Chicago & North Western railroad locomotive shops at Chicago
Ilargi: Let's try a history of the world for simpletons. That should make everyone feel smarter.
Not too long after Colonel Drake struck black gold in 1859, oil started to be pumped up out of the earth at an energy ratio of 1 barrel worth of work for 100 barrels of product. It took a while to figure out what to do with the stuff, but 50 years of inventions and innovation later it all fell into place. Oil’s qualities like cost, abundance, transportability and energy density made it a far more interesting source of power than anything that had ever existed beforehand.
One could, for instance, with a few gallons of it, run an engine no bigger than a large suitcase, which provided power equal to 100 horses, to transport oneself over a hundred miles. Therein of course also lies the shadow side of this engine in a suitcase, built into what we came to label the automobile. 1 horsepower equals 8 "manpowers". It therefore takes 800 men to allow 1 man to move over a distance he could also have walked, just a little faster. No, efficiency would be the last thing that comes to mind when one wishes to describe the automobile.
Now, Britain in the preceding century had developed quite a leg up on all other nations through the large-scale and concentrated -industrial- use of coal and the steam engine. That, combined with its warships and the treasury trove it had acquired by plundering far-away nations, made Albion the number one force in the world. Important in all this was the fact that the Brits found massive amounts of coal beneath their own feet, instead of having to import the stuff.
Still, the Brits all through their ascent, carried one fatal flaw on their shoulders, and they never even noticed until it was too late. Britain was a society of classes, in their case an upper class and a very low lower lowest class. Their former colony, the United States of America, was more or less specifically founded on the idea that such a class system was evil. Today, of course, the US has al but forgotten that notion, but back in the day it was all the rage.
It was thus more or less inevitable that an American -of Irish descent, no less, lovely detail-, by the name of Henry Ford, who was an industrialist as well as a prolific inventor, came up with idea to not only streamline the way his products were made -the assembly line-, but also to find a whole new target-group of buyers, namely his own workers. Whereas in Britain workers were considered inherently filthy, dumb, barely better than animals -though way above negroes- and fit to live and die only in the worst squalor that could be provided for them, Ford's new ideas about who his customers were seemed tailor-made for America.
America, by the way, had the advantage in oil that Britain had in coal (though it had that too): huge domestic finds of the preferred energy source, in this case oil. America didn’t just have to not import oil, in also didn't need to export its products. At least not in the early stages. The enormous advantage of having a large domestic client base in the earlier days of its build-up lifted the US above all other -European and formerly feudal- important nations. And it never looked back.
It did get into trouble, but that was of its own making. When people get free gifts, they always screw them up, after all. Remember the 800 men needed to transport the 1 man. In the case of the US, problems started in the 1960’s. Domestic oil was reaching its limits, and imports started; domestic production peaked around 1970. In finance, the dollar got a divorce from gold. Building empires has always been a risky business.
These days, one barrel of oil no longer produces 100 barrels, but maybe 10 or 5 or even just 2. Still, automobiles use the stuff just about as inefficiently as they always have. And there are many more of them. Bad idea. Which has been combined with another bad idea, and possibly even worse, namely that if you CAN transport a man 100 miles a day from home to work using the energy of 100 men, you apparently MUST do so. Super bad idea. But what a fantastical screw-up, when you get to think about it. Brilliant.
And also, wouldn't you know it, America has become the class society it once shed oceans of blood not to be, with upper echelons and filthy poor, and with ever more money and energy devoted towards maintaining the empire that in reality has long since been lost. Empires all travel the same road.
I wanted to do this little history overview in order to look at the future. There are many voices out there who claim that China will be the next world power, as a kind of natural successor to America. I think not.
China has no domestic energy sources it can readily and swiftly put to use. It has to import all of its energy except for coal and a small amount of uranium. That's not a recipe for developing an empire. China has no domestic customer base. Its annual per capita nominal GDP is $3,300 vs $47,000 for the US. Its per capita consumption is $1,150 vs $32,900 for the US. Even if it would try, it would take decades to develop a viable domestic customer base.
Meanwhile, its foreign customer base is rapidly shrinking. China has risen over the past decades to where it is today because it could export its industrial output to relatively affluent societies in Europe and North America. These export targets are now dwindling and may well soon practically disappear altogether. The human talent to screw up fantastically in the face of free gifts has led them to implode simply and only due to the fact that not even the power of 800 men is forever satisfactory for one man, we always want more, and it was too tempting to borrow from the future. That's our present credit crisis in a nutshell. And China will dwindle right along with them, left with a hundred thousand factories designed to produce articles its own citizens don't want or need or can't afford.
China's recent rise has been that of a parasite, fully dependent on its hosts for survival while achieving its present state. There are no other hosts in sight, which means its people will be lucky if it would just retreat into hibernation. Alternatively, it may try to expand in the face of a world in general contraction, in which the last remaining weapons of mayhem, provided by a century of super-abundant cheap energy and dreams of a never ending growth of empire and domination, augment the overall chaos and deterioration. 1.3 billion pieces of cannon fodder may well seem too formidable an opportunity to not at least try for dominance. But a force the scale of the 20th century US it will never be, or at least not for a very long time, measured in centuries or even milleniums.
Ilargi: The Automatic Earth Christmas Fund, top of the left hand column. Need we say more?
40 Million Americans Live Below Poverty Line
Worrisome trends of bank closings in America
Yesterday’s bank closings (three total) evidence a continuation of the worrisome trends we have been seeing over the past several months. These are:
- It is costing the FDIC a great deal more than it has historically to protect depositors in the failed banks.
- In other words, these banks are in much worse shape financially than they have been historically by the time the FDIC gets around to closing them.
- The fair market value of the assets held by these banks is turning out to be dramatically lower than the value at which they are being carried on the banks’ balance sheets. This most likely reflects unrealistic valuations assigned by bank management in the wake of the Financial Accounting Standards Board ("FASB") having suspended fair value accounting rules this year.
- The acquiring banks have so little confidence in the value of the assets they are purchasing that they are requiring the FDIC to enter into loss sharing agreements with respect to the vast majority of these assets. Another explanation for this may be that the FDIC prefers to share downside risk rather than accept the amounts the acquiring banks are willing to pay for these assets absent the loss sharing.
The largest of the banks closed this week, Solutions Bank of Overland Park, Kansas, is another example of a bank that on paper appeared to be very well capitalized. It claimed to have assets of $511.1 million against deposits of $421.3 million. Yet the FDIC’s estimate of the cost to close it is $122.1 million, about 29% of deposits. This implies the FDIC and the acquiring bank concluded the fair market value of Solution Bank’s assets was about $299.2 million, only 58.5% of the value claimed.
The acquiring bank purchased essentially all of the assets of Solutions Bank, but the FDIC had to enter into a loss sharing agreement with respect to $411.3 million of these assets. This implies the acquiring bank was only confident in the value of about $99.8 million – approximately 19.5%.
An emerging concern is that the magnitude of the loss sharing agreements the FDIC is entering into is substantially increasing the risk that its cost of closing these banks will be far more than originally projected. For example, there was an article posted on JSMineset yesterday reporting that the closing of Colonial Bankgroup, Inc., was likely going to cost the FDIC $5.8 billion – more than twice its original estimate of $2.8 billion. The FDIC is not specifying the precise terms of the loss sharing agreements it is entering into with acquiring banks. Depending on the terms, the FDIC’s downside risk may be significantly more than 50%.
The second largest of the banks closed this week, Republic Federal Bank of Miami, Florida, on paper had assets of $433 million against deposits of $352.7 million. Yet the estimated cost to the FDIC in this case is $122.6 million – about 34.8% of deposits. Percentage-wise, this is one of the costliest closings so far.
This implies that the FDIC and the acquiring bank valued Republic Federal’s assets at about $230.1 million – only about 53% of the value claimed. In this case the acquiring bank was only willing to purchase $267.1 million of Republic Federal’s claimed assets of $433 million, and it required that the FDIC enter into a loss-sharing agreement with respect to $210.4 million. This indicates the acquiring bank had confidence in the value of only $56.7 million of Republic Federal’s purported assets – about 13.1%.
The third bank, Valley Capital Bank, N.A. of Mesa, Arizona, was relatively small, and its closing illustrates a phenomenon seen several times recently. It is the only one of the three that appeared insolvent on paper. It had stated assets of $40.3 million against deposits of $41.3 million. Yet the FDIC’s estimated cost of closing it was only $7.4 million – about 17.9% of deposits. This is the least costly percentage-wise of the three.
This provides additional evidence that banks that appear on paper to be the healthiest may in fact be in far worse shape than banks that appear weaker. Once again, the problem appears to stem from the FASB’s suspension of fair value accounting requirements this year with respect to banks’ least liquid assets. This gives bank management far too much leeway to value assets at levels far beyond what they could fetch in the open market, resulting in banks’ balance sheets becoming increasingly less reliable indicators of their true financial health.
Biggest expansion of Bank of England's balance sheet in two centuries
There are some interesting stories that have come this morning from the Bank of England’s Quarterly Bulletin. Among them: the fact that households have seen their incomes safeguarded by the cuts in interest rates over the past year (but implying they will face a shock when rates start to rise); the point that markets are getting very jittery about the prospect of inflation in the UK, amid those worries about the UK’s credit rating; also, something investigating why the trade deficit hasn’t diminished despite the 20pc devaluation of the pound. All interesting stuff, but one bit I find particularly fascinating is this chart from the section on markets and operations.
It is, as far as I know, the first time the Bank has investigated just how its £200bn programme of quantitative easing compares with previous episodes of central bank balance sheet expansions in the past. What it shows is that, as the Bank puts it: These unconventional policy measures — alongside those to provide liquidity insurance — have led to a significant increase in the size of the Bank’s balance sheet over the past year. Chart 2 puts that expansion in a historical context: relative to annual GDP, the Bank’s balance sheet has become about as large as at any point in the past two centuries.
What I admit I hadn’t realised, however, was the extent to which the Bank’s balance sheet expanded in the wake of the Second World War. It’s an interesting comparison: back then, too, the Government was facing a deficit of mammoth proportions in the wake of the war (actually higher than today’s, at debt of well over 200pc of GDP, compared with the likely 100pc net debt could reach in the next decade or so). This wasn’t quantitative easing in the sense that we have today, but in many senses the balance sheet expansion has a similar effect. It is interesting that today’s episode of money pumping isn’t quite as unprecedented as most of us assumed.
Cleaners 'worth more to society' than bankers
Hospital cleaners are worth more to society than bankers, a study suggests. The research, carried out by think tank the New Economics Foundation, says hospital cleaners create £10 of value for every £1 they are paid. It claims bankers are a drain on the country because of the damage they caused to the global economy. Bankers reportedly destroy £7 of value for every £1 they earn.
Meanwhile, senior advertising executives are said to "create stress". The study says they are responsible for campaigns which create dissatisfaction and misery, and encourage over-consumption. And tax accountants damage the country by devising schemes to cut the amount of money available to the government, the research suggests. By contrast, child minders and waste recyclers are also doing jobs that create net wealth to the country. The Foundation has used a new form of job evaluation to calculate the total contribution various jobs make to society, including for the first time the impact on communities and environment.
Eilis Lawlor, spokeswoman for the New Economics Foundation, said: "Pay levels often don't reflect the true value that is being created. As a society, we need a pay structure which rewards those jobs that create most societal benefit rather than those that generate profits at the expense of society and the environment". She said the aim of the research was not to target individuals in highly paid jobs, or suggest people in low paid jobs should earn more. "The point we are making is more fundamental - that there should be a relationship between what we are paid and the value our work generates for society. We've found a way to calculate that," she said.
A total of six different jobs were analysed to assess their overall value. These are the study's main findings:
- The elite banker
"Rather than being wealth creators bankers are being handsomely rewarded for bringing the global financial system to the brink of collapse
Paid between £500,000 and £80m a year, leading bankers destroy £7 of value for every pound they generate".
- Childcare workers
"Both for families and society as a whole, looking after children could not be more important. As well as providing a valuable service for families, they release earnings potential by allowing parents to continue working. For every pound they are paid they generate up to £9.50 worth of benefits to society."
- Hospital cleaners
"Play a vital role in the workings of healthcare facilities. They not only clean hospitals and maintain hygiene standards but also contribute to wider health outcomes. For every pound paid, over £10 in social value is created."
- Advertising executives
The industry "encourages high spending and indebtedness. It can create insatiable aspirations, fuelling feelings of dissatisfaction, inadequacy and stress. For a salary of between £50,000 and £12m top advertising executives destroy £11 of value for every pound in value they generate".
- Tax accountants
"Every pound that a tax accountant saves a client is a pound which otherwise would have gone to HM Revenue. For a salary of between £75,000 and £200,000, tax accountants destroy £47 in value, for every pound they generate."
- Waste recycling workers
"Do a range of different jobs that relate to processing and preventing waste and promoting recycling. Carbon emissions are significantly reduced. There is also a value in reusing goods. For every pound of value spent on wages, £12 of value is generated for society."
The research also makes a variety of policy recommendations to align pay more closely with the value of work. These include establishing a high pay commission, building social and environmental value into prices, and introducing more progressive taxation.
Americans Owe Less. That’s Not All Good.
American consumers owe less now than they did a year ago. Before the current financial crisis, that would have been unthinkable. Figures released this week by the Federal Reserve showed that Americans owed $10.8 trillion on home mortgages at the end of the third quarter, down 2.2 percent from a year earlier and the lowest level since mid-2007. Similarly, the Fed said that outstanding credit card bills in October totaled $888 billion, down 8.5 percent from a year earlier. That number was the lowest since March 2007.
Those trends do not, however, necessarily indicate that Americans have paid down their debts and are starting to lead the more frugal lives that some financial planners have been recommending for years. There has undoubtedly been some of that, but the declines also indicate that banks have been forced to write off a lot of bad debts and have grown more stingy in granting credit.
As can be seen from the accompanying charts, banks’ credit card write-offs have soared, to an annual rate of 10.2 percent in the third quarter of this year. And the Mortgage Bankers Association reported that at the end of the third quarter, 4.5 percent of all mortgages were in foreclosure — one in 22 mortgages. It said another 6.1 percent — one in 16 — were at least two months overdue. Those figures are for all mortgages, not just subprime ones.
