afraid to confront Paulson, and now I suspect they are afraid to confront Geithner/Summers/Bernanke. Empty words, no change. A year from now we will still be hearing the same whining, which the nation's economic leaders will continue to ignore.

VK said...

I have listened to him speak; he is smarter than his critics. As long as Giethner's critics refuse to consider the possibility that his policies may be working exactly as he intends them to work, I think they speak with no effect.

Bravo! I've written before that there are 3 types of people amongst the political elite.

1) The happy camper who reckons the world is all sunshine and roses and we can just wish and think our way out of a problem. The CAN DO American attitude, I believe this is a significant majority.

2) The doubtful fellow on what's happening, but his paycheck depends on him keeping a happy face and saying everything is rosy while on the inside he holds significant doubt. I believe this is a growing group of people.

3) The psychopath, these are probably about 5% or less of the total but they are ruthlessly efficient, they know how to get power and make the most of it. These people probably get it that the US is going to collapse, whether it's now or 20 years later because of peak oil doesn't matter. They intend to profit and are highly rational. If they take down the system now, it's good for them, maximises their fitness.

I believe Bernanke falls in the number 2 camp and so does Obama but a guy like Geithner is frankly in number 3. So is someone like Jamie Dimon and Paulson and Lord Blankfein. One requires to be ruthless to get to the top of Goldman Sachs and JPM.

Coy Ote said...

Mugabe - "There was no choice. Also, no crash."

Your post raised a lot of questions but I will only ask one.

Define "crash" (as in no crash)?

el gallinazo said...


Do you define "crash" strictly as a sudden drop in equity market indices?

el gallinazo said...


I never thought that I would be writing this on this forum, but I have found someone who holds the American body politic in even far greater contempt than I. Cancel Medicare and Social Security but **keep the specific taxes in place.** If Americans accept this without an awesomely violet reaction involving much death and mayhem hopefully most of which is directed at the ruling classes and their minions, as you suggest that they will, than they deserve what they get.

007Billion said...

"One would think that the courts believe that the money people borrowed to buy homes magically appeared and did not come from other people’s savings, investments and retirement accounts.

Has any court considered that, when they preclude a bank from foreclosing a mortgage, the home owner, who actually borrowed the money and is refusing to repay, is actually stealing the savings of their neighbors?"

Forbes gets that wrong, here. I took the primer of Money as Debt months ago. I learned something too: Those mortgages were created from thin air. Loans to the bank as well as to the loanee. No savings or someones retirement were used to create them.
You'd think Forbes of all publications would know this.

el gallinazo said...


You have put your finger near the most essential question involving the human species, which is how does a society keep its natural psychopaths from accruing dominant economic and political power? I do believe that there are many human societies that have succeeded in this to a larger extent, but "advanced" western society dating back to classical times are not among them. The ones who have succeeded are all considered "primitive."

Coy Ote said...

9 minutes ago (9:50 USA Eastern)
Israeli aircraft strike Gaza targets!
Everytime I see one of these headlines I wonder if it going to be the straw that broke the camel's back. Even though this pot has been simmering--at times boiling--for a long, long time.

There are so many cracks in the fragile world house of cards that it could all come tumbling apart at any moment by something that starts out as a routine incident.

Complex manipulations will not be undone by the forgiving, extraordinary actions of a people, any people, who are poor, hungry, and wounded.

Greenpa said...

"A lie which is half a truth
Is ever the blackest of lies."


My own version:

"A half truth is the most durable of lies."

And well known and frequently exercised tool in herd management.

Brunswickian said...

Red Alert: The Second Wave of The Financial Tsunami
The Wave Is gathering force & could hit between the first & second quarter of 2010

by Matthias Chang

The US economy will be spiraling out of control in the coming months and will reach critical point by the end of the 1st quarter 2010 and implode by the 2nd quarter.

DIYer said...

VK and el g,
Q: how does a society keep its natural psychopaths from accruing dominant economic and political power?

A: localization.

One of the things we have done for amusement here in the Heart o' Texas has been to "volunteer" at the polling places at election time. (the county pays us but we couldn't really survive on it)

This one time we were working at a tiny Travis County town on the far side of the lake, it had maybe a thousand voters. A local election. The polling place was the fire station ... long story I'll try to get to the bottom line ...

Our firsthand observation was that the election in this tiny town really mattered, and the citizens managed to kick a jackass off the town council. As election workers we aren't allowed to discuss the candidates, and we really didn't know anybody in the town. But just from passing remarks we overheard and directly made to us by some of the folks, you know, we could tell how they felt.

You can't do that in downtown Austin. It's one of those profligacies of scale I keep going on about.

Greenpa said...

"DIYer said...
VK and el g,
Q: how does a society keep its natural psychopaths from accruing dominant economic and political power?

A: localization. "

sigh. Ah, if only.

We just went through this whole scenario, in spades.

Basically: a corrupt state representative has a majority of self-interested and physically related voters available. A machine.

His father-in-law decided he wanted to build a tire-burning plant, just outside the county seat. (Our county has ONE stoplight- far from the seat; and tons of bicycle tourism.)

They started construction, using a highly questionable city permit rammed through, and a corrupt state environmental "get out of jail free" card- no impact statement needed, you know.

It took a couple years of bitter, bitter fighting to have the building permit rescinded- then the builders sued- and won around $200K in damages (paid by us, of course).

The corrupt representative lost the next election; by a fraction.

And is now back in office.

Local is not enough, by itself- don't count on it.

Dr J said...

el g - it seems to me that democracy was designed specifically for the purpose of not allowing the concentration of power to fall into the hands of a single person without proper constraints. I think history has shown that when absolute power is granted to individuals, it is only a matter of time before a psychopath is ensconced and much human tragedy ensues. There is no doubt that the psychopaths scheme to subvert modern democratic processes for their own ends and with varying degrees of success. But it is only by deforming those safeguards inherent in a democratic model that they succeed in gaining absolute power. I fear we are teetering on the brink of such things in the US these days.

Ahimsa said...

I know some TAE readers/commenters are fans of Pete Seeger. I'm listening to Seeger's "We Shall Overcome," which always cheers me up. Hope this piece will cheer you up as well. I especially like the verse written in Montgomery, Alabama -- "We are not afraid." :)


Coy Ote said...

On localization - Localization may not eliminate elements of corrupt practices, but what it does is make visible who (or what) the culprits are. In other words it simplifies the situation to a level that regular folks can understand and get a handle on.
At least if you understand the problem, and it is local (geographically/politically) you have a better chance of repairing it.

This corruption in high places is complex, vague, and far removed intellectually (from Main St.). The precise definition of our predicament is not tangible in the same sense that, say, the Viet Nam war was. The slippery nature of various financial terms, the opposing predictions being made from inside the "profession" itself, and the mounting danger of accumulated debt due to the unbacked nature of credit is hard to grasp for many.
That's one reason organized resistance is slow in developing--my take.