The extent to which Americans are really cutting back may become clearer this holiday shopping season, when they decide how much money to spend. If what they tell pollsters can be trusted, they are going to cut back. A poll of 7,500 Americans in November, conducted for Alix Partners, a business consulting firm, found that people expected to save 15 percent of their income when the recession ended. That is about three times the current savings rate, as reflected in government figures. Asked what their largest personal financial concern was, 18 percent cited lowering their debt, more than any other choice.
Spending for some people will be down simply because they now have less credit available. As a group, Americans still have access to trillions of dollars, but the numbers have declined as banks have reduced or eliminated credit lines to many customers. Banks, as a group, reported $3.4 trillion in unused credit card lines at the end of September, according to a compilation by Foresight Analytics of bank reports to the Federal Deposit Insurance Corporation. That was down 28 percent from the peak of $4.7 billion reached in mid-2008.
The banks reported that outstanding home equity loans were down only 1 percent from the peak, to $667 billion. But unused home equity lines of credit came to $539 billion, the lowest since 2005 and down 25 percent from the peak reached at the end of 2007.
Support Grows for Fannie-Freddie Plan
A consensus appears to be growing among academics, investors and housing experts that the federal government should retain a role in the U.S. mortgage market over the long term and that the public-private partnership that has defined Fannie Mae and Freddie Mac should continue in some form.
Policy makers are still unsure how to transform or replace Fannie and Freddie, the two main providers of funding for home mortgages, which were taken over by the government last year amid huge losses on defaults. Still, there is broad support from a range of groups for the idea that private companies should succeed or replace Fannie and Freddie, but with enough government involvement to ensure that 30-year fixed mortgages remain available to most Americans. The idea isn't without opposition, though. Longtime critics of Fannie and Freddie, including some Republicans, argue that the government's ties to the companies or any successors should be cut and their federal subsidies ended.
Although the Obama administration isn't due to release its proposals for reshaping the mortgage market until February, several influential groups have outlined proposals. The latest, to be released at a private meeting on Monday, is from a group assembled by the Center for American Progress, a think tank with close ties to the administration. It calls for explicit federal guarantees on certain mortgage-backed securities and robust federal regulation to ensure that mortgages offered to the public are safe. The group also wants to make sure that mortgages are available to low-income borrowers and others who may be spurned by private-sector lenders.
While the draft report didn't involve the participation of any administration officials, the liberal think tank has played key roles in shaping some of the administration's personnel and policy decisions. Its recommendations promise to be closely studied by Democratic policy makers. A Treasury Department spokeswoman said the administration wouldn't comment on specific options until it puts forward its own recommendations. Most proposals avoid the extremes of turning Fannie and Freddie into national agencies or leaving the market to the private sector, opting instead for a middle ground. While such an approach is easiest to achieve politically, it means the new structure would retain at least some of the public-private conflicts that bedeviled the old, such as tension between shareholders' desire for dividends and political pressure on the companies to support the housing market.
Restarting the government-run finance companies exactly "in their old forms would do nothing but ask for a repeat of recent history," Federal Reserve Governor Elizabeth Duke said in a speech last week, even as she said that recent history suggested that "some form of government backstop may be necessary" to ensure liquidity for home loans. The authors of the latest proposal want to move away from the current situation in which 90% of home mortgages are backed by government-related entities, including Fannie, Freddie and the Federal Housing Administration. They address the potential public-private conflicts by calling for much tougher regulation of the entire mortgage market.
"Federal support is not simply about providing liquidity" but should be also designed to ensure that credit flows to "underserved areas," such as inner cities, said Sarah Rosen Wartell, one of the report's authors and an executive vice president at the Center for American Progress. Like other recent proposals, including one from the Mortgage Bankers Association and another by Credit Suisse analysts, the CAP proposal envisions the government providing an explicit guarantee on securities backed by certain types of mortgages. Without such a guarantee, the costs of a prepayable, 30-year fixed-rate mortgage might become too expensive for many homeowners.
To protect taxpayers, a fee paid on each issue of mortgage-backed securities would fund an insurance pool, and the government would step in to pay bondholders only if the companies and the insurance fund couldn't cover losses. A regulator would determine which mortgage products would be eligible for government backing and how large those mortgages could be. That would replace the current system in which investors have long assumed that the government would stand behind Fannie and Freddie. While the U.S. government has propped up the companies, some foreign investors lost confidence in that implied guarantee and have reduced their holdings of the companies' debt.
But there are sharp differences among experts over how far the government should go in ensuring that mortgages are available to those who may not have access to purely private lenders. The CAP paper says that, in exchange for the government backstop, the companies' profits would have to be regulated, akin to a public utility. The companies would also be required to lend during periods of financial shock and to support affordable housing, including multifamily rental housing.
While the new companies shouldn't be allowed to hold large investment portfolios of mortgages, the report says, they should maintain smaller, heavily regulated ones to support their public purposes. The debt issued to fund those portfolios wouldn't carry any government backing. Under their current structure, Fannie and Freddie are directed to target a big portion of their investment activities toward low- and moderate-income borrowers and communities. Republicans and other critics have argued that these mandates helped encourage Fannie and Freddie to loosen their standards, leading to massive taxpayer losses.
But the CAP paper places much of the blame for the current wave of mortgage defaults on the lending practices of Wall Street firms that during the housing boom sold mortgage securities not backed by any government-related entity. Irrational pricing in that market led Fannie and Freddie to make bad decisions as they lowered their standards in an effort to compete with Wall Street, the paper says. To keep that from happening again, the white paper calls for heavy regulation not only of the new government-backed entities, but also of all private issuers of mortgage-backed securities.
That proposal isn't likely to sit well with industry groups, which say that that more regulation will only raise costs for borrowers. The industry has opposed efforts, including one in the financial regulatory overhaul bill that passed the House Friday, to require financial firms to retain a portion of the loans that they bundle and sell off as securities.
"In retrospect, some very sophisticated investors made poor investment decisions, but the government can't legislate or mandate investment decisions," said Tom Deutsch, deputy executive director of the American Securitization Forum. The U.S. government took control of Fannie and its rival Freddie in September 2008 through a legal process known as conservatorship. To keep the companies afloat, the Treasury has agreed to purchase up to $200 billion of preferred stock in each company. By year's end, the companies will have taken a combined $112 billion in taxpayer money.
Try, Try Again
Proposals from the Center for American Progress for replacing Fannie Mae and Freddie Mac with new entities.
- Government-chartered firms, known as Chartered MBS Issuers, or CMIs, would finance home loans by selling securities explicitly guaranteed by the government, as opposed to Fannie and Freddie's implied guarantees.
- CMIs would be privately owned, but regulators would limit their profitability. Fannie and Freddie had no explicit caps on profits.
- Fees on mortgage securities would pay for insurance against defaults to lessen risks to the government. Fannie and Freddie currently pay dividends to the Treasury on preferred stock.
- Regulators would set risk standards for all mortgage securities, including those issued by private entities. At present, regulators don't set standards for mortgage securities issued by Wall Street firms.
- CMIs would have to support rental housing for low-income people.
- CMIs could hold only limited amounts of mortgages and related securities. Fannie and Freddie have large holdings.
Source: Center for American Progress
Fannie, Freddie Overseer Said to Consider Seeking More U.S. Aid
Fannie Mae and Freddie Mac’s federal regulator is renegotiating the companies’ financing plan with the U.S. Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year, according to people familiar with the talks. Treasury and Federal Housing Finance Agency officials are also debating whether to lower the cost of the companies’ dividend payments on their borrowings from Treasury, according to these people, who requested not to be identified describing the internal deliberations.
Fannie Mae and Freddie Mac, the largest sources of mortgage money in the U.S., have used $111.6 billion of their $400 billion in backup financing in less than a year. The companies say their 10 percent annual dividend payment, which comes to about $5 billion apiece, costs more than either have earned in most years and adds to their draws on Treasury. FHFA spokeswoman Stefanie Mullin, Treasury spokeswoman Meg Reilly, Freddie Mac spokesman Doug Duvall and Fannie Mae spokesman Brian Faith declined to comment.
The financing plan instituted for Fannie Mae and Freddie Mac requires them to reduce their $1.57 trillion combined mortgage portfolios by 10 percent annually starting next year and caps their debt issuance at 120 percent of their assets. The Treasury and Federal Housing Finance Agency seized control of the mortgage-finance companies almost 16 months ago amid fears the two were at risk of failing. Officials set up a $200 billion lifeline with the Treasury, which was doubled in May, to keep the companies solvent. If they exhaust that backstop, regulators will be required to place them into receivership.
Treasury officials aren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, said Paul Miller, a former examiner for the Federal Reserve who now analyzes the banking and mortgage industry for FBR Capital Markets in Arlington, Virginia. "The Treasury has shown that their pain threshold is almost" non-existent, and the housing "market is still very fragile," Miller said in an interview.
The companies have said $200 billion apiece may not be enough support. The Treasury Department is facing a Dec. 31 deadline to increase that amount without congressional approval. While Treasury officials are free to renegotiate other terms of the deal, such as the dividend payment and restrictions on debt issuance, at any time, Congress set a deadline of the end of this year on the department’s ability to invest in the companies. "Treasury should be giving confidence to the markets that they will take care of it," said Rajiv Setia, a fixed income analyst for Barclays Capital in New York. "You increase the backstop and it removes the element of doubt."
Washington-based Fannie Mae, which has lost $120.5 billion over the last nine quarters, has requested $60.9 billion from the Treasury this year. McLean, Virginia-based Freddie Mac has tapped $50.7 billion in government capital since November 2008 and recorded $67.9 billion in cumulative losses over the last nine quarters amid a three-year housing slump.
The companies are an integral part of President Barack Obama’s housing-relief plan and have been pushed by the government to help more homeowners modify or refinance their loans to more affordable terms to curb foreclosures. The government-sponsored enterprises, or GSEs, own or guarantee about $5.5 trillion of the $11 trillion in U.S. residential mortgage debt. "With the GSEs being used as public policy tools, it is impossible to quantify with certainty what losses might be in a stress scenario, as the rules of the game might keep shifting," Setia said.
Property Values: Four More Years To Fall
The exhaustive Freddie Mac price index fell 2% nationwide in the 3rd quarter and analysis of its data predicts prices will continue to fall for the next four years.
While Freddie announced Tuesday that its purchase-only index has gained for the past two quarters, the "Classic Series" of the Conventional Mortgage Home Price Index, which includes refinance appraisals as well as purchase values, has fallen 9% from the high in June 2007 and 3.8% for this year.
The projections say homeowners have lost only $1 for every $3 they can expect to lose in the end.
The trends show values will fall for four years through September 2013. Readers should take this estimate as an educated guess. The estimate may have greater relevance than forecasts described in mainstream-media headlines which typically fail to place new data within a long-term trend.
Widespread bullishness has lifted hopes for property values based largely on the definitive Standard & Poor’s/Case-Shiller home price index. The 10-city index has risen 5% from its April low.
A composite of projections derived from four major indexes — Freddie Mac, Case-Shiller, First American, and the Federal Housing Finance Agency – predicts a total fall from peak to trend of 35%. That same average of averages shows values falling nearly 20% further from their current level.
Real estate bears counter the bulls by arguing that record mortgage delinquencies will overpower inventories and that widespread credit-bubble debt will either stunt growth or ruin lenders and homeowners. The federal government is throwing everything including all of its kitchen sinks in to the fight over residential property values.
"The lowest average fixed-rate mortgage rates in a half-century, lower house prices, incentives to encourage first-time buyers, and loan modification efforts to stem foreclosures have worked together to support sales and reduce the inventory of unsold homes," said Frank Nothaft, Freddie Mac Vice President and chief economist.
For more charts on the four major residential property indexes, visit "Residential Property Price Index".
Abu Dhabi Supplies $10 Billion to Dubai
Dubai said Monday that it has received $10 billion in financing from Abu Dhabi, which will pay part of the debt held by conglomerate Dubai World and its property unit Nakheel. Out of this, $4.1 billion will be used to repay Nakheel's Islamic bond, or sukuk, that matures Monday. The remainder of the funds will be used to finance Dubai World's needs up until the end of April 2010. News of the financing sent shares on local stock markets soaring. The Dubai Financial Market's main index opened up 10% at 1866.82 points with heavyweight Emaar Properties rising 15%.
In Abu Dhabi, shares opened up 6.1% at 2772.34 points."This is very positive news, and will be welcomed relief to bondholders in particular," said Ali Khan, managing director at Arqaam Capital. "We are expecting a strong positive reaction to U.A.E. and regional markets." Dubai rocked world markets in late November when it requested a freeze on $26 billion of debt payments by Dubai World in order to restructure the conglomerate. Of immediate concern was the repayment of Nakheel's $3.52 billion bond, seen by many as a litmus test for Dubai's ability to repay more than $80 billion of government and corporate debt.
In a statement on the Nasdaq Dubai, Nakheel said it will repay the bond over the next two weeks "using funds that will be provided by the Dubai Financial Support Fund." "I think Abu Dhabi saw the adverse market reaction to Nakheel debt restructuring news play out over several days and perhaps decided they had seen enough," said Saud Masud, head of research at UBS AG in Dubai. "Market pressure may have dictated this outcome, which while is a big relief in the short term does not address systemic risks and other liabilities still outstanding."
In its statement Monday, Dubai said the U.A.E. central bank will provide support to local banks and that the emirate will focus on addressing the concerns of Dubai World's creditors and contractors. Dubai also announced a bankruptcy framework in case Dubai World can't reach agreement with creditors to restructure $26 billion of the conglomerate's debts. "There will certainly be challenges periodically, just as there are challenges in other major financial centers around the globe," said Mr. Maktoum.
As Fed Uses Fewer Tools, Exit Plan Emerges
A succession of encouraging economic reports has sparked intensified debate about when the Federal Reserve will rein in its substantial support to the U.S. economy. But in fact, an exit by the Fed from its role as economic-rescuer-in-chief has already begun. As Fed officials prepare to gather in Washington on Tuesday and Wednesday to discuss interest rates and other issues, it helps to see how this exit is unfolding to understand where it will go next.
Outsiders tend to look at Fed Chairman Ben Bernanke's choices in just one dimension: Will rates be increased, lowered or stay the same? Currently, investors are wondering when the Fed will stop saying short-term interest rates will remain low for an "extended period." When those words get dropped, the Fed, within a few months, is likely to start trying to push up overnight bank lending rates from near zero. Thus, when Mr. Bernanke used the phrase last week, the market breathed a sigh of relief. "He is still in an 'extended period' mindset," Joseph LaVorgna, chief U.S. economist for Deutsche Bank, assured clients in a note Friday.
Mr. Bernanke, however, sees himself moving in a slow and deliberate way along a continuum of several different dimensions. Early this year, he would do anything it took to revive the economy. Now, he's inching gradually toward a "normalization of monetary policy," as he has described it. The market sees the Fed controlling an on-off switch. Mr. Bernanke is eyeing a dashboard with many different dials.
Emergency short-term bank borrowing from the Fed's discount window has fallen from more than $100 billion last year to $19 billion in early December. Fed purchases of short-term business loans in the commercial-paper market have fallen from $350 billion in January to $15 billion. Loans to foreign financial institutions through overseas central banks have fallen from more than $500 billion to $17 billion. Several programs -- such as loans to Wall Street investment banks and commercial-paper loans -- expire altogether in February, and another program, credit pumped into the consumer-loan market, will follow in March.
Though cautious about the outlook, rhetorically, the Fed has become steadily more upbeat in its assessment of the economy. In August, after a regular meeting of the Federal Open Market Committee, officials said the economy was leveling out and the Fed would use "all available tools" to promote a recovery. By November, they said the economy had "continued to pick up" and they would use just "a wide range of tools." "We have a number of programs to try to keep down interest rates, to improve functioning in key credit markets," Mr. Bernanke told the Senate Banking Committee this month. "We'll have to unwind those programs, and we have a set of ways of doing that."
The latest round of data -- better-than-expected jobs numbers, firmer consumer spending and confidence, improving trade and business inventories rising -- is almost sure to move the Fed further along the continuum when it meets this week. Officials could upgrade their assessment of how the economy is performing. With emergency programs expiring, they could note they are narrowing how many tools they will use to promote recovery. At some point, they could also make it more expensive for banks to take out emergency short-term loans directly from the central bank at its discount window.
They have several reasons to wait on the bigger question about when to start raising short-term lending rates more broadly. They need more evidence that a recovery will be sustainable without so much government support. With the unemployment rate still so high at 10%, they also believe they can afford to wait because there is a lot of slack in the economy that drives down inflation. The timing of rate increases, says Alan Blinder, a Princeton professor and former Fed vice chairman, "depends completely on the progress of the economy."
He sees the economy growing at a robust pace in the coming months, pushing the Fed to start raising rates in June or August 2010. Doves at the Fed, who focus heavily on the high jobless rate, will push to wait even longer. Mr. Bernanke has made clear he's looking at more than just the jobless rate and inflation -- in recent weeks he has pointed to inflation expectations, asset prices and the value of the dollar as other factors in his thinking. While officials wait on the question of "when" to raise rates, they are likely to strategize in greater detail at coming meetings a complicated question of "how."
In the old days, when the Fed wanted to tighten financial conditions, the task was easy. It pulled a few billion dollars out of short-term lending markets by selling Treasury bonds and taking cash in return. That pushed up an interest rate called the Fed funds rate, which banks charge each other on overnight loans, and in turn it pushed up other short-term borrowing rates. Because the Fed has flooded the financial system with so much money, raising the Fed funds rate won't be so simple this time.
The Fed could try to shrink its $2 trillion balance sheet by reducing its large portfolio of mortgage-backed securities and Treasury bonds. It could also borrow money against that portfolio. Either step would drain cash from the financial system and, if done in large amounts, could help push up short-term rates. The Fed could also bid up the cost of borrowing by paying a higher interest rate on the reserves banks leave parked unused at the central bank. That would likely ripple through to higher rates on bank loans. Officials are reluctant to sell down their mortgage-backed securities, because it could hurt the part of the economy most in need of help: housing. They hold out most hope for the final choice, paying interest on reserves. But they haven't yet decided how to use it in combination with other tools when the time comes to raise rates.
U.S. Spend-a-thon Risks Slide Into Greek Tragedy
A Republican takeover of the House may be the only thing between the U.S. and the abyss. The world economy shuddered last week as a rating company downgrade of Greek debt set off fears of default. Investors decided to beware of Greeks bearing bonds, and markets stumbled. While the economic data are showing signs of a recovery, there is a genuine risk that the book on this financial crisis has yet to be completed. We may not even have reached the climax.
Governments around the world have propped up their failing financial institutions with borrowed money. We used to have overleveraged banks; we replaced them with overleveraged governments. Panics start small and spread. If Greece goes down, almost every Western government will be at risk. The sad fact is that Greece is hardly exceptional when it comes to fiscal insanity. If the current Greek budget outlook proves to be accurate, then its deficit over this year and next will average a whopping 10.9 percent of gross domestic product. Small wonder that investors headed for the exits. A deficit that high could easily turn into a fiasco.
As bad as that picture is, it’s worse in the U.S. Our deficit this year, according to the latest estimate from the Congressional Budget Office, will be 11.2 percent of gross domestic product.
Syracuse University economist Len Burman, the modest and sober budget expert who was a top official in President Bill Clinton’s Treasury Department, told the Washington Post that according to a model he has developed to study the current situation, a "catastrophic budget failure" might happen. Burman added, "I try not to get too depressed, because if I really thought it was going to play out the way this model works, I would just move to a cabin in Montana and stockpile gold and guns." The worst need not happen, of course. For the U.S., a clear and reliable indication that our government takes the situation seriously, and plans to address our terrible fiscal plight with tough policy moves, might assuage markets.
Here is what the Democrats have done instead. Health experts have for years been advocating the adoption of so-called game changers, such as reducing physician reimbursements, that could significantly reduce health-care spending. Under current law, Medicare and Medicaid are on a terrifying path to insolvency, having promised tens of trillions more in benefits than we can afford. The plan was to use these game changers to fix the government programs.
Instead, President Barack Obama and his Democratic colleagues have decided to bundle the game changers with a massive expansion of health spending. While they crow about the budget neutrality of the emerging health bill, they have essentially passed on the opportunity to fix the already broken system. A bill that contained only the game changers would have been fiscally responsible. A bill that spends all the savings on new initiatives moves poor Mr. Burman one step closer to a bunker in Montana. It is hard to imagine what other steps we might take in the future to reduce health spending. Obamacare loads us onto a runaway train.
Outside of health care, Democrats have been little more responsible stewards than their Republican predecessors. Last week, the House passed a budget that included a whopping 5,224 earmarks. The bill included funds for such high-priority projects as the Aquatic Adventures Science Education Foundation in San Diego, a water-taxi service for a Connecticut beach town and new bike racks in Washington’s Georgetown neighborhood. World capital markets are looking for us to signal that we are serious. In response, we give them new museum exhibits, scenic running trails and decorative sidewalks.
While the total fiscal damage from the earmarks is relatively slight in the scale of things -- last week’s binge cost taxpayers $3.9 billion -- the spending spree signals a clear lack of appreciation of this seriousness of the situation. And the cumulative damage is eye-popping. When Nancy Pelosi took over as speaker of the House in 2007, U.S. government spending was projected by the CBO to be $2.9 trillion for 2009. Instead, it was about $3.7 trillion. That bad news sticks, with spending ratcheted up as far as the eye can see. First with a Republican and now with a Democrat in the White House, congressional Democrats have increased spending and shown no inclination to stop, even as deficits have skyrocketed.
Last week’s House budget vote suggests that the current spending trend will continue. If so, there are two likely endgames. The first is a takeover of at least one branch of Congress by Republicans. Divided government created a political dynamic that delivered budget sanity when Clinton was president, and it might do so again. Given the failure of both Republicans and Democrats to govern sensibly as the dominant party, divided government may be our only hope. In the second scenario, Democrats continue to rule as they currently are. Anyone who wants to understand better where that will lead should call up the Greeks.
European farce descends into Greek tragedy
by Wolfgang Münchau
I almost fell off my chair when I heard Angela Merkel say that the European Union might sometimes have to take charge of the fiscal policies of highly indebted members. Does this mean that the German chancellor is abandoning her attachment to a rules-based system of fiscal policy co-ordination? Probably not quite. If I interpret her brief statement correctly, she is only talking about times of crisis. Nevertheless, this is probably the most far-reaching economic governance proposal I have heard coming out of Germany.
Her proposal was triggered by the Greek crisis, which has brutally exposed the weaknesses of Europe stability and growth pact. There is still a chance that catastrophe can be averted, if George Papandreou, Greece’s prime minister, announces a robust deficit-cutting plan on Monday. Experience teaches us to be cautious. But if the plan is judged insufficient, this crisis might get out of hand.
The European response is at least in part to blame for this disaster-in-the-making. In November, European finance ministers came up with what they thought would be a clever plan – too clever by half as it turned out. The idea was to bounce Greece into Irish-style austerity – a credible medium-term deficit reduction plan. To underline the urgency of the request, a string of finance ministers and central bankers went on the record with their concerns. Axel Weber, president of the Bundesbank, warned that Greek bonds might not be eligible as central bank collateral forever. Jean-Claude Juncker, president of the eurogroup of eurozone finance ministers, spoke almost daily, one day expressing outrage at Greek malpractices, another day explicitly ruling out default.
Even Fredrik Reinfeldt, the prime minister of non-eurozone Sweden, felt the need to comment. The Greek situation, he said, was "of course problematic, but it is basically a domestic problem that has to be addressed by domestic decisions." His comment reminded me of the now infamous statement by Peer Steinbrück, Germany’s former finance minister, when he confidently declared, shortly after the Lehman collapse, that the subprime crisis was primarily an American concern.
All of this not only failed to solve the problem; it made it worse. Instead of preventing a crisis, European policymakers, obsessed with internal procedural rules and oblivious to global financial markets, almost triggered one. Last week alone, two-year bond spreads between Greece and Germany rose by 1.3 percentage points. The EU’s politicians have confused global investors by appearing to link the unconditional bail-out guarantee, given by Mr Steinbrück in February, to Greece’s compliance with the stability pact. Ms Merkel herself reproduced a weaker version of that guarantee on Thursday, but the conditionality is still not clear.
It is no accident that rating agencies took a hard look at Greek and Spanish debt at exactly the moment when the EU’s policy stance was at its most cacophonous. If the guarantee had been 100 per cent credible, there would be no justification for even a small spread between Greek and German bonds. The markets’ perception of the credibility of this guarantee is absolutely critical. By placing blame on European officials, I am not condoning the way successive Greek governments have behaved. There is no question that the country’s political leadership acted in bad faith, that it misrepresented statistics and that it has made insufficient efforts to stick to the rules. But to provoke a financial crisis is not a constructive way of dealing with this problem.
Most of all, it is bad for the EU. If it ever came to a high-noon showdown between the Greeks and the EU, I would bet on the EU blinking first. We are headed towards a situation in which the risk of financial distress and contagion leads to an unconditional bail-out, whether or not Greece is reforming sufficiently. The reasons we are at this juncture lie in the nature of the stability and growth pact. It is a fair-weather construction, ill-suited to crisis. It collapsed before, in the previous recession.
Reformed in 2005, the pact has become more flexible. But once the financial crisis came, it lost all traction. The problem is not, as is often reported, that countries run budget deficits of more than 3 per cent of gross domestic product. This is perfectly alright during a crisis, even under the existing pact. The problem is the evident failure to co-ordinate binding exit strategies among the member states. The pact is about procedure, and Greece has not been following the procedure in good faith. Nor, in fact, have other member states, including France.
Hence Ms Merkel’s idea of a separate crisis management regime. If she is serious about her proposal, she will to accept that other dimensions of crisis management might need to be included – common financial resolution policies, more effective EU-level bank supervision, fiscal stimulus and structural policies. But there can be no doubt that the eurozone needs a crisis-management regime capable of coping with rough macroeconomic conditions of the kind we face today.
Greece defies Europe as EMU crisis turns deadly serious
by Ambrose Evans-Pritchard
Euroland's revolt has begun. Greece has become the first country on the distressed fringes of Europe's monetary union to defy Brussels and reject the Dark Age leech-cure of wage deflation. While premier George Papandreou offered pro forma assurances at Friday's EU summit that Greece would not default on its €298bn (£268bn) debt, his words to reporters afterwards had a different flavour. "Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state," he said.
Were we to believe that a country in the grip anarchist riots and prey to hard-Left unions would risk its democracy to please Brussels? Mr Papandreou has good reason to throw the gauntlet at Europe's feet. Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to IMF plans. The prescription is ruinous and patently self-defeating. Public debt is already 113pc of GDP. The Commission says it will reach 125pc by late 2010. It may top 140pc by 2012. If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral.
Ireland may just pull it off. It starts with lower debt. It has flexible labour markets, and has shown a Scandinavian discipline. Mr Papandreou faces circumstances more akin to those of Argentine leaders in 2001, when they tried to cut wages in the mistaken belief that ditching the dollar-peg would prove calamitous. Buenos Aires erupted in riots. The police lost control, killing 27 people. President De la Rua was rescued from the Casa Rosada by an air force helicopter. The peg collapsed, setting in train the biggest sovereign default in history. Economists waited for the sky to fall. It refused to do so. Argentina achieved Chinese growth for half a decade: 8.8pc in 2003, 9pc in 2004, 9.2pc in 2005, 8.5pc in 2006, and 8.7pc in 2007.
London bankers were soon lining up to lend money (our pension funds?) to the Argentine state – despite the 70pc haircut suffered by earlier creditors. In theory, Greece could do the same: restore its currency, devalue, pass a law switching internal euro debt into drachmas, and "restructure" foreign contracts. This is the "kitchen-sink" option. Such action would allow Greece to break out of its death loop. Bondholders would scream, but then they should have delved deeper into the inner workings of EMU. RBS said the UK and Ireland have most exposure, with 23pc of Greek debt between them (mostly for global clients). The French hold 11pc, Italians 6pc.
Remember, Athens holds the whip hand over Brussels, not the other way round. Greek exit from EMU would be dangerous. Quite apart from the instant contagion effects across Club Med and Eastern Europe, it would puncture the aura of manifest destiny that has driven EU integration for half a century. I don't wish to suggest that Mr Papandreou – an EU insider – is thinking in quite such terms. Full membership of the EU system is imperative for a country dangling off the bottom of Balkans, all too close to its Seljuk nemesis. But Mr Papandreou cannot comply with the EU's deflation diktat.