Ilargi and StoneLady (and many others to differing degrees) have things rather well prognosticated but it takes more than a few minutes, (days, weeks, months) to get it through the heads of millions of soft, propagandized boob tubed, but otherwise decent people.

DIYer said...

No I know, you couldn't count on it. But it was refreshing to see, just in this one case.

One of our voters in this election was a young guy, early 20's, had the same last name and address as the above-mentioned councilman. Showed up hung over and didn't have any ID -- had to have somebody identify him. Of course we couldn't directly observe that one vote, but about 20 of 'em (according to the closing tally) were the guy's entire "machine". The rest of the town had other priorities.

Even that election wasn't a sure thing ... frequently turnout is very light for a local election in a small town.

aargh! said...

This from the most-doomer-of-us-all site, Jesse's Café Américain.

(Most doomer, IMO as rather than the bang ending of deflation or inflation, he proclaims a middle road to the whimpering hell of stagflation.)

The graph shows we are out of the recession, but remember, that's only by jazzing government spending on to the backs of generations 'P' (for peons), at least on to the backs of the poor benighted buggers who haven't been shuffled to the sidelines for a life, while it lasts, of minimal everything. No cars, no houses, no food, no clothes and the shopping cart with three wheels.

el gallinazo said...

Two Zero Hedge articles:

A must read if you know anyone with MS

Also, Janet Tavakoli Retracts Her Apology To Goldman Sachs


"but about 20 of 'em (according to the closing tally) were the guy's entire "machine". The rest of the town had other priorities. "

You lost me on this. You you say it another way?

Ilargi said...

I don't know much about doomerism, but stagflation is not a very smart thing to predict.

aargh! said...

Almost as stupid as not realizing a coin has three sides.

el gallinazo said...

aargh! said...

"The graph shows we are out of the recession,"

The graph shows that someone at the ST. Louis Fed wished to imply that the recession had ended by not running the shaded portion into the third quarter. Of course, it could have simply been an artistic consideration.

el gallinazo said...

A phone call, intercepted by Jesse while eating a crepe at his Cafe Americain:

"Hello Lloyd? Yeah, Larry and I were talking, and we would like to see the market go up, not too fast, but on a nice gentle slope, within a range.
Whatever gains you make doing this are yours to keep. Ben will supply the liquidity. We need to make it look like the Administration's policies are working.
And most Americans will think they are if the stock market is up."

DIYer said...

el g,
The "machine" lost to a write-in candidate. Your question sent me to look at the historical results on the county website, and I see that I embellished my story somewhat...

The town had 2 precincts. Of a population of about 5,000 a thousand turned out. About two-thirds of the voters did so in "early voting", making our election day tally a smallish part of the total.

In fact the race was a lot closer than I remembered. As far as I know the guy may have gotten back in on the next election.

aargh! said...

El G, this is what they are talking about in that graph, it is, I guess, technically correct:
Economy finally back in gear
Government says GDP grew 3.5% in third quarter, ending a year-long string of declines and coming in better than forecasts.

Definitions of recession on the Web:

* the state of the economy declines; a widespread decline in the GDP and employment and trade lasting from six months to a year

Grey in graph may be correctly coloured but essentially of little meaning as the end of a recession does not necessarily mean recovery. The end of the grey preesently is a good part the result of government spending.

GDP = private consumption + gross investment + government spending+ (exports − imports),

scandia said...

Speaking of corruption in high places Canadians are being asked to destroy the good reputation of Mr Colvin, a Cdn diplomat currently posted in Washington. Last week, for the umpteenth time, he tried to get our conservative gov't to stop torturing Afganis. The gov't response is the most blatant spin I've seen in Canada. We are definitely a nation run by the Pentagon. I am sick of heart and sick of soul that my country undermines legislation to address climate change, supports torture thereby " pissing " publically on international law. Also pissing on legislation passed recently to protect whistleblowers. Mr. Colvin has great courage to speak up and will pay a high price. I hear the price will be the end of his diplomatic career. Makes one wonder who'll be left in the diplomatic corps. Clearly not anyone respecting international law.
An editor of a Cdn newspaper framed this gov't response as " waterboarding " of whistleblowers.

Gravity said...

Ash nazg durbatulûk, ash nazg gimbatul, ash nazg thrakatulûk, agh burzum-ishi krimpatul.

Gravity said...

Ash flash durbatulûk, stash cash gimbatul, goldman crash thrakatulûk, aargh!! burzum-stimuli krimpatul.

My master, Goldman the Great, bids thee welcome

ccpo said...

Re: Markets

A bit of tech analysis: Looks like we got a shoulder and a head; is another shoulder next, signaling a reverse?

Bear in mind that the pattern throughout this rise has been a weird sort of bumpy plateau, small fall, then back to the climb, not a head and shoulders pattern.



Coy Ote said...

El G - I read the Tavakoli article and while some of it was a little too knotty for me to untangle, statements like the following are quite transparent...

"Friedman owned shares of Goldman Sachs, and was a member of Goldman’s board, while he held his influential Fed position. He resigned the Fed position in May 2009, but not before purchasing 50,000 shares of Goldman Sachs, when the public was still in the dark about the terms of the bailout."

Why not just rob a bank? I thought to myself. Then I thought, well hell... I guess he did, and one propped up by me, you, and every other taxpayer!

el gallinazo said...


I thought it required a minimum of two quarters of positive GDP to consider officially ending a recession? Since the official second quarter GDP was -0.7, isn't the St. Louis Fed getting a little ahead of themselves? Or are the 4th quarter books already boiled and seasoned?

snuffy said...

...My guess,is that removal of social security,and medicare would destroy any credibility of the administration that tried it,and make it real hazardous to be part of the political system in any way shape or form.

So would any attempt at "gun control"

So will a continuation of the policy that got us to this location in the great scheme of things.

This "recession"went from "0"to "way bad"so quick that most folks don't have their "depression"on yet.

People are still purchasing houses,and cars,and clothes...and still think things will get better soon.

Its when the un-employment gets about twice this bad is when you will start to hears the creaks and tearing sounds associated with a whole society getting ready to blow. The well-published levels of "bonuses"and executive pay now, has left a gut-sick public past anger.Those who have a lot of contact with the public KNOW the level of anger.I ,at this point,don't see any quiet way out of this.All those who think that the propaganda machine will work,that the American public will continue to roll over for these constant string of abuses fail to realize when the carrot of a good job,and the opium of a warm house and happy family is gone,all people turn bone mean,and seek vengeance of those they consider responsible.It may not show in the polls,or in any form that can be measured by those in power...but trust me ,its there.True,its a small group of those who will go true radical...but it takes very few.
What would be the effect if 10 men ,in various cities in the USA,did what that recently executed sniper did?How long would we have a country?
With things going the way they are,my guess is we will hit the 20% point in early spring.If this jobs summit has no effect,[and I doubt if it will]All it will take is a match .There is so many ideological firebugs that intend to torpedo any attempt to stabilize and repair this system that a controlled crash is the best that all [at our level ]could hope for.Enough structure to keep the food supply system working and infrastructure enough to keep the lights on.