No doubt, EU institutions will rustle up a rescue. RBS says action by the European Central Bank may be "days away". While the ECB may not bail out states, it may buy Greek bonds in the open market. EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece's debt, drawing out the agony. What Greece needs – unless it leaves EMU – is a permanent subsidy from the North. Spain and Portugal will need help too. The danger point for Greece will come when the Pfennig drops in Berlin that EMU divergence between North and South has widened to such a point that the system will break up unless: either Germany tolerates inflation of 4pc or 5pc to prevent Club Med tipping into debt deflation; or it pays welfare transfers to the South (not loans) equal to East German subsidies after reunification.
Before we blame Greece for making a hash of the euro, let us not forget how we got here. EMU lured Club Med into a trap. Interest rates were too low for Greece, Portugal, Spain, and Ireland, causing them all to be engulfed in a destructive property and wage boom. The ECB was complicit. It breached its inflation and M3 money target repeatedly in order to nurse Germany through slump. ECB rates were 2pc until December 2005. This was poison for overheating Southern states. The deeper truth that few in Euroland are willing to discuss is that EMU is inherently dysfunctional – for Greece, for Germany, for everybody.
Ireland shows the rest of Europe what austerity really means
When the Irish finance minister, Brian Lenihan, in effect cut the pay of public-sector workers earlier this year by introducing a special 7% pension levy, he confessed that Ireland’s European Union partners were amazed at the muted public reaction. There would, he said, have been riots in France. On December 9th Mr Lenihan presented his 2010 budget, inflicting even more pain by imposing steep pay cuts on public employees. This time, the response may not be quite so muted. The police are already threatening to defy a no-strike law in protest, and other public-sector workers are preparing to hold ballots on industrial action.
In a week when Greece and Spain both saw their credit ratings under attack, the budget at least gave the government an opportunity to reassure international investors that Ireland, unlike some other EU countries, is serious about controlling its budget deficit and public-debt burden. Mr Lenihan has done this with the toughest budget in his country’s history. Public servants face pay cuts of 5-8% on salaries up to €125,000 ($190,000); higher earners (who will include the prime minister) will see their pay cut by 15% or more. Unemployment and welfare benefits have also been cut, though not pensions. Next year’s budget deficit, at around 11.6% of GDP, will be similar to this year’s.
The budget came against the background of a sharp contraction in economic activity, far greater than that experienced in other euro-area countries. GDP is projected to decline by 7.5% in 2009 and a further 1.3% in 2010. An unemployment rate of 12% this year is at least showing some signs of stabilising. But consumer confidence remains weak and households continue to save more and to spend less, thereby depressing tax revenues. Next year, almost half of all income earners will pay no tax. In an effort to widen the tax base, the government proposes to introduce a new property tax.
The budget will put the government into direct conflict with trade unions for the second time this year. The pension levy may have been accepted by the general public, but the unions still protested vociferously. In pre-budget talks, the government noted a hostile public reaction to the unions’ proposal for a temporary pay cut for public-sector workers and a promise of big public-sector reform. It chose a permanent pay cut instead.
These measures mark the end of two decades of social partnership, based on a consensus approach to pay bargaining between government, employers and unions. Whether this will usher in a long period of industrial conflict will become clearer in the coming weeks. Public-sector unions are already giving warning of a sustained campaign of strikes. But in these hard times they may not win much support from the Irish public.
France to Tap Financial Markets for $51 Billion Grand Loan
French President Nicolas Sarkozy’s government will earmark 35 billion euros ($51 billion) for its "Grand Loan" to aid manufacturers such as Areva SA, raising the bulk of the money in financial markets. The government will sell 22 billion euros of debt to finance the loan with the remaining 13 billion euros coming from banks reimbursing the government aid they received to help weather the country’s worst economic slump in 60 years, Sarkozy said at a press conference in Paris today.
"This large public and private investment plan isn’t a new stimulus package," Sarkozy said. "These are investments that will have consequences for the next 20 or 30 years." Sarkozy’s grand loan, which may benefit companies including European Aeronautic, Defence & Space Co. and jet-engine maker Safran SA, will add to the country’s debt, which rose to 1.43 trillion euros, or 74 percent of gross domestic product, at the end of the second quarter. Government stimulus spending is boosting global debt levels and threatening to undermine the creditworthiness of some the world’s safest sovereign borrowers.
France’s benchmark 3.75% bond due 2019 gained, with the yield falling 3 basis points to 3.44 percent. The premium that investors demand to buy the French debt over comparable German bond held at 26 basis points. As part of the grand loan the government will earmark 5 billion euros for sustainable development, including for fourth- generation nuclear power plants being built by Areva. The government will spend 4.5 billion euros on high-speed communication networks and other digital technologies and 3.5 billion on research, Sarkozy said. Small businesses will benefit from 6.5 billion euros of the loan.
Sarkozy said that funds will go to building more efficient planes and rockets, benefitting companies such as Safran. Alstom SA may be helped by spending on improved train technologies, while Sanofi-Aventis SA and STMicroelectronics SA may be helped by spending on biotechnology and nanotechnology. The plan includes 11 billion euros in spending to improve higher education, and 750 million euros to digitize French books, art works, and museum contents. The plan will also trigger 25 billion euros of investment from private companies, local governments and European agencies, he said.
American debt bulging between $56-$110 trillion
Last week, we witnessed Ben Bernanke's Senate confirmation hearings for a second term as Fed Chairman. The air was thick with hypocrisy, as Senators vied with each other to cast blame on the Fed Chairman for the fiscal mistakes of the Congress. As an overtly politicized figure who has looked to bolster the poll numbers of successive Administrations, Bernanke certainly should shoulder a large share of the blame for steering the United States towards the brink of bankruptcy; however, he did not act alone. Ironically, many of his co-conspirators are currently his harshest critics.
The truth is that if there were no debt from Congressional deficit spending, there would be nothing for the Fed to 'monetize' with the printing press. By behaving as the voters' 'best friend,' delivering both low taxes and generous entitlements, Congress forced the Fed to play the disciplinarian. Except, not wanting to spoil the party, it didn't. Ben Bernanke, like his predecessor Alan Greenspan, is an intelligent man who knows exactly where reckless spending will lead the country. Yet he refused to hit the brakes.
When former President Nixon broke the last ties between the U.S. dollar and gold, he opened the floodgates to Congressional abuse. Before the 'gold window' was closed, if the federal government ran up too much debt, other countries would start trading their reserves for our gold. Afterward, these creditors were left in something of a pickle: they held huge dollar reserves (built up on the belief that it was 'as good as gold') which now had a value dependent on being able to trade with Americans. This translated into a huge subsidy for America - quickly eaten up by a guns-and-butter spending philosophy directed by Congress.
Recently, under pressure from Wall Street, Congress repealed key provisions of the Glass-Steagall Act. Glass-Steagall created bank deposit insurance through the FDIC, while putting in place safeguards to prevent these now risk-free deposits from being used in speculative investments. Repealing Glass-Steagall without repealing deposit insurance created an environment of private gains and taxpayer losses.
Moreover, in an effort to sell an 'American dream' based on homeownership, Congress subsidized and guaranteed residential mortgages through Fannie Mae, Freddie Mac, and the FHA. This created a perfect speculative play for the combined investment/commercial bank behemoths emerging from the ashes of Glass-Steagall.
These major transgressions of government lie at the heart of the economic decline and financial crisis that now face America. They were the direct fault of Congress, not the Fed. The main charge against the Fed is that it has ignored its vital independence. This began under the stewardship of Chairman Alan Greenspan and continued under his protégé, Ben Bernanke. Both Greenspan and Bernanke could fairly be labeled as 'inflationists,' in that they favor inflation over recession.
Thanks to Nixon, the Fed can create paper money out of thin air by means of book entries in the accounts of Fed member banks. Over the turn of the century, Greenspan, assisted by Bernanke, used this power to finance the greatest asset boom in world history. Today, Bernanke is financing a second great financial inflation, but this time in the face of an economic recession. This will fuel the worst of all worlds: massive stagflation.
Already, total American government debt, including off-balance sheet IOU's to the Social Security Administration, stands at between $56 and $110 trillion. Based on a gross domestic product of some $13 trillion, it is most unlikely that the debt will be repaid. Increasingly, it is being described as the biggest Ponzi scheme in history. This Rake's Progress is not lost on the markets. The U.S. dollar has declined precipitously, both in terms of gold and against foreign currencies, sapping the confidence vital for an economic recovery.
Regardless of who is to blame, Bernanke faces a decision. He may either continue to debase the currency or raise interest rates, likely forcing the Treasury into default. The latter may sound like a political impossibility, but consider carefully the alternative. In our present situation, many countries throughout history have simply revalued their currencies, wiping out a huge chunk of their debt, and started again. But the U.S. dollar has no fixed value, except the external fix of China's currency peg. Since China is our largest creditor, they could theoretically revalue our currency by adjusting the peg. This would have a tremendous impact on the American economy, and we don't get a vote!
The Fed did not create this crisis, but it did abdicate its responsibility to stop it. In doing so, it has essentially exported our major monetary powers to China. We're partying in a house that China owns. If we don't keep ourselves under control, they will wake up and impose some harsh discipline.
The US could yet pay a high price for today's easy money
From the perspective of US financial markets, a Japanese-style lost decade has defined the performance of equities and bonds since the start of 2000. From the heady days of the technology bubble, the S&P 500 is 11 per cent lower over the decade, when you include the reinvestment of dividends. In contrast, an index of long-term Treasury bonds has risen more than 116 per cent, according to Barclays Capital.
The doubling in the value of long-term Treasuries helps explains why the famed "bond vigilantes" of prior decades have been missing in action. This has largely been a decade of disinflationary forces thanks to the internet and globalisation. There have been two very aggressive cycles of rate-cutting since 2000 by the Federal Reserve and it is little wonder that bonds have been the big beneficiary. Instead of "bond vigilantes" worried about inflation and rising deficits, the decade is described by some as one where "risk vigilantes" have ruled the roost.
When the technology bubble popped, the risk of a nasty recession and deflation meant markets moved quickly to price in big rate cuts. On that score, the Fed delivered - an extended period of easy money softened the blow of recession in 2001, sowing some of the seeds of a massive mortgage and credit bubble which culminated in the financial crisis of 2007/2008.
Today, the current policy prescription of even cheaper money has many worried about the value of the dollar and the risk of higher inflation in coming years, given the outlook of massive budget deficits and record issuance of US Treasuries. Amid fears of a new financial bubble in commodities and bonds, some forecast the Fed could start raising rates late next summer and wean the US economy off easy money. Except, by next March, the Fed will cease its planned purchase of $1,250bn in mortgages. The central bank's hefty purchases this year has encouraged investors and banks to buy either corporate bonds and/or Treasuries.
That has kept market rates low, but as new mortgages and other debt is priced into the market next year and the US Treasury keeps pumping out government bonds at a record pace, the odds of the clearing price for debt rising are very short. Unless the private sector is rapidly hiring workers next year, rising long term rates could easily derail a sustainable recovery. Already the market is showing its hand and expects the risk vigilantes to test how far they can push the Fed towards expanding its bond purchases in 2010. This week the difference between two-year and 30-year Treasury yields rose to a record steep level of 3.72 percentage points. Sales of 10-year, and 30-year debt found little demand.
Whether a rapid rise beyond 4 per cent or even 4.5 per cent in 10-year paper sparks a further expansion of quantitative easing by the Fed is an open question. More QE runs the risk of further damaging the dollar and would intensify concerns about inflation risk and the US government's triple A rating. But the Fed, which has been willing to err on the side of accommodative policy this decade, does have some tools at its disposal. One such tool, which could accompany any expansion of bond buying, is a reverse repurchase agreement.
The Fed has been testing reverse repos with dealers. The tool allows the Fed to sell assets such as Treasuries to dealers for cash, with an agreement to buy them back later at a slightly higher price. By draining reserves, it prevents excess money held by the banks, currently around $1,100bn, from entering the broader economy, and igniting inflation. The reverse repo could thus reassure inflation hawks and sterilise further purchases of long term bonds, as additional reserves are contained. That could appease the bond market next year.
All well and good for the risk vigilantes in the near term. But the eventual cost of easy money coming home to roost in the form of a dollar rout and much higher bond yields is still a possible outcome. That would be cold comfort for us all.
Citigroup strikes deal to repay TARP
Citigroup said Monday it has struck a deal with the government to return $20 billion in bailout money to taxpayers. The New York City-based lender said it would raise the money through a combination of stock and debt, the bulk of which would come from a $17 billion common stock offering. "We are pleased to be able to repay the U.S. government's trust preferred securities and to terminate the loss-sharing agreement," Citigroup CEO Vikram Pandit said in a statement. "As I have stated many times over the past year, we planned to exit TARP only when we were convinced that it was prudent to do so."
Citigroup became one of the biggest recipients of bailout money last year after the government injected $45 billion into the company to help stabilize the embattled lender. Concerned about the company's underlying health and ability to endure future loan losses, the government converted $25 billion of its preferred-stock stake in the company into common stock over the summer. That effectively gave U.S. taxpayers a 34% stake in one of the world's largest financial institutions.
Citigroup said Monday that the government would get rid of those shares, starting with the sale of $5 billion worth of stock. The remaining shares would be sold "in an orderly fashion" over the next 6 to 12 months. The company also said it was terminating the loss-sharing agreement it had struck with regulators in November in which the government agreed to backstop some losses against more than $300 billion in troubled assets.
Monday's announcement, while encouraging for taxpayers, is expected to push the company even deeper into the red when it delivers its fourth-quarter results on Jan. 19. Analysts are currently expecting the company to report a loss of $1.1 billion. More importantly, it will ultimately free the company from a variety of government restrictions, namely pay limits for its top executives.
On Friday, White House "pay czar" Kenneth Feinberg capped base salaries for 75 Citigroup employees at $500,000 for the remaining three weeks of 2009. Those changes were expected to serve as the model for their pay next year as well. Fearing such changes, large financial institutions have been scrambling to return bailout money to the government. Last week, rival Bank of America got out from under the government's thumb by repaying the full $45 billion in bailout money it received. Citigroup shares were unchanged in pre-market trading Monday after climbing 2% in the previous session.