Here is my prediction.

We may scrape by this election cycle,because all stops will be removed to keep the status quo.There is enough inertia to keep it solid...awhile.I have expected worse/sooner,but the trillions of dollars that have been jammed into a few pockets has leaked enough into the system to keep a small amount of activity.Very soon ,at some point,a inflection point will be reached with the long suffering American public,and things you never dreamed possible will become the norm.We are at the end of a one era,and the new one is not born yet.Most births are accompanied by pain,blood,and a lot of screaming.I am sure this one will be too.

I have made a place for mine.Its not the best,but a good liferaft is not required to be pretty.I would make the suggestion to the regulars here to re-read the primers to get the right mindset to face the next year.I think its later than we realize...


scandia said...

@ Snuffy,
One sign that it is later than we think is the article by Martin Wolf(FT). Martin is always very dry and circumspect in his judgements. Not in this one. he's calling the bonus BS now with the rest of us.
His efforts to guide a recovery have been admirable. He has supported the ruling class. I doubt he will anymore unless some folks get charged for stealing from the populace.
He must be heart broken to witness the governing class become the criminal class.

Coy Ote said...

Sound of Silence - I never got back with you but... good post above.

Snuffy - I agree on your points about SS, medicare and "gun control" being off limits, around here anyway. Med and SS may deteriorate in this great predicament but not by political decree, more likely by opaque bits and pieces.

In the 30's it was the "revenuers" or "feds" who got themselves in mortal trouble searching out stills in the hill country. Same thing would occur, only much worse if any attempt at firearm confiscation was ever attempted--never happen.

I too hope for the best but agree that we should prepare for... well... something much worse. I have a ways to go in that regard.

ric2 said...

Scary analysis and prediction for the US, snuffy, and I agree for the most part.

However, I think there are some in the elite/TPTB class that are fully aware of the potential for widespread social unrest in the US, and that it only takes a few "superempowered" individuals to ignite the powder keg. In fact, I believe many of the TPTB/elites are preparing themselves to benefit as much as they can from this unrest as Stoneleigh has alluded to in her references to Naomi Kleinʻs "Shock Doctrine." This is speculation, but I think some of the TPTB/elites will support the start of this unrest with their own agents.

As for the propaganda machine, TPTB/elites will change its focus from denial and obfuscation to scapegoating other groups besides the bankers and doing what they can to shift attention away from themselves while otherwise encouraging prole vs. prole violence.

How widespread will the civil unrest be, in which parts of the US, how pervasive in those parts, and how long will it last? It scares me since most of my somewhat oblivious loved ones think theyʻll be OK 3 miles from Baltimore. Thanks to the clear thinking and writing here at TAE, Iʻve managed to marshall arguments to convince my comfortably retired dad to purchase farmland 100 miles away. Weʻre still probably too late but Iʻve vowed to not have myself or my loved ones follow the lemmings off the cliff.

At any rate, TPTB will make sure a populist "savior" emerges (probably a right-wing fundie who appears to be in direct opposition to President Obama who has been set up to fail) to put a stop to all the craziness but weʻll have to give him (or her) dictatorial powers. Stoneleighʻs mentioned something along these lines in earlier comments, where she mentioned defended "Green Zones" popping up. There is also an interesting thread over at LATOC (not putting in a plug for them, but this is an interesting extrapolation) one of their frequent posters has described: OldHorsemanʻs Fedghetto scenario.

I am pretty sure Ilargi has mentioned it before, something like 2010 is the year Main Street realizes it has been eated by Wall Street. Stoneleigh has also mentioned that she thinks it is possible for civil unrest to start in 2010.

I guess the crisis has gone beyond the point of no return in transforming from financial to political.

aargh! said...

El G
I thought it required a minimum of two quarters of positive GDP to consider officially ending a recession?

Yes,I wondered what the criteria were, but the brief search I did before posting came up empty. At any rate nothing to get excited about, those typeof statistics won't really fool anyone worth the fooling, eh?

David said...

Ilargi said:

I don't know much about doomerism, but stagflation is not a very smart thing to predict.

Ruling stagflation as completely out of hand, of all possible eventual scenarios, is also not a very smart thing to predict.

Anything is possible.

Whom of all of us here has the infallible crystal ball?

I'm the first to admit that I do not.

Who is next?

Or do we have multiple crystal balls in play here?


Top Cat said...

I'm glad for every single extra day I get to work on the doomstead. Don't know why anyone would complain about things not unraveling fast enough. Been gathering every scrap of organic compost ingredient I can lay my hands on for next year's Extra Jumbo Survivor Countdown to Ecstasy Doomagedon Garden. I actually decided to just lay it out with the planting hills and stakes and wire cages and rows now, everything but the seed and new compost.

While slaving in the fields, I was toying with metaphors to help describe the financial landscape to a couple of friends and a few relatives who are beginning to be genuinely (finally) spooked by The New Speak Happy Talk (NSHT) that passes as critical commentary by MSM butthead sock puppets.

The Magic Bubble economy, which had been almost always going up for the last couple decades, particularly the last 8 or 9 years, finally met it's Needle in Peak Credit. Peak Credit defined the zenith for this Magic Bubble. (Let's call Peak Credit July 2007, your mileage may vary.)

Since the vast majority of economic transactions in the U.S. to that point were fueled by credit, not actual savings or deposits or circulating currency, the Credit Coronary cut off the air supply for the Magic Bubble.

As a child, I remember having a novel soap bubble blower which could blow a bubble inside of a larger bubble with ease and regularity. It looked very cool to see a small bubble bouncing around inside a larger one. The fate of the smaller one held within the path of it's master.

It was a neighborhood show stopper.

As the larger bubble went down on the air currents, the smaller one inside often went up relative to the walls of it's captor bubble.

The large bubble was losing altitude (deflation),
and so was the smaller bubble within it in absolute terms, but to an observer inside the bubble, it would appear that the smaller bubble was still rising (inflation)

As our whole bubble economy edifice sinks (deflates) the optical illusion of commodity prices rising (the bubble within the bigger bubble) appears to many to be incontrovertible. From their POV, it is rising, just not in absolute terms.

This is the sticking point with many folks I talk to. They have ceased to feel the motion or direction of the larger economic framework that holds their own little personal economic structure within it's domain.

And the MSM are actually collecting their paychecks to maintain this disorientation in the public at large.

It is not so much the litany of lies as the complete lack of honest reference points which doom the public.

Having flown planes myself as a young man, I can testify how terribly difficult it can be to pull out of a diving spiral, to even level flight, when you are in a cloud.

Your instruments can save you if they are accurate and you are trained to interpret and react to them.

Unfortunately, our economic instrument panel is cooked and uncalibrated and displays nothing but Goldman Sachs high frequency trading algorithms (backwards and upside down) and the Dow Jones Average. Not much help at this point.

getyourselfconnected said...