Ilargi: Mistake? Isn’t that a bit of a one-sided view? Citi and BofA are simply free to get into gambling again, and pay "real" bonuses. After that, they're free to come knocking again for the next round of bail-outs. This is Geithner and Obama, remember?! It’s not a mistake if it is intentional.
Another Colossal Mistake
Your government just blew it again. Big time. How?
By allowing the biggest zombie banks, Bank of America and Citigroup, to pay back TARP before we dealt with the biggest problem plaguing our financial policy of the past few years: Too Big To Fail.
As long as the banks were on the hook for that TARP money, the government had some ability to dictate reform. Now it has none. And in case you missed what is really going on here, the banks that repaid TARP are now getting all the benefits of government help with none of the drawbacks. They just ditched the bad stuff--namely, pay caps--and kept the good stuff (implicit bond guarantees, subsidized super-low interest rates, no obligation to do anything for anyone). Obama can jawbone all he wants about "fat cats," but that's all he can do. Wall Street has him and the rest of Washington right where they want him: By the balls.
Why does this matter? Because, as Alan Greenspan of all people just observed, taxpayers are still on the hook for everything, and the government now has no bullets left. If all goes well over the next few years--if the economy continues to recover, if the Fed keeps interest rates low, and if the US continues to be able to borrow at reasonable long-term rates--none of this will matter. This latest gift to Wall Street will just become a bad memory like all the rest. If all does not go well, however--if the economy relapses into a double-dip, if the Fed is forced to raise short-term rates to combat inflation, if loan losses exceed expectations--the government (and Wall Street) will have a big problem on its hands.
If the banks get in trouble again, or if it becomes plain as day that they're never going to start lending because their balance sheets are in rotten shape, the government won't be able to do anything. After watching the appalling bailouts and bonuses of the past year, taxpayers will start a revolution before they allow the government to put hundreds of billions of dollars directly into the pockets of Wall Street again. If we come to another crisis, therefore--or even if we simply crawl along sideways--this will put the government into a bind.
In a just world, the way out would be to finally make the bank bondholders pay for their stupidity, converting bank debt to equity and correcting the error made last time. In the heat of another crisis, however, the government will likely be terrified at the thought of rocking the boat and will fight tooth and nail to give bondholders another free pass. If this proves politically impossible, the government might actually have to let some firms fail, or risk being run out of town. And because we have yet to create a system in which banks CAN fail in an orderly manner without taking the whole economy down, this could put us on a path to Japan (zombie banks) or another Lehman-like disaster.
What should the government have done while it still had some leverage?
- Raise capital requirements, forcing the banks to use their tremendous profits to build big cushions against future problems instead of paying huge bonuses. Given the forced bailouts of last year, why on earth should banks be allowed to pay out normal compensation ratios for the next few years? Why shouldn't they be forced to keep this money on hand for a rainy day?
- Make every bank build "contingent convertible" bonds into their capital structures, thus creating an automatic bailout mechanism whose cost will be borne by the banks' capital providers instead of the taxpayer. These bonds, which automatically convert to equity if the banks' capital falls below a certain level, eliminate the need for government intervention. If the bank runs low on capital, the bond converts, and the bank is automatically recapitalized (and its ownership changes accordingly).
Instead of implementing these simple fixes, however, the government has given up its last bit of leverage. It continues to implicitly guarantee all the big banks under Too Big To Fail, but now all it can do to shape their behavior is make disapproving noises about "fat cats" (who, by the way, are doing exactly what any sentient being would do under the circumstances, which is take the free money and use it for the benefit of employees and shareholders).
EMI sues Citigroup for $3.25 billion over 'fraud' and 'lies'
Tensions between record company EMI and its bank Citigroup have escalated into an all-out war following EMI owner Terra Firma's filing of a £2bn lawsuit in New York. The lawsuit charges the investment bank with alleged "fraud" and specifically accuses senior Citi banker David Wormsley of lying about the presence of other buyers in the auction to bid up EMI's price in 2007. Terra Firma, which is run by Guy Hands, also accuses Citi of trying to drive EMI into bankruptcy in order to bring about a long-expected merger with rival Warner Music.
It emerged over the weekend that a leading Citi analyst in the US released a research note eight weeks ago stating that if the troubled music giant does not merge with US competitor Warner Music, then it may go bust. The note has been interpreted by City observers as an attempt by Citi to destabalise the business. Citi is also EMI's major creditor after providing it with a loan of £2.5bn in 2007 to buy EMI. The bank was Terra Firma's only creditor in the buy-out, as the bank was unable to syndicate the $4.1bn (£2.5bn) it loaned the firm as credit markets had started to chill. Profits in the music industry have plunged since.
In the note to US clients dates September 15, Citi analyst Jason B Bazinet upgraded his stance on US competitor Warner Music to a speculative buy, arguing that a tie-up with EMI may be "back on the front burner". "Without some financial flexibility on the part of the banks, Terra Firma may be forced to sell its recorded and publishing business to other players in the industry," the analyst said. If the two parties failed to agree on a deal "the possibility of an EMI insolvency could increase." Although Citi is EMI's major creditor, Chinese walls exist to prevent a conflict of interest with its analysts' views.
"EMI's results have improved ...but perhaps not enough," Mr Bazinet said in the note. "EMI's banks have more power to determine the ultimate fate of EMI," he wrote. In mid-November, Citi spurned a request by Terra Firma to write off £1bn of the loan in return for a £1bn cash injection into the music publisher. Mr Hands has admitted that purchasing the group was a mistake. The large debt pile has meant the company has undergone a painful cost-cutting exercise, which has led to the defection of some of its top-name artists, including Radiohead and the Rolling Stones. A spokesman for Citi told The Daily Telegraph that "this suit is without merit and neither Citi nor any of its bankers have done anything wrong. We will defend this lawsuit."
Governor Paterson to withhold 10% from schools, local governments - including NYC
Gov. Paterson called it a "day of reckoning." Lawmakers slammed it as just bad theater. Paterson on Sunday announced plans - first reported in Sunday's Daily News - to shortchange the state's cities and schools 10% of the $1.9 billion in state payments due Tuesday.
New York City will lose at least $84million in funding under Paterson's plan to withhold payments to keep the state afloat this month. "I can't say this enough: The state has run out of money. We are $1 billion short," he said. For the city that means its school aid payment will be about $60 million short and its municipal assistance payment $23.9 million lower than expected, Paterson's budget office said. The city is expected to lose more money at the end of the month when Paterson will withhold nearly 19% of the remaining $3 billion in scheduled payments statewide for a school property tax relief program and human services reimbursements to counties.
Paterson, citing possible federal issues, said he will not withhold any Medicaid payments. While a spokesman for Mayor Bloomberg had no comment, saying the city had not been briefed on the plan, the impact on the city is expected to be negligible. The $60 million being held back in school funds is far lower than the $223 million Paterson originally proposed cutting in October as part of an overall $686 education aid reduction ultimately rejected by the Legislature.
Bloomberg at the time had publicly praised Paterson for "trying to treat everyone fairly with evenly distributed cuts." While the impact on the city and city schools may not, for now, be severe, smaller cities without cash reserves could be in more trouble.
All told, Paterson said he will hold back $750 million in statewide payments due this month. He said the state may eventually pay the money if revenues pick up in the next few months. He placed blame on the Legislature for recently enacting a $2.7 billion deficit reduction package that fell $500 million short of the $3.2 billion in savings he was seeking to help close a current-year budget deficit. He blasted lawmakers for making "irresponsible" and "wrong" choices by putting politics ahead of the state's interests by not addressing the "full ramifications of this deficit and this budget crisis."
Paterson said he expects legal challenges but believes he is on sound footing. He said the budget enacted in the spring stipulates that no local assistance payments can be made until they are certified by his budget director. "The governor's action here is not to balance the budget, it's not to act in lieu of the Legislature, it's to make sure the state doesn't run out of money," he said. "It's to make sure the state does not become insolvent."
Legislators accused the governor of overstepping his boundaries. "Case law says the Legislature is the branch of government with the power to enact and amend the budget," said state Sen. Eric Schneiderman (D-Manhattan). Added Senate Democratic majority spokesman Austin Shafran: "New Yorkers don't want political rancor or self-indulgent theatrics. They want their leaders to work together to get things done." While Senate and Assembly insiders say there is no plan for the Legislature to sue Paterson, education groups have said they are prepared to do so.
Schwarzenegger calls attack on UC Berkeley chancellor's home a 'type of terrorism'
Governor Arnold Schwarzenegger described Friday's attack on the home of the University of California at Berkeley's chancellor as a "type of terrorism" that will not be tolerated. Protesters angry about budget cuts and fee hikes vandalized Chancellor Robert Birgeneau's home on campus at about 11 p.m. Friday night, according to the university. "California will not tolerate any type of terrorism against any leaders, including educators," Schwarzenegger said in a statement released Saturday.
He added that the incident was a criminal act, and participants will be prosecuted under the fullest extent of the law. "Debate is the foundation of democracy, and I encourage protestors to find peaceful and productive ways to express their opinions," he said. University of California President Mark Yudof also offered his support to Birgeneau and his family on Saturday. "The attack on Chancellor (Robert) Birgeneau's residence late last night was appalling," Yudof said in a prepared statement. "The behavior as described went far beyond the boundaries of public dissent, and such lawlessness cannot be tolerated."
At about 11 p.m. Friday, 40 to 70 protesters stormed Birgeneau's home on the north side of the campus and smashed planters, windows and lights while shouting, "No justice, no peace," according to the school's Web site. They also reportedly threw flammable objects into the home. Eight people were arrested for rioting, threatening an education official, attempted burglary, attempted arson of an occupied building, felony vandalism, and assault with a deadly weapon on a police officer, according to UC Berkeley. At least two of the eight arrested are Berkeley students.
Birgeneau urged community members to find more productive ways of expressing their feelings. "These are criminals, not activists," Birgeneau said in a statement posted on the university's Web site. "The attack at our home was extraordinarily frightening and violent. My wife and I genuinely feared for our lives." Earlier Friday, 66 protesters who had been occupying Wheeler Hall for several days were arrested for misdemeanor trespassing or resisting arrest. By the 2010-11 school year, undergraduate fees will increase by more than $2,500, or 32 percent.
Moody's Cuts Calpers' Rating
Calpers may be paying a price for its decision to help financially strapped local California governments. Moody's Investors Service slashed the triple-A rating of Calpers, formally known as the California Public Employees' Retirement System, by three notches to Aa3. The downgrade, made Thursday, in part reflected Calpers' recent spike in unfunded liabilities, following the fund's negative 24% return for the year ended in June. Calpers, the nation's largest public fund with about $200 billion in assets, last month delayed its efforts to offset those liabilities by agreeing to defer an increase in local-government contributions to the fund from 2011 until 2012.
Because Calpers doesn't have outstanding bonds, the downgrade's impact would be felt through Calpers credit enhancement program. The pension fund used its triple-A rating to guarantee the debt of various municipalities from California to New York City and Chicago in exchange for a fee. Calpers' lower credit rating means it may have to reduce its fee. It may even lose some business if municipalities seek out a guarantor with a triple-A rating, industry experts said. "We are confident this downgrade won't impact our ability to run our credit-enhancement program," Calpers spokesman Brad Pacheco said of the downgrade. Calpers has received $20 million in income from the program since its inception in 2003, he said.
Moody's also cut the credit rating of the California State Teachers' Retirement System to Aa3 from Triple-A. Calstrs also has a credit-enhancement program. Moody's said no other public pension fund has a long-term credit rating related to these programs. Standard & Poor's rates the short-term debt of Calpers and Calstrs. Moody's said the credit-enhancement programs played a small role in the ratings downgrade. If a municipality in the program is unable to roll over its debt, Calpers is obligated to support the debt. A Moody's official said that this had occurred on more than one occasion for both Calpers and Calstrs in the past year.
The downgrade underscores the tough choices Calpers faces. Local governments pay a percentage of their payrolls to Calpers, based on the amount of benefits their employees receive. Calpers is trying to reduce its unfunded liabilities, or the difference between assets and obligations, which were $35 billion before the 24% investment loss last year. Yet many California municipalities are struggling with their own budget pressures and didn't welcome higher contributions.
Separately, Calpers is weighing rate increases for state employers, which the board will discuss this week. Gov. Arnold Schwarzenegger would like the state to pay a large increase in 2010 to avoid paying even more in the future. Moody's said the pension fund downgrades were also influenced by the recent deterioration in California's financial situation, which faces a $21 billion budget shortfall through June 2011. Moody's cut the state's credit rating by three notches this year to A2 from Aa2.
Foreclosures fall, but banks bracing for next big wave
While November sees 8 percent fall in foreclosures, loan-modification programs mask the size of the problem.
In November, for the fourth month in a row, the number of foreclosure filings in the United States declined -- an 8 percent drop from October. But foreclosure experts aren't celebrating. They're bracing for the next wave of default notices, foreclosure auctions, and bank repossessions, which could hit early next year. "We don't believe the underlying conditions have actually improved," says Rick Sharga, senior vice president with RealtyTrac, which released its report of foreclosure trends Thursday. Instead, state and federal efforts to help homeowners work out their problem mortgages are delaying foreclosures, he adds.
Even in a normal year, a third of these attempted workouts end up in default, he says. With high unemployment, tight credit, and depressed housing prices, this period will see much higher failures of workout plans, mortgage experts say. For the moment, the number of foreclosures continues to fall. In November, the total fell to less than 307,000, the fourth monthly decline in a row after peaking at 360,000 in July. That's the lowest monthly level since February and, on the surface, represents particularly good news for Nevada.
For the second month in a row, the number of Nevada properties receiving a foreclosure notice fell by a third. Las Vegas, which had topped the list of large cities with high foreclosure rates, fell to No. 5 in November. The problem is that these drops are artificial, brought about because Nevada recently instituted a mandatory mediation program for problem loans, Mr. Sharga says. That's a potential boon for some owners of distressed homes. It may help those on the margin restructure loans that might otherwise default. Such programs are also helping to keep the foreclosure problem from spiraling out of control and sending home prices plunging again.
The challenge is that many of these attempt work-out loans won't work out, so foreclosure isn't averted, it's simply delayed. Of an estimated 7 million troubled home loans in this down cycle, 3.9 million will go through foreclosure, predicts William Campbell, a real estate adviser and head of RPC Group in Little Rock, Ark. "We're going to see a long drawn-out housing recovery that will gradually dispose of these distressed properties over the next three years," says Sharga of RealtyTrac, an online marketplace for foreclosure properties based in Irvine, Calif. "Modifications will help, but they won't solve the problem. It's too big."
Interest Rates Are Low, but Banks Balk at Refinancing
Mortgage rates in the United States have dropped to their lowest levels since the 1940s, thanks to a trillion-dollar intervention by the federal government. Yet the banks that once handed out home loans freely are imposing such stringent requirements that many homeowners who might want to refinance are effectively locked out. The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement, hinting at a recovery after two years of recession.
Refinancing could save owners hundreds of dollars a month, which could be spent, saved or used to pay down debts. Extra spending would help lift the economy, and lower payments might spare some people from losing their homes to foreclosure. The plight of homeowners has become a volatile political issue. On Friday, as the House passed a series of new financial regulations, it narrowly defeated a provision that would have allowed bankruptcy judges to modify the terms of mortgages. The measure was strongly opposed by the banking industry.
President Obama, in his weekly address on Saturday, placed much of the blame for the recession on "the irresponsibility of large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences." The president is scheduled to meet with banking executives at the White House on Monday in another administration effort to increase the flow of loans to consumers and small businesses. Among those expected to attend are representatives from Citigroup, JPMorgan Chase, Bank of America, Wells Fargo and Goldman Sachs.
An estimated six of 10 homeowners with mortgages have rates that exceed the 4.8 percent rate currently available on 30-year fixed mortgages, the least risky form of home loans. Nevertheless, only half as many refinancing applications were reported last week than were reported at the beginning of January, the peak level for the year. The total dollar volume of refinancing activity in 2009 will be about $1 trillion. In 2003, another year when rates fell, it was $2.8 trillion. (Mortgage applications to purchase houses showed modest improvement for much of the year, but recently fell sharply to their lowest level in 12 years.)
"The government has succeeded in driving mortgage rates down to their lowest level in our lifetime," said Guy Cecala, the publisher of Inside Mortgage Finance magazine. "That hasn’t been a big home run, because a lot of people can’t take advantage of it." It is highly unusual for mortgage money to be available below 5 percent. Average rates fell as low as 4.7 percent in the 1940s, as the government held down interest rates to finance World War II, and stayed just below 5 percent until the early 1950s. Rates went above 5 percent in 1952 and stayed there — until this year.
The super-low rates are not likely to last much longer. The Federal Reserve program that has driven rates to such lows, which involves buying $1.25 trillion in mortgage-backed securities, is scheduled to expire in March, and Fed leaders have said that it would not be renewed. Some analysts believe rates could jump as high as 6 percent in the spring. On a $300,000 mortgage, such a jump would cost an extra $225 a month.
Andrew Knapp, a sales executive in Bartlett, Ill., has tried twice to refinance, which would save his family several hundred sorely needed dollars every month. Lenders said the house had lost value and the Knapps had too much debt. "There was no urgency for them to do anything," Mr. Knapp said. The most recent Federal Reserve survey of lenders found that they were continuing to tighten terms for business and household loans. Banks say they are under pressure from regulators to raise their cash reserves, which means fewer loans. They also argue that a troubled economy breeds extreme caution.
"More than ever before, lenders are very conscious of making good quality loans," said Michael Fratantoni, the vice president for research at the Mortgage Bankers Association. "They are looking at the value of the collateral and the credit quality of the borrower." But some borrowers argue that more refinancings now might well forestall losses for the banks later.
Mark Belvedere bought a condominium in a San Francisco suburb in early 2004 and refinanced it in 2005. He now owes $235,000 on a property that would sell for barely half that today. Mr. Belvedere said he would be willing to live with all that lost equity if he could refinance his loan from a variable rate, which could eventually go as high as 12 percent, into a 30-year fixed term.
His lender said no, citing the diminished value of the property. "It makes no sense and is so frustrating," Mr. Belvedere said. "I’m ready and willing to pay the mortgage for the next 30 years, but they act like they’d rather have me walk away."
When Mr. Belvedere refinanced four years ago, the process was so easy he hardly remembers it. "In those days, a refinance was like a free weekend in Vegas," said Mr. Cecala of Inside Mortgage Finance. "Now it’s between an Army physical and a root canal — and that’s if you’re successful." The current lending freeze owes much to the excesses of the boom. Mr. Belvedere’s lender, IndyMac, failed in 2008 from too many bad loans. "The system was abused, so they threw it out the window," Mr. Cecala said. "Now lenders are paranoid about every loan unless it is guaranteed to be the safest deal on earth."
An Obama administration program to encourage the refinancing of loans owned or guaranteed by Fannie Mae and Freddie Mac, the government-controlled mortgage giants, is off to a slow start. The Home Affordable Refinance Program, known as HARP, was designed to benefit between four and five million homeowners whose loans exceeded the value of their property by as much as 5 percent. But as of Sept. 30, only 116,677 loans had been refinanced. "We’re refining our understanding of borrower behavior," said a Treasury Department spokeswoman, Meg Reilly.
The program was modified during the summer to refinance homes where the loan exceeded the value of the property by as much as 25 percent. But since lender participation is voluntary, they have the option of rejecting these loans — and they often do, mortgage brokers say. Jeff Jaye, a mortgage broker in Danville, Calif., said only three of the refinances he submitted to the program were successful. More than a dozen were rejected for various reasons, including the existence of second loans or the borrower’s lack of equity. "It seems that the lenders are choosing which components of the HARP program to offer to consumers, which is unfortunate," the broker said.
When it comes to refinancing loans that are too big to be in the government system, Mr. Jaye knows the difficulty first-hand. "I have a perfect credit score, I make a good living and I’ve never been late with my mortgage in my life," he said. "But as a self-employed businessman, there is no loan for me." He plans to dispose of his house in what is known as a short sale, where the lender agrees to accept less than it is owed.
At an industry conference last week, the Illinois Association of Mortgage Professionals, a brokers’ group, proposed a federal program that would allow streamlined refinancings up to 175 percent of the median price in a local market. A quarter of the savings from the lowered payments would go into an escrow account to reduce the principal balance. "The theory is simple," said Jeri Lynn Fox, the association president. "If people have jobs and are making their payments at 7.25 percent, they will make their payments at 5 percent."
For Mr. Knapp, the sales executive, any such program would be too late. He has given up on the possibility of refinancing and is trying for a loan modification. If that does not work, there is one more solution: walking away from his home. "We’re a flight risk," he said.
Defense Contractors Resist Fixed-Price Jobs
The Airbus A400M military transporter finally flew for the first time on Friday, but the delayed European airplane is still weighted down by an issue burdening defense projects on both sides of the Atlantic: an inflexible contract. The flying truck is being developed under a type of fixed-price deal that the U.S. and the U.K.—two of the world's biggest arms buyers—largely abandoned years ago because of repeated cost overruns.
But the U.S. Department of Defense is again considering imposing such terms in an effort to trim its bills. Military contractors are grumbling, and some analysts say the A400M shows what can go wrong. "Everybody thought we learned our lessons," said Jacques Gansler, who was the Pentagon's top weapons buyer from 1997 to 2001. Mr. Gansler calls the A400M "a good example of the problem" posed by fixed-price contracts.
When seven countries from the North Atlantic Treaty Organization ordered the four-engine A400M from Airbus in 2003, its parent company, European Aeronautic Defence & Space Co., agreed to build 180 of them for €20 billion ($29 billion). EADS promised to swallow any cost overruns. The project has since blown its budget by several billion euros and EADS wants the seven governments to share the burden that it had promised to shoulder. EADS officials say that would be fair because the extra expense comes partly from changes in contract terms and designs forced on it by the governments.
The governments, whose individual positions vary, say they want to reach an agreement with EADS. The two sides are locked in heated negotiations and hope to strike a deal before year-end that keeps the project alive. "The aircraft is much more complex and expensive than expected," said Domingo Urena-Raso, Chief Executive of Airbus' military division, in a recent interview. "Industry cannot bear the full burden of the project alone."
The complaint reminds some industry veterans of spats in the U.S. before the Pentagon in the 1990s shifted away from fixed-price contracts toward deals that share risk. The U.S. changed its approach because military programs take decades to complete. Their requirements and technology evolve during development, which increases costs. A more common approach now, known as cost-plus, pays a supplier's expenses and guarantees a fixed profit margin. Critics of cost-plus deals say they don't adequately encourage contractors to control outlays.
Opponents of fixed-price contracting, meanwhile, say the rigid approach also fails to control costs, and instead produces expensive legal battles. The Pentagon's last big fixed-price contract, for the A-12 Avenger II airplane, is still being fought out in court, 19 years after its cancellation. Airbus officials were aware of these risks when they signed the A400M contract. At that time, British defense giant BAE Systems PLC owned 20% of Airbus alongside EADS, and BAE was also fighting with the British Ministry of Defense over fixed-price contracts for a surveillance plane and a submarine. BAE's then-chief executive Mike Turner sat on the board of Airbus.
"We would have preferred it was not a fixed-price contract," Mr. Turner said of the A400M deal before he retired from BAE last year. BAE sold it stake in Airbus to EADS in 2006. Airbus officials in 2003 said they could handle the A400M contract using their experience competing with Boeing Co. in the commercial jetliner market. But four years later, EADS chief financial officer Hans Peter Ring said "the logic was wrong" behind that thinking.
Now, the Obama administration wants to use fixed-price deals as one tool to permanently shake up defense contracting and cut its cost of military systems. In August, the Pentagon awarded an Army truck contract worth billions of dollars to Oshkosh Corp. on a fixed-price basis. BAE, whose subsidiary had held the contract for 17 years, and another bidder, Navistar International Corp., lodged protests with Government Accountability Office to challenge the Army's pick. Oshkosh's lower pricing is an issue with the losing companies.
The biggest test of Washington's new approach is a $40 billion tender to buy 179 aerial refueling jets, which the Pentagon wants to handle on a fixed-price basis. When the Air Force issued a draft request for proposals in September, Deputy Defense Secretary Bill Lynn said the approach would "constrain prices considerably" and indicated a broader change in Pentagon policy. "It's shifting the department from a cost-plus world more towards a fixed-price world, and we think that that's going to be an important element in avoiding cost overruns," said Mr. Lynn. Executives at Northrop Grumman Corp. and Boeing—the only potential bidders for the tanker order—are balking at setting prices for a contract that will last almost two decades.
Northrop, which is cooperating with EADS, has objected to many aspects of the contract, including a fixed-price. Northrop now says it may not bid unless major changes are made to the terms. Wes Bush, Northrop's President and Chief Operating Officer, on Dec. 1 told the Defense Department's top weapons buyer in a letter that Northrop couldn't bid on a contract that "places contractual and financial burdens" on the company. Boeing Chief Financial Officer James Bell said recently that the company was taking its concerns to the Air Force. "Fixed price development is a tough contract," he told a conference. "It is very, very difficult."
British Airways Cabin Crew Vote To Strike
British Airways PLC's cabin crew Monday voted to strike over the busy Christmas period, threatening massive disruption for hundreds of thousands of passengers. A 12-day strike is due to begin Dec. 22, trade union Unite said, after 92.5% of workers who voted in a ballot supported industrial action. The union said it remained open to negotiations, but only if BA reverses changes to working practices that it already has imposed. It said it didn't rule out further action.
British Airways in a statement said it was extremely disappointed by the decision, which it said shows a lack of concern for its customers, its business and other employees. "A 12-day strike would be completely unjustified and a huge over-reaction to the modest changes we have announced for cabin crew which are intended to help us recover from record financial losses," it said.
If a strike goes ahead, it will be the first BA has had since Chief Executive Willie Walsh took charge in May 2005. The carrier and unions have clashed over BA's plans to restructure and adjust working practices in an effort to return the company to profitability after posting a GBP292 million loss for the six months to Sept. 30. Strikes are dangerous for airlines because not only are disruptions expensive but they can put off passengers from flying with strike-hit carriers again.
Airlines globally have been badly hit by the economic downturn as passengers traded down to cheaper economy tickets or refrained from travel altogether. Most airlines have swung to a loss this year, while others have gone out of business. The International Air Transport Association forecasts the industry will make an $11 billion loss this year. BA in particular has been hard hit because of its dependence on lucrative premium traffic across the Atlantic, which has fallen in the wake of the financial crisis and economic downturn. Analysts expect BA to make a GBP800 million pretax loss for the fiscal year ending March 2010, compared with a loss of GBP401 million in the previous fiscal year.
After making no progress on talks that dragged on for nine months, BA introduced cabin crew changes Nov. 16 at London's Heathrow Airport--reducing onboard personnel to 14 from 15--after the U.K. High Court dismissed an injunction application by unions. Instead, the two sides agreed to meet in court Feb. 1 to decide whether the changes are contractual or not.
BA insists changes allow the airline to accept more than 1,000 voluntary redundancies among cabin crew and allow 3,000 to shift to part-time work. BA employs 13,500 cabin crew, of whom 11,500 work at Heathrow. Approximately 9,000 work on long-haul routes. It aims to shed 4,900 positions during the fiscal year ending March 31, of which 3,700 will be in the U.K. BA employs about 38,700 workers. "This is a double disaster for British Airways," said Bob Atkinson, travel expert from travelsupermarket.com. "Its customers are now going to be significantly affected and the airline will take a financial hit from the action."
Gerald Celente Trends Forecasts coming true year after year
The Devil and Mr. Obama
by Joe Bageant
Barack promised change -- and sure enough, things changed for the worse
(Note: Patrick Ward, associate editor of the UK's Socialist Review asked Joe to write a piece for the party publication. This is the unabridged text of Joe's submission.)
Well lookee here! An invite from my limey comrades to recap Barack Obama's first year in office. Well comrades, I can do this thing two ways. I can simply state that the great mocha hope turned out to be a Trojan horse for Wall Street and the Pentagon. Or I can lay in an all-night stock of tequila, limes and reefer and puke up the entire miserable tale like some 5,000 word tequila purged Congolese stomach worm. I have chosen to do the latter.