I wonder when this country got so jaded that a provision in the health care bill (parodied as the Louisiana Purchase) which is a 100 million dollar gift to LA in exchange for senator Landries vote registers as a "business a usual" and not an outrage. I have always said you get the exact government you deserve, and boy do we have that!

Joseph j7uy5 said...


As you were saying:

Missouri Republicans Call For Violent Revolution. They put up a billboard that concludes: "PREPARE FOR WAR...LIVE FREE OR DIE."

Joseph j7uy5 said...

Oh, and US Rep. Michele Bachmann (R-MN) said:

"I want people in Minnesota armed and dangerous on this issue of the energy tax because we need to fight back. Thomas Jefferson told us, "Having a revolution every now and then is a good thing," and the people – we the people – are going to have to fight back hard if we're not going to lose our country. And I think this has the potential of changing the dynamic of freedom forever in the United States."

Mind you, I am not totally opposed to the idea of a revolution, but it would have to be about something really really serious. She is upset about proposed cap-and-trade legislation (!?)

Ilargi said...

There's a fast moving and fast growing group of opportunists trying to fill the power void on the right side of the US political spectrum. Palin, Beck, Dobbs, Limbaugh, there are more and more still will follow. It's simply about filling a vacuum. Just watch them: they are all very busy positioning themselves. The Palin book, Dobbs leaves CNN, Beck has a new "plan".

Scores of people are done with Washington as a whole, all that needs to be done is harvest their anger. The left has nothing to offer. No, not the Democrats, they are not the left. Nor do they have anything left.

The opportunists sense, and are being told by puppeteers, that they can, if their moves are the proper ones, take that power, either within or without the Republican party.

Think of it as a scramble, a dozen people all trying to fit through the same single door at the same time, and all wanting to be first.

in that sort of situation, if what they think it takes to be ahead, get ahead, is to appeal to peoples' base instincts, think violence, that is what at least some of them will do.

And that in itself can grow into a competition, a race to the bottom. Of the soul. Who dares to scream the most blatant texts?

The individual human mind is very adept at convincing itself of excuses after the fact for acts committed, crimes committed. The group mind reinforces that phenomenon in a phenomenal way.

It's a story as old as the world. And, at least potentially, it's a really scary one.


ogardener said...

Blogger el gallinazo said...


You have put your finger near the most essential question involving the human species, which is how does a society keep its natural psychopaths from accruing dominant economic and political power? I do believe that there are many human societies that have succeeded in this to a larger extent, but "advanced" western society dating back to classical times are not among them. The ones who have succeeded are all considered "primitive."

How true!

lord.bacon said...

@ Joseph j7uy5

I just looked at that billboard.

Wow. Pretty scary stuff if you ask me. Things are moving faster than I realized.

Significant segments of society seem to be emotionally detaching themselves from the stock/bond/commodity market news. If you don't have a job, and you don't have any savings to invest, then hearing about new market highs is probably more annoying than reassuring.

This type of extreme negative behavior seems to violate one of the expectations from Elliot Wave analysis. Shouldn't we be reading about euphoria with the markets as high as they are? IMO, the news has developed an increasingly negative tone for the last 2 weeks at least. Even the optimists seem to be sounding a bit nervous.

Thanks for the links on EW Stoneleigh. I'll try to read more about it soon.

lord.bacon said...

recent samples of negative tone:

Robert Reich -- Labor Secretary Under Clinton (from blog post last week):
"Where is this [economy/politics] heading? No place good."


Tom Friedman, NYTimes 11-22-09 (hinting that democracy isn't working)
"A lot of the disappointment settling in among Obama voters today is prompted by their dawning realization that maybe, like Arnold [Schwarzenegger], he can’t. China’s leaders, using authoritarian means, still can.....folks, we’re in trouble. A great power that can only produce suboptimal responses to its biggest challenges will, in time, fade"


Frank Rich, NYTimes 11-22-09 (sounding like he's been reading snuffy):
"the rest of the country cannot rest easy. The rage out there is larger than Palin and defies partisan labeling.......If Obama can’t tamp down that rage across the political map, Palin will at the very least pave the way for a demagogue with less baggage to pick up her torch."

I. M. Nobody said...


Good comments about the pretenders to the throne.

I suppose symmetry must be preserved. When St Ronnie of Rockford swooped down from heaven er Hollywood standing beside a burning er babbling Bush, about all that he had to say was that he would make the sun rise again. The Moron Tab and Apple Choir burst into song and the power and the glory was his. He blessed the Mammonites and we were foreordained to end up where we are.

The next true disciple of Mammon will indeed have to promise something else to get that choir to sing again. Maybe something like it's time for the sun to set.

While I'm on the topic, I'm a little surprised that no one that I'm aware of asked the question regarding Lord Blankcheck's allusion to "doing God's work" of just which God he was talking about. If he was referring to Mammon, the statement makes perfect sense.

Ilargi said...

SNL yesterday:

Obama and Hu Jintao.



snuffy said...

This as a sideline for those of you who live here in the northwest.

As I an a very frugal type,I go to cheap Chinese import place called "Harbor freight"to get things like sandpaper,drillbits, ect at about 1/10th the price retail.The place has a lot of junk in it,but if your careful you can save a lot of money there.While there,I struck up a conversation with a stranger.As it turned out,a very very interesting conversation ensued
The guy was one of those who "clean out" foreclosed homes.As I did not instantaneously call him a despicable asshole[as was my first thought]He quite readily opened up,and told me some very interesting things about whats REALLY going on

THERE IS 2000[sometimes] empty foreclosed homes in Washington county,that He alone[with his crew of 20 mostly Hispanic "cleanup"crew] are dealing with...and he is one of several.

Washington county is UPPER end homes.Thats where all the high dollar places are.

There is times when he has the joyous task of throwing people out of there homes.The sheriff sometimes misses folks in there houses.

One of his biggest problems is getting people to work for him[wonder why?]He says jingle mail is an avalanche now,and the houses are many time completely stripped bare....with everything of value sold on craigs list.He has 25 dumpsters,and says he could use 25 more.
The "revenge"of the evicted has ranged from guns in his face,to one creative fellow put 3 hogs in the house for 2 weeks before the bank got it.[house was demoed]

He is making a fortune.Anything not tied up on a property is his...

I maintained a relatively civil manner with him,which I think was not the usual case with people who find out what he does.As the conversation ended I told him that he will be having a lot more business,but He had better find another occupation as the karma with what hes doing will catch up at some point.He laughed and said his permit to carry outweighed his Karma....

I don't think so...

Think about that,Oregon neighbors.One contractor of several has 2000 homes to clear on his desk in Washington county alone....



Mugabe said...

I was overstating to say social security and medicare might be "cancelled." (The thought of a CRE bailout can make one crazy.) Curtailed is more like it -- "entitlement reform" is the anodyne term used by elites. I was just trying to figure out how TPTB even think they can get through the current situation.

Last week, BO was talking about the urgency of controlling the federal deficit. On the surface it seems like bizarre talk from Mr. Stimulus, whose every policy tends to ramp the deficit. Maybe he was just talking to the wind, trying to get a couple of poll-moving soundbites on the evening news, reassuring the Chinese with some empty words. A man with no credibility has nothing left to lose. Or perhaps it was the first step in setting up something. Either higher taxes or reduced spending.

If Ben, Timmy and Larry have recognized that markets are spinning out of control and another big lurch is unavoidable, they won't just wait for it to happen. They will do their best to prepare, manage, and utilize the next crisis moment. If the next panic can be blamed on the federal deficit, "entitlement reform" might be rammed through quickly as a means to improve government cash flows. That seems like the only way TPTB can bluff their way through over the long term.

As for violent resistance -- everyone talks about 18% unemployment, forgetting about the 82% employment (not to mention all those still getting some size of government check). The 80%+ fear disorder and violence acutely, much more than some esoteric zero-hedge theory of deflation. If violence flares, it's easy for the government to get a mandate from the 80%+ to suppress it by whatever means necessary. Perhaps they can ride that horse all the way to martial law and postponement of elections.

Erasmus said...

Recently Denninger has become a major embarrassment. Apart from the Global Warming BS, there is also the anti-China paranoia rhetoric, the "we are concerned for the Chinese people and their environment" hypocrisy and the many hysterical calls for an imminent collapse. Karl may be good at numbers, but he is terrible at predictions. He and his pawns over at TF adhere to the priceless dollar and US superiority nonsense. The "we are screwed but they are screwed worse" mumbo jumbo. Sad to say but Denninger has jumped the shark and I have cut down my reading of his materials substantially.

Erasmus said...

By the way Denninger was down on gold since it was trading at about $700-$800. How did that trade work out for him? He was very anti-gold, though he will now deny it. As I said, major embarrassment.

Starcade, now from Siren said...

I think it's clear that there is no future. The only question, now, is what they have planned for the lessers -- and I think it has something to do with FEMA camps, etc.

Mugabe: The problem is: You cancel SS and Medicare, and it's only a matter of who shoots first -- the ones who will lose their last lifelines, or the ones who should just start shooting those of us in the first group anyway.

el gal, in response to Mugabe: The problem with that is that there are millions of people who die if the plug is pulled. Pull out SS and Medicare, and it's only a question of whether they roll over and die or try to take someone out first and get shot. Same end, and probably a very short distance to that end.

Brunswickian/Matthias Chang: Really watch the situation in California this time around -- they won't stick-save it this time.

They CAN'T stick-save it this time.

Bukko_in_Australia said...

Upon your advice, ric2, I read that Old Horseman's post-apocalyptic Fedghetto scenario. (I see it's two years old.)

The part about the .gov keeping the bulk of the population in controlled cities was interesting. I could see that working as an shortage-era economic system. But too much of it read like it was written by a bitter guy who was just itching to shoot looters from his doomstead and see uppity wimmen get what they deserve, i.e.:

"Women with feminist delusions (“a woman needs a man like a fish needs a bicycle”) will be in for a rude awakening. As will those who’ve developed the Cornucopian preference for non-threatening, perma-teen guys. The value of old-fashioned, broad-shouldered, men who can work hard and scare off thugs will become apparent."

Wonder how many times HE's been divorced, eh?

Bigelow said...

“Goldman Sachs has a political problem and the tension is rising daily as the housing market continues to swoon and unemployment grows.

Goldman’s business model is simple.

The investment bank uses taxpayer credit to engage in high risk speculation for its own account in a manner that prevents capital from circulating to the real economy.

This results in huge profits which Goldman uses to pay billions in bonuses to Goldman partners and bankers.

It also causes falling income and increased bankruptcies in small and medium size business which increases unemployment.

With unemployment over 10%, lots of educated people have the time to unpack and explain the Goldman model to everyone else. Consequently, Goldman’s business is de-mystifying daily in the blogosphere.

Throwing salt on open wounds, Goldman’s chairman recently said that they were doing “God’s work.

The response was not positive.”
Goldman, God & the Great Vampire Squid

David said...


Nov. 23 (Bloomberg) -- The most accurate dollar forecasters predict the world’s reserve currency will continue sliding even when the Federal Reserve begins to raise interest rates, which policy makers say is an “extended period” away.

Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc. say the dollar will depreciate as much as 7.1 percent versus the euro. About $12 trillion of fiscal and monetary stimulus, the world’s lowest borrowing costs and a record $4 trillion of government bond sales between 2009 and 2010 will weigh on the currency, they said. So will the nation’s 10.2 percent unemployment rate and signs that the economic recovery may falter, they said.

“History tells us the dollar shouldn’t start rising on a sustained basis until 12 months after the Fed starts to lift rates,” said Callum Henderson, the Singapore-based global head of foreign-exchange strategy for Standard Chartered.

The best forecaster of the dollar against the euro in the six quarters ended June 30 in Bloomberg’s ranking of 46 firms last month predicts the greenback will weaken 5.4 percent to $1.58 per euro in 2010, from $1.4944 today.

“It’ll take time to drain the oversupply of dollars from the market,” Henderson said. “The dollar will remain weak until the Fed’s rates rise above the competitors’.”

el gallinazo said...


These "top historical forecasters" were only rated by Bloomberg for the last six quarters. If the same had been done for equity index forecasters in 2006, how many would have gotten the 2008 crash right?

el gallinazo said...

Good WJS article on India medical tourism for heart surgery (link through Mish)

Also, that SNL skit made most of the ecoblogs this morning which I read. When Jason Sudeikis bent over, I almost blew my first cup of coffee all over my new MacBook. Close call. Jenny Slate did a fabulous job as the translator!

Stoneleigh said...

The opportunists sense, and are being told by puppeteers, that they can, if their moves are the proper ones, take that power, either within or without the Republican party.

I agree. I don't think either main political party will survive the coming upheaval, as both are far to implicated in the debacle. I can see a wide open space developing for independent extremists. Some of them seem laughable now, but I'm guessing we won't be laughing in a couple of years time.

I. M. Nobody said...

Anybody that hasn't checked Dmitry Orlov yet today should do so. He has a new post up. It's a Monster Tale.

jal said...

Seeing the markets crash was a shook.

Seeing the markets climbing is an awe inspiring moment.

It's like watching the daredevil doing his stunt ... will he succeed ... again ... or ... will this time be a crash and disaster.


bluebird said...

Reading Snuffy's discussion with the guy who cleans out foreclosed houses reminded me about a year ago watching a California news video about the same thing. It was so sad seeing children's toys, family photographs, other personal belongings, being thrown away in huge dumpsters. The question was asked why these things couldn't be donated to charitable organizations. The answer was that they couldn't find anyone to pick up the items, and they didn't have time to deliver them anywhere because there were so many foreclosed houses to clean out. Sometimes it is found that houses are vandalized, copper tubing removed, etc. Some developments are bulldozed to the ground. So very sad.

TAE Summary said...