As you may know, Obama's public approval ratings are taking a beating. Millions of his former cult members have awakened with a splitting hangover to find their pockets turned inside out and eviction notices on the doors of their 4,000 square foot subprime mortgaged cardboard fuck boxes. Many who voted for Obama out of disgust for the Bush regime are now listening to the Republicans again on their car radios as they drive around looking for a suitable place to hide their vehicles from the repo man. Don't construe this as support for the GOP. It's just the standard ping ponging of disappointment and disgust that comes after the honeymoon is over with any administration. Most Americans' party affiliations are the same as they were when Bush was elected. After all, Obama did not get elected on a landslide by any means; he got 51% of the vote.
Right now his approval ratings are in the 40th percentile and would be headed for the basement of the league were it not for the residual effect of the Kool-Aid love fest a year ago. However, millions of American liberals remain faithful, and believe Obama will arise from the dead in the third year and ascend to glory. You will find them at Huffington Post. This frustrating ping pong game in which the margin of first time, disenchanted and undecided voters are batted back and forth has become the whole of American elections. That makes both the Republican and Democratic parties very happy, since it keeps the game down to fighting the enemy they know, each other, as opposed to being forced to deal with the real issues, or worse yet, an independent or third party candidate who might have a solution or two.
Thus, the game is limited to two players between two corporate parties. One is the Republican Party, which believes we should hand over our lives and resources directly to the local Chamber of Commerce, so the chamber can deliver them to the big corporations. The other, the Democratic Party, believes we should hand our lives and resources to a Democratic administration -- so it alone can deliver our asses to the big dogs who own the country. In the big picture it's always about who gets to deliver the money to the Wall Street hyena pack.
Americans may be starting to get the big picture about politics, money and corporate power. But I doubt it. Given that most still believe the war on terrorism is real, and that terrorists always just happen to be found near gas and oil deposits, there is plenty of room left to blow more smoke up their asses. Especially considering how we are conditioned to go into blind fits of patriotism at the sight of the flag, an eagle, or the mention of "our heroes," even if the heroes happen to be killing and maiming Muslim babies at the moment. Patriotism is a cataract that blinds us to all national discrepancies.
Much of the rest of the world seems plagued with similar cataracts that keep it from noticing the chasm of discrepancy between what Obama says and what he actually does. The Nobel Committee awarded the 2009 Peace Prize to the very person who dropped the most bombs and killed the most poor people on the planet during that year.
The same guy who started a new war in Pakistan, beefed up the ongoing war in Afghanistan, and continues to threaten Iran with attack unless Iran cops to phony US-Israeli charges of secret nuclear weapons facilities. It's weapons of mass destruction all over again. Somewhere in the whole fracas has been forgotten that Iran has been calling for a nuclear free zone in the Middle East since 1974. Iran has also been consistent in its position that "petroleum is a noble material, much too valuable to burn for electricity," and that nuclear energy makes much more sense, given that our food supply, whether we like it or not, is fundamentally dependent upon petrochemicals and will remain so until the earth's population is reduced to at least half of what it is now. The Iranian attitude has been to use the shrinking petroleum deposits as judiciously as possible.
To which oilman George Bush replied that "There will be consequences for Iran's attitude." Obama has reinforced Bush's sentiment, stating that not only will there be consequences, but that a military strike on Iran "is not out of the question." Although nuclear weapons are in direct opposition to the Muslim faith, 71 million Iranians must have shuddered and paused to think: "Maybe an Iranian bomb isn't such a bad idea after all."
Under cover of being the first "black" president, Obama is looking to best one of the Bush administration's records. And that is causing unshirted hell for anybody two shades darker than a paper bag, particularly if they are wearing sandals (Obama himself being only one shade darker than the bag and given to size eleven black Cole Haans). So far, two million Pakistanis have been, in official US State Department jargon, "displaced" by U.S. backed bombing and gunfire -- which will surely displace a fellow if anything will. A significant portion of them are "living with host families."
Translation: packed into crowded houses ten to a room, wiping out food and water supplies, crashing already fragile sanitation infrastructure, and serving as a giant human Petrie dish for intestinal and respiratory diseases. Many more are still living in the "conflict area." Makes it sound like living next door to a neighborhood domestic squabble, doesn't it? God only knows how many more innocent people will yet be killed in the conflict area of Obama's "war of necessity." You know, the "good war." The war that is supposed to offset the interminable bad one in Iraq, where we continue to occupy and build more bases.
Afghanistan: Grab the opium and run
Then there are Obama's noble efforts to fight terrorism by beefing up troop "deployment" in Afghanistan. Deployment may be construed to mean an American style armed gangbang, in which everybody piles on some wretched flea bitten hamlets for all they are worth, with periodic breaks for pizza and video games.
Now if you look at the deployment of US forces in Afghanistan, compared to NATO country forces there, you'll find them in a nice even line along what could easily be mistaken for an oil pipeline route. One that taps into the natural gas deposits in Uzbekistan and Turkmenistan and, by the purest coincidence, just happens to bypass nearby Russia and Iran. But we all know that "It's about fighting terrorism over there so we won't have to fight it here!" That still plays in Peoria, so we're sticking with it.
At the moment, out-of-pocket cost of America's wars in Iraq and Afghanistan is $900 billion. Interest on the debt incurred, plus the waste of productive resources on the war, pushes the cost to three thousand billion dollars (Nobel economist Joseph Stiglitz). By comparison, the entire 2009 government budget for elementary and secondary education is slightly above $800 billion. Or to look at it another way, how far would three thousand billion dollars go toward establishing energy independence? As Harvard monetary expert Linda Bilmes points out that there is "no benefit whatsoever for any American whose income does not derive from the military/security complex." I sent an email to Obama pointing this out, suggesting that we pull out of Afghanistan, grab the opium and run. I got a nice reply saying that my president is grateful for the input. So there ya go.
Lately there has been a ruckus about our little "slap shop" in Guantanamo Bay, Cuba. Despite Obama's promises to close down, "Cigarland," it is still open for business. Word has it that Cigarland may be moved to an "underused" maximum security prison (one would think a scarcity of criminals for a maximum security prison would be good news, but what do I know?) in the desperately broke community of Thompson, Illinois. Locals there tell the national press, "Sure, put it in our backyard. No problem." Or, "This town is in the prison business. Prisons R Us." Or more bluntly, "We know how to handle these creeps and we need the jobs." It's the kind of job creation Stalin would have understood.
Happiness is a warm tent
But at least the recession is over. This, according to Obama's monetary point man, Ben Bernanke, chairman of the Federal Reserve Bank. For British readers unfamiliar with the US system, the Federal Reserve is not a government agency, despite its agency like name. "The Fed" is an offshore private banking cartel that decides just how much bogus currency can be printed and circulated profitably for bankers without wrecking their Ponzi schemes. And the chairman of that august body has announced that the recession is over. Well halleluja! We can quit rolling our own cigs and buy ready mades, and run recklessly through the Dollar Store scooping up dented canned goods and cheap Chinese tube socks.
That makes us luckier than the three and a half million Americans, most of whom led normal lives a few of years ago, who are now homeless. That includes one million school children sleeping in tents, shelters and other makeshift arrangements, and trying to look presentable each morning at schools that have not even the mercy to let them use the school showers. By the administration's own calculation, the number of homeless and people out of work will continue to escalate at least into the next year. Home foreclosures, and therefore homelessness, "has not topped out yet," says Obama.
But Bernanke has announced that the recession is over. So there you have it. A grateful nation breathes a sigh of relief. And besides, he is right about it being over. The recession is over for the most important members of a capitalist society, the oligarchs and banksters, who have made fortunes off this recession, thanks to our unique economic system, and may now return to their standard garden variety usury.
Economic systems are merely belief systems. I didn't say that. Keynes said that. For instance, if the early Assyrians believed a shekel was worth a jar of wheat, then it was worth a jar of wheat. American style capitalism eventually stretched belief to the absolute limits of fantasy to the snapping point, as regards general credulity. Nobody abroad still believes the dollar is worth folding up and sticking in a wallet, certainly not worth exchanging for a good old fashioned shekel. However, be it shekels or dollars or euros, there is no economic system at all if there is no production. And there is no production if there are no jobs. Hence the obsession with unemployment rates.
The U.S. Ministry of Truth has announced that our unemployment rate is at 10%. I've yet to meet an American who does not know the official unemployment rate is a complete fiction. One half of the unemployed -- the half that has been unemployed for more than one year -- are simply erased from the official count. Poof! The real rate is somewhere around 20%. But if we acknowledged that, we'd have to admit to being on par with Europe's unemployment rate. And by diddle damned we can never do that. Every American fully understands that the purpose of life is to hang onto one meaningless job or another, two of them if possible. And by the state's official numbers more Americans have a white knuckled grip on life's purpose than any of those pussy socialist European nations with their free healthcare, low infant mortality rates and ridiculously long vacations.
But the bad news, which the Obama administration openly acknowledges, is this: Unemployment will in all likelihood go higher. And nobody on earth knows how to reduce it (although no one in the administration is about to acknowledge that). The factories are all but gone and they are not coming back. Not unless American workers are willing to work 13 hours a day for two Chinese yuan an hour, which is about 31 cents. What US factories remain are laying workers off due to high interest rates, and waiting for a lower interest rate policy before deciding if it is feasible to call any workers back into production.
During their wait they can watch hell freeze over. Banks know a fatter hog when they see it. And that hog is the consumer credit business (nobody has figured out yet that consumers need paychecks before they can consume anything, on credit or otherwise ). To that end the Federal Reserve has logically set a low interest rate policy. And in true accordance with banking logic, the banks took the Fed's money, then raised the annual percentage rate (APR) on credit card purchases and cash advances and on balances that have a penalty rate because of late payment. Next they raised the late fee. What the hell? If Americans are on the ropes, struggling to make their payments on time, then the logical thing to do is to stick it to them. Bleed 'em for all they're worth. It's an American free market tradition. We the people do not complain. We expect no mercy. America is a business and the American concept of business is pure ruthlessness.
A Deutsche Bank analyst tells me a near term worst is yet to come. Bank failures and home foreclosures have not peaked. A commercial real estate bust is coming down the pike. He says that, while there will be some minor periodic upswings, the fraudulent value of the dollar is now evident as it falls against every other currency, even the Russian ruble (13%), except those unlucky enough to be pegged to the US dollar. As former Assistant Secretary of Treasury Paul Craig Roberts says: "What sort of recovery is it when the safest investment an American can make is to bet against the US dollar?" My Deutsche Bank friend, who is younger and has a family to think about, has taken what he considers more appropriate action. He's buying gold and moving to an undeveloped Central American country.
But Mr. Bernanke assures us that the worst is indeed over. Despite the outside world's serious doubts, but Bernanke's announcement just might fly in the U.S. We believe whatever our Ministry of Truth tells us. We believed that debt was wealth, didn't we? And we believed in WMDs, and have come to believe warfare is a prerequisite to peace. The saddest thing is that Americans are cultivated like mushrooms from birth to death, kept in the dark and fed horseshit. Consequently, they haven't the slightest idea that there is an alternative to the system in which they labor at the pleasure of corporate and financial elites who own both their government and their every waking hour. That alternative is democratic Socialism. Self governance for the broadest common good. Which the Ministry of Truth has defined for them as fascism.
Healthcare and environment? Ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha
I would guess that you have heard about the "debate" over "healthcare reform in America." There really wasn't much debate, just a lot of thuggish behavior and wild tales of geriatric death panels by the right, and groveling capitulation on the left. The "reform" turned out to be a $70 billion a year giveaway to the insurance companies, by forcing those 45 million folks who cannot afford insurance at all to buy it anyway. Taxpayer dollars will make up the difference between what can be wrung out of the working poor, and what insurance corporations can demand and get because they have a throat lock on both of the other parties involved -- the doctors and the patients. As for the doctors, they have played it so cool butter wouldn't melt in theor mouths, and successfully avoided the question of whether their quarter million dollar and up incomes just might be contributing to the exorbitant cost of healthcare. Even with a majority in Congress, the best Obama and the Democratic Party's corporate lapdogs could come up with was total handover to the insurance industry. If this smells a bit suspicious, it is the sweat of cold fear you are smelling. The insurance companies have always made it clear they have billions to spend in defeating and destroying any elected official not on their side.
As for environmental legislation, under the Obama administration environmentalism is pretty much reduced to "cap and trade." In the truest spirit of capitalism, corporations will be able to sell their pollution for a profit, instead of ending it. And even this legislation barely made it through the House of Representatives. Moreover, environmental legislation has had the snot knocked out of it by the economic crash, and opinion polls now show the American public believes the price is too dear. It should be interesting to see what price their children will be willing to pay for oxygen and water.
Just when you think your country has reached the limits of raw shame and the outer banks of rogue internationalism occupied by Korea's Kim Jong-Il and Sudan's Omar al-Bashir, it surprises you with some new and worse outrage. America's latest is right up there with holocaust denial in sheer unmitigated abrasive gall -- putting the kibosh on the UN's Goldstone Report. The report documents Israeli war crimes in the Gaza Ghetto, where 1.5 million Palestinians have been held miserable hostages by Israel. Admittedly, leadership both in Gaza and Israel is nothing short of a pack of criminals. But the Israeli attack on civilians and civilian infrastructure such as hospitals and schools, using illegal munitions such as skin melting white phosphorus, was a war crime by every definition. The UN and the world agree that it meets and exceeds the Nuremberg standard that the US established in order to execute Nazis.
But as any American will tell you, the United States has never considered itself part of the rest of the world or in any way obliged to join. So the rest of the world was not surprised when the US House of Representatives voted 344 to 36 to condemn the Goldstone Report. The Obama administration has promised Zionist groups that it will never let the report get to the criminal court. The perps are safe. Zionists everywhere threw their hats in the air and cheered. The AIPAC boys at the back of the room nodded in approval: "Now tell us Congressmen, who's yer daddy?"
I might add at this point that I am not one of those conspiracy freaks who see Zionist plots behind everything. The Zionists are but one of many backstage operators with a death grip on some aspect of U.S. policy. Frankly, of all the greaseballs and thugs muscling US domestic and international policy, I fear the Wall Street and the bankers far more than I fear any Zionist (except maybe that spooky shapeshifting motherfucker, Rahm Emanuel. Brrrr!).