* Top Men predicting continued dollar decline; US economy is a sinking ship run by headless chickens trying to change horses mid-stream

* Denniger understands numbers but is disappointing and embarassing; There are fewer and fewer pithy nuggets in his froth; He and Glenn Beck were twins separated at birth

* There is no future; Feminist delusions will evaporate along with masculine aspirations

* Golm-aan Shakh business plan is simple and is written in the Black Speech; Golm-aan does Gob's work; Lloyd Blankfein, Fulk Yûl

* Geithner is smarter than his critics but will still be sacrificed and his blood sprinkled on the altar; Look for a replacement who belongs to Goldman but has never worked for them

* Financial crisis could be solved by cancelling Social Security and Medicare and replacing Thanksgiving turkey with fattened infants; There is no crash; The recession is over

* Gun control can't happen; When guns are controlled only the controlled will have guns

* The three types of political elites:
- Happy - I'ts all sunshine and roses and joy and joyness
- Doubtful - But still on the payroll
- Evil - Intent on profit

* Alloyed truth is harder and stronger than pure truth and makes better ball bearings, springs and cogs

* Absolute power attracts psychopaths; Localization keeps psychopaths from too much power unless they are too powerful

* Technical market analysis: We have had the head and shoulders; Expect knees and toes next

* People are angry but polls don't show it; Ten snipers could bring the whole country down; TPTB will prepare, manage and utilize the collapse; Opportunistic vacuum fillers will harvest the anger of the masses; The employed majority will repress the unemployed minority

* A new era is being born without the benefit of an epidural; The crisis is beyond the point of no return; US Economy will spiral out of control in early 2010; Re-read the primers and get your mind right

* Stagflation might happen; Anything is possible; Gravity might reverse itself; Magic beans might save us all; No one has a crystal ball or maybe we all do

* Magic Bubble Economy will give way to Extra Jumbo Survivor Countdown to Rapture Doomagedon Gardens; I see bubbles within bubbles within bubbles

* The news has turned negative; Yes We Cant

M said...

I read the Missouri billboard link. They sound like a very outraged group and probably haven’t been so angry since 1993, when Clinton was at the helm. Yeah, I have seen this act before. But their anger was nowhere to be found in 2000-2008. Let’s just say I mistrust these types immensely. They seek to attain some type of political camaraderie among disaffected voters; but only until “ their type of guy” --see 2000-2008--is at the helm and then they become secure in the knowledge that no tax money will be available, for example, to fund health-care reform. And quiet as a mouse when billions fund a war that resulted in untold innocent civilian casualties. I know, I know, but “War is Hell,” to echo the latest lunatic sentiments of blogger megalomaniac playing the bizarre role of some Curtis Lemay incarnate.

The billboard did mention one interesting thing: voting out incumbents. IMO, the real problem--aside from inherent structural issues such as lobbyists--is not with the incumbents; it’s with the voters themselves. Too many voters, in their zest to be politically aware and active, have drawn political lines in the partisan sand and in doing so undermined the power of their voting influence. A dyed-in-the-wool partisan is counted as an in-the-bag-chump-vote at the end of the day. No need to sweat and work for that vote; they’ll vote for their party regardless.

The power of the vote, and its ability to wield real influence, resides in assuming an undefined, allusive stance. From a post-structuralism perspective, this amounts to a voter retaining “unmarked" status in the Derridean sense of the term. The “marked” political pair of Democrat and Republican, bring more information and certainty to the political table and in doing so diminish the power of their influence. The unmarked voter, in slipping past delineated status into the position of greater generality, assumes a station of implicit power due to the very uncertainty of a political leaning, one way or another.

That’s where, IMO, the partisans have missed the real mark--they chase after politicians. They are the berserk dogs barking from the ground at the cat languidly walking the top plank.

And I don’t mean to suggest that allusive political status should conceal real political belief and concern. Rather, it suggests that those very political beliefs and policy concerns should mold and form the platform of the politicians who choose to represent them.

But back to the Missouri boys. In their zest to communicate their consternation, they have framed their dissent for all to see without reference to specific political, economic or social policy. Which allows them to tap into a general sense of dissatisfaction devoid of a specific political direction. Revealing their real political and policy sentiments, might deem their generalized dissent as immediately irrelevant.

To frame the frame, and mark what seeks to be purposefully generalized and undefined, is to ask the Missouri boys to ‘Show Me’ the real agenda.

Greenpa said...

Summery- "* Alloyed truth is harder and stronger than pure truth and makes better ball bearings, springs and cogs"

:-) Very nice, and very funny.

aargh! said...


What is awe inspiring is the opportunity lost by so many here. Oh well lets catch the next wave, there are more where this one came from, eh?

jal said...

The gov. put out a safety net for timmy.

The bloggers are inspecting the safety net.

We see 20% of the safety net has holes in it.

We see that 80% of the net is laying on the ground.

Timmy is concentrating on his daredevil act.
Timmy does not dare to look at the condition of his safety net.
Timmy cannot loose his confidence and fail/fall.

We watch in awe!

Ilargi said...

They feel there's no time left to lose. It'll be funny to watch. Until the words get more desperate and violent. I keep on thinking about "goose-stepping tea-baggers".

Lou Dobbs is considering running for president in 2012.


Ahimsa said...

Good reminder from Michael Ruppert:

"Remember This"

"One of the best things I ever did at FTW was to bring up good writers and thinkers. FTW was the first to publish Dmitry Orlov who has done so much to prepare us. He desribes what we can expect.

The Five Stages of Collapse

1. Stage one: Financial Collapse
2. Commercial Collapse
3. Political Collapse
4. Social Collapse
5. Cultural Collapse

I think everybody needs to break out their Dmitry Orlove reader right about now. We are just entering the second stage. We can expect to be able to function as something resembling normal until the end of Stage Three. That means there will be warning signs and time to prepare. We will not get caught flat-footed. How could we? We're the ones who made the map. Trust this. As to how long each stage lasts... that's anybody's guess right now.

Another rule of thumb is that with each new stage, things get less and less predictable/reliable.

What a horse race this is to get our message out as quickly as possible. The winds are now behind us."

ric2 said...

In a life imitates art sort of way, Dobbs reminds me of John Hurtʻs character High Chancellor Sutler in V for Vendetta.

Coy Ote said...

Lou Dobbs!? Lou Dobbs!? Mr. Obnoxious opportunist himself.

I recall his bizarre sense of timing on jobs. It was 20 years AFTER every midwestern town and city had already lost nearly all of their manufacturing (as it moved to new locations overseas) Lou Dobbs started his silly nightly ranting about NAFTA and job losses.

He is a bandwagon heister--waiting until an issue has a crest of popularity and belated relevance and then, after the fact, trying to take the reins as if he was the master antagonist all along. A complete phony and opportunist. IMO

TAE summary ;-) Thanks

Coy Ote said...

Just read Orlov's "Monster tale." His experience (as in ex. is the best teacher) with collapse makes his perspective quite valuable given we may be well on a similar path.

Ahimsa - From his view of 5 stages I agree it looks like we are about in the second stage. Of course as in all systems of "stages" there is some overlap.

I sometimes feel like I am in the twilight zone. Behind me on TV I see the Dow up, NAS, S&P up, etc. On my screen I see this (with graph) from Zerohedge...

Currency in Circulation), and the Fed's holdings of MBS and Agency paper (worthless GSE/FHA garbage). In summary: Currency in Circulation: $920 billion;
MBS/Agency Holdings: $997 billion. The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidized housing.

jal said...

There is a great smoke and mirror discussion going on concerning the war in Afghanistan.

The USA is already bankrupt.

Therefore, the war will have to be paid for by higher taxes on the rich and the middle class or by borrowing.

Obama will not be able to get a tax increase.

Therefore, why should China act as the banker to fund this war?

Thinking like a capitalist ...

1. Destroying your competitors’ financial position so that you get a monopoly sounds good.

2. A few more billions from China might be the cheapest way to achieve a monopoly.

3. China would be using the USA as a proxy to do the dirty work.

4. Obama is facing the choice of heads the USA lose, and tails China wins.

David said...

@ El G

These "top historical forecasters" were only rated by Bloomberg for the last six quarters. If the same had been done for equity index forecasters in 2006, how many would have gotten the 2008 crash right?

Well, these are forex guys, and they may be different in forecasting than the equity people. Don't know about the long-term track record there.

I posted this because, similar to the Great Inflation/Deflation debate, there is also the tug-of-war going on between the group that sees USD steadily tanking downward until rates start jumping, and the group that sees USD popping up because of deleveraging and flight-to-safety when the markets crash.

My take is that in the next equities blow-off, you will again see major liquidations, from several sectors, towards a move to lower-risk harbors. However, my caveat is that this time the deleveraging sweep will be less universal and more fragmented than what happened last year. There's been a lot more water under the bridge since then.

First of all, I think the jump into the US Treasuries pool will be less reflexive and more moderated. The USD has lost a lot of credibility in the last 9 months, as international nervousness over Fed printing is growing daily. As a result, I'm thinking that the liquidation and resultant flight-to-safety will be much more diverse, since "safety" has become more relative, and more in the eyes of the beholder.

What is deemed "safe" is evolving as we speak.

For example, a significant beneficiary in the next blow-out will be gold. IMHO, any price weakness due to hedgies flushing their portfolios will be very temporary (days? hours?), as major sectors (Asian Central Banks, Asian populations, large individual investors) are all waiting for a price pullback. Their is a major component now whose concept of a flight-to-safety is not UST but bullion.

Secondly, I'm thinking that this time around the Euro may surprise us as stealing thunder from the USD. Trichet has been making a lot of noise lately regarding turning off the stimulus faucet and jacking up rates. The possibility of the Euro being looked at as a flight-to-safety repository may not be far-fetched.

Thirdly, there's the very real possibility that the commodities will play a real wild-card scenario. Some entities may look upon any surge in Treasuries as an opportunity to cash-out portions of USD reserves and buy-in to hard assets. These chosen assets will be highly variable depending on the worldview of the individual players. Some assets will indeed suffer, while others may hold their own, and yet others may soar. The ones that look to have the highest possibility of benefiting would have to do with food, and industrial metals.

To repeat, my take is that the coming deleveraging is not going to be a clone of the last deleveraging, but a different animal altogether.


el gallinazo said...

aargh! said...

"What is awe inspiring is the opportunity lost by so many here."

What opportunities are you referring to? You can count the equity speculators on this site on one hand, so you couldn't be referring to them ( I guess us, since I am one of this "select" minority). Most of the people here are into serious preparations as best they can.

Gravity said...

Flash cash durbatulûk, stash trash prakhatul, ash crash tarbaam goldman smash thrakatulûk, agh burz stimulum-ishi krimpatul.

Shakatrog-gâdhûmûrz trov-ob bagûrzaz bukra ulkûrz fûr-dushatâr Summers, âshûrzaz dûmp-bugh-ob.

The desolation in the territory of the most poisonous clan Summers, evil and lying magician, greatest and chiefest of calamities.

mikel paul said...

"Everybody would like to beat up on the Fed and make them the bad guy," said Rep. Melvin Watt (D., N.C.), who opposed Mr. Paul's measure. He said audits would "substantially castrate the Fed so it cannot do what it was set up to do."

Sounds good to me.


Coy Ote said...

MikelPaul - I don't know much about Rep. Watt, but I suspect he knows not whereof he speaks in this case.
As for Rep. Paul, I like most of what he espouses, although I have a sense that we are past the point where they would be effective at this rather late date.

I like to hear French, and Spanish spoken, but I wish I could speak Gravity!

ric2 said...

Question for Ilargi/Stoneleigh or knowledgable board participants:

In Stoneleighʻs interview with Euan Mearns she made this statement:

"The scale of the problem has been temporarily concealed by a market rally and the shovelling of tens of trillions of dollars of taxpayer’s money into a giant black hole of credit destruction. This has done nothing to reignite lending, but the temporary (and entirely irrational) resurgence of confidence has restored a measure of liquidity."

My question is in regards to the snippet, "This has done nothing to reignite lending."

To which sort of "lending" was Stoneleigh referring?

How does one reconcile this statement with stories like this from Bloomberg, US Corporate Bond Sales Climb to Yearly Record. Someone is buying lots of corporate debt, which seems to indicate that there is lots of lending going on.

I am in the midst of heated arguments with family and one of them may mention this in an attempt to discredit the Stoneleighʻs entire interview with Euan.


el gallinazo said...

mikel paul said...
"Everybody would like to beat up on the Fed and make them the bad guy," said Rep. Melvin Watt (D., N.C.), who opposed Mr. Paul's measure. He said audits would "substantially castrate the Fed so it cannot do what it was set up to do."

If it ever were to happen, regarding castrating the Fed, I would suggest a North American prairie oyster barbecue for the TAE gang on the next fourth of July. We could have some asinine physical contest, and the winner could have Ben's oysters in tartar sauce.

Ilargi said...


The topic is consumer and small business lending, not corporate and sovereign.

Stoneleigh said...


In a life imitates art sort of way, Dobbs reminds me of John Hurtʻs character High Chancellor Sutler in V for Vendetta.

I agree. If anyone hasn't seen that film yet, I suggest you do. It's one of my favourites - very powerful piece of cinema.

ric2 said...

Roger that, Ilargi. Thanks for the quick reply.

Stoneleigh said...


My question is in regards to the snippet, "This has done nothing to reignite lending."

To which sort of "lending" was Stoneleigh referring?

Bank lending - the making of loans.

People are less risk averse now, thanks to the rally, so they are prepared to invest in corporate bonds.

I am still firmly of the opinion that the rally is topping and a trend reversal is coming. Watch this space.

Stoneleigh said...


Secondly, I'm thinking that this time around the Euro may surprise us as stealing thunder from the USD. Trichet has been making a lot of noise lately regarding turning off the stimulus faucet and jacking up rates. The possibility of the Euro being looked at as a flight-to-safety repository may not be far-fetched.