In any case, most Americans have never heard of the attack on Gaza or the Goldstone Report. They were prevented from hearing the outside world's news coverage of the grisly two week long specter. Residing in a free Central American country at the time, I was fortunate (or unfortunate) enough to hear the daily dispatches from inside Gaza, despite Israeli efforts to suppress them. About the only place the Zionist misinformation machinery really worked was in the United States, where it successfully repressed media coverage of Israeli atrocities and genocide. Not that it required great effort. American politicians and media long ago learned, as a client state of Zion, to look the other way. Or if that is not possible, to support one of the prepackaged lies conveniently provided the U.S. media by the Likudnik media management apparatus. "And besides, weren't the Palestinians the fuckers who danced in the streets after 9/11? Screw 'em! We now return to Cable News coverage of last night's America's Got Talent winners, the ZOOperstars!"
The man with the plan
The same day the assault on Gaza began, January 4, 2009, president elect Obama announced he would create or save three or four million jobs during his first two years in office. Ninety percent of them were to be in the private sector, of which about 400,000 would be in building roads, bridges, schools and broadband lines. Another 400,000 were predicted in solar panels, wind turbines, fuel-efficient cars; and one million in healthcare and education. The key term here was "jobs saved." Any job not lost apparently goes in the jobs created column. I'm rather math impaired, but it seems to me that with real unemployment at about twenty percent and rising, and job losses predicted by the administration to continue for at least another year, it's hard to see how the claim can be made. I suppose that as long as three million jobs remain in the US economy, Obama can claim to have saved them. I'd be the first to admit it's all over my head, and a damned good example of why I am not suited for public office. Then too, I never did understand Bill Clinton's surplus either. Political math is done in some fourth dimension anti-space where terrestrial rules do not apply.
One thing I do know is that for every dollar a worker would earn under Obama's plan, a capitalist corporation employing the worker would earn almost two dollars. That Mexican guy balling sod along the new highway's median strip for the contractor may be making eight bucks an hour he wouldn't have otherwise earned. But he is making his employer about $15.50 on the same hour. As a younger man in Colorado I balled sod, hired the Mexicans and passed out the paychecks, so I know. First rule about capitalist math is: The capitalist owner gets to do the math.
So Obama's plan lines more corporate pockets than those of the working man. This being America however, Obama was charged by conservatives with having an anti-capitalist socialist agenda. These businessmen conservatives are more than happy to take the money. But the rule of thumb in America is "Show No Gratitude! Bite the living hell out of any hand that feeds you, on the chance that it may give up more. Maybe even drop everything it is holding so you can grab it up and run while a crowd gathers to stone the alleged socialist."
But the truth is that Obama's jobs would have done nothing to help the economy "recover" anyway. There is no economy left to recover. It moved to China and India. Things such as road projects do not generate capital. Under capitalism roads are worthless unless they make money, and they can do no economic good if there is nothing being manufactured to haul on them.
Likewise education that does not contribute the gross national product (otherwise known as corporate interests) by producing higher wages to exponentially pump up American consumer fetishism is considered worthless. And let's face it, higher education has become, for the most part, another racket. The student is saddled with massive loan debt (again, there is the odor of hyena banker spoor in the air) on the promise of eventual higher wages. Or at least that the graduate will work in a nice warm dry video store and never have to ball sod. Unfortunately, the number of jobs that require "college educated" Americans -- quite an oxymoron, given the caliber of U.S. colleges these days -- is shrinking right along with the Empire. All those jobs middle managing the Republic, such as helping us cheat on our taxes, brainwashing the school kids, and devising sales strategies for beer, grow scarcer by the day. Even book editing and reading medical scans are being outsourced to Asia.
There's a nasty rumor that American medical scans are being read in India by trained Buddhist temple monkeys to save rupees. The US healthcare industry has been mum on the subject. Obama's recovery plan depends on going deeper in hock to the Chinese. For Christ sake, aren't there any of our tax dollars lying around anyplace other than in Wall Street vaults? Apparently not. So the Treasury Department keeps cranking out more funny money to make payments on the pawn ticket for the Empire. Rather like those doddering old Englishmen one meets on estates in rural Kent sporting "The Queen's Own" military ties, we still prefer to think of ourselves as an Empire.
But the Chinese are looking askance, questioning the wisdom of pouring more money down a rat hole, based upon the US Treasury's allegation that the other end of the rat hole comes out somewhere in China and not on Wall Street. Chinese talk shows publicly question American loans, when upcoming powerhouses such as Brazil are so ripe for investment. You can bet that if it's on television in China, the public is being issued an official state sanctioned opinion they may feel free hold as their own.
The big heist
In the end the campaign rattle and prattle about Obama's recovery plan turned out to be moot anyway. Wall Street moved in and heavied up on the whole damned country, in one of the ballsiest heists in American history. It was a stroke of pure genius as theft goes. Following a meeting of the Five Families, Citicorp, Bank of America, Morgan Chase, Wachovia, Taunus Corp., the financial cartels said, "The rip-off is in. We got it all. Now if you don't hand over all the people's savings and assets so we can loan it back to them, the whole flaming ball of shit you call the services and information economy is gonna come down on everybody's asses like a giant meteor. So you can load three trillion bucks for now into the armored cars lined up out front and nobody will get hurt. Or you can watch the national economy shrivel up until the schmucks out there in the cul de sacs and cardboard condos can't even put together cab fare for their ride to the poor house. It's your call Barack."
There are still a few delusional souls out there who believe Obama is trying to do his honest best to fulfill campaign promises, but just cannot get past the pack of vampire financial corporations and cold blooded Republican lizards. Which is true in a sense. He cannot get past the Wall Street pack because he is running in the middle of it. Obama's nefarious relationship with Wall Street's power players has been ongoing for years. It is no accident that Wall Street got to select the members of the president's financial cabinet. My mutton eating friends, it's a sad and sordid tale, one I have neither the space nor the stomach to cover here. Especially since better journalists such as Matt Taibbi and others have written extensively about it in detail.
Last I heard, the banks never un-assed the dough. Never let it circulate in the people's hands or even through business loans. Instead, they declared a profit, divvied it up in bonuses, and congratulated themselves. Indeed, this was the sort of sheer brilliance we have come to expect from the Yale/Harvard MBA crowd. Getting rich by going broke. Then getting even richer by sticking up the US government and the entire American public, and eventually the entire world, leaving 1.5 quadrillion dollar cloud of toxic derivatives girding the world, to hoover up more money for them before imploding like a dark star. And indeed, the derivatives are even astronomical in nature. They represent $180,000 in debt load for every man woman and child on earth (although I cannot understand why, if the money isn't real, why we should consider the debt real). It is impossible to produce our way out of this calamity. There aren't even enough resources left on earth to sustain that scale of production.
For now the financial mobsters have retired to Tuscan villas to savor their haul. The poor schmucks out there in the US heartland are left to devise new ways of hiding the family ride from the repo man. Never once, though, do they doubt capitalism. They figure it is all just a big financial accident. Fate. And that will somehow "work our way out of it," like we always have. These things happen in a dynamic free market economy.
A new mob moves in
To backtrack, that was when the smell of long green flying out of the public -- the insurance industry. Insurance racketeers moved in with their own muscle to fill the void left by the Wall Street gang. The insurance syndicate dispatched its made men and soldiers throughout the halls of Congress, and, voila! They were able to pass the aforementioned $70 billion a year political blackmail job off as "reform legislation." Say what you want to about my country, but pillage and looting have never been so elegantly ritualized, institutionalized and executed.
Realistic people on the left have long known that the last act of American strong-arm capitalism would be a massive gunpoint redistribution of wealth from the public to the owning class through the private financial sector -- which the owning class happens to own. But few would have expected it to be executed under a Democratic majority in both the House and the Senate. Or under a Democratic administration honchoed by the first black president. One liberal blogger wondered aloud, "Imagine what the Republicans would have done had John McCain been elected?" The same thing, brother. The same thing. Only with a different cover story. Both parties exist at the pleasure of the same crime syndicates.
How to join the rackets
As I remember, it was a Mexican diplomat who once told me that graft, theft and bribery are socialized in his and other Latin American countries -- democratically distributed throughout much of society. But in America, he said, this sort of criminal activity is legislatively institutionalized. Only the elites are allowed to practice usury, theft, insurance blackmail and other forms of non-violent looting (violent looting being reserved for oil bearing Middle Eastern countries). The first step in building one of these rackets is to become a legally recognized interest group, in order to access the key Congressional players you wish to bribe or strong-arm into acquiescence or complicity.
The banking mob, the insurance mob, and other criminally organized legislative muscle men, cartels and commodity syndicates, are all officially sanctioned as "interest groups" operating alongside hundreds of others in that whorehouse by the Potomac River.
To list just a few, there are environmental interest groups such as the Sierra Club, which exists so its officers can draw fat salaries and meet movie star environmentalists. There is an interest group for education, which exists to assure the mediocrity of our public schools. Munitions manufacturers are an interest group. Gambling casinos and tobacco corporations are interest groups. There is an interest group to force feed us corn sugar, in order to sustain Midwestern Republican farmers and ensure the future of the ever expanding weight loss and diabetes industries. There are even lobby groups to protect the interests of syndicates in other countries, such as Israel. There is an interest group for everything except we ordinary American pudwhackers. The folks who just want to raise families in peace, and maybe have modest financial security in old age. And there are thousands of interest groups whose purpose is to make damned sure we never get either one.
We ain't mean, just thrifty
Yesterday I watched a CNN host ask two experts: "Is stepping up the war in Afghanistan really the best use of our tax dollars?" The killing, maiming and displacement of untold thousands is discussed in terms of the best use of capital. A dehumanized and monetized capitalist society sees everything in dollars and cents and return on investment. Even infant mortality is rated that way, though seldom does anyone admit it. Saving a black ghetto baby has a low return on investment, according to some human services analysts, as regards their lifetime contribution to the gross national product. I actually heard an expert on a television panel show say this.
Yet Americans sitting in front of their TV sets do not find this one bit odd. Or even mean spirited, much less an indication of a cruel society. No American thinks of himself or herself as cruel, or connected in any way with the world's largest human and environmental killing machine. No American doubts his inalienable right to drive around or run air conditioning or drink wine from grapes grown in Chile at the expense of a national war on the environment and those of the world's people who have been born amid energy resources. If there are things such as cruelty and injustice, we the people aren't the ones doing it. We the voters and taxpayers are not the CIA snatching people off to Uzbekistan and Turkmenistan to be raped with broken bottles and boiled alive to extract those "terrorist confessions" that keep the war on terror alive. We simply finance such operations.
And accountability? Well, on the very slight chance that someday the world will hold America accountable (which will never happen so long as we possess more armaments that the rest of the world combined and are quite clearly willing to use them toward our own ends) we the people can express our shock and disgust as citizens. We good people would never, never, never have approved of all those awful acts. And besides, there is not much the ordinary person can do about such things anyway. Right? Maybe not. But it was Americans who so loudly proclaimed that complicity through silence is no defense, when we rubbed the German people's noses in the grisly filth of the concentration camps and hung their national leadership.
The revenge of Smirking George
We haven't heard much from George W. Bush since he packed up his comics and moved to Dallas. But his policies remain like dog piss stains to stink up the Obama White House. Rendition and assassinations continue, as does warrantless spying on the citizenry, along with other civil liberties violations in the name of the "war on terror."
All of these are terrible things for a president who ran on reform and change to continue to do. But it is the thing Barack Obama and his party did not do, the thing they did not insist upon, that will have the greatest ongoing effect on this country. Obama and the Democrats refused to prosecute Bush and Cheney, ensuring that:
1 -- No quail hunter is Georgia will ever be safe as long as Cheney's pacemaker still functions;
2 -- The precedents set by the most criminal administration in US history remain. Until they are confronted and rectified, America will not to have the opportunity to heal and recover. Honestly speaking though, the patient has been dead since the 2000 election fraud went unchallenged.
Obama's election was the only chance America had to hold the Bush Republicans accountable for their crimes. Now it's gone. Opportunities to exercise moral principles as a nation and a people are rare to begin with, and fast vanishing. At some point they will be extinguished by the exigencies of human species survival. It doesn't take a prophet to know this. Anyone paying attention to planetary population, resource depletion and the eco-collapse understands it in the gut. The mounting worldwide competition for human survival will not allow for much high mindedness. So we should exercise principle and administration of justice while principle and justice are still possible.
There are endless rationalizations proffered as to why Obama has not come within a mile of fulfilling the promise and potential of his presidency, and the Democratic Party is writing more of them every day. Disappointed Democratic voters grab at them, and desperately defend each one on internet forums and in letters to the editor. But we must use our own personal capabilities as free rational human beings to assess Obama, and decide why he is failing. Or not failing. To hell with highly crafted official explanations about "wars of necessity" and trillion dollar blackmail payments.
George W. Bush left office wearing the same smirk he came in with. Perhaps it's congenital. But if Bush was smirking when he left office, he must now be convulsed in crazed hysterical laughter. His gang not only got away clean, but Obama carries on the dark Bush-Cheney legacy. And, almost as if to top the whole black escapade with a cherry of irony, the most inarticulate president in American history is now on the motivational speaking circuit at $200,000 a pop. Never let it be said that the Devil does not care for his own.
Will Americans ever rise up in defense of their own common well being through such things as education, health and a productive peace caring society? Nope. Because it has been seen to that socialism -- the administration of the nation solely for the common good and benefit of all the people without preference or privilege -- doesn't stand a chance in America. For over a century those who have attempted to further socialism have been shot, hanged, burned alive in their beds on Christmas Eve, imprisoned, falsely accused of crimes and falsely convicted, and demonized by the capitalist elites of the corporate state. The cause of socialism has effectively been wiped out in the US. Few Americans can even define the word. Most think it is a political system when it is a social philosophy. Hell, half the socialists these days think it is entirely a political system.
But even if Americans understood socialism, they are too terrified to ever admit to its virtues, much less publicly support the cause. And without free and open public participation in some democratic form of socialism, regardless of the name or label given it, there can be no recognition of the people's common welfare and good. And so the most egalitarian social philosophy ever conceived dies within a nation, with very little chance of being reborn because such an ideal, by its definition, cannot exist within the narrow mindset of bankers and oligarchs. Bush smirks, Obama breakdances in and around the minefield of his false promises, and Wall Street CEO bonuses are higher than ever.
Like I said, the Devil does take care of his own.