IMO the euro is topping and the dollar is poised to rally. Watch this space.

lord.bacon said...

Give up ric2. These arguments with the family/friends are worthless until: (A) somebody loses a job or (B) the stock market crashes.

Hell, even I need a heavy dose of re-education every time the market spikes to the heavens.

Morning ritual: Check markets. If I see green across the board except for the lowly red dollar, then inject a syringe full of Denninger, snort a few lines of Ilargi, and pop a handful of Stoneleigh. Rinse it all down with a glass of Bonner and I'm on my way.

DIYer said...

Just ran across this article on Boingboing. ... Understanding the psychology of authoritarianism by Bob Altmeyer at the U of Manitoba.

I haven't read it yet but it might be an interesting analyis of the motivations of our Wall St. Overlords. :-)

el gallinazo said...

More on the tungsten bubble:

Glad to see that my suggestions of micro core sampling of gold plated tungsten bars and use of mass spectroscopy are being widely used to assay the quality of these high grade rectangular prism tungsten ore deposits, Will there be CDS issued on the quality of the tungsten deposits at Fort Knox? Will they be bought up by the investment bankers who "swapped" our gold for tungsten? If they are, will the Vampire Squid then support Ron Paul, so Fort Knox could be audited and then they could collect on the CDS's on the people's gold they stole. Stay tuned for the next exciting episode of As The World Implodes. But, what me worry? Tungsten can actually be used to spread light around the world. And tungsten is as tough as an army of one. And tungsten is forever, Gold is just a one night stand.

David said...

@ Stoneleigh

IMO the euro is topping and the dollar is poised to rally. Watch this space.

My Dear StoneLady,

Print that. Print it large.

We will be watching this space very closely.

The Dollar will have a sustained rally when, and only when, the Demon Bernanke choses it to.

Not one second before.

Not one second after.

Not when you believe it will happen.

Not when Ilargi believes it will happen.

When, and only when, the Ben believes it must happen.

Read it and weep.


ogardener said...

Repost of Dmitry Orlov's THE 5 STAGES OF COLLAPSE with a forward by Mike Ruppert.

I found it more relevant after I read it a second time. There is lots of usable info in there to consider as we move toward unprecedented political, economical and societal transition.

David said...

@ El G

Gold is just a one night stand.

Yeah, and Silver is just a passing kiss my ass.

To each his own. SAEs feel just as nice in-hand as GAEs. Weight and heft is a prize in itself.

BTW, I do agree with you about ZH.

Not so much for the Cut and Paste. But much, much more for the Commentariat.

Lot's of clever, very clever observations, snide, cutting, pithy, and on target.

The kind of stuff that we used to get from KD and Mish. Who are now passe.

Funny how things evolve and devolve.

You are one of the TAE commentariat worth coming back for. You and Snuffy, and VK, and Coy Ote, and GreenPa, and many others too numerous to mention.

So be it. Have a fulfilling evening and night.


JR said...

Just to add a little drop to the ocean of mortgage messes...

Consider the millions of reverse mortgages given to seniors during the height of the bubble. They cashed out big. Some took lump sums, others took monthly payments or a line of credit. Living in their homes til they pass away or move.

There are many, many more homes out there that the banks lost big on, but can't even foreclose upon.

getyourselfconnected said...

Instead of a race to the bottom, when will some country (or the EU) raise rates big time, igniting a carry trade for their own currency?

Besides the bubble in "gold is a bubble" stories, second place goes to "the dollar rallies big time" tales.

Ed_Gorey said...

Read the Irish Times.

The Emerald Isle offers a preview of things to come.


Union chiefs expect up to 250,000 workers to strike today (note that's 5.5% of Ireland's total population).

Poor Ireland, it gave all its money to the banks and now it can't borrow any more.

"The nationwide strike in protest at Government plans to cut pay will result in the closure of all public offices and schools. Telephone services operated by Government departments, the Revenue Commissioners and the Passport Office will also be hit."

Where should the poor people direct their anger?


Poll shows hardening of attitude towards immigrants

"THE VAST majority (72 per cent) of people want to see a reduction in the number of non-Irish immigrants living here, according to an Irish Times /Behaviour Attitudes opinion poll."

How much longer before we see a return of the Irish Punt?

aargh! said...

El G,

You can count the equity speculators on this site on one hand, so you couldn't be referring to them...

At the risk of you considering me a smart-ass, and as I know nothing about 'speculating' within a 401-K, do you mean that there are only a handful here who own such an item?

While I think I&S are right in advising to beware of the market, I think that as long as one does not get too greedy, and keeps a sharp eye on the parking meter, a bit can be added to ones oak chest for that coming dark and stormy night.

Persephone said...

Greetings Ilargi, Stoneleigh, and All -

Just came across this tidbit
Falling Chicago Fed index bodes ill for U.S. recovery

and WTH is up with Dimon being proposed as a replacement for Geithner? Out of the frying pan into the fire.

PS- love the pics El G

Ilargi said...


You're getting ahead of yourself. Tone it down.

Ilargi said...

New post up.

Ilargi said...


your last comment seems to have disappeared entirely. it may have a connection with the fact that comments are being published in non-chronological order, i.e. server trouble

Ilargi said...

And, see 10:57 PM:

New post up.

snuffy said...

i have noticed a real intense attempt to blow M.Ruppert the hell out of the water...This heavy of attack is most likely based on the not-negligible impact his film is likely to have with joe & mama sixpack.I have not seen it yet,but if it goes viral,and people start to tie their current troubles to the repercussions of peak oil...

That film could do a whole lot of damage to the plans of TPTB.If preping for collapse becomes a trend,like the y2k non-event...

My,My My....wouldn't that make the plans of some a bit more difficult.

So they need to show him as a complete loony-toon...and try to discredit his books on 911 too...

Which may have some effect...or have the complete reverse...make him a hero to some... get his books more attention...looks like he has succeeded in being a pain in the ass once again to tptb..[wonder if it will cost him his life this time?].

Dmitry has written another incredible,thought provoking essay.This guy has the ability to see things in America we don't want to see,and present it in such a manner as to amuse,and provoke one to greater understanding of "reality"It might be time to re-read his book.[I have to see if I have any left.I bought 5,and passed them out to friends&family]

I think we will have a trigger type event at some point that will show everyone "We are not in Kansas any more Toto"I haven't a clue what it might be...but a bank holiday,or suchlike would be the kind of trigger that would set off the kind of fireworks tptb are so desperate to avoid.It will most likly be a "Dammed if you do,Damned if you don't"sort of no-win that will drop this administration.

I have to go track down a article by Paul Krugman that my brother told me just smokes o-man for losing the trust of the American young and progressives.If he spells it out and talks slowly maybe some one in this administration is bright enough to figure out he is 1/2" from being a 1 term wonder.

And god knows what kind of nutcake we get next time.The dems blew it,lost the young voters by lies and blowing off the antiwar folks.Nobody will trust the republicans for having anything to do with the teabaggers...

Christ,what a political mess.

sleep...and no dreams please.